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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000 Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 76-0511324
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 BERING DRIVE, SUITE 1000 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 369-1700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant is
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
CLASS OUTSTANDING AT MAY 12, 2000
----------------------------- ---------------------------
Common stock, par value $.002 19,419,381
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SYNAGRO TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of March 31, 2000
(Unaudited) and December 31, 1999............................ 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 (Unaudited)...... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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>
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,234,135 $ 180,633
Restricted cash, current portion 2,324,102 --
Accounts receivable, net 14,388,210 11,641,160
Notes receivable 90,082 90,131
Prepaid expenses and other current assets 5,498,354 3,745,590
------------- -------------
Total current assets 23,534,883 15,657,514
Property, machinery & equipment, net 31,580,818 15,918,674
Other Assets:
Goodwill, net 115,359,029 64,280,266
Restricted cash, long-term portion 1,300,000 --
Notes receivable, long-term portion 183,396 183,396
Other assets 7,008,017 3,132,247
------------- -------------
Total assets $ 178,966,143 $ 99,172,097
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 10,281,178 $ 10,428,823
Current portion of notes payable to prior owners 796,786 849,010
Current portion of long-term debt 3,545,222 398,040
------------- -------------
Total current liabilities 14,623,186 11,675,873
Long term liabilities:
Other liabilities-long term 2,500,000 --
Long term debt - net 90,339,401 39,936,222
Notes payable to prior owners 200,000 2,245,511
------------- -------------
Total long term liabilities 93,039,401 42,181,733
Commitments and contingencies
Redeemable Convertible Preferred Stock 22,365,462 --
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,
19,419,381 and 17,693,489 issued and outstanding 38,840 35,388
Additional and paid in capital 94,138,532 66,406,731
Accumulated deficit (45,239,278) (21,127,628)
------------- -------------
Total stockholders' equity 48,938,094 45,314,491
------------- -------------
Total liabilities and stockholders' equity $ 178,966,143 $ 99,172,097
============= =============
</TABLE>
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales ........................................ $ 18,666,426 $ 9,060,478
Cost of services ................................. 15,092,223 7,748,604
------------ ------------
Gross profit ..................................... 3,574,203 1,311,874
Selling, general and administrative
expenses........................................ 2,479,920 1,654,271
Amortization of goodwill ......................... 622,514 322,651
------------ ------------
Income (loss) from operations .................... 471,769 (665,048)
Other income ................................... 4,258 54,902
Interest expense ............................... (2,089,908) (547,306)
------------ ------------
Other expenses ................................... (2,085,650) (492,404)
Loss before provision for income taxes ........... (1,613,881) (1,157,452)
------------ ------------
Provision for income taxes ....................... -- --
------------ ------------
Net loss before preferred stock dividends ........ (1,613,881) (1,157,452)
Preferred stock dividends ........................ 359,426 --
Non-cash beneficial conversion charge on
preferred stock issuance ($1.17 per share) ..... 22,138,343 --
------------ ------------
Net loss applicable to common stock .............. $(24,111,650) $ (1,157,452)
============ ============
Basic and diluted loss per share:
Net loss per share before preferred
stock dividends ............................. $ (0.09) $ (0.08)
Preferred stock dividends ...................... (0.02) --
Non-cash beneficial conversion charge .......... (1.17) --
------------ ------------
Net loss per common share ...................... $ (1.28) $ (0.08)
============ ============
Weighted average shares outstanding, basic ....... 18,863,475 14,262,854
Weighted average shares outstanding, diluted ..... 18,863,475 14,262,854
</TABLE>
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Loss before redeemable preferred stock
dividends ................................................................. $ (1,613,881) $ (1,157,542)
Adjustments to reconcile net income (loss)
provided by operating activities
Depreciation and amortization ........................................... 1,682,047 912,439
Loss (gain) on sale of equipment ........................................ (4,257) 21,815
Change in operating assets and liabilities,
net of effects of acquired businesses:
Accounts receivable ..................................................... 2,426,549 795,263
Prepaid expenses and other .............................................. 1,221,862 40,631
Accounts payable and accrued expenses ................................... (2,223,928) (577,929)
------------ ------------
Net cash provided by operating activities ...................................... 1,488,392 34,677
Cash flows from investing activities:
Additions to property, machinery & equipment ............................ (992,563) (796,727)
Proceeds from sale of equipment ......................................... 19,026 101,507
Cash paid for acquired business, net of cash acquired ................... (49,451,716) --
Proceeds from notes receivable........................................... 49 289,635
------------ ------------
Net cash used in investing activities .......................................... (50,425,204) (405,585)
Cash flows from financing activities:
Proceeds from debt ...................................................... 85,821,746 4,200,000
Payments on debt ........................................................ (50,906,470) (3,942,200)
Debt issuance costs ..................................................... (5,246,941) --
Increase in restricted cash ............................................. (547,630) --
Sale of redeemable preferred stock ...................................... 20,743,359 --
Exercise of options and warrants ........................................ 126,250 52,500
------------ ------------
Net cash provided by financing activities ...................................... 49,990,314 310,300
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 1,053,502 (60,608)
Cash and cash equivalents, beginning of period ................................. 180,633 414,712
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 1,234,135 $ 354,104
============ ============
</TABLE>
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
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SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
----------- ----------
(UNAUDITED)
<S> <C> <C>
Supplemental Cash Flow Information
Interest paid during the period ...... $ 1,983,431 $ 579,845
Taxes paid during the period ......... -- --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the first quarter of 2000, the Company issued an aggregate of 25,033.6
shares of Series C and Series D Preferred Stock ("Preferred Stock) with a
beneficial conversion feature. The Company recognized the value of the
beneficial conversion feature of $22,138,343 as a preferred stock dividend.
During the three month period ended March 31, 2000, the Company issued an
aggregate of 220,898 common shares relating to cashless exercises of certain
warrants and options.
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SYNAGRO TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Registrant ("Synagro Technologies, Inc." or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed consolidated financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for the fair
presentation of such financial statements for the periods indicated. Certain
information relating to the Company's organization and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted in this Form 10-Q
pursuant to Rule 10-01 of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission. However, the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. The results for the three months ended
March 31, 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 FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which became effective for financial
statements beginning after June 15, 1999. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB amended SFAS No. 133
to defer its effective date to all fiscal quarters and all fiscal years
beginning after June 15, 2000. The Company 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 was required to hedge 50% of the facility in order to
reduce interest rate volatility. The Company entered into a hedge agreement with
Bank of America N.A. during April 2000 establishing a maximum fixed Libor rate
of 6.55%. The Company is evaluating SFAS No.133 and the impact on existing
accounting policies and financial reporting disclosures.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The adoption of this
standard did not have a material effect on the Company's consolidated financial
position or results of operations.
7
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(2) ACQUISITIONS
1999 ACQUISITIONS
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
balance sheet at March 31, 2000 includes a preliminary allocation of the
purchase price and is subject to final adjustment, which management believes
will not be material. The preliminary allocation resulted in approximately
$19,700,000 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......... 3,126,000
------------
Goodwill .................................... $ 19,700,000
============
</TABLE>
ACQUISITION OF NATIONAL RESOURCE RECOVERY, INC.
In March 1999, Synagro Technologies 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.
8
<PAGE> 9
2000 ACQUISITIONS
During the three month period ended March 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; and certain assets and contracts of
Whiteford Construction Company (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. Additionally, the
Company assumed approximately $13.4 million, net of cash reserves, of municipal
bonds in connection with the acquisition of RESTEC. The bonds are currently in
default due to violations in change in control provisions and certain other
financial covenants. Accordingly, the bonds are subject to redemption by the
bondholders. The bonds also contain a provision whereby RESTEC can defease the
bonds and be released from all future obligations by placing an equivalent
amount of U.S. Securities with the bonds trustee. The Company is in the process
of defeasing the bonds and has $13.5 million of availability 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 resulted in approximately $51,453,000 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 issued.................. 1,325,000
============
Value of common stock issued................ $ 5,471,000
Cash paid including transaction costs,
net of cash acquired...................... 49,914,000
Less: Historical net assets acquired........ 3,932,000
------------
Goodwill.................................... $ 51,453,000
============
</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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
-----------------------------
2000 1999
------------- ------------
<S> <C> <C>
Net sales .......................................... $ 22,464,724 $ 19,922,570
Net income (loss) before Preferred Stock Dividends.. (1,452,159) (3,879)
Net earnings (loss) applicable to Common Stock ..... $ (23,724,468) $ (3,879)
Net earnings (loss) per share.......................
Basic ......................................... $ (1.23) $ 0.00
Diluted ....................................... $ (1.23) $ 0.00
</TABLE>
(3) PREFERRED STOCK
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred Stock
which 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
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unpaid dividends. Dividends on each share of Series C Preferred Stock shall
accrue on a daily basis at the rate of 8% 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 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.
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% 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, par value $.002 per share, 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 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.
NON-CASH BENEFICIAL CONVERSION
The Series D Preferred Stock (including Series C Preferred Stock that is
convertible into Series D Preferred Stock - see above, and the warrants issued
in connection with the subordinated debt, which were converted into Series C
Preferred Stock and Series D Preferred Stock - see note 5) is convertible into
shares of the Company's common stock at $2.50 per share. This conversion feature
was below the market price at the time of issuance. The Company recognized the
value of this beneficial conversion feature of approximately $22,000,000 as a
preferred stock dividend at the time 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, future
issuances of Series D Preferred Stock and warrants related to subordinated debt
(see note 5) may result in non-cash beneficial conversions valued in future
periods recognized as preferred stock dividends if the market value is higher
than the conversion price.
(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,
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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.
In connection with the issuance of the Series C Preferred Stock and Series D
Preferred Stock to GTCR Fund VII, L.P. and its affiliates, the Board of
Directors waived the application of the rights plan.
(5) DEBT
CREDIT FACILITY
On October 7, 1998, the Company obtained a $40 million bank credit facility (the
"Facility"). The Facility was used to retire certain debt payable to various
individuals and financial institutions. The Facility is secured by substantially
all of the Company's assets.
The Facility 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, prohibited the payments of cash dividends,
limited the issuance of indebtedness and required 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 loan commitments under the Senior
Credit Agreement are as follows:
(i.) Revolving Loans up to $20,000,000 outstanding at any one time;
(ii.) Term A Loans of up to $40,000,000 were available until April
27, 2000; and $13,500,000 is available until June 26, 2000 for
the repayment or defeasement of certain indebtedness assumed in
connection with the Acquisition of RESTEC;
(iii.) Term B Loans (which once repaid may not be reborrowed) of
$30,000,000 made on the closing date;
(iv.) Acquisition Loans up to $30,000,000 outstanding at any one time
available on a revolving basis prior to January 27, 2001
provided that certain approvals are obtained and certain
financial ratios are met; and
(v.) Letters of credit issuable by the Company up to $15,000,000 as
a subset of the Revolving Loans.
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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................................. -- 6.56% 1.00% 0%
Year 2................................. -- 13.75% 1.00% 6.67%
Year 3................................. -- 15.00% 1.00% 3.33%
Year 4................................. -- 22.50% 1.00% 10.00%
Year 5................................. 100.00% 25.00% 1.00% 13.33%
Year 6................................. -- 17.19% 1.00% 66.67%
Year 6 1/2............................. -- -- 94.00% --
--------- -------- -------- -----------
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 was in compliance with
those covenants as of May 10, 2000. The Senior Credit Agreement is secured by
all the assets of the Company and expires on July 27, 2006. As of May 10, 2000,
the Company has borrowed approximately $56,500,000, ($26,500,000 of Term A Loans
and $30,000,000 of Term B Loans) which was primarily used to refinance existing
debt and partially fund the 2000 Acquisitions. The company is required to hedge
50% of the facility and therefore entered into a hedge agreement with Bank of
America, N.A for $35,000,000 of the facility. This agreement prevents the Libor
rate from exceeding 6.55%. The Company has approximately $63,500,000 available
for additional borrowing under the Senior Credit Agreement at May 10, 2000.
SUBORDINATED DEBT
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% paid quarterly and provide warrants which 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 May 10, 2000, the Company has incurred approximately
$21,904,000 of indebtedness under the terms of the agreement which was used to
partially fund the 2000 Acquisitions. Warrants to acquire 3,129,201 shares of
Series C Preferred Stock were issued in connection with these borrowings. These
warrants were immediately exercised by GTCR.
(6) COMMITMENTS AND CONTINGENCIES
LITIGATION
AZURIX, CORP.
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. Under Synagro's
lawsuit against Azurix filed in Texas (the "Texas Suit") Synagro claims that
subsequent to the confidentiality agreement, 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 breached its obligations to Synagro under the
confidentiality and standstill agreements as well as the subscription agreement.
Azurix filed on October 29, 1999, a lawsuit in Delaware (the "Delaware Suit")
seeking unspecified injunctive relief, limited declaratory relief relating to
the construction of the standstill agreement and the stock subscription
agreement entered into between the Company and
12
<PAGE> 13
Azurix, and attorneys' and experts' fees. Azurix claims that Synagro toruously
interfered in its negotiations with a potential acquisition candidate. The
Company believes the Delaware Suit was filed by Azurix in an attempt to have the
Company's dispute with Azurix tried in Delaware under a non-jury proceeding
rather than in Texas under a jury proceeding. The Company filed the Texas Suit
on November 1, 1999, seeking injunctive relief, actual and exemplary damages,
and attorneys' fees against Azurix alleging 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 and $23,000,000 investment by Azurix in the Company and a potential
merger of the companies. The Company's current petition seeks injunctive relief,
actual damages, exemplary damages, attorneys' fees, and costs arising from
Azurix's alleged misappropriation of the Company's confidential and proprietary
information. 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 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 Company reactivated
the Texas Suit and recently filed an amended Petition seeking additional damages
against Azurix's breach of the subscription agreement.
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
forgoing matters cannot be determined at this time.
COUNTY OF RIVERSIDE
The Company operates a composting facility in Riverside County, California under
a conditional use permit ("CUP"), which expires January 1, 2010. The permit
conditions allow for a reduction in material intake and the permit life in the
event of noncompliance with permit terms and conditions. On September 15, 1999,
the Company received a preliminary injunction restraining and enjoining the
County of Riverside (the "County") from restricting intake of biosolids at the
Company's Riverside compost facility based upon a June 22, 1999, order of the
Board of Supervisors of the County.
Synagro 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 regarding the county's action in reducing the
term of the CUP. Although the Company feels that its case is meritorious, the
case has not proceeded to the discovery stage and the ultimate outcome of the
forgoing matters cannot be determined at this time.
OTHER
The Company currently and from time to time is subject to other claims and
lawsuits arising in the ordinary course of business. In the opinion of
management, the outcome of such proceedings will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
13
<PAGE> 14
(7) EARNINGS (LOSS) PER COMMON SHARE
SFAS No. 128, "Earnings Per Share" requires dual presentation of earnings per
share (EPS): basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. For purposes of the calculation,
outstanding stock options, warrants and redeemable preferred stock are
considered common stock equivalents. Diluted per common share amounts are not
applicable for loss periods. The adjusted number of shares for the three months
ended March 31, 2000 and March 31, 1999, that would be increased related to
stock options and preferred stock were approximately 10,939,499 and 956,358,
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 three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Net loss before preferred stock
dividends .......................................... $ (1,613,881) $ (1,157,452)
Preferred stock dividend ............................. 359,426 --
Non-cash beneficial conversion charge ................ 22,138,343 --
------------ ------------
Net loss applicable to common stock .................. $(24,111,650) $ (1,157,452)
============ ============
Basic and diluted loss per share:
Net loss per share before preferred
stock dividends ................................. $ (0.09) $ (0.08)
Preferred stock dividends .......................... (0.02) --
Non-cash beneficial conversion charge .............. (1.17) --
------------ ------------
Net loss per common share .......................... $ (1.28) $ (0.08)
============ ============
Weighted average shares outstanding, basic ........... 18,863,475 14,262,854
Weighted average shares outstanding, diluted ......... 18,863,475 14,262,854
</TABLE>
(8) PROPOSED ACQUISITIONS
On April 3, 2000, Synagro Technologies, Inc. announced that it has entered into
a stock purchase agreement to purchase all of the shares of Environmental
Protection & Improvement Company, Inc., a wholly owned subsidiary of Compost
America Holding Company, Inc. for $37.5 million payable in cash and assumed
debt. The closing of this transaction and the financing is contingent upon
receiving necessary consents, approvals, and releases, as well as other
customary closing conditions.
On May 1, 2000, Synagro Technologies, Inc. announced that it has entered into a
stock purchase agreement to acquire the Bio Gro business of Waste Management,
Inc. for $201 million payable in cash and assumed debt. Synagro has obtained
commitments to finance the transaction with senior debt provided by Bank of
America, N. A. and a combination of senior subordinated debt and convertible
preferred stock issued to GTCR Golder Rauner, LLC. The closing of this
transaction and the financing is contingent upon receiving necessary consents,
approvals, and releases, as well as other customary closing conditions.
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 combined financial statements of the Company and
related notes thereto included elsewhere in this Form 10-Q and the Annual Report
on Form 10-K, as amended for the year ended December 31, 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 MARCH 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales ......................................... $ 18,666,426 $ 9,060,478
Cost of services .................................. 15,092,223 7,748,604
------------ ------------
Gross profit ...................................... 3,574,203 1,311,874
Selling, general and administrative expenses ...... 2,479,920 1,654,271
Amortization of goodwill .......................... 622,514 322,651
------------ ------------
Income (loss) from operations ..................... 471,769 (665,048)
Other income .................................... 4,258 54,902
Interest expense ................................ (2,089,908) (547,306)
------------ ------------
Other expenses .................................... (2,085,650) (492,404)
Loss before provision for income taxes ............ (1,613,881) (1,157,452)
------------ ------------
Provision for income taxes ........................ -- --
------------ ------------
Net loss before preferred stock dividends ......... (1,613,881) (1,157,452)
Preferred stock dividends ......................... 359,426 --
Non-cash beneficial conversion charge on
preferred stock issuance ($1.17 per share) ...... 22,138,343 --
------------ ------------
Net loss applicable to common stock ............... $(24,111,650) $ (1,157,452)
============ ============
</TABLE>
For the three month period ended March 31, 2000, net sales were approximately
$18,666,000 compared to approximately $9,060,000 for the three month period
ended March 31, 1999, representing an increase of approximately $9,606,000 or
106%. The increase for the three months ended March 31, 2000 relates to sales
from the 1999 Acquisitions of approximately ($4,195,000) and the 2000
Acquisitions of approximately ($5,247,000) with the remaining increase resulting
from higher net volumes.
Cost of operations and gross profit for the three month period ended March 31,
2000 were approximately $15,092,000 and approximately $3,574,000, respectively,
compared with approximately $7,749,000 and approximately $1,312,000,
respectively, for the three month period ended March 31, 1999, resulting in
gross profit as a percentage of sales increasing to 19.1% in 2000 from 14.5% in
1999. The increase in gross profit for the three months ended March 31, 2000
relates to the 1999 Acquisitions of approximately ($1,172,000) and the 2000
Acquisitions of approximately ($1,571,000), partially offset by higher tip fees
in the western United States and higher fuel costs nationwide. The gross profit
percent increase relates to higher margins on the 2000 Acquisitions that are not
impacted by seasonal weather trends.
Selling, general and administrative expenses were approximately $2,480,000 for
the three month period ended March 31, 2000 compared to approximately $1,654,000
for the three month period ended March 31, 1999, representing an increase of
approximately $826,000. The increase for the three months ended March 31, 2000
relates to additional selling, general and administrative costs from the 1999
Acquisitions of approximately ($47,000) and the 2000 Acquisitions of
approximately ($219,000). The increase also reflects additional marketing, human
resources, and other staff and other selling, general and administrative
expenses at the corporate level to implement the Company's growth strategies.
Amortization of goodwill was approximately $623,000 for the three month period
ended March 31, 2000 compared to approximately $323,000 for the three month
period ended March 31, 1999, representing an increase of approximately $300,000.
The increases relate to the 1999 Acquisitions and the 2000 Acquisitions.
Other income (expense) was approximately $4,000 for the three month period ended
March 31, 2000 compared to approximately $55,000 for the three month period
ended March 31, 1999, representing a decrease of approximately $51,000. The
decrease relates to notes receivable collected during the three month period
ended March 31, 1999 that were fully reserved. There were no such items during
the three month period ended March 31, 2000.
15
<PAGE> 16
Interest expense for the three months ended March 31, 2000 increased to $2.1
million (11.2% of revenues) from $.5 million (6.0% of revenues) for the three
month period ended March 31, 1999. The increase in interest expense is
attributable to additional interest on debt incurred to fund fiscal 1999 and
2000 acquisitions, higher interest costs associated with the refinancing of
existing debt and issuance of subordinated debt in January 2000, in connection
with the 2000 acquisitions and to a lesser extent recent increases in market
interest rates.
As a result of the foregoing, a net loss of approximately $1,613,000 before
preferred stock dividends, or $0.09 loss per share, was reported for the three
month period ended March 31, 2000 compared to a net loss of approximately
$1,157,000 before preferred stock dividends, or $0.08 loss per share, for the
three month period ended March 31, 1999.
During the three month period ended March 31, 2000, the Company issued $21.9
million of preferred stock (and 3,129 warrants that were converted into
preferred stock) in connection with refinancing its debt and completing the 2000
Acquisitions. This preferred stock is convertible into common stock at $2.50 per
share that was below the market price of the Company's stock at the time of
issuance. Financial accounting rules require that the Company record a "non-cash
beneficial conversion charge" for the difference between the market price and
the conversion price at the date of issuance of this preferred stock.
Accordingly, the Company has recorded a non-cash beneficial conversion charge of
$22.1 million during the three months ended March 31, 2000. Additionally, a
preferred stock dividend of approximately $359,000 was recognized. See Note (3)
herein for further discussion. There were no such dividends during 1999.
As a result of the Company's cumulative operating losses, the Company has not
paid federal income tax since inception. As of March 31, 2000, the Company had
net operating loss carry forwards totaling approximately $10,643,000.
Utilization of the Company's net operating losses are subject to limitation
under certain circumstances.
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 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, the Series C Preferred Stock is
convertible by the holders to 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% 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 unpaid and accrued dividends.
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% per annum on aggregate Liquidation Value plus unpaid and
accrued interest. 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, 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.
16
<PAGE> 17
On January 27, 2000, the Company issued 2,641.176 shares of Series D Preferred
Stock, par value $.002 per share, to GTCR Fund VII, L.P. and its affiliates for
$2,641,176. The proceeds were used primarily to fund the 2000 Acquisitions.
The Series D Preferred Stock and warrants related to subordinated debt may
result in non-cash beneficial conversions valued in future periods recognized as
preferred stock dividends if the market value is higher than the conversion
price. See Note 8 in the accompanying "Notes to the Consolidated Financial
Statements."
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.
Through May 10, 2000, the Company had completed the 2000 Acquisitions for
aggregate consideration of approximately $53,846,000. The transactions were
accounted for using the purchase method of accounting. The preliminary
allocation of purchase prices resulted in approximately $51,453,000 of goodwill
that is being amortized over 40 years.
The Company purchased additional capital assets during the three months ended
March 31, 2000 in the amount of approximately $886,000 and sold capital assets
with proceeds totaling approximately $19,000.
As of March 31, 2000, the Company had current maturities on long-term debt of
$4,342,008, as compared to approximately $-0- in 1999. The Company's long-term
debt was $90,339,401 at March 31, 2000, reflecting an increase of approximately
$48,289,000 over March 31, 1999. This increase is due primarily to the funding
of the 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 is secured by substantially
all of the Company's assets.
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 can
be refinanced through the Facility).
The Facility required the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibited the payments of cash dividends,
limited the issuance of indebtedness and required 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 Senior 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 loan commitments under the
Senior Credit Agreement are as follows:
(i.) Revolving Loans up to $20,000,000 outstanding at any one
time;
(ii.) Term A Loans of up to $40,000,000 were available until
April 27, 2000; and $13,500,000 is available until June 26,
2000 for the repayment or defeasement of certain
indebtedness assumed in connection with the acquisition of
RESTEC;
(iii.) Term B Loans (which once repaid may not be reborrowed) of
$30,000,000 made on the closing date;
(iv.) Acquisition Loans up to $30,000,000 outstanding at any one
time available on a revolving basis prior to January 27,
2001 provided that certain approvals are obtained and
certain financial ratios are met; and
(v.) Letters of credit issuable by the Company up to $15,000,000
as a subset of the Revolving Loans.
17
<PAGE> 18
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................................ -- 6.56% 1.00% 0%
Year 2................................ -- 13.75% 1.00% 6.67%
Year 3................................ -- 15.00% 1.00% 3.33%
Year 4................................ -- 22.50% 1.00% 10.00%
Year 5................................ 100.00% 25.00% 1.00% 13.33%
Year 6................................ -- 17.19% 1.00% 66.67%
Year 6 1/2............................ -- -- 94.00% --
--------- --------- --------- -----------
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 was in compliance with
those covenants as of May 10, 2000. The Senior Credit Agreement is secured by
all the assets of the Company and expires on July 27, 2006. As of May 10, 2000,
the Company has borrowed approximately $56,500,000, ($26,500,000 of Term A Loans
and $30,000,000 of Term B Loans) which was primarily used to refinance existing
debt and partially fund the 2000 Acquisitions, and has approximately $63,500,000
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 loans bear interest at an annual rate of
12% paid quarterly and provide warrants which 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 March 27, 2000, the Company has incurred $21,904,000
of indebtedness under the terms of the agreement which was used to partially
fund 2000 the Acquisitions. Warrants to acquire 3,129,201 shares of Series C
Preferred Stock were issued in connection with these borrowings. These warrants
were immediately exercised by GTCR.
At March 31, 2000, the Company had working capital of approximately $8,911,000.
Accounts receivable and prepaid expenses and other currents assets increased by
approximately $4,500,000 during the three months ended March 31, 2000, primarily
due to the acquisitions partially offset by reduced receivables due to
seasonality. The Company evaluates the collectibility of its receivables based
on a specific account-by-account review, and has an allowance of approximately
$523,000 at March 31, 2000. Accounts payable and accrued expenses decreased by
approximately $148,000 during the three months ended March 31, 2000 primarily as
a result of cash availability and seasonality partially offset by 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 March 31, 2000, related primarily to an
increase in deferred financing costs associated with the credit facility, GTCR
subordinated debt, and preacquisition costs related to pending acquisitions to
be consummated in 2000.
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 and
aggressively pursue its goal of acquiring additional biosolids management
companies.
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
18
<PAGE> 19
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 May 10, 2000, included approximately $56,500,000 in floating rate
debt attributed to the bank credit facility borrowings at an average interest
rate of 9.89%. As a result, the Company's annual interest cost in 2000 will
fluctuate based on short-term interest rates. The Company entered into a hedge
agreement with Bank of America, N.A., establishing a maximum fixed Libor rate on
$35,000,000 of floating rate debt. The impact on annual cash flow of a
ten-percent change in the floating rate would be approximately $200,000 after
taking into consideration the hedge agreement.
At May 10, 2000, the Company's fixed rate debt had a book value and fair market
value of $40,881,000.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1.
LITIGATION
AZURIX, CORP.
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. Under Synagro's
lawsuit against Azurix filed in Texas (the "Texas Suit") Synagro claims that
subsequent to the confidentiality agreement, 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 breached its obligations to Synagro under the
confidentiality and standstill agreements as well as the subscription agreement.
Azurix filed on October 29, 1999, a lawsuit in Delaware (the "Delaware Suit")
seeking unspecified injunctive relief, limited declaratory relief relating to
the construction of the standstill agreement and the stock subscription
agreement entered into between the Company and Azurix, and attorneys' and
experts' fees. Azurix claims that Synagro tortuously interfered in its
negotiations with a potential acquisition candidate. The Company believes the
Delaware Suit was filed by Azurix in an attempt to have the Company's dispute
with Azurix tried in Delaware under a non-jury proceeding rather than in Texas
under a jury proceeding. The Company filed the Texas Suit on November 1, 1999,
seeking injunctive relief, actual and exemplary damages, and attorneys' fees
against Azurix alleging 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 and
$23,000,000 investment by Azurix in the Company and a potential merger of the
companies. The Company's current petition seeks injunctive relief, actual
damages, exemplary damages, attorneys' fees, and costs arising from Azurix's
alleged misappropriation of the Company's confidential and proprietary
information. 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 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 Company reactivated
the Texas Suit and recently filed an amended Petition seeking additional damages
against Azurix's breach of the subscription agreement.
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
forgoing matters cannot be determined at this time.
COUNTY OF RIVERSIDE
The Company operates a composting facility in Riverside County, California under
a conditional use permit ("CUP"), which expires January 1, 2010. The permit
conditions allow for a reduction in material intake and the permit life in the
event of noncompliance with permit terms and conditions. On September 15, 1999,
the Company received a preliminary injunction restraining and enjoining the
County of Riverside (the "County") from restricting intake of biosolids at the
Company's Riverside compost facility based upon a June 22, 1999, order of the
Board of Supervisors of the County.
Synagro 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.
20
<PAGE> 21
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 regarding the county's action in reducing the
term of the CUP. Although the company feels that its case is meritorious, the
case has not proceeded to the discovery stage and the ultimate outcome of the
foregoing matters cannot be determined at this time.
OTHER
The Company currently and from time to time is subject to other claims and
lawsuits arising in the ordinary course of business. In the opinion of
management, the outcome of such proceedings will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) On January 27, 2000, the Company issued 1,235,000 shares of Common
Stock to the former owners of Residual Technologies, Limited
Partnership and certain affiliates, in connection with the acquisition
of that entity pursuant to an exemption from registration under Section
4 (2) of the Securities Act.
During the three month period ended March 31, 2000, the Company issued
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.
ITEM 6. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
10.1 Reference Agreements
27.1 Financial Data Schedule
(B) Reports on Form 8-K
Current Report on Form 8-K filed on February 11, 2000
Current Report on Form 8-K filed on February 17, 2000
Current Report on Form 8-K filed on February 22, 2000
Current Report on Form 8-K filed on April 10, 2000
Current Report on Form 8-K/A filed on April 11, 2000
Current Report on Form 8-K filed on May 12, 2000
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: May 15, 2000 By: /s/ Ross M. Patten
------------------------------
Chief Executive Officer
Date: May 15, 2000 By: /s/ Paul Withrow
------------------------------
Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,234,135
<SECURITIES> 0
<RECEIVABLES> 14,911,106
<ALLOWANCES> 522,896
<INVENTORY> 0
<CURRENT-ASSETS> 23,534,883
<PP&E> 41,244,835
<DEPRECIATION> 9,664,017
<TOTAL-ASSETS> 178,966,143
<CURRENT-LIABILITIES> 14,623,186
<BONDS> 0
0
22,365,462
<COMMON> 38,840
<OTHER-SE> 48,899,254
<TOTAL-LIABILITY-AND-EQUITY> 178,966,143
<SALES> 18,666,426
<TOTAL-REVENUES> 18,666,426
<CGS> 15,092,223
<TOTAL-COSTS> 15,092,223
<OTHER-EXPENSES> (4,258)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,089,908
<INCOME-PRETAX> (1,613,881)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,613,881)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,111,650)
<EPS-BASIC> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
