##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2006
    
    Commission File Number 0-21054
 SYNAGRO TECHNOLOGIES, INC.
  DELAWARE
    
    88-0219860(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)1800 BERING DRIVE, SUITE 1000HOUSTON, TEXAS
    
    77057(Address of principal executive offices)
    
    (Zip Code)
 (713) 369-1700
  þ o
  o þ o
  o þ
  CLASS
    
    OUTSTANDING AT NOVEMBER 2, 2006Common stock, par value $.002
    
    77,695,994




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##### 



SYNAGRO TECHNOLOGIES, INC.
 INDEX
 PAGEPART I  FINANCIAL INFORMATIONCondensed Consolidated Balance Sheets as of September 30, 2006
(Unaudited),
and December 31, 2005 (Derived From Audited Financial Statements)
    
    
    3Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the Nine
Months Ended September 30, 2006 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    37PART II  OTHER INFORMATION
    
    
    38Item 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    38Item 6. Exhibits
    
    
    38Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer
  2




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS EXCEPT SHARE DATA)
 September 30,
    
    
    December 31,2006
    
    
    2005(UNAUDITED)
    
    
    (DERIVED FROMAUDITED FINANCIALSTATEMENTS)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,161
    
    
    $
    18,571Restricted cash
    
    
    4,308
    
    
    
    2,444Accounts receivable, net
    
    
    69,874
    
    
    
    66,429Costs and estimated earnings in excess of billings
    
    
    3,332
    
    
    
    10,579Prepaid expenses and other current assets
    
    
    18,447
    
    
    
    15,168Total current assets
    
    
    97,122
    
    
    
    113,191Property, machinery & equipment, net
    
    
    245,932
    
    
    
    227,678Other Assets:Costs and estimated earnings in excess of billings
    
    
    4,784
    
    
    
    3,837Goodwill
    
    
    176,445
    
    
    
    176,196Restricted cash  construction fund
    
    
    
    
    
    
    406Restricted cash  debt service fund
    
    
    9,476
    
    
    
    7,304Other, net
    
    
    14,453
    
    
    
    14,694Total assets
    
    $
    548,212
    
    
    $
    543,306LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    1,190
    
    
    $
    1,776Current maturities of nonrecourse project revenue bonds
    
    
    3,480
    
    
    
    3,480Current maturities of capital lease obligations
    
    
    3,682
    
    
    
    3,175Accrued interest payable
    
    
    4,556
    
    
    
    962Accounts payable and accrued expenses
    
    
    46,244
    
    
    
    47,539Total current liabilities
    
    
    59,152
    
    
    
    56,932Long-Term Debt:Long-term debt obligations, net
    
    
    211,324
    
    
    
    212,488Nonrecourse project revenue bonds, net
    
    
    55,593
    
    
    
    55,575Capital lease obligations, net
    
    
    10,924
    
    
    
    11,888Total long-term debt
    
    
    277,841
    
    
    
    279,951Other long-term liabilities
    
    
    25,357
    
    
    
    22,269Total liabilities
    
    
    362,350
    
    
    
    359,152Commitments and ContingenciesStockholders Equity:Preferred stock, $.002 par value, 10,000,000 shares authorized, none
issued or
outstanding
    
    
    
    
    
    
    Common stock, $.002 par value, 100,000,000 shares authorized, 77,694,994
and
72,813,378 shares issued and outstanding in 2006 and 2005, respectively
    
    
    155
    
    
    
    146Unearned restricted stock
    
    
    
    
    
    
    (404
    )Additional paid in capital
    
    
    193,984
    
    
    
    197,453Accumulated deficit
    
    
    (8,753
    )
    
    
    (13,525
    )Accumulated other comprehensive income
    
    
    476
    
    
    
    484Total stockholders equity
    
    
    185,862
    
    
    
    184,154Total liabilities and stockholders equity
    
    $
    548,212
    
    
    $
    543,306
  3




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    91,071
    
    
    $
    88,238
    
    
    $
    256,616
    
    
    $
    247,984Cost of services
    
    
    72,091
    
    
    
    70,495
    
    
    
    208,467
    
    
    
    201,232Gross profit
    
    
    18,980
    
    
    
    17,743
    
    
    
    48,149
    
    
    
    46,752Selling, general and administrative expenses (including $0.8 million and $2.1
million of share based compensation expense for three and nine months ended
September 30, 2006, respectively, none in 2005)
    
    
    7,641
    
    
    
    6,417
    
    
    
    23,994
    
    
    
    17,976Transaction costs and expenses
    
    
    
    
    
    
    
    
    
    
    316
    
    
    
    1,517Stock option redemptions and transaction bonuses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,805(Gain) loss on sale of assets
    
    
    30
    
    
    
    (2,375
    )
    
    
    (159
    )
    
    
    (2,580
    )Income from operations
    
    
    11,309
    
    
    
    13,701
    
    
    
    23,998
    
    
    
    23,034Other expense:Interest expense
    
    
    5,388
    
    
    
    4,711
    
    
    
    16,002
    
    
    
    17,312Interest income
    
    
    (120
    )
    
    
    
    
    
    
    (412
    )
    
    
    Debt extinguishment costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,487Other expense (income), net
    
    
    911
    
    
    
    (175
    )
    
    
    240
    
    
    
    (116
    )Total other expense, net
    
    
    6,179
    
    
    
    4,536
    
    
    
    15,830
    
    
    
    36,683Income (loss) before provision for income taxes
    
    
    5,130
    
    
    
    9,165
    
    
    
    8,168
    
    
    
    (13,649
    )Provision (benefit) for income taxes
    
    
    2,120
    
    
    
    4,027
    
    
    
    3,396
    
    
    
    (4,548
    )Net income (loss) before preferred stock dividends
    
    
    3,010
    
    
    
    5,138
    
    
    
    4,772
    
    
    
    (9,101
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,587Net income (loss) applicable to common stock
    
    $
    3,010
    
    
    $
    5,138
    
    
    $
    4,772
    
    
    $
    (18,688
    )Earnings (loss) per share:Basic net earnings (loss) per share
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    (0.47
    )Diluted net earnings (loss) per share
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    (0.47
    )Weighted average shares outstanding:Weighted average shares outstanding for basic earnings per share calculation
    
    
    77,291,669
    
    
    
    72,130,712
    
    
    
    75,159,160
    
    
    
    39,350,721Effect of dilutive stock options
    
    
    1,062,889
    
    
    
    1,528,965
    
    
    
    787,104
    
    
    
    Effect of dilutive restricted stock
    
    
    6,764
    
    
    
    
    
    
    
    23,164
    
    
    
    Weighted average shares outstanding for diluted earnings per share
    
    
    78,361,322
    
    
    
    73,659,677
    
    
    
    75,969,428
    
    
    
    39,350,721
 
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SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (UNAUDITED)
 (IN THOUSANDS EXCEPT SHARE DATA)
 AccumulatedUnearned
    
    
    Additional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Restricted
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    Total
    
    
    Income(Loss)BALANCE, January 1,
2006
    
    
    72,813,378
    
    
    $
    146
    
    
    $
    (404
    )
    
    $
    197,453
    
    
    $
    (13,525
    )
    
    $
    484
    
    
    $
    184,154Reclassification
of unearned
restricted stock
due to adoption of
accounting
principle
    
    
    
    
    
    
    
    
    
    
    404
    
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in other
comprehensive
income related to
change in the fair
value of
derivatives, net
of tax of $4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )
    
    $
    (8
    )Common stock cash
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,472
    )
    
    
    
    
    
    
    
    
    
    
    (21,472
    )
    
    
    Stock dividends
    
    
    284,806
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    190,444
    
    
    
    
    
    
    
    
    
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    489
    
    
    
    Issuance of
restricted stock
    
    
    410,855
    
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    Forfeiture of
restricted stock
    
    
    (4,489
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesting of
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    448
    
    
    
    Issuance of common
shares, net of
issuance costs of
$748
    
    
    4,000,000
    
    
    
    8
    
    
    
    
    
    
    
    15,844
    
    
    
    
    
    
    
    
    
    
    
    15,852
    
    
    
    Share based
compensation on
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,105
    
    
    
    
    
    
    
    
    
    
    
    1,105
    
    
    
    Net income
applicable to
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,772
    
    
    
    
    
    
    
    4,772
    
    
    
    4,772BALANCE, September
30, 2006
    
    
    77,694,994
    
    
    $
    155
    
    
    $
    
    
    
    $
    193,984
    
    
    $
    (8,753
    )
    
    $
    476
    
    
    $
    185,862
    
    
    $
    4,764
  5




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (IN THOUSANDS)
 Nine Months Ended September 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss) applicable to common stock
    
    $
    4,772
    
    
    $
    (18,688
    )Adjustments to reconcile net income applicable to common stock to net cash provided (used) by operating activities:Preferred stock dividends and warrant accretion
    
    
    
    
    
    
    9,587Bad debt expense
    
    
    450
    
    
    
    500Depreciation and amortization
    
    
    17,369
    
    
    
    15,960Amortization and write-off of debt financing costs
    
    
    1,071
    
    
    
    5,232Provision (benefit) for deferred income taxes
    
    
    3,127
    
    
    
    (5,535
    )Shared based compensation expense
    
    
    2,076
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    1,176Gain on sale of property, machinery and equipment
    
    
    (159
    )
    
    
    (2,580
    )(Increase) decrease in the following, net:Accounts receivable
    
    
    (3,895
    )
    
    
    (13,160
    )Costs and estimated earnings in excess of billings
    
    
    6,298
    
    
    
    5,407Prepaid expenses and other current assets
    
    
    (778
    )
    
    
    2,053Increase (decrease) in the following, net:Accrued interest payable
    
    
    3,594
    
    
    
    (2,471
    )Accounts payable, accrued expenses and other long-term liabilities
    
    
    (3,488
    )
    
    
    (13,364
    )Net cash provided (used) by operating activities
    
    
    30,437
    
    
    
    (15,883
    )Cash flows from investing activities:Purchase of businesses
    
    
    (249
    )
    
    
    (253
    )Purchases of property, machinery and equipment
    
    
    (34,110
    )
    
    
    (13,914
    )Proceeds from sale of property, machinery and equipment
    
    
    762
    
    
    
    4,141Facility construction funded by restricted cash
    
    
    
    
    
    
    (1,648
    )Decrease in restricted cash for facility construction
    
    
    
    
    
    
    1,648Increase in other restricted cash accounts
    
    
    (3,630
    )
    
    
    (3,838
    )Other
    
    
    
    
    
    
    3Net cash used by investing activities
    
    
    (37,227
    )
    
    
    (13,861
    )Cash flows from financing activities:Payments of debt
    
    
    (4,244
    )
    
    
    (180,318
    )Proceeds from debt
    
    
    
    
    
    
    180,000Net increase in bank revolver borrowings
    
    
    
    
    
    
    3,400Net decrease in book overdrafts
    
    
    (911
    )
    
    
    469Debt issuance costs
    
    
    (334
    )
    
    
    (7,650
    )Dividends on common stock
    
    
    (21,472
    )
    
    
    (7,222
    )Proceeds from equity offering, net
    
    
    15,852
    
    
    
    37,641Proceeds from exercise of options
    
    
    489
    
    
    
    3,348Net cash provided (used) in financing activities
    
    
    (10,620
    )
    
    
    29,668Net decrease in cash and cash equivalents
    
    
    (17,410
    )
    
    
    (76
    )Cash and cash equivalents, beginning of period
    
    
    18,571
    
    
    
    326Cash and cash equivalents, end of period
    
    $
    1,161
    
    
    $
    250Schedule of non-cash transactions:Capital lease agreements entered into for operating and transportation equipment
    
    $
    2,036
    
    
    $
    
 
 6




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED
 (1) Basis of Presentation
 General
    2006 Secondary Equity Offering
  2005 Recapitalization
   7




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##### Table of Contents



Accounting Pronouncements
  ,
  Use of Estimates
  Allowance for Doubtful Accounts
 Loss Contracts
 Long Term Construction Contracts
 Property and Equipment/Long-Lived Assets
 8




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##### Table of Contents



Goodwill
 Purchase Accounting
 Income Taxes
 Legal and Contingency Accruals
 Derivatives
 Self-Insurance Reserves
  (2) Costs and Estimated Earnings in Excess of Billings
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Costs and estimated earnings on contracts in progress
    
    $
    57,531
    
    
    $
    51,709Less  Billings to date
    
    
    (49,415
    )
    
    
    (37,293
    )Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    8,116
    
    
    $
    14,416Current assets
    
    $
    3,332
    
    
    $
    10,579Non current assets
    
    
    4,784
    
    
    
    3,837Total
    
    $
    8,116
    
    
    $
    14,416
 9




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##### Table of Contents



(3) Long-Term Debt Obligations
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)$305 million senior credit facility 
Term loans
    
    $
    210,000
    
    
    $
    210,000Notes payable to former owners
    
    
    2,514
    
    
    
    4,257Other notes payable
    
    
    
    
    
    
    7Total debt
    
    
    212,514
    
    
    
    214,264Less: Current maturities
    
    
    (1,190
    )
    
    
    (1,776
    )Long-term debt, net of current maturities
    
    $
    211,324
    
    
    $
    212,488
 Senior Credit Facility
 1 2
  (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 $50.0 million as a subset of the Revolver. At September 30,
2006, the Company had approximately $37.7 million of Letters of Credit outstanding.
  Eurodollar
    
    Base RateRevolver
    
    
    8.07
    %
    
    
    10.00
    %Term
    
    
    7.76
    %
    
    
    9.50
    %
    10




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##### Table of Contents



Derivatives and Hedging Activities
       11




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##### Table of Contents



(4) Nonrecourse Project Revenue Bonds
 September 30,
    
    
    December 31,2006
    
    
    2005(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%
    
    $
    16,295
    
    
    $
    16,295Term revenue bond due 2016 at stated interest rate of 6.45%
    
    
    22,360
    
    
    
    22,36038,655
    
    
    
    38,655California 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 $267 and $285, respectively
    
    
    19,808
    
    
    
    19,790Series 2002B  Revenue bonds due 2006 at stated interest rate of 4.25%
    
    
    610
    
    
    
    61020,418
    
    
    
    20,400Total nonrecourse project revenue bonds
    
    
    59,073
    
    
    
    59,055Less: Current maturities
    
    
    (3,480
    )
    
    
    (3,480
    )Nonrecourse project revenue bonds, net of current maturities
    
    $
    55,593
    
    
    $
    55,575Amounts recorded in other assets as restricted cash  debt service fund
    
    $
    9,476
    
    
    $
    7,304
 Maryland Project Revenue Bonds
   12




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##### Table of Contents



Sacramento Project Bonds
       13




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##### Table of Contents



(5) Commitments and Contingencies
 Litigation
  Reliance Insurance
    Design and Build Contract Risk
  Other
  14




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##### Table of Contents



Self-Insurance
  (6) Earnings Per Common Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands except share data)Net income (loss) applicable to common stock:Net income (loss) before preferred stock dividends
    
    $
    3,010
    
    
    $
    5,138
    
    
    $
    4,772
    
    
    $
    (9,101
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,587Net income (loss) applicable to common stock
    
    $
    3,010
    
    
    $
    5,138
    
    
    $
    4,772
    
    
    $
    (18,688
    )Earnings (loss) per share:Basic earnings (loss) per share
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    (0.47
    )Diluted earnings (loss) per share
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    (0.47
    )Weighted average shares outstanding for basic earnings per share
    
    
    77,291,669
    
    
    
    72,130,712
    
    
    
    75,159,160
    
    
    
    39,350,721Effect of dilutive stock options
    
    
    1,062,889
    
    
    
    1,528,965
    
    
    
    787,104
    
    
    
    Effect of dilutive restricted stock
    
    
    6,764
    
    
    
    
    
    
    
    23,164
    
    
    
    Weighted average shares outstanding for diluted earnings per share
    
    
    78,361,322
    
    
    
    73,659,677
    
    
    
    75,969,428
    
    
    
    39,350,721
  (7) Condensed Consolidating Financial Statements
  15




---



##### Table of Contents



CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2006
(Dollars in thousands)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDASSETSCurrent Assets:Cash and cash equivalents
    
    $
    82
    
    
    $
    32
    
    
    $
    1,047
    
    
    $
    
    
    
    $
    1,161Restricted cash
    
    
    
    
    
    
    2,959
    
    
    
    1,349
    
    
    
    
    
    
    
    4,308Accounts receivable, net
    
    
    
    
    
    
    68,639
    
    
    
    1,238
    
    
    
    (3
    )
    
    
    69,874Prepaid expenses and other current assets
    
    
    2,998
    
    
    
    18,707
    
    
    
    74
    
    
    
    
    
    
    
    21,779Total current assets
    
    
    3,080
    
    
    
    90,337
    
    
    
    3,708
    
    
    
    (3
    )
    
    
    97,122Property, machinery & equipment, net
    
    
    
    
    
    
    229,220
    
    
    
    16,712
    
    
    
    
    
    
    
    245,932Other Assets:Goodwill
    
    
    
    
    
    
    176,445
    
    
    
    
    
    
    
    
    
    
    
    176,445Investments in subsidiaries
    
    
    101,547
    
    
    
    
    
    
    
    
    
    
    
    (101,547
    )
    
    
    Intercompany
    
    
    313,454
    
    
    
    
    
    
    
    
    
    
    
    (313,454
    )
    
    
    Restricted cash  debt service fund
    
    
    
    
    
    
    7,739
    
    
    
    1,737
    
    
    
    
    
    
    
    9,476Other, net
    
    
    6,450
    
    
    
    10,041
    
    
    
    2,746
    
    
    
    
    
    
    
    19,237Total assets
    
    $
    424,531
    
    
    $
    513,782
    
    
    $
    24,903
    
    
    $
    (415,004
    )
    
    $
    548,212LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    1,190
    
    
    $
    
    
    
    $
    
    
    
    $
    1,190Current maturities of nonrecourse project
revenue bonds
    
    
    
    
    
    
    2,870
    
    
    
    610
    
    
    
    
    
    
    
    3,480Current maturities of capital lease obligations
    
    
    
    
    
    
    3,682
    
    
    
    
    
    
    
    
    
    
    
    3,682Accrued interest payable
    
    
    3,358
    
    
    
    837
    
    
    
    361
    
    
    
    
    
    
    
    4,556Accounts payable and accrued expenses
    
    
    
    
    
    
    46,043
    
    
    
    204
    
    
    
    (3
    )
    
    
    46,244Total current liabilities
    
    
    3,358
    
    
    
    54,622
    
    
    
    1,175
    
    
    
    (3
    )
    
    
    59,152Long-Term Debt:Long-term debt obligations, net
    
    
    210,000
    
    
    
    1,324
    
    
    
    
    
    
    
    
    
    
    
    211,324Nonrecourse project revenue bonds, net
    
    
    
    
    
    
    35,785
    
    
    
    19,808
    
    
    
    
    
    
    
    55,593Intercompany
    
    
    
    
    
    
    313,083
    
    
    
    371
    
    
    
    (313,454
    )
    
    
    Capital lease obligations, net
    
    
    
    
    
    
    10,924
    
    
    
    
    
    
    
    
    
    
    
    10,924Total long-term debt
    
    
    210,000
    
    
    
    361,116
    
    
    
    20,179
    
    
    
    (313,454
    )
    
    
    277,841Other long-term liabilities
    
    
    25,311
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    25,357Total liabilities
    
    
    238,669
    
    
    
    415,784
    
    
    
    21,354
    
    
    
    (313,457
    )
    
    
    362,350Stockholders Equity:Capital
    
    
    194,139
    
    
    
    43,925
    
    
    
    2,255
    
    
    
    (46,180
    )
    
    
    194,139Accumulated earnings (deficit)
    
    
    (8,753
    )
    
    
    54,073
    
    
    
    1,294
    
    
    
    (55,367
    )
    
    
    (8,753
    )Accumulated other comprehensive income
    
    
    476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    476Total stockholders equity
    
    
    185,862
    
    
    
    97,998
    
    
    
    3,549
    
    
    
    (101,547
    )
    
    
    185,862Total liabilities and stockholders equity
    
    $
    424,531
    
    
    $
    513,782
    
    
    $
    24,903
    
    
    $
    (415,004
    )
    
    $
    548,212
 16




---



##### Table of Contents



CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2005
(Dollars in thousands)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDASSETSCurrent Assets:Cash and cash equivalents
    
    $
    18,233
    
    
    $
    34
    
    
    $
    304
    
    
    $
    
    
    
    $
    18,571Restricted cash
    
    
    
    
    
    
    1,679
    
    
    
    765
    
    
    
    
    
    
    
    2,444Accounts receivable, net
    
    
    
    
    
    
    65,534
    
    
    
    942
    
    
    
    (47
    )
    
    
    66,429Prepaid expenses and other current assets
    
    
    3,019
    
    
    
    22,601
    
    
    
    127
    
    
    
    
    
    
    
    25,747Total current assets
    
    
    21,252
    
    
    
    89,848
    
    
    
    2,138
    
    
    
    (47
    )
    
    
    113,191Property, machinery & equipment, net
    
    
    
    
    
    
    202,775
    
    
    
    24,903
    
    
    
    
    
    
    
    227,678Other Assets:Goodwill
    
    
    
    
    
    
    176,196
    
    
    
    
    
    
    
    
    
    
    
    176,196Investments in subsidiaries
    
    
    100,258
    
    
    
    
    
    
    
    
    
    
    
    (100,258
    )
    
    
    Intercompany
    
    
    288,422
    
    
    
    
    
    
    
    
    
    
    
    (288,422
    )
    
    
    Restricted cash  construction fund
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    406Restricted cash  debt service fund
    
    
    
    
    
    
    5,587
    
    
    
    1,717
    
    
    
    
    
    
    
    7,304Other, net
    
    
    7,089
    
    
    
    8,583
    
    
    
    2,859
    
    
    
    
    
    
    
    18,531Total assets
    
    $
    417,021
    
    
    $
    482,989
    
    
    $
    32,023
    
    
    $
    (388,727
    )
    
    $
    543,306LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    1,776
    
    
    $
    
    
    
    $
    
    
    
    $
    1,776Current maturities of nonrecourse project revenue
bonds
    
    
    
    
    
    
    2,870
    
    
    
    610
    
    
    
    
    
    
    
    3,480Current maturities of capital lease obligations
    
    
    
    
    
    
    3,175
    
    
    
    
    
    
    
    
    
    
    
    3,175Accrued interest payable
    
    
    664
    
    
    
    206
    
    
    
    92
    
    
    
    
    
    
    
    962Accounts payable and accrued expenses
    
    
    
    
    
    
    46,737
    
    
    
    849
    
    
    
    (47
    )
    
    
    47,539Total current liabilities
    
    
    664
    
    
    
    54,764
    
    
    
    1,551
    
    
    
    (47
    )
    
    
    56,932Long-Term Debt:Long-term debt obligations, net
    
    
    210,000
    
    
    
    2,488
    
    
    
    
    
    
    
    
    
    
    
    212,488Nonrecourse project revenue bonds, net
    
    
    
    
    
    
    35,785
    
    
    
    19,790
    
    
    
    
    
    
    
    55,575Intercompany
    
    
    
    
    
    
    288,395
    
    
    
    27
    
    
    
    (288,422
    )
    
    
    Capital lease obligations, net
    
    
    
    
    
    
    11,888
    
    
    
    
    
    
    
    
    
    
    
    11,888Total long-term debt
    
    
    210,000
    
    
    
    338,556
    
    
    
    19,817
    
    
    
    (288,422
    )
    
    
    279,951Other long-term liabilities
    
    
    22,203
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    22,269Total liabilities
    
    
    232,867
    
    
    
    393,386
    
    
    
    21,368
    
    
    
    (288,469
    )
    
    
    359,152Commitments and ContingenciesStockholders Equity:Capital
    
    
    197,195
    
    
    
    36,339
    
    
    
    9,841
    
    
    
    (46,180
    )
    
    
    197,195Accumulated earnings (deficit)
    
    
    (13,525
    )
    
    
    53,264
    
    
    
    814
    
    
    
    (54,078
    )
    
    
    (13,525
    )Accumulated other comprehensive loss
    
    
    484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    484Total stockholders equity
    
    
    184,154
    
    
    
    89,603
    
    
    
    10,655
    
    
    
    (100,258
    )
    
    
    184,154Total liabilities and stockholders equity
    
    $
    417,021
    
    
    $
    482,989
    
    
    $
    32,023
    
    
    $
    (388,727
    )
    
    $
    543,306
 17




---



##### Table of Contents



CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006
(DOLLARS IN THOUSANDS)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDRevenue
    
    $
    
    
    
    $
    89,831
    
    
    $
    1,261
    
    
    $
    (21
    )
    
    $
    91,071Cost of services
    
    
    
    
    
    
    71,479
    
    
    
    633
    
    
    
    (21
    )
    
    
    72,091Gross profit
    
    
    
    
    
    
    18,352
    
    
    
    628
    
    
    
    
    
    
    
    18,980Selling, general and administrative expenses
    
    
    
    
    
    
    7,622
    
    
    
    19
    
    
    
    
    
    
    
    7,641Gain on sale of assets
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Income from operations
    
    
    
    
    
    
    10,700
    
    
    
    609
    
    
    
    
    
    
    
    11,309Other (income) expense:Interest expense, net
    
    
    4,736
    
    
    
    265
    
    
    
    267
    
    
    
    
    
    
    
    5,268Intercompany interest (income) expense
    
    
    (7,330
    )
    
    
    7,329
    
    
    
    1
    
    
    
    
    
    
    
    Equity in earnings of subs
    
    
    (1,980
    )
    
    
    
    
    
    
    
    
    
    
    1,980
    
    
    
    Other expense, net
    
    
    861
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    911Total other (income) expense, net
    
    
    (3,713
    )
    
    
    7,644
    
    
    
    268
    
    
    
    1,980
    
    
    
    6,179Income (loss) before provision for income
taxes
    
    
    3,713
    
    
    
    3,056
    
    
    
    341
    
    
    
    (1,980
    )
    
    
    5,130Provision for income taxes
    
    
    703
    
    
    
    1,277
    
    
    
    140
    
    
    
    
    
    
    
    2,120Net income (loss) applicable to common stock
    
    $
    3,010
    
    
    $
    1,779
    
    
    $
    201
    
    
    $
    (1,980
    )
    
    $
    3,010
 CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006
(DOLLARS IN THOUSANDS)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDRevenue
    
    $
    
    
    
    $
    252,937
    
    
    $
    3,771
    
    
    $
    (92
    )
    
    $
    256,616Cost of services
    
    
    
    
    
    
    206,479
    
    
    
    2,080
    
    
    
    (92
    )
    
    
    208,467Gross profit
    
    
    
    
    
    
    46,458
    
    
    
    1,691
    
    
    
    
    
    
    
    48,149Selling, general and administrative expenses
    
    
    
    
    
    
    23,970
    
    
    
    24
    
    
    
    
    
    
    
    23,994Transaction fees and expenses
    
    
    316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316Gain on sale of assets
    
    
    
    
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    (159
    )Income from operations
    
    
    (316
    )
    
    
    22,647
    
    
    
    1,667
    
    
    
    
    
    
    
    23,998Other (income) expense:Interest expense, net
    
    
    13,295
    
    
    
    1,452
    
    
    
    843
    
    
    
    
    
    
    
    15,590Intercompany interest (income) expense
    
    
    (19,763
    )
    
    
    19,761
    
    
    
    2
    
    
    
    
    
    
    
    Equity in loss of subs
    
    
    (1,289
    )
    
    
    
    
    
    
    
    
    
    
    1,289
    
    
    
    Other expense, net
    
    
    190
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    240Total other (income) expense, net
    
    
    (7,567
    )
    
    
    21,263
    
    
    
    845
    
    
    
    1,289
    
    
    
    15,830Income (loss) before provision for income
taxes
    
    
    7,251
    
    
    
    1,384
    
    
    
    822
    
    
    
    (1,289
    )
    
    
    8,168Provision for income taxes
    
    
    2,479
    
    
    
    575
    
    
    
    342
    
    
    
    
    
    
    
    3,396Net income (loss) applicable to common stock
    
    $
    4,772
    
    
    $
    809
    
    
    $
    480
    
    
    $
    (1,289
    )
    
    $
    4,772
 18




---



##### Table of Contents



CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005
(DOLLARS IN THOUSANDS)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDRevenue
    
    $
    
    
    
    $
    87,131
    
    
    $
    1,107
    
    
    $
    
    
    
    $
    88,238Cost of services
    
    
    
    
    
    
    69,936
    
    
    
    559
    
    
    
    
    
    
    
    70,495Gross profit
    
    
    
    
    
    
    17,195
    
    
    
    548
    
    
    
    
    
    
    
    17,743Selling, general and administrative expenses
    
    
    
    
    
    
    6,415
    
    
    
    2
    
    
    
    
    
    
    
    6,417Gain on sale of assets
    
    
    
    
    
    
    (2,375
    )
    
    
    
    
    
    
    
    
    
    
    (2,375
    )Income from operations
    
    
    
    
    
    
    13,155
    
    
    
    546
    
    
    
    
    
    
    
    13,701Other (income) expense:Interest expense, net
    
    
    3,534
    
    
    
    873
    
    
    
    304
    
    
    
    
    
    
    
    4,711Intercompany interest (income) expense
    
    
    (5,578
    )
    
    
    5,578
    
    
    
    
    
    
    
    
    
    
    
    Equity in earnings of subs
    
    
    (4,858
    )
    
    
    
    
    
    
    
    
    
    
    4,858
    
    
    
    Other income, net
    
    
    
    
    
    
    (175
    )
    
    
    
    
    
    
    
    
    
    
    (175
    )Total other (income) expense, net
    
    
    (6,902
    )
    
    
    6,276
    
    
    
    304
    
    
    
    4,858
    
    
    
    4,536Income (loss) before provision for income
taxes
    
    
    6,902
    
    
    
    6,879
    
    
    
    242
    
    
    
    (4,858
    )
    
    
    9,165Provision for income taxes
    
    
    1,764
    
    
    
    2,198
    
    
    
    65
    
    
    
    
    
    
    
    4,027Net income (loss) applicable to common stock
    
    $
    5,138
    
    
    $
    4,681
    
    
    $
    177
    
    
    $
    (4,858
    )
    
    $
    5,138
 CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005
(DOLLARS IN THOUSANDS)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDRevenue
    
    $
    
    
    
    $
    244,729
    
    
    $
    3,255
    
    
    $
    
    
    
    $
    247,984Cost of services
    
    
    
    
    
    
    199,526
    
    
    
    1,706
    
    
    
    
    
    
    
    201,232Gross profit
    
    
    
    
    
    
    45,203
    
    
    
    1,549
    
    
    
    
    
    
    
    46,752Selling, general and administrative expenses
    
    
    
    
    
    
    17,964
    
    
    
    12
    
    
    
    
    
    
    
    17,976Transaction fees and expenses
    
    
    1,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,517Stock option redemptions and transaction bonuses
    
    
    6,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,805Gain on sale of assets
    
    
    
    
    
    
    (2,580
    )
    
    
    
    
    
    
    
    
    
    
    (2,580
    )Income from operations
    
    
    (8,322
    )
    
    
    29,819
    
    
    
    1,537
    
    
    
    
    
    
    
    23,034Other (income) expense:Interest expense, net
    
    
    13,776
    
    
    
    2,611
    
    
    
    925
    
    
    
    
    
    
    
    17,312Interest
expense  debt extinguishment costs
    
    
    19,487
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,487Intercompany interest (income) expense
    
    
    (18,258
    )
    
    
    18,258
    
    
    
    
    
    
    
    
    
    
    
    Equity in earnings of subs
    
    
    (6,453
    )
    
    
    
    
    
    
    
    
    
    
    6,453
    
    
    
    Other income, net
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    
    
    
    
    (116
    )Total other (income) expense, net
    
    
    8,552
    
    
    
    20,753
    
    
    
    925
    
    
    
    6,453
    
    
    
    36,683Income (loss) before provision (benefit) for income
taxes
    
    
    (16,874
    )
    
    
    9,066
    
    
    
    612
    
    
    
    (6,453
    )
    
    
    (13,649
    )Provision (benefit) for income taxes
    
    
    (7,773
    )
    
    
    3,021
    
    
    
    204
    
    
    
    
    
    
    
    (4,548
    )Net income (loss) before preferred stock dividends
    
    
    (9,101
    )
    
    
    6,045
    
    
    
    408
    
    
    
    (6,453
    )
    
    
    (9,101
    )Preferred stock dividends
    
    
    9,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,587Net income (loss) applicable to common stock
    
    $
    (18,688
    )
    
    $
    6,045
    
    
    $
    408
    
    
    $
    (6,453
    )
    
    $
    (18,688
    )
 19




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##### Table of Contents



CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2006
(DOLLARS IN THOUSANDS)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDCash flows from operating activities:Net income (loss) applicable to common stock
    
    $
    4,772
    
    
    $
    809
    
    
    $
    480
    
    
    $
    (1,289
    )
    
    $
    4,772Adjustments to reconcile net income applicable to
common stock to net cash provided by operating
activities:Bad debt expense
    
    
    
    
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    450Depreciation and amortization expense
    
    
    
    
    
    
    16,564
    
    
    
    805
    
    
    
    
    
    
    
    17,369Amortization of debt financing costs
    
    
    1,052
    
    
    
    1
    
    
    
    18
    
    
    
    
    
    
    
    1,071Provision for deferred income taxes
    
    
    2,210
    
    
    
    575
    
    
    
    342
    
    
    
    
    
    
    
    3,127Share based compensation
    
    
    
    
    
    
    2,076
    
    
    
    
    
    
    
    
    
    
    
    2,076Gain on sale of property, machinery and
equipment
    
    
    
    
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    (159
    )Equity in earnings
    
    
    (1,289
    )
    
    
    
    
    
    
    
    
    
    
    1,289
    
    
    
    (Increase) decrease in the following, net:Accounts receivable
    
    
    
    
    
    
    (3,599
    )
    
    
    (296
    )
    
    
    
    
    
    
    (3,895
    )Costs and estimated earnings in excess of billings
    
    
    
    
    
    
    6,298
    
    
    
    
    
    
    
    
    
    
    
    6,298Prepaid expenses and other current assets
    
    
    3,991
    
    
    
    (4,822
    )
    
    
    53
    
    
    
    
    
    
    
    (778
    )Increase (decrease) in the following, net:Accrued interest payable
    
    
    2,694
    
    
    
    (552
    )
    
    
    1,452
    
    
    
    
    
    
    
    3,594Intercompany
advances  trade
    
    
    (19,763
    )
    
    
    19,762
    
    
    
    1
    
    
    
    
    
    
    
    Accounts payable, accrued expenses and other
long term liabilities
    
    
    (3,545
    )
    
    
    1,884
    
    
    
    (1,827
    )
    
    
    
    
    
    
    (3,488
    )Net cash (used in) provided by operating activities
    
    
    (9,878
    )
    
    
    39,287
    
    
    
    1,028
    
    
    
    
    
    
    
    30,437Cash flows from investing activities:Purchase of business
    
    
    
    
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    (249
    )Purchase of property, machinery & equipment
    
    
    
    
    
    
    (34,023
    )
    
    
    (87
    )
    
    
    
    
    
    
    (34,110
    )Proceeds from sale of property, machinery & equipment
    
    
    
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    762(Increase) decrease in other restricted cash accounts
    
    
    
    
    
    
    (3,432
    )
    
    
    (198
    )
    
    
    
    
    
    
    (3,630
    )Net cash used in investing activities
    
    
    
    
    
    
    (36,942
    )
    
    
    (285
    )
    
    
    
    
    
    
    (37,227
    )Cash flows from financing activities:Payments of debt
    
    
    
    
    
    
    (4,244
    )
    
    
    
    
    
    
    
    
    
    
    (4,244
    )Intercompany notes with subsidiaries
    
    
    (1,897
    )
    
    
    1,897
    
    
    
    
    
    
    
    
    
    
    
    Debt issuance costs
    
    
    (334
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (334
    )Decrease in book overdraft
    
    
    (911
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (911
    )Common stock dividends
    
    
    (21,472
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,472
    )Proceeds from equity offering
    
    
    15,852
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,852Exercise of options
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    489Net cash used in financing activities
    
    
    (8,273
    )
    
    
    (2,347
    )
    
    
    
    
    
    
    
    
    
    
    (10,620
    )Net increase (decrease) in cash and cash equivalents
    
    
    (18,151
    )
    
    
    (2
    )
    
    
    743
    
    
    
    
    
    
    
    (17,410
    )Cash and cash equivalents, beginning of period
    
    
    18,233
    
    
    
    34
    
    
    
    304
    
    
    
    
    
    
    
    18,571Cash and cash equivalents, end of period
    
    $
    82
    
    
    $
    32
    
    
    $
    1,047
    
    
    $
    
    
    
    $
    1,161
 20




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##### Table of Contents



CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005
(DOLLARS IN THOUSANDS)
 NON-GUARANTOR
    
    
    GUARANTORPARENT
    
    
    SUBSIDIARIES
    
    
    SUBSIDIARIES
    
    
    ELIMINATIONS
    
    
    CONSOLIDATEDCash flows from operating activities:Net income (loss) applicable to common stock
    
    $
    (18,688
    )
    
    $
    6,045
    
    
    $
    408
    
    
    $
    (6,453
    )
    
    $
    (18,688
    )Adjustments to reconcile net income applicable to
common stock to net cash provided by operating
activities:Preferred stock dividends
    
    
    9,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,587Bad debt expense
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    500Depreciation and amortization expense
    
    
    
    
    
    
    15,158
    
    
    
    802
    
    
    
    
    
    
    
    15,960Amortization and write-off of debt financing costs
    
    
    5,212
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    5,232Provision (benefit) for deferred income taxes
    
    
    (8,760
    )
    
    
    3,021
    
    
    
    204
    
    
    
    
    
    
    
    (5,535
    )Tax benefit from exercise of stock options
    
    
    1,176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,176Gain on sale of property, machinery and
equipment
    
    
    
    
    
    
    (2,580
    )
    
    
    
    
    
    
    
    
    
    
    (2,580
    )Equity in earnings
    
    
    (6,453
    )
    
    
    
    
    
    
    
    
    
    
    6,453
    
    
    
    (Increase) decrease in the following, net:Accounts receivable
    
    
    
    
    
    
    (12,933
    )
    
    
    (227
    )
    
    
    
    
    
    
    (13,160
    )Costs and estimated earnings in excess of billings
    
    
    
    
    
    
    5,407
    
    
    
    
    
    
    
    
    
    
    
    5,407Prepaid expenses and other current assets
    
    
    240
    
    
    
    1,890
    
    
    
    (77
    )
    
    
    
    
    
    
    2,053Increase (decrease) in the following, net:Accrued interest payable
    
    
    (3,606
    )
    
    
    888
    
    
    
    247
    
    
    
    
    
    
    
    (2,471
    )Intercompany
advances  trade
    
    
    (18,258
    )
    
    
    18,258
    
    
    
    
    
    
    
    
    
    
    
    Accounts payable, accrued expenses and other
long term liabilities
    
    
    (477
    )
    
    
    (12,773
    )
    
    
    (114
    )
    
    
    
    
    
    
    (13,364
    )Net cash (used in) provided by operating activities
    
    
    (40,027
    )
    
    
    22,881
    
    
    
    1,263
    
    
    
    
    
    
    
    (15,883
    )Cash flows from investing activities:Purchase of business
    
    
    
    
    
    
    (253
    )
    
    
    
    
    
    
    
    
    
    
    (253
    )Purchase of property, machinery & equipment
    
    
    
    
    
    
    (12,296
    )
    
    
    (1,618
    )
    
    
    
    
    
    
    (13,914
    )Proceeds from sale of property, machinery & equipment
    
    
    
    
    
    
    4,141
    
    
    
    
    
    
    
    
    
    
    
    4,141Facility construction funded by restricted cash
    
    
    
    
    
    
    
    
    
    
    (1,648
    )
    
    
    
    
    
    
    (1,648
    )Decrease in restricted cash for facility construction
    
    
    
    
    
    
    
    
    
    
    1,648
    
    
    
    
    
    
    
    1,648Increase in other restricted cash accounts
    
    
    
    
    
    
    (2,330
    )
    
    
    (1,508
    )
    
    
    
    
    
    
    (3,838
    )Other
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Net cash used in investing activities
    
    
    
    
    
    
    (10,735
    )
    
    
    (3,126
    )
    
    
    
    
    
    
    (13,861
    )Cash flows from financing activities:Payments of debt
    
    
    (173,867
    )
    
    
    (2,451
    )
    
    
    (4,000
    )
    
    
    
    
    
    
    (180,318
    )Proceeds from debt
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180,000Net increase in bank revolver borrowings
    
    
    3,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,400Decrease in book overdrafts
    
    
    469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469Debt issuance costs
    
    
    (7,650
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,650
    )Common stock dividends
    
    
    (7,222
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,222
    )Proceeds from equity offering
    
    
    37,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,641Intercompany notes with subsidiaries
    
    
    9,662
    
    
    
    (9,662
    )
    
    
    
    
    
    
    
    
    
    
    Capital contributions
    
    
    (5,768
    )
    
    
    
    
    
    
    5,768
    
    
    
    
    
    
    
    Exercise of options
    
    
    3,348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,348Net cash (used in) provided by financing activities
    
    
    40,013
    
    
    
    (12,113
    )
    
    
    1,768
    
    
    
    
    
    
    
    29,668Net increase in cash and cash equivalents
    
    
    (14
    )
    
    
    33
    
    
    
    (95
    )
    
    
    
    
    
    
    (76
    )Cash and cash equivalents, beginning of period
    
    
    99
    
    
    
    21
    
    
    
    206
    
    
    
    
    
    
    
    326Cash and cash equivalents, end of period
    
    $
    85
    
    
    $
    54
    
    
    $
    111
    
    
    $
    
    
    
    $
    250
 21




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##### Table of Contents



(8) Segment Information
    RESIDUALS
    
    
    
    
    
    ENGINEERINGMANAGEMENT
    
    RAIL
    
    FACILITIES
    
    CORPORATE/OPERATIONS
    
    TRANSPORTATION
    
    DEVELOPMENT
    
    ELIMINATIONS
    
    CONSOLIDATEDThree Months Ended September 30, 2006Revenue from external services
    
    $
    76,984
    
    
    $
    11,147
    
    
    $
    2,940
    
    
    $
    
    
    
    $
    91,071Revenues from other segments
    
    
    424
    
    
    
    180
    
    
    
    21
    
    
    
    (625
    )
    
    
    Income (loss) from operations
    
    
    15,582
    
    
    
    1,396
    
    
    
    (219
    )
    
    
    (5,450
    )
    
    
    11,309Three Months Ended September
30, 2005Revenue from external services
    
    $
    70,909
    
    
    $
    12,005
    
    
    $
    5,324
    
    
    $
    
    
    
    $
    88,238Revenues from other segments
    
    
    700
    
    
    
    66
    
    
    
    26
    
    
    
    (792
    )
    
    
    Income (loss) from operations
    
    
    15,297
    
    
    
    1,761
    
    
    
    (193
    )
    
    
    (3,164
    )
    
    
    13,701
 RESIDUALS
    
    
    
    
    
    ENGINEERINGMANAGEMENT
    
    RAIL
    
    FACILITIES
    
    CORPORATE/OPERATIONS
    
    TRANSPORTATION
    
    DEVELOPMENT
    
    ELIMINATIONS
    
    CONSOLIDATEDNine Months Ended September
30, 2006Revenue from external services
    
    $
    213,302
    
    
    $
    34,041
    
    
    $
    9,273
    
    
    $
    
    
    
    $
    256,616Revenues from other segments
    
    
    1,693
    
    
    
    443
    
    
    
    95
    
    
    
    (2,231
    )
    
    
    Income (loss) from operations
    
    
    33,941
    
    
    
    5,769
    
    
    
    (1,192
    )
    
    
    (14,520
    )
    
    
    23,998Nine Months Ended September
30, 2005Revenue from external services
    
    $
    197,632
    
    
    $
    27,929
    
    
    $
    22,423
    
    
    $
    
    
    
    $
    247,984Revenues from other segments
    
    
    1,428
    
    
    
    1,039
    
    
    
    80
    
    
    
    (2,547
    )
    
    
    Income (loss) from operations
    
    
    36,330
    
    
    
    3,279
    
    
    
    539
    
    
    
    (17,114
    )
    
    
    23,034
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Segment income from operations
    
    $
    16,759
    
    
    $
    16,865
    
    
    $
    38,518
    
    
    $
    40,148Corporate
    
    
    (5,450
    )
    
    
    (3,164
    )
    
    
    (14,520
    )
    
    
    (17,114
    )Income from operations
    
    
    11,309
    
    
    
    13,701
    
    
    
    23,998
    
    
    
    23,034Total other expense, net
    
    
    6,179
    
    
    
    4,536
    
    
    
    15,830
    
    
    
    36,683Income (loss) before provision (benefit) for income taxes
    
    $
    5,130
    
    
    $
    9,165
    
    
    $
    8,168
    
    
    $
    (13,649
    )
  
 22




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##### Table of Contents



(9)
Stock Based Compensation
      September 30, 2006Three Months Ended
    
    Nine Months Ended(In thousands of dollars, except per share data)Compensation costs recorded for all plans, net of
tax expense of $339 and $863, respectively
    
    $
    477
    
    
    $
    1,212Impact of adopting SFAS No. 123R:Reduction in Income from operations
    
    $
    816
    
    
    $
    2,076Reduction in Income before income tax expense
    
    $
    816
    
    
    $
    2,076Reduction in Net income
    
    $
    477
    
    
    $
    1,212Reduction in Basic and diluted earnings per share
    
    $
    0.01
    
    
    $
    0.02
    23




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##### Table of Contents



Stock Option Plans
 2000 Plan
  Expected Volatility
    
    
    61.0
    %Expected Dividend
    
    
    10.0
    %Expected Term (in years)
    
    
    6.7Risk Free Rate
    
    
    5.1
    %
  For The Nine Months Ended September 30, 2006Weighted
    
    
    WeightedWeighted
    
    
    Average
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Fair Value
    
    
    Life In Years
    
    
    Value (000s)Options outstanding, December 31, 2005
    
    
    3,799,132
    
    
    $
    3.07Options granted
    
    
    553,750
    
    
    $
    4.18
    
    
    $
    1.11
    
    
    
    Options exercised
    
    
    (190,444
    )
    
    $
    2.62Options forfeited
    
    
    (112,300
    )
    
    $
    3.15Options outstanding, September 30, 2006
    
    
    4,050,138
    
    
    $
    3.24
    
    
    
    
    
    
    
    6.4
    
    
    $
    4,241Options exercisable and vested
    
    
    2,504,128
    
    
    $
    2.89
    
    
    
    
    
    
    
    5.1
    
    
    $
    3,564
 1993 Plan
  For The Nine Months Ended September 30, 2006Weighted
    
    
    WeightedWeighted
    
    
    Average
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Fair Value
    
    
    Life In Years
    
    
    Value (000s)Options outstanding, December 31, 2005
    
    
    21,000
    
    
    $
    4.46Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    Options outstanding, September 30, 2006
    
    
    21,000
    
    
    $
    4.46
    
    
    
    
    
    
    
    3.3
    
    
    $
    0.1Options exercisable and vested
    
    
    21,000
    
    
    $
    4.46
    
    
    
    
    
    
    
    3.3
    
    
    $
    0.1
 24




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##### Table of Contents



Other Options
  For The Nine Months Ended September 30, 2006Weighted
    
    
    WeightedWeighted
    
    
    Average
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Fair Value
    
    
    Life In Years
    
    
    Value (000s)Options outstanding, December 31, 2005
    
    
    1,224,160
    
    
    $
    2.82Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    Options outstanding, September 30, 2006
    
    
    1,224,160
    
    
    $
    2.82
    
    
    
    
    
    
    
    3.7
    
    
    $
    1,720Options exercisable and vested
    
    
    984,160
    
    
    $
    2.89
    
    
    
    
    
    
    
    3.3
    
    
    $
    1,307
    Number ofSharesNonvested at December 31, 2005
    
    
    100,777Granted
    
    
    410,855Vested
    
    
    (226,083
    )Forfeited
    
    
    (4,489
    )Nonvested at September 30, 2006
    
    
    281,060
  25




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##### Table of Contents



Prior to January 1, 2006
  September 30, 2005Three Months
    
    
    Nine MonthsEnded
    
    
    EndedNet income (loss) applicable to common stock, as reported
    
    $
    5,138
    
    
    $
    (18,688
    )Plus: Option redemptions, net of tax
    
    
    
    
    
    
    3,404Less: Compensation expense per SFAS 123, net of tax
    
    
    249
    
    
    
    1,601Pro forma net income (loss)
    
    $
    4,889
    
    
    $
    (16,885
    )Loss per share:Diluted income (loss) per share, as reported
    
    $
    0.07
    
    
    $
    (0.47
    )Pro forma income (loss) per share after effect of SFAS 123
    
    $
    0.06
    
    
    $
    (0.43
    )
  September 30, 2005Nine MonthsEndedRisk-free interest rate
    
    
    4.1
    %Expected volatility
    
    
    264.0
    %Expected term in years
    
    
    6.37
 26




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Background
     For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Contract
    
    
    83
    %
    
    
    81
    %
    
    
    83
    %
    
    
    82
    %Purchase order
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %Product sales
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Design/build construction
    
    
    0
    %
    
    
    5
    %
    
    
    1
    %
    
    
    7
    %Event
    
    
    12
    %
    
    
    9
    %
    
    
    11
    %
    
    
    6
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    27




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##### Table of Contents




    
    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.
 Historical Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    91,071
    
    
    
    100.0
    %
    
    $
    88,238
    
    
    
    100.0
    %
    
    $
    256,616
    
    
    
    100.0
    %
    
    $
    247,984
    
    
    
    100.0
    %Cost of services
    
    
    72,091
    
    
    
    79.2
    %
    
    
    70,495
    
    
    
    79.9
    %
    
    
    208,467
    
    
    
    81.2
    %
    
    
    201,232
    
    
    
    81.1
    %Gross profit
    
    
    18,980
    
    
    
    20.8
    %
    
    
    17,743
    
    
    
    20.1
    %
    
    
    48,149
    
    
    
    18.8
    %
    
    
    46,752
    
    
    
    18.9
    %Selling, general and administrative expenses
    
    
    7,641
    
    
    
    8.4
    %
    
    
    6,417
    
    
    
    7.3
    %
    
    
    23,994
    
    
    
    9.4
    %
    
    
    17,976
    
    
    
    7.3
    %Transaction costs and expenses
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    316
    
    
    
    0.1
    %
    
    
    1,517
    
    
    
    0.6
    %Stock option redemptions and transaction bonuses
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    6,805
    
    
    
    2.7
    %Gain on sale of assets
    
    
    30
    
    
    
    0.0
    %
    
    
    (2,375
    )
    
    
    (2.7
    )%
    
    
    (159
    )
    
    
    (0.1
    )%
    
    
    (2,580
    )
    
    
    (1.0
    )%Income from operations
    
    
    11,309
    
    
    
    12.4
    %
    
    
    13,701
    
    
    
    15.5
    %
    
    
    23,998
    
    
    
    9.4
    %
    
    
    23,034
    
    
    
    9.3
    %Other (income) expense:Other (income) expense, net
    
    
    911
    
    
    
    1.0
    %
    
    
    (175
    )
    
    
    (0.2
    )%
    
    
    240
    
    
    
    0.1
    %
    
    
    (116
    )
    
    
    0.0
    %Debt extinguishment costs
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    19,487
    
    
    
    7.9
    %Interest income
    
    
    (120
    )
    
    
    (0.1
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (412
    )
    
    
    (0.1
    )%
    
    
    
    
    
    
    0.0
    %Interest expense
    
    
    5,388
    
    
    
    5.9
    %
    
    
    4,711
    
    
    
    5.3
    %
    
    
    16,002
    
    
    
    6.2
    %
    
    
    17,312
    
    
    
    7.0
    %Total other expense, net
    
    
    6,179
    
    
    
    6.8
    %
    
    
    4,536
    
    
    
    5.1
    %
    
    
    15,830
    
    
    
    6.2
    %
    
    
    36,683
    
    
    
    14.9
    %Income (loss) before provision (benefit) for income taxes
    
    
    5,130
    
    
    
    5.6
    %
    
    
    9,165
    
    
    
    10.4
    %
    
    
    8,168
    
    
    
    3.2
    %
    
    
    (13,649
    )
    
    
    (5.6
    )%Provision (benefit) for income taxes
    
    
    2,120
    
    
    
    2.3
    %
    
    
    4,027
    
    
    
    4.6
    %
    
    
    3,396
    
    
    
    1.3
    %
    
    
    (4,548
    )
    
    
    (1.9
    )%Net income (loss) before preferred stock dividends
    
    
    3,010
    
    
    
    3.3
    %
    
    
    5,138
    
    
    
    5.8
    %
    
    
    4,772
    
    
    
    1.9
    %
    
    
    (9,101
    )
    
    
    (3.7
    )%Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,587Net income (loss) applicable to common stock
    
    $
    3,010
    
    
    
    
    
    
    $
    5,138
    
    
    
    
    
    
    $
    4,772
    
    
    
    
    
    
    $
    (18,688
    )
 28




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##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenueResiduals Management Operations
    
    $
    77,408
    
    
    $
    71,609
    
    
    $
    214,995
    
    
    $
    199,060Rail Transportation
    
    
    11,327
    
    
    
    12,071
    
    
    
    34,484
    
    
    
    28,968Engineering, Facilities, and Development
    
    
    2,961
    
    
    
    5,350
    
    
    
    9,368
    
    
    
    22,503Elimination
    
    
    (625
    )
    
    
    (792
    )
    
    
    (2,231
    )
    
    
    (2,547
    )$
    91,071
    
    
    $
    88,238
    
    
    $
    256,616
    
    
    $
    247,984Income (loss) from operationsResiduals Management Operations
    
    $
    15,582
    
    
    $
    15,297
    
    
    $
    33,941
    
    
    $
    36,330Rail Transportation
    
    
    1,396
    
    
    
    1,761
    
    
    
    5,769
    
    
    
    3,279Engineering, Facilities, and Development
    
    
    (219
    )
    
    
    (193
    )
    
    
    (1,192
    )
    
    
    539Corporate
    
    
    (5,450
    )
    
    
    (3,164
    )
    
    
    (14,520
    )
    
    
    (17,114
    )$
    11,309
    
    
    $
    13,701
    
    
    $
    23,998
    
    
    $
    23,034
 29




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##### Table of Contents



Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
        30




---



##### Table of Contents



Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
       31




---



##### Table of Contents



Liquidity and Capital Resources
 Overview
  Historical Cash Flows
 Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 32




---



##### Table of Contents



Cash Flows from Financing Activities
 Capital Expenditure Requirements
  Debt Service Requirements
 Senior Credit Facility
   (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 $50.0 million as a subset of the Revolver. At September 30,
2006, we had approximately $37.7 million of Letters of Credit outstanding.
  Eurodollar
    
    Base RateRevolver
    
    
    8.07
    %
    
    
    10.00
    %Term
    
    
    7.76
    %
    
    
    9.50
    %
    33




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##### Table of Contents











Other Debt






Notes Payable to Sellers of Acquired Businesses




34



---



##### Table of Contents



Future Minimum Principal Payments of Debt
  Nonrecourse
    
    
    CapitalLong-Term
    
    
    Project
    
    
    Lease
    
    
    Estimated
    
    
    Operating
    
    
    PurchaseYear Ended December 31,
    
    Debt
    
    
    Revenue Bonds
    
    
    Obligations
    
    
    Interest
    
    
    Leases
    
    
    Commitments
    
    
    Total2006
    
    $
    26
    
    
    $
    3,480
    
    
    $
    907
    
    
    $
    6,719
    
    
    $
    2,267
    
    
    $
    3,143
    
    
    $
    16,5422007
    
    
    1,441
    
    
    
    3,710
    
    
    
    4,564
    
    
    
    21,712
    
    
    
    14,443
    
    
    
    4,036
    
    
    
    49,9062008
    
    
    1,047
    
    
    
    3,935
    
    
    
    4,918
    
    
    
    21,002
    
    
    
    13,088
    
    
    
    2,993
    
    
    
    46,9832009
    
    
    
    
    
    
    4,165
    
    
    
    2,437
    
    
    
    20,520
    
    
    
    10,136
    
    
    
    2,993
    
    
    
    40,2512010
    
    
    
    
    
    
    4,420
    
    
    
    1,220
    
    
    
    18,992
    
    
    
    7,897
    
    
    
    2,993
    
    
    
    35,5222011-2015
    
    
    210,000
    
    
    
    24,005
    
    
    
    560
    
    
    
    24,945
    
    
    
    11,290
    
    
    
    
    
    
    
    270,8002016-2020
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    3,106
    
    
    
    1,326
    
    
    
    
    
    
    
    12,682Thereafter
    
    
    
    
    
    
    7,375
    
    
    
    
    
    
    
    1,142
    
    
    
    1,662
    
    
    
    
    
    
    
    10,179Total
    
    $
    212,514
    
    
    $
    59,340
    
    
    $
    14,606
    
    
    $
    118,138
    
    
    $
    62,109
    
    
    $
    16,158
    
    
    $
    482,865
     Interest Rate Risk
  Working Capital
  35




---



##### Table of Contents



Accounting Pronouncements
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Derivatives and Hedging Activities
      36




---



##### Table of Contents



Interest Rate Risk
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   37




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 6. Exhibits
      38




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.Date: November 2, 2006
    
    By:
    
    /s/ Robert C. Boucher, Jr.Chief Executive Officer and DirectorDate: November 2, 2006
    
    By:
    
    /s/ J. Paul WithrowChief Financial Officer and Director
 39




---



##### Table of Contents



Exhibit No
    
    Description31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
 40