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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, 2005 Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 88-0219860
(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 by check mark whether the Registrant is an accelerated filer as defined
in Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
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 5, 2005
----- --------------------------
Common stock, par value $.002 20,231,121
SYNAGRO TECHNOLOGIES, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited),
and December 31, 2004 (Derived From Audited Financial Statements)...... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004 (Unaudited)................. 4
Condensed Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 2005 (Unaudited)............................... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 (Unaudited)................. 6
Notes to Condensed Consolidated Financial Statements...................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 27
Item 4. Controls and Procedures.......................................... 28
PART II - OTHER INFORMATION............................................... 29
2
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
--------- -------------
(UNAUDITED) (DERIVED FROM
AUDITED
FINANCIAL
STATEMENTS)
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ 273 $ 326
Restricted cash ............................................ 1,496 655
Accounts receivable, net ................................... 57,665 63,891
Costs and estimated earnings in excess of billings ......... 10,822 8,099
Prepaid expenses and other current assets .................. 11,203 11,793
--------- ---------
Total current assets ..................................... 81,459 84,764
Property, machinery & equipment, net ......................... 223,352 225,541
Other Assets:
Costs and estimated earnings in excess of billings ......... 4,848 4,704
Goodwill ................................................... 171,855 171,855
Restricted cash -- construction fund ....................... 339 1,988
Restricted cash -- debt service fund ....................... 7,965 7,287
Other, net ................................................. 14,185 14,645
--------- ---------
Total assets ............................................. $ 504,003 $ 510,784
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt ............................................ $ -- $ 4,000
Current maturities of long-term debt ....................... 850 848
Current maturities of nonrecourse project revenue bonds .... 3,300 3,300
Current maturities of capital lease obligations ............ 2,944 3,028
Accrued interest payable ................................... 8,866 4,018
Accounts payable and accrued expenses ...................... 52,945 58,651
--------- ---------
Total current liabilities ................................ 68,905 73,845
Long-Term Debt:
Long-term debt obligations, net ............................ 177,806 178,453
Nonrecourse project revenue bonds, net ..................... 59,035 59,028
Capital lease obligations, net ............................. 10,647 11,318
--------- ---------
Total long-term debt ..................................... 247,488 248,799
Other long-term liabilities .............................. 22,892 24,289
--------- ---------
Total liabilities ........................................ 339,285 346,933
Commitments and Contingencies
Redeemable Preferred Stock, 69,792.29 shares issued and
outstanding, redeemable at $1,000 per share ............... 97,398 95,126
Stockholders' Equity:
Preferred stock, $.002 par value, 10,000,000 shares
authorized, none issued or outstanding .................. -- --
Common stock, $.002 par value, 100,000,000 shares
authorized, 20,160,121 and 19,809,621 shares
issued and outstanding in 2005 and 2004, respectively ... 40 40
Additional paid in capital ................................. 72,167 73,358
Accumulated deficit ........................................ (4,215) (3,875)
Accumulated other comprehensive loss ....................... (672) (798)
--------- ---------
Total stockholders' equity ............................... 67,320 68,725
--------- ---------
Total liabilities and stockholders' equity ............... $ 504,003 $ 510,784
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ------------
Revenue .................................................. $ 76,214 $ 72,660
Cost of services ......................................... 64,176 60,344
------------ ------------
Gross profit ............................................. 12,038 12,316
Selling, general and administrative expenses ............. 6,169 5,822
Gain on sale of assets ................................... (76) (158)
------------ ------------
Income from operations ................................ 5,945 6,652
------------ ------------
Other expense:
Interest expense, net ................................. 6,515 5,169
Other (income) expense, net ........................... (3) 40
------------ ------------
Total other expense, net .......................... 6,512 5,209
------------ ------------
Income (loss) before provision (benefit) for income taxes (567) 1,443
Provision (benefit) for income taxes .................. (227) 563
------------ ------------
Net income (loss) before preferred stock dividends ....... (340) 880
Preferred stock dividends ................................ 2,272 2,138
------------ ------------
Net loss applicable to common stock ...................... $ (2,612) $ (1,258)
============ ============
Loss per share:
Basic net loss per share .............................. $ (0.13) $ (0.06)
============ ============
Diluted net loss per share ............................ $ (0.13) $ (0.06)
============ ============
Weighted average shares outstanding for basic and
diluted earnings per share ......................... 20,020,183 19,775,821
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL LOSS
---------- ---------- ----------- ----------- ------------- ----------- -------------
BALANCE, January 1, 2005 ..................... 19,809,621 $ 40 $ 73,358 $ (3,875) $ (798) $ 68,725 $ --
Change in other comprehensive income ........ -- -- -- -- 126 126 126
Preferred stock dividends ................... -- -- (2,272) -- -- (2,272) --
Exercise of options ......................... 350,500 -- 993 -- -- 993 --
Tax benefit from exercise of stock options... -- -- 88 -- -- 88 --
Net loss before preferred stock dividends.... -- -- -- (340) -- (340) (340)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, March 31, 2005 ...................... 20,160,121 $ 40 $ 72,167 $ (4,215) $ (672) $ 67,320 $ (214)
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SYNAGRO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
----------- ------------
Cash flows from operating activities:
Net loss applicable to common stock ........................ $ (2,612) $ (1,258)
Adjustments to reconcile net income applicable to common
stock to net cash provided by operating activities:
Preferred stock dividends .............................. 2,272 2,138
Bad debt expense ....................................... 150 --
Depreciation and amortization expense .................. 5,228 4,632
Amortization of debt financing costs ................... 321 267
Provision (benefit) for income taxes .................. (227) 563
Tax benefit from exercise of stock options ............. 88 --
Gain on sale of property, machinery and equipment ...... (76) (158)
(Increase) decrease in the following, net:
Accounts receivable .................................. 6,076 3,066
Cost and estimated earnings in excess of billings .... (2,867) (639)
Prepaid expenses and other assets .................... 1,296 1,464
Increase (decrease) in the following:
Accrued interest payable ............................. 4,848 4,407
Accounts payable, accrued expenses and other
long-term liabilities ............................. (6,019) (2,748)
---------- ----------
Net cash provided by operating activities ................ 8,478 11,734
---------- ----------
Cash flows from investing activities:
Purchases of property, machinery and equipment ........... (2,932) (4,216)
Facility construction funded by restricted cash .......... (1,648) (2,768)
Proceeds from sale of property, machinery and equipment .. 168 283
Decrease in restricted cash for facility construction .... 1,648 2,768
Increase in other restricted cash accounts ............... (1,519) (869)
Other .................................................... -- (280)
---------- ----------
Net cash used in investing activities .................... (4,283) (5,082)
---------- ----------
Cash flows from financing activities:
Payments of debt ......................................... (6,741) (6,498)
Net increase in bank revolver borrowings ................. 1,500 --
Debt issuance costs ...................................... -- (175)
Exercise of options ...................................... 993 --
---------- ----------
Net cash used in financing activities .................... (4,248) (6,673)
---------- ----------
Net decrease in cash and cash equivalents ................... (53) (21)
Cash and cash equivalents, beginning of period ................ 326 206
---------- ----------
Cash and cash equivalents, end of period ...................... $ 273 $ 185
========== ==========
Supplemental Cash Flow Information
Interest paid during the period ............................ $ 935 $ 506
Taxes paid during the period ............................... $ 310 $ 288
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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., a Delaware corporation, ("Synagro")
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
statement of such financial statements for the periods indicated. Certain
information relating to Synagro'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, Synagro believes
that the disclosures herein are adequate to make the information presented not
misleading. The results for the three months ended March 31, 2005 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 Synagro's Annual Report on Form 10-K for the year
ended December 31, 2004.
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 for the
year ended December 31, 2004.
Synagro and collectively with its subsidiaries (the "Company") is a national
water and wastewater residuals management company serving more than 600
municipal and industrial water and wastewater treatment accounts with operations
in 37 states and the District of Columbia. Synagro offers many services that
focus on the beneficial reuse of organic nonhazardous residuals resulting from
the wastewater treatment process. The Company's broad range of services include
drying and pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services.
ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
An Amendment of FASB Statement No. 123." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair-value-based method of
accounting for stock-based employee compensation. Companies must disclose in
both annual and interim financial statements the method used to account for
stock-based compensation. The Company will continue to apply Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its plans. Therefore, no compensation cost has been recognized in
the accompanying condensed consolidated financial statements for the Company's
stock option plans.
7
If the Company elected to apply SFAS No. 123, the Company's net loss and loss
per diluted share would have approximated the pro forma amounts indicated below:
THREE MONTHS ENDED MARCH 31,
------------------------------------
2005 2004
------------- --------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net loss applicable to common stock, as reported.......... $ (2,612) $ (1,258)
Less: Compensation expense per SFAS No. 123, net of tax... 311 271
------------ ------------
Pro forma loss after effect of SFAS No. 123............... $ (2,923) $ (1,529)
============ ============
Diluted loss per share, as reported....................... $ (0.13) $ (0.06)
Pro forma loss per share after effect of SFAS No. 123..... $ (0.15) $ (0.08)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model resulting in a weighted average per share
fair value of $3.80 and $2.35 for grants made during the quarters ended March
31, 2005 and 2004, respectively. The following assumptions were used for option
grants made during the quarters ended March 31, 2005 and 2004, respectively:
expected volatility of 222 percent and 105 percent; risk-free interest rates of
4.0 percent and 3.98 percent; expected lives of up to ten years and no expected
dividends to be paid. The compensation expense included in the above pro forma
data may not be indicative of amounts to be included in future periods as the
fair value of options granted prior to 1995 was not determined and the Company
expects future grants.
In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation" was
revised (SFAS No. 123R). SFAS No. 123R establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R is effective for annual periods beginning after
January 1, 2006. The Company is in the process of evaluating the impact of the
implementation of SFAS No. 123R.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are the Company's significant estimates and assumptions made in
preparation of its financial statements that deal with the greatest amount of
uncertainty:
Allowance for Doubtful Accounts -- The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation and the likelihood of success in collecting the receivable. Accounts
are written off periodically during the year as they are deemed uncollectible
when collection efforts have been unsuccessful. The allowance for doubtful
accounts was approximately $1.2 million at March 31, 2005 and December 31, 2004.
Loss Contracts -- The Company evaluates its revenue producing contracts to
determine whether the projected revenues of such contracts exceed the direct
cost to service such contracts. These evaluations include estimates of the
future revenues and expenses. Accruals for loss contracts are adjusted based on
these evaluations. An accrual for loss contracts was not required as of March
31, 2005.
Long Term Construction Contracts -- Certain long term construction projects are
accounted for using the percentage of completion method of accounting and
accordingly revenues are recorded based on estimates of total costs to be
incurred under the contract. We typically subcontract a portion of the work to
subcontractors under fixed price contracts. Costs and estimated earnings in
excess of billings included in the accompanying consolidated balance sheets
represents revenues recognized in excess of amounts billed under the terms of
contracts accounted for on the percentage of completion method of accounting.
These amounts are billable upon completion of contract performance milestones or
other specified conditions of the contract.
8
Property and Equipment/Long-Lived Assets - Property and equipment is reviewed
for impairment pursuant to the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The carrying amount of an asset
(group) is considered impaired if it exceeds the sum of the Company's estimate
of the undiscounted future cash flows expected to result from the use and
eventual disposition of the asset (group), excluding interest charges.
The Company regularly incurs costs to develop potential projects or facilities
and procure contracts for the design, permitting, construction and operations of
facilities. The Company has recorded $8.1 million in property and long-term
assets related to these activities at March 31, 2005, compared to $29.2 million
at December 31, 2004 (approximately $4.2 million and $21.8 million are
classified as construction in progress at March 31, 2005 and December 31, 2004,
respectively). The decrease as of March 31, 2005 is primarily due to the
Sacramento biosolids facility which commenced operations in December 2004 and is
now being depreciated. The Company routinely reviews the status of each of these
projects to determine if these costs are realizable.
Goodwill -- Goodwill attributable to the Company's reporting units is tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Significant estimates used in the determination of fair value include
estimates of future cash flows, future growth rates, costs of capital and
estimates of market multiples. As required under current accounting standards,
the Company tests for impairment annually at year end unless factors indicate
that an impairment may have occurred.
Purchase Accounting -- The Company estimates the fair value of assets, including
property, machinery and equipment and its related useful lives and salvage
values, and liabilities when allocating the purchase price of an acquisition.
Income Taxes -- The Company assumes the deductibility of certain costs in its
income tax filings and estimates the recovery of deferred income tax assets. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the activity underlying these
assets becomes deductible. The Company considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. If actual future taxable income differs
from its estimates, the Company may not realize deferred tax assets to the
extent it was estimated.
Legal and Contingency Accruals -- The Company estimates and accrues the amount
of probable exposure it may have with respect to litigation, claims and
assessments. These estimates are based on management's facts and the
probabilities of the ultimate resolution of the litigation.
Self-Insurance Reserves - The Company is substantially self-insured for worker's
compensation, employer's liability, auto liability, general liability and
employee group health claims in view of the relatively high per-incident
deductibles the Company absorbs under its insurance arrangements for these
risks. Losses up to deductible amounts are estimated and accrued based on known
facts, historical trends, industry averages and actuarial assumptions regarding
future claims development and claims incurred but not reported.
Actual results could differ materially from the estimates and assumptions that
the Company uses in the preparation of its financial statements.
(2) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Activity of the Company's costs and estimated earnings in excess of billings
consists of the following:
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
(IN THOUSANDS)
Costs and estimated earnings on contracts in progress .... $ 28,637 $ 20,262
Less -- Billings to date ................................. (12,967) (7,459)
---------- ----------
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................. $ 15,670 $ 12,803
========== ==========
Current assets ........................................... $ 10,822 $ 8,099
Non current assets ....................................... 4,848 4,704
---------- ----------
Total .................................................... $ 15,670 $ 12,803
========== ==========
Accounts payable includes approximately $11.0 and $6.5 million at March 31, 2005
and December 31, 2004, respectively, for contracts accounted for under the
percentage of completion method of accounting, the majority of which is not
payable until the Company collects its customer billings on the related
contracts.
9
(3) SHORT-TERM DEBT OBLIGATIONS
In August 2004, the Company entered into a $4.0 million short term note with a
bank for the purchase of land. The note bears interest at LIBOR or prime plus a
margin which currently approximates 4.67 percent and was repaid in February 2005
with borrowings on the Company's revolving line of credit. The Company plans to
use the land as part of the development of a compost facility in Southern
California.
(4) LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations consist of the following:
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(IN THOUSANDS)
Senior credit facility --
Revolving line of credit ................................ $ 4,700 $ 5,100
Term loans .............................................. 23,806 23,867
Subordinated debt .......................................... 150,000 150,000
Fair value adjustment of subordinated debt
as a result of interest rate swaps ...................... (694) (534)
Notes payable to former owners ............................. 831 855
Other notes payable ........................................ 13 13
----------- -----------
Total debt ........................................ $ 178,656 $ 179,301
Less: Current maturities ................................... (850) (848)
----------- -----------
Long-term debt, net of current maturities ......... $ 177,806 $ 178,453
=========== ===========
CREDIT FACILITY
On May 8, 2002, the Company entered into a $150 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, to provide working capital
for operations, to fund capital expenditures and for 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
which currently approximates 7.25 percent for the Revolving Loan and 5.83
percent on the Term B loans.
During May 2003, the Company further amended its credit facility to increase the
revolving loan commitment to approximately $95 million.
The loan commitments under the Senior Credit Agreement, as amended, are as
follows:
(i) Revolving Loan up to $95 million outstanding at anytime;
(ii) Term B Loans (which, once repaid, may not be reborrowed) of $70
million; and
(iii) Letters of Credit up to $50 million as a subset of the Revolving
Loan. At March 31, 2005, the Company had approximately $37.8 million
of Letters of Credit outstanding.
On March 9, 2004, the Company amended its credit facility to, among other
things, exclude certain charges from its financial covenant calculations, to
clarify certain defined terms, to increase the amount of indebtedness permitted
under its total leverage ratio, and to reset capital and operating lease
limitations.
The amounts borrowed under the Senior Credit Agreement are subject to repayment
as follows:
REVOLVING TERM
PERIOD ENDING DECEMBER 31, LOAN LOANS
- ------------------------------ --------- -------
2002.......................... -- 0.25%
2003.......................... -- 1.00%
2004.......................... -- 1.00%
2005.......................... -- 1.00%
2006.......................... -- 1.00%
2007.......................... 100.00% 1.00%
2008.......................... -- 94.75%
------ ------
100.00% 100.00%
====== ======
10
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. 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 financial covenants. The Company was
in compliance with those covenants as of March 31, 2005. The Senior Credit
Agreement is collateralized by substantially all the assets of the Company and
expires on December 31, 2008. As of March 31, 2005, the Company had
approximately $52.5 million of unused borrowings under the Senior Credit
Agreement, of which approximately $38.8 million is available for borrowing based
on the ratio limitations included in the Senior Credit Agreement.
SENIOR SUBORDINATED NOTES
In April 2002, the Company issued $150 million aggregate in principal amount of
its 9 1/2 percent Senior Subordinated Notes due on April 1, 2009 (the "Notes").
The Notes are unsecured senior indebtedness and are guaranteed by all of the
Company's existing and future domestic subsidiaries, other than subsidiaries
treated as unrestricted subsidiaries ("Guarantors"). As of March 31, 2005, all
subsidiaries, other than the subsidiaries formed to own and operate the
Sacramento dryer project, Synagro Organic Fertilizer Company of Sacramento, Inc.
and Sacramento Project Finance, Inc. (see Note 5) and South Kern Industrial
Center, LLC, were Guarantors of the Notes. Interest on the Notes accrues from
April 17, 2002, and is payable semi-annually on April 1 and October 1 of each
year, commencing October 1, 2002. On or after April 1, 2006, the Company may
redeem some or all of the Notes at the redemption prices (expressed as
percentages of principal amount) listed below, plus accrued and unpaid interest
and liquidated damages, if any, on the Notes redeemed, to the applicable date of
redemption, if redeemed during the 12-month period commencing on April 1 of the
years indicated below:
YEARS LOAN
----- ----
2006.................. 104.750%
2007.................. 102.375%
2008 and thereafter... 100.000%
Prior to April 1, 2005, the Company could redeem up to 35 percent of the
original aggregate principal amount of the Notes at a premium of 9 1/2 percent
with the net cash of public offerings of equity, provided that at least 65
percent of the original aggregate principal amount of the Notes remains
outstanding after the redemption. Upon the occurrence of specified change of
control events, unless the Company has exercised its option to redeem all the
Notes as described above, each holder will have the right to require the Company
to repurchase all or a portion of such holder's Notes at a purchase price in
cash equal to 101 percent of the aggregate principal amount of the Notes
repurchased plus accrued and unpaid interest and liquidated damages, if any, on
the Notes repurchased, to the applicable date of purchase. The Company did not
redeem any of these Notes prior to April 1, 2005. The Notes were issued under an
indenture, dated as of April 17, 2002, among the Company, the Guarantors and
Wells Fargo Bank Minnesota, National Association, as trustee (the "Indenture").
The Indenture limits the ability of the Company and the restricted subsidiaries
to, among other things, incur additional indebtedness and issue preferred stock,
pay dividends or make other distributions, make other restricted payments and
investments, create liens, incur restrictions on the ability of certain of its
subsidiaries to pay dividends or other payments to the Company, enter into
transactions with affiliates, and engage in mergers, consolidations and certain
sales of assets.
The Notes and the guarantees of the Guarantors are (i) unsecured; (ii)
subordinate in right of payment to all existing and future senior indebtedness
(including all borrowings under the credit facility and surety obligations) of
Synagro and the Guarantors; (iii) equal in right of payment to all future and
senior subordinated indebtedness of Synagro and the Guarantors; and (iv) senior
in right of payment to future subordinated indebtedness of Synagro and the
Guarantors.
DERIVATIVES AND HEDGING ACTIVITIES
On July 24, 2003, the Company entered into two interest rate swap transactions
with two financial institutions to hedge the Company's exposure to changes in
the fair value on $85 million of its Notes. The purpose of these transactions
was to convert future interest due on $85 million of the Notes to a lower
variable rate in an attempt to realize savings on the Company's future interest
payments. The terms of the interest rate swap contract and the underlying debt
instruments are identical. The Company has designated these swap agreements as
fair value hedges. On September 23, 2004, the Company unwound $18 million of
these swaps and received a settlement payment of approximately $0.1 million that
was deducted from interest expense. On January 6, 2005, the Company unwound the
remaining $67 million of interest rate swaps and paid $0.5 million for the
settlement of these swaps. At March 31, 2005 the fair value adjustment to the
subordinated debt relating to these swaps was $0.7 million and was recorded as a
reduction to debt. This fair value adjustment will be amortized over the
remaining original life of the Notes and
11
charged to interest expense. The amount of amortization charged to interest
expense during the three month period ended March 31, 2005 was approximately
$29,000.
The Company previously had outstanding 12 percent subordinated debt which was
repaid on April 17, 2002, with the proceeds from the sale of the Notes. On June
25, 2002, the Company entered into a floating-to-fixed interest rate swap
agreement that substantially offsets market value changes in the Company's
reverse swap agreement. The liability related to this reverse swap agreement and
the floating-to-fixed offset agreement totaling approximately $2.2 million is
reflected in other long-term liabilities at March 31, 2005. The loss recognized
during the period ended March 31, 2005 related to the floating-to-fixed interest
rate swap agreement was approximately $0.8 million, while the gain recognized
related to the reverse swap agreement was approximately $0.8 million. The amount
of the ineffectiveness of the reverse swap agreement charged to other expense
was approximately $3,000 during the three month period ended March 31, 2005.
On June 25, 2001, the Company entered into a reverse swap on its 12 percent
subordinated debt and used the proceeds from the reverse swap agreement to
retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and option agreements. Accordingly, the balance included
in accumulated other comprehensive loss included in stockholders' equity related
to the retired swaps is being recognized in future periods' income over the
remaining term of the original swap agreement. The amount of accumulated other
comprehensive income charged to interest expense during the three month period
ended March 31, 2005 was approximately $0.1 million.
(5) NONRECOURSE PROJECT REVENUE BONDS
MARCH 31, DECEMBER 31,
2005 2004
------------- ------------
(IN THOUSANDS)
Maryland Energy Financing Administration Limited
Obligation Solid Waste Disposal Revenue Bonds, 1996 series --
Revenue bonds due 2001 to 2005 at stated interest rates of 5.45% to 5.85%.... $ 2,710 $ 2,710
Term revenue bond due 2010 at stated interest rate of 6.30%.................. 16,295 16,295
Term revenue bond due 2016 at stated interest rate of 6.45%.................. 22,360 22,360
------------- ------------
41,365 41,365
California Pollution Control Financing Authority Solid Waste Revenue Bonds --
Series 2002A -- Revenue bonds due 2008 to 2024 at stated interest
rates of 4.375% to 5.50%, net of discount of $278......................... 19,772 19,766
Series 2002B -- Revenue bonds due 2005 at stated interest
rate of 4.25%, net of discount of $2...................................... 1,198 1,197
------------- ------------
20,970 20,963
------------- ------------
Total nonrecourse project revenue bonds......................................... 62,335 62,328
Less: Current maturities..................................................... (3,300) (3,300)
------------- ------------
Nonrecourse project revenue bonds, net of current maturities................. $ 59,035 $ 59,028
============= ============
Amounts recorded in other assets as restricted cash - debt service fund......... $ 7,965 $ 7,287
============= ============
In 1996, the Maryland Energy Financing Administration (the "Administration")
issued nonrecourse tax-exempt project revenue bonds (the "Maryland Project
Revenue Bonds") in the aggregate amount of $58.6 million. The Administration
loaned the proceeds of the Maryland Project Revenue Bonds to Wheelabrator Water
Technologies Baltimore L.L.C., now Synagro's wholly owned subsidiary known as
Synagro-Baltimore, L.L.C., pursuant to a June 1996 loan agreement, and the terms
of the loan mirror the terms of the Maryland Project Revenue Bonds. The loan
financed a portion of the costs of constructing thermal facilities located in
Baltimore County, Maryland, at the site of its Back River Wastewater Treatment
Plant, and in the City of Baltimore, Maryland, at the site of its Patapsco
Wastewater Treatment Plant. The Company assumed all obligations associated with
the Maryland Project Revenue Bonds in connection with its acquisition of the Bio
Gro division of Waste Management, Inc. ("Bio Gro") in 2000. Maryland Project
Revenue Bonds in the aggregate amount of approximately $17.2 million have
already been repaid. The remaining Maryland Project Revenue Bonds bear interest
at annual rates between 5.85 percent and 6.45 percent and mature on dates
between December 1, 2005, and December 1, 2016.
The Maryland Project Revenue Bonds are primarily collateralized by the pledge of
revenues and assets related to the Company's Back River and Patapsco thermal
facilities. The underlying service contracts between the Company and the City of
Baltimore obligated the Company to design, construct and operate the thermal
facilities and obligated the City of Baltimore to deliver biosolids for
processing at the thermal facilities. The City of Baltimore makes all payments
under the service contracts directly with a trustee for the purpose of paying
the Maryland Project Revenue Bonds.
At the Company's option, it may cause the redemption of the Maryland Project
Revenue Bonds at any time on or after December 1, 2006, subject to redemption
prices specified in the loan agreement. The Maryland Project Revenue Bonds will
be redeemed at
12
any time upon the occurrence of certain extraordinary conditions, as defined in
the loan agreement.
Synagro-Baltimore, L.L.C. guarantees the performance of services under the
underlying service agreements with the City of Baltimore. Under the terms of the
Bio Gro acquisition purchase agreement, Waste Management, Inc. also guarantees
the performance of services under those service agreements. Synagro has agreed
to pay Waste Management $0.5 million per year beginning in 2007 until the
Maryland Project Revenue Bonds are paid or its guarantee is removed. Neither
Synagro-Baltimore, L.L.C. nor Waste Management has guaranteed payment of the
Maryland Project Revenue Bonds or the loan funded by the Maryland Project
Revenue Bonds.
The loan agreement, based on the terms of the related indenture, requires that
Synagro place certain monies in restricted fund accounts and that those funds be
used for various designated purposes (e.g., debt service reserve funds, bond
funds, etc.). Monies in these funds will remain restricted until the Maryland
Project Revenue Bonds are paid.
At March 31, 2005, the Maryland Project Revenue Bonds were collateralized by
property, machinery and equipment with a net book value of approximately $53.7
million and restricted cash of approximately $7.7 million, of which
approximately $6.3 million is in a debt service fund that is established to
partially secure certain payments and can be utilized to make the final payment
at the Company's request.
SACRAMENTO PROJECT BONDS
In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of $20.9
million (net of original issue discount of $0.4 million). The nonrecourse
revenue bonds consist of $19.7 million (net of original issue discount of $0.4
million) Series 2002-A and $1.2 million (net of original issue discount of
$9,000) Series 2002-B (collectively, the "Sacramento Bonds"). The Authority
loaned the proceeds of the Sacramento Bonds to Sacramento Project Finance, Inc.,
a wholly owned subsidiary of the Company, pursuant to a loan agreement dated
December 1, 2002. The purpose of the loan is to finance the design, permitting,
constructing and equipping of a biosolids dewatering and heat drying/pelletizing
facility for the Sacramento Regional County Sanitation District ("Sanitation
District"). The Sacramento Bonds bear interest at annual rates between 4.25
percent and 5.5 percent and mature on dates between December 1, 2006, and
December 1, 2024. The Sacramento facility commenced commercial operations in
December 2004.
The Sacramento Bonds are primarily collateralized by the pledge of certain
revenues and all of the property of Sacramento Project Finance, Inc. The
facility will be owned by Sacramento Project Finance, Inc. and leased to Synagro
Organic Fertilizer Company of Sacramento, Inc., another wholly owned subsidiary
of the Company. Synagro Organic Fertilizer Company of Sacramento, Inc. will be
obligated under a lease agreement dated December 1, 2002, to pay base rent to
Sacramento Project Finance, Inc. in an amount exceeding the debt service of the
Bonds. The facility will be located on property owned by the Sanitation
District. The Sanitation District will provide the principal source of revenues
to Synagro Organic Fertilizer Company of Sacramento, Inc. through a service fee
under a contract that has been executed.
At the Company's option, it may cause the early redemption of some Sacramento
Bonds at any time or after December 7, 2007, subject to redemption prices
specified in the loan agreement.
The loan agreement requires that Sacramento Project Finance, Inc. place certain
monies in restricted accounts and that those funds be used for designated
purposes (e.g., operation and maintenance expense account, reserve requirement
accounts, etc.). Monies in these funds will remain restricted until the Bonds
are paid.
At March 31, 2005, the Sacramento Bonds are partially collateralized by
restricted cash of approximately $2.1 million, of which approximately $1.7
million is in a debt service fund that is established to secure certain payments
and can be utilized to make the final payment at the Company's request, and the
remainder is reserved for construction costs expected to be incurred after
notice to proceed is received. The Company is not a guarantor of the Bonds or
the loan funded by the Bonds.
The Maryland Project Revenue Bonds and the Sacramento Bonds are excluded from
the financial covenant calculations required by the Company's Senior Credit
Agreement.
13
(6) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company'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, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. The Company believes that these matters will not have a
material adverse effect on its business, financial condition, results of
operations and cash flows. However, the outcome of any particular proceeding
cannot be predicted with certainty. The Company is required under various
regulations to procure licenses and permits to conduct its operations. These
licenses and permits are subject to periodic renewal without which its
operations could be adversely affected. There can be no assurance that
regulatory requirements will not change to the extent that it would materially
affect the Company's consolidated financial statements.
Reliance Insurance
For the 24 months ended October 31, 2000 (the "Reliance Coverage Period"), the
Company insured certain risks, including automobile, general liability, and
worker's compensation, with Reliance National Indemnity Company ("Reliance")
through policies totaling $26 million in annual coverage. On May 29, 2001, the
Commonwealth Court of Pennsylvania entered an order appointing the Pennsylvania
Insurance Commissioner as Rehabilitator and directing the Rehabilitator to take
immediate possession of Reliance's assets and business. On June 11, 2001,
Reliance's ultimate parent, Reliance Group Holdings, Inc., filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code of 1978, as amended. On
October 3, 2001, the Pennsylvania Insurance Commissioner removed Reliance from
rehabilitation and placed it into liquidation.
Claims have been asserted and/or brought against the Company and its affiliates
related to alleged acts or omissions occurring during the Reliance Coverage
period. It is possible, depending on the outcome of possible claims made with
various state insurance guaranty funds, that the Company will have no, or
insufficient, insurance funds available to pay any potential losses. There are
uncertainties relating to the Company's ultimate liability, if any, for damages
arising during the Reliance Coverage Period, the availability of the insurance
coverage, and possible recovery for state insurance guaranty funds.
In June 2002, the Company settled one such claim that was pending in Jackson
County, Texas. The full amount of the settlement was paid by insurance proceeds;
however, as part of the settlement, the Company agreed to reimburse the Texas
Property and Casualty Insurance Guaranty Association an amount ranging from $0.6
to $2.5 million depending on future circumstances. The Company estimated its
exposure at approximately $1.0 million for the potential reimbursement to the
Texas Property and Casualty Insurance Guaranty Association for costs associated
with the settlement of this case and for unpaid insurance claims and other costs
for which coverage may not be available due to the pending liquidation of
Reliance. The Company believes accruals of approximately $1.0 million as of
March 31, 2005, are adequate to provide for its exposures. The final resolution
of these exposures could be substantially different from the amount recorded.
DESIGN AND BUILD CONTRACT RISK
The Company participates in design and build construction operations, usually as
a general contractor. Virtually all design and construction work is performed by
unaffiliated subcontractors. As a consequence, the Company is dependent upon the
continued availability of and satisfactory performance by these subcontractors
for the design and construction of its facilities. There is no assurance that
there will be sufficient availability of and satisfactory performance by these
unaffiliated subcontractors. In addition, inadequate subcontractor resources and
unsatisfactory performance by these subcontractors could have a material adverse
effect on the Company's business, financial condition and results of operation.
Further, as the general contractor, the Company is legally responsible for the
performance of its contracts and, if such contracts are under-performed or
nonperformed by its subcontractors, the Company could be financially
responsible. Although the Company's contracts with its subcontractors provide
for indemnification if its subcontractors do not satisfactorily perform their
contract, there can be no assurance that such indemnification would cover the
Company's financial losses in attempting to fulfill the contractual obligations.
OTHER
There are various other lawsuits and claims pending against the Company that
have arisen in the normal course of business and relate mainly to matters of
environmental, personal injury and property damage. The outcome of these matters
is not presently
14
determinable but, in the opinion of the Company's management, the ultimate
resolution of these matters will not have a material adverse effect on the
consolidated financial condition, results of operations or cash flows of the
Company.
SELF-INSURANCE
The Company is substantially self-insured for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims in
view of the relatively high per-incident deductibles the Company absorbs under
its insurance arrangements for these risks. Losses up to deductible amounts are
estimated and accrued based upon known facts, historical trends, industry
averages, and actuarial assumptions regarding future claims development and
claims incurred but not reported.
(7) EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding for the
period. For periods in which the Company has reported a cumulative effect of an
accounting change, the Company uses income from continuing operations as the
"control number" in determining whether potential common shares are dilutive or
antidilutive. That is, the same number of potential common shares used in
computing the diluted per-share amount for income from continuing operations has
been used in computing all other reported diluted per-share amounts even if
those amounts will be antidilutive to their respective basic per-share amounts.
Diluted EPS is computed by dividing net income before preferred stock dividends
by the total of the weighted average number of common shares outstanding for the
period, the weighted average number of shares of common stock that would be
issued assuming conversion of the Company's preferred stock, and other common
stock equivalents for options and warrants outstanding determined using the
treasury stock method.
The following table summarizes the net income and weighted average shares to
reconcile basic EPS and diluted EPS for the period ended March 31, 2005 and
2004.
THREE MONTHS ENDED MARCH 31,
--------------------------------
2005 2004
------------- --------------
(IN THOUSANDS EXCEPT SHARE DATA)
Net income (loss) applicable to common stock:
Net income (loss) before preferred stock dividends .... $ (340) $ 880
Preferred stock dividends ............................. 2,272 2,138
------------- -------------
Net loss applicable to common stock ................... $ (2,612) $ (1,258)
============= =============
Loss per share:
Basic net loss per share .............................. $ (0.13) $ (0.06)
============= =============
Diluted net loss per share ............................ $ (0.13) $ (0.06)
============= =============
Weighted average shares outstanding for basic and
diluted earnings per share ......................... 20,020,183 19,775,821
============= =============
Basic and diluted EPS are the same for the period ended March 31, 2005 and 2004,
because diluted EPS was less dilutive than basic EPS ("antidilutive").
Accordingly, 42,046,326 and 37,461,672 shares representing common stock
equivalents have been excluded from the diluted EPS calculations for the period
ended March 31, 2005 and 2004, respectively.
(8) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
As discussed in Note 5, as of March 31, 2005, all of the Company's 100% owned
domestic subsidiaries, except the subsidiaries formed to own and operate the
compost project in Southern California, South Kern Industrial Center, L.L.C.
(see Note 3), the Sacramento biosolids processing facility, Synagro Organic
Fertilizer Company of Sacramento, Inc. and Sacramento Project Finance, Inc. (See
Note 5), and Philadelphia Biosolids Services, L.L.C. (collectively the
"Non-Guarantor Subsidiaries"), are Guarantors of the Notes. Each of the
Guarantors is 100% owned by Synagro and the guarantees are full, unconditional
and joint and several. Additionally, the Company is not a Guarantor for the debt
of the Non-Guarantor Subsidiaries. Accordingly, the following condensed
consolidating balance sheets have been presented as of March 31, 2005 and
December 31, 2004. The condensed consolidated statements of operations and of
cash flows have also been presented for the three month period ended
15
March 31, 2005 with no comparable period in the prior year as there were no
operations at the Sacramento biosolids processing facility until December 2004.
CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2005
(DOLLARS IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 32 $ 32 $ 209 $ -- $ 273
Restricted cash ..................................... -- 1,496 -- -- 1,496
Accounts receivable, net ............................ -- 55,979 1,686 -- 57,665
Note receivable, current ............................ -- 218 -- -- 218
Prepaid expenses and other current assets ........... -- 21,719 88 -- 21,807
---------- ---------- ---------- ---------- ----------
Total current assets ............................ 32 79,444 1,983 -- 81,459
Property, machinery & equipment, net .................. -- 200,617 22,735 -- 223,352
Other Assets:
Goodwill ............................................ -- 171,855 -- -- 171,855
Investments in subsidiaries ......................... 85,384 -- -- (85,384) --
Intercompany ........................................ 280,415 -- -- (280,415) --
Restricted cash -- construction fund ................ -- -- 339 -- 339
Restricted cash -- debt service fund ................ -- 6,251 1,714 -- 7,965
Other, net .......................................... 4,650 11,410 2,973 -- 19,033
---------- ---------- ---------- ---------- ----------
Total assets .................................... $ 370,481 $ 469,577 $ 29,744 $ (365,799) $ 504,003
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ................ $ 244 $ 606 $ -- $ -- $ 850
Current maturities of nonrecourse project
revenue bonds .................................... -- 2,710 590 -- 3,300
Current maturities of capital lease obligations ..... -- 2,944 -- -- 2,944
Accrued interest payable ............................ 7,572 925 369 8,866
Accounts payable and accrued expenses ............... -- 52,157 788 -- 52,945
---------- ---------- ---------- ---------- ----------
Total current liabilities ....................... 7,816 59,342 1,747 -- 68,905
Long-Term Debt:
Long-term debt obligations, net ..................... 177,568 238 -- -- 177,806
Nonrecourse project revenue bonds, net .............. -- 38,655 20,380 -- 59,035
Intercompany ........................................ -- 280,343 72 (280,415) --
Capital lease obligations, net ...................... -- 10,647 -- -- 10,647
---------- ---------- ---------- ---------- ----------
Total long-term debt ............................... 177,568 329,883 20,452 (280,415) 247,488
Other long-term liabilities ........................... 20,379 2,513 -- -- 22,892
---------- ---------- ---------- ---------- ----------
Total liabilities ............................... 205,763 391,738 22,199 (280,415) 339,285
Commitments and Contingencies
Redeemable Preferred Stock, 69,792.29 shares issued
and outstanding, redeemable at $1,000 per share ..... 97,398 -- -- -- 97,398
Stockholders' Equity:
Capital ............................................. 72,207 36,339 7,397 (43,736) 72,207
Accumulated deficit ................................. (4,215) 41,500 148 (41,648) (4,215)
Accumulated other comprehensive loss ................ (672) -- -- -- (672)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity ...................... 67,320 77,839 7,545 (85,384) 67,320
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity ............ $ 370,481 $ 469,577 $ 29,744 $ (365,799) $ 504,003
========== ========== ========== ========== ==========
16
CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2004
(DOLLARS IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ 99 $ 21 $ 206 $ -- $ 326
Restricted cash ............................................ -- 655 -- -- 655
Accounts receivable, net ................................... -- 63,367 524 -- 63,891
Note receivable, current ................................... -- 218 -- -- 218
Prepaid expenses and other current assets .................. -- 19,663 11 -- 19,674
----------- ----------- ----------- ------------ -----------
Total current assets .................................. 99 83,924 741 -- 84,764
Property, machinery & equipment, net ......................... -- 202,659 22,882 -- 225,541
Other Assets:
Goodwill ................................................... -- 171,855 -- -- 171,855
Investments in subsidiaries ................................ 81,649 -- -- (81,649) --
Intercompany ............................................... 280,157 -- -- (280,157) --
Restricted cash -- construction fund ....................... -- -- 1,988 -- 1,988
Restricted cash -- debt service fund ....................... -- 5,573 1,714 -- 7,287
Other, net ................................................. 5,204 11,135 3,010 -- 19,349
----------- ----------- ----------- ------------ -----------
Total assets .......................................... $ 367,109 $ 475,146 $ 30,335 $ (361,806) $ 510,784
=========== =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term debt ............................................ $ -- $ -- $ 4,000 $ -- $ 4,000
Current maturities of long-term debt ....................... 244 604 -- -- 848
Current maturities of nonrecourse project revenue bonds .... -- 3,300 -- -- 3,300
Current maturities of capital lease obligations ............ -- 3,028 -- -- 3,028
Accounts payable and accrued expenses ...................... 3,896 56,192 2,581 -- 62,669
----------- ----------- ----------- ------------ -----------
Total current liabilities ............................. 4,140 63,124 6,581 -- 73,845
Long-Term Debt:
Long-term debt obligations, net ............................ 178,189 264 -- -- 178,453
Nonrecourse project revenue bonds, net ..................... -- 38,065 20,963 -- 59,028
Intercompany ............................................... -- 280,157 -- (280,157) --
Capital lease obligations, net ............................. -- 11,318 -- -- 11,318
----------- ----------- ----------- ------------ -----------
Total long-term debt ..................................... 178,189 329,804 20,963 (280,157) 248,799
Other long-term liabilities .................................. 20,929 3,360 -- -- 24,289
----------- ----------- ----------- ------------ -----------
Total liabilities ..................................... 203,258 396,288 27,544 (280,157) 346,933
Commitments and Contingencies
Redeemable Preferred Stock, 69,792.29 shares issued
and outstanding, redeemable at $1,000 per share ............ 95,126 -- -- -- 95,126
Stockholders' Equity:
Capital .................................................... 73,398 36,339 2,750 (39,089) 73,398
Accumulated deficit ........................................ (3,875) 42,519 41 (42,560) (3,875)
Accumulated other comprehensive loss ....................... (798) -- -- -- (798)
----------- ----------- ----------- ------------ -----------
Total stockholders' equity ............................ 68,725 78,858 2,791 (81,649) 68,725
----------- ----------- ----------- ------------ -----------
Total liabilities and stockholders' equity ................... $ 367,109 $ 475,146 $ 30,335 $ (361,806) $ 510,784
=========== =========== =========== ============ ===========
17
CONSOLIDATING STATEMENTS OF OPERATIONS
AS OF MARCH 31, 2005
(DOLLARS IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
Revenue ............................................... $ -- $ 75,154 $ 1,060 $ -- $ 76,214
Cost of services ...................................... -- 63,615 561 -- 64,176
-------- -------- -------- -------- --------
Gross Profit .......................................... -- 11,539 499 -- 12,038
Selling, general and administrative expenses .......... -- 6,124 8 -- 6,132
Gain on sale of assets ................................ -- (76) -- -- (76)
Amortization .......................................... -- 37 -- -- 37
-------- -------- -------- -------- --------
Income from operations .......................... -- 5,454 491 -- 5,945
Other expense:
Interest expense, net ................................. 5,234 970 311 -- 6,515
Intercompany interest (income) expense ................ (6,184) 6,184 -- -- --
Equity in earnings of subs ............................ 912 -- -- (912) --
Other (income) expense, net ........................... -- (3) -- -- (3)
-------- -------- -------- -------- --------
Total other expense, net ........................ (38) 7,151 311 (912) 6,512
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes 38 (1,697) 180 912 (567)
Provision (benefit) for income taxes ................ 378 (677) 72 -- (227)
-------- -------- -------- -------- --------
Net income (loss) before preferred stock dividends ...... (340) (1,020) 108 912 (340)
Preferred stock dividends ............................... 2,272 -- -- -- 2,272
-------- -------- -------- -------- --------
Net income (loss) applicable to common stock ............ $ (2,612) $ (1,020) $ 108 $ 912 $ (2,612)
======== ======== ======== ======== ========
18
CONSOLIDATING STATEMENTS OF CASH FLOWS
AS OF MARCH 31, 2005
(DOLLARS IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) applicable to common stock .................. $ (2,612) $ (1,020) $ 108 $ 912 $ (2,612)
Adjustments to reconcile net income applicable
to common stock to net cash provided by
operating activities: ......................................
Preferred stock dividends ................................... 2,272 -- -- -- 2,272
Bad debt expense ............................................ -- 150 -- -- 150
Depreciation and amortization expense ....................... -- 4,963 265 -- 5,228
Amortization of debt financing costs ........................ 314 -- 7 -- 321
Provision (benefit) for deferred income taxes ............... 378 (677) 72 -- (227)
Tax benefit from exercise of stock options................... 88 -- -- -- 88
Gain on sale of property, machinery and equipment ........... -- (76) -- -- (76)
(Increase) decrease in the following, net:
Accounts receivable ......................................... -- 7,238 (1,162) -- 6,076
Cost in excess of billings .................................. -- (2,867) -- -- (2,867)
Prepaid expenses and other current assets ................... 240 1,133 (77) -- 1,296
Equity in earnings .......................................... 912 -- -- (912) --
Increase (decrease) in the following, net:
Accrued interest payable .................................... 3,676 925 247 -- 4,848
Intercompany advances - trade ............................... (6,184) 6,184 -- -- --
Accounts payable and accrued expenses and other
long term liabilities ................................... (357) (5,640) (22) -- (6,019)
-------- -------- -------- -------- --------
Net cash (used in) provided by operating activities ............. (1,273) 10,313 (562) -- 8,478
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, machinery & equipment ................... -- (2,850) (82) -- (2,932)
Proceeds from sale of property, machinery & equipment ......... -- 168 -- -- 168
Facility construction funded by restricted cash ............... -- -- (1,648) -- (1,648)
Decrease in restricted cash for facility construction ......... -- -- 1,648 -- 1,648
Increase in other restricted cash accounts .................... -- (1,519) -- -- (1,519)
-------- -------- -------- -------- --------
Net cash used in investing activities ........................... -- (4,201) (82) -- (4,283)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Payments of debt .............................................. (1,961) (780) (4,000) -- (6,741)
Net increase in bank revolver borrowings ...................... 1,500 -- -- -- 1,500
Intercompany notes with subsidiaries .......................... 5,321 (5,321) -- -- --
Capital contributions ......................................... (4,647) -- 4,647 -- --
Exercise of options and warrants .............................. 993 -- -- -- 993
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities ............. 1,206 (6,101) 647 -- (4,248)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ (67) 11 3 -- (53)
Cash and cash equivalents, beginning of period .................. 99 21 206 -- 326
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ........................ $ 32 $ 32 $ 209 $ -- $ 273
======== ======== ======== ======== ========
19
(9) SEGMENT INFORMATION
The Company's Chief Operating Decision Maker regularly evaluates operating
results, assesses performance and allocates resources on a geographic basis,
except for the Company's rail operations and its engineering, facilities, and
development (EFD) group which are separately managed. Accordingly, the Company
reports the results of its activities in three reporting segments, which
include: Residuals Management Operations, Rail Transportation, and EFD.
Residuals Management Operations include the Company's business activities that
are managed on a geographic basis in the Northeast, Central, South, and West
regions of the United States. These geographic areas have been aggregated and
reported as a segment because they meet the aggregation criteria of SFAS 131.
Rail Transportation includes the transfer and rail haul of materials across
several states where the material is typically either land applied or landfill
disposed. Rail Transportation is a separate segment because it is monitored
separately and because it only offers long-distance land application and
disposal services to its customers. EFD includes construction management
activities and first year of operations for certain new processing facilities as
well as the marketing and sale of certain pellets and compost fertilizers.
The Company's operations by reportable segment are summarized below (in
thousands):
RESIDUALS ENGINEERING
MANAGEMENT RAIL FACILITIES SEGMENTS CORPORATE/
OPERATIONS TRANSPORTATION DEVELOPMENT COMBINED ELIMINATIONS CONSOLIDATED
---------- -------------- ----------- -------- ------------ ------------
THREE MONTHS ENDED MARCH 31, 2005
Revenue from external services.... $ 58,293 $ 7,284 $ 10,637 $ 76,214 $ -- $ 76,214
Revenues from other segments...... 228 665 -- 893 (893) --
Income (loss) from operations..... 8,147 488 663 9,298 (3,353) 5,945
THREE MONTHS ENDED MARCH 31, 2004
Revenue from external services.... $ 61,197 $ 9,606 $ 1,857 $ 72,660 $ -- $ 72,660
Revenues from other segments...... -- 785 -- 785 (785) --
Income (loss) from operations..... 9,636 1,355 (601) 10,390 (3,738) 6,652
The accounting policies of the Company's segments are the same as those
described for the Company in Note 1. Revenues from transactions with other
segments are based on terms substantially similar to transactions with unrelated
third party customers. The following reconciles segment income from operations
to the Company's consolidated income before provision for income taxes:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- -------
(IN THOUSANDS)
Segment income from operations .................................. $ 9,298 $10,390
Corporate ....................................................... 3,353 3,738
-------- -------
Income from operations .......................................... 5,945 6,652
Total other expense, net ........................................ 6,512 5,209
------- -------
Income (loss) before provision (benefit) for income taxes........ $ (567) $ 1,443
======== =======
(10) SUBSEQUENT EVENTS
On April 29, 2005, the Company executed a new credit facility with Bank of
America, N.A., Lehman Commercial Paper Inc., CIBC World Markets Corp., and
certain other lenders. The closing of the new credit facility is contingent upon
and will coincide with the anticipated closing of the Company's proposed equity
offering (as discussed below), tender offer for the Notes, and certain other
conditions precedent. The lenders' commitments with respect to the new credit
facility will expire on June 30, 2005, in the event all conditions precedent
have not been satisfied or waived or the expiration date has not been extended.
A portion of the proceeds from the new credit facility will be used to refinance
indebtedness under the Company's existing senior credit facility and to tender
for all of its $150 million of outstanding 9 1/2% senior subordinated notes due
2009. The new facility will allow the Company to pay a significant portion of
its excess cash flow to shareholders through cash dividends provided the Company
maintains compliance with certain financial covenants and certain other
restrictions. The Company expects that the new credit facility will also result
in cash interest savings of approximately $5 million per year. The new credit
facility will be comprised of a 5-year $95 million revolving credit facility, a
7-year $180 million term loan, and a 7-year $30 million delayed draw term loan.
The proceeds of the delayed draw term loan will be used to partially fund new
facility construction costs in 2005. The Company has several new facilities
under development which are scheduled to begin operations in the next 18 months.
These new
20
facilities will be operated under signed long-term contracts. The development of
these new facilities is consistent with the Company's strategy to pursue new
facilities opportunities that provide long-term highly predictable cash flows.
These facilities include a composting facility in Kern County, California, an
incineration facility upgrade in Woonsocket, Rhode Island, a dewatering facility
in Providence, Rhode Island, a dryer facility in Honolulu, Hawaii and a
composting facility in Los Palos, California.
On April 27, 2005, the Company filed a Registration Statement on Form S-1/A for
the issuance and sale of 9,713,024 shares of the Company's common stock by the
Company and 23,879,451 shares of the Company's common stock by the selling
shareholders named in the registration statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
historical financial statements and related notes thereto included elsewhere in
this Form 10-Q and the Annual Report on Form 10-K for the year ended December
31, 2004. This discussion contains forward-looking statements regarding our
business and industry within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on our current plans and
expectations 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, but are not limited to those factors
more thoroughly disclosed in our Annual Report on Form 10-K.
BACKGROUND
We generate substantially all of our revenue by providing water and wastewater
residuals management services to municipal and industrial customers. We provide
our customers with services and capabilities, including, drying and
pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services. We currently serve more
than 600 customers in 37 states and the District of Columbia. Our contracts
typically have inflation price adjustments, renewal clauses and broad force
majeure provisions. In 2004, we experienced a contract retention rate (both
renewals and rebids) of approximately 88 percent.
We categorize our revenues into five types -- contract, purchase order, product
sales, design\build construction and event work.
Contract revenues are generated primarily from land application, collection and
transportation services, dewatering, incineration, composting, drying and
pelletization services and facility operations and maintenance, and are
typically performed under a contract with terms ranging from 1 to 25 years.
Contract revenues accounted for approximately 80 percent and 81 percent of total
revenues in the first three months of 2005 and 2004, respectively.
Purchase order revenues are primarily from facility operations, maintenance
services, and collection and transportation services where services are
performed on a recurring basis, but not under a long-term contract. Purchase
order revenues accounted for approximately three percent of total revenues in
the first three months of 2005 and 2004, respectively.
Product sales revenues are primarily generated from sales of composted and
pelletized biosolids from internal and external facilities. Revenues from
product sales accounted for approximately three percent and five percent of
total revenues in the first three months of 2005 and 2004, respectively.
Design\build construction revenues are derived from construction projects where
we agree to design and build a biosolids facility such as a drying and
pelletization facility, composting facility, incineration facility or a
dewatering facility that we will subsequently operate once the facility
commences commercial operations. Revenues from design\build construction
projects accounted for approximately ten percent and one percent of total
revenues in the first three months of 2005 and 2004, respectively.
Event project revenues are typically generated from digester or lagoon cleanout
projects and temporary dewatering projects. Revenue from event projects
accounted for approximately four percent and ten percent of total revenues in
the first three months of 2005 and 2004, respectively.
Revenues under our facilities operations and maintenance contracts are
recognized either when wastewater residuals enter the facility or when the
residuals have been processed, depending on the contract terms. All other
revenues under service contracts are recognized when the service is performed.
Revenues from design/build construction projects are accounted for under the
percentage-of-completion method of accounting. We provide for losses in
connection with long-term contracts where an obligation exists to perform
services and it becomes evident that the projected contract costs will exceed
the related revenue.
21
Our costs relating to service contracts include processing, transportation,
spreading and disposal costs, and depreciation of operating assets. Our
spreading, transportation and disposal costs can be adversely affected by
unusual weather conditions and unseasonably heavy rainfall, which can
temporarily reduce the availability of land application. Material must be
transported to either a permitted storage facility (if available) or to a local
landfill for disposal. In either case, this results in additional costs for
transporting, storage and disposal of the biosolid materials versus land
application in a period of normal weather conditions. Processing and
transportation costs can also be adversely impacted by higher fuel costs. In
order to manage this risk at processing facilities, we generally enter into
contracts that pass-thru fuel cost increases to the customer, or for contracts
without pass-through provisions, we from time to time lock in our fuel costs
with our fuel suppliers for terms ranging from twelve to twenty-four months. As
of March 31, 2005, we did not have any agreements with our fuel suppliers that
locked in the unit cost of our fuel throughout fiscal 2005. We subcontract a
significant portion of our transportation requirements to numerous contractors
which enables us to minimize the impact of changes in fuel costs for over the
road equipment. We have also periodically implemented temporary fuel surcharges
with selected customers. Our costs relating to construction contracts primarily
include subcontractor costs related to design, permit and general construction.
Our selling, general and administrative expenses are comprised of accounting,
information systems, marketing, legal, human resources, regulatory compliance,
and regional and executive management costs.
Our management reviews and analyzes several trends and key performance
indicators in order to manage our business. Since approximately 90% of our
revenues are generated from municipal water and wastewater plants, we monitor
trends involving municipal generators, including, among other things, aging
infrastructure, technology advances, and regulatory activity in the water and
wastewater residuals management industry. We use this information to anticipate
upcoming growth opportunities, including new facility growth opportunities
similar to the Sacramento, California and Pinellas County, Florida dryer
projects that we started over the past two years. We also use this information
to manage potential business risks such as increased regulatory pressure or
local public opposition to residuals management programs. On an ongoing basis,
our management also considers several variables associated with the ongoing
operations of the business, including, among other things:
- new sales (including the mix of contract and event sales) and
existing business retention objectives necessary to maintain our
high percentage of contract and other recurring revenues;
- storage and permitted landbase available to efficiently manage land
application of biosolids, especially during inclement weather
patterns;
- monitoring regulatory and permit compliance requirements and safety
programs and initiatives specific to our business; and
- reviewing and monitoring utility costs, fuel costs, subcontractor
transportation costs, equipment utilization and availability,
equipment purchasing activity, headcount, field operating overhead
and selling, general and administrative expenses.
22
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth certain items included in the consolidated
financial statements as a percentage of revenue for the periods indicated:
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
2005 2004
----------------------- -----------------------
(IN THOUSANDS)
Revenue ...................................................... $ 76,214 100.0% $ 72,660 100.0%
Cost of services ............................................. 64,176 84.2% 60,344 83.0%
-------- ----- -------- -----
Gross profit ................................................. 12,038 15.8% 12,316 17.0%
Selling, general and administrative expenses ................. 6,169 8.1% 5,822 8.0%
Gain on sale of assets ....................................... (76) (0.1)% (158) (0.2)%
-------- ----- -------- -----
Income from operations ....................................... 5,945 7.8% 6,652 9.2%
-------- ----- -------- -----
Other expense:
Interest expense, net ........................................ 6,515 8.5% 5,169 7.1%
Other (income) expense, net .................................. (3) 0.0% 40 0.1%
-------- ----- -------- -----
Total other expense, net .................................. 6,512 8.5% 5,209 7.2%
-------- ----- -------- -----
Income (loss) before provision (benefit) for income taxes .... (567) (0.7)% 1,443 2.0%
Provision (benefit) for income taxes ......................... (227) (0.3)% 563 0.8%
-------- ----- -------- -----
Net income (loss) before preferred stock dividends ........... (340) (0.4)% 880 1.2%
===== =====
Preferred stock dividends .................................... 2,272 2,138
-------- --------
Net loss applicable to common stock .......................... $ (2,612) $ (1,258)
======== ========
Revenue and income from operations are summarized by reporting segment, as
follows (in thousands):
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------------------
2005 2004
--------------- --------------
Revenue
Residuals Management Operations........................................... $ 58,521 $ 61,197
Rail Transportation....................................................... 7,949 10,391
Engineering, Facilities, and Development.................................. 10,637 1,857
Elimination............................................................... (893) (785)
--------------- ---------------
$ 76,214 $ 72,660
=============== ===============
Income (loss) from operations
Residuals Management Operations........................................... $ 8,147 $ 9,636
Rail Transportation....................................................... 488 1,355
Engineering, Facilities, and Development.................................. 663 (601)
Corporate................................................................. (3,353) (3,738)
--------------- ---------------
$ 5,945 $ 6,652
=============== ===============
For the three months ended March 31, 2005, net revenue was approximately $76.2
million compared to approximately $72.7 million for the three months ended March
31, 2004, representing an increase of approximately $3.6 million, or 5.0
percent. Approximately $8.0 million of the increase related to the Honolulu
dryer project, partially offset by a $3.0 million decrease in event and product
sales revenues and a $1.5 million decrease in contract revenues. These decreases
were anticipated going into the year as in process and pre-sold event work was
higher at the beginning of 2004 than 2005 and there was $1.3 million of contract
revenue recognized in 2004 on a long-term contract accounted for using the
percentage of completion accounting method that is not expected to have
significant activity in 2005. Our Residuals Management Operations revenues for
the three months ended March 31, 2005, decreased approximately $2.7 million or
4.4 percent to $58.5 million compared to $61.2 million for the three months
ended March 31, 2004 due primarily to expected decreases in contract and event
revenues. Our Rail Transportation segment revenues for the three months ended
March 31, 2005 decreased approximately $2.4 million or 24.0 percent to $7.9
million for the three months ended March 31, 2005 compared to $10.4 million for
the three months ended March 31, 2004 due primarily to a decrease in event and
purchase order revenues from disposal services as well as a decrease in volume
under contracted land application and disposal services. Our Engineering,
Facilities, and Development revenues for the three months ended March 31, 2005,
increased approximately $8.8 million to $10.6 million compared to $1.9 million
for the three months ended March 31, 2004 due primarily to an increase in
construction revenues on a new facility in Honolulu, Hawaii, and an increase in
contract revenues on the Sacramento, California dryer facility that commenced
operations in December 2004.
Gross profit for the three months ended March 31, 2005, was approximately $12.0
million compared to approximately $12.3 million for the three months ended March
31, 2004, a decrease of approximately $0.3 million, or 2.3 percent. Gross profit
as a percentage of revenue decreased to 15.8 percent in 2005 from 17.0 percent
in 2004 primarily due to a $0.9 million increase in fuel costs related primarily
to an unexpected supply interruption at a dryer facility in January 2005 and a
$0.6 million increase in
23
depreciation expense, partially offset by an expected reduction in facility
repairs which were higher than normal in the prior year and the margin impact of
the revenue changes noted above.
Selling, general and administrative expenses were approximately $6.2 million, or
8.1 percent of revenue, for the three months ended March 31, 2005, compared to
approximately $5.8 million, or 8.0 percent of revenue, for the three months
ended March 31, 2004. The increase relates primarily to a planned increase in
headcount and a $0.2 million increase in allowance for doubtful accounts.
As a result of the foregoing, income from operations for the three months ended
March 31, 2005, was approximately $5.9 million, or 7.8 percent of revenue,
compared to approximately $6.7 million, or 9.2 percent of revenue, for the three
months ended March 31, 2004. Our Residuals Management Operations income from
operations for the three months ended March 31, 2005, totaled approximately $8.1
million compared to $9.6 million for the three months ended March 31, 2004 due
primarily to the expected decreases in event and contract revenues described
above along with a $0.4 million increase in depreciation expense and the changes
in fuel and repairs costs described above. Our Rail Transportation income from
operations decreased from $1.4 million in 2004 to $0.5 million in 2005 due
primarily to the decrease in revenues described above, an increase in rail
transportation costs and excess equipment capacity. Our Engineering, Facilities,
and Development income from operations increased to $0.7 million the three
months ended March 31, 2005 compared to a loss of $0.6 million for the three
months ended March 31, 2004 due primarily to the increase in construction
revenues and dryer facility revenues described above and related margins.
Other expense, net, for the three months ended March 31, 2005, was approximately
$6.5 million compared to approximately $5.2 million for the three months ended
March 31, 2004, representing an increase of approximately $1.0 million primarily
due to increases in market rates along with the termination of interest rate
swaps in anticipation of the pending refinancing of our debt and a $0.3 million
increase in interest on debt for the Sacramento dryer facility which commenced
operations in December 2004.
For the three months ended March 31, 2005, we recorded a benefit for income
taxes of approximately $0.2 million compared to a provision of $0.6 million for
the three months ended March 31, 2004. Our effective tax rate was approximately
40 percent in the first three months of 2005 compared to 39 percent in the first
three months of 2004. The increase in the effective tax rate is primarily
related to the increase in income taxes at the state level. Our provision for
income taxes differs from the federal statutory rate primarily due to state
income taxes. Our tax provision is principally a deferred tax provision that
will not significantly impact cash flow since we have significant tax deductions
in excess of book deductions and net operating loss carryforwards available to
offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
In the past, our principal sources of funds were cash generated from operating
activities and long-term borrowings and equity issuances. We use cash mainly for
working capital, capital expenditures and debt service. In the future, we expect
that we will use cash principally to fund working capital, debt service,
repayment obligations and capital expenditures. In addition, we may use cash to
pay dividends on preferred and common stock, the repurchase of shares and
potential earn-out payments resulting from prior acquisitions. Historically, we
have financed our acquisitions principally through the issuance of equity and
debt securities, our credit facility, and funds provided by operating
activities.
HISTORICAL CASH FLOWS
Cash Flows from Operating Activities -- For the three months ended March 31,
2005, cash flows provided from operating activities were approximately $8.5
million compared to approximately $11.7 million for the same period in 2004, a
decrease of approximately $3.3 million. The decrease primarily relates to
decreased operating income of $0.7 million, a $0.6 million increase in
depreciation expense and a reduction in working capital of $2.2 million. The
decrease in working capital relates primarily to a $2.2 million increase in cost
and estimated earnings in excess of billings and an increase in payables on
contracts accounted for under the percentage of completion method of accounting
that are not paid until billings from the customer is collected.
Cash Flows from Investing Activities -- For the three months ended March 31,
2005, cash flows used by investing activities were approximately $4.3 million
compared to approximately $5.1 million for the same period in 2004 and relates
primarily to capital expenditures. This decrease is due primarily to a $1.3
million reduction in capital expenditures partially offset by a $0.6
24
million increase in other restricted cash.
Cash Flows from Financing Activities -- For the three months ended March 31,
2005, cash flows used in financing activities were approximately $4.2 million
compared to approximately $6.7 million for the same period in 2004, a decrease
of approximately $2.4 million. The decrease primarily relates to a $1.3 million
reduction of debt payments and the $1.0 million of proceeds received from the
exercise of stock options in the first three months of 2005.
CAPITAL EXPENDITURE REQUIREMENTS
Capital expenditures for the three months ended March 31, 2005, totaled
approximately $2.9 million compared to approximately $4.2 million in the same
period of 2004. Our ongoing capital expenditure program consists of expenditures
for replacement equipment, betterments and growth. We expect our capital
expenditures for 2005 to be approximately $11.0 to $13.0 million, which excludes
approximately $39.0 million expected to be spent on new facilities in 2005.
DEBT SERVICE REQUIREMENTS
In May 2002, we entered into an amended and restated $150 million Senior Credit
Agreement that provides for a $70 million funded term loan and up to a $50
million revolver, with the ability to increase the total commitment to $150
million. The term loan proceeds were used to pay off the existing senior debt
that remained unpaid after the private placement of our $150 million aggregate
principal amount of 9 1/2 percent Senior Subordinated Notes due 2009 (the
"Notes"). This credit facility is secured by substantially all of our assets and
those of our subsidiaries (other than assets securing nonrecourse debt) and
includes covenants restricting the incurrence of additional indebtedness, liens,
certain payments and sale of assets. 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. During May 2003, we amended our
Senior Credit Agreement to increase the revolving loan commitment to
approximately $95 million. Requirements for mandatory debt payments from excess
cash flows, as defined, are unchanged in the new credit facility. On March 9,
2004, we further amended our Senior Credit Agreement to, among other things,
exclude certain charges from its financial covenant calculations, to clarify
certain defined terms, to increase the amount of indebtedness permitted under
its total leverage ratio, and to reset capital and operating lease limitations.
On April 29, 2005, we executed a new credit facility with Bank of America, N.A.,
Lehman Commercial Paper Inc., CIBC World Markets Corp., and certain other
lenders (the "New Credit Facility"). The closing of the New Credit Facility is
contingent upon and will coincide with the anticipated closing of the Company's
proposed equity offering (as discussed below), tender offer for the Notes, and
certain other conditions precedent. The lenders' commitments with respect to the
New Credit Facility will expire on June 30, 2005, in the event all conditions
precedent have not been satisfied or waived or the expiration date has not been
extended. A portion of the proceeds from the New Credit Facility will be used to
refinance indebtedness under the Company's existing senior credit facility and
to tender for all of its Notes. The New Credit Facility will allow us to pay a
significant portion of our excess cash flow to shareholders through cash
dividends provided we maintain compliance with certain financial covenants and
certain other restrictions. We expect that the New Credit Facility will also
result in cash interest savings of approximately $5 million per year. The New
Credit Facility will be comprised of a 5-year $95 million revolving credit
facility, a 7-year $180 million term loan, and a 7-year $30 million delayed draw
term loan.
The proceeds of the delayed draw term loan will be used to partially fund new
facility construction costs in 2005. We have several new facilities
under development which are scheduled to begin operations in the next 18 months.
These new facilities will be operated under signed long-term contracts. The
development of these new facilities is consistent with our strategy to
pursue new facilities opportunities that provide long-term highly predictable
cash flows. These facilities include a composting facility in Kern County,
California, an incineration facility upgrade in Woonsocket, Rhode Island, a
dewatering facility in Providence, Rhode Island, a dryer facility in Honolulu,
Hawaii and a composting facility in Los Palos, California.
In 1996, the Maryland Energy Financing Administration issued nonrecourse
tax-exempt project revenue bonds (the "Maryland Project Revenue Bonds") in the
aggregate amount of $58.6 million. The Administration loaned the proceeds of the
Maryland Project Revenue Bonds to Wheelabrator Water Technologies Baltimore
L.L.C., now our wholly owned subsidiary known as Synagro -- Baltimore, L.L.C.,
pursuant to a June 1996 loan agreement, and the terms of the loan mirror the
terms of the Maryland Project Revenue Bonds. The loan financed a portion of the
construction costs of the thermal facilities located in Baltimore County,
Maryland, at the site of our Back River Wastewater Treatment Plant, and in the
City of Baltimore, Maryland, at the site of our Patapsco Wastewater Treatment
Plant. We assumed all obligations associated with the Maryland Project Revenue
Bonds in connection with our acquisition of the Bio Gro Division of Waste
Management, Inc. in 2000. Maryland Project Revenue Bonds in the aggregate amount
of $17.2 million have already been paid, and the remaining Maryland Project
Revenue Bonds bear interest at annual rates between 5.85 percent and 6.45
percent and mature on dates between December 1, 2005, and December 1, 2016.
In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of $21.3
million. The nonrecourse revenue bonds consist of a face amount of $20.1 million
Series 2002-A and a face amount of $1.2 million Series 2002-B (taxable)
(collectively, the "Sacramento Bonds"). The Authority loaned the proceeds of the
Sacramento Bonds to Sacramento Project Finance, Inc., one of our wholly owned
subsidiaries, pursuant to a loan agreement dated December 1, 2002. The loan will
finance the acquisition, design, permitting, constructing and equipping of a
biosolids dewatering and heat drying/pelletizing facility for the Sacramento
Regional Sanitation District. The Sacramento Bonds bear interest at annual rates
between 4.25 percent and 5.5 percent and mature on dates between December 1,
2005, and December 1, 2024.
We believe we will have sufficient cash generated by our operations and
available through our existing credit facility to provide for future working
capital and capital expenditure requirements that will be adequate to meet our
liquidity needs for the foreseeable future, including payment of interest on our
credit facility and payments on the Maryland Project Revenue Bonds. We cannot
assure, however, that our business will generate sufficient cash flow from
operations, that any cost savings and any operating improvements will be
realized or that future borrowings will be available to us under our credit
facility in an amount
25
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness on or
before maturity. We make no assurance that we will be able to refinance any of
our indebtedness, including our credit facility, on commercially reasonable
terms or at all.
We have entered into various lease transactions to purchase transportation and
operating equipment that have been accounted for as capital lease obligations
and operating leases. The capital leases have lease terms of three to six years
with interest rates from 5.0 percent to 7.18 percent. The net book value of the
equipment related to these capital leases totaled approximately $15.2 million as
of March 31, 2005. The operating leases have terms of two to eight years.
Additionally, we have guaranteed a maximum lease risk amount to the lessor of
one of the operating leases. The fair value of this guaranty is approximately
$0.1 million as of March 31, 2005.
Historically, we have reinvested earnings available for distribution to holders
of Common Stock, and accordingly, we have not paid any cash dividends on our
Common Stock. Currently, covenants relating to our outstanding preferred stock
and bank debt restrict our ability to pay dividends. We expect that our board of
directors will adopt a dividend policy in the second quarter of 2005 that
reflects an intention to distribute a substantial portion of the cash generated
by our business in excess of operating needs, interest and principal payments on
our indebtedness and capital expenditures as regular quarterly dividends to our
stockholders. In connection with the adoption of such a policy, we have entered
into the New Credit Facility allowing for the payment of dividends, all of our
outstanding preferred stock would be converted into shares of Common Stock, and
we expect to issue additional shares of our Common Stock to the public. We have
filed a Registration Statement on Form S-1/A for the issuance and sale of
9,713,024 shares of our Common Stock by us and 23,879,451 shares of our Common
Stock by the selling shareholders named in the registration statement (the
"equity offering").
Our ability to service the New Credit Facility will depend on our ability to
generate cash in the future. We may need to refinance all or a portion of the
New Credit Facility on or before maturity. We may not be able to refinance the
New Credit Facility on commercially reasonable terms or at all. If we were
unable to renew or refinance the New Credit Facility, our failure to repay all
amounts due on the maturity date would cause a default under the New Credit
Facility.
Based on the dividend policy with respect to our common stock which our board of
directors will adopt upon the closing of the equity offering, we may not have
any significant cash available to meet any large unanticipated liquidity
requirements, other than available borrowings, if any, under our new revolver.
As a result, we may not retain a sufficient amount of cash to finance growth
opportunities, including acquisitions, or unanticipated capital expenditures or
to fund our operations. If we do not have sufficient cash for these purposes,
our financial condition and our business will suffer. However, our board of
directors may, in its discretion, amend or repeal this dividend policy to
decrease the level of dividends provided for under the policy, or discontinue
entirely the payment of dividends.
SERIES D REDEEMABLE PREFERRED STOCK
We have authorized 32,000 shares of Series D Preferred Stock, par value $.002
per share. In 2000, we issued a total of 25,033.601 shares of the Series D
Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which is convertible
by the holders into a number of shares of our common stock computed by dividing
(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 our common stock or any
other of its equity securities. The liquidation value of each share of Series D
Preferred Stock is $1,000 per share. Dividends on each share of Series D
Preferred Stock accrue daily at the rate of eight percent per annum on the
aggregate liquidation value and may be paid in cash or accrued, at the our
option. Upon conversion of the Series D Preferred Stock by the holders, the
holders may elect to receive the accrued and unpaid dividends in shares of our
common stock at the conversion price. The Series D Preferred Stock is entitled
to one vote per share. Shares of Series D Preferred Stock are subject to
mandatory redemption by us on January 26, 2010, at a price per share equal to
the liquidation value plus accrued and unpaid dividends. If the outstanding
shares of Series D Preferred Stock excluding accrued dividends were converted at
March 31, 2005, they would represent 10,013,441 shares of common stock.
SERIES E REDEEMABLE PREFERRED STOCK
We have authorized 55,000 shares of Series E Preferred Stock, par value $.002
per share. GTCR Fund VII, L.P. and our affiliates own 37,497.183 shares of
Series E Preferred Stock and certain affiliates of The TCW Group, Inc. own
7,261.504 shares. The Series E Preferred Stock is convertible by the holders
into a number of shares of our common stock computed by dividing (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
26
prevent dilution, the conversion price may be adjusted. The Series E Preferred
Stock is senior to our common stock and any other of our equity securities. The
liquidation value of each share of Series E Preferred Stock is $1,000 per share.
Dividends on each share of Series E Preferred Stock accrue daily at the rate of
eight percent per annum on the aggregate liquidation value and may be paid in
cash or accrued, at our option. Upon conversion of the Series E Preferred Stock
by the holders, the holders may elect to receive the accrued and unpaid
dividends in shares of our common stock at the conversion price. The Series E
Preferred Stock is entitled to one vote per share. Shares of Series E Preferred
Stock are subject to mandatory redemption by us on January 26, 2010, at a price
per share equal to the liquidation value plus accrued and unpaid dividends. If
the outstanding shares of Series E Preferred Stock excluding accrued dividends
were converted at March 31, 2005, they would represent 17,903,475 shares of
common stock.
The future issuance of Series D and Series E Preferred Stock may result in
noncash beneficial conversions valued in future periods recognized as preferred
stock dividends if the market value of our common stock is higher than the
conversion price at date of issuance.
INTEREST RATE RISK
Total debt at March 31, 2005, included approximately $21.4 million in floating
rate debt at a base interest rate plus 3.0 percent, or approximately 5.9 percent
and approximately $2.4 million in floating rate debt at an interest rate of
approximately 7.8 percent attributed to the Senior Credit Agreement. As a
result, our interest cost in 2005 will fluctuate based on short-term interest
rates. The impact on annual cash flow of a ten percent change in the floating
rate (i.e.LIBOR) would be approximately $0.1 million.
WORKING CAPITAL
At March 31, 2005, we had working capital of approximately $12.6 million
compared to approximately $10.9 million at December 31, 2004, an increase of
approximately $1.6 million. The increase in working capital is principally due
to reduced receivables and payables due to the seasonal nature of our business,
increases in cost and estimated earnings in excess of billings and payables on
contracts accounted for under the percentage of completion method of accounting,
and the repayment of a $4.0 million short-term note in February 2005.
ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements can be found under the
"Accounting Pronouncements" section of Note (1) to the Condensed Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVES AND HEDGING ACTIVITIES
On July 24, 2003, we entered into two interest rate swap transactions with two
financial institutions to hedge our exposure to changes in the fair value on $85
million of our Notes. The purpose of these transactions was to convert future
interest due on $85 million of the Notes to a lower variable rate in an attempt
to realize savings on our future interest payments. The terms of the interest
rate swap contract and the underlying debt instruments are identical. We have
designated these swap agreements as fair value hedges. On September 23, 2004, we
unwound $18 million of these swaps and received a settlement payment of
approximately $0.1 million that was deducted from interest expense. On January
6, 2005, we unwound the $67 million remaining swaps and paid $0.5 million for
the settlement of these swaps. At March 31, 2005 the fair value adjustment to
the subordinated debt relating to these swaps was $0.7 million and was recorded
as a reduction to debt. This fair value adjustment will be amortized over the
remaining original life of the notes and charged to interest expense. The amount
of amortization charged to interest expense during the three month period as of
March 31, 2005 was approximately $29,000.
The 12 percent subordinated debt was repaid on April 17, 2002, with the proceeds
from the sale of the Notes. On June 25, 2002, we entered into a
floating-to-fixed interest rate swap agreement that substantially offsets market
value changes in our reverse swap agreement. The liability related to this
reverse swap agreement and the floating-to-fixed offset agreement totaling
approximately $2.2 million is reflected in other long-term liabilities at March
31, 2005. The loss recognized during the period ended March 31, 2005, related to
the floating-to-fixed interest rate swap agreement was approximately $0.8
million, while the gain recognized related to the reverse swap agreement was
approximately $0.8 million. The amount of the ineffectiveness of the
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reverse swap agreement charged to other expense was approximately $3,000 during
the three month period ended March 31, 2004.
On June 25, 2001, we entered into a reverse swap on our 12 percent subordinated
debt and used the proceeds from the reverse swap agreement to retire previously
outstanding floating-to-fixed interest rate swap agreements (the "Retired
Swaps") and option agreements. Accordingly, the balance included in accumulated
other comprehensive loss included in stockholders' equity related to the Retired
Swaps is being recognized in future periods' income over the remaining term of
the original swap agreement. The amount of accumulated other comprehensive
income charged to interest expense during the three month period ended March 31,
2005, was approximately $0.1 million.
INTEREST RATE RISK
Total debt at March 31, 2005, included approximately $21.4 million in floating
rate debt at a base interest rate plus 3.0 percent, or approximately 5.9 percent
and approximately $2.4 million in floating rate debt at an interest rate of
approximately 7.8 percent attributed to the Senior Credit Agreement. As a
result, our interest cost in 2005 will fluctuate based on short-term interest
rates. The impact on annual cash flow of a ten percent change in the floating
rate (i.e.LIBOR) would be approximately $0.1 million.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this quarterly report.
Based on this evaluation, such officers have concluded that these controls and
procedures are effective in ensuring that the information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely discussions regarding required
disclosure.
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-13(f) and 15d - 15 (f) under the Exchange Act) that
occurred during the period covered by this quarterly report that has materially
affected, or is reasonable likely to materially affect, our internal control
over financial reporting.
During 2005 management implemented procedures to correct weaknesses in our
internal controls over financial reporting that existed as of December 31, 2004.
The weaknesses identified related to imputed interest on receivables associated
with a long-term contract and segment disclosures. Technical accounting issues
are now required to be analyzed, documented and reviewed by appropriate
personnel on a timely basis. Evidence of the review is required to be
documented. Management is also currently in the process of hiring an independent
third party to assist in the preparation of our compliance with Rule 404 of the
Sarbanes Oxley Act of 2002.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding our legal proceedings can be found under the "Litigation"
section of Note (6), "Commitments and Contingencies," to the Condensed
Consolidated Financial Statements.
ITEM 6. EXHIBITS
Exhibit Index
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
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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 5, 2005 By: /s/ Robert C. Boucher,Jr.
----------------------------------------------
Chief Executive Officer and Director
Date: May 5, 2005 By: /s/ J. Paul Withrow
----------------------------------------------
Chief Financial Officer and Director
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EXHIBIT INDEX
Exhibit No Description
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
31