<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report
Date of Report (Date of earliest event reported):
October 30, 2000 (August 28, 2000)
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0511324
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
1800 BERING, SUITE 1000 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 369-1700
<PAGE> 2
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 August 28, 2000.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(b) FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Synagro Technologies, Inc.
Introduction to Unaudited Pro Forma Financial Statements .................................................... 1
Pro Forma Combined Balance Sheet as of
June 30, 2000 (Unaudited) ................................................................................ 2
Pro Forma Combined Statement of Operations for the six months
ended June 30, 2000 (Unaudited) .......................................................................... 3
Pro Forma Combined Statement of Operations for the year
ended December 31, 1999 (Unaudited) ...................................................................... 4
Notes to Unaudited Pro Forma Combined Financial Statements .................................................. 5
Bio Gro Division of Waste Management, Inc.
Report of Independent Public Accountants .................................................................... 7
Combined Balance Sheets as of December 31, 1999 and 1998 ................................................. 8
Combined Statements of Operations for the years
ended December 31, 1999, 1998 and 1997................................................................ 9
Combined Statements of Changes in Division Equity ........................................................ 10
Combined Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997................................................................ 11
Combined Notes to Financial Statements ................................................................... 12
Bio Gro Division of Waste Management, Inc.
Combined Balance Sheet as of June 30, 2000 (Unaudited) ................................................... 23
Combined Statements of Operations for the six
months ended June 30, 2000 and 1999 (Unaudited) ...................................................... 24
Combined Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (Unaudited) ..................................................... 25
Notes to Financial Statements ............................................................................ 26
</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
-----------------------
(Corporate Controller)
Date: October 30, 2000
<PAGE> 4
SYNAGRO TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In 1999, the Company purchased Anti-Pollution Associates, Inc. and D&D Pumping,
Inc., Vital Cycle, Inc. and AMSCO, Inc. (collectively, the "1999 Acquisitions").
The 1999 Acquisitions were recorded using the purchase method of accounting. The
Company also completed a business combination with National Resource Recovery,
Inc., which was accounted for using the pooling-of-interests method of
accounting. The allocation of the purchase price resulted in approximately
$19,889,000 of goodwill that is being amortized over 40 years. The assets
acquired and liabilities assumed relating to the 1999 Acquisitions were as
follows:
<TABLE>
<S> <C>
Common stock shares 3,044,784
=============
Common stock issued $ 9,024,000
Cash paid including transaction costs, net
of cash acquired $ 13,802,000
Less: Historical net assets acquired $ 2,937,000
-------------
Goodwill $ 19,889,000
=============
</TABLE>
Subsequent to December 31, 1999, and through October 30, 2000, the Company
purchased Residual Technologies, Limited Partnership and its affiliates,
Ecosytematics, Inc., Davis Water Analysis, Inc., AKH Water Management, Inc.,
Rehbein, Inc., certain assets and contracts of Whiteford Construction Company,
Environmental Protection & Improvement Company, Inc. ("EPIC"), and the Bio Gro
Division of Waste Management, Inc. ("Bio Gro") (collectively, the "2000
Acquisitions"). The 2000 Acquisitions were accounted for using the purchase
method of accounting. The preliminary allocation of the purchase price, which
is subject to final adjustment, resulted in approximately $84,453,000 of
goodwill that is being amortized over 40 years. The assets acquired and
liabilities assumed relating to the 2000 Acquisitions are summarized as
follows:
<TABLE>
<S> <C>
Common stock shares 1,325,000
=============
Common stock issued $ 5,471,000
Cash paid including transaction costs, net
of cash acquired $ 237,560,000
Less: Historical net assets acquired $ 158,578,000
-------------
Goodwill $ 84,453,000
=============
</TABLE>
The following unaudited pro forma combined financial statements include the
unaudited consolidated financial statements of the Company as of and for the six
months ended June 30, 2000, and the year ended December 31, 1999, combined with
the historical financial statements of the 1999 Acquisitions and the 2000
Acquisitions as follows: (i) the unaudited pro forma combined balance sheet as
of June 30, 2000, includes the consolidated balance sheet of the Company
combined with the historical balance sheet of Bio Gro which was acquired
subsequent to June 30, 2000, as if Bio Gro had been acquired on June 30, 2000,
(ii) the unaudited pro forma combined statement of operation for the six month
period ended June 30, 2000, includes the consolidated statement of operation of
the Company combined with the historical statements of operations of the 2000
Acquisitions as if they had been acquired on January 1, 2000, and (iii) the
unaudited pro forma combined statement of operation for the year ended
December 31, 1999, includes the consolidated statement of operation of the
Company combined with the historical statements of operations of the 1999
Acquisitions and the 2000 Acquisitions as if they had been acquired on
January 1, 1999.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions, and may be revised as additional
information becomes available. The pro forma financial statements do not
purport to represent what the Company's results of operations would actually
have been if such transactions, in fact, had occurred on those dates or project
the Company's 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 combined financial statements
should be read in conjunction with the Company's periodic filings with the
Securities and Exchange Commission.
1
<PAGE> 5
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED BALANCE SHEET
As of June 30, 2000
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS COMPANY BIO GRO ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,490 $ 42 $ (2,532)(a) $ --
Restricted cash -- 2,802 -- 2,802
Accounts receivable, net 21,930 31,803 (1,000)(b) 52,733
Notes receivable 32 -- -- 32
Prepaid expenses and other 7,383 2,137 -- 9,520
Deferred tax asset -- 2,324 -- 2,324
----------- ----------- ----------- -----------
Total current assets 31,835 39,108 (3,532) 67,411
Property, machinery & equipment, net 43,732 98,646 59,100 (b) 201,478
Other Assets:
Goodwill, net 138,057 81,848 (72,656)(b) 147,249
Notes receivable, long-term portion 183 -- -- 183
Other assets 7,832 2,189 4,082 (c) 14,103
----------- ----------- ----------- -----------
Total assets $ 221,639 $ 221,791 $ (13,006) $ 430,424
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of related-party notes payable $ -- $ 338 $ (338)(b) $ --
Current portion of notes payable to prior owners 353 -- -- 353
Current portion of long-term debt 5,886 2,075 -- 7,961
Accounts payable and accrued expenses 13,980 12,298 133 (a) 26,411
----------- ----------- ----------- -----------
Total current liabilities 20,219 14,711 (205) 34,725
Long-term liabilities:
Long-term debt, net 119,364 45,309 118,455 (d) 283,128
Related party notes payable -- 6,817 (6,817)(b) --
Notes payable to prior owners 125 -- -- 125
Other long-term liabilities 1,700 19,543 (19,543)(b) 1,700
----------- ----------- ----------- -----------
Total long-term liabilities 121,189 71,669 92,095 284,953
COMMITMENTS AND CONTINGENCIES
Redeemable Preferred Stock 29,907 -- 33,335 (d) 63,242
Stockholders' Equity:
Preferred stock, $.002 par value, 10,000,000 shares
authorized, non issued and outstanding -- -- -- --
Common stock, $.002 par value, 1000,000,000
shares authorized, 19,419,381 and 17,693,489
issued and outstanding 39 -- -- 39
Additional and paid-in capital 97,662 -- -- 97,662
Accumulated earnings (deficit) (47,377) 135,411 (138,231)(b) (50,197)
----------- ----------- ----------- -----------
Total stockholders' equity 50,324 135,411 (138,231) 47,504
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 221,639 $ 221,791 $ (13,006) $ 430,424
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this
pro forma combined financial statement.
2
<PAGE> 6
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
(In Thousands, except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
2000 ACQUISITIONS
-------------------------------------------- PRO FORMA PRO FORMA
COMPANY BIO GRO EPIC OTHERS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 46,435 $ 64,828 $ 10,385 $ 3,798 $ 125,446
Cost of services 34,603 43,958 8,238 3,235 14 (a) 87,700
(2,348)(b)
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 11,832 20,870 2,147 563 2,334 37,746
Selling, general and
administrative expenses 5,017 9,218 1,551 1,248 (1,406)(a) 15,337
(27)(c)
(264)(d)
Amortization of goodwill 1,439 1,237 906 8 (1,488)(e) 2,102
Special charges -- -- 200 -- (200)(f) --
------------ ------------ ------------ ------------ ------------ ------------
Income from operations 5,376 10,415 (510) (693) 5,719 20,307
Other income (expense):
Interest 5,017 1,888 998 192 6,991 (g) 15,086
Other, net 14 (127) -- -- -- (113)
------------ ------------ ------------ ------------ ------------ ------------
Net income before preferred stock
dividends and income taxes 345 8,654 (1,508) (885) (1,272) 5,334
Provision for income taxes -- 3,808 -- -- (3,808) --
------------ ------------ ------------ ------------ ------------ ------------
Net income before preferred stock
dividends and beneficial
conversion charge 345 4,846 (1,508) (885) 2,536 5,334
Preferred stock dividends 951 -- -- -- 2,088 (h) 3,039
Non-cash beneficial conversion
charge 25,644 -- -- -- -- 25,644
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common stock $ (26,250) $ 4,846 $ (1,508) $ (885) $ (448) $ (23,349)
============ ============ ============ ============ ============ ============
Income (loss) per common share:
Basic $ (1.37) $ (1.21)
============ ============
Diluted $ (1.37) $ (1.21)
============ ============
Weighted average shares
outstanding:
Basic 19,143,834 19,340,400 (i)
============ ============
Diluted 19,143,834 19,340,400 (i)
============ ============
</TABLE>
The accompanying notes are an integral part of this
pro forma combined financial statement.
3
<PAGE> 7
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(In Thousands, except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
2000 ACQUISITIONS
------------------------------------------ 1999 PRO FORMA PRO FORMA
COMPANY BIO GRO EPIC OTHERS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 56,463 $ 117,677 $ 23,938 $ 33,445 $ 4,260 $ -- $ 235,783
Cost of services 42,471 81,002 18,904 25,016 2,894 (785)(a) 164,215
(5,287)(b)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 13,992 36,675 5,034 8,429 1,366 6,072 71,568
Selling, general and
administrative
expenses 6,875 19,439 2,290 4,531 493 (1,875)(a) 31,158
(75)(c)
(520)(d)
Amortization of
goodwill 1,527 2,528 1,979 101 -- (1,932)(e) 4,203
Special charges 1,500 -- 1,728 -- -- (1,728)(f) 1,500
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from
operations 4,090 14,708 (963) 3,797 873 12,202 34,707
Other income
(expense):
Interest 3,236 3,838 841 1,349 18 20,892 (g) 30,174
Other, net (294) (11) -- (20) -- -- (325)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income before
preferred stock
dividends and
income taxes 1,148 10,881 (1,804) 2,468 855 (8,690) 4,858
Provision for
income taxes -- (5,046) -- -- -- 5,046 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income before
preferred stock
dividends 1,148 5,835 (1,804) 2,468 855 (3,644) 4,858
Preferred stock
dividends -- -- -- -- -- 6,079 (h) 6,079
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)
applicable to
common stock $ 1,148 $ 5,835 $ (1,804) $ 2,468 $ 855 $ (9,723) $ (1,221)
============ ============ ============ ============ ============ ============ ============
Income (loss) per
common share:
Basic $ 0.07 $ (0.06)
============ ============
Diluted $ 0.07 $ (0.06)
============ ============
Weighted average
shares outstanding:
Basic 16,481,399 18,817,577 (i)
============ ============
Diluted 17,479,376 18,817,577 (i)
============ ============
</TABLE>
The accompanying notes are an integral part of this
pro forma combined financial statement.
4
<PAGE> 8
SYNAGRO TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
The unaudited pro forma combined statement of operations adjustments
consists of the following:
(a) To adjust expenses related to prior owners based on employment
agreements entered and salary costs attributed to staff reductions.
(b) To adjust depreciation expense related to purchase price adjustments,
re-evaluation of useful lives and conformity with the Company's
depreciation methods of property and equipment.
(c) To adjust rental charge for facility closures.
(d) To eliminate certain nonrecurring expenses related to the acquisition,
including legal fees and certain accounting costs.
(e) To reflect the amortization of goodwill related to purchase price
adjustments to be recorded in connection with the acquisitions over a
40-year estimated life.
(f) To eliminate write-offs of EPIC's intercompany receivables, which were
forgiven in connection with the acquisition of EPIC by the Company.
(g) To record additional interest expense on the debt incurred in
connection with the 1999 Acquisitions and the 2000 Acquisitions, as
applicable.
(h) To record amortization of Preferred Stock issuance costs and the
noncash dividends associated with the Preferred Stock.
(i) Includes shares issued in connection with the 1999 Acquisitions and
the 2000 Acquisitions assuming these shares were issued at the
beginning of the respective periods presented. Basic earnings per
share (EPS) is computed by dividing net income applicable to common
stock by the weighted average number of common shares outstanding for
the period and common stock equivalents (common stock equivalents for
stock options and warrants are determined using the treasury stock
method). Diluted EPS reflects the potential dilution that could occur
if the Company's preferred stock were converted into common stock.
Diluted EPS is computed by dividing net income before preferred stock
dividends by the total of the weighted average number of common shares
outstanding for the period, the number of shares of common stock that
would be issued assuming conversion of the Company's preferred stock,
and other common stock equivalents (i.e., options and warrants). Basic
and diluted EPS are the same and shares assuming conversion of the
Company's preferred stock and certain other common stock equivalents
totaling 28,638,699 and 28,914,893 for the six months ended June 30,
2000, and the year ended December 31, 1999, respectively, were
excluded from the diluted per share amounts because diluted earnings
per share was antidilutive.
II. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS:
The unaudited pro forma balance sheet adjustments consist of the following:
(a) To reduce cash for funds used to partially fund the acquisition of Bio
Gro (see note (d) below) and to remove cash not acquired.
5
<PAGE> 9
(b) To adjust receivables, property, machinery and equipment to their
estimated fair value, to remove related party notes payable, other
liabilities, and the accumulated earnings which were not acquired,
and to adjust goodwill as follows:
<TABLE>
<S> <C>
Cash purchase price $ 146,018
Transaction costs 4,063
------------
Total consideration $ 150,081
Bio Gro equity $ 135,411
Receivables (1,000)
Deferred issuance costs 2,528
Property, machinery & equipment 59,100
Goodwill (81,848)
Related party notes payable 7,155
Other liabilities (deferred taxes) 19,543
------------
Net assets acquired $ 140,889
------------
Goodwill $ 9,192
------------
Bio Gro goodwill $ 81,848
Goodwill adjustment (72,658)
------------
Goodwill $ 9,190
============
</TABLE>
(c) To record debt issuance costs related to funds borrowed to fund the
cash portion of the purchase price of Bio Gro including the value of
the warrants issued.
(d) To record the issuance of debt and preferred stock which was used to
fund the Bio Gro purchase price as follows:
<TABLE>
<S> <C>
Senior bank debt $ 92,075
Subordinated debt 26,380
------------
118,455
Preferred stock 29,003
Existing cash 2,623
------------
$ 150,081
============
</TABLE>
The Company also issued warrants to purchase 6,906.82 shares of
preferred stock to the shareholders of the subordinated debt and
preferred stock. These warrants were simultaneously converted into
preferred stock. Accordingly, the preferred stock recorded consists of
the following:
<TABLE>
<S> <C>
Preferred stock issued $ 29,003
Warrants converted into
Preferred stock 4,469
Issuance costs (137)
------------
$ 33,335
============
</TABLE>
6
<PAGE> 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Bio Gro Division
of Waste Management, Inc.:
We have audited the accompanying combined balance sheets of the Bio Gro division
of Waste Management, Inc. (as defined in Note 1), as of December 31, 1999 and
1998, and the related combined statements of operations, changes in division
equity and cash flows for the three years in the period ended December 31, 1999.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 combined financial position of the Bio Gro
division of Waste Management, Inc., as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Houston, Texas
October 27, 2000
7
<PAGE> 11
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 41 $ 46
Restricted cash 925 1,834
Accounts receivable, net of allowance for doubtful accounts of $262
and $726, respectively 31,387 26,546
Prepaids and other 1,820 2,004
Deferred tax asset 1,901 1,054
-------- --------
Total current assets 36,074 31,484
PROPERTY, PLANT AND EQUIPMENT, net 101,107 106,684
OTHER ASSETS:
Goodwill, net of accumulated amortization of $13,015 and
$10,611, respectively 83,057 85,461
Deferred debt issuance costs and other, net 2,350 2,423
-------- --------
Total assets $222,588 $226,052
======== ========
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,075 $ 1,975
Current portion of related-party notes payable 264 243
Accounts payable and accrued liabilities 13,535 13,274
Unearned revenue -- 268
-------- --------
Total current liabilities 15,874 15,760
LONG-TERM DEBT 45,309 47,563
RELATED-PARTY NOTES PAYABLE 7,021 7,288
DEFERRED INCOME TAXES 17,701 14,015
COMMITMENTS AND CONTINGENCIES
DIVISION EQUITY 136,683 141,426
-------- --------
Total liabilities and division equity $222,588 $226,052
======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
8
<PAGE> 12
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES $ 117,677 $ 145,656 $ 198,583
COST AND EXPENSES:
Operating (exclusive of depreciation and amortization) 70,013 81,477 112,194
General and administrative 19,439 16,881 18,861
Depreciation and amortization 12,698 12,869 31,432
Asset impairments -- -- 11,179
---------- ---------- ----------
Income from operations 15,527 34,429 24,917
INTEREST EXPENSE 3,838 4,249 4,907
MANAGEMENT ALLOCATION 819 2,417 4,646
OTHER (INCOME) EXPENSE, net (11) (138) (968)
---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 10,881 27,901 16,332
INCOME TAX PROVISION 5,046 11,894 6,987
---------- ---------- ----------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 5,835 16,007 9,345
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net
of income tax benefit -- 566 --
---------- ---------- ----------
NET INCOME $ 5,835 $ 15,441 $ 9,345
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
9
<PAGE> 13
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(In Thousands)
<TABLE>
<S> <C>
BALANCE, December 31, 1996 $ 144,752
NET INCOME 9,345
NET DISTRIBUTIONS TO WASTE MANAGEMENT, INC., AND AFFILIATES (24,174)
---------
BALANCE, December 31, 1997 129,923
NET INCOME 15,441
NET DISTRIBUTIONS TO WASTE MANAGEMENT, INC., AND AFFILIATES (3,938)
---------
BALANCE, December 31, 1998 141,426
NET INCOME 5,835
NET DISTRIBUTIONS TO WASTE MANAGEMENT, INC., AND AFFILIATES (10,578)
---------
BALANCE, December 31, 1999 $ 136,683
=========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
10
<PAGE> 14
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,835 $ 15,441 $ 9,345
Adjustments to reconcile net income to net cash provided by
operating activities-
Impairment charge -- -- 11,179
Cumulative effect of change in accounting principle -- 943 --
Depreciation and amortization 12,698 12,869 31,432
Deferred income tax provision (benefit) 2,839 4,986 (2,471)
Changes in assets and liabilities-
Accounts receivable, net (4,841) 17,659 5,317
Prepaids and other current assets (663) 561 1,540
Accounts payable and accrued liabilities 261 (1,419) 1,867
Unearned revenue (268) (2,709) (9,652)
Other, net 7 1,500 1,163
-------- -------- --------
Net cash provided by operating activities 15,868 49,831 49,720
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,291) (2,359) (7,692)
-------- -------- --------
Net cash used in investing activities (6,291) (2,359) (7,692)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in restricted cash 909 1,300 2,635
Repayments of long-term debt (2,154) (1,885) (900)
Repayments of related-party notes payable (246) (16,491) (20,248)
Net cash distributions to Waste Management, Inc., and affiliates (8,091) (30,738) (24,174)
-------- -------- --------
Net cash used in financing activities (9,582) (47,814) (42,687)
-------- -------- --------
DECREASE IN CASH (5) (342) (659)
CASH AT BEGINNING OF YEAR 46 388 1,047
-------- -------- --------
CASH AT END OF YEAR $ 41 $ 46 $ 388
======== ======== ========
CASH PAID FOR INTEREST - NONAFFILIATE $ 3,370 $ 3,460 $ 3,500
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
11
<PAGE> 15
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION:
The Bio Gro division of Waste Management, Inc. (Bio Gro or the Company),
consists of the accounts of Wheelabrator Water Technologies Inc. (a Maryland
corporation) and its consolidated subsidiaries (collectively, WWTI) and
Residuals Processing Inc. (RPI) (a California corporation). WWTI is wholly owned
by Resco Holdings, Inc., which is wholly owned by Wheelabrator Technologies,
Inc. (WTI). WTI and RPI are both wholly owned by Waste Management Holdings, Inc.
Waste Management Holdings, Inc., is wholly owned by Waste Management, Inc.
(Waste Management). Bio Gro, operating as a division of Waste Management, offers
municipalities and various industrial customers (commonly referred to as waste
"generators") a range of management services for nonhazardous sludges resulting
from treatment of municipal and industrial wastewater (biosolids). All of Bio
Gro's operations are located in the United States. Services are typically
provided to customers pursuant to multiyear contracts under which Bio Gro
handles, processes and disposes biosolids. The Company's primary means of
disposing of biosolids are primarily through land application and thermal
facilities.
Land application involves the application of nonhazardous biosolids as a natural
fertilizer on farmland pursuant to site-specific permits issued by applicable
state authorities. Land-applied biosolids are often stabilized prior to
application using proprietary technology. Biosolids are also disposed of at
composting sites and landfills. Principal areas of operation include Maryland,
New Jersey, Illinois, Ohio, Michigan and California.
Bio Gro also develops and operates facilities at which biosolids are dried and
pelletized or composted. Development of dryer and composting facilities
generally involves various contractual arrangements with a variety of private
and public entities, including municipalities which generate the biosolids,
lenders, contractors and subcontractors which build the facilities, and
end-users of the fertilizer, pellets or compost generated from the treatment
process. These facilities incorporate a variety of biosolids drying and emission
control technologies, some proprietary and some licensed to Bio Gro. Biosolids
which have been dried and pelletized or composted are generally used as
fertilizer by farmers, commercial landscapers and nurseries and as a bulking
agent by fertilizer manufacturers. Principal areas of operation include
Maryland, New York and New Jersey.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination
WWTI is comprised of Enviroland Incorporated, New York Organic Fertilizer
Company Holdings Inc., Wheelabrator Clean Water New Jersey Inc., Vista
Properties Inc., New York Organic Fertilizer Inc. (NYOFCO), Wheelabrator Water
Technologies Baltimore LLC and a 40 percent interest in JABB II LLC. RPI
includes Future-Tech Environmental Services Inc. All intercompany accounts and
transactions have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, income
and expenses and disclosures of contingencies. Actual results could differ from
those estimates.
12
<PAGE> 16
Concentration of Credit Risk
Bio Gro provides services to various geographical regions in the U.S. Bio Gro's
credit risk primarily consists of receivables from a variety of customers,
including state and local agencies, municipalities and private industries. Bio
Gro reviews its accounts receivable and provides allowances as deemed necessary.
Fair Value of Financial Instruments
Bio Gro's financial instruments consist primarily of cash, receivables,
restricted cash, accounts payable and debt instruments. The book values of cash,
receivables, restricted cash and accounts payable are considered to be
representative of their respective fair values. See Note 6 for the terms,
carrying values and fair values of Bio Gro's various debt instruments.
Property, Plant and Equipment
Property, plant and equipment (including major improvements) is stated at cost.
Expenditures which increase the utility or extend the lives of assets in service
are capitalized and depreciated. Expenditures of an ordinary maintenance or
repair nature are charged directly to operating expense. Upon retirement or
disposition of property, plant and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the combined statement of income.
The cost of Bio Gro's buildings, building improvements, machinery and equipment
utilized in Bio Gro's thermal operations is depreciated on a straight-line basis
over the shorter of the estimated useful lives of the individual assets or the
lives of the initial service contracts related to each thermal facility. When
evidence (such as service contract renegotiations or extensions) supports longer
useful lives for thermal assets depreciated based on service contract lives,
depreciation is adjusted and accounted for on a prospective basis. Except for
land, the cost of all other property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the asset. See Note 4 for
further information regarding amounts recorded in the combined financial
statements and estimated useful lives.
Capitalized Interest
Bio Gro capitalizes interest on significant projects under construction in
accordance with Statement of Financial Accounting Standards (SFAS) No. 34,
"Capitalization of Interest Cost." There were no amounts capitalized for the
years ended December 31, 1999, 1998 and 1997.
Goodwill
Goodwill represents the aggregate purchase price paid by Bio Gro in acquisitions
accounted for as a purchase over the fair value of the net tangible assets
acquired. Goodwill is amortized on a straight-line basis over a period not
exceeding 40 years. Goodwill amortization expense was $2,405,000, $2,209,000 and
$1,670,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed on the basis of the
estimated future undiscounted cash flows associated with the asset. Any
impairment would be recognized in the period identified. Bio Gro believes the
goodwill remaining as of December 31, 1999, is fully realizable.
In 1998, Waste Management purchased certain shareholding interests in WTI not
previously held by Waste Management. As a result of such purchase, approximately
$26,800,000 in goodwill was allocated to Bio Gro in the accompanying combined
financial statements.
13
<PAGE> 17
Deferred Debt Issuance Costs
Deferred debt issuance costs, net of accumulated amortization at December 31,
1999 and 1998, totaled approximately $1,097,000 and $1,166,000, respectively,
and is included in other assets. Deferred debt issuance costs are amortized over
the life of the underlying debt.
Environmental Costs and Liabilities
Bio Gro has instituted procedures to periodically evaluate potential
environmental exposures. When Bio Gro concludes it is probable that a liability
has been incurred, provision is made in the financial statements, based upon
management's judgment and prior experience, for Bio Gro's best estimate of the
liability. Such estimates are subsequently revised as deemed necessary when
additional information becomes available.
While Bio Gro does not presently anticipate that any such adjustment would be
material to its financial statements in the near term, it is reasonably possible
that technological, regulatory or enforcement developments, results of
environmental studies or other factors could alter this expectation and
necessitate the recording of additional liabilities, which could be material.
Estimates of the extent of the Company's degree of responsibility for
remediation and the method and ultimate cost of remediation require a number of
assumptions and are inherently difficult, and the ultimate outcome may differ
from current estimates. As part of its ongoing operations, the Company reviews
its reserve requirements for remediation and other environmental matters based
on an analysis of the regulatory environment. Revisions to reserve requirements
may result in adjustments to income from operations in any given period.
Revenues
Revenues under land application contracts are recognized when the service is
performed. Revenues under thermal operations are recognized either when cake
sludge enters the facilities or when the sludge has been pelletized, depending
on the contract terms.
During 1997, Bio Gro entered into a long-term engineering and construction
contract to design, build and operate a composting facility for which Bio Gro
did not take title. Bio Gro recognized revenue on the percentage-of-completion
basis. Under this method, Bio Gro recognized as revenue that portion of the
total contract price which the cost of work completed bears to the estimated
total cost of the work included in the contract. Because the contract extended
over more than one fiscal period, revisions of cost and profit estimates were
made periodically and were reflected in the accounting period in which they were
determined (see Note 3).
Impairment Charge
In accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
Bio Gro reviews long-lived assets held for use for impairment whenever events or
changes in circumstances indicate that the carrying value of the asset may not
be recoverable. During 1997, Bio Gro determined that the carrying amount of
certain assets held for use exceeded an estimate of its future undiscounted net
cash flows or estimated net realizable value. Accordingly, Bio Gro recorded an
impairment loss of approximately $11,179,000 during 1997 to reduce the carrying
value of these assets to an amount equal to their estimated fair value.
Income Taxes
Bio Gro accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
14
<PAGE> 18
Bio Gro is considered a part of the consolidated results of WTI for income tax
purposes. Effective April 1, 1998, in conjunction with the acquisition of the
remaining outstanding shares of WTI by Waste Management, WTI joined in filing a
consolidated federal income tax return with Waste Management. Income taxes in
Bio Gro's combined financial statements reflect Waste Management's and WTI's
payment of taxes related to income generated by Bio Gro. Amounts related to
income taxes have been allocated as if Bio Gro had prepared a stand-alone
federal income tax filing. Reference is made to Note 5 for further financial
information related to income tax amounts.
Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
with respect to accounting for the various types of costs incurred for computer
software developed or obtained for Bio Gro's use. Bio Gro was required to and
adopted SOP 98-1 in the first quarter of fiscal 1999. The adoption did not have
a material effect on Bio Gro's combined financial position or results of
operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred. This statement is effective for fiscal years beginning after December
15, 1998. The statement requires previously capitalized costs related to
start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Bio Gro capitalized certain
costs related primarily to start-up activities in connection with a thermal
facility. Bio Gro recorded an after-tax charge in 1998 of approximately $566,000
for the cumulative effect of this change in accounting principle upon adoption.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires a company to recognize all derivative instruments (including certain
derivative instruments embedded in other contracts) as assets or liabilities in
its balance sheet and measure them at fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 137, is effective for the Company in its first fiscal quarter of 2001.
Management is currently assessing the impact on existing accounting policies and
financial reporting disclosures. However, Bio Gro has not historically engaged
in activities or entered into arrangements normally associated with derivative
instruments.
3. SIGNIFICANT SERVICE CONTRACTS:
A significant portion of Bio Gro's revenues are derived from service contracts
with a limited number of customers. For the years ended December 31, 1999, 1998
and 1997, two customers accounted for 20 percent and 15 percent; 34 percent and
12 percent; and 37 percent and 6 percent, respectively, of the Company's
revenues. In addition, 15 percent of revenues recognized during 1997 was derived
from a construction contract with a county.
Municipal Service Contracts
During 1998, due to the expiration of the initial five-year service contract
with a municipality, which commenced in 1992 upon completion of construction of
a thermal facility, a new 15-year service contract was awarded and became
effective July 1, 1998. Bio Gro owns the property, plant and equipment utilized
in the operations. The service contract is subject to a termination option
exercisable by the municipality at any time upon giving a 10-day notice of
termination to Bio Gro. The site lease covers five years from July 1, 1998, to
June 30, 2003, with two five-year renewal options to Bio Gro. Upon expiration of
the site lease, Bio Gro is to remove all trade fixtures, machinery and equipment
from the facility, at which time unlimited title to all building and
improvements will pass to the third-party lessor. The land at the site is leased
from a third party under a separate site lease agreement.
Bio Gro owns the property, plant and equipment utilized in the operations of two
other thermal facilities. The land at each site is leased from a municipality
under separate long-term site lease agreements expiring January 1,
15
<PAGE> 19
2020, and August 31, 2022, respectively, or five years after expiration of the
service agreement, whichever is later. Both leases can be extended with two
mutually agreeable five-year options. Title to the facilities remains with Bio
Gro, or with a trustee, so long as the bonds used to finance the facilities
remain outstanding. Upon expiration of the site leases, the municipality may
request that Bio Gro dismantle and remove the facilities and restore the land,
all at Bio Gro's expense, or should the municipality not request removal, Bio
Gro may elect to not remove the facilities and, instead, transfer title to the
municipality.
The service agreements with the municipality are subject to a termination option
exercisable by the municipality, in the case of one facility, in years 2005,
2010 or 2015 and, in the case of the other facility, in years 2007, 2012 or
2017. Under both contracts, the municipality must provide a notice of
termination one year prior to termination. If the municipality elects to
terminate either or both service contracts, the municipality must redeem a
portion of the outstanding Project Revenue Bonds (as defined in Note 6) and make
certain payments to Bio Gro generally based on a portion of lost profits for the
remaining term of the service contract and undepreciated or otherwise
unamortized project costs. Both contracts contain an option, based on mutual
consent, to renew the contract for additional terms aggregating five years.
Composting Facility
On May 10, 1996, the Company entered into a co-composting facility construction
and operating agreement with a county providing for the design, construction,
operation and maintenance of a composting facility. The price to construct the
facility was fixed and was based on completion of certain milestones throughout
the contract period. Construction of the facility began in March 1997 and was
completed in October 1998. The Company accounted for this contract under the
percentage-of-completion method, using costs incurred to date in relation to
estimated total costs of the contract to measure the stage of completion. The
cumulative effect of revisions of estimated total costs and revenues was
recorded in the period in which the facts requiring the revision became known.
Commercial operations of the facility began in 1998. Under the agreement,
Bio Gro to operate the facility for a period of five years, with a mutual
option for an additional five-year renewal period.
4. PROPERTY, PLANT AND EQUIPMENT:
The following is a summary of capitalized costs of property, plant and equipment
and useful lives (in years) at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Approximate
Useful Life 1999 1998
------------ ------------ ------------
(In Years)
<S> <C> <C> <C>
Land N/A $ 2,419 $ 2,491
Buildings and improvements 5-20 52,863 53,353
Machinery and equipment 3-20 184,919 183,983
Vehicles 3-10 22,321 20,885
Other 3-25 3,837 3,560
Construction in progress N/A 515 286
Less- Accumulated depreciation (165,767) (157,874)
------------ ------------
Net property, plant and equipment $ 101,107 $ 106,684
============ ============
</TABLE>
Depreciation of property, plant and equipment included for the years ended
December 31, 1999, 1998 and 1997, was $10,170,000, $9,958,000 and $28,512,000,
respectively.
16
<PAGE> 20
5. INCOME TAXES:
A summary of Bio Gro's income tax provision (benefit) for the years ended
December 31, 1999 and 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current tax expense-
U.S. federal $ 1,782 $ 5,275
State and local 425 1,256
-------- --------
Total current 2,207 6,531
-------- --------
Deferred tax expense-
U.S. federal 2,293 4,027
State and local 546 959
-------- --------
Total deferred 2,839 4,986
-------- --------
Total provision $ 5,046 $ 11,517
======== ========
</TABLE>
The principal items accounting for the difference in income taxes computed at
the U.S. statutory rates compared to amounts recorded for the years ended
December 31, 1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
Amount Amount
-------- --------
<S> <C> <C>
Statutory federal income tax $ 3,808 $ 9,435
State income taxes after federal income tax benefit 631 1,440
Other, net 607 642
-------- --------
Effective tax rate $ 5,046 $ 11,517
======== ========
</TABLE>
The principal items that comprise deferred tax assets (liabilities) are as
follows as of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Reserves not deductible until paid $ 1,479 $ 323
Accruals not deductible until paid 1,375 721
Other 1,668 1,054
-------- --------
Subtotal 4,522 2,098
-------- --------
Property, plant and equipment (17,931) (12,305)
Intangibles (2,391) (2,651)
Other -- (103)
-------- --------
Subtotal (20,322) (15,059)
-------- --------
Net deferred tax asset (liability) $(15,800) $(12,961)
======== ========
</TABLE>
17
<PAGE> 21
6. DEBT:
Long-term debt and related-party notes payable at December 31, 1999 and 1998,
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Long-term debt-
Maryland Energy Financing Administration Limited Obligation Solid
Waste Disposal Revenue Bonds, 1996 series-
Revenue bonds due 1999 to 2005 at stated interest rates of 5.10% to 5.85% $ 14,270 $ 16,245
Term revenue bond due 2010 at stated interest rate of 6.30% 16,295 16,295
Term revenue bond due 2016 at stated interest rate of 6.45% 22,360 22,360
Less- Restricted cash (5,541) (5,362)
-------- --------
Total debt, net of restricted cash 47,384 49,538
Less- Current portion (2,075) (1,975)
-------- --------
Total long-term debt $ 45,309 $ 47,563
======== ========
Related-party notes payable-
WTI related-party notes payable-
Note payable monthly through 2014 at interest rate of 7% $ 4,539 $ 4,707
Note payable monthly through 2017 at interest rate of 7% 2,746 2,824
-------- --------
7,285 7,531
Less- Current portion (264) (243)
-------- --------
Total long-term related-party notes payable $ 7,021 $ 7,288
======== ========
</TABLE>
The aggregate fair value of Bio Gro's debt, excluding restricted cash,
was approximately $60,209,000 and $62,431,000 at December 31, 1999 and 1998,
respectively. The fair value of Bio Gro's long-term debt was determined using
market quotes of similar debt with similar maturities and stated interest rates.
Restricted cash represents monies held by First Union National Bank (the
Trustee) for the loan agreement between the Maryland Energy Financing
Administration and Wheelabrator Water Technologies Baltimore LLC (WWTB). As a
requirement of the loan agreement, WWTB must meet the requirements stipulated
per the agreement dated June 1, 1996. The loan, based on the terms of the
related indenture, requires that certain monies be placed in restricted fund
accounts to be used for various designated purposes (i.e., debt service reserve
funds, bond funds, etc.). The debt service reserve fund has been presented net
of debt in the accompanying balance sheets. Monies in the funds will remain
restricted until such time as the related loan matures or is paid off, whichever
occurs first. WWTB was in compliance with the reserve requirements as of
December 31, 1999 and 1998.
The revenue bonds (the Revenue Bonds) and the term revenue bonds (the Term
Revenue Bonds) (collectively, the Project Revenue Bonds) were issued in 1996 by
the Maryland Energy Financing Administration pursuant to the Maryland Energy
Financing Act. The proceeds of the Project Revenue Bonds were loaned to Bio Gro
pursuant to a June 1996 financing agreement for the purposes of financing the
costs of the construction of Bio Gro's thermal operations located in Baltimore
County, Maryland, at the site of Baltimore's Back River Wastewater Treatment
Plant and in Baltimore City, Maryland, at the site of Baltimore's Patapsco
Wastewater Treatment Plant. Both facilities were in operation prior to 1998.
The Project Revenue Bonds are primarily secured by the pledge of revenues and
assets related to Bio Gro's Back River and Patapsco thermal facilities. The
underlying service contracts between Bio Gro and Baltimore obligated Bio Gro to
design, construct and operate the thermal facilities and obligated Baltimore to
deliver biosolids for processing at the thermal facilities. Bio Gro and
Baltimore have agreed that Baltimore will deposit all payments made by Baltimore
to Bio Gro under the service contracts directly with a trustee for the purpose
of maintaining a reserve fund to service debt requirements.
18
<PAGE> 22
At December 31, 1999 and 1998, the Project Revenue Bonds were collateralized by
property, plant and equipment with a net book value of $56,556,000 and
$59,371,000, respectively, and restricted cash of $6,466,000 and $7,196,000,
respectively.
The Project Revenue Bonds can be redeemed at the option of Bio Gro at any time
on or after December 1, 2006, subject to redemption prices specified in the
financing agreement. The Project Revenue Bonds can be redeemed at the option of
Bio Gro under certain extraordinary conditions, as defined in the financing
agreement. Additionally, the Term Revenue Bonds are subject to mandatory sinking
fund requirements prior to final maturity beginning on December 1, 2006.
WWTI has guaranteed the performance of services under the underlying service
agreements. WTI has also guaranteed the performance of services under the
underlying service agreements. In July 1998, the WTI guarantee was assigned to
Waste Management. Neither WWTI nor Waste Management has guaranteed payment of
debt service on the Project Revenue Bonds.
Principal payments on debt at December 31, 1999, are due as follows
(in thousands):
<TABLE>
<CAPTION>
Related-Party
Long-Term Debt Notes Payable
-------------- --------------
<S> <C> <C>
2000 $ 2,075 $ 264
2001 2,185 283
2002 2,300 303
2003 2,430 325
2004 2,570 349
Thereafter 41,365 5,761
-------------- --------------
Total $ 52,925 $ 7,285
============== ==============
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, Bio Gro incurred
$519,000, $829,000 and $2,315,000, respectively, of interest expense on the
related-party notes payable to WTI.
7. COMMITMENTS AND CONTINGENCIES:
Bio Gro's business activities are subject to environmental regulation under
federal, state and local laws and regulations. In the ordinary course of
conducting its business activities, Bio Gro becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. Bio Gro believes that these matters will not have a
material adverse effect on its results of operations or financial condition.
However, the outcome of any particular proceeding cannot be predicted with
certainty. Bio Gro is under various regulations to procure licenses and permits
to conduct its operations. These licenses and permits are subject to periodic
renewal without which the Company's operations could be adversely affected.
Also, there can be no assurance that regulatory requirements will not change to
the extent that it would materially affect Bio Gro's combined financial
statements.
The Company is a defendant in a lawsuit in which the plaintiff claims that the
death of an individual was allegedly caused by certain biosolids disposed of by
the Company. The litigation is currently in the discovery phase, and the Company
is waiting for plaintiff's production of a court-ordered expert on causation.
The Company is vigorously defending itself in the litigation. Bio Gro cannot
predict the ultimate outcome of the matter at this time.
There are various other lawsuits and claims pending against Bio Gro that have
arisen in the normal course of Bio Gro's business and relate mainly to matters
of environmental, personal injury and property damage. The outcome of these
matters is not presently determinable but, in the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the combined financial condition or results of operations of Bio Gro. It is
reasonably possible, however, that a change in Bio Gro's estimate of its
probable liability with respect to these matters could occur.
19
<PAGE> 23
Bio Gro has issued or is a party to bank letters of credit, performance bonds
and other guarantees. Such financial instruments are given in the ordinary
course of business. Bio Gro insures the majority of its contractual obligations
through performance bonds.
Noncancelable operating lease payments for operating and office facilities at
December 31, 1999, are due as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 1,872
2001 1,723
2002 1,662
2003 1,038
2004 440
Thereafter 975
-------
Total $ 7,710
=======
</TABLE>
Total rent expense was $1,800,000, $1,794,000 and $2,239,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
8. DETAIL OF CERTAIN
BALANCE SHEET ACCOUNTS:
Activity of Bio Gro's allowance for doubtful accounts at December 31, 1999 and
1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Balance at beginning of year $ 726 $ 479
Deductions for recoveries and for uncollectible receivables
written off (548) (184)
Charged to cost of services 84 431
------ ------
Balance at end of year $ 262 $ 726
====== ======
</TABLE>
Accrued liabilities at December 31, 1999 and 1998, consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accounts payable $ 5,158 $ 3,412
Salaries and benefits 2,614 2,070
Other 5,763 7,792
-------- --------
Total $ 13,535 $ 13,274
======== ========
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
Management Allocation
Bio Gro receives services from WTI and other Waste Management affiliates
relating to various corporate general and administrative functions such as legal
services, tax, accounting and reporting, treasury, information systems,
insurance and loss control and employee benefits administration. For the years
ended December 31, 1999, 1998 and 1997, Bio Gro was allocated $819,000,
$2,417,000 and $4,646,000, respectively, from WTI and other Waste Management
affiliates for these services. The allocation of affiliated corporate general
and administrative expenses is based on estimated levels of effort devoted to
the Bio Gro operations. Bio Gro's management believes the method for allocating
corporate general and administrative expenses is reasonable.
20
<PAGE> 24
Insurance Allocations
Bio Gro participates in consolidated insurance programs administrated by Waste
Management on behalf of certain of its subsidiaries. Under these programs, a
broad range of coverages are provided, including general liability, automobile
liability, workers' compensation, property, health and medical and such other
coverages as deemed necessary. Some of these coverages are subject to varying
retentions of risk. Pursuant to such insurance programs, Bio Gro was allocated
insurance premiums based on various factors, including payroll costs, employee
elections and other available information. Additionally, Bio Gro was also
allocated a charge for certain claims directly related to its operations. For
the years ended December 31, 1999, 1998 and 1997, Bio Gro incurred charges of
approximately $5,100,000, $4,900,000 and $5,300,000, respectively. It was not
practical to determine the amount of insurance cost of Bio Gro if it had
operated on a stand-alone basis. However, management believes the method of
allocation applied is reasonable.
Division Equity and Related-Party Transactions
The division equity of Bio Gro includes the common stock of WWTI and RPI. The
authorized capital stock of WWTI consists of 1,000 shares of common stock, par
value $1.00 per share, all of which shares are issued and outstanding. The
authorized capital stock of RPI consists of 1,000 shares of stock, all of which
shares are issued and outstanding.
Net distributions to Waste Management affiliates in the combined statement of
changes in division equity consist of net cash and noncash changes in
receivables and payables with WTI and other Waste Management affiliates which
have been included in combined division equity. Historically, WTI and other
Waste Management affiliates have transferred cash funds to and from Bio Gro
under a central cash management program, transferred net assets of acquired
businesses to Bio Gro, transferred assets from Bio Gro to other WTI or other
Waste Management affiliates, allocated tax-related assets, liabilities and
provisions and charged expenses to Bio Gro for various services and other
benefits provided, as discussed further herein.
In 1998, the remaining net book value of $2,500,000 related to a facility that
was written down in 1997 was transferred to Waste Management.
Related-Party Transaction on Composting Site
In January 1999, Bio Gro entered into a verbal agreement with Waste Management
of New York (WMNY), a wholly owned subsidiary of Waste Management, to construct
and operate a composting facility for the county of Rockland, New York. The
verbal agreement provided that all assets and liabilities related to
construction of the facility would remain on the books of WMNY and Bio Gro would
be paid a fee, from WMNY, of cost plus 10 percent. During 1999, revenues related
to this contract totaled $323,000 and are included in 1999 revenues in the
accompanying combined statement of income. During August 2000, the contract and
all associated assets and liabilities between Rockland and WMNY were sold to
Synagro Technologies, Inc. (Synagro), upon the sale of Bio Gro to Synagro (see
Note 11).
Other Related-Party Arrangements
Bio Gro is a party to certain arrangements with Waste Management affiliates
which primarily provide for the use by Bio Gro in disposing of biosolids at
certain facilities of Waste Management affiliates. The charges incurred by Bio
Gro pursuant to such arrangements for the years ended December 31, 1999, 1998
and 1997, were approximately $4,732,000, $3,377,000 and $3,926,000,
respectively.
21
<PAGE> 25
10. COMPENSATION AND BENEFIT PLANS:
Savings and Retirement Plan
During 1998 and 1997, substantially all employees participated in the
Wheelabrator-Rust Savings and Retirement Plan (the Plan), which was a qualified
defined contribution plan consisting of a savings account component (the Savings
Account) and a retirement account component (the Retirement Account). Under the
terms of the Savings Account, eligible employees of Bio Gro could elect to
contribute a portion of their annual compensation not to exceed 16 percent. Bio
Gro was required to match a minimum of 30 percent of the first 6 percent of
eligible compensation contributed by an employee. At the discretion of WTI
management, supplemental savings account contributions could be made to each
employee. Under the terms of the Retirement Account, eligible employees of Bio
Gro received an annual contribution equal to a minimum of 3 percent of their
eligible earnings. Employees vested in Bio Gro contributions and the associated
earnings in the Savings Account at 20 percent per year and in the Retirement
Account after five years. Bio Gro's contributions to the Plan for the years
ended December 31, 1998 and 1997, amounted to approximately $922,000 and
$819,000, respectively. The Plan was terminated at December 31, 1998, as a
result of the merger of Waste Management with USA Waste Services, Inc., in July
1998 at which time vesting was accelerated.
Effective January 1, 1999, the Waste Management Retirement Savings Plan and the
Plan were merged into the USA Waste Services, Inc. Employee Savings Plan, which
was then renamed the Waste Management Retirement Savings Plan (the Savings
Plan). The Savings Plan covers employees (except those working subject to
collective bargaining agreements which do not provide for coverage under such
plans) following a 90-day waiting period after hire and allows eligible
employees to contribute up to 15 percent of their annual compensation, as
limited by IRS regulations. Under the Savings Plan, the Company matches employee
contributions up to 3 percent of eligible compensation and matches 50 percent of
employee contributions in excess of 3 percent but no more then 6 percent of
eligible compensation. Both employee and Company contributions vest immediately.
Charges to operations for the Company's defined contribution plan was $645,000
for the year ended December 31, 1999.
Other
Certain Bio Gro employees participate in a Waste Management stock option plan
for which Accounting Principles Board Opinion No. 25 is followed for accounting
purposes. Exercise prices on options granted are equivalent to the market value
of Waste Management shares on the date of grant. As such, no compensation
expense is recognized or allocated to Bio Gro for options granted.
11. SUBSEQUENT EVENT:
On August 14, 2000, Synagro Technologies, Inc. (Synagro), closed the acquisition
of Bio Gro. The acquisition will be accounted for as a purchase; accordingly,
the purchase price will be allocated to the underlying assets and liabilities
based on their respective estimated fair values at the date of acquisition.
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THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 42 $ 41
Restricted cash 2,802 925
Accounts receivable, net of allowance for doubtful
accounts of $479 and $262, respectively 31,803 31,387
Prepaids and other 2,137 1,820
Deferred tax asset 2,324 1,901
------------ ------------
Total current assets 39,108 36,074
PROPERTY, PLANT AND EQUIPMENT, net 98,646 101,107
OTHER ASSETS:
Goodwill, net of accumulated amortization of $14,224 and $13,015,
respectively 81,848 83,057
Deferred debt issuance costs and other 2,189 2,350
------------ ------------
Total assets $ 221,791 $ 222,588
============ ============
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,075 $ 2,075
Current portion of related-party notes payable 338 264
Accounts payable and accrued liabilities 12,298 13,535
------------ ------------
Total current liabilities 14,711 15,874
LONG-TERM DEBT 45,309 45,309
RELATED-PARTY NOTES PAYABLE 6,817 7,021
DEFERRED INCOME TAXES 19,543 17,701
COMMITMENTS AND CONTINGENCIES
DIVISION EQUITY 135,411 136,683
------------ ------------
Total liabilities and division equity $ 221,791 $ 222,588
============ ============
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
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<PAGE> 27
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
OPERATING REVENUES $ 64,828 $ 53,227
COST AND EXPENSES:
Operating (exclusive of depreciation and amortization) 38,774 33,054
General and administrative 9,218 4,981
Depreciation and amortization 6,027 5,653
-------- --------
Income from operations 10,809 9,539
INTEREST EXPENSE 1,888 1,895
MANAGEMENT ALLOCATION 394 263
OTHER (INCOME) EXPENSE, net (127) (66)
-------- --------
Income before income taxes 8,654 7,447
INCOME TAX PROVISION 3,808 3,625
-------- --------
NET INCOME $ 4,846 $ 3,822
======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
24
<PAGE> 28
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,846 $ 3,822
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 6,027 5,653
Deferred income taxes 2,655 4,873
Changes in assets and liabilities-
Accounts receivable, net (416) 1,289
Prepaids and other current assets (317) (792)
Accounts payable and accrued liabilities (1,508) (1,089)
Unearned revenue 271 1
Other, net (107) (647)
---------- ----------
Net cash provided by operating activities 11,451 13,110
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,359) (2,261)
---------- ----------
Net cash used in investing activities (2,359) (2,261)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in restricted cash (1,877) (526)
Repayments of related-party notes payable (130) (300)
Net cash distributions to Waste Management, Inc., and affiliates (7,084) (9,983)
---------- ----------
Net cash used in financing activities (9,091) (10,809)
---------- ----------
INCREASE IN CASH 1 40
CASH AT BEGINNING OF YEAR 41 46
---------- ----------
CASH AT END OF YEAR $ 42 $ 86
========== ==========
CASH PAID FOR INTEREST -- NON AFFILIATE $ 1,725 $ 1,685
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
25
<PAGE> 29
THE BIO GRO DIVISION OF WASTE MANAGEMENT, INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION:
The Bio Gro division of Waste Management, Inc. (Bio Gro or the Company),
consists of the accounts of Wheelabrator Water Technologies Inc. (a Maryland
corporation) and its consolidated subsidiaries (collectively, WWTI) and
Residuals Processing Inc. (RPI) (a California corporation). WWTI is wholly owned
by Resco Holdings, Inc., which is wholly owned by Wheelabrator Technologies,
Inc. (WTI). WTI and RPI are both wholly owned by Waste Management Holdings, Inc.
Waste Management Holdings, Inc., is wholly owned by Waste Management, Inc.
(Waste Management). Bio Gro, operating as a division of Waste Management, offers
municipalities and various industrial customers (commonly referred to as waste
"generators") a range of management services for nonhazardous sludges resulting
from treatment of municipal and industrial wastewater (biosolids). All of Bio
Gro's operations are located in the United States. Services are typically
provided to customers pursuant to multiyear contracts under which Bio Gro
handles, processes and disposes biosolids. The Company's primary means of
disposing of biosolids are primarily through land application and thermal
facilities.
Land application involves the application of nonhazardous biosolids as a natural
fertilizer on farmland pursuant to site-specific permits issued by applicable
state authorities. Land-applied biosolids are often stabilized prior to
application using proprietary technology. Biosolids are also disposed of at
composting sites and landfills. Principal areas of operation include Maryland,
New Jersey, Illinois, Ohio, Michigan and California.
Bio Gro also develops and operates facilities at which biosolids are dried and
pelletized or composted. Development of dryer and composting facilities
generally involves various contractual arrangements with a variety of private
and public entities, including municipalities which generate the biosolids,
lenders, contractors and subcontractors which build the facilities, and
end-users of the fertilizer, pellets or compost generated from the treatment
process. These facilities incorporate a variety of biosolids drying and emission
control technologies, some proprietary and some licensed to Bio Gro. Biosolids
which have been dried and pelletized or composted are generally used as
fertilizer by farmers, commercial landscapers and nurseries and as a bulking
agent by fertilizer manufacturers. Principal areas of operation include
Maryland, New York and New Jersey.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination
WWTI is comprised of Enviroland Incorporated, New York Organic Fertilizer
Company Holdings Inc., Wheelabrator Clean Water New Jersey Inc., Vista
Properties Inc., New York Organic Fertilizer Inc. (NYOFCO), Wheelabrator Water
Technologies Baltimore LLC and a 40 percent interest in JABB II LLC. RPI
includes Future-Tech Environmental Services Inc. All intercompany accounts and
transactions have been eliminated in combination.
Interim Financial Statements
The interim financial statements as of June 30, 1999, and for the six months
ended June 30, 2000 and 1999, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been omitted. In the
26
<PAGE> 30
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, income
and expenses and disclosures of contingencies. Actual results could differ from
those estimates.
Concentration of Credit Risk
Bio Gro provides services to various geographical regions in the U.S. Bio Gro's
credit risk primarily consists of receivables from a variety of customers,
including state and local agencies, municipalities and private industries. Bio
Gro reviews its accounts receivable and provides allowances as deemed necessary.
Fair Value of Financial Instruments
Bio Gro's financial instruments consist primarily of cash, receivables,
restricted cash, accounts payable and debt instruments. The book values of cash,
receivables, restricted cash and accounts payable are considered to be
representative of their respective fair values.
Property, Plant and Equipment
Property, plant and equipment (including major improvements) is stated at cost.
Expenditures which increase the utility or extend the lives of assets in service
are capitalized and depreciated. Expenditures of an ordinary maintenance or
repair nature are charged directly to operating expense. Upon retirement or
disposition of property, plant and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the combined statement of income.
The cost of Bio Gro's buildings, building improvements, machinery and equipment
utilized in Bio Gro's thermal operations is depreciated on a straight-line basis
over the shorter of the estimated useful lives of the individual assets or the
lives of the initial service contracts related to each thermal facility. When
evidence (such as service contract renegotiations or extensions) supports longer
useful lives for thermal assets depreciated based on service contract lives,
depreciation is adjusted and accounted for on a prospective basis. Except for
land, the cost of all other property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the asset.
Capitalized Interest
Bio Gro capitalizes interest on significant projects under construction in
accordance with Statement of Financial Accounting Standards (SFAS) No. 34,
"Capitalization of Interest Cost." There were no amounts capitalized during the
six months ended June 30, 2000 and June 30, 1999.
Goodwill
Goodwill represents the aggregate purchase price paid by Bio Gro in acquisitions
accounted for as a purchase over the fair value of the net tangible assets
acquired. Goodwill is amortized on a straight-line basis over a period not
exceeding 40 years.
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<PAGE> 31
In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed on the basis of the
estimated future undiscounted cash flows associated with the asset. Any
impairment would be recognized in the period identified. Bio Gro believes the
goodwill remaining as of June 30, 2000, is fully realizable.
Deferred Debt Issuance Costs
Deferred debt issuance costs are amortized on the straight-line method over the
life of the underlying debt.
Environmental Costs and Liabilities
Bio Gro has instituted procedures to periodically evaluate potential
environmental exposures. When Bio Gro concludes it is probable that a liability
has been incurred, provision is made in the financial statements, based upon
management's judgment and prior experience, for Bio Gro's best estimate of the
liability. Such estimates are subsequently revised as deemed necessary when
additional information becomes available.
While Bio Gro does not presently anticipate that any such adjustment would be
material to its financial statements in the near term, it is reasonably possible
that technological, regulatory or enforcement developments, results of
environmental studies or other factors could alter this expectation and
necessitate the recording of additional liabilities, which could be material.
Estimates of the extent of the Company's degree of responsibility for
remediation and the method and ultimate cost of remediation require a number of
assumptions and are inherently difficult, and the ultimate outcome may differ
from current estimates. As part of its ongoing operations, the Company reviews
its reserve requirements for remediation and other environmental matters based
on an analysis of the regulatory environment. Revisions to reserve requirements
may result in adjustments to income from operations in any given period.
Revenues
Revenues under land application contracts are recognized when the service is
performed. Revenues under thermal operations are recognized either when cake
sludge enters the facilities or when the sludge has been pelletized, depending
on the contract terms.
Long-lived Assets
In accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
Bio Gro reviews long-lived assets held for use for impairment whenever events or
changes in circumstances indicate that the carrying value of the asset may not
be recoverable.
Income Taxes
Bio Gro accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Bio Gro is considered a part of the consolidated results of WTI for income tax
purposes. Effective April 1, 1998, in conjunction with the acquisition of the
remaining outstanding shares of WTI by Waste Management, WTI joined in filing a
consolidated federal income tax return with Waste Management. Income taxes in
Bio Gro's combined financial statements reflect Waste Management's and WTI's
payment of taxes related to income generated by Bio Gro. Amounts related to
income taxes have been allocated as if Bio Gro had prepared a stand-alone
federal income tax filing.
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<PAGE> 32
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires a company to recognize all derivative instruments (including certain
derivative instruments embedded in other contracts) as assets or liabilities in
its balance sheet and measure them at fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 137, is effective for the Company in its first fiscal quarter of 2001.
Management is currently assessing the impact on existing accounting policies and
financial reporting disclosures. However, Bio Gro has not historically engaged
in activities or entered into arrangements normally associated with derivative
instruments.
3. COMMITMENTS AND CONTINGENCIES:
Bio Gro's business activities are subject to environmental regulation under
federal, state and local laws and regulations. In the ordinary course of
conducting its business activities, Bio Gro becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. Bio Gro believes that these matters will not have a
material adverse effect on its results of operations or financial condition.
However, the outcome of any particular proceeding cannot be predicted with
certainty. Bio Gro is under various regulations to procure licenses and permits
to conduct its operations. These licenses and permits are subject to periodic
renewal without which the Company's operations could be adversely affected.
Also, there can be no assurance that regulatory requirements will not change to
the extent that it would materially affect Bio Gro's combined financial
statements.
The Company is a defendant in a lawsuit in which the plaintiff claims that the
death of an individual was allegedly caused by certain biosolids disposed of by
the Company. The litigation is currently in the discovery phase, and the Company
is waiting for plaintiff's production of a court-ordered expert on causation.
The Company is vigorously defending itself in the litigation. Bio Gro cannot
predict the ultimate outcome of the matter at this time.
There are various other lawsuits and claims pending against Bio Gro that have
arisen in the normal course of Bio Gro's business and relate mainly to matters
of environmental, personal injury and property damage. The outcome of these
matters is not presently determinable but, in the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the combined financial condition or results of operations of Bio Gro. It is
reasonably possible, however, that a change in Bio Gro's estimate of its
probable liability with respect to these matters could occur.
Bio Gro has issued or is a party to bank letters of credit, performance bonds
and other guarantees. Such financial instruments are given in the ordinary
course of business. Bio Gro insures the majority of its contractual obligations
through performance bonds.
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<PAGE> 33
4. RELATED-PARTY TRANSACTIONS:
Bio Gro is party to certain arrangements with WTI and other Waste Management
affiliates. Reference is made to the audited financial statements for further
discussions of these transactions.
5. SUBSEQUENT EVENT:
On August 14, 2000, Synagro Technologies, Inc. (Synagro), closed the acquisition
of Bio Gro. The acquisition will be accounted for as a purchase; accordingly,
the purchase price will be allocated to the underlying assets and liabilities
based on their respective estimated fair values at the date of acquisition.
30
