##### Table of Contents



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 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 MAY 5, 2006Common stock, par value $.002
    
    73,338,568




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.
 INDEX
 PAGEPART I  FINANCIAL INFORMATIONCondensed Consolidated Balance Sheets as of March 31, 2006
(Unaudited), and December 31, 2005 (Derived From Audited Financial
Statements)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the
Three Months Ended March 31, 2006 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 6. Exhibits
    
    
    35Certification of CEOCertification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO
 2




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##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS EXCEPT SHARE DATA)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Derived FromAudited FinancialStatements)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,702
    
    
    $
    18,571Restricted cash
    
    
    1,721
    
    
    
    2,444Accounts receivable, net
    
    
    71,994
    
    
    
    66,429Costs and estimated earnings in excess of billings
    
    
    7,979
    
    
    
    10,579Prepaid expenses and other current assets
    
    
    14,646
    
    
    
    15,168Total current assets
    
    
    104,042
    
    
    
    113,191Property, machinery & equipment, net
    
    
    232,442
    
    
    
    227,678Other Assets:Costs and estimated earnings in excess of billings
    
    
    3,837
    
    
    
    3,837Goodwill
    
    
    176,196
    
    
    
    176,196Restricted cash  construction fund
    
    
    
    
    
    
    406Restricted cash  debt service fund
    
    
    8,873
    
    
    
    7,304Other, net
    
    
    17,851
    
    
    
    14,694Total assets
    
    $
    543,241
    
    
    $
    543,306LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current maturities on long-term debt
    
    $
    1,776
    
    
    $
    1,776Current maturities of nonrecourse project revenue bonds
    
    
    3,480
    
    
    
    3,480Current maturities of capital lease obligations
    
    
    3,334
    
    
    
    3,175Accrued interest payable
    
    
    3,924
    
    
    
    962Accounts payable and accrued expenses
    
    
    48,891
    
    
    
    47,539Total current liabilities
    
    
    61,405
    
    
    
    56,932Long-Term Debt:Long-term debt obligations, net
    
    
    212,213
    
    
    
    212,488Nonrecourse project revenue bonds, net
    
    
    55,581
    
    
    
    55,575Capital lease obligations, net
    
    
    11,572
    
    
    
    11,888Total long-term debt
    
    
    279,366
    
    
    
    279,951Other long-term liabilities
    
    
    23,272
    
    
    
    22,269Total liabilities
    
    
    364,043
    
    
    
    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, 73,310,068 and 72,813,378 shares issued and
outstanding in 2006 and 2005, respectively
    
    
    147
    
    
    
    146Unearned restricted stock
    
    
    
    
    
    
    (404
    )Additional paid in capital
    
    
    192,185
    
    
    
    197,453Accumulated deficit
    
    
    (14,286
    )
    
    
    (13,525
    )Accumulated other comprehensive income
    
    
    1,152
    
    
    
    484Total stockholders equity
    
    
    179,198
    
    
    
    184,154Total liabilities and stockholders equity
    
    $
    543,241
    
    
    $
    543,306
  3




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SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
 Three Months EndedMarch 31,2006
    
    
    2005Revenue
    
    $
    79,278
    
    
    $
    76,214Cost of services
    
    
    67,057
    
    
    
    64,176Gross profit
    
    
    12,221
    
    
    
    12,038Selling, general and administrative expenses (including $0.7 million and $0 of share
based compensation expense for 2006 and 2005, respectively)
    
    
    8,771
    
    
    
    6,169Gain on sale of assets
    
    
    (35
    )
    
    
    (76
    )Income from operations
    
    
    3,485
    
    
    
    5,945Other expense:Interest expense
    
    
    5,268
    
    
    
    6,515Interest income
    
    
    (155
    )
    
    
    Other income, net
    
    
    (321
    )
    
    
    (3
    )Total other expense, net
    
    
    4,792
    
    
    
    6,512Loss before benefit for income taxes
    
    
    (1,307
    )
    
    
    (567
    )Benefit for income taxes
    
    
    (546
    )
    
    
    (227
    )Net loss before preferred stock dividends
    
    
    (761
    )
    
    
    (340
    )Preferred stock dividends
    
    
    
    
    
    
    2,272Net loss applicable to common stock
    
    $
    (761
    )
    
    $
    (2,612
    )Loss per share:Basic net loss per share
    
    $
    (0.01
    )
    
    $
    (0.13
    )Diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.13
    )Weighted average shares outstanding for basic and diluted earnings per share
    
    
    72,923,667
    
    
    
    20,020,183
  4




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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 $418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668
    
    
    
    668
    
    
    $
    668Common stock cash
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,961
    )
    
    
    
    
    
    
    
    
    
    
    (5,961
    )
    
    
    Stock dividends
    
    
    284,806
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    149,944
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    Issuance of
restricted stock
    
    
    66,429
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    Forfeiture of
restricted stock
    
    
    (4,489
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesting of
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    Share based
compensation on options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    526
    
    
    
    
    
    
    
    
    
    
    
    526
    
    
    
    Net loss
applicable to
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (761
    )
    
    
    
    
    
    
    (761
    )
    
    
    (761
    )BALANCE, March 31,
2006
    
    
    73,310,068
    
    
    $
    147
    
    
    $
    
    
    
    $
    192,185
    
    
    $
    (14,286
    )
    
    $
    1,152
    
    
    $
    179,198
    
    
    $
    (93
    )
  5




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SYNAGRO TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (IN THOUSANDS)
 Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activities:Net loss applicable to common stock
    
    $
    (761
    )
    
    $
    (2,612
    )Adjustments to reconcile net income applicable to common stock to net
cash provided by operating activities:Preferred stock dividends
    
    
    
    
    
    
    2,272Bad debt expense
    
    
    150
    
    
    
    150Depreciation and amortization expense
    
    
    5,687
    
    
    
    5,228Amortization of debt financing costs
    
    
    287
    
    
    
    321Benefit for income taxes
    
    
    (546
    )
    
    
    (227
    )Share based compensation expense
    
    
    710
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    88Gain on sale of property, machinery and equipment
    
    
    (35
    )
    
    
    (76
    )(Increase) decrease in the following, net:Accounts receivable
    
    
    (5,715
    )
    
    
    6,076Cost and estimated earnings in excess of billings
    
    
    2,600
    
    
    
    (2,867
    )Prepaid expenses and other assets
    
    
    1,000
    
    
    
    1,296Increase (decrease) in the following:Accrued interest payable
    
    
    2,962
    
    
    
    4,848Accounts payable, accrued expenses and other long-term liabilities
    
    
    230
    
    
    
    (5,758
    )Net cash provided by operating activities
    
    
    6,569
    
    
    
    8,739Cash flows from investing activities:Purchases of property, machinery and equipment
    
    
    (9,936
    )
    
    
    (2,932
    )Facility construction funded by restricted cash
    
    
    
    
    
    
    (1,648
    )Decrease in restricted cash for facility construction
    
    
    
    
    
    
    1,648Proceeds from sale of property, machinery and equipment
    
    
    152
    
    
    
    168Increase in other restricted cash accounts
    
    
    (440
    )
    
    
    (1,519
    )Net cash used in investing activities
    
    
    (10,224
    )
    
    
    (4,283
    )Cash flows from financing activities:Payments of debt
    
    
    (1,057
    )
    
    
    (6,741
    )Net increase in bank revolver borrowings
    
    
    
    
    
    
    1,500Net decrease in book overdrafts
    
    
    (250
    )
    
    
    (261
    )Debt issuance costs
    
    
    (334
    )
    
    
    Dividends on common stock
    
    
    (5,961
    )
    
    
    Exercise of options
    
    
    388
    
    
    
    993Net cash used in financing activities
    
    
    (7,214
    )
    
    
    (4,509
    )Net decrease in cash and cash equivalents
    
    
    (10,869
    )
    
    
    (53
    )Cash and cash equivalents, beginning of period
    
    
    18,571
    
    
    
    326Cash and cash equivalents, end of period
    
    $
    7,702
    
    
    $
    273Schedule of
non-cash transactions:Capital
lease agreements entered into for operating and transportation
equipment
    
    $
    627
    
    
    $
    
  6




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SYNAGRO TECHNOLOGIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED
 (1) Basis of Presentation
 General
    Accounting Pronouncements
  ,
  7




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##### Table of Contents



Use of Estimates
  Allowance for Doubtful Accounts
 Loss Contracts
 Long Term Construction Contracts
 Property and Equipment/Long-Lived Assets
  Goodwill
 Purchase Accounting
 Income Taxes
 8




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##### Table of Contents



Legal and Contingency Accruals
 Derivatives
 Self-Insurance Reserves
  Reclassifications
  (2) Costs and Estimated Earnings in Excess of Billings
  MARCH 31,
    
    
    DECEMBER 31,2006
    
    
    2005(IN THOUSANDS)Costs and estimated earnings on contracts in progress
    
    $
    54,831
    
    
    $
    51,709Less  Billings to date
    
    
    (43,015
    )
    
    
    (37,293
    )Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    11,816
    
    
    $
    14,416Current assets
    
    $
    7,979
    
    
    $
    10,579Non current assets
    
    
    3,837
    
    
    
    3,837Total
    
    $
    11,816
    
    
    $
    14,416
  (3) Long-Term Debt Obligations
  MARCH 31,
    
    
    DECEMBER 31,2006
    
    
    2005(in thousands)$305 million senior credit facility Term loans
    
    $
    210,000
    
    
    $
    210,000Notes payable to former owners
    
    
    3,982
    
    
    
    4,257Other notes payable
    
    
    7
    
    
    
    7Total debt
    
    
    213,989
    
    
    
    214,264Less: Current maturities
    
    
    (1,776
    )
    
    
    (1,776
    )Long-term debt, net of current maturities
    
    $
    212,213
    
    
    $
    212,488
 Senior Credit Facility
  9




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##### Table of Contents



(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 Revolving Loan. At March 31,
2006, the Company had approximately $33.7 million of Letters of Credit outstanding.
  Eurodollar
    
    Base RateRevolver
    
    
    7.58
    %
    
    
    9.50
    %Term
    
    
    6.89
    %
    
    
    9.00
    %
  1 2
    Derivatives and Hedging Activities
  10




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(4) Nonrecourse Project Revenue Bonds
 March 31,
    
    
    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 $279 and $285, respectively
    
    
    19,796
    
    
    
    19,790Series 2002B  Revenue bonds due 2005 at stated interest rate of 4.25%
    
    
    610
    
    
    
    61020,406
    
    
    
    20,400Total nonrecourse project revenue bonds
    
    
    59,061
    
    
    
    59,055Less: Current maturities
    
    
    (3,480
    )
    
    
    (3,480
    )Nonrecourse project revenue bonds, net of current maturities
    
    $
    55,581
    
    
    $
    55,575Amounts recorded in other assets as restricted cash  debt service fund
    
    $
    8,873
    
    
    $
    7,304
 Maryland Project Revenue Bonds
  11




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##### Table of Contents



Sacramento Project Bonds
   12




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##### Table of Contents



(5) Commitments and Contingencies
 Litigation
  Reliance Insurance
    13




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##### Table of Contents



Design and Build Contract Risk
  Other
  Self-Insurance
  (6) Earnings Per Common Share
  14




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005(in thousands except share data)Net loss applicable to common stock:Net loss before preferred stock dividends
    
    $
    (761
    )
    
    $
    (340
    )Preferred stock dividends
    
    
    
    
    
    
    2,272Net loss applicable to common stock
    
    $
    (761
    )
    
    $
    (2,612
    )Loss per share:Basic net loss per share
    
    $
    (0.01
    )
    
    $
    (0.13
    )Diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.13
    )Weighted average shares outstanding for basic and diluted earnings per share
    
    
    72,923,667
    
    
    
    20,020,183
  15




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(7) Condensed Consolidating Financial Statements
  16




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##### Table of Contents



CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2006
(Dollars in Thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    7,267
    
    
    $
    39
    
    
    $
    396
    
    
    $
    
    
    
    $
    7,702Restricted cash
    
    
    
    
    
    
    906
    
    
    
    815
    
    
    
    
    
    
    
    1,721Accounts receivable, net
    
    
    
    
    
    
    71,054
    
    
    
    953
    
    
    
    (13
    )
    
    
    71,994Prepaid expenses and other current assets
    
    
    3,019
    
    
    
    19,497
    
    
    
    109
    
    
    
    
    
    
    
    22,625Total current assets
    
    
    10,286
    
    
    
    91,496
    
    
    
    2,273
    
    
    
    (13
    )
    
    
    104,042Property, machinery & equipment, net
    
    
    
    
    
    
    202,961
    
    
    
    29,481
    
    
    
    
    
    
    
    232,442Other Assets:Goodwill
    
    
    
    
    
    
    176,196
    
    
    
    
    
    
    
    
    
    
    
    176,196Investments in subsidiaries
    
    
    102,848
    
    
    
    
    
    
    
    
    
    
    
    (102,848
    )
    
    
    Intercompany
    
    
    292,107
    
    
    
    
    
    
    
    
    
    
    
    (292,107
    )
    
    
    Restricted cash  construction fund
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted cash  debt service fund
    
    
    
    
    
    
    6,304
    
    
    
    2,569
    
    
    
    
    
    
    
    8,873Other, net
    
    
    9,886
    
    
    
    8,980
    
    
    
    2,822
    
    
    
    
    
    
    
    21,688Total assets
    
    $
    415,127
    
    
    $
    485,937
    
    
    $
    37,145
    
    
    $
    (394,968
    )
    
    $
    543,241LIABILITIES 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
    
    
    
    
    
    
    3,334
    
    
    
    
    
    
    
    
    
    
    
    3,334Accrued interest payable
    
    
    2,717
    
    
    
    846
    
    
    
    361
    
    
    
    
    
    
    
    3,924Accounts payable and accrued expenses
    
    
    
    
    
    
    48,238
    
    
    
    666
    
    
    
    (13
    )
    
    
    48,891Total current liabilities
    
    
    2,717
    
    
    
    57,064
    
    
    
    1,637
    
    
    
    (13
    )
    
    
    61,405Long-Term Debt:Long-term debt obligations, net
    
    
    210,000
    
    
    
    2,213
    
    
    
    
    
    
    
    
    
    
    
    212,213Nonrecourse project revenue bonds, net
    
    
    
    
    
    
    35,785
    
    
    
    19,796
    
    
    
    
    
    
    
    55,581Intercompany
    
    
    
    
    
    
    291,987
    
    
    
    120
    
    
    
    (292,107
    )
    
    
    Capital lease obligations, net
    
    
    
    
    
    
    11,572
    
    
    
    
    
    
    
    
    
    
    
    11,572Total long-term debt
    
    
    210,000
    
    
    
    341,557
    
    
    
    19,916
    
    
    
    (292,107
    )
    
    
    279,366Other long-term liabilities
    
    
    23,212
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    23,272Total liabilities
    
    
    235,929
    
    
    
    398,681
    
    
    
    21,553
    
    
    
    (292,120
    )
    
    
    364,043Stockholders Equity:Capital
    
    
    192,332
    
    
    
    36,339
    
    
    
    14,649
    
    
    
    (50,988
    )
    
    
    192,332Accumulated deficit
    
    
    (14,286
    )
    
    
    50,917
    
    
    
    943
    
    
    
    (51,860
    )
    
    
    (14,286
    )Accumulated other comprehensive income
    
    
    1,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,152Total stockholders equity
    
    
    179,198
    
    
    
    87,256
    
    
    
    15,592
    
    
    
    (102,848
    )
    
    
    179,198Total liabilities and stockholders equity
    
    $
    415,127
    
    
    $
    485,937
    
    
    $
    37,145
    
    
    $
    (394,968
    )
    
    $
    543,241
 17




---



##### Table of Contents



CONDENSED 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
 18




---



##### Table of Contents



CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(Dollars in Thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    78,101
    
    
    $
    1,211
    
    
    $
    (34
    )
    
    $
    79,278Cost of services
    
    
    
    
    
    
    66,395
    
    
    
    696
    
    
    
    (34
    )
    
    
    67,057Gross Profit
    
    
    
    
    
    
    11,706
    
    
    
    515
    
    
    
    
    
    
    
    12,221Selling, general and administrative expenses
    
    
    
    
    
    
    8,768
    
    
    
    3
    
    
    
    
    
    
    
    8,771Gain on sale of assets
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Income from operations
    
    
    
    
    
    
    2,973
    
    
    
    512
    
    
    
    
    
    
    
    3,485Other expense:Interest expense
    
    
    4,281
    
    
    
    697
    
    
    
    290
    
    
    
    
    
    
    
    5,268Intercompany interest (income) expense
    
    
    (6,463
    )
    
    
    6,462
    
    
    
    1
    
    
    
    
    
    
    
    Equity in earnings of subsidiaries
    
    
    2,218
    
    
    
    
    
    
    
    
    
    
    
    (2,218
    )
    
    
    Other (income) expense, net
    
    
    (321
    )
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    (476
    )Total other expense, net
    
    
    (285
    )
    
    
    7,004
    
    
    
    291
    
    
    
    (2,218
    )
    
    
    4,792Income (loss) before provision (benefit) for income
taxes
    
    
    285
    
    
    
    (4,031
    )
    
    
    221
    
    
    
    2,218
    
    
    
    (1,307
    )Provision (benefit) for income taxes
    
    
    1,046
    
    
    
    (1,684
    )
    
    
    92
    
    
    
    
    
    
    
    (546
    )Net income (loss) before preferred stock dividends
    
    
    (761
    )
    
    
    (2,347
    )
    
    
    129
    
    
    
    2,218
    
    
    
    (761
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) applicable to common stock
    
    $
    (761
    )
    
    $
    (2,347
    )
    
    $
    129
    
    
    $
    2,218
    
    
    $
    (761
    )
 CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(Dollars in Thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    75,154
    
    
    $
    1,060
    
    
    $
    
    
    
    $
    76,214Cost of services
    
    
    
    
    
    
    63,615
    
    
    
    561
    
    
    
    
    
    
    
    64,176Gross Profit
    
    
    
    
    
    
    11,539
    
    
    
    499
    
    
    
    
    
    
    
    12,038Selling, general and administrative expenses
    
    
    
    
    
    
    6,161
    
    
    
    8
    
    
    
    
    
    
    
    6,169Gain on sale of assets
    
    
    
    
    
    
    (76
    )
    
    
    
    
    
    
    
    
    
    
    (76
    )Income from operations
    
    
    
    
    
    
    5,454
    
    
    
    491
    
    
    
    
    
    
    
    5,945Other expense:Interest expense
    
    
    5,234
    
    
    
    970
    
    
    
    311
    
    
    
    
    
    
    
    6,515Intercompany interest (income) expense
    
    
    (6,184
    )
    
    
    6,184
    
    
    
    
    
    
    
    
    
    
    
    Equity in earnings of subsidiaries
    
    
    912
    
    
    
    
    
    
    
    
    
    
    
    (912
    )
    
    
    Other (income) expense, net
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )Total other expense, net
    
    
    (38
    )
    
    
    7,151
    
    
    
    311
    
    
    
    (912
    )
    
    
    6,512Income (loss) before provision (benefit) for income
taxes
    
    
    38
    
    
    
    (1,697
    )
    
    
    180
    
    
    
    912
    
    
    
    (567
    )Provision (benefit) for income taxes
    
    
    378
    
    
    
    (677
    )
    
    
    72
    
    
    
    
    
    
    
    (227
    )Net income (loss) before preferred stock dividends.
    
    
    (340
    )
    
    
    (1,020
    )
    
    
    108
    
    
    
    912
    
    
    
    (340
    )Preferred stock dividends
    
    
    2,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,272Net income (loss) applicable to common stock
    
    $
    (2,612
    )
    
    $
    (1,020
    )
    
    $
    108
    
    
    $
    912
    
    
    $
    (2,612
    )
 19




---



##### Table of Contents



CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(Dollars in Thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss) applicable to common stock
    
    $
    (761
    )
    
    $
    (2,347
    )
    
    $
    129
    
    
    $
    2,218
    
    
    $
    (761
    )Adjustments to reconcile net income applicable to
common stock to net cash provided by operating
activities:Bad debt expense
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Depreciation and amortization expense
    
    
    
    
    
    
    5,420
    
    
    
    267
    
    
    
    
    
    
    
    5,687Amortization of debt financing costs
    
    
    281
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    287Provision (benefit) for deferred income taxes
    
    
    1,046
    
    
    
    (1,684
    )
    
    
    92
    
    
    
    
    
    
    
    (546
    )Share based compensation
    
    
    
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    710Gain on sale of property, machinery and
equipment
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )(Increase) decrease in the following, net:Accounts receivable
    
    
    
    
    
    
    (5,704
    )
    
    
    (11
    )
    
    
    
    
    
    
    (5,715
    )Cost in excess of billings
    
    
    
    
    
    
    2,600
    
    
    
    
    
    
    
    
    
    
    
    2,600Prepaid expenses and other current assets
    
    
    (170
    )
    
    
    1,152
    
    
    
    18
    
    
    
    
    
    
    
    1,000Equity in earnings
    
    
    2,218
    
    
    
    
    
    
    
    
    
    
    
    (2,218
    )
    
    
    Increase (decrease) in the following, net:Accrued interest payable
    
    
    2,053
    
    
    
    640
    
    
    
    269
    
    
    
    
    
    
    
    2,962Intercompany advances  trade
    
    
    (6,463
    )
    
    
    6,462
    
    
    
    1
    
    
    
    
    
    
    
    Accounts payable and accrued expenses and other
long term liabilities
    
    
    (351
    )
    
    
    763
    
    
    
    (182
    )
    
    
    
    
    
    
    230Net cash (used in) provided by operating activities
    
    
    (2,147
    )
    
    
    8,127
    
    
    
    589
    
    
    
    
    
    
    
    6,569Cash flows from investing activities:Purchase of property, machinery & equipment
    
    
    
    
    
    
    (5,128
    )
    
    
    (4,808
    )
    
    
    
    
    
    
    (9,936
    )Proceeds from sale of property, machinery &
equipment
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    152Increase in other restricted cash accounts
    
    
    
    
    
    
    57
    
    
    
    (497
    )
    
    
    
    
    
    
    (440
    )Net cash used in investing activities
    
    
    
    
    
    
    (4,919
    )
    
    
    (5,305
    )
    
    
    
    
    
    
    (10,224
    )Cash flows from financing activities:Payments of debt
    
    
    
    
    
    
    (1,057
    )
    
    
    
    
    
    
    
    
    
    
    (1,057
    )Intercompany notes with subsidiaries
    
    
    1,896
    
    
    
    (1,896
    )
    
    
    
    
    
    
    
    
    
    
    Capital contributions
    
    
    (4,808
    )
    
    
    
    
    
    
    4,808
    
    
    
    
    
    
    
    Debt issuance costs
    
    
    (334
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (334
    )(Increase) decrease in book overdraft
    
    
    
    
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    (250
    )Common stock dividends
    
    
    (5,961
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,961
    )Exercise of options
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Net cash (used in) provided by financing activities.
    
    
    (8,819
    )
    
    
    (3,203
    )
    
    
    4,808
    
    
    
    
    
    
    
    (7,214
    )Net increase (decrease) in cash and cash equivalents
    
    
    (10,966
    )
    
    
    5
    
    
    
    92
    
    
    
    
    
    
    
    (10,869
    )Cash and cash equivalents, beginning of period
    
    
    18,233
    
    
    
    34
    
    
    
    304
    
    
    
    
    
    
    
    18,571Cash and cash equivalents, end of period
    
    $
    7,267
    
    
    $
    39
    
    
    $
    396
    
    
    $
    
    
    
    $
    7,702
 20




---



##### Table of Contents



CONSOLIDATING STATEMENTS OF CASH FLOWS
AS OF MARCH 31, 2005
(Dollars in Thousands)
 Non-Guarantor
    
    
    GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss) applicable to common stock
    
    $
    (2,612
    )
    
    $
    (1,020
    )
    
    $
    108
    
    
    $
    912
    
    
    $
    (2,612
    )Adjustments to reconcile net income applicable to
common stock to net cash provided by operating
activities:Preferred stock dividends
    
    
    2,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,272Bad debt expense
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Depreciation and amortization expense
    
    
    
    
    
    
    4,963
    
    
    
    265
    
    
    
    
    
    
    
    5,228Amortization of debt financing costs
    
    
    314
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    321Provision (benefit) for deferred income taxes
    
    
    378
    
    
    
    (677
    )
    
    
    72
    
    
    
    
    
    
    
    (227
    )Tax benefit from exercise of stock options
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Gain on sale of property, machinery and
equipment
    
    
    
    
    
    
    (76
    )
    
    
    
    
    
    
    
    
    
    
    (76
    )(Increase) decrease in the following, net:Accounts receivable
    
    
    
    
    
    
    7,238
    
    
    
    (1,162
    )
    
    
    
    
    
    
    6,076Cost in excess of billings
    
    
    
    
    
    
    (2,867
    )
    
    
    
    
    
    
    
    
    
    
    (2,867
    )Prepaid expenses and other current assets
    
    
    240
    
    
    
    1,133
    
    
    
    (77
    )
    
    
    
    
    
    
    1,296Equity in earnings
    
    
    912
    
    
    
    
    
    
    
    
    
    
    
    (912
    )
    
    
    Increase (decrease) in the following, net:Accrued interest payable
    
    
    3,676
    
    
    
    925
    
    
    
    247
    
    
    
    
    
    
    
    4,848Intercompany advances  trade
    
    
    (6,184
    )
    
    
    6,184
    
    
    
    
    
    
    
    
    
    
    
    Accounts payable and accrued expenses and other
long term liabilities
    
    
    (357
    )
    
    
    (5,379
    )
    
    
    (22
    )
    
    
    
    
    
    
    (5,758
    )Net cash (used in) provided by operating activities
    
    
    (1,273
    )
    
    
    10,574
    
    
    
    (562
    )
    
    
    
    
    
    
    8,739Cash flows from investing activities:Purchase of property, machinery & equipment
    
    
    
    
    
    
    (2,850
    )
    
    
    (82
    )
    
    
    
    
    
    
    (2,932
    )Proceeds from sale of property, machinery & equipment
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    168Facility 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
    
    
    
    
    
    
    (1,519
    )
    
    
    
    
    
    
    
    
    
    
    (1,519
    )Net cash used in investing activities
    
    
    
    
    
    
    (4,201
    )
    
    
    (82
    )
    
    
    
    
    
    
    (4,283
    )Cash flows from financing activities:Payments of debt
    
    
    (1,961
    )
    
    
    (780
    )
    
    
    (4,000
    )
    
    
    
    
    
    
    (6,741
    )Net increase in bank revolver borrowings
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500Net decrease in book overdrafts
    
    
    
    
    
    
    (261
    )
    
    
    
    
    
    
    
    
    
    
    (261
    )Intercompany notes with subsidiaries
    
    
    5,321
    
    
    
    (5,321
    )
    
    
    
    
    
    
    
    
    
    
    Capital contributions
    
    
    (4,647
    )
    
    
    
    
    
    
    4,647
    
    
    
    
    
    
    
    Exercise of options
    
    
    993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    993Net cash (used in) provided by financing activities
    
    
    1,206
    
    
    
    (6,362
    )
    
    
    647
    
    
    
    
    
    
    
    (4,509
    )Net increase (decrease) in cash and cash equivalents
    
    
    (67
    )
    
    
    11
    
    
    
    3
    
    
    
    
    
    
    
    (53
    )Cash and cash equivalents, beginning of period
    
    
    99
    
    
    
    21
    
    
    
    206
    
    
    
    
    
    
    
    326Cash and cash equivalents, end of period
    
    $
    32
    
    
    $
    32
    
    
    $
    209
    
    
    $
    
    
    
    $
    273
 21




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##### Table of Contents



(8) Segment Information
    Residuals
    
    
    
    
    
    EngineeringManagement
    
    Rail
    
    Facilities
    
    Segments
    
    Corporate/Operations
    
    Transportation
    
    Development
    
    Combined
    
    Eliminations
    
    ConsolidatedThree Months Ended March 31,
2006Revenue from external services
    
    $
    65,244
    
    
    $
    10,885
    
    
    $
    3,149
    
    
    $
    79,278
    
    
    $
    
    
    
    $
    79,278Revenues from other segments
    
    $
    305
    
    
    $
    169
    
    
    $
    34
    
    
    $
    508
    
    
    $
    (508
    )
    
    $
    Income (loss) from operations
    
    $
    6,939
    
    
    $
    1,940
    
    
    $
    (592
    )
    
    $
    8,287
    
    
    $
    (4,802
    )
    
    $
    3,485Three Months Ended March 31,
2005Revenue from external services
    
    $
    58,293
    
    
    $
    7,284
    
    
    $
    10,637
    
    
    $
    76,214
    
    
    $
    
    
    
    $
    76,214Revenues from other segments
    
    $
    228
    
    
    $
    665
    
    
    $
    
    
    
    $
    893
    
    
    $
    (893
    )
    
    $
    Income (loss) from operations
    
    $
    8,147
    
    
    $
    488
    
    
    $
    663
    
    
    $
    9,298
    
    
    $
    (3,353
    )
    
    $
    5,945
  Three Months Ended March 31,2006
    
    
    2005(in thousands)Segment income from operations
    
    $
    8,287
    
    
    $
    9,298Corporate expenses and adjustments
    
    
    4,802
    
    
    
    3,353Income from operations
    
    
    3,485
    
    
    
    5,945Total other expense, net
    
    
    4,792
    
    
    
    6,512Loss before benefit for income taxes
    
    $
    (1,307
    )
    
    $
    (567
    )
 (9) Stock Based Compensation
   22




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##### Table of Contents



Three Months EndedMarch 31, 2006(In thousands of dollars,expect per share data)Compensation costs recorded for all plans, net of tax benefit of $296
    
    $
    414Impact of adopting SFAS No. 123R to:Income from operations
    
    $
    710Loss before benefit for income taxes
    
    $
    710Net loss applicable to common stock
    
    $
    414Basic and diluted earnings per share
    
    $
    0.01
    Stock Option Plans
 2000 Plan
  23




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##### Table of Contents



For The Three Months Ended March 31, 2006Weighted
    
    
    WeightedWeighted
    
    
    Average
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Fair Value
    
    
    Life In Years
    
    
    Value (000s)Beginning balance
    
    
    3,799,132
    
    
    $
    3.07Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (149,944
    )
    
    $
    2.65Options forfeited
    
    
    (100,300
    )
    
    $
    3.22Total outstanding
    
    
    3,548,888
    
    
    $
    3.09
    
    
    
    
    
    
    
    5.3
    
    
    $
    6,785Options exercisable and vested
    
    
    2,088,822
    
    
    $
    2.73
    
    
    
    
    
    
    
    4.4
    
    
    $
    4,733
 1993 Plan
  For The Three Months Ended March 31, 2006Weighted
    
    
    WeightedWeighted
    
    
    Average
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Fair Value
    
    
    Life In Years
    
    
    Value (000s)Beginning balance
    
    
    21,000
    
    
    $
    4.46Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    Total outstanding
    
    
    21,000
    
    
    $
    4.46
    
    
    
    
    
    
    
    3.6
    
    
    $
    11Options exercisable and vested
    
    
    21,000
    
    
    $
    4.46
    
    
    
    
    
    
    
    3.6
    
    
    $
    11
 Other Options
  For The Three Months Ended March 31, 2006Weighted
    
    
    WeightedWeighted
    
    
    Average
    
    
    Average
    
    
    AggregateNumber of
    
    
    Average
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Fair Value
    
    
    Life In Years
    
    
    Value (000s)Beginning balance
    
    
    1,224,160
    
    
    $
    2.82Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    Total outstanding
    
    
    1,224,160
    
    
    $
    2.82
    
    
    
    
    
    
    
    3.0
    
    
    $
    2,674Options exercisable and vested
    
    
    984,160
    
    
    $
    2.82
    
    
    
    
    
    
    
    3.0
    
    
    $
    2,074
   24




---



##### Table of Contents



Number of SharesNonvested at December 31, 2005
    
    
    100,777Granted
    
    
    66,429Vested
    
    
    (39,939
    )Forfeited
    
    
    (4,489
    )Nonvested at March 31, 2006
    
    
    122,778
  Prior to January 1, 2006
  Three MonthsEndedMarch 31, 2005Net loss applicable to common stock, as reported
    
    $
    (2,612
    )Less: Compensation expense per SFAS 123, net of tax
    
    
    311Pro forma net loss
    
    $
    (2,923
    )Loss per share:Diluted loss per share, as reported
    
    $
    (0.13
    )Pro forma loss per share after effect of SFAS 123
    
    $
    (0.15
    )
  Three MonthsEndedMarch 31, 2005Risk-free interest rate
    
    
    4.0
    %Expected volatility
    
    
    222.0
    %Expected term in years
    
    
    6.37
 25




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Background
     For the Period Ended March 31,2006
    
    2005Contract
    
    
    84
    %
    
    
    80
    %Purchase order
    
    
    2
    %
    
    
    3
    %Product sales
    
    
    3
    %
    
    
    3
    %Design/build construction
    
    
    2
    %
    
    
    10
    %Event
    
    
    9
    %
    
    
    4
    %100
    %
    
    
    100
    %
   26




---



##### Table of Contents



-
    
    new sales (including the mix of contract and event sales) and existing business retention
objectives necessary to maintain the companys 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 March 31,2006
    
    
    2005(in thousands)Revenue
    
    $
    79,278
    
    
    
    100.0
    %
    
    $
    76,214
    
    
    
    100.0
    %Cost of services
    
    
    67,057
    
    
    
    84.6
    %
    
    
    64,176
    
    
    
    84.2
    %Gross profit
    
    
    12,221
    
    
    
    15.4
    %
    
    
    12,038
    
    
    
    15.8
    %Selling, general and administrative expenses
(includes $0.7 million and $0 million of share
based compensation expense for 2006 and 2005,
respectively)
    
    
    8,771
    
    
    
    11.1
    %
    
    
    6,169
    
    
    
    8.1
    %Gain on sale of assets
    
    
    (35
    )
    
    
    (0.0
    )%
    
    
    (76
    )
    
    
    (0.1
    )%Income from operations
    
    
    3,485
    
    
    
    4.3
    %
    
    
    5,945
    
    
    
    7.8
    %Other expense:Interest expense
    
    
    5,268
    
    
    
    6.6
    %
    
    
    6,515
    
    
    
    8.5
    %Interest income
    
    
    (155
    )
    
    
    (0.2
    )%
    
    
    
    
    
    
    
    %Other (income) expense, net
    
    
    (321
    )
    
    
    (0.4
    )%
    
    
    (3
    )
    
    
    0.0
    %Total other expense, net
    
    
    4,792
    
    
    
    6.0
    %
    
    
    6,512
    
    
    
    8.5
    %Loss before benefit for income taxes
    
    
    (1,307
    )
    
    
    (1.7
    )%
    
    
    (567
    )
    
    
    (0.7
    )%Benefit for income taxes
    
    
    (546
    )
    
    
    (0.7
    )%
    
    
    (227
    )
    
    
    (0.3
    )%Net loss before preferred stock dividends
    
    
    (761
    )
    
    
    (1.0
    )%
    
    
    (340
    )
    
    
    (0.4
    )%Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    2,272Net loss applicable to common stock
    
    $
    (761
    )
    
    
    
    
    
    $
    (2,612
    )
 27




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##### Table of Contents



For the Three MonthsEnded March 31,2006
    
    
    2005RevenueResiduals Management Operations
    
    $
    65,549
    
    
    $
    58,521Rail Transportation
    
    
    11,054
    
    
    
    7,949Engineering, Facilities, and Development
    
    
    3,183
    
    
    
    10,637Elimination
    
    
    (508
    )
    
    
    (893
    )$
    79,278
    
    
    $
    76,214Income (loss) from operationsResiduals Management Operations
    
    $
    6,939
    
    
    $
    8,147Rail Transportation
    
    
    1,940
    
    
    
    488Engineering, Facilities, and Development
    
    
    (592
    )
    
    
    663Corporate
    
    
    (4,802
    )
    
    
    (3,353
    )$
    3,485
    
    
    $
    5,945
      28




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##### Table of Contents



Liquidity and Capital Resources
 Overview
  Historical Cash Flows
 Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 Cash Flows from Financing Activities
 Capital Expenditure Requirements
  29




---



##### Table of Contents



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 Revolving Loan. At March 31,
2006, we had approximately $33.7 million of Letters of Credit outstanding.
  Eurodollar
    
    Base RateRevolver
    
    
    7.58
    %
    
    
    9.50
    %Term
    
    
    6.89
    %
    
    
    9.00
    %
  1 2
    30




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##### Table of Contents



Other Debt
   Notes Payable to Sellers of Acquired Businesses
  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
    
    $
    1,501
    
    
    $
    3,480
    
    
    $
    2,481
    
    
    $
    18,267
    
    
    $
    7,081
    
    
    $
    7,298
    
    
    $
    40,1082007
    
    
    1,441
    
    
    
    3,710
    
    
    
    4,298
    
    
    
    18,095
    
    
    
    8,943
    
    
    
    2,993
    
    
    
    39,4802008
    
    
    1,047
    
    
    
    3,935
    
    
    
    5,034
    
    
    
    17,486
    
    
    
    7,442
    
    
    
    2,993
    
    
    
    37,9372009
    
    
    
    
    
    
    4,165
    
    
    
    1,862
    
    
    
    17,065
    
    
    
    6,361
    
    
    
    2,993
    
    
    
    32,4462010
    
    
    
    
    
    
    4,420
    
    
    
    890
    
    
    
    15,570
    
    
    
    5,060
    
    
    
    2,993
    
    
    
    28,9332011-2015
    
    
    210,000
    
    
    
    24,005
    
    
    
    341
    
    
    
    21,640
    
    
    
    8,675
    
    
    
    
    
    
    
    264,6612016-2020
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    3,146
    
    
    
    1,526
    
    
    
    
    
    
    
    12,922Thereafter
    
    
    
    
    
    
    7,375
    
    
    
    
    
    
    
    1,176
    
    
    
    1,263
    
    
    
    
    
    
    
    9,814Total
    
    $
    213,989
    
    
    $
    59,340
    
    
    $
    14,906
    
    
    $
    112,445
    
    
    $
    46,351
    
    
    $
    19,270
    
    
    $
    466,301
   31




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##### Table of Contents



Interest Rate Risk
  Working Capital
  Accounting Pronouncements
   32




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Derivatives and Hedging Activities
      Interest Rate Risk
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures 
  33




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##### Table of Contents



34




---



##### 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 6. Exhibits
  31.1
    
    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
 35




---



##### Table of Contents



SYNAGRO TECHNOLOGIES, INC.Date: May 5, 2006
    By:
    /s/ Robert C. Boucher, Jr.Chief Executive Officer and DirectorDate: May 5, 2006
    By:
    /s/ J. Paul WithrowChief Financial Officer and Director 36




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##### Table of Contents



EXHIBIT INDEX
 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
 37