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(Exact name of Registrant as
Specified in its Charter)
DELAWARE (State or other
jurisdiction
of incorporation or organization)
88-0219860 (I.R.S. employer
identification no.)
1800 BERING DRIVE,
SUITE 1000
HOUSTON, TEXAS (Address of principal
executive offices)
Internet
Website —
www.synagro.com
77057 (Zip
Code)
REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 369-1700
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common
Stock, $.002 par value (Title
of each class)
Indicate by check mark whether the registrant is well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark whether the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the Exchange
Act. Yes o No þ
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
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in Securities Exchange Act of 1934
Rule 12b-2.
Large accelerated
filer o Accelerated
filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the 76,274,612 shares of the
Registrant’s common stock held by nonaffiliates of the
Registrant was $299,759,225 on June 30, 2006 based on the
$3.93 last sale price of the Registrant’s common stock on
the Nasdaq Global Market on that date.
As of March 1, 2007, 78,403,679 shares of the
Registrant’s common stock were outstanding.
Certain portions of the registrant’s Proxy Statement to be
used in connection with its 2007 Annual Meeting of Stockholders
and to be filed within 120 days of December 31, 2006
are incorporated by reference in Part III ,
Items 10-14,
of this report on
Form 10-K.
We are including the following cautionary statements to secure
the protection of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for all forward-looking
statements made by us in this Annual Report on
Form 10-K.
Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future
results, performance, or trends, and may contain the words
“believe,”“anticipate,”“expect,”“estimate,”“project,”“will be,”“will continue,”“will likely result,” or
words or phrases of similar meaning. In addition, from time to
time, we (or our representatives) may make forward-looking
statements of this nature in our annual report to shareholders,
proxy statement, quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
press releases or in oral or written presentations to
shareholders, securities analysts, members of the financial
press or others. All such forward-looking statements, whether
written or oral, and whether made by or on our behalf, are
expressly qualified by these cautionary statements and any other
cautionary statements which may accompany the forward-looking
statements. In addition, the forward-looking statements speak
only of our views as of the date the statement
was made, and we disclaim any obligation to update any
forward-looking statements to reflect events or circumstances
after the date thereof. Forward-looking statements involve risks
and uncertainties which could cause actual results, performance
or trends to differ materially from those expressed in the
forward-looking statements. We believe that all forward-looking
statements made by us have a reasonable basis, but there can be
no assurance that management’s expectations, beliefs or
projections as expressed in the forward-looking statements will
actually occur or prove to be correct. Factors that could cause
actual results to differ materially are discussed under Risk
Factors.
Business
Overview
Recent
Developments
On January 28, 2007, we entered into a definitive Agreement
and Plan of Merger (the “Merger Agreement”) with
Synatech Holdings, Inc., a Delaware corporation
(“Parent”) owned by The Carlyle Group, and Synatech,
Inc., a Delaware corporation and wholly-owned subsidiary of
Parent (“Merger Sub”) pursuant to which Merger Sub
will merge with and into us (the “Merger”). We will
continue as the surviving corporation and as a wholly-owned
subsidiary of Parent. The Merger Agreement provides that Merger
Sub’s Certificate of Incorporation and bylaws will be the
Certificate of Incorporation and bylaws of the surviving
corporation except that the Certificate of Incorporation shall
be amended to provide for the name of the corporation to be
Synagro Technologies, Inc.
The Merger Agreement provides that at the effective time of the
Merger, each issued and outstanding share of our common stock,
par value $.002 per share, other than any such shares owned
by us, Parent or any of their respective subsidiaries, shall be
cancelled and shall be converted automatically into the right to
receive $5.76 in cash, without interest. Also, pursuant to the
Merger Agreement, at the effective time of the Merger, each
outstanding option to acquire shares of our common stock under
any stock option, restricted stock, or incentive plan will be
cancelled in exchange for the right to receive, for each share
of common stock issuable upon exercise of such option, cash in
the amount of the excess, if any, of $5.76 over the exercise
price per share of any such option.
The Merger Agreement contains termination rights for both us and
Parent, and further provides that, upon termination of the
Merger Agreement under specified circumstances, including
(i) by us approving or recommending an acquisition
proposal, and (ii) our board of director’s withdrawal
or modification of its approval of the Merger, we may be
required to pay Parent a
break-up fee
equal to $13.9 million. We may be required to pay Parent
its expenses not in excess of $1.5 million if the Merger
Agreement is terminated due to a breach of our representations,
warranties, or covenants. Parent may be required to pay us
liquidated damages of $13.9 million and our expenses not in
excess of $1.5 million if the Merger Agreement is
terminated due to a breach of Parent’s or Merger Sub’s
representations, warranties, or covenants.
The consummation of the Merger is subject to the satisfaction or
waiver of certain closing conditions, including, without
limitation, the approval of a majority of the votes by our
stockholders entitled to vote thereon
(other than those held by Parent and their respective
affiliates), and the termination or expiration of the waiting
period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. The Merger
Agreement also contains customary representations, warranties,
and covenants of Parent, Merger Sub, and us. The Merger is not
subject to a financing condition. A special meeting of our
stockholders has been scheduled for March 29, 2007 to vote
on the approval of the merger.
General
We believe that we are the largest recycler of biosolids and
other organic residuals in the United States and we believe that
we are the only national company focused exclusively on the
estimated $8 billion organic residuals industry, which
includes water and wastewater residuals. Incorporated in the state of Delaware in 1996, we serve approximately
600 municipal and industrial water and wastewater treatment
accounts with operations in 33 states and the District of
Columbia.
Biosolids and other organic residuals are solid or liquid
material generated by municipal wastewater treatment facilities
or residual management facilities. We provide our customers with
services and capabilities that focus on the beneficial reuse of
organic nonhazardous residuals, including biosolids, resulting
primarily from the wastewater treatment process. We believe that
the services we offer are compelling to our customers because
they allow our customers to avoid the significant capital and
operating costs that they would have to incur if they internally
managed their water and wastewater residuals.
We partner with our clients to develop cost-effective and
environmentally sound solutions for their residuals processing
and beneficial use requirements. Our 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. We currently operate
six heat-drying and pelletization facilities, six composting
facilities, three incineration facilities and 35 permanent and
48 mobile dewatering units.
Our existing customer base is comprised primarily of municipal
customers, which accounted for approximately 88 percent of
our revenues for the year ended December 31, 2006, as well
as industrial and commercial waste generators. We also cater to
buyers who purchase our fertilizers, soil amendments and other
marketed products, which total approximately 3 percent of
our revenues. Our size and scale offer significant advantages
over our competitors in terms of operating efficiencies and the
breadth of services we provide our customers. Approximately
89 percent of our revenues for the year ended
December 31, 2006 was derived from sources that we believe
are recurring in nature, including contracts, purchase orders
and product sales.
Contract revenues accounted for approximately 83 percent of
our revenues for the year ended December 31, 2006. These
revenues were generated through more than 650 contracts that
range from one to twenty-five years in length. Contract revenues
are generated primarily from land application, drying and
pelletization, incineration, transportation services,
composting, dewatering, facility operations and maintenance
services. These contracts have an estimated remaining contract
value including renewal options, which we call backlog, of
approximately $2.1 billion as of December 31, 2006.
This backlog represents more than six times our revenues for the
year ended December 31, 2006. Our estimated backlog,
excluding renewal options, was approximately $1.3 billion
as of December 31, 2006. See “ —
Backlog.” Our top ten customers, which represent
approximately $1.3 billion, or 58 percent of our
backlog as of December 31, 2006, have a weighted average of
14 years remaining on their current contracts, including
renewal options. We have historically enjoyed high contract
retention rates (including both renewals and rebids) of
approximately 85 percent to 90 percent of contract
revenue value. In 2006, our contract retention rate was
approximately 94 percent.
We currently have three significant fixed price contracts that
are accounted for under the percentage of completion method of
accounting. Two of the contracts are for the removal and
disposal of biosolids from lagoons over multi-year periods. We
have also entered into a separate contract to operate a dryer
facility upon customer acceptance after completion of
construction of the dryer. The revenue generated under the
percentage of completion method of accounting associated with
construction of the new dryer facility is reported as
design/build revenue. Once the new dryer commences operations,
which is expected in 2007, the operating revenues will be
included in contract revenues. The revenue generated under the
percentage of completion method of accounting for removing and
disposing of bio-solids from lagoons over a multi-year period is
reported as contract revenue. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for additional
information about these contracts and their impact on our
revenues, earnings and liquidity.
Description
of Business by Segment
We evaluate operating results, assess performance and allocate
resources on a geographic basis, with the exception of our rail
operations and our engineering, facilities and development
(“EFD”) group which are separately monitored.
Accordingly, we report the results of our activities in three
operating segments, which include: Residuals Management
Operations, Rail Transportation and EFD.
Residuals Management Operations include our business activities
that are managed on a geographic basis in the Northeast,
Central, and Southwest regions of the United States. These
geographic areas have been aggregated and reported as a segment
because they have similar economic characteristics, offer all of
our residuals management services, have a similar customer base
and operate in a similar regulatory environment. 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 our customers. EFD includes construction management
activities and startup operations for certain new processing
facilities, as well as the marketing and sale of certain pellets
and compost fertilizers.
The table below details total revenues recognized by each of our
reportable segments in the three-year period ended
December 31, 2006. More information about our results of
operations by reportable segment is included in Note 16 to
the consolidated financial statements.
Land application and disposal includes revenues generated from providing land application,
dewatering and disposal services. Facilities operations include revenues generated from providing
drying and pelletization, composting and incineration operations services. Cleanout services
include revenues generated from lagoon and digester cleanout projects. Product marketing includes
revenues generated from selling pellets and compost as organic fertilizers. Design and build
services include revenues generated from contracts where we agree to design, build and operate
certain processing facilities under a long-term operating contract.
Residuals Management Operations derives its revenues from
facilities operations, product marketing, land application and
disposal and cleanout services. Rail Transportation derives its
revenues from land application and disposal services. EFD
derives its revenues from product marketing and design and build
services.
We believe that the organic residuals industry, which includes
water and wastewater residuals, is approximately $8 billion
in size and will continue to grow at four to five percent
annually over the next decade. The growth in the underlying
volumes of wastewater residuals generated by the municipal and
industrial markets is driven by a number of factors, including:
•
Population growth and population served;
•
Pressures to better manage wastewater;
•
More restrictive laws and regulations; and
•
Advances in technology.
Most residential, commercial, and industrial wastewater is
collected through an extensive network of sewers and transported
to wastewater treatment plants, which are known as publicly
owned treatment works (“POTWs”). When wastewater is
treated at POTWs or at industrial wastewater pre-treatment
facilities, the treatment process normally consists of
biological
and/or
chemical treatment (secondary treatment) followed by some type
of clarification (separates the liquid portion of the wastewater
from the solids/wastewater residuals). The clarified water may
be further treated through disinfection and filtration depending
upon effluent limitation requirements contained in the
POTW’s National Pollutant Discharge Elimination System
permit and discharged — typically into a river or
other surface water. Prior to the promulgation of the
Title 40 of the Code of Federal Regulations
(CFR) Part 503 published in 1993, many POTWs were
beneficially recycling their wastewater residuals under
Title 40 CFR Part 257 by landfilling,
incinerating, or surface disposing. Ocean dumping was banned in
1989 and completely phased out by 1991. The Part 503
Regulations also were much more comprehensive than
Part 257, especially in the level of risk assessment done
by the EPA to develop the pollutant concentration requirements.
The Part 503 Regulations also supported the EPA’s
beneficial use policy that was published in 1984 and provided
some closure to the regulatory process that had been ongoing
since the Clean Water Act amendments of 1977. Once the
Part 503 regulations were final, they created significant
growth opportunities for the municipal wastewater residuals
management industry. To establish beneficial reuse as an option
for municipal wastewater generators, the EPA established a
classification methodology for municipal wastewater residuals
based on how residuals pathogens are treated, vectors reduced
and associated pollution levels minimized. Now, in most cases,
POTWs further treat wastewater residuals to produce a semisolid,
nutrient-rich by-product known as biosolids. We use the term
“wastewater residuals” to include both residuals that
have been treated pursuant to the Part 503 Regulations and
those that have not. Biosolids, as a subset of wastewater
residuals, is intended to refer to wastewater residuals that
meet either the Part 503 Regulations Class A or
Class B standards.
Classes
of Biosolids
When treated and processed according to the Part 503
Regulations, biosolids can be beneficially reused and applied to
crop land to improve soil quality and productivity due to the
nutrients and organic matter that they contain. Biosolids
applied to agricultural land, forest, public contact sites, or
reclamation sites must meet pollution, pathogen and vector
Part 503 Regulation requirements. This classification is
determined by the level of treatment the wastewater residuals
have undergone. Pursuant to the Part 503 Regulations, there
are specific treatment processes available to achieve
Class A and Class B standards, otherwise the biosolids
are considered
Sub-Class B.
Class A treatment processes require resulting biosolids to
be essentially pathogen free. In general, Class A biosolids
require more capital intensive treatment processes, such as
composting, heat drying, heat treatment, high temperature
digestion and pasteurizations. Class A biosolids have a
high market value, are sold as fertilizer or fuel, and can be
applied to any type of land or crop.
Class B biosolids are treated to a lesser degree by
processes to significantly reduce pathogens such as digestion or
alkaline stabilization. Class B biosolids are typically
land applied on farmland by professional farmers or agronomists
and are monitored to comply with associated federal and state
reporting requirements. The Part 503 Regulations, however,
regulate the type of agricultural crops for which Class B
biosolids may be used.
Finally, in some cases, the POTW does not treat its wastewater
residuals to either Class A or Class B standards and
such residuals are considered
Sub-Class B.
Sub-Class B
residuals can either be processed to Class A standards or
Class B standards by an outside service provider or
disposed of through incineration or landfilling.
Market
Size/Fragmentation
According to the EPA’s 1999 study entitled Biosolids
Generation, Use, and Disposal in the United States, the quantity
of municipal biosolids produced in the United States was
projected to be approximately 8.2 million dry tons in 2010,
processed through approximately 16,000 POTWs. It is estimated
that an additional 3,000 POTWs will be built by 2012. It is also
estimated that 70 percent of biosolids volumes will be
beneficially reused by 2010. An independent 2000 study by the
Water Infrastructure Network, entitled Clean & Safe
Water for the 21st Century, estimates that municipalities
spend more than $22 billion per year on the operations and
maintenance of wastewater treatment plants. We estimate that,
based on conversations with consulting engineers, up to
40 percent of those annual costs, or $8.8 billion, are
associated with the management of municipal wastewater residuals.
Industry sources, including EPA studies and manuals and internal
information have led us to estimate that a total volume of
135 million dry tons of organic residuals are processed
each year. Therefore, we estimate the total size of the organic
residuals industry to be approximately $8 billion.
We believe that the management of wastewater residuals is a
highly fragmented industry and we believe that we are the only
dedicated provider of a full range of services on a national
scale. Historically, POTWs performed the necessary wastewater
residuals management services, but this function is increasingly
being performed by private contractors in an effort to lower
cost, increase efficiency and comply with stricter regulations.
We believe we compete in a stable, recession resistant industry.
We provide a necessary service to our municipal and industrial
and commercial customers. We derive substantially all of our
revenues from municipal water and wastewater utilities. Demand
for our industry’s services is promulgated by government
regulations defining the use and disposal of wastewater
residuals. We believe that population growth, better wastewater
management treatment processes and stricter regulations are
factors driving growth in the organic residuals industry.
Market
Growth
We believe the estimated $8 billion organic residuals
industry, which includes water and wastewater residuals, will
continue to grow at four to five percent annually over the next
decade. The growth in the underlying volumes of wastewater
residuals generated by the municipal and industrial markets is
driven by a number of factors. These factors include:
Population Growth and Population Served. As
the population grows, the amount of biosolids produced by
municipal POTWs is expected to increase proportionately. In
addition to population growth, the amount of residuals available
for reuse should also grow as more of the population is served
by municipal sewer networks. As urban sprawl continues and the
desire of cities to annex surrounding areas increases, POTWs
will treat more wastewater. It is expected that the amount of
wastewater residuals managed on a daily basis by municipal
wastewater treatment plants will increase to more than
8.2 million dry tons by 2010.
Pressures To Better Manage Wastewater. There
is tremendous pressure from many stakeholders, including
environmentalists, land owners, and politicians, being applied
to municipal and industrial wastewater generators to better
manage the wastewater treatment process. The costs (such as
regulatory penalties and litigation exposure) of not applying
the best available technology to properly manage waste streams
have now grown to material levels. This trend should continue to
drive the growth of more wastewater treatment facilities with
better separation technologies, which increase the amount of
residuals ultimately produced.
Stricter Regulations. If the trend continues
and laws and regulations that govern the quality of the effluent
from wastewater treatment plants become stricter, POTWs and
industrial wastewater treatment facilities will be forced to
remove more and more residuals from the wastewater, thereby
increasing the amount of residuals needing to be properly
managed.
Advances in Technology. The total amount of
residuals produced annually continues to increase due to
advancements in municipal and industrial wastewater treatment
technology. In addition to improvements in secondary and
advanced treatment methods, which can increase the quantity of
residuals produced at a wastewater treatment plant, segregation
technologies, such as microfiltration, also result in more
residuals being separated from the wastewater.
Market
Trends
In addition to the growth of the underlying volumes of
wastewater residuals, there is a trend of municipalities
converting from
Sub-Class B
and Class B pathogen and vector treatment processes to
Class A pathogen and vector treatment processes. There are
numerous reasons for this trend, including:
Decaying Infrastructure. Many municipal POTWs
operate aging and decaying wastewater infrastructure. According
to the Water Infrastructure Network’s 2000 study,
municipalities will need to spend approximately $1 trillion
between 2000 and 2020 to upgrade these systems. As this effort
is rolled out and POTWs undergo design changes and new
construction, opportunities will exist to also upgrade
wastewater residuals treatment processes. We expect that the
trend toward more facility-based approaches, such as drying and
pelletization, will increase with this infrastructure spending.
In addition, the need to provide capital for these expenditures
should create pressures for more outsourcing opportunities.
Shrinking Agricultural Base and
Urbanization. As population density increases,
the availability of nearby farmland for land application of
Class B biosolids becomes diminished. Under these
circumstances, the transportation costs associated with a
Class B program may increase to such an extent that the
higher upfront infrastructure costs of Class A programs may
become attractive to generators. Production of Class A
pellets offers significant volume reduction, greatly reduced
transportation costs, and the enhanced value of pellets allows,
in many cases, revenue realization from product sales.
Public Sentiment. While the Part 503
Regulations provide equal levels of public safety in the
management of Class A and Class B biosolids, the
public sometimes perceives a greater risk from the use of
Class B biosolids. This is particularly true in heavily
populated areas. Municipalities are responding to these public
and political pressures by upgrading their biosolids programs to
the Class A level. Certain municipalities and wastewater
agencies have industry leadership mindsets where they endeavor
to provide their constituents with the highest level, most
advanced pathogen and vector attraction treatment technologies
available. These municipalities and agencies will typically
fulfill at least a portion of their residuals management
treatment portfolio with Class A technologies.
Regulatory Stringency. With the promulgation
of the Part 503 Regulations, the EPA and, subsequently,
state regulatory agencies have made the distribution of
Class A biosolids products largely unrestricted.
Utilization requirements for Class B biosolids are
significantly more onerous. Based on this, municipalities are
moving to Class A programs to reduce the governmental
permitting, public hearings, compliance and enforcement
bureaucracy required with Class B programs. The regulatory
support to reduce and recycle organic residuals and to increase
the quality of the biosolids, should be favorable to us.
Our
Competitive Strengths
We believe that the following strengths differentiate us in the
marketplace:
National, Full-Service Industry Leader. We
believe that we are the largest recycler of biosolids and other
organic residuals in the United States and we believe that we
are the only national company focused exclusively on water and
wastewater residuals management. 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 believe our broad range of services exceeds those
offered by our competitors in the water and wastewater residuals
management industry and provides us with a unique and
differentiated service offering platform. We believe that our
leading market position provides us with more operating leverage
and a unique competitive advantage in attracting and retaining
customers and employees as compared to our regional and local
competitors.
Recurring Revenues and Stable Operating Cash
Flows. Approximately 89 percent of our
revenue for the year ended December 31, 2006 was derived
from sources that we believe are recurring in nature, including
long-term contracts primarily with municipal customers. These
contracts accounted for approximately 84 percent of our
revenue for the year ended December 31, 2006. Our estimated
contract expirations are staggered, mitigating the impact of any
individual contract loss. Our contract revenue backlog,
including renewal options, was approximately $2.1 billion
as of December 31, 2006. This backlog represents more than
six times our revenue for the year ended December 31, 2006.
Our estimated backlog, excluding renewal options, was
approximately $1.3 billion as of December 31, 2006. We
believe our recurring revenue base, stable capital expenditures
requirements and minimal working capital requirements will allow
us to maintain predictable and consistent cash flows. See
“ — Backlog.”
Significant Land Base. We have a large land
base available for the land application of wastewater residuals.
As of December 31, 2006, we maintained permits and
registration or licensing agreements on more than
960,000 acres of land in 24 states. We feel that this
land base provides us with an important advantage when bidding
for new work and retaining existing business.
Large Range of Processing Capabilities and Product Marketing
Experience. We are one of the largest firms in
treating wastewater residuals to meet the EPA’s
Class A standards. We currently operate 11 Class A
processing facilities and believe that our next two largest
Class A competitors operate five and three Class A
facilities, respectively. Class A residuals undergo more
processing than Class B residuals, and may be distributed
and marketed as commercial fertilizer. We have numerous
capabilities to achieve Class A standards, and we currently
operate six heat-drying facilities and six composting
facilities. In addition, we are a leader in marketing
Class A biosolids either generated by us or by others. For
the year ended December 31, 2006, we marketed 121,000 tons,
or approximately 39 percent, of the heat-dried pellets
produced in the United States. We also marketed 500,000 tons of
compost, which we believe is significantly more than any other
producer of municipal based compost materials.
Experienced Sales Force. We have a sales force
dedicated to the wastewater residuals market. We market our
services via a multi-tiered sales force, utilizing a combination
of business developers, engineering support staff, and seasoned
operations directors. This group of individuals is responsible
for maintaining our existing business and identifying new
wastewater residuals management opportunities. On average, these
individuals have in excess of ten years of industry experience.
We believe that their unique knowledge and longstanding customer
relationships gives us a competitive advantage in identifying
and successfully securing new business.
Regulatory Compliance and Reporting. An
important element for the long-term success of a wastewater
residuals management program is the certainty of compliance with
local, state and federal regulations. Accurate and timely
documentation of regulatory compliance is mandatory. We provide
this service, as part of our turn-key operations, through a
proprietary integrated data management system (the Residuals
Management System) that has been designed to store, manage and
report information about our clients’ wastewater residuals
programs. We believe that our regulatory compliance and
reporting capabilities provide us with an important competitive
advantage when presented to the municipal and industrial
wastewater generators.
Bonding Capacity. Commercial, federal, state
and municipal projects often require operators to post
performance and, in some cases, payment bonds at the execution
of a contract. The amount of bonding capacity offered by
sureties is a function of the financial health of the company
requesting the bonding. Operators without adequate bonding may
be ineligible to bid or negotiate on many projects. Our national
presence and tenure in the market have helped us develop strong
bonding relationships with large national sureties that smaller
industry participants do not possess. We believe the existing
capacity is sufficient to meet bonding needs for the foreseeable
future. To date, no payments have been made by any bonding
company for bonds issued on our behalf.
Strong, Experienced Management Team. We have a
strong and experienced management team at the corporate and
operating levels. Our senior management on average has been
involved in the environmental services industry for over
20 years. We believe the skill and experience of our
management team continue to provide significant benefits to us
as we evaluate opportunities to expand our business.
Our goals are to maintain and strengthen our position as the
only national company exclusively focused on water and
wastewater residuals management. Our business strategy is to
increase cash flow from operations and profitability through a
combination of organic growth, growth through complementary
acquisitions and a disciplined approach to capital expenditures.
Organic Growth. We believe that we have the
opportunity to expand our business by providing services for new
customers who currently perform their own wastewater residuals
management and by increasing the range of services that our
existing customers outsource to us. The principal factors
contributing to our organic growth include:
•
Developing New Customers. Our sales and
marketing efforts focus on adding new customers by marketing our
products and services. In many cases, we believe that we can
provide the customer with better service at a cost to them that
is lower than what it costs them to provide the service
internally or with their current service provider. We take a
collaborative approach with potential customers where our sales
force consults with potential customers and positions us as a
solution provider.
•
Expanding Services to Existing Customers. We
have the opportunity to provide many of our existing customers
with additional services as part of a complete residuals
management program. We endeavor to educate these existing
customers about the benefits of a complete residuals management
solution and offer other services where the value is compelling.
These opportunities may provide us with long-term contracts,
increased barriers to entry, and better relationships with our
customers.
•
Capitalize on Increased Demand for Class A
Services. In order to take advantage of operating
efficiencies, technology and our comprehensive capabilities, we
will endeavor to capitalize on the increased demand for
Class A services, including drying and pelletizing,
dewatering and composting. We believe this focus will result in
more long-term contracts and recurring revenue. In addition, we
are building several new facilities, which we expect will also
result in longer-term contracts, steady revenue streams, higher
barriers to entry for competitors, higher switching costs for
the customer and lower seasonality.
Growth Through Complementary Acquisitions. We
plan to continue to pursue strategic acquisitions in a
disciplined manner in order to achieve further growth. We
selectively seek strategic opportunities to acquire businesses
that profitably expand our service offerings, increase our
geographic coverage or increase our customer base. We believe
our strategic acquisitions enable us to gain new industry
residuals expertise and efficiencies in our existing operations.
Determination of attractive acquisition targets is based on many
factors, including the size and location of the business and
customers served, existing contract terms, potential operating
efficiencies and cost savings.
Disciplined Approach to Capital
Expenditures. Whether a new contract or an
acquisition, we are focused on the ability to generate the
revenues and operating cash flow to validate the capital
investment decision. As such, new contracts, renewals
and/or
acquisitions undergo a comprehensive financial analysis to
ensure that our return criteria are being met. In addition,
capital expenditures relating to maintenance activities are also
subject to rigorous internal review and a formal approval
process.
Services
and Operations
Today, generators of municipal and industrial residuals must
provide sound environmental management practices with limited
economic resources. For help with these challenges, municipal
and industrial generators throughout the United States have
turned to us for solutions.
We partner with our clients to develop cost-effective,
environmentally sound solutions to their residuals processing
and beneficial use requirements. We provide the flexibility and
comprehensive services that generators need, with negotiated
pricing, regulatory compliance, and operational performance. We
work with our clients to find innovative and cost effective
solutions to their wastewater residuals management challenges.
In addition, because we do not manufacture equipment, we are
able to provide unbiased solutions to our customers’ needs.
We provide our customers with complete, vertically integrated
services and capabilities, including design/build
services, facility operations, facility cleanout services,
regulatory compliance, dewatering, collection and
transportation, composting, drying and pelletization, product
marketing, incineration, alkaline stabilization, and land
application.
1. Design and Build Services. We
designed, built, and operate six heat-drying and pelletization
facilities and six composting facilities. We recently completed
construction on a new drying facility that will begin operations
in the second quarter of 2007. We operate three incineration
facilities, two of which we significantly upgraded and one that
we built. We also operate 35 permanent and 48 mobile dewatering
facilities. All of our facility design, construction and
operating experience is with biosolids projects.
2. Facility Cleanout Services. Our
facility cleanout services focus on the cleaning and maintenance
of the digesters at municipal and industrial wastewater
facilities. Digester cleaning involves complex operational and
safety considerations. Our self-contained pumping systems and
agitation equipment remove a high percentage of biosolids
without the addition of large quantities of dilution water. This
method provides our customers a low bottom-line cost per dry ton
of solids removed. Solids removed from the digesters can either
be recycled through our ongoing agricultural land application
programs or landfilled.
3. Regulatory Compliance. An important
element for the long-term success of a wastewater residuals
management program is the certainty of compliance with local,
state and federal regulations. Accurate and timely documentation
of regulatory compliance is mandatory. We provide this service
through our proprietary Residuals Management System
(“RMS”).
RMS is an integrated data management system that has been
designed to store, manage and report information about our
clients’ wastewater residuals programs. Every time our
professional operations or technical staff performs activities
relating to a particular project, RMS is updated to record the
characteristics of the material, how much material was moved,
when it was moved, who moved it and where it went. In addition
to basic operational information, laboratory analyses are input
in order to monitor both annual and cumulative loading rates for
metals and nutrients. This loading information is coupled with
field identification to provide current information for
agronomic application rate computations.
This information is used in two ways. First and foremost, it
provides a database for regulatory reporting and provides the
information required for monthly and annual technical reports
that are sent to the EPA and state regulatory agencies. Second,
information entered into RMS is used as an important part of the
invoicing process. This check and balance system provides a link
between our operational, technical and billing departments to
ensure correct invoicing and regulatory compliance.
RMS is a tool that gives our clients timely access to
information regarding their wastewater residuals management
program. We continue to dedicate resources to the continuous
improvement of RMS. We believe that our regulatory compliance
and reporting capabilities provide us with a competitive
advantage when presented to the municipal and industrial
wastewater generators.
4. Dewatering. We provide residuals
dewatering services for wastewater treatment facilities on
either a permanent, temporary or emergency basis. These services
include design, procurement, and operations. We provide the
staffing to operate and maintain these facilities to ensure
satisfactory operation and regulatory compliance of the
residuals management program. We currently operate 35 permanent
and 48 mobile dewatering units.
5. Collection and Transportation. For our
liquid residuals operations, a combination of mixers, dredges
and/or pumps
are used to load our tanker trailers. These tankers transport
the residuals to either a land application site or one of our
residuals processing facilities. For our dewatered residuals
operations, the dewatered residuals are loaded into trailers by
either front end loaders or conveyors. These trailers are then
transported to either land application sites or to one of our
residuals processing facilities.
6. Composting. For composting projects,
we provide a comprehensive range of technologies, operations
services and end product marketing through our various divisions
and regional offices. All of our composting alternatives provide
high-quality Class A products that we market to
landscapers, nurseries, farms and fertilizer companies through
our Organic Product Marketing Group (“OPMG”) described
below. In some cases, fertilizer companies package the product
and resell it for home consumer use. We utilize three different
types of composting methodologies: aerated static pile,
in-vessel, and open windrow. When a totally enclosed facility is
not required, aerated static pile composting offers economic
advantages. In-vessel composting uses an automated, enclosed
system that mechanically agitates and aerates blended organic
materials in concrete bays. We also offer the windrow method of
composting to clients with favorable climatic conditions. In
areas with a hot and dry climate, the windrow method lends
itself to the efficient evaporation of excess water from
dewatered residuals. This makes it possible to minimize or
eliminate any need for bulking agents other than recycled
compost. We currently operate five composting facilities.
7. Drying and Pelletization. The heat
drying process utilizes a recirculating system to evaporate
water from wastewater residuals and creates fertilizer pellets.
A critical aspect of any drying technology is its ability to
produce a consistent and high quality Class A end product
that is marketable to identified end-users. This requires the
system to manufacture pellets that meet certain criteria with
respect to size, dryness, dust elimination, microbiological
cleanliness, and durability. We market heat-dried biosolids
products to the agricultural and fertilizer industries through
our described below.
We built and currently operate six drying and pelletization
facilities with municipalities, including one in Pinellas
County, Florida, two in Baltimore, Maryland, one in New York,
New York, one in Hagerstown, Maryland and one in Sacramento,
California. We have also completed construction phase of a
drying and pelletization facility for Honolulu, Hawaii, which is
scheduled to be operational in the second quarter of 2007.
8. Product Marketing. In 1992, we formed
the OPMG to market composted and pelletized biosolids from our
own facilities as well as municipally owned facilities. OPMG
currently markets in excess of 982,000 cubic
yards of compost and 121,000 tons of pelletized biosolids
annually. OPMG markets a majority of its biosolids products
under the trade names Granulite Company and AllGro Company.
Based on our experience, OPMG is capable of marketing biosolids
products to the highest paying markets. We believe that we are
the leader in marketing end-use wastewater residuals products,
such as compost and heat-dried pellets used for fertilizers. In
2006, we marketed 121,000 tons or approximately 39 percent
of the heat-dried pellets produced in the United States. We also
marketed 500,000 tons of compost, which we believe is
significantly more than any other producer of municipal based
compost materials.
9. Incineration. In the Northeast, we
economically and effectively process wastewater residuals
through the utilization of the proven thermal processing
technologies of multiple-hearth and fluid bed incineration. In
multiple-hearth processing, residuals are fed into the top of
the incinerator and then mechanically passed down to the hearths
below. The heat from the burning residuals in the middle of the
incinerator dries the residuals coming down from the top until
they begin to burn. Since residuals have approximately the same
British thermal unit value as wood chips, very little additional
fuel is needed to make the residuals start to burn. The
resulting ash by-product is nontoxic and inert, and can be
beneficially used as alternative daily cover for landfills. In
fluid bed processing, residuals are pumped directly into a
boiling mass of super heated sand and air (the fluid bed) that
vaporizes the residuals on contact. The top of the fluid bed
burns off any remaining compounds resulting in very low air
emissions and very little ash by-product. Computerized control
of the entire process makes this modern technology fuel
efficient, easy to operate, and an environmentally friendly
disposal method. We currently operate three incineration
facilities.
10. Alkaline Stabilization. We provide
alkaline stabilization services by using lime to treat
Sub-Class B
biosolids to
Class-B
standards. Lime chemically reacts with the residuals and creates
a Class B product. We offer this treatment process through
our BIO*FIX process. Due to its very low capital cost, BIO*FIX
is used in interim and emergency applications as well as
long-term programs. The BIO*FIX process is designed to
effectively inactivate pathogenic microorganisms and to prevent
vector attraction and odor. The BIO*FIX process combines
specific high-alkalinity materials with residuals at low cost.
11. Land Application. The beneficial
reuse of municipal and industrial biosolids through land
application has been successfully performed in the United States
for more than 100 years. Direct agricultural land
application has the proven benefits of fertilization and organic
matter addition to the soil. Agricultural communities throughout
the country are well acquainted with the practice of land
application of biosolids and have first hand experience with the
associated agricultural and environmental benefits. Currently,
we recycle Class B biosolids through agricultural land
application programs in 24 states. Our revenues from land
application services are the highest among our service offerings.
Contract revenues accounted for approximately 83 percent of
our revenue for the year ended December 31, 2006. These
revenues were generated through more than 650 contracts that
range from one to twenty five years in length. Contract revenues
are generated primarily from land application, drying and
pelletization services, incineration, collection and
transportation services, composting, dewatering, facility
operations and maintenance services. These contracts have an
estimated backlog, including renewal options, of approximately
$2.1 billion as of December 31, 2006. In general, our
contracts contain provisions for inflation related annual price
increases, renewal provisions, and broad force majeure clauses.
Our top ten customers have a weighted average of 14 years
remaining on their current contracts, including renewal options.
We have historically enjoyed high contract retention rates
(including both renewals and rebids) of approximately
85 percent to 90 percent of contract revenue value.
During 2006, our contract retention rate was approximately
94 percent. See “ — Backlog” for a more
detailed discussion.
Our largest customer is the New York City Department of
Environmental Protection (“NYDEP”), which
accounted for 16 percent of our revenues in 2006. No other
customer accounted for more than 10 percent of our revenues
in 2006.
Although we have a standard form of agreement, terms may vary
depending upon the customer’s service requirements and the
volume of residuals generated and, in some situations,
requirements imposed by statute or regulation. Contracts
associated with our land application business are typically two-
to four-year exclusive arrangements excluding renewal options.
Contracts associated with drying and pelletizing, incineration
or
composting are typically longer term contracts, from five to
twenty years, excluding renewal options, and typically include
provisions such as
put-or-pay
arrangements and estimated adjustments for changes in the
consumer price index for contracts that contain price indexing.
Other services such as cleanout and dewatering typically may or
may not be under long-term contract depending on the
circumstances.
The majority of our contracts are with municipal entities.
Typically, a municipality will advertise a request for proposal
and numerous entities will bid to perform the services
requested. Often the municipality will choose the best qualified
bid by weighing multiple factors, including range of services
provided, experience, financial capability and lowest cost. The
successful bidder then enters into contract negotiations with
the municipality.
Contracts typically include provisions relating to the
allocation of risk, insurance, certification of the material,
force majeure conditions, change of law situations, frequency of
collection, pricing, form and extent of treatment, and
documentation for tracking purposes. Many of our agreements with
municipalities and water districts provide options for extension
without the necessity of going to bid. In addition, many
contracts have termination provisions that the customer can
exercise; however, in most cases, such terminations create
obligations to our customers to compensate us for lost costs and
profits.
Our largest contract is with the NYDEP. The contract relates to
the New York Organic Fertilizer Company dryer and pelletizer
facility and was assumed in connection with the acquisition of
Waste Management Inc.’s Bio Gro Division in 2000. The
contract provides for the removal, transport and processing of
wastewater residuals into Class A product that is
transported, marketed and sold to the fertilizer industry for
beneficial reuse. We also have a contract with the NYDEP to
transport and land apply biosolids. These contracts accounted
for 16 percent of our revenues in 2006, and have terms of
15 years and expire in June 2013. These contracts include
provisions relating to the allocation of risk, insurance,
certification of the material, force majeure conditions, change
of law situations, frequency of collection, pricing, form and
extent treatment, and documentation for tracking purposes. In
addition, these contracts include a provision that allows for
the NYDEP to terminate the contract upon notice. See “Risk
Factors — Risks Relating to our Business and the
Industry — A significant amount of our business comes
from a limited number of customers and our revenue and profits
could decrease significantly if we lost one or more of them as
customers.”
Backlog
At December 31, 2006, our estimated remaining contract
value including renewal options, which we call backlog, was
approximately $2.1 billion, of which we estimate
approximately $234.4 million will be realized in 2007. In
determining backlog, we calculate the expected payments
remaining under the current terms of our contracts, assuming the
renewal of contracts in accordance with their renewal
provisions, no increase in the level of services during the
remaining term, and estimated adjustments for changes in the
consumer price index for contracts that contain price indexing.
Assuming the renewal provisions are not exercised, we estimate
our backlog at December 31, 2006 would have been
approximately $1.3 billion. We believe that the
$1.3 billion of estimated backlog excluding renewal
provisions is firm. These estimates are based on our operating
experience, and we believe them to be reasonable. However, there
can be no assurance that our backlog will be realized as
contract revenue or earnings. See “Risk Factors —
Risks Relating to our Business and Industry — We are
not able to guarantee that our estimated remaining contract
value, which we call backlog, will result in actual revenues in
any particular fiscal period.”
Sales and
Marketing
We have a sales and marketing group that has developed and
implemented a comprehensive internal growth strategy to expand
our business by providing services for new customers who
currently perform their own wastewater residuals management and
by increasing the range of services that our existing customers
outsource to us.
In addition, to maintain our existing market base, we endeavor
to achieve a 100 percent renewal rate on expiring service
contracts. For 2006, we achieved a renewal rate of approximately
94 percent. We believe that the ability to renew existing
contracts is a direct indication of the level of customer
satisfaction with our operations.
Although we value our current customer base, our focus is to
increase revenues that generate long-term, stable income at
acceptable margins rather than simply increasing market share.
Our sales and marketing group also works with our operations
staff, which typically responds to requests to proposals for
routine work that is awarded to the lowest cost bidder. This
allows our sales and marketing group to focus on prospective,
rather than reactive, marketing activities. Our sales and
marketing group is focused on developing new business from
specific market segments that have historically netted the
highest returns. These are segments where we believe we should
have an enhanced competitive advantage due to the complexity of
the job, the proximity of the work to our existing business, or
a unique technology or facility that we are able to offer. We
seek to maximize profit potential by focusing on negotiated
versus low-bid procurements, long-term versus short-term
contracts and projects with multiple services. In addition, we
are focusing on the rapidly growing Class A market. Our
sales incentive program is designed to reward the sales force
for success in these target markets.
We proactively approach municipal market segments, as well as
new industrial segments, through professional services
contracts. We are in a unique industry position to successfully
market through professional services contracts because we are an
operations company that offers virtually every type of proven
service category marketed in the industry today. This means we
can customize a wastewater residuals management program for a
client with no technology or service category bias.
Acquisitions
History
Historically, acquisitions have been an important part of our
growth strategy. We completed 18 acquisitions from 1998 through
2006, highlighted by our acquisition in August 2000 of Waste
Management’s Bio Gro Division. Bio Gro had been one of the
largest providers of wastewater residuals management services in
the United States, with 1999 annual revenues of
$118 million. Bio Gro provided wastewater residuals
management services in 24 states and was the market leader
in thermal drying and pelletization. Other acquisitions from
1998 to the present include the following:
Company
Date Acquired
U.S. Market Served
Capabilities Acquired
A&J Cartage, Inc.
June 1998
Midwest
Land Application
Recyc, Inc.
July 1998
West
Composting
Environmental Waste Recycling,
Inc.
November 1998
Southeast
Land Application
National Resource Recovery,
Inc.
March 1999
Midwest
Land Application
Anti-Pollution Associates
April 1999
Florida Keys
Facility Operations
D&D Pumping, Inc.
April 1999
Florida Keys
Land Application
Vital Cycle, Inc.
April 1999
Southwest
Product Marketing
AMSCO, Inc.
May 1999
Southeast
Land Application
Residual Technologies, LP
January 2000
Northeast
Incineration
Davis Water Analysis, Inc.
February 2000
Florida Keys
Facility Operations
AKH Water Management, Inc.
February 2000
Florida Keys
Facility Operations
Ecosystematics, Inc.
February 2000
Florida Keys
Facility Operations
Rehbein, Inc.
March 2000
Midwest
Land Application
Whiteford Construction Company
March 2000
Mid-Atlantic
Cleanouts
Environmental
Protection & Improvement Inc.
March 2000
Mid-Atlantic
Rail Transportation
Earthwise Organics, Inc and
Earthwise Trucking
August 2002
West
Composting and
Transportation
Aspen Resources, Inc.
May 2003
Midwest
Pulp and Paper Residuals
Competition
We provide a variety of services relating to the transportation
and treatment of wastewater residuals. Although water, land
application, fertilizer, farming, consulting and composting
companies provide some of the same
services we offer, we believe that we are the only national
company to provide a comprehensive suite of services. We are not
aware of another company focused exclusively on the management
of wastewater residuals from a national perspective. We have
several types of direct competitors. Our direct competitors
include small local companies, regional residuals management
companies, and national and international water and wastewater
operations privatization companies.
We compete with these competitors in several ways, including
providing quality services at competitive prices, partnering
with technology providers to offer proprietary processing
systems, and utilizing strategic land application sites.
Municipalities often structure bids for large projects based on
the best qualified bid, weighing multiple factors, including
experience, financial capability and cost. We also believe that
the full range of wastewater residuals management services we
offer provide a competitive advantage over other entities
offering a lesser complement of services.
In many cases, municipalities and industries choose not to
outsource their residuals management needs. In the municipal
market, we estimate that up to 60 percent of the POTW
plants are not privatized. We are actively reaching out to this
segment to persuade them to explore the benefits of outsourcing
these services to us. For these generators, we can offer
increased value through numerous areas, including lower cost,
ease of management, technical expertise, liability
assumption/risk management, access to capital or technology and
performance guarantees.
Federal,
State and Local Government Regulation
Federal, state and local environmental authorities regulate the
activities of the municipal and industrial wastewater generators
and enforce standards for the discharge from wastewater
treatment plants (effluent wastewater) with permits issued under
the authority of the Clean Water Act, as amended, state water
quality control acts and local regulations. The treatment of
wastewater produces an effluent and wastewater solids. The
treatment of these solids produces biosolids. To the extent
demand for our residuals treatment methods is created by the
need to comply with the environmental laws and regulations, any
modification of the standards created by such laws and
regulations may reduce the demand for our residuals treatment
methods. Changes in these laws or regulations, or in their
enforcement, may also adversely affect our operations by
imposing additional regulatory compliance costs on us, requiring
the modification of
and/or
adversely affecting the market for our wastewater residuals
management services.
The Comprehensive Environmental Response, Compensation and
Liability Act (“CERCLA”) generally imposes strict,
joint and several liability for cleanup costs upon various
parties, including: (1) present owners and operators of
facilities at which hazardous substances were disposed;
(2) past owners and operators at the time of disposal;
(3) generators of hazardous substances that were disposed
at such facilities; and (4) parties who arranged for the
disposal of hazardous substances at such facilities. CERCLA
liability extends to cleanup costs necessitated by a release or
threat of release of a hazardous substance. However, the
definition of “release” under CERCLA excludes the
“normal application of fertilizer.” The EPA
regulations regard biosolids applied to land as a fertilizer
substitute or soil conditioner. The EPA has indicated in a
published document that it considers biosolids applied to land
in compliance with the applicable regulations not to constitute
a “release.” However, the land application of
biosolids that do not comply with Part 503 Regulations
could be considered a release and lead to CERCLA liability.
Monitoring as required under Part 503 Regulations is thus
very important. Although the biosolids and alkaline waste
products may contain limited quantities or concentrations of
hazardous substances (as defined under CERCLA), we have
developed plans to manage the risk of CERCLA liability,
including training of operators, regular testing of the
biosolids and the alkaline admixtures to be used in treatment
methods and reviewing incineration and other permits held by the
entities from which alkaline admixtures are obtained.
Permitting
Process
We operate in a highly regulated environment and the wastewater
treatment plants and other plants at which our biosolids
management services may be provided are usually required to have
permits, registrations
and/or
approvals from federal, state
and/or local
governments for the operation of such facilities.
Many states, municipalities and counties have regulations,
guidelines or ordinances covering the land application of
Class B biosolids, many of which set either a maximum
allowable concentration or maximum
pollutant-loading rate for at least one pollutant. The
Part 503 Regulations also require monitoring Class B
biosolids to ensure that certain pollutants or pathogens are
below thresholds.
The EPA has considered increasing these thresholds or adding new
thresholds for different substances, which could increase our
compliance costs. In addition, some states have established
management practices for land application of Class B
biosolids. In some jurisdictions, state
and/or local
authorities have imposed permit requirements for, or have
prohibited, the land application or agricultural use of
Class B biosolids. There can be no assurance that any such
permits will be issued or that any further attempts to require
permits for, or to prohibit, the land application or
agricultural use of Class B biosolids products will not be
successful.
Any of the permits, registrations or approvals noted above, or
applications therefore may be subject to denial, revocation or
modification under various circumstances. In addition, if new
environmental legislation or regulations are enacted or existing
legislation or regulations are amended or are enforced
differently, we may be required to obtain additional, or modify
existing, operating permits, registrations or approvals. The
process of obtaining or renewing a required permit, registration
or approval can be lengthy and expensive and the issuance of
such permit or the obtaining of such approval may be subject to
public opposition or challenge. Much of this public opposition
or challenge, as well as related complaints, relates to odor
issues, even when we are generally in compliance with odor
requirements and even though we have worked hard to minimize
odor from our operations. There can be no assurances that we
will be able to meet applicable regulatory requirements or that
further attempts by state or local authorities to prohibit, or
public opposition or challenge to, the land application,
agricultural use of biosolids, thermal processing or biosolids
composting will not be successful.
Securities
and Exchange Commission
As a public company, we are required to file periodic reports,
as well as other information, with the Securities and Exchange
Commission (SEC) within established deadlines. Any document we
file with the SEC may be viewed or copied at the SEC’s
Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Additional information regarding
the Public Reference Room can be obtained by calling the SEC at
(800) SEC-0330. Our SEC filings are also available to the
public through the SEC’s web site located at
http://www.sec.gov.
We maintain a corporate Web site at
http://www.synagro.com, on which investors may access
free of charge our annual report on
Form 10-K,
quarterly reports on
Form 10-Q
and amendments to those reports as soon as is reasonably
practicable after furnishing such material with the SEC. In
addition, we will voluntarily provide electronic or paper copies
of our filings free of charge upon request to our Investor
Relations department at
(713) 369-1700.
Patents
and Proprietary Rights
We have several patents and licenses relating to the treatment
and processing of biosolids. Our current patents expire between
2008 to 2020. While there is no single patent that is material
to our business, we believe that our aggregate patents are
important to our prospects for future success. However, we
cannot be certain that future patent applications will be issued
as patents or that any issued patents will give us a competitive
advantage. It is also possible that our patents could be
successfully challenged or circumvented by competition or other
parties. In addition, we cannot assure that our treatment
processes do not infringe patents or other proprietary rights of
other parties.
In addition, we make use of our trade secrets or
“know-how” developed in the course of our experience
in the marketing of our services. To the extent that we rely
upon trade secrets, unpatented know-how and the development of
improvements in establishing and maintaining a competitive
advantage in the market for our services, we can provide no
assurances that such proprietary technology will remain a trade
secret or that others will not develop substantially equivalent
or superior technologies to compete with our services.
Employees
As of March 1, 2007, we had 966 full-time
employees. These employees include approximately 13 executive
and nonexecutive officers, 105 operations managers, 60
environmental specialists, 50 maintenance
personnel, 167 drivers and transportation personnel,
87 land application specialists, 311 general operation
specialists, 30 sales employees and 143 technical support,
administrative, financial and other employees. Additionally, we
use contract labor for various operating functions, including
hauling and spreading services, when it is economically
advantageous.
Although we have approximately 33 union employees, our employees
are generally not represented by a labor union or covered by a
collective bargaining agreement. We believe we have good
relations with our employees. We provide our employees with
certain benefits, including health, life, dental, and accidental
death and disability insurance and 401(k) benefits.
Potential
Liability and Insurance
The wastewater residuals management industry involves potential
liability risks of statutory, contractual, tort, environmental
and common law liability claims. Potential liability claims
could involve, for example:
•
personal injury;
•
damage to the environment;
•
violations of environmental permits;
•
transportation matters;
•
employee matters;
•
contractual matters;
•
property damage; and
•
alleged negligence or professional errors or omissions in the
planning or performance of work.
We could also be subject to fines or penalties in connection
with violations of regulatory requirements.
We carry $51 million of liability insurance (including
umbrella coverage), and under a separate policy,
$10 million of aggregate pollution legal liability
insurance ($10 million each loss) subject to retroactive
dates, which we consider sufficient to meet regulatory and
customer requirements and to protect our employees, assets and
operations. There can be no assurance that we will not face
claims under CERCLA or similar state laws resulting in
substantial liability for which we are uninsured or could be
greater than each policy’s limit and which could have a
material adverse effect on our business.
Our insurance programs utilize large deductible/self-insured
retention plans offered by commercial insurance companies. Large
deductible/self-insured retention plans allow us the benefits of
cost-effective risk financing while protecting us from
catastrophic risk with specific stop-loss insurance limiting the
amount of self-funded exposure for any one loss and aggregate
stop-loss insurance limiting the self-funded exposure for health
insurance for any one year.
Item 1A.
Risk
Factors
Risk
Factors That May Affect Future Results
Federal
wastewater treatment and biosolid regulations may restrict our
operations and/or increase our costs of operations.
Federal wastewater treatment and wastewater residuals laws and
regulations impose substantial costs on us and affect our
business in many ways. If we are not able to comply with the
governmental regulations and requirements that apply to our
operations, we could be subject to fines and penalties, and we
may be required to invest significant capital to bring
operations into compliance or to temporarily or permanently stop
operations that are not permitted under the law. Those costs or
actions could have a material adverse effect on our business,
financial condition and results of operations.
Federal environmental authorities regulate the activities of the
municipal and industrial wastewater generators and enforce
standards for the discharge from wastewater treatment plants
(effluent wastewater) with permits issued under the authority of
the Clean Water Act, as amended. The treatment of wastewater
produces an effluent and wastewater solids. The treatment of
these solids produces biosolids. The use and disposal of
biosolids and wastewater residuals is regulated by 40 CFR
Part 503 Regulations promulgated by the EPA pursuant to the
Clean Water Act (“Part 503 Regulations”). The
Part 503 Regulations also establish use and disposal
standards for biosolids and wastewater residuals that are
applicable to publicly and privately owned wastewater treatment
plants in the United States. Biosolids may be surface disposed
in landfills, incinerated, or applied to land for beneficial use
in accordance with the requirements established by the
regulations. To the extent demand for our wastewater residuals
treatment methods is created by the need to comply with the
environmental laws and regulations, any modification of the
standards created by such laws and regulations, or in their
enforcement, may reduce the demand for our wastewater residuals
treatment methods. Changes in these laws or regulations
and/or
changes in the enforcement of these laws or regulations may also
adversely affect our operations by imposing additional
regulatory compliance costs on us, and requiring the
modification of
and/or
adversely affecting the market for our wastewater residuals
management services.
We are
subject to extensive and increasingly strict federal, state and
local environmental regulation and permitting, which could
impose substantial costs on our operations and/or reduce our
operational flexibility.
Our operations are subject to increasingly strict environmental
laws and regulations, including laws and regulations governing
the emission, discharge, treatment, storage, disposal and
transportation of certain substances and related odor.
Wastewater treatment plants and other plants at which our
biosolids management services may be implemented are usually
required to have permits, registrations
and/or
approvals from state
and/or local
governments for the operation of such facilities. Some of our
facilities require air, wastewater, storm water, composting, use
or siting permits, registrations or approvals. We may not be
able to maintain or renew our current permits, registrations or
licensing agreements or to obtain new permits, registrations or
licensing agreements, including for the land application of
biosolids when necessary. The process of obtaining a required
permit, registration or license agreement can be lengthy and
expensive. We may not be able to meet applicable regulatory or
permit requirements, and therefore may be subject to related
legal or judicial proceedings.
Many states, municipalities and counties have regulations,
guidelines or ordinances covering the land application of
biosolids, many of which set either a maximum allowable
concentration or maximum pollutant-loading rate for at least one
pollutant. The Part 503 Regulations also require certain
monitoring to ensure that certain pollutants or pathogens are
below designated thresholds. The EPA has considered increasing
these thresholds or adding new thresholds for different
substances, which could increase our compliance costs. In
addition, some states have established management practices for
land application of biosolids. Some members of Congress, some
state and local authorities, and some private parties, have
sought to prohibit or limit the land application, agricultural
use, thermal processing or composting of biosolids. Much of this
public opposition and challenge, as well as related complaints,
relates to odor issues, even when we are in compliance with odor
requirements and even though we have worked hard to minimize
odor from our operations. Public misperceptions about our
business and any related odor could influence the governmental
process for issuing such permits, registrations and licensing
agreements or for responding to any such public opposition or
challenge. Community groups could pressure local municipalities
or state governments to implement laws and regulations which
could increase our costs of our operations.
In states where we currently conduct business, certain counties
and municipalities have banned the land application of
Class B biosolids. Other states and local authorities are
reviewing their current regulations relative to land application
of biosolids. There can be no assurances that these or other
prohibition or limitation efforts will not be successful and
have a material adverse effect on our business, financial
condition and results of operations. In addition, many states
enforce landfill restrictions for nonhazardous biosolids and
some states have site restrictions or other management practices
governing lands. These regulations typically require a permit to
use biosolid products (including incineration ash) as landfill
daily cover material or for disposal in the landfill. It is
possible that landfill operators will not be able to obtain or
maintain such required permits. Any of the permits,
registrations or approvals noted above, or related applications
may be subject to denial, revocation or modification, or
challenge by
a third party, under various circumstances, which could have a
material adverse effect on our ability to conduct our business.
We are
affected by unusually adverse weather and winter conditions,
which may adversely affect our revenues and operational
results.
Our business is adversely affected by unusual weather conditions
and unseasonably heavy rainfall, which can temporarily reduce
the availability of land application sites in close proximity to
our business upon which biosolids can be beneficially reused and
applied to crop land. 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 disposal of the biosolids material. In addition, our
revenues and operational results are adversely affected during
the winter months when the ground freezes thus limiting the
level of land application that can be performed. Long periods of
inclement weather could reduce our revenues and operational
results causing a material adverse effect on our results of
operations and financial position.
Our
ability to grow may be limited by direct or indirect competition
with other businesses that provide some or all of the same
services that we provide.
We provide a variety of services relating to the transportation
and treatment of wastewater residuals. We are in direct and
indirect competition with other businesses that provide some or
all of the same services including small local companies,
regional residuals management companies, and national and
international water and wastewater operations/privatization
companies, technology suppliers, municipal solid waste
companies, farming operations and, most significantly,
municipalities and industries who choose not to outsource their
residuals management needs. Some of these competitors are
larger; more firmly established and have greater capital
resources than we have.
If our
long-term contracts are renewed on less attractive terms, or not
renewed at all, or if we are unsuccessful in bidding on new
long-term contracts, our operating results and financial
condition would be adversely affected.
We derive a substantial portion of our revenue from services
provided under municipal contracts. A portion of our contracts
expire annually and are sometimes subject to competitive
bidding. Any contracts that are successfully renewed may be on
less attractive terms and conditions than the expired agreement.
We also intend to bid on new municipal contracts. In the event
we are unable to renew our existing contracts on attractive
terms, or at all, or be successful in bidding on new contracts,
our operating results and financial condition would be adversely
affected.
If one
or more of our customer contracts are terminated prior to the
expiration of their term, and we are not able to replace
revenues from the terminated contract or receive liquidated
damages pursuant to the terms of the contract, the lost revenue
would have a material adverse effect on our business,
financial condition and results of operations.
A substantial portion of our revenue is derived from services
provided under contracts and written agreements with our
customers. Some of these contracts, especially those contracts
with large municipalities (including our largest contract and at
least four of our other top ten customers), provide for
termination of the contract by the customer after giving
relative short notice (in some cases as little as ten days). In
addition, some of these contracts contain liquidated damages
clauses, which may or may not be enforceable in the event of
early termination of the contracts.
If one
or more of our new facilities is not completed as scheduled, and
we are not able to replace revenues from the new facility, this
could have a material and adverse effect on our financial
performance and cash flow.
Our ability to generate revenues and cash flow sufficient to pay
dividends on our outstanding common stock and interest on
outstanding debt is dependent upon successfully financing and
completing two new facilities scheduled to commence operations
in 2007. Although permitting processes for the new facilities
are complete and construction is in progress or near completion,
there can be no assurance that we will be able to complete
construction as scheduled (or at all) and begin to operate the facilities
without the need to remedy certain defects that may
arise immediately after construction. In addition, as with our
other facilities, our relationship is governed by customer
contracts which can be terminated prior to the expiration of
their term.
A
significant amount of our business comes from a limited number
of customers and our revenue and profits could decrease
significantly if we lost one or more of them as
customers.
Our business depends on our ability to provide services to our
customers. One or more of these customers may stop buying
services from us or may substantially reduce the amount of
services we provide them. Any cancellation, deferral or
significant reduction in the services we provide these principal
customers or a significant number of smaller customers could
seriously harm our business, financial condition and results of
operations. For the year ended December 31, 2006, our
single largest customer accounted for 16 percent of our
revenues and our top ten customers accounted for approximately
37 percent of our revenues.
If we
were unable to obtain bonding required in connection with
certain projects, we would be ineligible to bid on those
projects.
Consistent with industry practice, we are required to post
performance bonds in connection with certain contracts on which
we bid. In addition, we are often required to post both
performance and payment bonds at the time of execution of
contracts for commercial, federal, state and municipal projects.
The amount of bonding capacity offered by sureties is a function
of the financial health of the entity requesting the bonding.
Although we could issue letters of credit under our credit
facility for bonding purposes, if we are unable to obtain
bonding in sufficient amounts we may be ineligible to bid or
negotiate on projects. As of March 1, 2007, we had a
bonding capacity of approximately $235 million with
approximately $164 million utilized as of that date.
We
could face personal injury, third-party or environmental claims
or other damages resulting in substantial liability for which we
are uninsured or inadequately insured and which could have a
material adverse effect on our business, financial condition and
results of operations.
We carry $51 million of liability insurance (including
umbrella coverage), and under a separate policy,
$10 million of aggregate pollution and legal liability
insurance ($10 million each loss) subject to retroactive
dates, which we consider sufficient to meet regulatory and
customer requirements and to protect our employees, assets and
operations. It is possible that we will not be able to maintain
such insurance coverage in the future.
Our insurance programs utilize large deductible/self-insured
retention plans offered by a commercial insurance company. Large
deductible/self-insured retention plans allow us the benefits of
cost-effective risk financing while protecting us from
catastrophic risk with specific stop-loss insurance limiting the
amount of self-funded exposure for any single loss.
We are
dependent on the availability and satisfactory performance of
subcontractors for our design and build operations and the
insufficiency and unavailability of and unsatisfactory
performance by these unaffiliated third party contractors could
have a material adverse effect on our business, financial
condition and results of operations.
We participate in design and build construction operations
usually as general contractor. Virtually all design and
construction work is performed by unaffiliated third-party
subcontractors. As a consequence, we are dependent on the
continued availability of and satisfactory performance by these
subcontractors for the design and construction of our
facilities. Further, as the general contractor, we are legally
responsible for the performance of our contracts and/if such
contracts are underperformed or nonperformed by our
subcontractors, we could be financially responsible. Although
our contracts with our subcontractors provide for
indemnification if our subcontractors do not satisfactorily
perform their contract, such indemnification may not cover our
financial losses in attempting to fulfill the contractual
obligations.
Fluctuations
in fuel costs could increase our operating expenses and
negatively impact our net income.
The price and supply of fuel is unpredictable and fluctuates
based on events outside our control, including geopolitical
developments, supply and demand for oil and gas, actions by OPEC
and other oil and gas producers,
war and unrest in oil producing countries, regional production
patterns and environmental concerns. Because fuel is needed to
run the fleet of trucks that service our customers, our
incinerators, our dryers and other facilities, price escalations
or reductions in the supply of fuel could increase our operating
expenses and have a negative impact on net income. In the past,
we have implemented a fuel surcharge to offset increased fuel
costs. However, we are not always able to pass through all or
part of the increased fuel costs due to the terms of certain
customers’ contracts and the inability to negotiate such
pass through costs.
If we
fail to properly estimate the cost of completing a project, and
we cannot pass additional costs through to our customers, we may
not generate sufficient revenue from the project to cover the
operating costs of such project, which would adversely affect
our net income.
Our customer contracts involve performing tasks for a fixed cost
(in total or on a per unit basis), and if actual costs end up
exceeding anticipated costs, our net income would be adversely
affected. Due in part to the technical imprecision inherent in
estimating the volume of residuals, we may misestimate the
volume of residuals, which may increase our costs. To the extent
that unexpected costs may arise in connection with work done
pursuant to contracts that do not allow us to fully transfer
such costs to our customers, our operating costs would increase
and our net income would in turn be negatively affected.
We are
not able to guarantee that our estimated remaining contract
value, which we call backlog, will result in actual revenues in
any particular fiscal period.
Any of the contracts included in our backlog, or estimated
remaining contract value, presented herein may not result in
actual revenues in any particular period or the actual revenues
from such contracts may not equal our backlog. In determining
backlog, we calculate the expected payments remaining under the
current terms of our contracts, assuming the renewal of
contracts in accordance with their renewal provisions, no
increase in the level of services during the remaining term, and
estimated adjustments for changes in the consumer price index
for contracts that contain price indexing. However, part or all
of our backlog may not be recognized as revenue or earnings.
If we
lose the pending lawsuits we are currently involved in, we could
be liable for significant damages and legal
expenses.
In the ordinary course of business, we may become involved in
various legal and administrative proceedings, including
proceedings related to permits, land use or environmental laws
and regulations. We are currently subject to several lawsuits
relating to our business. Our defense of these claims or any
other claims against us may not be successful. If we lose these
or future lawsuits, we may have to pay significant damages and
legal expenses, and we could be subject to injunctions, court
orders, loss of revenues and defaults under our credit and other
agreements. See “Item 3. — Legal
Proceedings.”
We
could face considerable business and financial risk in
implementing our acquisition strategy.
As part of our growth strategy, we intend to consider acquiring
complementary businesses. We regularly engage in discussions
with respect to possible acquisitions. Future acquisitions could
result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities, which could
have a material adverse effect upon our business, financial
position and results of operations. Risks we could face with
respect to acquisitions include:
•
difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;
•
potential loss of employees;
•
diversion of management’s attention away from other
business concerns;
•
expenses of any undisclosed or potential legal liabilities of
the acquired company; and
•
risks of entering markets in which we have no or limited prior
experience.
In addition, it is possible that we will not be successful in
consummating future acquisitions on favorable terms or at all.
As we pursue our acquisition strategy, we might experience
periods of rapid growth that could strain our management, as
well as our operational, financial and other resources. Such a
strain might negatively impact our ability to retain our
existing employees. In order to maintain and manage our growth
effectively, we will need to expand our management information
systems capabilities and improve our operational and financial
systems and controls. As we grow, our staffing requirements will
increase significantly. We will need to attract, train,
motivate, retain and manage our senior managers, technical
professionals and other employees. We might not be able to find
and train qualified personnel, or do so on a timely basis, or
expand our operations and systems to the extent, and in the
time, required.
We are
dependent on our senior management for their depth of industry
experience and knowledge.
We are highly dependent on the services of our senior management
team. Our senior management team has been in the industry for
many years and has substantial industry knowledge and contacts.
If a member of our senior management team were to terminate his
association with us, we could lose valuable human capital,
adversely affecting our business. We currently do not maintain
key man insurance on any member of our senior management team.
We generally enter into employment agreements with members of
our senior management team, which contain noncompete and other
provisions. The laws of each state differ concerning the
enforceability of noncompetition agreements. State courts will
examine all of the facts and circumstances at the time a party
seeks to enforce a noncompete covenant. We cannot predict with
certainty whether or not a court will enforce a noncompete
covenant in any given situation based on the facts and
circumstances at that time. If one of our key executive officers
were to leave us and the courts refused to enforce the
noncompete covenant, we might be subject to increased
competition, which could have a material adverse effect on
our business, financial condition and results of operations.
Efforts
by labor unions to organize our employees could divert
management attention and increase our operating
expenses.
Certain groups of our employees have chosen to be represented by
unions, and we have negotiated collective bargaining agreements
with some of the groups. The negotiation of these agreements
could divert management attention away from the operations of the
business and result in increased
operating expenses and lower net income. If we are unable to
negotiate acceptable collective bargaining agreements, we might
have to wait through “cooling off” periods, which are
often followed by union-initiated work stoppages, including
strikes. Depending on the type and duration of such work
stoppage, our operating expenses could increase significantly.
We may
become subject to CERCLA or other federal or state cleanup laws,
which could increase our costs of operations.
The Comprehensive Environmental Response, Compensation and
Liability Act (“CERCLA”) generally imposes strict,
joint and several liability for cleanup costs upon various
parties, including: (1) present owners and operators of
facilities at which hazardous substances were disposed;
(2) past owners and operators at the time of disposal;
(3) generators of hazardous substances that were disposed
at such facilities; and (4) parties who arranged for the
disposal of hazardous substances at such facilities. The costs
of a CERCLA cleanup or a cleanup required by applicable state
environmental laws can be very expensive. Given the difficulty
of obtaining insurance for environmental impairment liability,
CERCLA liability or any liability imposed under state cleanup
laws could have a material impact on our business and financial
condition.
CERCLA liability extends to cleanup costs necessitated by a
release or threat of release of a hazardous substance. The
definition of “release” under CERCLA excludes the
“normal application of fertilizer.” The EPA regards
the land application of biosolids that meet the Part 503
Regulations as a “normal application of fertilizer,”
and thus not subject to CERCLA. However, if we were to transport
or handle biosolids that contain hazardous substances in
violation of the Part 503 Regulations, we could be liable
under CERCLA.
From time to time, we manage hazardous substances which we
dispose at landfills or we transport soils or other materials
which may contain hazardous substances to landfills. We also
send residuals and ash from our incinerators
to landfills for use as daily cover over the landfill. Liability
under CERCLA, or comparable state statutes, can be founded on
the disposal, or arrangement for disposal, of hazardous
substances at sites such as landfills and for the transporting
of such substances to landfills. Under CERCLA, or comparable
state statutes, we may be liable for the remediation of a
disposal site that was never owned or operated by us if the site
contains hazardous substances that we generated or transported
to such site. We could also be responsible for hazardous
substances during actual transportation and may be liable for
environmental response measures arising out of disposal at a
third party site with whom we had contracted.
In addition, under CERCLA, or comparable state statutes, we
could be required to clean any of our current or former
properties if hazardous substances are released or are otherwise
found to be present. We are currently monitoring the remediation
of soil and groundwater at one of our properties in cooperation
with the applicable state regulatory authority, but do not
believe any additional material expenditures will be required.
However, there can be no assurance that currently unknown
contamination would not be found on this or other properties
which would cause us to incur additional material expenditures.
Our
intellectual property may be misappropriated or subject to
claims of infringement.
We attempt to protect our intellectual property rights through a
combination of patent, trademark and trade secret laws, as well
as licensing agreements. Our failure to obtain or maintain
adequate protection of our intellectual property rights for any
reason could have a material adverse effect on our business,
results of operations and financial condition.
We also rely on unpatented proprietary technology. It is
possible that others will independently develop the same or
similar technology or otherwise obtain access to our unpatented
technology. To protect our trade secrets and other proprietary
information, we require employees, consultants, advisors and
collaborators to enter into confidentiality agreements. We
cannot be assured that these agreements will provide meaningful
protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how
or other proprietary information. If we are unable to maintain
the proprietary nature of our technologies, our operations could be
materially adversely affected.
If we
determine that our goodwill is impaired, we may have to write
off all or part of it.
Goodwill represents the aggregate purchase price paid by us in
acquisitions accounted for as a purchase over the fair value of
the identifiable net assets acquired. Under Statement of
Financial Accounting Standards No. 142, we no longer
amortize goodwill, but review annually for impairment. In the
event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed. If
a write-down to market value of all or part of our goodwill
becomes necessary, our accounting results and net worth would be
adversely affected. As of December 31, 2006, our total
goodwill, net of amortization, was approximately
$176.6 million.
We may
be unable to meet changing laws, regulations and standards
related to corporate governance and public
disclosure.
We are spending increasing amount of management time and
external resources to comply with changing laws, regulations and
standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and Nasdaq Stock Market rules (the
“Regulations”). In particular, Section 302 and
404 of the Sarbanes-Oxley Act of 2002 require management’s
annual review and evaluation of our internal accounting and
disclosure controls and procedures, and beginning in 2005
attestations of the effectiveness of these controls by our
independent registered public accounting firm. The process of
documenting and testing our controls has required that we hire
additional personnel and outside advisory services and has
resulted in additional accounting and legal expenses. While we
invested significant time and money in our effort to design,
evaluate and test our internal control over financial reporting,
there are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including cost
limitations, the possibility of human error, judgments and
assumptions regarding the likelihood of future events, and the
circumvention or overriding of the controls and procedures.
Accordingly, even effective internal accounting and disclosure
controls and procedures can provide only reasonable assurance of
achieving their control objectives. If we were unable to comply
with the Regulations or
were to report a material weakness in our internal control over
financial reporting such disclosure may impact investor
perception of our company and may affect our stock price.
There
is no assurance that we will continue declaring dividends or
have the available cash to make dividend payments.
Although we have a stated policy of paying dividends on our
common stock at an annual rate of approximately $0.40 per
share, and we paid a cash dividend of $0.10 per share in
each quarter since the adoption of our dividend policy in June
2005, there can be no assurance that funds will be available for
this purpose in the future. The declaration and payment of
dividends is subject to the sole discretion of our Board of
Directors, are not cumulative, and will depend upon our
profitability, financial condition, capital needs, future
prospects, and other factors deemed relevant by our board of
directors, and may be restricted by the terms of our Senior
Credit Facility.
Item 1B.
Unresolved
Staff Comments
None.
Item 2.
Properties
Our headquarters are located at 1800 Bering Drive,
Suite 1000, Houston, Texas77057, and our telephone number
is
(713) 369-1700.
We currently lease approximately 18,414 square feet of
office space at our corporate office located in Houston, Texas.
We also lease regional operational facilities in Houston, Texas;
Mt. Arlington, New Jersey; Baltimore, Maryland; Naugatuck,
Connecticut; and we have 19 district offices throughout the
United States.
We own and operate four drying and pelletization facilities; one
located in Sacramento, California, one in New York, New York and
two in Baltimore, Maryland. We also own and operate four
composting facilities located in Corona, California; Dos Palos,
California; Salome, Arizona; and Kern County, California. We own
and operate three incineration facilities located in Waterbury,
Connecticut; Woonsocket, Rhode Island; and New Haven,
Connecticut. Additionally, we own the underlying real estate located in Salome, Arizona
and Kern County, California.
We operate three drying and pelletizing facilities located in
Hagerstown, Maryland; Honolulu, Hawaii; and Pinellas County,
Florida. We operate one composting facility located in
Burlington, New Jersey. We also operate a wastewater treatment
facility located in the Florida Keys.
We are in the process of building, and will own and operate, a
composting facility in Okeechobee, Florida. We will also operate
a drying and pelletizing facility located in Stamford,
Connecticut once it is built.
We maintain permits, registrations or licensing agreements on
more than approximately 960,000 acres of land in
24 states for applications of biosolids.
Item 3.
Legal
Proceedings
Our business activities are subject to environmental regulation
under federal, state and local laws and regulations. In the
ordinary course of conducting our business activities, we become
involved in judicial and administrative proceedings involving
governmental authorities at the federal, state and local levels.
We believe that these matters will not have a material adverse
effect on our business, financial condition and results of
operations.
However, the outcome of any particular proceeding cannot be
predicted with certainty. We are required under various
regulations to procure licenses and permits to conduct our
operations. These licenses and permits are subject to periodic
renewal without which our operations could be adversely
affected. There can be no assurance that any change in
regulatory requirements will not have a material adverse effect
on our financial condition, results of operations or cash flows.
Reliance
Insurance
For the 24 months ended October 31, 2000 (the
“Reliance Coverage Period”), we 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 us and our 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 we will have no, or
insufficient, insurance funds available to pay any potential
losses. There are uncertainties relating to our 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, we 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,
we 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. We
estimated our 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 (including defense costs) for which coverage may not
be available due to the liquidation of Reliance. We believe
accruals of approximately $1.0 million as of
December 31, 2006 are adequate to provide for our
exposures. The final resolution of these exposures could be
substantially different from the amount recorded.
We participate 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, we are dependent upon the continued
availability of and satisfactory performance by these
subcontractors for the design and construction of our
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 our
business, financial condition and results of operation. Further,
as the general contractor, we are legally responsible for the
performance of our contracts and, if such contracts are
under-performed or not performed by our subcontractors, we could
be financially responsible. Although our contracts with our
subcontractors provide for indemnification if our subcontractors
do not satisfactorily perform their contract, there can be no
assurance that such indemnification would cover our financial
losses in attempting to fulfill the contractual obligations.
Other
There are various other lawsuits and claims pending against us
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
determinable but, in the opinion of management, the ultimate
resolution of these matters will not have a material adverse
effect on our consolidated financial condition, results of
operations or cash flows.
Self-Insurance
We are 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 we absorb under our
insurance arrangements for these risks. Losses 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.
Item 4.
Submission
of Matters to a Vote of Security Holders
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Common
Stock Price Range
Our common stock is quoted on the Nasdaq Global Market
(“Nasdaq”), and trades under the symbol
“SYGR.” The following table presents the high and low
sales prices for our common stock for each fiscal quarter of the
fiscal years ended 2006 and 2005, as reported by Nasdaq.
High
Low
Fiscal Year 2006
First Quarter
$
5.00
$
4.02
Second Quarter
$
5.15
$
3.85
Third Quarter
$
4.30
$
3.56
Fourth Quarter
$
4.67
$
4.00
Fiscal Year 2005
First Quarter
$
5.10
$
2.50
Second Quarter
$
4.85
$
3.96
Third Quarter
$
5.42
$
4.53
Fourth Quarter
$
5.00
$
3.38
As of March 1, 2007, we had 78,403,679 shares of
common stock issued and outstanding and 265 holders of record of
our common stock.
Dividend
Policy
Our board of directors adopted a dividend policy in June 2005,
effective upon the closing of the Recapitalization (See
Note 1) whereby, we expect to pay quarterly dividends
at an annual rate of approximately $0.40 per share, but
only if and to the extent dividends are declared by our board of
directors and permitted by applicable law and by the terms of
our senior secured credit facility (See Note 4). Dividend
payments are not guaranteed and our board of directors may
decide, in its absolute discretion, not to pay dividends.
Dividends on our common stock are not cumulative. For the year
ended December 31, 2006, we paid quarterly dividends of
$0.10 per share totaling $29.2 million. We paid a
quarterly dividend of $0.10 per share in February 2007.
The following table summarizes as of December 31, 2006,
certain information regarding equity compensation to our
employees, officers, directors and other persons under our
equity compensation plans:
Number of Securities
Remaining Available for
Number of Securities
Future Issuance Under
to be Issued Upon
Weighted Average
Equity Compensation
Exercise of
Exercise Price of
Plans (Excluding
Outstanding
Outstanding
Securities Reflected
Stock Options
Stock Options
in column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved
by security holders(1)
4,017,388
$
3.26
7,677,000
Equity compensation not approved
by security holders(2)
1,224,160
$
2.82
—
Total
5,241,548
7,677,000
(1)
We have outstanding stock options granted under the 2000 Stock
Option Plan (the “2000 Plan”) and the Amended and
Restated 1993 Stock Option Plan (the “1993 Plan”) for
officers, directors and key employees. There are 7,677,000
options for shares of common stock reserved under the 2000 Plan
for future grants. Effective with the approval of the 2000 Plan,
no further grants have been made under the 1993 Plan.
(2)
Represents options granted pursuant to individual stock option
agreements. An aggregate of 1,181,954 options were granted to
executive officers in 1998 and prior. These options had an
exercise price equal to the market price, vested over three
years, and expire ten years from the date of grant. An aggregate
of 850,000 options were granted to executive officers as an
inducement essential to the individuals entering into an
employment contract with us. These options have an exercise
price equal to market value on the date of grant, vest over
three years, and expire ten years from the date of grant.
The following graph illustrates the yearly percentage change in
the cumulative stockholder return of our Common
Stock with the cumulative total return of (i) the NASDAQ
(U.S. Companies) Stock Index (the “NASDAQ
U.S. Index”) and (ii) the group of peer companies
selected by us based on similarity to our line of business and similar market
capitalization.
CUMULATIVE
TOTAL RETURN
Based upon an initial investment of $100 on December 31,2001
with dividends reinvested
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Synagro Technologies
Inc.
$
100
$
114
$
100
$
139
$
202
$
232
Nasdaq Composite
Index
$
100
$
72
$
107
$
117
$
121
$
137
Custom Composite Index (13
Stocks)
$
100
$
79
$
102
$
107
$
116
$
146
The Custom Composite Index consists of Allied Waste Industries
Inc., American Ecology Corp., Casella Waste Systems, Inc., Clean
Harbors Inc., Covanta Holding Corp., Duratek Inc. (ending 1Q06),
Republic Services Group, Stericycle Inc. Waste Connections,
Inc., Waste Industries USA, Inc., Waste Management, Inc., and
WCA Waste Corp. (beginning 3Q04).
The following table summarizes our selected consolidated
financial data for each fiscal year of the five-year period
ended December 31, 2006. The following selected
consolidated financial data should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated
financial statements, including the notes thereto, included
elsewhere herein.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following is a discussion of our results of operations and
financial position for the periods described below. This
discussion should be read in conjunction with the consolidated
financial statements included herein. Our discussion of our
results of operations and financial condition includes various
forward-looking statements about our markets, the demand for our
products and services and our future results. These statements
are based on certain assumptions that we consider reasonable.
Our actual results may differ materially from these indicated
forward-looking statements. For information about these
assumptions and other risks and exposures relating to our
business and our company, you should refer to the section
entitled “Forward-Looking Statements” and “Risk
Factors.”
2006
Secondary Equity Offering
On May 16, 2006, we completed a secondary equity offering
at $4.15 per share for 19,129,710 shares of common
stock, including 15,129,710 shares held by stockholders for
which we did not receive any proceeds and 4,000,000 shares
issued by us. We received total net proceeds from the sale of
the 4,000,000 shares, after underwriting discounts and
commissions and offering expenses, of approximately
$15.9 million. We used the net proceeds from the offering
for working capital and general corporate purposes.
2005
Recapitalization
On June 21, 2005, we executed a $305 million senior
credit agreement (See Note 4), repaid $196.9 million
of debt under our previously outstanding senior credit agreement
and
91/2% senior
subordinated notes due 2009, converted all outstanding shares of
preferred stock into 41,885,597 shares of common stock, and
completed a $160 million offering of 9,302,326 primary and
27,847,674 secondary shares of common stock at an offering price
of $4.30 per share. The credit agreement allows us to pay
dividends and also resulted in significant cash interest savings
when compared to the interest costs of our previously
outstanding senior and subordinated debt. The credit agreement,
debt repayment, preferred stock conversion, and primary and
secondary common stock offering referenced in this paragraph,
are collectively referred to herein as the
“Recapitalization”.
We incurred certain costs and write-offs relating to the
Recapitalization, including $1.5 million of transaction
costs and expenses, $5.5 million for stock option
redemptions, $1.3 million for transaction bonuses and
$19.5 million of debt extinguishment costs. The
$5.5 million charge for stock options redeemed relates to
3,043,000 options that were redeemed for $5.5 million of
cash. We also recognized as dividends $4.4 million of
previously unrecognized accretion on our preferred stock. These
costs, write-offs and accretion have been included in our
statements of operations for the year ended December 31,2005.
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, transportation, regulatory compliance, dewatering,
and facility cleanout services. We currently serve more than 600
customers in 33 states and the District of Columbia. Our
contracts typically have inflation price adjustments, renewal
clauses and broad force majeure provisions. For the year ended
December 31, 2006, we experienced a contract retention rate
(both renewals and rebids) of approximately 94 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.
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. Product sales revenues are primarily
generated from sales of composted and pelletized biosolids from
internal and external facilities. 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. Event project revenues are typically generated from
digester or lagoon cleanout projects and temporary dewatering
projects.
Our percentage of revenue by type is summarized below:
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 and multi-year
cleanout 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.
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-through
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 or hedge these costs
with financial derivative arrangements. We have hedged
92 percent of our natural gas unit costs for which we do
not have a contractual pass-through through December 31,2011. We have also locked in 47 percent of our electricity
costs on contracts that do not have contractual pass-through
agreements through December 2010. We continuously review various
hedging strategies and plant efficiency opportunities to
mitigate this risk going forward, but do expect natural gas
costs will remain high through 2007 when compared to historical
price levels for natural gas. 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 percent 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 Kern County, California, Woonsocket, Rhode
Island, Honolulu, Hawaii, Sacramento, California and Pinellas
County, Florida facility projects that we completed over the
past three 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;
•
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.
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 (in thousands):
For the year ended December 31, 2006, revenue was
approximately $345.8 million compared to approximately
$338.0 million for the year ended December 31, 2005,
an increase of approximately $7.8 million, or
2.3 percent. Contract revenues increased $17.0 million
due primarily to a $7.0 million increase in revenue from
new facilities, including the Central Valley compost, Providence
Soils dewatering and Honolulu dryer facilities, a
$2.6 million increase related to a disposal contract that
started in the third quarter of 2005, a $3.6 million
increase related to a long-term cleanout project, and other
volume changes. Event revenues increased $15.4 million due
primarily to $3.2 million of emergency digester clean-out
work, $3.1 million on a soil disposal project, a
$1.1 million increase in revenue generated on a large clean
water lagoon clean-out project that is being completed over a
two year period, $7.5 million on several large lagoon
clean-out projects, and other volume changes. Design build
construction revenues decreased $23.5 million primarily due
to the decrease in construction revenue on the Honolulu dryer
facility and other construction projects that have been
substantially completed.
Our Residuals Management Operations segment revenues for the
year ended December 31, 2006, increased approximately
$22.1 million, or 8.2 percent, to $291.7 million
compared to $269.6 million for the same period in 2005 due
primarily to the increase in revenues from new facility projects
described above, the increase in revenue from a long-term
cleanout project described above, an increase in other contract
revenues, and increases in event work described above. Our Rail
Transportation segment revenues for the year ended
December 31, 2006, increased approximately
$5.2 million, or 13.2 percent, to $44.5 million
compared to $39.3 million for the same period in 2005 due
primarily to an increase in volume under contracted land
application and disposal services contracts, an increase in a
disposal contract that started in the third quarter of 2005, and
an increase in event work, partially offset by a decrease in
purchase order work. Our Engineering, Facilities, and
Development segment revenues for the year ended
December 31, 2006, decreased approximately $19.8 million to
$12.3 million compared to $32.1 million for the same
period in 2005 due primarily to the decrease in construction
revenue on the Honolulu dryer facility project that has been
substantially completed.
Gross profit for the year ended December 31, 2006, was
approximately $66.3 million compared to approximately
$62.2 million for the year ended December 31, 2005, an
increase of $4.1 million. Gross profit as a percentage of
revenue increased to 19.2 percent in 2006 from
18.4 percent in 2005. The increase in gross profit margin
is a result of revenue mix changes associated with the increase
in higher margin contract and event work and the decrease in
lower margin design build construction work, partially offset by
expected higher fuel costs, an increase in repairs and disposal
costs, higher insurance claims, and a $1.4 million increase
in depreciation expense.
Transaction costs and expenses and stock option redemptions and
transaction bonuses decreased by $8.0 million to
$0.3 million for the year ended December 31, 2006,
compared to $8.3 million for the year ended
December 31, 2005. During 2006, we expensed
$0.3 million of transaction costs related to the sale of
common stock held by selling shareholders in which we received
no proceeds, compared to $8.3 million expended as a result
of the Recapitalization in 2005.
Gain on sale of assets decreased by $2.4 million due to
$2.4 million of gains from sales of real estate during the
year ended December 31, 2005.
Selling, general and administrative expenses for the year ended
December 31, 2006 increased $6.7 million to
approximately $31.4 million compared to $24.7 million
for the same period in 2005. The increase in general and
administrative expense is primarily due to $2.7 million of
non-cash expense for share based compensation expense related to
the issuance of restricted stock and the implementation of
SFAS No. 123R in January 2006 (which requires that we
expense the fair value of employee stock options over the
related service period), $0.9 million of costs related to
the completion of the 2005 audit, including the external audit
of internal controls required by Section 404 of the
Sarbanes-Oxley Act, a $1.4 million positive litigation
reserve adjustment that occurred in the second quarter of 2005,
and $0.3 million of severance costs related to changes in
regional management, and increases in commissions, other
incentive compensation, depreciation and other costs.
As a result of the foregoing, income from operations for the
year ended December 31, 2006 was approximately
$34.7 million compared to approximately $31.6 million
for the year ended December 31, 2005. Our Residuals
Management Operations segment income from operations for the
year ended December 31, 2006, totaled approximately
$49.0 million compared to $48.2 million for 2005 due
primarily to the positive impact of contract and event revenue
mix changes, offset by higher fuel costs, and an increase in
repairs and depreciation expense, as well as the
$2.4 million decrease in asset sale gains noted above. Our
Rail Transportation segment income from operations increased
from $4.2 million in 2005 to $6.5 million in 2006 due
primarily to higher volumes described above and related improved
equipment utilization as well as improved pricing on existing
contracts. Our Engineering, Facilities, and Development segment
income from operations decreased from $0.6 million in 2005
to a loss of $1.9 million in 2006 due primarily to the
decrease in construction revenues described above. The decrease
in corporate loss from operations from a loss of
$21.4 million in 2005 to a loss of $18.8 million in
2006, primarily relates to the $8.0 million decrease in
transaction costs and expenses and stock option expenses and
transaction bonuses described above, partially offset by the
$1.4 million favorable reserve adjustment in 2005 described
above, an increase in insurance claims not recharged to other
segments, and the $2.7 million noncash charge in 2006 for
share based compensation expense noted above.
Other expense, net, was approximately $21.1 million for the
year ended December 31, 2006, compared to approximately
$41.6 million for the year ended December 31, 2005,
representing a decrease in other expense of approximately
$20.5 million. The decrease is primarily due to
$19.5 million in debt extinguishment costs and a
$1.3 million decrease in interest expense associated with
the Recapitalization.
For the year ended December 31, 2006, we recorded a
provision for income taxes of approximately $5.6 million
compared to a benefit of $0.3 million for the year ended
December 31, 2005. Our effective tax rate was approximately
41 percent in 2006 compared to 3 percent in 2005. The
increase in the effective tax rate is primarily related to one
time provisions in the prior year for deferred taxes related to
an increase in the expected statutory rates that will be applied
when temporary differences turn in future periods following a
legal entity restructuring, and a tax issue identified during a
tax audit related to net operating loss carryforwards that has
been fully reserved. Additionally, the permanent differences for
state taxes, meals and entertainment and similar items that are
not deductible for federal purposes reduced the benefit
recognized in 2005 because in 2005 we reported a loss. 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 future taxable income.
For the year ended December 31, 2005, revenue was
approximately $338.0 million compared to approximately
$325.9 million for the year ended December 31, 2004,
an increase of approximately $12.1 million, or
3.7 percent.
We have four significant fixed price, long-term contracts for
which we recognized revenues under the percentage of completion
method of accounting totaling $31.5 million in 2005 and
$17.0 million in 2004 with related gross margin totaling
$4.2 million in 2005 and $5.9 million in 2004. The
four significant contracts included a $36.5 million project
for the design and construction of a biosolids dryer facility, a
$14.9 million contract for the removal and disposal of
cleanwater residuals from a lagoon over a two year period, a
$12.0 million contract for the removal and disposal of
biosolids from a lagoon over a five year period and a
$3.6 million contract for the installation of a dewatering
facility that was substantially completed in 2005. These types
of contracts occur infrequently but have a significant impact on
reported revenues and earnings. The revenue recognized for
construction of the new dryer facility and the dewatering
facility is reported as design/build construction revenue, while
the revenue recognized for removing and disposing of bio-solids
from the lagoon over a multi-year period is reported as contract
revenue and the revenue recognized for the removal of clean
water residuals over a two year period is being reported as
event revenues. Design/build construction revenues increased
$14.7 million primarily due to a $11.9 million
increase in construction revenue on the Honolulu dryer facility
project, which was substantially completed in 2006 and
$2.9 million increase for construction of a dewatering
facility in Knoxville, Tennessee. Contract revenues increased
$1.3 million compared to the prior year due to a
$4.1 million increase in revenues from the Sacramento dryer
facility that commenced operations in December 2004, a
$2.2 million increase related to a new disposal contract
and $2.5 million of other contract changes, offset by an
expected $7.5 million decrease in revenue on a long-term
cleanout job. Event revenues decreased $2.1 million due to
an expected year over year decrease in the number of large event
projects in 2005 compared to 2004, partially offset by
$5.8 million of revenue in 2005 under a $15 million
clean water lagoon cleanout project that is expected to take
approximately two years to complete. Purchase order and product
sales revenues decreased by $1.7 million due primarily to a
decrease in purchase order work for soil cleanup projects.
Our Residuals Management Operations revenues for the year ended
December 31, 2005, decreased approximately
$5.2 million or 1.9 percent to $269.6 million
compared to $274.8 million for the same period in 2004 due
primarily to the decreases in contract and event 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 $7.7 million of contract revenue
recognized in 2004 on a long-term cleanout contract accounted
for using the
percentage-of-completion
accounting method that did not generate any significant revenue
in 2005. Our Rail Transportation revenues for the year ended
December 31, 2005, increased approximately
$1.3 million or 3.4 percent to $39.3 million
compared to $38.0 million for the same period in 2004 due
primarily to a $2.2 million increase related to a new
disposal contract partially offset by a decrease in event and
purchase order revenues from disposal services. Our Engineering,
Facilities, and Development revenues for the year ended
December 31, 2005, increased approximately
$14.8 million to $32.1 million compared to
$17.3 million in 2004 due primarily to a $11.9 million
increase in construction revenues on a new dryer facility in
Honolulu, and a $4.1 million increase in revenues on the
Sacramento dryer facility that commenced operations in December
2004, partially offset by the transfer of the Pinellas dryer
facility operations to the Residuals Management Operations
segment.
Gross profit for the year ended December 31, 2005, was
approximately $62.2 million compared to approximately
$67.8 million for the year ended December 31, 2004, a
decrease of $5.6 million or 8.3 percent. Gross profit
as a percentage of revenue decreased to 18.4 percent in
2005 from 20.8 percent in 2004. This decrease in gross
profit and gross profit margin is a result of revenue mix
changes associated with an increase in low margin construction
revenue and the decrease in higher margin contract (including
the $7.5 million decrease in revenue on the long-term
cleanout contract that had higher than normal margins) and event
revenue, along with a $3.6 million increase in the cost of
utilities for certain facilities and a $1.6 million
increase in depreciation, partially offset by a decrease in
facility repair and maintenance costs and a reduction in
insurance expense due to lower claims activity.
Selling, general and administrative expenses for the year ended
December 31, 2005, were approximately $24.7 million
compared to approximately $24.3 million for the year ended
December 31, 2004. Selling, general and administrative
expenses as a percentage of revenues were 7.3 percent for
the year ended December 31, 2005, a slight decrease from
the same period of 2004. The decrease relates primarily to
favorable net reserve adjustments of $1.0 million, offset
by an increase in costs to implement section 404 of the
Sarbanes Oxley Act totaling $0.7 million and
$0.3 million of compensation expense for grants of
restricted stock to certain key employees pursuant to the
terms of a new incentive compensation plan approved in
connection with the Recapitalization that results in grants of
shares of our common stock at dividend payments dates (See
Note 1).
Transaction costs incurred in connection with the
Recapitalization consisted of $1.5 million in legal,
accounting and underwriting fees.
Stock option redemptions and transaction bonuses included
$1.3 million of cash paid for transaction bonuses and
$5.5 million for stock options redeemed for certain of our
key employees.
Gain on the sale of assets of $2.7 million was
$1.8 million higher than in 2004, due primarily to planned
sales of certain real estate.
As a result of the foregoing, income from operations for the
year ended December 31, 2005 was approximately
$31.6 million compared to approximately $43.9 million
in the same period in 2004. Our Residuals Management Operations
income from operations for the year ended December 31,2005, totaled approximately $48.2 million compared to
$55.9 million for 2004 due primarily to the expected
decreases in event and contract revenues (including the decrease
in the long-term cleanout contract revenue) described above
along with a $1.6 million increase in depreciation expense
and the $3.6 million increase in facility utility costs,
partially offset by a decrease in facility repair and
maintenance costs, a reduction in insurance expense due to lower
claims activity and $1.8 million increase in gains on asset
sales. Our Rail Transportation income from operations decreased
from $5.1 million in 2004 to $4.2 million in 2005 due
primarily to an increase in rail transportation costs and excess
equipment capacity. Our Engineering, Facilities, and Development
income from operations increased from a loss of approximately
$1.6 million in 2004 to income of approximately
$0.6 million in 2005 due primarily to margin from
design/build construction revenue generated on the Honolulu
facility and the first year of operations of the Sacramento
dryer facility revenue and other revenue changes described above
and related margins.
Other expense, net, was approximately $41.6 million for the
year ended December 31, 2005, compared to approximately
$22.3 million for the year ended December 31, 2004,
representing an increase in other expense of approximately
$19.3 million, due primarily to the $19.5 million of
debt extinguishment costs associated with the Recapitalization.
For the year ended December 31, 2005, we recorded a benefit
for income taxes of approximately $0.3 million compared to
a provision of $8.6 million for the year ended
December 31, 2004. Our effective tax rate was approximately
3 percent in 2005 compared to 40 percent in 2004. The
decrease in the effective tax rate is primarily related to a
20 percent decrease associated with the increase in the
expected statutory rates that will be applied when temporary
differences turn in future periods following a legal entity
restructuring in the fourth quarter of 2005, and a
10 percent decrease associated with a tax issue identified
during a tax audit related to net operating loss carryforwards
that has been fully reserved, along with permanent differences
for state taxes, meals and entertainment and similar items that
are not deductible for federal tax purposes and therefore reduce
the benefit recognized in loss periods. Our tax provision is
principally a deferred tax provision that will not significantly
impact cash flow because we have significant tax deductions in
excess of book deductions and net operating loss carryforwards
available to offset future taxable income.
Liquidity
and Capital Resources
Overview
During the past three years, our principal sources of funds were
cash generated from our operating activities. We use cash mainly
for capital expenditures, working capital, debt service and
dividends. In the future, we expect that we will use cash
principally to fund working capital, our debt service and
repayment obligations, capital expenditures and payment of our
dividends. In addition, we may use cash to pay potential earn
out payments resulting from prior acquisitions. We have
historically financed our acquisitions principally through the
issuance of equity and debt securities, our credit facility, and
funds provided by operating activities.
Cash Flows from Operating Activities — For the
year ended December 31, 2006, cash flows provided by
operating activities were approximately $44.6 million
compared to cash flow used in operating activities of
approximately $3.0 million for the same period in 2005, an
increase of approximately $47.6 million. The increase
primarily relates to a $27.2 million increase in net income
applicable to common stock primarily resulting from improved
operating results and the decrease in 2005 charges related to
the Recapitalization for transaction costs of $1.5 million,
transaction bonuses and stock option redemptions of
$6.8 million and debt extinguishment costs of
$19.5 million. In addition, we had a decrease in cash
required by working capital of $22.5 million, due to
$14.7 million of cash generated from increases in accounts
payables, $12.6 million of cash generated from changes in
cost and estimated earnings in excess of billings due to
substantial completion and billing of several projects,
$4.9 million of cash generated from changes in accrued
interest related to timing of interest payments, partially
offset by $8.6 million of cash used related to prepaids and
other current assets and a $1.2 million decrease of cash
used related to accounts receivable. The improvement in payables
primarily relates to a significant use of payables in the prior
year following the Recapitalization.
For the year ended December 31, 2005, cash flows used by
operating activities was approximately $3.0 million
compared to approximately $33.4 million provided by
operating activities for the same period in 2004, a decrease of
approximately $36.4 million, or 109 percent. The
decrease primarily relates to the net loss applicable to common
stock of $19.2 million (primarily resulting from
$27.8 million of charges related to the Recapitalization
including transaction costs of $1.5 million, transaction
bonuses and stock option redemptions of $6.8 million and
debt extinguishment costs of $19.5 million) compared to net
income of $4.1 million in the same period in 2004. In
addition, we had an increase in the use of working capital of
$11.2 million. The increase in working capital relates
primarily to a $5.4 million decrease in trade payables
between periods, a $3.1 million decrease in interest
payable due to the repayment of debt as part of the
Recapitalization, a $2.5 million increase in trade
receivables, a $1.6 million increase in costs and estimated
earnings in excess of billings, a $2.3 million decrease in
benefits accruals relating to the timing of cutoff of payroll
between periods and lower bonus accruals, and other decreases in
deferred revenues, legal and insurance reserves and other
liabilities.
Under the percentage of completion method of accounting, we
recognize revenue based on the percentage of costs incurred to
date to total estimated costs expected to be incurred on the
project multiplied by the contract price. Cost and estimated
earnings in excess of billings represents the amount of revenue
recognized on these projects in excess of what has been billed
to date as provided in the underlying contract. Costs and
estimated earnings in excess of billings totaled
$8.4 million at December 31, 2006, of which
approximately $5.7 million will not be billable in fiscal
2007 and $14.4 million at December 31, 2005, of which
approximately $3.8 million was not billable in fiscal 2006
under the terms of the related contract and has therefore been
included in non-current assets. Costs incurred on these
contracts are expected to be covered by billings and related
cash receipts in 2007 and are therefore not expected to
significantly impact our liquidity in 2007. There have not been
any significant changes to the scope of the work or the payment
terms of these contracts and there are no payment related
disputes on these contracts. The increase in costs in excess of
billings is believed to be fully collectable and thus no
additional increase to allowance for doubtful accounts has been
deemed necessary.
Cash Flows from Investing Activities — For the
year ended December 31, 2006, cash flows used by investing
activities were approximately $45.4 million compared to
approximately $17.1 million for the same period in 2005.
This increase is due primarily to a $27.8 million increase
in capital expenditures including new facilities. We expended
$40.6 million in 2006 on new facility construction
projects, compared to $8.3 million in 2005. Such increases
in new facility spending were partially offset by spending
decreases on other capital projects.
For the year ended December 31, 2005, cash flows used by
investing activities increased to approximately
$17.1 million from approximately $13.5 million for the
same period in 2004, an increase of approximately
$3.6 million. This increase is due primarily to a
$5.2 million increase in capital expenditures partially
offset by a $3.2 million increase in proceeds from asset
sales and a $2.6 million increase in the use of cash
restricted for capital projects. The increase in capital
expenditures relates to $8.3 million of capital spent
(excluding a project funded from restricted cash) on new
facility projects compared to $2.7 million spent in the
same period last year, and a $1.4 million increase in other
capital expenditures.
Cash Flows from Financing Activities — For the
year ended December 31, 2006, cash flows used in financing
activities were approximately $17.3 million compared to
cash flows provided of approximately $38.3 million for the
same period in 2005, a decrease of approximately
$55.6 million. The decrease primarily relates to a decrease
in proceeds from equity offerings from $37.6 million in
2005 to $15.9 million in 2006, an increase in cash dividend
payments to $29.2 million in 2006 compared to
$14.5 million in 2005, and other changes in debt and debt
issuance costs (including the repayment of debt and debt
issuance costs and the refinancing of debt related to the
Recapitalization in 2005 summarized in Note 1), as well as
a $3.6 million decrease in proceeds received from the
exercise of options.
For the year ended December 31, 2005, cash flows provided
by financing activities were approximately $38.3 million
compared to cash flows used of approximately $19.8 million
for the same period in 2004, an increase of approximately
$58.1 million. The increase primarily relates to proceeds
of $37.6 million received from the equity offering (See
Note 1), $4.2 million of proceeds received from the
exercise of stock options in 2005, proceeds from our new senior
secured credit facility net of the repayment of debt and debt
issuance costs related to the Recapitalization, less
$14.5 million of dividends paid in 2005, compared to
$21.3 million of net payments on debt in 2004.
Capital
Expenditure Requirements
Capital expenditures for the year ended December 31, 2006
totaled approximately $47.7 million (which included
approximately $40.6 million for new facilities) compared to
approximately $21.5 million (which included
$10.0 million for new facilities) in the same period of
2005. Our ongoing capital expenditure program consists of
expenditures for replacement equipment, betterments, and growth.
Debt
Service Requirements
Senior
Credit Facility
On June 21, 2005, we executed our Senior Credit Facility
with a syndicate of financial institutions, including affiliates
of Banc of America Securities LLC, Lehman Brothers Inc. and CIBC
World Markets Corp. A portion of the proceeds received from the
Senior Credit Facility were used to repay our $150 million
amended and restated Senior Credit Agreement, entered into on
May 8, 2002 by and among us, Bank of America, N.A. and
certain other lenders and to tender for all of our
$150 million of outstanding
91/2% senior
subordinated notes due April 1, 2009 (the
“Notes”).
The loan commitments under the Senior Credit Facility are as
follows:
(i) Revolving Loan (“Revolver”) up to
$95.0 million outstanding at anytime;
(ii) Term B Loans (which, once repaid, may not be
reborrowed) of $210.0 million including $30.0 million
that was borrowed in December 2005; and
(iii) Letters of Credit up to $50 million as a subset
of the Revolver. At December 31, 2006, we had approximately
$38.4 million of letters of credit outstanding.
The Revolver has a five-year maturity and the term loan has a
seven-year maturity. The Senior Credit Facility is secured by
first priority security interests in substantially all of our
assets and those of our subsidiaries (other than assets securing
nonrecourse debt) and expires on December 31, 2012. There
is no amortization of the term loan. The term loan bears
interest at LIBOR or prime rate plus a margin (2.25 percent
for Eurodollar loans, and 1.25 percent for base rate
loans), and the Revolver bears interest at LIBOR or prime rate
plus a margin based on a rate schedule (currently
2.75 percent for Eurodollar loans, and 1.75 percent
for base rate loans). As of December 31, 2006, these rates
total approximately:
Eurodollar
Base Rate
Revolver
8.10
%
10.00
%
Term
7.63
%
9.50
%
As of December 31, 2006, we had $5.2 million borrowed
on the Revolver.
The Senior Credit Facility allows 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.
The proceeds of the $30.0 million term loan drawn in
December 2005 were used to partially fund new facility
construction costs in 2006. The development of these new
facilities is consistent with our strategy to pursue new
facility opportunities that provide long-term, highly
predictable cash flows. These facilities include a composting
facility in Kern County, California, and an incineration
facility upgrade in Woonsocket, Rhode Island.
The Senior Credit Facility 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 Facility. These mandatory repayment
provisions may also reduce the available commitment. The Senior
Credit Facility contains standard covenants including compliance
with laws, limitations on capital expenditures, restrictions on
dividend payments, limitations on mergers and compliance with
financial covenants. We were in compliance with those covenants
as of December 31, 2006. As of December 31, 2006, we
had approximately $51.4 million of unused borrowings under
the Senior Credit Facility.
On March 6, 2006, we amended our Senior Credit Facility to,
among other things, increase the maximum amount of debt
permitted under the leverage ratio and to decrease the minimum
amount of interest coverage required under the interest coverage
ratio.
Senior
Subordinated Notes
In April 2002, we issued the Notes, which were unsecured senior
indebtedness and were guaranteed by all of our existing and
future domestic subsidiaries, other than subsidiaries treated as
unrestricted subsidiaries (“Guarantors”). As of
December 31, 2004, 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. and South Kern Industrial
Center, LLC, were Guarantors of the Notes. On June 21,2005, the Notes were repurchased with the proceeds of the Senior
Credit Facility.
Other
Debt
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 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 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. 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. (“Bio Gro”)
in 2000. Maryland Project Revenue Bonds in the aggregate amount
of approximately $22.8 million have already been repaid.
The remaining Maryland Project Revenue Bonds bear interest at
annual rates between 6.30 percent and 6.45 percent and
mature on dates between December 1, 2007, and
December 1, 2016.
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., one of our wholly owned subsidiaries,
pursuant to a loan agreement dated December 1, 2002. The
purpose of the loan was to finance the design, permitting,
construction of a biosolids dewatering and heat
drying/pelletizing facility for the Sacramento Regional County
Sanitation District. Sacramento Bonds in the aggregate amount of
approximately $1.2 million have already been repaid. The
remaining Sacramento Bonds bear interest at annual rates between
4.375 percent and 5.50 percent and mature on dates
between December 1, 2007, and December 1, 2024. The
Sacramento facility commenced commercial operations in December
2004.
In connection with previous acquisitions, we have
$2.5 million in notes payable with certain former owners
which includes payments for contingent consideration. The notes
payable are due over three remaining years in installments with
interest payable at annual rates ranging from five percent to
eight percent.
At December 31, 2006, future minimum principal payments of
long-term debt, nonrecourse project revenue bonds (See
Note 5), capital lease obligations (see Note 6),
estimated interest expense on debt, operating lease obligations
and purchase commitments are as follows (in thousands):
Nonrecourse
Capital
Long-Term
Project
Lease
Estimated
Operating
Purchase
Year Ended December 31,
Debt
Revenue Bonds
Obligations
Interest
Leases
Commitments
Total
2007
$
1,465
$
3,710
$
4,708
$
22,131
$
11,076
$
4,078
$
47,168
2008
1,072
3,935
5,476
21,412
10,021
2,993
44,909
2009
27
4,165
2,331
20,922
8,235
2,993
38,673
2010
30
4,420
1,268
19,440
6,353
2,993
34,504
2011
5,232
4,685
1,123
19,087
4,871
—
34,998
2012-2016
210,151
23,000
—
23,303
4,946
—
261,400
2017-2021
—
5,875
—
2,671
238
—
8,784
Thereafter
—
6,070
—
771
1,417
—
8,258
Total
$
217,977
$
55,860
$
14,906
$
129,737
$
47,157
$
13,057
$
478,694
Interest expense is estimated because certain of our debt has
variable interest rates. For purposes of this estimate, variable
interest rates as of December 31, 2006 were utilized.
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 ranging from 4.9 percent to
9.34 percent. The net book value of the equipment related
to these capital leases totaled approximately $18.3 million
as of December 31, 2006. 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
$0.2 million as of December 31, 2006 and is included
in current liabilities.
We believe we will have sufficient cash generated by our
operations and available through our Senior 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
Senior Credit Facility and payments on the Maryland Project
Revenue Bonds and the Sacramento 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 Senior Credit Facility in an amount
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 Senior Credit Facility, on commercially reasonable
terms or at all.
Our board of directors adopted a dividend policy, effective upon
the closing of the Recapitalization in 2005, pursuant to which
we paid quarterly dividends of $0.10 per share which
totaled $29.2 million in 2006. We expect to pay quarterly
dividends at an annual rate of approximately $0.40 per
share, but only if and to the extent dividends are declared by
our board of directors and permitted by applicable law and by
the terms of our Senior Credit Facility (See Note 4).
Dividend payments are not guaranteed and our board of directors
may decide, in its absolute discretion, not to pay dividends.
Dividends on our common stock are not cumulative. We declared a
quarterly dividend of $0.10 per share in February 2007.
Series D
Redeemable Preferred Stock
We have authorized 32,000 shares of Series D Preferred
Stock, par value $.002 per share, and previously had
outstanding 25,033.601 shares of the Series D
Preferred Stock, which was held by GTCR Fund VII, L.P. and
its
affiliates, and were 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 was $2.50 per share
provided that in order to prevent dilution, the conversion price
could be adjusted. The Series D Preferred Stock was senior
to our common stock or any other of our equity securities. The
liquidation value of each share of Series D Preferred Stock
was $1,000 per share. Dividends on each share of
Series D Preferred Stock accrued daily at the rate of
8 percent per annum on the aggregate liquidation value.
Upon conversion of the Series D Preferred Stock by the
holders, the holders could have elected to receive the accrued
and unpaid dividends in shares of our common stock at the
conversion price. The Series D Preferred Stock was entitled
to one vote per share. Shares of Series D Preferred Stock
were 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. On June 21, 2005, holders of
our preferred stock converted all of their preferred shares into
shares of our existing common stock.
Series E
Redeemable Preferred Stock
We have authorized 55,000 shares of Series E Preferred
Stock, par value $.002 per share, and previously had
outstanding 37,497.183 shares of Series E Preferred
Stock held by GTCR Fund VII, L.P. and 7,261.504 shares
held by certain affiliates of The TCW Group, Inc. The
Series E Preferred Stock was 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
was $2.50 per share provided that in order to prevent
dilution, the conversion price could be adjusted. The
Series E Preferred Stock was senior to our common stock and
any other of our equity securities. The liquidation value of
each share of Series E Preferred Stock was $1,000 per
share. Dividends on each share of Series E Preferred Stock
accrued daily at the rate of eight percent per annum on the
aggregate liquidation value. Upon conversion of the
Series E Preferred Stock by the holders, the holders could
have elected to receive the accrued and unpaid dividends in
shares of our common stock at the conversion price. The
Series E Preferred Stock was entitled to one vote per
share. Shares of Series E Preferred Stock were 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. On June 21, 2005, holders of our preferred stock
converted all of their preferred shares into shares of our
existing common stock.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements.” This statement establishes a framework for
measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The provisions of
SFAS No. 157 should be applied prospectively as of the
beginning of the fiscal year in which SFAS No. 157 is
initially applied, except in limited circumstances. We expect to
adopt SFAS No. 157 beginning January 1, 2008. We
are currently evaluating the impact that this interpretation may
have on our consolidated financial statements.
In September 2006, the SEC released Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB No. 108”),
which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC
staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. The provisions
of SAB No. 108 are effective for us beginning in the
first quarter of 2007. We do not expect any impact to our
consolidated financial statements upon adoption of
SAB No. 108.
In June 2006, FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”, an interpretation of FASB
Statement 109 Accounting for Income Taxes, was issued
(“FIN No. 48”). FIN No. 48
describes accounting for uncertainty in income taxes, and
includes a recognition threshold and measurement attribute for
recognizing the effect of a tax position taken or expected to be
taken in a tax return. FIN No. 48 is effective for
fiscal years ending
after December 15, 2006. We adopted FIN No. 48 on
January 1, 2007, and will not have a material effect on our
financial condition, results of operations, or cash flows.
In December 2004, SFAS No. 123 “Accounting for
Stock-Based Compensation” was revised
(“SFAS No. 123R”). SFAS No. 123R
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions and requires that companies record compensation
expense for employee stock option awards.
SFAS No. 123R is effective for annual periods
beginning after June 15, 2005. We adopted
SFAS No. 123R on January 1, 2006 using the
modified prospective method. The impact of adopting
SFAS No. 123R resulted in annual expense in 2006 of
approximately $2.7 million.
In March 2005, the FASB issued Interpretation No. 47,
“Accounting for Conditional Asset Retirement
Obligations — An interpretation of FASB Statement
No. 143” (“FIN No. 47”).
FIN No. 47 clarifies the term conditional asset
retirement obligation as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations”, and
clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 was effective for the year
ended December 31, 2005, but did not have a material effect
on our financial condition, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial
Instruments — an amendment of FASB Statements
No. 133 and 140”. SFAS No. 155 amends
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, and
SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities”. This Statement also resolves issues addressed
in SFAS No. 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interests
in Securitized Financial Assets.” SFAS No. 155
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation and clarifies which interest-only
strips and principal-only strips are not subject to the
requirements of SFAS No. 133. SFAS No. 140
is amended to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument. SFAS No. 155
is effective for all financial instruments acquired or issued
during fiscal years beginning after September 15, 2006. We
do not expect this statement to have a material impact on our
consolidated financial statements.
Critical
Accounting Estimates and Assumptions
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the
reported amounts of assets, 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 our significant
estimates and assumptions made in preparation of our financial
statements that deal with the greatest amount of uncertainty:
Allowance for Doubtful Accounts — We estimate
losses for uncollectible accounts receivables based on the aging
of the accounts receivable and the evaluation and the likelihood
of success in collecting the receivable. Accounts receivables
are written off periodically during the year as they are deemed
uncollectible when collection efforts have been unsuccessful.
The allowance for doubtful accounts at December 31, 2006
and 2005 was approximately $1.0 million and
$1.1 million, respectively and is recorded as a reduction
of accounts receivables.
Loss Contracts — We evaluate our 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 December 31, 2006.
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.
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 our estimate of the undiscounted future cash
flows expected to result from the use and eventual disposition
of the asset (group), excluding interest charges. We did not
have any asset impairments under the provisions of
SFAS No. 144 as of December 31, 2006.
We regularly incur costs to develop potential projects or
facilities and procure contracts for the design, permitting,
construction and operations of facilities. We recorded
$46.1 million in property and long-term assets related to
these activities at December 31, 2006, compared to
$12.3 million at December 31, 2005 (approximately
$44.2 million and $10.4 million are classified as
construction in progress as of December 31, 2006 and 2005,
respectively). The increase at December 31, 2006 is
primarily a result of the construction on the composting
facility in Kern County, California (which began operations in
January 2007) and an incinerator facility upgrade in
Woonsocket, Rhode Island. As required under current accounting
standards, we routinely review the status of each of these
projects to determine if these costs are realizable.
Goodwill — Goodwill attributable to our
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, we test for impairment
annually at year end unless factors otherwise indicate that
impairment may have occurred. We did not have any impairments
under the provisions of SFAS No. 142 as of
December 31, 2006.
Purchase Accounting — We estimate 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 — We assume the deductibility of
certain costs in our income tax filings and estimate 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 become deductible. We consider 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 our
estimates, we may not realize deferred tax assets to the extent
we have estimated.
As of December 31, 2006, we had generated net operating
loss (“NOL”) carryforwards of approximately
$97.9 million available to reduce future income taxes.
These carryforwards begin to expire in 2008. A change in
ownership, as defined by federal income tax regulations, could
significantly limit our ability to utilize our carryforwards.
Accordingly, our ability to utilize our NOLs to reduce future
taxable income and tax liabilities may be limited. Additionally,
because federal tax laws limit the time during which these
carryforwards may be applied against future taxes, we may not be
able to take full advantage of these attributes for federal
income tax purposes. We estimate that our effective tax rate in
2007 will approximate 42 percent of pre-tax income.
Substantially all of our tax provision over the next several
years is expected to be deferred in nature due to significant
tax deductions in excess of book deductions for goodwill and
depreciation.
Legal and Contingency Accruals — We estimate
and accrue the amount of probable exposure we may have with
respect to litigation, claims and assessments. These estimates
are based on management’s assessment of the facts and the
probabilities of the ultimate resolution of the litigation.
Derivatives — We have entered into various
interest rate and natural gas derivatives to manage our exposure
to changes in interest rates and natural gas prices. We estimate
the fair value of these derivatives using market data,
information provided by the counterparties to these arrangements
and other information, as necessary.
Self-Insurance Reserves — We are substantially
self-insured for workers’ compensation, employers’
liability, auto liability, general liability and employee group
health claims in view of the relatively high per-incident
deductibles we absorb under our 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.
Actual results could differ materially from the estimates and
assumptions that we use in the preparation of our financial
statements.
Off-Balance Sheet Arrangements — We do not have
any material transactions that meet the definition of an
off-balance sheet arrangement, other than operating leases.
We utilize financial instruments, which inherently have some
degree of market risk due to interest rate fluctuations.
Management is actively involved in monitoring exposure to market
risk and continues to develop and utilize appropriate risk
management techniques. We are not exposed to any other
significant market risks, including commodity price risk,
foreign currency exchange risk or interest rate risks from the
use of derivative financial instruments. Management does not
currently use derivative financial instruments for trading or to
speculate on changes in interest rates or commodity prices.
Derivatives
and Hedging Activities
Effective October 6, 2006, we entered into a interest rate
corridor on a notional amount of $73.5 million whereby we
will receive the difference between LIBOR and 5.5 percent
if LIBOR is between 5.5 and 6.0 percent. We paid $129,000
to execute this agreement. This agreement expires May 2009. We
chose not to designate the arrangement as a hedge. Accordingly,
changes in its fair value are recorded in Other Expense
(Income), net. At December 31, 2006, this corridor has a
fair market value representing an asset of approximately
$0.1 million; accordingly, approximately $23,000 has been
recorded in Other Expense (Income), net.
Effective June 26, 2006, we entered into a five year
natural gas swap on a monthly settlement volume of 10,416
mmbtu’s, whereby each month beginning January 2007, we
receive the NYMEX price for 10,416 mmbtu’s and pay $8.41
for the 10,416 mmbtu’s. This swap is considered to be a
cash flow hedge and accordingly the fair value adjustments will
be recorded to Accumulated Other Comprehensive Income. The
aggregate liability for the fair value of this agreement was
approximately $0.5 million at December 31, 2006.
Approximately, $0.4 million, net of tax, has been charged
to Accumulated Other Comprehensive Income for the year ended
December 31, 2006 for this agreement. This swap expires on
December 2011.
Also effective June 26, 2006, we entered into a five year
three way collar on a monthly settlement volume of 31,250
mmbtu’s, whereby each month beginning January 2007, we will
receive the NYMEX price and pay the NYMEX price unless the NYMEX
price settles below $6.17 per mmbtu or above $8.00 per
mmbtu. If the NYMEX price settles below $6.17 per mmbtu, we
will pay the difference between the NYMEX price and
$6.17 per mmbtu. If the NYMEX price settles above $8.00 per
mmbtu then we will receive the difference between the NYMEX
price and $8.00 up to $10.00 per mmbtu. We chose not to
designate the arrangement as a hedge. Accordingly, changes in
its fair value are recorded in Other Expense (Income), net. At
December 31, 2006, this collar has a fair market value
representing a liability of approximately $0.4 million;
accordingly, approximately $0.4 million has been recorded
in Other Expense (Income), net. This collar expires December 2011.
Effective January 31, 2006, we entered into an interest
rate cap agreement on a notional amount of $124.0 million
whereby we receive three month LIBOR and pay three month LIBOR
unless three month LIBOR settles above 5 percent, in such
event we would pay 5 percent. We paid $174,000 to execute
this cap. We chose not to designate this arrangement as a hedge.
The fair value of the swap was approximately $0.2 million
at December 31, 2006; accordingly, the change in the fair
value totaling approximately $49,000 has been recorded to Other
Expense (Income), net. This agreement expires May 2007.
Effective July 1, 2005, we entered into two interest rate
agreements. The first is an interest rate collar agreement on a
notional amount of $86.5 million, whereby we will receive
three month LIBOR and pay three month LIBOR unless three month
LIBOR settles below 3.52 percent or above
4.50 percent, in either such event we would pay
3.52 percent or 4.50 percent, as applicable. We chose
not to designate this arrangement as a hedge. Accordingly,
changes in its fair value are recorded in Other Expense
(Income), net. The change in the fair value of approximately
$0.2 million has been recorded in Other Expense (Income),
net for the year ended December 31, 2006. This swap expired
November 2006.
Also effective July 1, 2005, we entered into an interest
rate cap agreement on a notional amount of $73.5 million
whereby we will receive three month LIBOR and pay three month
LIBOR unless three month LIBOR settles above 6 percent in
which case we would pay 6 percent. We paid $220,000 to
execute this cap. We chose not to designate this arrangement as
a hedge. Accordingly, changes in its fair value are recorded in
Other Expense (Income), net. At December 31, 2006, this cap
has a fair market value representing an asset of approximately
$0.1 million; accordingly, the change in the fair value of
approximately $0.2 million has been recorded in Other
Expense (Income), net.
This cap expires May 2009.
During the second quarter of 2005, we entered into three forward
starting fixed rate swap agreements that were effective
November 13, 2006, and mature in May 2010. The notional
amount for each fixed rate swap is $28 million, and the
fixed rates of interest are 4.69 percent,
4.54 percent, and 4.21 percent. These swaps are
considered to be cash flow hedges and accordingly the fair value
adjustments will be recorded to Accumulated Other Comprehensive
Income and the cash settlements will be recorded to Interest
Expense. The aggregate asset for the fair value of these
agreements was approximately $1.3 million at
December 31, 2006. Approximately $0.4 million, net of
tax, has been included in Accumulated Other Comprehensive Income
as of December 31, 2006 and approximately $0.1 million
has been recorded as a reduction to Interest Expense as of
December 31, 2006.
We 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, we entered into a
floating-to-fixed
interest rate swap agreement that substantially offsets market
value changes in our reverse swap agreement (both of which will
expire in January 2008). The liability related to this reverse
swap agreement and the
floating-to-fixed
offset agreement totaling approximately $0.9 million is
reflected in Other Long-Term Liabilities at December 31,2006. The loss recognized during the year ended
December 31, 2006 related to the
floating-to-fixed
interest rate swap agreement was approximately
$0.3 million, while the gain recognized related to the
reverse swap agreement was approximately $0.3 million. The
amount of the ineffectiveness of the reverse swap agreement
charged to Other Expense (Income), net was approximately $54,000
for the year ended December 31, 2006.
Interest
Rate Risk
Total debt at December 31, 2006, included
$215.2 million in floating rate debt at a base interest
rate plus LIBOR. As a result, our interest cost in 2007 will
fluctuate based on short-term interest rates. The impact on
annual cash flow of a 10 percent change in the floating
rate (i.e. LIBOR) would be approximately $0.6 million.
We have audited management’s assessment, included in
Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A, that Synagro
Technologies, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Synagro Technologies,
Inc. management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness
of the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Synagro
Technologies, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Synagro Technologies, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Synagro Technologies, Inc. as of
December 31, 2006, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the
year ended December 31, 2006 of Synagro Technologies, Inc.
and our report dated March 2, 2007 expressed an unqualified
opinion thereon.
We have audited the consolidated balance sheet of Synagro
Technologies, Inc. as of December 31, 2006, and the related
consolidated statements of operations, stockholders’equity
and cash flows for the year ended December 31, 2006. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Synagro Technologies, Inc. as of December 31,2006, and the results of its operations and its cash flows for
the year ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
management’s assessment, included in Management’s
Report on Internal Control over Financial Reporting appearing
under Item 9A, that Synagro Technologies, Inc. maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO
criteria) and our report dated March 2, 2007 expressed an
unqualified opinion thereon.
As discussed in Note 11 to the consolidated financial
statements, the Company adopted Statement of Accounting
Standards No. 123 (revised 2004), “Share-Based
Payment,” during the year ended December 31, 2006.
To the Board of Directors and Stockholders of Synagro
Technologies, Inc.:
In our opinion, the consolidated balance sheet as of
December 31, 2005 and the related consolidated statements
of income, stockholders’ equity and cash flows for each of
the two years in the period ended December 31, 2005 present
fairly, in all material respects, the financial position of
Synagro Technologies, Inc. and its subsidiaries at
December 31, 2005, and the results of their operations and
their cash flows for each of the two years in the period ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
NONCASH
INVESTING AND FINANCING ACTIVITIES RELATING
TO CONSOLIDATED STATEMENT OF CASH FLOWS
During 2004, dividends totaled approximately $8.8 million,
of which approximately $7.8 million represents the eight
percent dividend on the Company’s preferred stock that was
provided for with additional shares of preferred stock, and
approximately $1.0 million represents accretion and
amortization of issuance costs.
During 2004, the Company entered into a $4.0 million note
to purchase land and entered into capital lease agreements with
obligations of approximately $1.7 million to purchase
operating and transportation equipment.
During 2005, dividends on preferred shares totaled approximately
$9.6 million, of which approximately $3.9 million
represents the eight percent dividend on the Company’s
preferred stock that was provided for with additional shares of
preferred stock, approximately $4.9 million represents
accretion and $0.8 million represents amortization and
write off of issuance costs.
During 2005, the Company entered into capital lease agreements
with obligations of approximately $4.5 million to purchase
operating and transportation equipment.
During 2006, the Company entered into capital lease agreements
with obligations of approximately $3.4 million to purchase
operating and transportation equipment.
The accompanying notes are an integral part of these
consolidated financial statements.
(1) Business
and Summary of Significant Accounting Policies
Business
and Organization
Synagro Technologies, Inc., a Delaware corporation
(“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 and has
operations in 33 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. Our broad range of services include drying
and pelletization, composting, product marketing, incineration,
alkaline stabilization, land application, transportation,
regulatory compliance, dewatering, and facility cleanout
services.
2006
Secondary Equity Offering
On May 16, 2006, the Company completed a secondary equity
offering at $4.15 per share for 19,129,710 shares of
common stock, including 15,129,710 shares held by
stockholders for which the Company did not receive any proceeds
and 4,000,000 shares issued by the Company. The Company
received total net proceeds from the sale of the
4,000,000 shares, after underwriting discounts and
commissions and offering expenses, of approximately
$15.9 million. The Company used the net proceeds from the
offering for working capital and general corporate purposes.
2005
Recapitalization
On June 21, 2005, the Company executed a $305 million
senior credit agreement (See Note 4), repaid
$196.9 million of debt under its previously outstanding
senior credit agreement and
91/2% senior
subordinated notes due 2009, converted all outstanding shares of
preferred stock into 41,885,597 shares of common stock, and
completed a $160 million offering of 9,302,326 primary and
27,847,674 secondary shares of common stock at an offering price
of $4.30 per share. The credit agreement allows the Company
to pay dividends and also resulted in significant cash interest
savings when compared to the interest costs of the
Company’s previously outstanding senior and subordinated
debt. The credit agreement, debt repayment, preferred stock
conversion, and primary and secondary common stock offering
referenced in this paragraph, are collectively referred to
herein as the “Recapitalization”.
The Company incurred certain costs and write-offs relating to
the Recapitalization, including $1.5 million of transaction
costs and expenses, $5.5 million for stock option
redemptions, $1.3 million for transaction bonuses and
$19.5 million of debt extinguishment costs. The
$5.5 million charge for stock options redeemed relates to
3,043,000 options that were redeemed for $5.5 million of
cash. The Company also recognized as dividends $4.4 million
of previously unrecognized accretion on its preferred stock.
These costs, write-offs and accretion have been included in the
Company’s statements of operations for the year ended
December 31, 2005.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Synagro and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
Cash
Equivalents
The Company considers all investments with an original maturity
of three months or less when purchased to be cash equivalents.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Costs
and Estimated Earnings in Excess of Billings
The asset “Costs and estimated earnings in excess of
billings” represents revenues recognized in excess of
amounts billed under the terms of contracts accounted for under
the percentage of completion method of accounting. These amounts
are billable upon completion of contract performance milestones
or other specified conditions of the contracts.
Property,
Machinery and Equipment, net
Property, machinery and equipment are stated at cost less
accumulated depreciation. Depreciation is recorded using the
straight-line method over estimated useful lives of three to
thirty years, net of estimated salvage values. Leasehold
improvements are capitalized and amortized over the lesser of
the lease term or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense
when incurred. Expenditures for major renewals and betterments,
which extend the useful lives of existing equipment, are
capitalized and depreciated. Upon retirement or disposition of
property, machinery and equipment, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in income from operations
in the consolidated statements of operations.
Interest is capitalized on certain assets under construction.
Capitalized interest included in construction in process totaled
approximately $2.2 million, $0.1 million and
$2.1 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Goodwill
Goodwill represents the excess of aggregate purchase price paid
by the Company in acquisitions accounted for as purchases over
the fair value of the net identifiable assets acquired. 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 unless
factors otherwise indicate that an impairment may have occurred.
Self-Insurance
Liabilities
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.
Deferred
Financing Costs
Deferred financing costs, net of accumulated amortization at
December 31, 2006 and 2005, totaled approximately
$6.1 million and $7.0 million, respectively, and are
included in other assets. Deferred financing costs are amortized
to interest expense on a straight-line basis over the life of
the underlying instruments, which is not materially different
from the effective interest method.
Revenue
Recognition
Revenues generated from facilities operations and maintenance
contracts are recognized either when wastewater residuals enter
the facilities 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.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenues related to long-term fixed price projects are
recognized in accordance with
percentage-of-completion
accounting guidance. Percentage of completion is measured
principally by the percentage of costs incurred to date for each
contract to the estimated total costs for each contract at
completion. Due to uncertainties inherent in the estimation
process, it is reasonably possible that the estimated completion
costs will be revised in the near term. Such revisions to cost
and income are recognized in the periods in which the revisions
are determined.
The Company provides for losses in connection with its contracts
where an obligation exists to perform services and when it
becomes evident the projected contract costs exceed the related
revenues.
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 at December 31, 2006
and 2005 was approximately $1.0 million and
$1.1 million, respectively, and is recorded as a reduction
of accounts receivable.
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 December 31, 2006 and 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. The Company typically subcontracts
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.
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
did not have any asset impairments under the provisions of
SFAS No. 144 as of December 31, 2006.
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 $46.1 million in property and long-term assets
related to these activities at December 31, 2006, compared
to $12.3 million at December 31, 2005 (approximately
$44.2 million and $10.4 million are classified as
construction in progress as of December 31, 2006 and 2005,
respectively). The increase at December 31, 2006 is
primarily a result of the construction on the composting
facility in Kern County, California and an incinerator facility
upgrade in Woonsocket, Rhode Island. The Company routinely
reviews the status of each of these projects to determine if
these costs are realizable.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 unless factors otherwise
indicate that an impairment may have occurred. The Company did
not have any impairments under the provisions of
SFAS No. 142 as of December 31, 2006.
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 become 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.
As of December 31, 2006, the Company had generated net operating loss (“NOL”) carryforwards of
approximately $97.9 million available to reduce future income taxes. These carryforwards begin to
expire in 2008. A change in ownership, as defined by federal income tax regulations, could
significantly limit the Company’s ability to utilize its carryforwards. Accordingly, the Company’s
ability to utilize its NOLs to reduce future taxable income and tax liabilities may be limited.
Additionally, because federal tax laws limit the time during which these carryforwards may be
applied against future taxes, the Company may not be able to take full advantage of these
attributes for federal income tax purposes. The Company estimates that our effective tax rate in
2007 will approximate 42 percent of pre-tax income. Substantially all of the Company’s tax
provision over the next several years is expected to be deferred in nature due to significant tax
deductions in excess of book deductions for goodwill and depreciation.
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.
Derivatives — The Company has entered into
various interest rate and natural gas derivatives to manage its
exposure to changes in interest rates and natural gas prices.
The Company estimates the fair value of these derivatives using
market data, information provided by the counterparties to these
arrangements and other information, as necessary.
Self-Insurance Reserves — The Company is
substantially self-insured for workers’ compensation,
employers’ 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.
Actual results could differ materially from the estimates and
assumptions that the Company uses in the preparation of its
financial statements.
Off-Balance Sheet Arrangements — The Company does not have any material transactions that
meet the definition of an off-balance sheet arrangement, other than operating leases.
Concentration
of Credit Risk
The Company provides services to a broad range of geographical
regions. The Company’s credit risk primarily consists of
receivables from a variety of customers including state and
local agencies, municipalities and private industries. The
Company had one customer that accounted for approximately
16 percent of total revenue for the years ended
December 31, 2006, 2005 and 2004. No other customers
accounted for more than ten percent of revenues. Municipal
customers accounted for 88 percent of consolidated revenues
for the years ended December 31, 2006, 2005 and 2004.
Fair
Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate their fair
values because of the short-term nature of these instruments.
Management believes the carrying amounts of the current and
long-term debt approximate their fair value based on interest
rates for the same or similar debt offered to the Company having
the same or similar terms and maturities.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income
Taxes
The Company files a consolidated return for federal income tax
purposes. The Company accounts for income taxes in accordance
with SFAS No. 109, “Accounting for Income
Taxes.” This standard provides the method for determining
the appropriate asset and liability for deferred income taxes,
which are computed by applying applicable tax rates to temporary
differences. Therefore, expenses recorded for financial
statement purposes before they are deducted for income tax
purposes create temporary differences, which give rise to
deferred income tax assets. Expenses deductible for income tax
purposes before they are recognized in the financial statements
create temporary differences which give rise to deferred income
tax liabilities.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.” This statement establishes a framework
for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The provisions of SFAS No. 157 should be
applied prospectively as of the beginning of the fiscal year in
which SFAS No. 157 is initially applied, except in
limited circumstances. The Company expects to adopt
SFAS No. 157 beginning January 1, 2008. The
Company is currently evaluating the impact that this
interpretation may have on its consolidated financial statements.
In September 2006, the SEC released Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (SAB No. 108),
which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC
staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. The provisions
of SAB No. 108 are effective for the Company beginning
in the first quarter of 2007. The Company does not expect any
impact to its consolidated financial statements upon adoption of
SAB No. 108.
In June 2006, FASB Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes”, an
interpretation of FASB Statement 109 Accounting for Income
Taxes, was issued. FIN No. 48 describes accounting for
uncertainty in income taxes, and includes a recognition
threshold and measurement attribute for recognizing the effect
of a tax position taken or expected to be taken in a tax return.
FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN No. 48
on January 1, 2007, and will not have a material effect on
the Company’s financial condition, results of operations,
or cash flows.
In December 2004, SFAS No. 123 “Accounting for
Stock-Based Compensation” was revised
(“SFAS No. 123R”). SFAS No. 123R
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions and requires that companies record compensation
expense for employee stock option awards.
SFAS No. 123R is effective for annual periods
beginning after June 15, 2005. The Company adopted
SFAS No. 123R on January 1, 2006 using the
modified prospective method. See Note 11.
In March 2005, FASB Interpretation No. 47, “Accounting
for Conditional Asset Retirement Obligations — An
interpretation of FASB Statement No. 143”, was
issued. FIN No. 47 clarifies the term conditional
asset retirement obligation as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations”, and
clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 was effective for the year
ended December 31, 2005, but did not have a material effect
on the Company’s financial condition, results of operations
or cash flows.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial
Instruments — an amendment of FASB Statements
No. 133 and 140”. SFAS No. 155 amends
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, and
SFAS No. 140, “Accounting for Transfers and
Servicing of
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Financial Assets and Extinguishments of Liabilities”. This
Statement also resolves issues addressed in Statement
No. 133 Implementation Issue No. D1, “Application
of Statement 133 to Beneficial Interests in Securitized
Financial Assets.” SFAS No. 155 permits fair
value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require
bifurcation and clarifies which interest-only strips and
principal-only strips are not subject to the requirements of
SFAS No. 133. SFAS No. 140 is amended to
eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to
a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all
financial instruments acquired or issued during fiscal years
beginning after September 15, 2006. The Company does not
expect this statement to have a material impact on its
consolidated financial statements.
Reclassifications
Certain reclassifications have been made in prior period
financial statements to conform to current period presentation.
These reclassifications have not resulted in any changes to
previously reported net income for any periods. The Company has
reclassified prior year book overdrafts totaling
$1.7 million for the year ended December 31, 2004 in
the Statement of Cash Flows from an operating activity to a
financing activity to conform to the current year presentation.
(2) Property,
Machinery and Equipment
Property, machinery and equipment consist of the following:
Estimated
Useful
December 31,
Life in Years
2006
2005
(In thousands)
Land
N/A
$
5,469
$
5,469
Buildings and improvements
7-25
48,430
43,860
Machinery and equipment
3-30
260,342
250,259
Office furniture and equipment
3-10
8,332
7,739
Construction in process
—
46,722
14,011
369,295
321,338
Less: Accumulated depreciation
114,126
93,660
Property, machinery and equipment,
net
$
255,169
$
227,678
Depreciation expense for the years ended December 31, 2006,
2005 and 2004 was $23.1 million, $21.4 million and
$19.8 million, respectively.
(3) Detail
of Certain Balance Sheet Accounts
Activity of the Company’s allowance for doubtful accounts
consists of the following:
Costs and estimated earnings on
contracts in progress
$
59,693
$
51,709
Less — Billings to date
(51,302
)
(37,293
)
Costs and estimated earnings in
excess of billings on uncompleted contracts
$
8,391
$
14,416
Current assets
$
2,685
$
10,579
Non current assets
5,706
3,837
Total
$
8,391
$
14,416
Accounts payable includes approximately $1.1 and
$9.3 million at December 31, 2006 and
December 31, 2005, 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.
Prepaid and other current assets consist of the following:
The goodwill additions in 2006 and 2005 primarily represent the
recording of contingent consideration for previous acquisitions.
Such agreements may result in contingent consideration payments
through 2008.
On June 21, 2005, the Company closed a $305.0 million
senior secured credit facility (the “Senior Credit
Facility”) with a syndicate of financial institutions,
including affiliates of Banc of America Securities LLC, Lehman
Brothers Inc. and CIBC World Markets Corp. A portion of the
proceeds received from the Senior Credit Facility were used to
repay the Company’s $150 million amended and restated
Senior Credit Agreement, entered into on May 8, 2002 by and
among the Company, Bank of America, N.A. and certain other
lenders (the “Senior Credit Agreement”) and to tender
for all of its $150 million of outstanding
91/2
percent senior subordinated notes due April 1, 2009 (the
“Notes”).
The loan commitments under the Senior Credit Facility are as
follows:
(i) Revolving Loan (“Revolver”) up to
$95.0 million outstanding at anytime;
(ii) Term B Loans (which, once repaid, may not be
reborrowed) of $210.0 million, including $30.0 million
borrowed in December 2005; and
(iii) Letters of Credit up to $50.0 million as a
subset of the Revolver. At December 31, 2006, the Company
had approximately $38.4 million of letters of credit
outstanding.
The Revolver has a five-year maturity and the term loans have a
seven-year maturity. The Senior Credit Facility is secured by
first priority security interests in substantially all of the
Company’s assets and those of its subsidiaries (other than
assets securing nonrecourse debt) and expires on
December 31, 2012. There is no amortization of the term
loan. The term loan bears interest at LIBOR or prime rate plus a
margin (2.25 percent for Eurodollar loans, and
1.25 percent for base rate loans), and the Revolver bears
interest at LIBOR or prime rate plus a margin based on a rate
schedule (currently 2.75 percent for Eurodollar loans, and
1.75 percent for base rate loans). As of December 31,2006, these rates total approximately:
The Senior Credit Facility allows 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.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The proceeds of the $30.0 million term loan drawn in
December 2005 were used to partially fund new facility
construction costs in 2006. The development of these new
facilities is consistent with the Company’s strategy to
pursue new facility opportunities that provide long-term, highly
predictable cash flows. These facilities include a composting
facility in Kern County, California and an incineration facility
upgrade in Woonsocket, Rhode Island.
The Senior Credit Facility 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 Facility. These mandatory repayment
provisions may also reduce the available commitment. The Senior
Credit Facility 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 December 31, 2006. As of December 31,2006, the Company had approximately $51.4 million of unused
borrowings under the Senior Credit Facility.
On March 6, 2006, the Company amended its Senior Credit
Facility to, among other things, increase the maximum amount of
debt permitted under the leverage ratio and to decrease the
minimum amount of interest coverage required under the interest
coverage ratio.
Senior
Subordinated Notes
In April 2002, the Company issued the Notes. The Notes were
unsecured senior indebtedness and were guaranteed by all of the
Company’s existing and future domestic subsidiaries, other
than subsidiaries treated as unrestricted subsidiaries
(“Guarantors”). As of December 31, 2004, 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. On June 21, 2005, the Notes
were repurchased with the proceeds of the Senior Credit Facility.
Notes Payable
to Sellers of Acquired Businesses
In connection with previous acquisitions, the Company has
$2.5 million in notes payable with certain former owners,
which includes payments for contingent consideration. The notes
payable are due through December 31, 2008 in installments
with interest payable at annual rates ranging from five to eight
percent.
Future
Payments
At December 31, 2006, future minimum principal payments of
long-term debt, nonrecourse Project Revenue Bonds (see
Note 5) and Capital Lease Obligations (see
Note 6) are as follows (in thousands):
Maryland Energy Financing
Administration Limited Obligation Solid Waste Disposal Revenue
Bonds, 1996 series —
Term revenue bond due 2010 at
stated interest rate of 6.30%
$
13,425
$
16,295
Term revenue bond due 2016 at
stated interest rate of 6.45%
22,360
22,360
35,785
38,655
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 $261 and $285, respectively
19,814
19,790
Series 2002B —
Revenue bonds due 2006 at stated interest rate of 4.25%
—
610
19,814
20,400
Total nonrecourse project revenue
bonds
55,599
59,055
Less: Current maturities
(3,710
)
(3,480
)
Nonrecourse project revenue bonds,
net of current maturities
$
51,889
$
55,575
Amounts recorded in other assets
as restricted cash — debt service fund
$
7,067
$
7,304
Maryland
Project Revenue Bonds
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 the Company’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 $22.8 million have
already been repaid. The remaining Maryland Project Revenue
Bonds bear interest at annual rates between 6.30 percent
and 6.45 percent and mature on dates between
December 1, 2007, 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 any time upon the occurrence of certain
extraordinary conditions, as defined in the loan agreement.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 December 31, 2006, the Maryland Project Revenue Bonds
were collateralized by property, machinery and equipment with a
net book value of approximately $50.2 million and
restricted cash of approximately $6.1 million, of which
approximately $5.3 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 was to finance the design, permitting,
construction of a biosolids dewatering and heat
drying/pelletizing facility for the Sacramento Regional County
Sanitation District (“Sanitation District”).
Sacramento Bonds in the aggregate amount of approximately
$1.2 million have already been repaid. The remaining
Sacramento Bonds bear interest at annual rates between
4.375 percent and 5.50 percent and mature on dates
between December 1, 2007, and December 1, 2024. The
Sacramento facility has been constructed and 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
Sacramento 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 on or after
December 1, 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
Sacramento Bonds are paid.
At December 31, 2006, the Sacramento Bonds are partially
collateralized by restricted cash of approximately
$2.3 million, of which approximately $1.7 million is
in a debt service fund that was 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
Sacramento Bonds or the loan funded by the Sacramento Bonds.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Maryland Project Revenue Bonds and the Sacramento Bonds are
excluded from the financial covenant calculations required by
the Company’s Senior Credit Facility.
(6) Capital
Lease Obligations
The Company has entered into various capital lease transactions
to purchase transportation and operating equipment. The capital
leases have lease terms of three to six years with interest
rates ranging from 4.9 percent to 9.34 percent. The
net book value of the equipment related to capital leases
totaled approximately $18.3 million and $17.3 million
as of December 31, 2006 and 2005, respectively.
Future minimum lease payments, together with the present value
of the minimum lease payments, are as follows (in thousands):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Actual income tax provision differs from income tax provision
computed by applying the U.S. federal statutory corporate
rate of 35 percent to income before provision for income
taxes as follows:
State income taxes, net of benefit
for federal deduction
5.1
%
2.2
%
4.6
%
Other items, net
1.0
%
(2.8
)%
0.4
%
Change in valuation allowance
(0.1
)%
(0.2
)%
—
41.0
%
3.3
%
40.0
%
Deferred taxes for temporary differences are reported at the
statutory rates that are expected to be in effect when the
temporary differences reverse into taxable income in future
periods. The Company completed a legal entity restructuring in
the fourth quarter of 2005 which is expected to simplify federal
and state tax compliance requirements. As a result of the
restructuring, the Company increased its net deferred tax
liability for state statutory rates that are expected to be in
effect for future taxable income related to temporary
differences from 3.4 percent to 5.0 percent. The
Company also recorded a reserve for a tax contingency which
relates to a tax issue identified during a tax audit related to
deductions that are included in the Company’s net operating
loss carryforwards.
Significant components of the Company’s deferred tax assets
and liabilities for federal income taxes consist of the
following (in thousands):
Accruals not currently deductible
for tax purposes
2,921
2,373
Allowance for bad debts
392
455
Other
407
632
Total deferred tax assets
42,752
45,041
Valuation allowance for deferred
tax assets
(365
)
(374
)
Deferred tax liability —
Differences between book and tax
bases of fixed assets
49,261
49,682
Differences between book and tax
bases of goodwill
13,929
12,188
Other
1,557
—
Total deferred tax liabilities
64,747
61,870
Net deferred tax liability
$
22,360
$
17,203
As of December 31, 2006, the Company had net operating loss
(“NOL”) carryforwards of approximately
$97.9 million available to reduce future income taxes.
These carryforwards begin to expire in 2008. A change in
ownership, as defined by federal income tax regulations, could
significantly limit the Company’s ability to utilize its
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
carryforwards. Accordingly, the Company’s ability to
utilize its NOLs to reduce future taxable income and tax
liabilities may be limited for both federal and state purposes.
Additionally, because federal tax laws limit the time during
which these carryforwards may be applied against future taxes,
the Company may not be able to take full advantage of these
attributes for federal income tax purposes. The net deferred tax
liability is recorded in other long-term liabilities in the
accompanying consolidated balance sheet. Substantially all of
the Company’s tax provision over the next several years is
expected to be deferred in nature due to significant tax
deductions in excess of book deduction for goodwill and
depreciation.
(8) Derivatives
and Hedging Activities
Effective October 6, 2006, the Company entered into an
interest rate corridor agreement on a notional amount of
$73.5 million whereby the Company will receive the
difference between LIBOR and 5.5 percent if LIBOR is
between 5.5 and 6.0 percent. The Company paid $129,000 to
execute this agreement. This agreement expires May, 2009. The
Company chose not to designate this agreement as a hedge.
Accordingly, changes in its fair value are recorded in Other
Expense (Income), net. At December 31, 2006 this corridor
has a fair market value representing an asset of approximately
$0.1 million; accordingly, approximately $23,000 has been
recorded in Other Expense (Income), net.
Effective June 26, 2006, the Company entered into a five
year natural gas swap on a monthly settlement volume of 10,416
mmbtu’s, whereby each month beginning January 2007, the
Company receives the NYMEX price for 10,416 mmbtu’s and
pays $8.41 for the 10,416 mmbtu’s. This swap is considered
to be a cash flow hedge and accordingly the fair value
adjustments will be recorded to Accumulated Other Comprehensive
Income. The aggregate liability for the fair value of this
agreement was approximately $0.5 million at
December 31, 2006. Approximately, $0.4 million, net of
tax, has been charged to Accumulated Other Comprehensive Income
for the year ended December 31, 2006 for this agreement.
This swap expires December 2011.
Also effective June 26, 2006, the Company entered into a
five year three way collar on a monthly settlement volume of
31,250 mmbtu’s, whereby each month beginning January 2007,
the Company will receive the NYMEX price and pay the NYMEX price
unless the NYMEX price settles below $6.17 per mmbtu or
above $8.00 per mmbtu. If the NYMEX price settles below
$6.17 per mmbtu, the Company will pay the difference
between the NYMEX price and $6.17 per mmbtu. If the NYMEX
price settles above $8.00 per mmbtu then the Company will
receive the difference between the NYMEX price and $8.00 up to
$10.00 per mmbtu. The Company chose not to designate the
arrangement as a hedge. Accordingly, changes in its fair value
are recorded in Other Expense (Income), net. At
December 31, 2006 this collar has a fair market value
representing a liability of approximately $0.4 million;
accordingly, approximately $0.4 million has been recorded
in Other Expense (Income), net. This collar expires December
2011.
Effective January 31, 2006, the Company entered into an
interest rate cap agreement on a notional amount of
$124.0 million whereby it receives three month LIBOR and
pays three month LIBOR unless three month LIBOR settles above
5 percent, in such event it would pay 5 percent. The
Company paid $174,000 to execute this cap. The Company chose not
to designate this arrangement as a hedge. The fair value of the
swap representing an asset was approximately $0.2 million
at December 31, 2006; accordingly, the change in the fair
value totaling approximately $49,000 has been recorded to Other
Expense (Income), net. This agreement expires May 2007.
Effective July 1, 2005, the Company entered into two
interest rate agreements. The first is an interest rate collar
agreement on a notional amount of $86.5 million, whereby
the Company will receive three month LIBOR and pay three month
LIBOR unless three month LIBOR settles below 3.52 percent
or above 4.50 percent, in either such event the Company
would pay 3.52 percent or 4.50 percent, as applicable.
The Company chose not to designate this arrangement as a hedge.
Accordingly, changes in its fair value are recorded in Other
Expense (Income), net. The change in the fair value of
approximately $0.2 million has been recorded in Other
Expense (Income), net for the year ended December 31, 2006.
The swap expired November 2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Also effective July 1, 2005, the Company entered into an
interest rate cap agreement on a notional amount of
$73.5 million whereby the Company will receive three month
LIBOR and pay three month LIBOR unless three month LIBOR settles
above 6 percent, in which case the Company would pay
6 percent. The Company paid $220,000 to execute this cap.
The Company chose not to designate this arrangement as a hedge.
Accordingly, changes in its fair value are recorded in Other
Expense (Income), net. At December 31, 2006, this cap has a
fair market value representing an asset of approximately
$0.1 million; accordingly, the change in the fair value of
approximately $0.2 million has been recorded in Other
Expense (Income), net. This cap expires May 2009.
During the second quarter in 2005, the Company entered into
three forward starting fixed rate swap agreements that were
effective November 13, 2006, and mature in May 2010. The
notional amount for each fixed rate swap is $28 million,
and the fixed rates of interest are 4.69 percent,
4.54 percent, and 4.21 percent. These swaps are
considered to be cash flow hedges and accordingly the fair value
adjustments will be recorded to Accumulated Other Comprehensive
Income and the cash settlements will be recorded to Interest
Expense. The aggregate asset for the fair value of these
agreements was approximately $1.3 million at
December 31, 2006. Approximately $0.4 million, net of
tax, has been included in Accumulated Other Comprehensive Income
for the year ended December 31, 2006 and approximately
$0.1 million has been recorded as a reduction to Interest
Expense as of December 31, 2006.
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 (both
of which will expire in January 2008). The liability related to
this reverse swap agreement and the
floating-to-fixed
offset agreement totaling approximately $0.9 million is
reflected in Other Long-term Liabilities at December 31,2006. The loss recognized during the year ended
December 31, 2006 related to the
floating-to-fixed
interest rate swap agreement was approximately
$0.3 million, while the gain recognized related to the
reverse swap agreement was approximately $0.3 million. The
amount of the ineffectiveness of the reverse swap agreement
charged to Other Expense (Income), net was approximately $54,000
during the year ended December 31, 2006.
(9) Commitments
and Contingencies
Leases
The Company leases certain facilities and equipment for its
corporate and operations offices under noncancelable long-term
operating lease agreements. Rental expense was approximately
$14.7 million for 2006 and $12.5 million for 2005 and
2004. Minimum annual rental commitments under these leases are
as follows (in thousands):
A substantial portion of the Company’s revenue is derived
from services provided under contracts and written agreements
with the Company’s customers. Some of these contracts,
especially those contracts with large
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
municipalities (including its largest contract and at least four
of the Company’s top ten contracts), provide for
termination of the contract by the customer after giving
relatively short notice (in some cases as little as ten days).
In addition, these contracts contain liquidated damages clauses
which may or may not be enforceable in the case of early
termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and the
Company is not able to replace revenues from the terminated
contracts or receive liquidated damages pursuant to the terms of
the contract, the lost revenue could have a material and adverse
effect on the Company’s business, financial condition,
results of operations and cash flows.
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 in the aggregate as of December 31, 2006,
are adequate to provide for its exposures. The final resolution
of these exposures could be substantially different from the
amount recorded.
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
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 not performed 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
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 self-insured for losses up to deductible amounts
for worker’s compensation, employer’s liability, auto
liability, general liability and employee group health claims
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.
(10) Stockholders’
Equity
Preferred
Stock
The Company is authorized to issue up to 10,000,000 shares
of Preferred Stock, which may be issued in one or more series or
classes by the Board of Directors of the Company. Each such
series or class shall have such powers, preferences, rights and
restrictions as determined by resolution of the Board of
Directors. Series A Junior Participating Preferred Stock
will be issued upon exercise of the Stockholder Rights described
below.
Series D
Redeemable Preferred Stock
The Company has authorized 32,000 shares of Series D
Preferred Stock, par value $.002 per share, and previously
had outstanding a total of 25,033.601 shares of the
Series D Preferred Stock, which were held by GTCR
Fund VII, L.P. and its affiliates and were convertible by
the holders into a number of shares of the Company’s 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 was $2.50 per share provided that in order
to prevent dilution, the conversion price could be adjusted. The
Series D Preferred Stock was senior to the Company’s
common stock or any other of its equity securities. The
liquidation value of each share of Series D Preferred Stock
was $1,000 per share. Dividends on each share of
Series D Preferred Stock accrued daily at the rate of
8 percent per annum on the aggregate liquidation value and
could be paid in cash or accrued, at the Company’s option.
Upon conversion of the Series D Preferred Stock by the
holders, the holders could have elected to receive the accrued
and unpaid dividends in shares of the Company’s common
stock at the conversion price. The Series D Preferred Stock
was entitled to one vote per share. Shares of Series D
Preferred Stock were subject to mandatory redemption by the
Company on January 26, 2010, at a price per
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
share equal to the liquidation value plus accrued and unpaid
dividends. On June 21, 2005, holders of the Company’s
preferred stock converted all of their preferred shares into
shares of the Company’s existing common stock.
Series E
Redeemable Preferred Stock
The Company has authorized 55,000 shares of Series E
Preferred Stock, par value $.002 per share. GTCR
Fund VII, L.P. and its affiliates owned
37,497.183 shares of Series E Preferred Stock and
certain affiliates of The TCW Group, Inc. owned
7,261.504 shares. The Series E Preferred Stock was
convertible by the holders into a number of shares of the
Company’s 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 was $2.50 per share
provided that in order to prevent dilution, the conversion price
could be adjusted. The Series E Preferred Stock was senior
to the Company’s common stock and any other of its equity
securities. The liquidation value of each share of Series E
Preferred Stock was $1,000 per share. Dividends on each
share of Series E Preferred Stock accrued daily at the rate
of 8 percent per annum on the aggregate liquidation value
and could be paid in cash or accrued, at the Company’s
option. Upon conversion of the Series E Preferred Stock by
the holders, the holders could have elected to receive the
accrued and unpaid dividends in shares of the Company’s
common stock at the conversion price. The Series E
Preferred Stock was entitled to one vote per share. Shares of
Series E Preferred Stock were subject to mandatory
redemption by the Company on January 26, 2010, at a price
per share equal to the liquidation value plus accrued and unpaid
dividends. On June 21, 2005, holders of the Company’s
preferred stock converted all of their preferred shares into
shares of the Company’s existing common stock.
Earnings
Per 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. 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 outstanding determined using the
treasury stock method.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the net income (loss) and
weighted average shares to reconcile basic EPS and diluted EPS
for the fiscal years 2006, 2005, and 2004 (in thousands except
share and per share data):
Net income (loss) before preferred
stock dividends
$
8,003
$
(9,650
)
$
12,954
Preferred stock dividends
—
9,587
8,827
Net income (loss) applicable to
common stock
$
8,003
$
(19,237
)
$
4,127
Earnings (loss) per share:
Basic earnings (loss) per share
$
0.11
$
(0.40
)
$
0.21
Diluted earnings (loss) per share
$
0.10
$
(0.40
)
$
0.21
Weighted average shares
outstanding for basic earnings per share
75,763,943
47,725,820
19,777,041
Effect of dilutive stock options
931,491
—
—
Effect of dilutive restricted stock
27,237
—
—
Weighted average shares
outstanding for diluted earnings per share
76,722,671
47,725,820
19,777,041
Basic and diluted EPS are the same for 2005 and 2004 because
diluted EPS was less dilutive than basic EPS. Accordingly,
20,766,863 and 38,903,912 shares representing common stock
equivalents have been excluded from the diluted earnings per
share calculations for 2005 and 2004, respectively.
(11) Stock
Based Compensation
As of January 1, 2006, the Company adopted
SFAS No. 123R to account for stock based employee
compensation. SFAS No. 123R requires the Company to
record the cost of stock options and other equity-based
compensation in its income statement based upon the estimated
fair value of those awards. The Company elected to use the
modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock
options and other equity-based compensation beginning in the
first quarter of adoption. Accordingly, prior periods have not
been restated to reflect stock based compensation. For all
unvested options outstanding as of December 31, 2005, the
previously measured but unrecognized compensation expense, based
on the fair value at the original grant date, will be recognized
in the statement of operations over the remaining requisite
service period. For equity-based compensation granted subsequent
to January 1, 2006, compensation expense, based on the fair
value on the date of grant, will be recognized in the statement
of operations over the requisite service period.
Information related to stock based compensation is as follows:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Option Plans
At December 31, 2006, the Company had outstanding stock
options granted under the 2000 Stock Option Plan (the “2000
Plan”) and the Amended and Restated 1993 Stock Option Plan
(the “1993 Plan”) for officers, directors and key
employees of the Company (collectively, the “Option
Plans”).
At December 31, 2006 there were 7.7 million options
for shares of common stock reserved under the 2000 Plan for
future grants. Effective with the approval of the 2000 Plan, no
further grants have been made under the 1993 Plan. The exercise
price of options granted shall be at least 100 percent
(110 percent for 10 percent or greater stockholders)
of the fair value of the Company’s common stock on the date
of grant. Options must be granted within ten years from the date
of the Option Plan and become exercisable at such times as
determined by the Option Plan committee. Options are exercisable
for no longer than five years for certain ten percent or greater
stockholders and for no longer than ten years for others.
SFAS No. 123R requires tax benefits relating to excess
stock based compensation deductions over that recognized in
expense to be prospectively presented in the Company’s
statement of cash flows as financing cash inflows. However, in
cases where the Company has a NOL carryforward,
SFAS No. 123R states that no amount shall be recorded
until the deduction reduces income taxes payable on the basis
that cash tax savings have not occurred. Accordingly, for the
year ended December 31, 2006, the Company has not reported
any excess tax benefits from the settlement (i.e. exercise of
options) of stock based compensation as cash provided by
financing activities on its statement of cash flows.
The Company’s policy of meeting the requirements upon
exercise of stock options is to issue new shares.
2000
Plan
The fair value of each option award granted after
December 31, 2005, is estimated on the date of grant using
a Black-Scholes option valuation model. Expected volatilities
are based on the historical volatility of the Company’s
stock. The expected term of options granted is derived from the
simplified method referred to in SEC’s Staff Accounting
Bulletin No. 107, “Share-Based Payment”
(“SAB No. 107”) which represents the period
of time that options granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve at the
time of grant. For the year ended December 31, 2006, the
Company used the following information related to new option
grants.
The weighted average grant date fair value for the 553,750
options granted in 2006 was $1.11 per share. Options
outstanding at December 31, 2006, had a weighted average
remaining contractual life of 6.2 years and an intrinsic
value of $4.8 million. Options exercisable at
December 31, 2006, had a weighted average remaining
contractual life of 4.8 years and an intrinsic value of
$4.0 million.
Options outstanding at December 31, 2006, had a weighted
average remaining contractual life of 3.0 years and an
intrinsic value of $860. Options exercisable at
December 31, 2006, had a weighted average remaining
contractual life of 3.0 years and an intrinsic value of
$860.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other
Options
In addition to options available for issuance under the above
plans, the Company has other options outstanding to employees
and directors of the Company which were issued at exercise
prices equal to the fair market value at the grant date of the
options. The following table provides additional information
related to the other stock options:
Options outstanding at December 31, 2006, had a weighted
average remaining contractual life of 3.5 years and an
intrinsic value of $2.0 million. Options exercisable at
December 31, 2006, had a weighted average remaining
contractual life of 3.0 years and an intrinsic value of
$1.5 million.
The following table summarizes information about total stock
options outstanding as of December 31, 2006:
Options Outstanding
Options Exercisable
Weighted
Weighted
Average
Average
Remaining
Weighted
Remaining
Range of
Number
Contractual
Average
Number
Contractual Life
Weighted Average
Exercise Prices
Outstanding
Life (in Years)
Exercise Price
Exercisable
(in Years)
Exercise Price
$2.00 - 2.99
3,210,329
4.89
$
2.52
2,607,829
4.56
$
2.50
$3.00 - 3.99
571,511
2.42
$
3.49
504,845
1.49
$
3.43
$4.00 - 5.99
1,384,708
8.39
$
4.32
327,864
7.10
$
4.45
$6.00 - 6.99
75,000
2.49
$
6.31
75,000
2.49
$
6.31
5,241,548
3,515,538
The total intrinsic value of options exercised during the years
ended December 31, 2006, 2005 and 2004 was approximately
$0.4 million, $3.1 million and $28,000, respectively.
Cash received from option exercises under all share-based
payment arrangements for the years ended December 31, 2006,
2005, and 2004 was approximately $0.6 million,
$4.2 million and $0.1 million, respectively. There was
no tax benefit realized for the tax deductions resulting from
option exercises of share-based payment arrangements for the
year ended December 31, 2006.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2006, there was approximately
$2.2 million of total unrecognized compensation cost
related to nonvested options. That cost is expected to be
recognized on a straight line basis over the weighted average
vesting period of 2.9 years.
Prior to January 1, 2006, the Company accounted for stock
based compensation using the intrinsic method prescribed in
Accounting Principles Board Opinion No. 25 (“Opinion
No. 25”). As required by SFAS No. 123R, the
Company has disclosed below the effect on net loss and loss per
share on equity-based employee compensation, including stock
options, which would have been recorded using the fair value
based method for the years ended December 31, 2005 and
2004, respectively.
Net income (loss) applicable to
common stock, as reported
$
(19,237
)
$
4,127
Plus: Option redemptions, net of
tax
3,404
—
Less: Compensation expense per
SFAS 123, net of tax
1,356
1,191
Pro forma net income (loss)
$
(17,189
)
$
2,936
Income (loss) per share:
Diluted income (loss) per share,
as reported
$
(0.40
)
$
0.21
Pro forma income (loss) per share
after effect of SFAS 123
$
(0.36
)
$
0.15
The weighted average fair values of options granted were $4.31
and $2.51 for the years ended December 31, 2005 and 2004,
respectively. The weighted average fair values were determined
using the Black-Scholes option valuation method assuming no
expected dividends. The expected term was calculated using the
simplified method referred to in SAB No. 107. Other
assumptions used are as follows:
During June 2005, the Company executed the Synagro Technologies,
Inc. 2005 Restricted Stock Plan (the “Restricted
Plan”) for the benefit of certain named employees. Under
the Restricted Plan up to 3.5 million shares of the
Company’s common stock were authorized for issuance.
Shares, which are granted by the Company’s Compensation
Committee, are subject to a vesting schedule. As the vesting
dates pass, the restrictions on a proportionate number of shares
will lapse, and such shares will be considered to be
compensation to the recipient, and may be held or sold at the
option of the recipient. Currently, the number of shares granted
is based on the outstanding stock options held by the employee
under the Company’s stock option plans multiplied by the
Company’s dividend rate on its common stock.
Upon adoption of SFAS No. 123R on January 1,2006, amounts previously recorded in equity under Opinion
No. 25 at December 31, 2005, related to unearned
compensation for restricted stock awards have been reversed
against paid in capital and will be expensed over the requisite
service period in accordance with SFAS No. 123R.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Expense related to shares of restricted stock is recorded
straight line over the longest vesting tranche in accordance
with the provisions of SFAS No. 123R. The following
table provides additional information related to the
Company’s Restricted Plan:
Fair value for shares granted is determined using the closing
price on the day prior to the date of grant. The total fair
value of shares vested was approximately $1.2 million for
the year ended December 31, 2006.
As of December 31, 2006, there was approximately
$1.1 million of total unrecognized compensation cost
related to nonvested restricted shares. That cost is expected to
be recognized on a straight line basis over the weighted average
vesting period of 3.7 years.
(12) Special
Charges
The Company incurred a special charge of $0.3 million for costs
associated with the re-audit of its 2001 financial statements
during 2004.
(13) Employee
Benefit Plans
The Company sponsors a defined contribution retirement plan for
full-time and some part-time employees. The plan covers
employees at all of the Company’s operating locations. The
defined contribution plan provides for contributions ranging
from 1 percent to 15 percent of covered
employees’ salaries or wages. The Company may make a
matching contribution as a percentage of the employee
contribution. The matching contributions totaled approximately
$1.1 million for each of 2006, 2005 and 2004.
(14) Quarterly
Results of Operations (Unaudited)
Quarterly financial information for the years ended
December 31, 2006 and 2005, is summarized as follows (in
thousands, except per share data):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In the second quarter of 2005, the Company incurred certain
costs and write-offs relating to the Recapitalization (See
Note 1).
The sum of the individual quarterly earnings per share amounts
do not agree with
year-to-date
earnings per share as each quarter’s computation is based
on the weighted average number of shares outstanding during the
quarter, the weighted average stock price during the quarter,
and the dilutive effects of the redeemable preferred stock and
stock options, if applicable, in each quarter.
(15) Condensed
Consolidating Financial Statements
As discussed in Note 4, all of the Company’s 100%
owned domestic subsidiaries, except the subsidiaries formed to
own and operate the Sacramento biosolids processing facility,
Synagro Organic Fertilizer Company of Sacramento, Inc. and
Sacramento Project Finance, Inc., (See Note 4) and
Philadelphia Biosolids Services, L.L.C. (collectively the
“Non-Guarantor Subsidiaries”), are Guarantors of the
Senior Credit Facility. Each of the Guarantors is 100% owned by
the Company 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 December 31, 2006 and December 31,2005. In October 2006, South Kern Industrial Center, L.L.C. which had no operations prior to December 2006,
and was formed to own and operate a compost facility, became a
Guarantor of the Senior Credit Facility. Accordingly, it has
been classified as a Guarantor subsidiary in the accompanying
December 31, 2006 condensed consolidating balance sheets.
The condensed consolidating statements of operations has also
been presented for the year ended December 31, 2006 and
December 31, 2005 and the condensed consolidating statement
of cash flows has been presented for the year ended
December 31, 2006 and December 31, 2005.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(16) Segment
Information
The Company’s Chief Operating Decision Maker regularly
evaluates operating results, assesses performance and allocates
resources on a geographic basis, with the exception of its 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, Southwest regions of the United States.
These geographic areas have been aggregated and reported as a
segment because they meet the aggregation criteria of
SFAS No. 131 “Disclosures about Segments of an
Enterprise and Related Information.” 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
start up 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):
Corporate assets primarily include prepaid expenses, investments
in subsidiaries and intercompany loans. Corporate expenses
primarily include general and administrative expenses and
adjustments for insurance and other benefit allocations.
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
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
unrelated third party customers. The following reconciles
segment income from operations to the Company’s
consolidated income before provision for income taxes:
For the year ended December 31, 2005, included in total
other expense are certain costs and write-offs relating to the
Recapitalization discussed in Note 1, including
$1.5 million of transaction costs and expenses,
$5.5 million for stock option redemptions,
$1.3 million for transaction bonuses and $19.5 million
of debt extinguishment costs.
Revenues generated from the services that the Company provides
are summarized below:
Land application and disposal includes revenues generated from providing land application,
dewatering and disposal services. Facilities operations include revenues generated from providing
drying and pelletization, composting and incineration operations services. Cleanout services
include revenues generated from lagoon and digester cleanout projects. Product marketing includes
revenues generated from selling pellets and compost as organic fertilizers. Design and build
services include revenues generated from contracts where we agree to design, build and operate
certain processing facilities under a long-term operating contract.
The Company had one customer that accounted for approximately
16 percent of total revenue for the years ended
December 31, 2006, 2005, and 2004, and whose revenue are
included in the Residuals Management Operations and Rail
Transportation reporting segments.
(17) Subsequent
Events
On January 28, 2007, the Company entered into a definitive
Agreement and Plan of Merger (the “Merger Agreement”)
with Synatech Holdings, Inc., a Delaware corporation
(“Parent”) owned by The Carlyle Group, and Synatech,
Inc., a Delaware corporation and wholly-owned subsidiary of
Parent (“Merger Sub”) pursuant to which Merger Sub
will merge with and into the Company (the “Merger”),
with the Company continuing as the surviving corporation and as
a wholly-owned subsidiary of Parent. The Merger Agreement
provides that Merger Sub’s Certificate of Incorporation and
bylaws will be the Certificate of Incorporation and bylaws of
the surviving corporation except that the Certificate of
Incorporation shall be amended to provide for the name of the
corporation to be Synagro Technologies, Inc.
The Merger Agreement provides that at the effective time of the
Merger, each issued and outstanding share of common stock, par
value $.002 per share, of the Company, other than any such
shares owned by the Company,
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Parent or any of their respective subsidiaries, shall be
cancelled and shall be converted automatically into the right to
receive $5.76 in cash, without interest. Also, pursuant to the
Merger Agreement, at the effective time of the Merger, each
outstanding option to acquire shares of Company common stock
under any stock option, restricted stock, or incentive plan will
be cancelled in exchange for the right to receive, for each
share of common stock issuable upon exercise of such option,
cash in the amount of the excess, if any, of $5.76 over the
exercise price per share of any such option.
The Merger Agreement contains termination rights for both the
Company and Parent, and further provides that, upon termination
of the Merger Agreement under specified circumstances, including
(i) by the Company approving or recommending an acquisition
proposal, and (ii) the Company board of director’s
withdrawal or modification of its approval of the Merger, the
Company may be required to pay Parent a
break-up fee
equal to $13.9 million. The Company may be required to pay
Parent its expenses not in excess of $1.5 million if the
Merger Agreement is terminated due to a breach of the
Company’s representations, warranties, or covenants. Parent
may be required to pay the Company liquidated damages of
$13.9 million and its expenses not in excess of
$1.5 million if the Merger Agreement is terminated due to a
breach of Parent’s or Merger Sub’s representations,
warranties, or covenants.
The consummation of the Merger is subject to the satisfaction or
waiver of certain closing conditions, including, without
limitation, the approval of a majority of the votes by the
Company’s stockholders entitled to vote thereon (other than
those held by Parent and their respective affiliates), and the
termination or expiration of the waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. The Merger
Agreement also contains customary representations, warranties,
and covenants of Parent, Merger Sub, and the Company. The Merger
is not subject to a financing condition. A special meeting of
the Company’s stockholders has been scheduled for
March 29, 2007 to vote on the approval of the merger.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A.
Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of the
Company’s disclosure controls and procedures, as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended, have
concluded that, as of the end of the fiscal year covered by this
Annual Report on
Form 10-K,
the Company’s disclosure controls and procedures were
effective to provide reasonable assurances that information
required to be disclosed in the reports filed or submitted under
such Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and such information is
accumulated and communicated to management, including the CEO
and CFO, as appropriate, to allow timely decisions regarding
required disclosures.
Changes
in Internal Control over Financial Reporting
There were no changes in the Company’s internal control
over financial reporting during the quarter ended
December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management of Synagro Technologies, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control over
financial reporting has been designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
The Company’s internal control over financial reporting
includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets of the Company;
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures are
being made only in accordance with authorization of management
and directors of the Company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets
that could have a material effect on the Company’s
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2006. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework. Based
on that assessment using the criteria in Internal
Control — Integrated Framework, management
determined that, as of December 31, 2006, the
Company’s internal control over financial reporting was
effective.
Management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2006 has been audited by Hein &
Associates LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
In accordance with paragraph (3) of General
Instruction G to
Form 10-K,
Part III of this Report is omitted because the Company has
filed with the Securities and Exchange Commission, not later
than 120 days after December 31, 2006, a definitive
proxy statement pursuant to Regulation 14A involving the
election of directors. Reference is made to the sections of such
proxy statement entitled “Other Information —
Principal Stockholders,”“Other
Information — Executive Compensation,”“Election of Directors — Management
Stockholdings,”“Principal Accounting Fees,” and
“Other Information — Certain Relationships and
Related Transactions, and Director Independence,” which
sections and subsections of such proxy statement are
incorporated herein.
All financial statement schedules are omitted for the reason
that they are not required or are not applicable, or the
required information is shown in the financial statements or the
notes thereto.
3. Exhibits:
3
.1
—
Restated Certificate of
Incorporation of Synagro Technologies, Inc. (the
‘Company”) dated August 16, 1996 (Incorporated by
reference to Exhibit 3.1 to the Company’s
Post-Effective Amendment No. 1 to Registration Statement
No. 33-95028,
dated October 25, 1996).
3
.2
—
Amended and Restated Bylaws of the
Company dated effective January 27, 2000 (Incorporated by
reference to Exhibit No. 3.2 to the Company’s Annual
Report on
Form 10-K
for the year ended December 31, 2001).
Certificate of Designations,
Preferences and Rights of Series D Convertible Preferred
Stock of Synagro Technologies, Inc. (Incorporated by reference
to Exhibit 2.5 to the Company’s Current Report on
Form 8-K,
dated February 17, 2000).
4
.3
—
Certificate of Designations,
Preferences and Rights of Series E Convertible Preferred
Stock of Synagro Technologies, Inc. (Incorporated by reference
to Exhibit 2.3 to the Company’s Current Report on
Form 8-K,
dated June 30, 2000).
Employment Agreement dated
February 19, 1999, by and between Synagro Technologies,
Inc. and Alvin L. Thomas II (Incorporated by reference to
Exhibit 10.22 to the Company’s Current Report on
Form 10-K/A,
dated April 30, 2001); Agreement Concerning Employment
Rights dated January 27, 2000, by and between Synagro
Technologies, Inc. and Alvin L. Thomas, II (Incorporated by
reference to Exhibit 2.10 to the Company’s Current
Report on
Form 8-K,
dated February 17, 2000).(1)
10
.4
—
Employment Agreement dated
May 10, 1999, by and between Synagro Technologies, Inc. and
J. Paul Withrow (Incorporated by reference to Exhibit 2.11
to the Company’s Current Report on
Form 8-K,
dated February 17, 2000); Agreement Concerning Employment
Rights dated January 27, 2000, by and between Synagro
Technologies, Inc. and J. Paul Withrow (Incorporated by
reference to Exhibit 2.12 to the Company’s Current
Report on
Form 8-K,
dated February 17, 2000).(1)
Credit Agreement, dated as of
April 29, 2005, among Synagro Technologies, Inc., each
lender from time to time party thereto, Bank of America, N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer,
Lehman Commercial Paper Inc., as Syndication Agent, and CIBC
World Markets Corp., as Documentation Agent. (Incorporated by
reference to Exhibit 10.1 to the Company’s Current
Report on
Form 8-K/A,
dated May 23, 2005).
10
.11
—
Amendment No. 1 to Credit
Agreement dated as of March 6, 2006, among Synagro
Technologies, Inc., the Lenders signatory thereto and Bank of
America, N.A. (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on
Form 8-K,
dated March 9, 2006).
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Guarantee, dated as of
January 28, 2007, by Carlyle Infrastructure Partners, L.P.,
in favor of Synagro Technologies, Inc. (Incorporated by
reference to Exhibit 2.2 to the Company’s Current
Report on
Form 8-K,
dated January 29, 2007).
3
.1
—
Restated Certificate of
Incorporation of Synagro Technologies, Inc. (the
“Company”) dated August 16, 1996 (Incorporated by
reference to Exhibit 3.1 to the Company’s
Post-Effective Amendment No. 1 to Registration Statement
No. 33-95028,
dated October 25, 1996).
3
.2
—
Amended and Restated Bylaws of the
Company dated effective January 27, 2000 (Incorporated by
reference to Exhibit No. 3.2 to the Company’s
Annual Report on
Form 10-K
for the year ended December 31, 2001).
Certificate of Designations,
Preferences and Rights of Series D Convertible Preferred
Stock of Synagro Technologies, Inc. (Incorporated by reference
to Exhibit 2.5 to the Company’s Current Report on
Form 8-K,
dated February 17, 2000).
4
.3
—
Certificate of Designations,
Preferences and Rights of Series E Convertible Preferred
Stock of Synagro Technologies, Inc. (Incorporated by reference
to Exhibit 2.3 to the Company’s Current Report on
Form 8-K,
dated June 30, 2000).
10
.1
—
Form of Indemnification Agreement
(Incorporated by reference to Appendix F to the
Company’s Proxy Statement on Schedule 14A for Annual
Meeting of Stockholders, dated May 9, 1996).
Employment Agreement dated
February 19, 1999, by and between Synagro Technologies,
Inc. and Alvin L. Thomas II (Incorporated by reference to
Exhibit 10.22 to the Company’s Current Report on
Form 10-K/A,
dated April 30, 2001); Agreement Concerning Employment
Rights dated January 27, 2000, by and between Synagro
Technologies, Inc. and Alvin L. Thomas, II (Incorporated by
reference to Exhibit 2.10 to the Company’s Current
Report on
Form 8-K,
dated February 17, 2000).(1)
10
.4
—
Employment Agreement dated
May 10, 1999, by and between Synagro Technologies, Inc. and
J. Paul Withrow (Incorporated by reference to Exhibit 2.11
to the Company’s Current Report on
Form 8-K,
dated February 17, 2000); Agreement Concerning Employment
Rights dated January 27, 2000, by and between Synagro
Technologies, Inc. and J. Paul Withrow (Incorporated by
reference to Exhibit 2.12 to the Company’s Current
Report on
Form 8-K,
dated February 17, 2000).(1)
Third Amended and Restated Credit
Agreement dated May 8, 2002, among Synagro Technologies,
Inc., various financial institutions, and Bank of America, N.A.
(Incorporated by reference to the Company’s
Form 10-Q
for the period ended March 31, 2002)
10
.10
—
Credit Agreement, dated as of
April 29, 2005, among Synagro Technologies, Inc., each
lender from time to time party thereto, Bank of America, N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer,
Lehman Commercial Paper Inc., as Syndication Agent, and CIBC
World Markets Corp., as Documentation Agent. (Incorporated by
reference to Exhibit 10.1 to the Company’s Current
Report on
Form 8-K/A,
dated May 23, 2005)
Amendment No. 1 to Credit
Agreement dated as of March 6, 2006, among Synagro
Technologies, Inc., the Lenders signatory thereto and Bank of
America, N.A. (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on
Form 8-K,
dated March 9, 2006)