SYNAGRO TECHNOLOGIES INC, 10-Q, 2000-11-14

SYNAGRO TECHNOLOGIES INC
10-Q, 2000-11-14
REFUSE SYSTEMS

Previous: DEARBORN BANCORP INC /MI/, 10-Q, EX-27, 2000-11-14

Next: SYNAGRO TECHNOLOGIES INC, 10-Q, EX-27.1, 2000-11-14

<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

<TABLE>
<S> <C>
For the Quarterly Period Ended September 30, 2000 Commission File Number 0-21054
</TABLE>

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 NOVEMBER 10, 2000
----- --------------------------------
Common stock, par value $.002 19,435,780

<PAGE> 2

SYNAGRO TECHNOLOGIES, INC.

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION

Condensed Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999............................ 3

Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999
(Unaudited).................................................. 4

Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited).... 5

Notes to Condensed Consolidated Financial Statements............ 7

Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 14

PART II -- OTHER INFORMATION.................................... 20
</TABLE>

2
<PAGE> 3

SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents $ 387,686 $ 180,633
Restricted cash 4,108,026 --
Accounts receivable, net 59,598,498 11,641,160
Prepaid expenses and other current assets 7,680,688 3,835,721
-------------- --------------
Total current assets 71,774,898 15,657,514

Property, machinery & equipment, net 199,772,495 15,918,674

Other Assets:
Goodwill, net 161,479,942 64,280,266
Other assets 10,759,465 3,315,643
-------------- --------------
Total assets $ 443,786,800 $ 99,172,097
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued expenses $ 35,204,546 $ 10,428,823
Current portion of notes payable to prior owners 352,835 849,010
Current portion of long-term debt 11,350,129 398,040
-------------- --------------
Total current liabilities 46,907,510 11,675,873

Long term liabilities:
Long term debt, net 282,322,611 39,936,222
Notes payable to prior owners 125,000 2,245,511
-------------- --------------
Total long term liabilities 282,447,611 42,181,733

COMMITMENTS AND CONTINGENCIES

Redeemable Preferred Stock 61,662,516 --

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, 19,435,780 and 17,693,489 issued and outstanding 38,872 35,388
Additional paid-in capital 109,085,542 66,406,731
Accumulated deficit (56,355,251) (21,127,628)
-------------- --------------
Total stockholders' equity 52,769,163 45,314,491
-------------- --------------
Total liabilities and stockholders' equity $ 443,786,800 $ 99,172,097
============== ==============
</TABLE>

The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.

3
<PAGE> 4

SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ......................................... $ 53,512,995 $ 15,856,641 $ 99,947,848 $ 39,834,873
Cost of services .................................. 38,778,632 11,271,832 73,381,592 29,785,853
------------ ------------ ------------ ------------
Gross profit ...................................... 14,734,363 4,584,809 26,566,256 10,049,020

Selling, general and administrative expenses ...... 4,080,764 1,732,170 9,098,552 4,952,622
Amortization of goodwill .......................... 1,040,131 433,848 2,478,266 1,101,876
------------ ------------ ------------ ------------
Income from operations ............................ 9,613,468 2,418,791 14,989,438 3,994,522

Other income (expense), net ....................... (32,842) 168,619 (46,447) 219,651
Interest expense, net ............................. (5,873,980) (913,014) (10,891,509) (2,229,000)
------------ ------------ ------------ ------------
Other expense, net ................................ (5,906,822) (744,395) (10,937,956) (2,009,349)
------------ ------------ ------------ ------------

Income before provision for income taxes .......... 3,706,646 1,674,396 4,051,482 1,985,173

Provision for income taxes ........................ -- -- -- --
------------ ------------ ------------ ------------
Net income ........................................ 3,706,646 1,674,396 4,051,482 1,985,173
Preferred stock dividends ......................... 1,282,703 -- 2,233,837 --
Non-cash beneficial conversion charge ............. 11,401,389 -- 37,045,268 --
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock ...... $ (8,977,446) $ 1,674,396 $(35,227,623) $ 1,985,173
============ ============ ============ ============

Basic and diluted earnings (loss) per share:
Net income ...................................... $ 0.19 $ 0.09 $ 0.21 $ 0.12
Preferred stock dividends ....................... (0.06) -- (0.12) --
------------ ------------ ------------ ------------
Subtotal .................................... 0.13 0.09 0.09 0.12
Non-cash beneficial conversion charge ........... (0.59) -- (1.92) --
------------ ------------ ------------ ------------
Net income (loss) per common share .............. $ (0.46) $ 0.09 $ (1.83) $ 0.12
============ ============ ============ ============

Weighted average shares outstanding, basic ........ 19,433,850 17,641,495 19,241,211 16,095,245
Weighted average shares outstanding, diluted ...... 19,433,850 18,997,522 19,241,211 17,073,245
</TABLE>

The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.

4
<PAGE> 5

SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 4,051,482 $ 1,985,173
Adjustments to reconcile net income
provided by (used in) operating activities
Depreciation and amortization ................................ 7,392,088 3,202,631
Gain on sale of equipment .................................... (46,447) (126,531)
Change in operating assets and liabilities, net of effects of
acquired businesses:
Accounts receivable .......................................... (8,921,678) (3,151,020)
Prepaid expenses and other ................................... 1,266,951 (782,048)
Accounts payable and accrued expenses ........................ 1,378,292 285,069
-------------- --------------
Net cash provided by operating activities ........................... 5,120,688 1,413,274
-------------- --------------

Cash flows from investing activities:
Additions to property, machinery & equipment ................. (3,896,673) (3,240,064)
Proceeds from sale of property, machinery & equipment ........ 107,000 835,087
Cash paid for acquired business, net of cash acquired ........ (240,091,564) (13,802,090)
Proceeds from notes receivable ............................... 68,097 397,084
-------------- --------------
Net cash used in investing activities ............................... (243,813,140) (15,809,983)
-------------- --------------

Cash flows from financing activities:
Proceeds from debt ........................................... 260,692,462 18,568,188
Payments on debt ............................................. (70,937,893) (5,786,715)
Decrease in restricted cash .................................. -- 680,656
Debt issuance costs .......................................... (10,450,110) --
Sale of redeemable preferred stock ........................... 59,428,679 --
Exercise of options and warrants ............................. 166,367 857,129
-------------- --------------
Net cash provided by financing activities ........................... 238,899,505 14,319,258
-------------- --------------

Net increase (decrease) in cash and cash equivalents ................ 207,053 (77,451)
Cash and cash equivalents, beginning of period ...................... 180,633 414,712
-------------- --------------
Cash and cash equivalents, end of period ............................ $ 387,686 $ 337,261
============== ==============
</TABLE>

The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.

5
<PAGE> 6

SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Supplemental Cash Flow Information
Interest paid during the period ..... $ 10,445,928 $ 2,089,185
Taxes paid during the period ........ -- --
</TABLE>

NON-CASH INVESTING AND FINANCING ACTIVITIES

During the first nine months of 2000, the Company issued an aggregate of
57,746.93 shares of Series C, Series D, and Series E Preferred Stock ("Preferred
Stock) with a beneficial conversion feature. The Company recognized the value of
the beneficial conversion feature of $37,045,268 as a preferred stock dividend.

During the nine-month period ended September 30, 2000, the Company issued an
aggregate of 220,898 shares relating to cashless exercises of certain warrants
and options pursuant to an exemption from registration under Rule 144 of the
Securities Act.

On July 9, 1999, the Company entered into a capital lease agreement to purchase
ten trucks with a purchase price of approximately $660,000.

6
<PAGE> 7

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 Synagro Technologies, Inc. ("Synagro" 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 nine months
ended September 30, 2000, 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, 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, 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

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which became effective for financial
statements beginning after June 15, 1999. SFAS No. 133, as amended, 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. The Company is evaluating SFAS No.133 and the
impact on existing accounting policies and financial reporting disclosures. The
Company has not historically engaged in activities or entered into arrangements
normally associated with derivative instruments. However, under the Company's
amended credit facility dated January 27, 2000, the Company is required to hedge
the interest rate on 50 percent of the total bank credit facility (see note 5).
The Company has entered into two two-year hedge agreements dated April 18, 2000,
and July 28, 2000, respectively, with Bank of America, N. A., for $35,000,000
and $15,000,000, respectively. Bank of America, N.A., at its discretion, can
extend the term of the agreements by three years.

7
<PAGE> 8

(2) ACQUISITIONS

1999 ACQUISITIONS

In 1999, the Company purchased Anti-Pollution Associates, Inc., 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
balance sheet at September 30, 2000, includes the final allocation of the
purchase price. The allocation 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 are summarized as follows:

<TABLE>
<S> <C>
Common stock shares issued ....................... 3,044,784
============
Value of 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>

ACQUISITION OF NATIONAL RESOURCE RECOVERY, INC.

In March 1999, Synagro completed the acquisition of all the common stock of
National Resource Recovery, Inc. ("NRR"), in a business combination accounted
for as a "pooling-of-interests" transaction. NRR, headquartered in Michigan,
provides biosolids management services. Synagro issued 1,000,001 shares of
common stock in exchange for all of the common stock of NRR. There were no
transactions between Synagro and NRR during the periods prior to the business
combination.

2000 ACQUISITIONS

Subsequent to December 31, 1999, and through September 30, 2000, the Company
purchased Residual Technologies, Limited Partnership and its affiliates
(collectively "RESTEC"), 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"). In connection with the purchase of
RESTEC, the former owners are entitled to receive up to an additional $12.0
million over the next eight years if certain performance targets are met. In
connection with the purchase of Rehbein, Inc., the former owners are entitled to
receive up to an additional $2.0 million over the next three years if certain
performance targets are met. In connection with the purchase of EPIC, the former
owners are entitled to receive up to an additional $ 5.4 million over the next
three years if certain performance targets are met. Additionally, the Company
assumed approximately $13.4 million, net of restricted cash reserves of
approximately $3,076,000, of municipal bonds in connection with the acquisition
of RESTEC. The bonds contained a provision whereby RESTEC could defease the
bonds and be released from all future obligations by placing an equivalent
amount of U.S. Securities with the bonds trustee. On July 21, 2000, the Company
defeased the bonds utilizing the $13.5 million available under its amended
Senior Credit Agreement reserved for defeasance. The 2000 Acquisitions were
accounted for using the purchase method of accounting. The preliminary
allocation of the purchase prices, which is subject to final adjustment,
resulted in approximately $99,783,000 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 issued .................. 1,325,000
============
Value of common stock issued ................ $ 5,471,000
Cash paid including transaction costs,
net of cash acquired ................... 239,425,000
Less: Historical net assets acquired ........ 145,113,000
------------
Goodwill .................................... $ 99,783,000
============
</TABLE>

The following unaudited pro forma information for the periods set forth below
gives effect to the 1999 Acquisitions and 2000 Acquisitions as if they had
occurred at the beginning of 1999. 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. The adjustments primarily relate to
depreciation, interest, amortization of goodwill, preferred stock dividends and
noncash beneficial conversion charges associated with the 1999 Acquisitions and
2000 Acquisitions.

8
<PAGE> 9

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
-------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 69,624,000 $ 62,737,000 $ 193,026,000 $ 172,351,000
Net income (loss) before Preferred Stock
Dividends ........................................ 3,846,000 (160,000) 7,990,000 1,713,000
Net earnings (loss) applicable to Common Stock ... 2,027,000 (1,251,000) 2,730,000 (39,631,000)
Net earnings (loss) per share
Basic ....................................... 0.10 (0.07) 0.14 (2.11)
Diluted ..................................... 0.08 (0.07) 0.14 (2.11)
</TABLE>

(3) PREFERRED STOCK

PREFERRED STOCK

The Company is authorized to issue up to 10,000,000 shares of Preferred Stock
that 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 of the Board of Directors.
Series A Junior Participating Preferred Stock will be issued upon exercise of
the Stockholder Rights described below.

SERIES C REDEEMABLE PREFERRED STOCK

On January 26, 2000, the Company authorized 30,000 shares of Series C Preferred
Stock, par value $.002 per share. Upon approval by a majority of the Company's
shareholders and certain other conditions in March 2000, the Series C Preferred
Stock became convertible into Series D Preferred Stock at a rate of 1:1. The
Series C Preferred Stock is senior to the Common Stock or any other equity
securities of the Company. The liquidation value of each share of Series C
Preferred Stock is $1,000 per share ("Liquidation Value") plus accrued and
unpaid dividends. Dividends on each share of Series C Preferred Stock shall
accrue on a daily basis at the rate of 8 percent per annum on aggregate
Liquidation Value plus accrued and unpaid dividends. The Series C Preferred
Stock has no voting rights. Shares of Series C Preferred Stock are subject to
mandatory redemption by the Company on January 26, 2010, at a price per share
equal to the Liquidation Value plus accrued and unpaid dividends.

On January 27, 2000, the Company issued 17,358.824 shares of Series C Preferred
Stock, par value $.002 per share, to GTCR Fund VII, L.P. and its affiliates for
$17,358,824. On February 4, 2000, the Company issued 419.4 shares of Series C
Preferred Stock to GTCR Fund VII, L.P. and its affiliates for $419,400. On March
24, 2000, the Company issued 225.000 shares of Series C Preferred Stock to GTCR
Fund VII, L.P. and its affiliates for $225,000. On March 27, 2000, the Company
issued 1,260.000 shares of Series C Preferred Stock to GTCR Fund VII, L.P. and
its affiliates for $1,260,000. The proceeds were used primarily to fund the 2000
Acquisitions. The Company also issued warrants to GTCR Fund VII, L.P. for a
nominal price in connection with the issuance of subordinated debt, which
warrants were immediately converted into 272.058 shares of Series C Preferred
Stock.

During April 2000, all Series C Preferred Stock was converted to Series D
Preferred Stock.

SERIES D REDEEMABLE PREFERRED STOCK

On January 26, 2000, the Company authorized 32,000 shares of Series D Preferred
Stock, par value $.002 per share. The Series D Preferred Stock is convertible by
the holders into a number of shares of Common Stock computed by (i) the sum of
(a) the number of shares to be converted multiplied by the Liquidation Value and
(b) the amount of accrued and unpaid dividends by (ii) the conversion price then
in effect. The initial conversion price is $2.50 per share, provided that in
order to prevent dilution, the conversion price may be adjusted. The Series D
Preferred Stock is senior to the Common Stock or any other equity securities of
the Company. The liquidation value of each share of Series D Preferred Stock is
$1,000 per share ("Liquidation Value") plus accrued and unpaid dividends.
Dividends on each share of Series D Preferred Stock shall accrue on a daily
basis at the rate of 8 percent per annum on the aggregate Liquidation Value. The
Series D Preferred Stock is entitled to one vote per share. Shares of Series D
Preferred Stock are subject to mandatory redemption by the Company on January
26, 2010, at a price per share equal to the Liquidation Value plus accrued and
unpaid dividends.

On January 27, 2000, the Company issued 2,641.176 shares of Series D Preferred
Stock to GTCR Fund VII, L.P. and its affiliates for $2,641,176. The proceeds
were used primarily to fund the 2000 Acquisitions. The Company also issued
warrants to GTCR Fund VII, L.P. for a nominal price in connection with the
issuance of subordinated debt, which warrants were immediately converted into
2,857.143 shares of Series D Preferred Stock.

9
<PAGE> 10

SERIES E REDEEMABLE PREFERRED STOCK

On June 14, 2000, the Company authorized 55,000 shares of Series E Preferred
Stock, par value $.002 per share. The Series E Preferred Stock is convertible by
the holders into a number of shares of Common Stock computed by (i) the sum of
(a) the number of shares to be converted multiplied by the Liquidation Value and
(b) the amount of accrued and unpaid dividends by (ii) the conversion price then
in effect. The initial conversion price is $2.50 per share, provided that in
order to prevent dilution, the conversion price may be adjusted. The Series E
Preferred Stock is senior to the Common Stock or any other equity securities of
the Company. The liquidation value of each share of Series E Preferred Stock is
$1,000 per share ("Liquidation Value") plus accrued and unpaid dividends.
Dividends on each share of Series E Preferred Stock shall accrue on a daily
basis at the rate of 8 percent per annum on the aggregate Liquidation Value. The
Series E Preferred Stock is entitled to one vote per share. Shares of Series E
Preferred Stock are subject to mandatory redemption by the Company on January
26, 2010, at a price per share equal to the Liquidation Value plus accrued and
unpaid dividends.

On June 15, 2000, the Company issued 6,840 shares of Series E Preferred Stock to
GTCR Fund VII, L.P. and its affiliates for $6,840,000. The proceeds were used
primarily to fund the acquisition of EPIC. The Company also issued warrants to
GTCR for a nominal price in connection with the issuance of subordinated debt,
which warrants were immediately converted into 1,400.00 shares of Series E
Preferred Stock.

On August 14, 2000, the Company issued 25,768.744 shares of Series E Preferred
Stock to GTCR Fund VII, L.P. and its affiliates, and 3,233.788 shares to
TCW/Crescent Lenders. Additionally, the Company issued 2,589.635 and 229.88
warrants to GTCR Fund VII, L.P. and Affiliates, and TCW/Crescent Lenders,
respectively, in connection with the issuance of the preferred stock; these were
immediately converted into Series E Preferred Stock. The proceeds were used to
fund the Bio Gro acquisition.

NONCASH BENEFICIAL CONVERSION

The Series D and Series E Preferred Stock, including Series C Preferred Stock
that were converted into Series D Preferred Stock (see above), the warrants
issued in connection with the subordinated debt (see Note 5) and warrants issued
in connection with the issuance of Preferred Stock, which were converted into
Series C Preferred Stock, Series D Preferred Stock, and Series E Preferred
Stock, are convertible into shares of the Company's common stock at $2.50 per
share. This conversion feature was below the market price at the dates of
issuance. The Company recognized the value of this beneficial conversion feature
of approximately $37,045,000 as a preferred stock dividend at the dates of
issuance. The value of such preferred stock dividend has no impact on the
Company's cash flows, but reduces basic and diluted earnings applicable to
holders of Common Stock. Additionally, current and future issuances of Series D
and Series E Preferred Stock and warrants related to subordinated debt and
issuance of Preferred Stock may result in noncash beneficial conversions valued
in future periods recognized as preferred stock dividends.

(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.

10
<PAGE> 11

In connection with the issuance of the Series C Preferred Stock, Series D
Preferred Stock, and Series E Preferred Stock to GTCR Fund VII, L.P. and its
affiliates, the Board of Directors waived the application of the rights plan.

(5) DEBT

On October 7, 1998, the Company obtained a $40 million bank credit facility (the
"Facility"). The Facility was used to retire certain debt payable to various
individuals and financial institutions. The Facility was due to expire October
5, 2001, and bore interest at the bank Eurodollar or reference rate plus a
margin based upon a pricing schedule per the Facility agreement. The Facility
was subject to a borrowing base equal to 3.75 times earnings before interest,
taxes, depreciation and amortization ("EBITDA") based on a trailing twelve
months calculation, as defined in the Facility, less funded debt as defined
(which included notes payable to prior owners, which could be refinanced through
the Facility).

The Facility required the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payments of cash dividends,
limits the issuance of indebtedness and requires the Company to comply with
certain financial covenants, including a minimum net worth requirement, maximum
senior and total debt to pro forma EBITDA and interest coverage ratio.

On January 27, 2000, the Company entered into a $110 million amended and
restated Senior Credit Agreement (the "Senior Credit Agreement") by and among
the Company, Bank of America, N.A., and certain other lenders to fund working
capital for acquisitions, to refinance existing debt (including the Facility),
to fund capital expenditures and other general corporate purposes. The Senior
Credit Agreement bears interest at Libor or prime plus a margin based on a
pricing schedule as set out in the Senior Credit Agreement. The Senior Credit
Agreement was subsequently syndicated on March 15, 2000, to a banking group, and
the capacity was increased to $120 million. The Senior Credit Agreement was
amended and resyndicated on August 14, 2000, to a banking group, and the
capacity was increased to $230 million. The loan commitments under the Senior
Credit Agreement are as follows:

(i.) Revolving Loans up to $30,000,000 outstanding at any one time;

(ii.) Term A Loans of up to $50,000,000;

(iii.) Term B Loans (which, once repaid, may not be reborrowed) of
$100,000,000 made on the closing date;

(iv.) Acquisition Loans up to $50,000,000 outstanding at any one
time available on a revolving basis prior to August 14, 2001,
provided that certain approvals are obtained and certain
financial ratios are met; and

(v.) Letters of credit issuable by the Company up to $20,000,000 as
a subset of the Revolving Loans.

The amounts borrowed under the Senior Credit Agreement are subject to repayment
as follows:

<TABLE>
<CAPTION>
REVOLVING TERM A TERM B ACQUISITION
LOANS LOANS LOANS LOANS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year 1 ........ -- 10.00% 1.00% 0%
Year 2 ........ -- 20.00% 1.00% 3.33%
Year 3 ........ -- 25.00% 1.00% 3.33%
Year 4 ........ -- 10.00% 1.00% 10.00%
Year 5 ........ 100.00% 35.00% 1.00% 83.34%
Year 6 ........ -- -- 95.00% --
------------ ------------ ------------ ------------
100.00% 100.00% 100.00% 100.00%
============ ============ ============ ============
</TABLE>

The Senior Credit Agreement includes mandatory repayment provisions related to
excess cash flows, proceeds from certain asset sales, debt issuances and equity
issuances, all as defined in the Senior Credit Agreement. These mandatory
repayment provisions may also reduce the available commitment for Revolving
Loans and Acquisition Loans. The Senior Credit Agreement contains standard
covenants including compliance with laws, limitations on capital expenditures,
restrictions on dividend payments, limitations on mergers and compliance with
certain financial covenants. The Company believes that it is in compliance with
those covenants. The Senior Credit Agreement is secured by all the assets of the
Company and expires on July 27, 2006. As of November 14, 2000, the Company has
borrowed approximately $192,000,000 ($50,000,000 of Term A Loans, $100,000,000
of Term B Loans, and $42,000,000 of Acquisition Loans), which was primarily used
to refinance existing debt, partially fund the 2000

11
<PAGE> 12

Acquisitions, and defease bonds acquired in the RESTEC purchase. As of November
14, 2000, the Company has approximately $38,000,000 available for additional
borrowing under the Senior Credit Agreement.

On January 27, 2000, the Company entered into an agreement with GTCR Capital
providing up to $125 million in subordinated debt financing to fund acquisitions
and for certain other uses, in each case as approved by the Board of Directors
of the Company and GTCR Capital. The agreement was amended on August 14, 2000,
allowing, among other things, for GTCR Capital to syndicate a portion of the
commitment. The loans bear interest at an annual rate of 12 percent paid
quarterly and provide warrants that are convertible into Preferred Stock at $.01
per warrant. The unpaid principal plus unpaid and accrued interest must be paid
in full by January 27, 2008. The agreement contains general and financial
covenants. As of November 14, 2000, the Company has borrowed approximately
$52,760,000 of indebtedness under the terms of the agreement, which was used to
partially fund the 2000 Acquisitions. Warrants to acquire 9,225.839 shares of
Series C, D, and E Preferred Stock were issued in connection with these
borrowings. These warrants were immediately exercised (see Note 3).

The Company had total debt of approximately $294,151,000 at September 30, 2000,
net of restricted cash of approximately $5,541,000.

(6) COMMITMENTS AND CONTINGENCIES

Synagro'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, Synagro becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. Synagro 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. Synagro 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 Synagro's consolidated 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
a wholly owned subsidiary of the Company. The litigation is currently in the
discovery phase concerning causation. The Company plans to file a motion
challenging causation. Trial is currently scheduled for April 2001. The Company
is vigorously defending itself in the litigation. Synagro cannot predict the
ultimate outcome of the matter at this time. The extent of damages, if any, in
this action has not been determined and although the Company is confident in its
position, the ultimate outcome of the foregoing cannot be determined at this
time.

The Company is involved in two related lawsuits with Azurix Corp. ("Azurix").
These cases arise from disputes between the Company and Azurix. The events
giving rise to the lawsuits began when Synagro and Azurix entered into a
confidentiality agreement, giving Azurix access to confidential and proprietary
information about Synagro for purposes of evaluating potential transactions
between the parties, including an equity investment (through a subscription
agreement) by Azurix in Synagro to provide the equity capital for pending
acquisitions and a possible merger between the two companies. Subsequently,
Synagro and Azurix supplemented the confidentiality agreement by mutually
consenting to the terms and conditions of a standstill agreement under which
Azurix agreed, among other things, not to pursue, for a specified period and in
the absence of Synagro's consent, the acquisition of companies that Synagro had
targeted for acquisition. Synagro believes that Azurix has breached its
obligations to Synagro under the confidentiality and standstill agreements as
well as the subscription agreement.

Azurix filed the Delaware Suit on October 29, 1999, seeking injunctive relief,
declaratory relief relating to Azurix's obligations under the standstill
agreement and the stock subscription agreement entered into between the Company
and Azurix, and attorneys' and experts' fees. The Company believes Azurix filed
the Delaware action in an attempt to have the Company's dispute with Azurix
tried in Delaware (non-jury) rather than in Texas (jury).

The Company filed the Texas Suit on November 1, 1999, seeking injunctive relief,
actual and exemplary damages, and attorneys' fees against Azurix for violations
of the standstill agreement and certain confidentiality agreements governing
Azurix's ability to use confidential and proprietary information provided to
Azurix by the Company. The exchanges of information at issue occurred during
negotiations regarding a $16,000,000 up to $23,000,000 investment by Azurix in
the Company and a potential merger of the companies. On the Company's motion,
the Texas Court entered a temporary restraining order on November 2, 1999, that
prohibited Azurix from, among other things, consummating a contemplated
acquisition of certain third-party companies that were subject to the standstill
agreement, and from using information provided by the Company to Azurix during
the course of their negotiations. On November 15, 1999, on Azurix's motion, the
Texas Court abated the Texas Suit pending a decision by the court hearing the
Delaware Suit as to which of the two actions should proceed. The Company
subsequently filed a motion with the Delaware Court to dismiss or

12
<PAGE> 13

stay the Delaware Suit, which was granted in part by a decision of the Delaware
Court, on February 3, 2000, to stay the Delaware Suit pending the resolution of
the Texas Suit. Azurix's efforts to appeal the Delaware Court's ruling have been
denied. Subsequently, the Texas Court lifted the abatement and reactivated the
Texas Suit.

On May 9, 2000, the Company filed a First Amended Petition in which the Company
seeks money damages, attorneys' fees and costs of court against Azurix for
breaches of the subscription agreement and confidentiality and standstill
agreements. On August 4, 2000, Azurix filed a First Amended Answer and
Counterclaim in the Texas Suit asserting allegations of fraud, breaches of
contract, and tortuous interference and seeking money damages, exemplary
damages, attorneys' fees, and costs of court. The Company is vigorously
contesting Azurix's claims. Trial in the Texas Suit is scheduled to begin on
January 1, 2001. The extent of the damages, if any, in either action has not
been determined and although the Company is confident in its position, the
ultimate outcome of the foregoing matters cannot be determined at this time.

The Company operates a composting facility in Riverside County, California,
under a conditional use permit ("CUP") that expires January 1, 2010. The CUP
conditions allow for a reduction in material intake and the CUP life in the
event of noncompliance with the CUP terms and conditions. On September 15, 1999,
the Company received a preliminary injunction restraining and enjoining the
County of Riverside ("County") from restricting intake of biosolids at the
Company's Riverside composting facility based upon a June 22, 1999, order of the
Board of Supervisors of the County.

The Company has complained that its due process rights were being affected
because the County was improperly administering the odor protocol in the CUP.
Among its complaints, the Company alleges that the County was using untrained
observers to detect odor violations and that those observers were not using
scientific methods to distinguish among different sources of odors and the
levels of odor magnitude. The Court elected not to grant the Company's request
for a preliminary injunction on those issues. Rather, those issues will be
addressed during the underlying lawsuit that is still pending against the County
of Riverside.

The Company has taken the position that certain alleged odor violations asserted
by the County staff during the pending litigation were not appropriate under the
CUP. On certain of those instances, the Company has declined to reduce its
intake of biosolids. The County alleges that the Company's actions in not
reducing intake constitute violations that could reduce the term of the CUP by
as many as 63 months. The Company disagrees and is challenging the County's
position in the lawsuit.

On May 10, 2000, the Company prevailed at a hearing on its motion to amend the
complaint to allow allegations challenging the County's authority to reduce
intake and term of the CUP. The County successfully moved to strike portions of
the amended complaint and the Company took a Writ to the California Court of
Appeals on this ruling. The California appeals court granted the Company's
motion and reversed the trial court's ruling. Consequently, the stricken
portions of the amended complaint are again part of the case. No trial date has
been set at this time. Although the Company feels that its case is meritorious,
discovery has not been completed and the ultimate outcome cannot be determined
at this time.

There are various other lawsuits and claims pending against Synagro that have
arisen in the normal course of Synagro'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 consolidated financial condition or results of operations of Synagro. It is
reasonably possible, however, that a change in Synagro's estimate of its
probable liability with respect to these matters could occur.

Synagro 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. Synagro insures the majority of its contractual obligations
through performance bonds.

13
<PAGE> 14

(7) EARNINGS (LOSS) PER COMMON SHARE

Basic earnings per share (EPS) exclude dilution and are 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 preferred stock are considered common stock equivalents. The
adjusted number of shares for the nine months ended September 30, 2000, and the
three months September 30, 2000, that would be increased related to stock
options and convertible preferred stock were approximately 14,238,131 and
23,923,909, respectively; however, diluted per share amounts are not applicable
for loss periods. The following table summarizes the basic EPS and diluted EPS
computations for the quarter and nine months ended September 2000 and 1999:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income ...................................... $ 3,706,646 $ 1,674,396 $ 4,051,482 $ 1,985,173
Preferred stock dividend ........................ 1,282,703 -- 2,233,837 --
Non-cash beneficial conversion charge ........... 11,401,389 -- 37,045,268 --
-------------- -------------- -------------- --------------
Net income (loss) applicable to common stock .... $ (8,977,446) $ 1,674,396 $ (35,227,623) $ 1,985,173
============== ============== ============== ==============

Basic and diluted earnings (loss) per share:
Net income (loss) ............................. $ 0.19 $ 0.09 $ 0.21 $ 0.12
Preferred stock dividends ..................... (0.06) -- (0.12) --
-------------- -------------- -------------- --------------
Subtotal ................................ 0.13 0.09 0.09 0.12
Non-cash beneficial conversion charge ......... (0.59) -- (1.92) --
-------------- -------------- -------------- --------------
Net income (loss) per common share ............ $ (0.46) $ 0.09 $ (1.83) $ 0.12
============== ============== ============== ==============

Weighted average shares outstanding, basic ...... 19,433,850 17,641,495 19,241,211 16,095,245
Weighted average shares outstanding, diluted .... 19,433,850 18,997,522 19,241,211 17,073,245
</TABLE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the consolidated
historical and pro forma financial information 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, 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
currently performs services for municipalities, local agencies and private
industry and plans to consolidate the fragmented biosolids markets. 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.

14
<PAGE> 15

HISTORICAL RESULTS AND OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(UNAUDITED)
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 53,512,995 $ 15,856,641 $ 99,947,848 $ 39,834,873
Cost of services ................................. 38,778,632 11,271,832 73,381,592 29,785,853
------------ ------------ ------------ ------------
Gross profit ..................................... 14,734,363 4,584,809 26,566,256 10,049,020

Selling, general and administrative expenses ..... 4,080,764 1,732,170 9,098,552 4,952,622
Amortization of goodwill ......................... 1,040,131 433,848 2,478,266 1,101,876
------------ ------------ ------------ ------------
Income from operations ........................... 9,613,468 2,418,791 14,989,438 3,994,522

Other income (expense), net ...................... (32,842) 168,619 (46,447) 219,651
Interest expense, net ............................ (5,873,980) (913,014) (10,891,509) (2,229,000)
------------ ------------ ------------ ------------
Other expenses, net .............................. (5,906,822) (744,395) (10,937,956) (2,009,349)
------------ ------------ ------------ ------------

Income before provision for income taxes ......... 3,706,646 1,674,396 4,051,482 1,985,173

Provision for income taxes ....................... -- -- -- --
------------ ------------ ------------ ------------
Net income ....................................... 3,706,646 1,674,396 4,051,482 1,985,173
Preferred stock dividends ........................ 1,282,703 -- 2,233,837 --
Non-cash beneficial conversion charge ............ 11,401,389 -- 37,045,268 --
------------ ------------ ------------ ------------
Net income (loss) applicable to common stock ..... $ (8,977,466) $ 1,674,396 $(35,227,623) $ 1,985,173
============ ============ ============ ============
</TABLE>

For the quarter ended September 30, 2000, net sales were approximately
$53,513,000 compared to approximately $15,857,000 for the quarter ended
September 30, 1999, representing an increase of approximately $37,656,000 or 237
percent. The increase relates to sales from the 2000 Acquisitions of
approximately $35,859,000 with the remaining increase resulting from internal
growth. For the nine-month period ended September 30, 2000, net sales were
approximately $99,948,000 compared to approximately $39,835,000 for the
nine-month period ended September 30, 1999, representing an increase of
approximately $60,113,000 or 151 percent. The increase relates to sales from the
1999 Acquisitions of approximately $4,683,000 and the 2000 Acquisitions of
approximately $51,869,000 with the remaining increase resulting from internal
growth.

Cost of services and gross profit for the quarter ended September 30, 2000, were
approximately $38,779,000 and approximately $14,734,000, respectively, compared
with approximately $11,272,000 and approximately $4,585,000, respectively, for
the quarter ended September 30, 1999, resulting in gross profit as a percentage
of sales of approximately 28 percent in 2000 compared to approximately 29
percent in 1999. The increase in gross profit for the quarter ended September
30, 2000, relates to the 2000 Acquisitions of approximately $10,265,000, and
increased profits relating to additional volumes. Cost of services and gross
profit for the nine-month period ended September 30, 2000, were approximately
$73,382,000 and approximately $26,566,000, respectively, compared with
approximately $29,786,000 and approximately $10,049,000, respectively, for the
nine-month period ended September 30, 1999, resulting in gross profit as a
percentage of sales of approximately 27 percent in 2000 compared to
approximately 25 percent in 1999. The increase in gross profit for the
nine-month period ended September 30, 2000, relates to the 1999 Acquisitions of
approximately $1,220,000 and the 2000 Acquisitions of approximately $15,346,000,
and increased profits relating to additional volumes.

Selling, general and administrative expenses were approximately $4,080,000 for
the quarter ended September 30, 2000, compared to approximately $1,732,000 for
the quarter ended September 30, 1999, representing an increase of approximately
$2,348,000. The increase for the quarter ended September 30, 2000, relates to
additional selling, general and administrative costs from the 2000 Acquisitions
of approximately $793,000. The increase also reflects additional marketing,
human resources, and other staff at the corporate level to support the Company's
growth strategy. Selling, general and administrative expenses were approximately
$9,098,000 for the nine-month period ended September 30, 2000, compared to
approximately $4,953,000 for the nine-month period ended September 30, 1999,
representing an increase of approximately $4,145,000. The increase for the
nine-month period ended September 30, 2000, relates to additional selling,
general and administrative costs from the 1999 Acquisitions of approximately
$80,000 and the 2000 Acquisitions of approximately $1,289,000. The increase also
reflects additional marketing, human resources, and other staff at the corporate
level necessary to implement the Company's growth strategy.

15
<PAGE> 16

Amortization of goodwill was approximately $1,040,000 for the quarter ended
September 30, 2000, and $2,478,000 for the nine-month period ended September 30,
2000, compared to approximately $434,000 for the quarter ended September 30,
1999, and $1,102,000 for the nine-month period ended September 30, 1999. The
increases relate to the 1999 Acquisitions and the 2000 Acquisitions.

Other expense, net was approximately $5,907,000 for the quarter ended September
30, 2000 compared to approximately $744,000 for the quarter ended September 30,
1999, representing an increase in expense of approximately $5,163,000. Other
expense, net for the nine months ended September 30, 2000, was approximately
$10,938,000 compared to approximately $2,009,000 for the nine months ended
September 30, 1999. The increase relates primarily to interest expense which
increased due to additional debt incurred to fund the 1999 Acquisitions and 2000
Acquisitions.

As a result of the foregoing, net income of approximately $3,707,000 before
preferred stock dividends, or $0.19 per share, was reported for the quarter
ended September 30, 2000, compared to a net income of approximately $1,674,000
before preferred stock dividends, or $0.09 income per share, for the quarter
ended September 30, 1999. Net income of approximately $4,051,000 before
preferred stock dividends, or $0.21 per share, was reported for the nine-month
period ended September 30, 2000, compared to net income of approximately
$1,984,000 before preferred stock dividends, or $0.12 income per share, for the
nine-month period ended September 30, 1999.

During the quarter ended September 30, 2000, and the nine-month period ending
September 30, 2000, preferred stock dividends of approximately $11,401,000 and
$37,045,000, respectively, were recognized relating to the issuance of
redeemable preferred stock with a beneficial conversion feature in connection
with the 2000 Acquisitions. Additionally, for the quarter ended September 30,
2000, and the nine-month period ended September 30, 2000, preferred stock
dividends of approximately $1,283,000 and $2,234,000, respectively, were
recognized. See Note (3) herein for further discussion. There were no such
dividends during 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations principally through the
sale of equity and debt securities, a credit facility and through funds provided
by operating activities.

On January 26, 2000, the Company authorized 32,000 shares of Series D Preferred
Stock, par value $.002 per share. The Series D Preferred Stock is convertible by
the holders into a number of shares of Common Stock computed by (i) the sum of
(a) the number of shares to be converted multiplied by the Liquidation Value and
(b) the amount of accrued and unpaid dividends by (ii) the conversion price then
in effect. The initial conversion price is $2.50 per share provided that in
order to prevent dilution, the conversion price may be adjusted. The Series D
Preferred Stock is senior to the Common Stock or any other equity securities of
the Company. The liquidation value of each share of Series D Preferred Stock is
$1,000 per share ("Liquidation Value") plus accrued and unpaid dividends.
Dividends on each share of Series D Preferred Stock shall accrue on a daily
basis at the rate of 8 percent per annum on aggregate Liquidation Value. The
Series D Preferred Stock is entitled to one vote per share. Shares of Series D
Preferred Stock are subject to mandatory redemption by the Company on January
26, 2010, at a price per share equal to the Liquidation Value plus accrued and
unpaid dividends.

On January 27, 2000, the Company issued 17,358.824 shares of Series C Preferred
Stock to GTCR Fund VII, L.P. and its affiliates for $17,358,824. On February 4,
2000, the Company issued 419.4 shares of Series C Preferred Stock to GTCR Fund
VII, L.P. and its affiliates for $419,400. On March 24, 2000, the Company issued
225.000 shares of Series C Preferred Stock to GTCR Fund VII, L.P. and its
affiliates for $225,000. On March 27, 2000, the Company issued 1,260.000 shares
of Series C Preferred Stock to GTCR Fund VII, L.P. and its affiliates for
$1,260,000. The proceeds were used primarily to fund the 2000 Acquisitions.

16
<PAGE> 17

On January 27, 2000, the Company issued 2,641.176 shares of Series D preferred
stock to GTCR Fund VII, L.P. and its affiliates for $2,641,176. The proceeds
were used primarily to fund the 2000 Acquisitions.

The Company also issued warrants for a nominal price in connection with the
issuance of subordinated debt, which were immediately converted into 2,857.143
shares of Series D Preferred Stock and 272.058 shares of Series C Preferred
Stock.

During April 2000, all Series C Preferred Stock was converted to Series D
Preferred Stock.

On June 15, 2000, the Company issued 6,840 shares of Series E Preferred Stock to
GTCR Fund VII, L.P. and its affiliates for $6,840,000. Additionally, the Company
issued 1,400.00 warrants for a nominal price in connection with the issuance of
the preferred stock; these were immediately converted into preferred stock. The
proceeds were used primarily to fund the acquisition of EPIC.

On August 14, 2000, the Company issued 25,768.744 shares of Series E Preferred
Stock to GTCR Fund VII, L.P. and its affiliates, and 3,233.788 shares to
TCW/Crescent Lenders. Additionally, the Company issued 2,589.635 and 229.88
warrants to GTCR Fund VII, L.P. and its affiliates, and TCW/Crescent Lenders,
respectively, in connection with the issuance of the preferred stock; these were
immediately converted into Series E preferred stock. The proceeds were used
primarily to fund the acquisition of Bio Gro.

The Series D and Series E Preferred Stock and warrants related to subordinated
debt may result in noncash beneficial conversions valued in future periods
recognized as preferred stock dividends if the market value is higher than the
conversion price. See Note 3 in the accompanying "Notes to the Consolidated
Financial Statements."

Through September 30, 2000, the Company had completed the 2000 Acquisitions for
aggregate consideration of approximately $244,896,000. The transactions were
accounted for using the purchase method of accounting. The preliminary
allocation of purchase prices resulted in approximately $99,783,000 of goodwill
that is being amortized over 40 years.

The Company purchased capital assets during the nine-months ended September 30,
2000, in the amount of approximately $3,897,000 and sold capital assets with
proceeds totaling approximately $107,000.

As of September 30, 2000, the Company had current maturities on long-term debt
of $11,703,000, as compared to approximately $2,818,000 in 1999. The Company's
total long-term debt was approximately $294,151,000 at September 30, 2000,
reflecting an increase of approximately $251,330,000 over September 30, 1999.
This increase is due primarily to additional financing to fund the 2000
Acquisitions.

On October 7, 1998, the Company obtained a $40 million bank credit facility (the
"Facility"). The Facility was used to retire certain debt payable to various
individuals and financial institutions. The Facility was due to expire October
5, 2001, and bore interest at the bank Eurodollar or reference rate plus a
margin based upon a pricing schedule per the Facility agreement. The Facility
was subject to a borrowing base equal to 3.75 times earnings before interest,
taxes, depreciation and amortization ("EBITDA") based on a trailing twelve
months calculation, as defined in the Facility, less funded debt as defined
(which includes notes payable to prior owners, which could be refinanced through
the Facility).

17
<PAGE> 18

(i.) Revolving Loans up to $30,000,000 outstanding at any one time;

(ii.) Term A Loans of up to $50,000,000;

(iii.) Term B Loans (which, once repaid, may not be reborrowed) of
$100,000,000 made on the closing date;

(v.) Letters of credit issuable by the Company up to $20,000,000 as
a subset of the Revolving Loans.

The amounts borrowed under the Senior Credit Agreement are subject to repayment
as follows:

On January 27, 2000, the Company entered into an agreement with GTCR Capital
providing up to $125 million in subordinated debt financing to fund acquisitions
and for certain other uses, in each case as approved by the Board of Directors
of the Company and GTCR Capital. The loans bear interest at an annual rate of 12
percent paid quarterly and provide warrants that are convertible into Preferred
Stock at $.01 per warrant. The unpaid principal plus unpaid and accrued interest
must be paid in full by January 27, 2008. The agreement contains general and
financial covenants. As of November 14, 2000, the Company has borrowed
approximately $52,706,000 of indebtedness under the terms of the agreement that
was used to partially fund the 2000 Acquisitions. Warrants to acquire 9,225.839
shares of Series C, D, and E Preferred Stock were issued in connection with
these borrowings. These warrants were immediately exercised.

The Company had total debt of approximately $246,767,000 at September 30, 2000,
net of restricted cash of approximately $5,541,000.

At September 30, 2000, the Company had working capital of approximately
$24,867,000. Accounts receivable and prepaid expenses and other currents assets
increased by approximately $51,802,000 during the nine months ended September
30, 2000, primarily due to the acquisitions and increased receivables relating
to additional sales volumes. The Company evaluates the collectibility of its
receivables based on a specific account-by-account review, and has an allowance
of approximately $1,711,000 at September 30, 2000. Accounts payable and accrued
expenses increased by approximately $24,776,000 during the nine months ended
September 30, 2000, primarily as a result of the 2000 Acquisitions. The Company
believes its cash requirements for 2000 can be met with existing cash, cash
flows from operations and its borrowing availability under the Senior Credit
Agreement.

The increase in other assets as of September 30, 2000, related primarily to an
increase in deferred bank costs associated with the credit facility and GTCR
subordinated debt, partially offset by a reduction in pre-acquisition costs
related to acquisitions consummated in 2000.

18
<PAGE> 19

The Company has undergone significant restructuring throughout the last three
years, including changes in senior management and refinancing of its
indebtedness. As a result of these changes, management believes the Company is
better positioned to respond to opportunities in the biosolids market.

SEASONALITY

The Company's business is seasonal and subject to certain unusual weather
conditions and unseasonably heavy rainfall that can temporarily reduce the
availability of land application sites in close proximity to the Company's
business. During the winter months, the ground is frozen in certain geographic
areas where the Company operates, which can limit the level of land application
that can be performed. Generally, the customer stores the product during the
winter months with transportation and land application services performed as the
ground thaws. As a result, the Company's revenues and operational results are
generally lower in the first calendar quarter.

ITEM 3. 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 risk, foreign currency
exchange risk or interest rate risks from the use of derivative financial
instruments. Management does not currently use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.

INTEREST RATE RISK

Total debt at November 14, 2000, included approximately $190,500,000 in floating
rate debt attributed to the bank credit facility borrowings at an average
interest rate of 10.14 percent. As a result, the Company's annual interest cost
in 2000 will fluctuate based on short-term interest rates. The Company entered
into two three-year hedge agreements dated April 18, 2000, and July 28, 2000,
with Bank of America, N.A., for $35,000,000 and $15,000,000, respectively,
establishing maximum fixed LIBOR rates of 6.28125 and 6.65, respectively. Bank
of America, N.A., at its sole discretion, can extend the term of agreements by
three years. The impact on annual cash flow of a ten-percent change in the
floating rate would be approximately $916,000 after taking into consideration
the hedge agreements.

At November 14, 2000, the Company's fixed rate debt had a book value and fair
market value of approximately $157,692,000.

19
<PAGE> 20

PART II - OTHER INFORMATION

ITEM 1.

LITIGATION

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 concerning
causation. The Company plans to file a motion challenging causation. Trial is
currently scheduled for April 2001. The Company is vigorously defending itself
in the litigation. Synagro cannot predict the ultimate outcome of the matter at
this time. The extent of damages, if any, in this action has not been determined
and although the Company is confident in its position, the ultimate outcome of
the foregoing cannot be determined at this time.

20
<PAGE> 21

begin on January 1, 2001. The extent of the damages, if any, in either action
has not been determined and although the Company is confident in its position,
the ultimate outcome of the foregoing matters cannot be determined at this time.

There are various other lawsuits and claims pending against Synagro that have
arisen in the normal course of Synagro'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 Synagro. It is
reasonably possible, however, that a change in Synagro's estimate of its
probable liability with respect to these matters could occur.

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

Current Report on Form 8-K filed on August 28, 2000, Item 5

Current Report on Form 8-K/A filed on August 29, 2000, Item 5

21
<PAGE> 22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SYNAGRO TECHNOLOGIES, INC.

Date: November 14, 2000 By: /s/ Ross M. Patten
-----------------------
Chief Executive Officer

Date: November 14, 2000 By: /s/ J. Paul Withrow
-----------------------
Chief Financial Officer

<PAGE> 23

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>