**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended September 30, 2005**

 

**OR**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from       to       **

 

**Commission file number:**

**333-64687**

 

### **GreatLakes Dredge & Dock Corporation**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **13-3634726**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **2122 York Road, Oak Brook, IL**                               | ** ** | **60523**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(630) 574-3000**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

ý  Yes   o  No

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).

o  Yes   ý  No

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o  Yes   ý  No

 

All of the Company’s commonstock is held by a holding company.

 

As of November 10, 2005,there were outstanding 1,000 shares of Common Stock and zero shares ofPreferred Stock.

 

 

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**Great LakesDredge & Dock Corporation and Subsidiaries**

**QuarterlyReport Pursuant to Section 13 or 15(d) of the**

### **SecuritiesExchange Act of 1934**

### **For theQuarterly Period ended September 30, 2005**

### ** **

##### **INDEX**

##### ** **

| **Part I**        | **Financial Information** |                                                                                                                   |
|------------------------|---------------------------|------------------------------------------------------------------------------------------------------------------------|
|                   |                      |                                                                                                                   |   |
|                   | Item 1                    | Financial Statements (Unaudited)                                                                                       |   |
|                   |                      |                                                                                                                   |   |
|                   |                      | Condensed  Consolidated Balance Sheets at September 30, 2005 and December 31,  2004                          |   |
|                   |                      |                                                                                                                   |   |
|                   |                      | Condensed  Consolidated Statements of Operations for the Three and Nine Months ended  September 30, 2005 and 2004 |   |
|                   |                      |                                                                                                                   |   |
|                   |                      | Condensed  Consolidated Statements of Cash Flows for the Nine Months ended  September 30, 2005 and 2004           |   |
|                   |                      |                                                                                                                   |   |
|                   |                      | Notes to  Unaudited Condensed Consolidated Financial Statements                                                        |   |
|                   |                      |                                                                                                                   |   |
|                   | Item 2                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            |   |
|                   |                      |                                                                                                                   |   |
|                   | Item 3                    | Quantitative and Qualitative Disclosures  About Market Risk                                                            |   |
|                   |                      |                                                                                                                   |   |
|                   | Item 4                    | Controls and Procedures                                                                                                |   |
|                   |                      |                                                                                                                   |   |
| **Part II**       | **Other Information**     |                                                                                                                   |
|                   |                      |                                                                                                                   |   |
|                   | Item 1                    | Legal proceedings                                                                                                      |   |
|                   | Item 6                    | Exhibits                                                                                                               |   |
|                   |                      |                                                                                                                   |   |
| **Signature**          |                      |
|                   |                      |                                                                                                                   |   |
| **Exhibit Index** |                      |

 

----

 

###### **PART I– Financial Information**

###### ** **

**Great LakesDredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Balance Sheets**

**(Unaudited)**

**(inthousands, except share and per share amounts)**

 
| ** **                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **Assets**                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                    |       |                   |       |                  |       |
| Cash and equivalents                                               |       | $                      | 3,485      |                  | $          | 1,962 |   |
| Accounts receivable, net                                           |       | 71,867                 |       | 65,762                |       |
| Contract revenues in excess of billings                            |       | 16,266                 |       | 12,439                |       |
| Inventories                                                        |       | 16,237                 |       | 16,497                |       |
| Prepaid expenses and other current assets                          |       | 22,799                 |       | 15,654                |       |
| Total current assets                                               |       | 130,654                |       | 112,314               |       |
| Property and equipment, net                                        |       | 243,921                |       | 256,594               |       |
| Goodwill                                                           |       | 98,747                 |       | 103,563               |       |
| Other intangible assets, net                                       |       | 1,782                  |       | 3,267                 |       |
| Inventories                                                        |       | 11,429                 |       | 11,278                |       |
| Investments in joint ventures                                      |       | 9,139                  |       | 7,965                 |       |
| Other assets                                                       |       | 12,371                 |       | 13,654                |       |
| Total assets                                                       |       | $                      | 508,043    |                  | $          | 508,635 |   |
|                                                               |       |                   |       |                  |       |
| **Liabilities and Stockholder’s Equity**                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                               |       |                   |       |                  |       |
| Accounts payable                                                   |       | $                      | 45,905     |                  | $          | 46,770 |   |
| Accrued expenses                                                   |       | 26,965                 |       | 17,676                |       |
| Billings in excess of contract revenues                            |       | 9,842                  |       | 6,706                 |       |
| Current maturities of long-term debt                               |       | 1,950                  |       | 1,950                 |       |
| Total current liabilities                                          |       | 84,662                 |       | 73,102                |       |
| Long-term debt                                                     |       | 250,838                |       | 252,300               |       |
| Deferred income taxes                                              |       | 88,080                 |       | 90,429                |       |
| Other                                                              |       | 4,713                  |       | 5,314                 |       |
| Total liabilities                                                  |       | 428,293                |       | 421,145               |       |
| Minority interest                                                  |       | 1,783                  |       | 1,599                 |       |
| Commitments and contingencies (Note 10)                            |       | —                 |       | —                |       |
| Stockholder’s equity:                                         |       |                   |       |                  |       |
| Common stock, $.01 par value; 1,000 shares  issued and Outstanding |       | —                 |       | —                |       |
| Additional paid-in capital                                         |       | 97,000                 |       | 97,000                |       |
| Accumulated deficit                                                |       | (19,990                | )          | (11,087               | )          |
| Accumulated other comprehensive income  (loss)                     |       | 957                    |       | (22                   | )          |
| Total stockholder’s equity                                    |       | 77,967                 |       | 85,891                |       |
| Total liabilities and stockholder’s equity                    |       | $                      | 508,043    |                  | $          | 508,635 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

2

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**Great LakesDredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Statements of Operations**

**(Unaudited)**

**(inthousands)**

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                       |       |                                      |       |   |   |   |   |
| Contract revenues                             |       | $                                          | 119,745    |                                      | $          | 66,473 |   | $ | 313,039 |   | $ | 242,524 |   |
| Costs of contract revenues                    |       | 103,184                                    |       | 62,144                                    |       | 278,005 |   | 215,951 |   |
| Gross profit                                  |       | 16,561                                     |       | 4,329                                     |       | 35,034 |   | 26,573 |   |
| General and administrative expenses           |       | 7,493                                      |       | 5,719                                     |       | 21,230 |   | 18,234 |   |
| Subpoena-related expenses                     |       | 459                                        |       | 698                                       |       | 2,269 |   | 1,563 |   |
| Demolition litigation expense                 |       |                                       |       | 1,275                                     |       | — |   | 1,275 |   |
| Amortization of intangible assets             |       | 183                                        |       | 730                                       |       | 583 |   | 3,642 |   |
| Impairment of goodwill and intangible  assets |       | 5,718                                      |       | —                                    |       | 5,718 |   | — |   |
| Operating income (loss)                       |       | 2,708                                      |       | (4,093                                    | )          | 5,234 |   | 1,859 |   |
| Interest expense, net                         |       | (6,439                                     | )          | (3,428                                    | )          | (17,305 | ) | (15,034 | ) |
| Equity in earnings of joint ventures          |       | 912                                        |       | 727                                       |       | 1,674 |   | 1,558 |   |
| Minority interests                            |       | 36                                         |       | 92                                        |       | (184 | ) | 104 |   |
| Loss before income taxes                      |       | (2,783                                     | )          | (6,702                                    | )          | (10,581 | ) | (11,513 | ) |
| Income tax (expense) benefit                  |       | (943                                       | )          | 2,070                                     |       | 1,678 |   | 3,202 |   |
| Net loss                                      |       | $                                          | (3,726     | )                                         | $          | (4,632 | ) | $ | (8,903 | ) | $ | (8,311 | ) |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

3

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**Great LakesDredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                      | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Operating  Activities**                                                       |       |                                      |       |   |   |
| Net loss                                                                        |       | $                                         | (8,903     | ) | $ | (8,311 | ) |
| Adjustments  to reconcile net loss to net cash flows from operating activities: |       |                                      |       |   |   |
| Depreciation and amortization                                                   |       | 18,478                                    |       | 19,637 |   |
| Earnings of joint ventures                                                      |       | (1,674                                    | )          | (1,558 | ) |
| Distribution from equity joint ventures                                         |       | 500                                       |       | 1,550 |   |
| Minority interests                                                              |       | 184                                       |       | (104 | ) |
| Deferred income taxes                                                           |       | (2,830                                    | )          | (4,333 | ) |
| Gain on dispositions of property and equipment                                  |       | (19                                       | )          | (357 | ) |
| Impairment of goodwill and intangible  assets                                   |       | 5,718                                     |       | — |   |
| Other, net                                                                      |       | 1,283                                     |       | 1,255 |   |
| Changes in assets and liabilities:                                              |       |                                      |       |   |   |
| Accounts receivable                                                             |       | (6,105                                    | )          | 18,411 |   |
| Contract revenues in excess of billings                                         |       | (3,827                                    | )          | (1,264 | ) |
| Inventories                                                                     |       | 109                                       |       | (1,892 | ) |
| Prepaid expenses and other current assets                                       |       | (5,721                                    | )          | (1,550 | ) |
| Accounts payable and accrued expenses                                           |       | 8,287                                     |       | 399 |   |
| Billings in excess of contract revenues                                         |       | 3,136                                     |       | (1,237 | ) |
| Other noncurrent assets and liabilities                                         |       | 16                                        |       | (26 | ) |
| Net cash flows from operating activities                                        |       | 8,632                                     |       | 20,620 |   |
|                                                                            |       |                                      |       |   |   |
| **Investing  Activities**                                                       |       |                                      |       |   |   |
| Purchases of  property and equipment                                            |       | (9,437                                    | )          | (15,691 | ) |
| Dispositions  of property and equipment                                         |       | 4,596                                     |       | 675 |   |
| Adjustment  to acquisition price of Predecessor common and preferred shares     |       | —                                    |       | 527 |   |
| Cash  released from equipment escrow                                            |       | —                                    |       | 2,451 |   |
| Net cash flows from investing activities                                        |       | (4,841                                    | )          | (12,038 | ) |
|                                                                            |       |                                      |       |   |   |
| **Financing  Activities**                                                       |       |                                      |       |   |   |
| Repayments  of long-term debt                                                   |       | (1,462                                    | )          | (3,962 | ) |
| Borrowings  under revolving loans, net of repayments                            |       | —                                    |       | — |   |
| Repayment of  capital lease debt                                                |       | (806                                      | )          | — |   |
| Financing  fees                                                                 |       | —                                    |       | (197 | ) |
| Net cash flows from financing activities                                        |       | (2,268                                    | )          | (4,159 | ) |
| Net change  in cash and equivalents                                             |       | 1,523                                     |       | 4,423 |   |
| Cash and  equivalents at beginning of period                                    |       | 1,962                                     |       | 2,775 |   |
| Cash and  equivalents at end of period                                          |       | $                                         | 3,485      |   | $ | 7,198 |   |
|                                                                            |       |                                      |       |   |   |
| **Supplemental  Cash Flow Information**                                         |       |                                      |       |   |   |
| Cash paid  for interest                                                         |       | $                                         | 11,524     |   | $ | 9,666 |   |
| Cash paid  (refunded) for taxes                                                 |       | $                                         | 85         |   | $ | (4,725 | ) |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

4

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GREAT LAKES DREDGE & DOCKCORPORATION AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars in thousands)

 

**1.****             ****Basis of presentation**

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the U.S. for interim financialinformation.  Accordingly, thesefinancial statements do not include all the information in the notes requiredby generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, the unaudited condensed consolidated financial statements includeall adjustments (consisting of normal recurring adjustments) considerednecessary for a fair presentation of the financial position, results ofoperations and cash flows as of and for the dates presented.  The unaudited condensed consolidatedfinancial statements and notes herein should be read in conjunction with theaudited consolidated financial statements of Great Lakes Dredge & DockCorporation and Subsidiaries (the “Company”) and the notes thereto, included inthe Company’s Annual Report filed on Form 10-K for the year ended December 31,2004.

 

The condensed consolidatedresults of operations for the interim periods presented herein are notnecessarily indicative of the results to be expected for the full year.

 

**2.****             ****Comprehensive loss**

 

Total comprehensive loss comprisesthe Company’s net loss and net unrealized gains and losses on cash flowhedges.  Total comprehensive loss for thethree months ended September 30, 2005 and 2004 was $3,578 and $3,937,respectively.  Total comprehensive lossfor the nine months ended September 30, 2005 and 2004 was $7,924 and $7,347,respectively.

 

**3.****             ****Risk management activities**

 

The Company uses derivative instruments to managecommodity price, interest rate, and foreign currency exchange risks.  Such instruments are not used for tradingpurposes.  As of September 30, 2005,the Company was party to various swap arrangements to hedge the price of aportion of its diesel fuel purchase requirements for work in its backlog to beperformed through May 2006. As of September 30, 2005, there were 2.9million gallons remaining on these contracts. Under these agreements, the Company will pay fixed prices ranging from $1.41to $1.85 per gallon.  At September 30,2005 and December 31, 2004, the fair value on these contracts wasestimated to be $1,577 and $(36), respectively, based on quoted market prices,and is recorded in other current assets and accrued liabilities, respectively.Ineffectiveness related to these fuel hedge arrangements was determined to beimmaterial.  The remaining gains includedin accumulated other comprehensive income at September 30, 2005 will bereclassified into earnings over the next eight months, corresponding to theperiod during which the hedged fuel is expected to be utilized.

 

In February 2004, the Company entered into aninterest rate swap arrangement to swap a notional amount of $50 million from afixed rate of 7.75% to a floating LIBOR-based rate in order to manage theinterest rate paid with respect to the Company’s 73⁄4% senior subordinateddebt.  The fair value of the swap at September 30,2005 and December 31, 2004 was $(1,540) and $(662), respectively, and isrecorded in accrued expenses.  The swapis not accounted for as a

 

5

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hedge;therefore, the changes in fair value are recorded as adjustments to interestexpense in each reporting period.

 

The carrying values of otherfinancial instruments included in current assets and current liabilitiesapproximate fair values due to the short-term maturities of these instruments.  The carrying value of long-term bank debt isa reasonable estimate of its fair value as interest rates are variable, basedon the prevailing market rates.  The fairvalue of the Company’s $175,000 of 73⁄4% senior subordinated notes was $161,875and $157,938 at September 30, 2005 and December 31, 2004,respectively, based on quoted market prices.

 

**4.****             ****Goodwill impairmentwrite-down**

 

In the third quarter of2005, the Company performed its annual assessment for the impairment ofgoodwill.  At the time of the Company’ssale transaction in December 2003, a portion of the total goodwill hadbeen allocated to the demolition segment. Although NASDI is likely to achieve its 2005 forecast and is projectedto be cash flow positive going forward, Company management does not believethat it will achieve the future returns contemplated in the 2003 forecastsprepared when the goodwill was allocated. These downward revised projections for the demolition business areattributable to higher anticipated incentive pay to retain a key member of thedemolition business’s management.  Basedon these revised projections the Company determined there was an impairment ofthe goodwill related to its demolition reporting unit. Therefore, the Companyrecorded a non-cash write-down of $4,816 to the goodwill reflecting management’sbest estimate, using a discounted cash flow model, of the impairment at thispoint in the assessment process.  TheCompany expects to finalize its assessment during the fourth quarter.

 

**5.****             ****Accounts receivable**

 

Accounts receivable at September 30, 2005 and December 31,2004 are as follows:

 
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Completed  contracts             |       | $        | 18,061     |     | $          | 13,971 |   |
| Contracts in  progress           |       | 42,874   |       | 43,088   |       |
| Retainage                        |       | 11,520   |       | 9,211    |       |
|                             |       | 72,455   |       | 66,270   |       |
| Allowance  for doubtful accounts |       | (588     | )          | (508     | )          |
|                             |       |     |       |     |       |
|                             |       | $        | 71,867     |     | $          | 65,762 |   |

 

**6.****             ****Contracts in progress**

 

The components of contractsin progress at September 30, 2005 and December 31, 2004 are asfollows:

 

6

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| ** **                                                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Costs and earnings in excess of billings:                                       |       |                         |       |                        |       |
| Costs and earnings for contracts in  progress                                   |       | $                            | 210,577    |                        | $          | 232,994 |   |
| Amounts billed                                                                  |       | (201,081                     | )          | (221,243                    | )          |
| Costs and earnings in excess of billings  for contracts in progress             |       | 9,496                        |       | 11,751                      |       |
| Costs and earnings in excess of billings  for completed contracts               |       | 6,770                        |       | 688                         |       |
|                                                                            |       |                         |       |                        |       |
|                                                                            |       | $                            | 16,266     |                        | $          | 12,439 |   |
|                                                                            |       |                         |       |                        |       |
| Prepaid contract costs (included in prepaid  expenses and other current assets) |       | $                            | 2,862      |                        | $          | 718 |   |
|                                                                            |       |                         |       |                        |       |
| Billings in excess of costs and earnings:                                       |       |                         |       |                        |       |
| Amounts billed                                                                  |       | $                            | (99,861    | )                           | $          | (196,639 | ) |
| Costs and earnings for contracts in  progress                                   |       | 90,019                       |       | 189,933                     |       |
|                                                                            |       |                         |       |                        |       |
|                                                                            |       | $                            | (9,842     | )                           | $          | (6,706 | ) |

 

**7.****             ****Intangible assets**

 

The net book value of intangible assets is asfollows:

 
| ** **                         | ** ** | **Estimated  Life** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|------------------------------------|------------|---------------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| As of  September 30, 2005:    |       |                |       |     |       |                          |       |    |       |
|                               |       |                |       |     |       |                          |       |    |       |
| Customer  contract backlog         |       | 13-24 mos.          |       | $        | 4,237      |                          | $          | 4,052   |       | $ | 185 |   |
| Demolition  customer relationships |       | 7 years             |       | 1,093    |       | 458                           |       | 635     |       |
| Software and  databases            |       | 7-10 years          |       | 1,209    |       | 247                           |       | 962     |       |
|                               |       |                |       | $        | 6,539      |                          | $          | 4,757   |       | $ | 1,782 |   |
| As of  December 31, 2004:     |       |                |       |     |       |                          |       |    |       |
|                               |       |                |       |     |       |                          |       |    |       |
| Customer  contract backlog         |       | 13-24 mos.          |       | $        | 4,237      |                          | $          | 3,747   |       | $ | 490 |   |
| Demolition  customer relationships |       | 7 years             |       | 1,995    |       | 285                           |       | 1,710   |       |
| Software and  databases            |       | 7-10 years          |       | 1,209    |       | 142                           |       | 1,067   |       |
|                               |       |                |       | $        | 7,441      |                          | $          | 4,174   |       | $ | 3,267 |   |

 

In the third quarter of 2005, the Company wrote-downthe intangible asset related to demolition customer relationships by $902.  When the original customer relationshipintangible was established in 2003, it required estimation of future annualrevenues attributable to certain key customers. Over the past two years, the demolition revenues were generated by agreater variety of customers, rather than being as concentrated as anticipatedwith these key customers.  Therefore, thefuture revenue expectations related to these particular customers were revised,resulting in this non-cash impairment write-down based on a discountedcash-flow analysis.

 

7

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**8.   Accruedexpenses**

 

Accrued expenses at September 30,2005 and December 31, 2004 are as follows:

 
| ** **                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Insurance                      |       | $                      | 6,464      |                  | $          | 5,022 |   |
| Payroll and  employee benefits |       | 6,166                  |       | 4,700                 |       |
| U.S. income  and other taxes   |       | 4,790                  |       | 2,564                 |       |
| Interest                       |       | 4,418                  |       | 799                   |       |
| Interest  rate swap liability  |       | 1,540                  |       | 662                   |       |
| Demolition  litigation expense |       | 1,275                  |       | 1,275                 |       |
| Equipment  leases              |       | 892                    |       | 719                   |       |
| Other                          |       | 1,420                  |       | 1,935                 |       |
|                           |       |                   |       |                  |       |
|                           |       | $                      | 26,965     |                  | $          | 17,676 |   |

 

**9****.   Segment information**

 

The Company operates in two reportablesegments: dredging and demolition.  TheCompany’s financial reporting systems present various data for management torun the business, including profit and loss statements prepared according tothe segments presented.  In the thirdquarter of 2005, the Company recorded a non-cash write-down of $5,718 relatedto the demolition segment's goodwill and certain other intangibles.  See footnotes 4 and 7 for further discussion.  Segment information for the periods presentedis as follows:

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Dredging**            |       |                                       |       |                                      |       |   |   |   |   |
| Contract revenues       |       | $                                          | 106,353    |                                      | $          | 57,586 |   | $ | 275,699 |   | $ | 216,657 |   |
| Operating income (loss) |       | 8,895                                      |       | (3,479                                    | )          | 8,552 |   | 1,482 |   |
|                    |       |                                       |       |                                      |       |   |   |   |   |
| **Demolition**          |       |                                       |       |                                      |       |   |   |   |   |
| Contract revenues       |       | $                                          | 13,392     |                                      | $          | 8,887 |   | $ | 37,340 |   | $ | 25,867 |   |
| Operating income (loss) |       | (6,187                                     | )          | (614                                      | )          | (3,318 | ) | 377 |   |
|                    |       |                                       |       |                                      |       |   |   |   |   |
| **Total**               |       |                                       |       |                                      |       |   |   |   |   |
| Contract revenues       |       | $                                          | 119,745    |                                      | $          | 66,473 |   | $ | 313,039 |   | $ | 242,524 |   |
| Operating income (loss) |       | 2,708                                      |       | (4,093                                    | )          | 5,234 |   | 1,859 |   |

 

**10.   Commitments and contingencies**

 

At September 30, 2005, the Company wascontingently liable, in the normal course of business, for $14,860 in undrawnletters of credit, relating to foreign contract performance guarantees and insurancepayment liabilities.

 

The Company finances certain key vessels used in itsoperations with operating lease arrangements with unrelated lessors, requiring annualrentals decreasing from $14,000 to $11,000

 

8

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overthe next five years.  These operatingleases contain default provisions that are triggered by an acceleration of debtmaturity under the terms of the Company’s Credit Agreement. Additionally, theleases typically contain provisions whereby the Company indemnifies the lessorsfor the tax treatment attributable to such leases based on the tax rules inplace at lease inception. The tax indemnifications do not have a contractualdollar limit.  To date, no lessors haveasserted any claims against the Company under these tax indemnificationprovisions.  The Company has additionalrental commitments for office facilities and dozer leases totalingapproximately $1,000 to $2,000, annually.

 

Borrowings under the Company’s Credit Agreement aresecured by first lien mortgages on certain operating equipment of the Companywith a net book value of approximately $86,000 at December 31, 2004.  Additionally, the Company obtains itsperformance and bid bonds through an underwriting and indemnity agreement witha surety company that has been granted a security interest in a substantialportion of the Company’s operating equipment with a net book value ofapproximately $88,000 at December 31, 2004.  The Company also has an equipment term loan,which is secured by a first lien mortgage on certain operating equipment with anet book value of approximately $22,000 at December 31, 2004. The net bookvalue of equipment serving as collateral under these agreements at September 30,2005 does not materially differ from the values at December 31, 2004.  These agreements contain provisions requiringthe Company to maintain certain financial ratios and restricting the Company’sability to pay dividends, incur indebtedness, create liens, and take certainother actions.  The Company was incompliance with all required covenants at September 30, 2005.

 

The performance and bid bonds issued under thebonding agreement are customarily required for dredging and marine constructionprojects, as well as some demolition projects. Bid bonds are generally obtained for a percentage of bid value andaggregate amounts outstanding typically range from $5,000 to $10,000.  Performance bonds typically cover 100% of thecontract value with no maximum bond amounts. At September 30, 2005, the Company had outstanding performancebonds valued at approximately $380,683; however the revenue value remaining inbacklog related to these projects totaled approximately $145,119 at September 30,2005.

 

Certain foreign projects performed by the Companyhave warranty periods, typically spanning no more than three to five yearsbeyond project completion, whereby the Company retains responsibility tomaintain the project site to certain specifications during the warrantyperiod.  Generally, any potentialliability of the Company is mitigated by insurance, shared responsibilitieswith consortium partners, and/or recourse to owner-provided specifications.

 

The Company considers it unlikely that it would haveto perform under any of these aforementioned contingent obligations andperformance has never been required in any of these circumstances in the past.

 

As is customary with negotiated contracts andmodifications or claims to competitively-bid contracts with the federalgovernment, the government has the right to audit the books and records of theCompany to ensure compliance with such contracts, modifications or claims and theapplicable federal laws.  The governmenthas the ability to seek a price adjustment based on the results of suchaudit.  Any such audits have not had andare not expected to have a material impact on the financial position, operationsor cash flows of the Company.

 

In the normal course of business, the Company is a defendant in variouslegal proceedings.  Except as describedbelow, the Company is not currently a party to any material legal proceedingsor environmental claims.

 

On February 10, 2004, the Company was served with a subpoena toproduce documents in connection with a federal grand jury convened in theUnited States District Court for the District

 

9

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ofSouth Carolina.  The Company believes thegrand jury has been convened to investigate the United States dredging industryin connection with work performed for the U.S. Army Corp of Engineers. TheCompany continues to comply with the Justice department’s requests and Companymanagement believes that it has provided substantially all of the documents thathave been requested to this point.  Inaddition to the documents requested, seven employees or former employees of theCompany have now been interviewed or have testified before the grand jury.  In connection with the investigation, theCompany continues to incur legal expenses, which totaled $459 and $2,269 forthe three and nine months ended September 30, 2005, respectively, and $698and $1,563 for the same periods of 2004.

 

In 1999, the Boston Housing Authority (“BHA”), for whom the Company’sdemolition business, NASDI, had worked, asserted that NASDI and itssubcontractors were responsible for improperly disposing of some contaminatedmaterials.  At the time the Companyacquired NASDI in 2001, it was believed that NASDI had sufficient recourse inthe matter and that any potential liability would be minimal.  However, since 2001, certain of the insurancecarriers that would be responsible for this matter have gone bankrupt.  Negotiations between the parties havecontinued to progress, and in the third quarter of 2004, the case went before ajudge in the Massachusetts court system, who advised NASDI and thesubcontractors to accept a settlement with the BHA.  Therefore, in the third quarter of 2004, theCompany recorded a $1,275 charge for NASDI’s share of this potential settlementliability.   This final settlement amountwas paid out in October, 2005.

 

On January 19, 2005, the Company, along with its joint-venturepartners on the Port of Los Angeles Deepening Project, received a request forinformation from the United States Environmental Protection Agency (“EPA”)pursuant to section 308(a) of the Clean Water Act.  The EPA is investigating alleged dredging ofunauthorized material and unauthorized discharge of that material at variouslocations in federally regulated waters of the U.S. relating to thisproject.   The Company performed thisproject under a contract with the Los Angeles district of the Corps andbelieves it was in compliance with the contract specifications.  The Company has complied with the request forinformation and has received no further response from the EPA.  It is management’s understanding that theCorps is currently addressing this matter with the EPA in Washington, as thisis a national policy issue.  Therefore,the Company believes the EPA request it has received will not result in anyfurther action against the Company.

 

On August 15, 2003 a claim was broughtin the Landesgericht (District Court) of Berlin, Germany against Great Lakes byHafemeister Erd-und Tiefbau GmbH, a German construction Company.  On June 8, 2004 Great Lakes was servedwith notice of this claim, alleging that in 2000 the Company along with a Dutchcompany wrongfully withdrew from a consortium prior to the submission of atender for a project to be performed in Germany.  The claimant is seeking damages from itsinability to bid on or perform the works in the amount of approximately €21,000.  Great Lakes has filed a petition with theGerman courts to seek dismissal of the claim for lack of factual and legal merit.  During the third quarter, a hearing wasscheduled for mid-December 2005.  Asindicated by the Company’s petition, management does not believe that the claimhas merit and does not expect it to have a material impact on the Company’sfinancial position or results of operations.

 

**11.   Supplemental condensed consolidating financial information**

 

Included in the Company’slong-term debt is $175,000 of 73⁄4% senior subordinated notes which will matureon December 15, 2013.  The paymentobligations of the Company under the senior subordinated notes are guaranteedby the Company’s domestic subsidiaries (the “Subsidiary Guarantors”).  Such guarantees are full, unconditional andjoint and several.  Separate financialstatements of the Subsidiary Guarantors are not presented because the

 

10

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Company’s management has determined that theywould not be material to investors.  Thefollowing supplemental financial information sets forth, on a combined basis,the balance sheets, statements of operations and statements of cash flows forthe Subsidiary Guarantors, the Company’s non-guarantor subsidiary and for theCompany (“GLD Corporation”).

 

Effective August 1,2005, Great Lakes Dredge & Dock Company, the key dredging operatingsubsidiary and guarantor subsidiary, of the Company, was reorganized into alimited liability company under the laws of Delaware (now, the “LLC”).   The LLC entity is not subject to income tax,so the income tax obligations since the date of reorganization are reflected inthe tax returns of the parent, GLD Corporation. Accordingly, as of September 30, 2005, there are no income taxobligations recorded on the balance sheet of the LLC.

 

**Condensed Consolidating Balance Sheet at September 30,2005**

 
| ** **                                    | ** ** | **Guarantor**    | ** ** | **Other**      | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Subsidiaries** | ** ** | **Subsidiary** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| **ASSETS**                                    | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                              |       |             |       |           |       |            |       |             |       |             |       |
| Cash and equivalents                          |       | $                | 3,480      |           | $          | 5               |       | $                | —     |             | $          | — |   | $ | 3,485 |   |
| Accounts receivable, net                      |       | 71,867           |       | —         |       | —          |       | —           |       | 71,867           |       |
| Receivables from affiliates                   |       | 10,128           |       | 2,886          |       | 4,540           |       | (17,554          | )          | —           |       |
| Contract revenues in excess of billings       |       | 16,266           |       | —         |       | —          |       | —           |       | 16,266           |       |
| Inventories                                   |       | 16,237           |       | —         |       | —          |       | —           |       | 16,237           |       |
| Prepaid expenses and other current assets     |       | 16,754           |       | —         |       | 6,045           |       | —           |       | 22,799           |       |
| Total current assets                          |       | 134,732          |       | 2,891          |       | 10,585          |       | (17,554          | )          | 130,654          |       |
| Property and  equipment, net                  |       | 231,099          |       | —         |       | 12,822          |       | —           |       | 243,921          |       |
| Goodwill                                      |       | 98,747           |       | —         |       | —          |       | —           |       | 98,747           |       |
| Other  intangible assets, net                 |       | 1,782            |       | —         |       | —          |       | —           |       | 1,782            |       |
| Investments  in subsidiaries                  |       | 2,891            |       | —         |       | 362,022         |       | (364,913         | )          | —           |       |
| Notes  receivable from affiliates             |       | —           |       | —         |       | 22,702          |       | (22,702          | )          | —           |       |
| Inventories                                   |       | 11,429           |       | —         |       | —          |       | —           |       | 11,429           |       |
| Investments  in joint ventures                |       | 9,139            |       | —         |       | —          |       | —           |       | 9,139            |       |
| Other assets                                  |       | 2,026            |       | —         |       | 10,345          |       | —           |       | 12,371           |       |
|                                          |       | $                | 491,845    |           | $          | 2,891           |       | $                | 418,476    |             | $          | (405,169 | ) | $ | 508,043 |   |
|                                          |       |             |       |           |       |            |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                         |       |             |       |           |       |            |       |             |       |             |       |
| Accounts payable                              |       | $                | 45,905     |           | $          | —          |       | $                | —     |             | $          | — |   | $ | 45,905 |   |
| Payables to affiliates                        |       | 1,787            |       | —         |       | 11,227          |       | (13,014          | )          | —           |       |
| Accrued expenses                              |       | 16,804           |       | —         |       | 10,161          |       | —           |       | 26,965           |       |
| Billings in excess of contract revenues       |       | 9,842            |       | —         |       | —          |       | —           |       | 9,842            |       |
| Current maturities of long-term debt          |       | 6,490            |       | —         |       | —          |       | (4,540           | )          | 1,950            |       |
| Total current liabilities                     |       | 80,828           |       | —         |       | 21,388          |       | (17,554          | )          | 84,662           |       |
| Long-term  debt                               |       | 18,038           |       | —         |       | 232,800         |       | —           |       | 250,838          |       |
| Notes  payable to affiliates                  |       | 22,702           |       | —         |       | —          |       | (22,702          | )          | —           |       |
| Deferred  income taxes                        |       | 1,352            |       | —         |       | 86,728          |       | —           |       | 88,080           |       |
| Other                                         |       | 4,163            |       | —         |       | 550             |       | —           |       | 4,713            |       |
| Total liabilities                             |       | 127,083          |       | —         |       | 341,466         |       | (40,256          | )          | 428,293          |       |
| Minority  interests                           |       | —           |       | —         |       | —          |       | 1,783            |       | 1,783            |       |
| Stockholder’s  equity                    |       | 364,762          |       | 2,891          |       | 77,010          |       | (366,696         | )          | 77,967           |       |
|                                          |       | $                | 491,845    |           | $          | 2,891           |       | $                | 418,476    |             | $          | (405,169 | ) | $ | 508,043 |   |

 

11

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**Condensed Consolidating Balance Sheet at December 31,2004**

 
| ** **                                    | ** ** | **Guarantor**    | ** ** | **Other**      | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Subsidiaries** | ** ** | **Subsidiary** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| **ASSETS**                                    | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                              |       |             |       |           |       |            |       |             |       |             |       |
| Cash and equivalents                          |       | $                | 1,957      |           | $          | 5               |       | $                | —     |             | $          | — |   | $ | 1,962 |   |
| Accounts receivable, net                      |       | 65,762           |       | —         |       | —          |       | —           |       | 65,762           |       |
| Receivables from affiliates                   |       | 8,422            |       | 2,906          |       | 4,540           |       | (15,868          | )          | —           |       |
| Contract revenues in excess of billings       |       | 12,439           |       | —         |       | —          |       | —           |       | 12,439           |       |
| Inventories                                   |       | 16,497           |       | —         |       | —          |       | —           |       | 16,497           |       |
| Prepaid expenses and other current assets     |       | 13,780           |       | —         |       | 1,874           |       | —           |       | 15,654           |       |
| Total current assets                          |       | 118,857          |       | 2,911          |       | 6,414           |       | (15,868          | )          | 112,314          |       |
| Property and  equipment, net                  |       | 242,672          |       | —         |       | 13,922          |       | —           |       | 256,594          |       |
| Goodwill                                      |       | 103,563          |       | —         |       | —          |       | —           |       | 103,563          |       |
| Other  intangible assets, net                 |       | 3,267            |       | —         |       | —          |       | —           |       | 3,267            |       |
| Investments  in subsidiaries                  |       | 2,924            |       | —         |       | 281,813         |       | (284,737         | )          | —           |       |
| Notes  receivable from affiliates             |       | —           |       | —         |       | 22,702          |       | (22,702          | )          | —           |       |
| Inventories                                   |       | 11,278           |       | —         |       | —          |       | —           |       | 11,278           |       |
| Investments  in joint ventures                |       | 7,965            |       | —         |       | —          |       | —           |       | 7,965            |       |
| Other assets                                  |       | 2,073            |       | —         |       | 11,581          |       | —           |       | 13,654           |       |
|                                          |       | $                | 492,599    |           | $          | 2,911           |       | $                | 336,432    |             | $          | (323,307 | ) | $ | 508,635 |   |
|                                          |       |             |       |           |       |            |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY** | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                         |       |             |       |           |       |            |       |             |       |             |       |
| Accounts payable                              |       | $                | 46,770     |           | $          | —          |       | $                | —     |             | $          | — |   | $ | 46,770 |   |
| Payables to affiliates                        |       | 4,143            |       | —         |       | 7,185           |       | (11,328          | )          | —           |       |
| Accrued expenses                              |       | 13,238           |       | —         |       | 4,438           |       | —           |       | 17,676           |       |
| Billings in excess of contract revenues       |       | 6,706            |       | —         |       | —          |       | —           |       | 6,706            |       |
| Current maturities of long-term debt          |       | 6,490            |       | —         |       | —          |       | (4,540           | )          | 1,950            |       |
| Total current liabilities                     |       | 77,347           |       | —         |       | 11,623          |       | (15,868          | )          | 73,102           |       |
| Long-term  debt                               |       | 19,500           |       | —         |       | 232,800         |       | —           |       | 252,300          |       |
| Notes  payable to affiliates                  |       | 22,702           |       | —         |       | —          |       | (22,702          | )          | —           |       |
| Deferred  income taxes                        |       | 85,311           |       | (13            | )          | 5,131           |       | —           |       | 90,429           |       |
| Other                                         |       | 4,630            |       | —         |       | 684             |       | —           |       | 5,314            |       |
| Total liabilities                             |       | 209,490          |       | (13            | )          | 250,238         |       | (38,570          | )          | 421,145          |       |
| Minority  interests                           |       | —           |       | —         |       | —          |       | 1,599            |       | 1,599            |       |
| Stockholder’s  equity                    |       | 283,109          |       | 2,924          |       | 86,194          |       | (286,336         | )          | 85,891           |       |
|                                          |       | $                | 492,599    |           | $          | 2,911           |       | $                | 336,432    |             | $          | (323,307 | ) | $ | 508,635 |   |

 

12

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**Condensed Consolidating Statement of Operations forthe three months ended September 30, 2005**

 
| ** **                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                          |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract  revenues                            |       | $                           | 119,745    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 119,745 |   |
| Costs of  contract revenues                   |       | (103,332                    | )          | —                |       | 148                  |       | —           |       | (103,184                 | )          |
| Gross profit                                  |       | 16,413                      |       | —                |       | 148                  |       | —           |       | 16,561                   |       |
| General and  administrative expenses          |       | (8,150                      | )          | (20                   | )          | 218                  |       | —           |       | (7,952                   | )          |
| Amortization  of intangible assets            |       | (183                        | )          | —                |       | —               |       | —           |       | (183                     | )          |
| Impairment  of goodwill and intangible assets |       | (5,718                      | )          | —                |       | —               |       | —           |       | (5,718                   | )          |
| Operating income (loss)                       |       | 2,362                       |       | (20                   | )          | 366                  |       | —           |       | 2,708                    |       |
| Interest  expense, net                        |       | (1,028                      | )          | —                |       | (5,411               | )          | —           |       | (6,439                   | )          |
| Equity in  (loss) earnings of subsidiaries    |       | (13                         | )          | —                |       | 4,013                |       | (4,000           | )          | —                   |       |
| Equity in  earnings of joint ventures         |       | 912                         |       | —                |       | —               |       | —           |       | 912                      |       |
| Minority  interests                           |       | —                      |       | —                |       | —               |       | 36               |       | 36                       |       |
| Income (loss) before income taxes             |       | 2,233                       |       | (20                   | )          | (1,032               | )          | (3,964           | )          | (2,783                   | )          |
| Income tax  (expense) benefit                 |       | 857                         |       | 7                     |       | (3,473               | )          | 1,666            |       | (943                     | )          |
| Net income (loss)                             |       | $                           | 3,090      |                  | $          | (13                  | )          | $                | (4,505     | )                        | $          | (2,298 | ) | $ | (3,726 | ) |

 

**Condensed Consolidating Statement ofOperations for the three months ended September 30, 2004**

 
| ** **                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                 |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract  revenues                   |       | $                           | 66,473     |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 66,473 |   |
| Costs of  contract revenues          |       | (62,373                     | )          | 6                     |       | 223                  |       | —           |       | (62,144                  | )          |
| Gross profit                         |       | 4,100                       |       | 6                     |       | 223                  |       | —           |       | 4,329                    |       |
| General and  administrative expenses |       | (7,432                      | )          | (15                   | )          | (245                 | )          | —           |       | (7,692                   | )          |
| Amortization  of intangible assets   |       | (730                        | )          | —                |       | —               |       | —           |       | (730                     | )          |
| Operating loss                       |       | (4,062                      | )          | (9                    | )          | (22                  | )          | —           |       | (4,093                   | )          |
| Interest  expense, net               |       | (1,011                      | )          | —                |       | (2,417               | )          | —           |       | (3,428                   | )          |
| Equity in  loss of subsidiaries      |       | (8                          | )          | —                |       | (2,819               | )          | 2,827            |       | —                   |       |
| Equity in  earnings of joint venture |       | 727                         |       | —                |       | —               |       | —           |       | 727                      |       |
| Minority  interests                  |       | —                      |       | —                |       | —               |       | 92               |       | 92                       |       |
| Loss before income taxes             |       | (4,354                      | )          | (9                    | )          | (5,258               | )          | 2,919            |       | (6,702                   | )          |
| Income tax  benefit                  |       | 1,421                       |       | 1                     |       | 1,196                |       | (548             | )          | 2,070                    |       |
| Net loss                             |       | $                           | (2,933     | )                     | $          | (8                   | )          | $                | (4,062     | )                        | $          | 2,371 |   | $ | (4,632 | ) |

 

13

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**Condensed Consolidating Statement of Operations forthe nine months ended September 30, 2005**

 
| ** **                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                          |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract  revenues                            |       | $                           | 313,039    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 313,039 |   |
| Costs of  contract revenues                   |       | (278,337                    | )          | —                |       | 332                  |       | —           |       | (278,005                 | )          |
| Gross profit                                  |       | 34,702                      |       | —                |       | 332                  |       | —           |       | 35,034                   |       |
| General and  administrative expenses          |       | (23,300                     | )          | (50                   | )          | (149                 | )          | —           |       | (23,499                  | )          |
| Amortization  of intangible assets            |       | (583                        | )          | —                |       | —               |       | —           |       | (583                     | )          |
| Impairment  of goodwill and intangible assets |       | (5,718                      | )          | —                |       | —               |       | —           |       | (5,718                   | )          |
| Operating income (loss)                       |       | 5,101                       |       | (50                   | )          | 183                  |       | —           |       | 5,234                    |       |
| Interest  expense, net                        |       | (3,022                      | )          | —                |       | (14,283              | )          | —           |       | (17,305                  | )          |
| Equity in  earnings (loss) of subsidiaries    |       | (33                         | )          | —                |       | 4,821                |       | (4,788           | )          | —                   |       |
| Equity in  earnings of joint venture          |       | 1,674                       |       | —                |       | —               |       | —           |       | 1,674                    |       |
| Minority  interests                           |       | —                      |       | —                |       | —               |       | (184             | )          | (184                     | )          |
| Income (loss) before income taxes             |       | 3,720                       |       | (50                   | )          | (9,279               | )          | (4,972           | )          | (10,581                  | )          |
| Income tax  (expense) benefit                 |       | 436                         |       | 17                    |       | (864                 | )          | 2,089            |       | 1,678                    |       |
| Net income (loss)                             |       | $                           | 4,156      |                  | $          | (33                  | )          | $                | (10,143    | )                        | $          | (2,883 | ) | $ | (8,903 | ) |

 

**Condensed Consolidating Statement of Operations for the ninemonths ended September 30, 2004**

 
| ** **                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                 |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract  revenues                   |       | $                           | 242,524    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 242,524 |   |
| Costs of  contract revenues          |       | (216,684                    | )          | (13                   | )          | 746                  |       | —           |       | (215,951                 | )          |
| Gross profit (loss)                  |       | 25,840                      |       | (13                   | )          | 746                  |       | —           |       | 26,573                   |       |
| General and  administrative expenses |       | (20,699                     | )          | (45                   | )          | (328                 | )          | —           |       | (21,072                  | )          |
| Amortization  of intangible assets   |       | (3,642                      | )          | —                |       | —               |       | —           |       | (3,642                   | )          |
| Operating income (loss)              |       | 1,499                       |       | (58                   | )          | 418                  |       | —           |       | 1,859                    |       |
| Interest  expense, net               |       | (3,102                      | )          | —                |       | (11,932              | )          | —           |       | (15,034                  | )          |
| Equity in  loss of subsidiaries      |       | (40                         | )          | —                |       | (513                 | )          | 553              |       | —                   |       |
| Equity in  earnings of joint venture |       | 1,558                       |       | —                |       | —               |       | —           |       | 1,558                    |       |
| Minority  interests                  |       | —                      |       | —                |       | —               |       | 104              |       | 104                      |       |
| Loss before income taxes.            |       | (85                         | )          | (58                   | )          | (12,027              | )          | 657              |       | (11,513                  | )          |
| Income tax  (expense) benefit        |       | (579                        | )          | 18                    |       | 4,039                |       | (276             | )          | 3,202                    |       |
| Net loss                             |       | $                           | (664       | )                     | $          | (40                  | )          | $                | (7,988     | )                        | $          | 381 |   | $ | (8,311 | ) |

 

14

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**CondensedConsolidating Cash Flows for the nine months ended September 30, 2005**

 
| ** **                                  | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Operating  Activities**                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net cash flows from operating activities    |       | $                           | 13,985     |                  | $          | (20                  | )          | $                | (5,333     | )                        | $          | — |   | $ | 8,632 |   |
|                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Investing  Activities**                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Purchases of  property and equipment        |       | (9,437                      | )          | —                |       | —               |       | —           |       | (9,437                   | )          |
| Dispositions  of property and equipment     |       | 4,596                       |       | —                |       | —               |       | —           |       | 4,596                    |       |
| Net cash flows from investing activities    |       | (4,841                      | )          | —                |       | —               |       | —           |       | (4,841                   | )          |
|                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Financing  Activities**                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Repayments  of long-term debt               |       | (1,462                      | )          | —                |       | —               |       | —           |       | (1,462                   | )          |
| Net change  in accounts with affiliates     |       | (5,353                      | )          | 20                    |       | 5,333                |       | —           |       | —                   |       |
| Repayment of  capital lease debt            |       | (806                        | )          | —                |       | —               |       | —           |       | (806                     | )          |
| Net cash flows from financing activities    |       | (7,621                      | )          | 20                    |       | 5,333                |       | —           |       | (2,268                   | )          |
|                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net change in cash and equivalents          |       | 1,523                       |       | —                |       | —               |       | —           |       | 1,523                    |       |
| Cash and equivalents at beginning of period |       | 1,957                       |       | 5                     |       | —               |       | —           |       | 1,962                    |       |
| Cash and equivalents at end of period       |       | $                           | 3,480      |                  | $          | 5                    |       | $                | —     |                     | $          | — |   | $ | 3,485 |   |

 

**Condensed Consolidating Cash Flows for the nine months ended September 30,2004**

 
| ** **                                                                   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                                                         |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Operating  Activities**                                                    |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net cash flows from operating activities                                     |       | $                           | 16,647     |                  | $          | (39                  | )          | $                | 4,012      |                     | $          | — |   | $ | 20,620 |   |
|                                                                         |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Investing  Activities**                                                    |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Purchases of  property and equipment                                         |       | (15,691                     | )          | —                |       | —               |       | —           |       | (15,691                  | )          |
| Dispositions  of property and equipment                                      |       | 650                         |       | 25                    |       | —               |       | —           |       | 675                      |       |
| Adjustment to acquisition price of  Predecessor common and preferred shares. |       | 527                         |       | —                |       | —               |       | —           |       | 527                      |       |
| Cash  released from equipment escrow                                         |       | 2,451                       |       | —                |       | —               |       | —           |       | 2,451                    |       |
| Net cash flows from investing activities                                     |       | (12,063                     | )          | 25                    |       | —               |       | —           |       | (12,038                  | )          |
|                                                                         |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Financing  Activities**                                                    |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Repayments  of long-term debt                                                |       | (1,462                      | )          | —                |       | (2,500               | )          | —           |       | (3,962                   | )          |
| Net change  in accounts with affiliates                                      |       | 1,302                       |       | 13                    |       | (1,315               | )          | —           |       | —                   |       |
| Financing  fees                                                              |       | —                      |       | —                |       | (197                 | )          | —           |       | (197                     | )          |
| Net cash flows from financing activities                                     |       | (160                        | )          | 13                    |       | (4,012               | )          | —           |       | (4,159                   | )          |
|                                                                         |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net change in cash and equivalents                                           |       | 4,424                       |       | (1                    | )          | —               |       | —           |       | 4,423                    |       |
| Cash and equivalents at beginning of period                                  |       | 2,766                       |       | 9                     |       | —               |       | —           |       | 2,775                    |       |
| Cash and equivalents at end of period                                        |       | $                           | 7,190      |                  | $          | 8                    |       | $                | —     |                     | $          | — |   | $ | 7,198 |   |

 

15

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

###### **Statement Under the PrivateSecurities Litigation Reform Act**

###### ** **

Certaininformation in this Quarterly Report on Form 10-Q, including but notlimited to the Management’s Discussion and Analysis of Financial Condition andResults of Operations, may constitute forward-looking statements as such termis defined in Section 27A of the Securities Exchange Act of 1933 (the “SecuritiesAct”) and Section 21E of the Securities Exchange Act of 1934.  Certain forward-looking statements can beidentified by the use of forward-looking terminology such as, “believes,” “expects,”“may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,”“anticipates,” or “hopeful,” or the negative thereof or other comparableterminology, or by discussions of strategy, plans or intentions.  Forward-looking statements involve risks anduncertainties, including those described in the Risk Factors section ofthe Company’s Form S-4 Registration Statement (Registration No. 333-114059),which could cause actual results to be materially different than those in theforward-looking statements, which speak only as of the date hereof.  The Company assumes no obligation to updatesuch information.

 

###### **General**

 

TheCompany is the largest provider of dredging services in the United States.Dredging generally involves the enhancement or preservation of the navigabilityof waterways or the protection of shorelines through the removal orreplenishment of soil, sand or rock.  TheU.S. dredging market consists of three primary types of work:  Capital, Maintenance and Beach Nourishment,in which the Company experienced an average combined U.S. bid market share of 43%over the last three fiscal years (2002 to 2004).  The Company’s bid market is defined as thepopulation of projects on which it bid or could have bid if not for capacityconstraints (“bid market”).  In addition,the Company has continued its role as the only U.S. dredging contractor withsignificant international operations, which averaged 16% of its contractrevenues over the last three fiscal years.

 

TheCompany also owns 85% of the capital stock of North American Site Developers, Inc.(“NASDI”), a demolition service provider located in the Boston, Massachusettsarea.  NASDI’s principal services consistof interior and exterior demolition of commercial and industrial buildings,salvage and recycling of related materials, and removal of hazardous substancesand materials.  One NASDI managementstockholder retains a 15% non-voting interest in NASDI, which is reflected as aminority interest within the financial statements.

 

TheCompany’s equity in earnings of joint ventures relates to the Company’s 50%ownership interests in Amboy Aggregates (“Amboy”) and an adjoining landinvestment, which are accounted for using the equity method.

 

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###### **Results of Operations**

 

Thefollowing table sets forth the components of net loss and EBITDA as apercentage of contract revenues for the three and nine months ended September 30,2005 and 2004:

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Contract  revenues                    |       | 100.0                                      | %          | 100.0                                     | %          | 100.0 | % | 100.0 | % |
| Costs of  contract revenues           |       | (86.2                                      | )          | (93.5                                     | )          | (88.8 | ) | (89.0 | ) |
| Gross profit                          |       | 13.8                                       |       | 6.5                                       |       | 11.2 |   | 11.0 |   |
| General and  administrative expenses  |       | (6.3                                       | )          | (8.6                                      | )          | (6.8 | ) | (7.5 | ) |
| Subpoena-related  expenses            |       | (0.4                                       | )          | (1.0                                      | )          | (0.7 | ) | (0.7 | ) |
| Litigation  settlement                |       | —                                     |       | (1.9                                      | )          | — |   | (0.5 | ) |
| Amortization  of intangible assets    |       | (0.1                                       | )          | (1.1                                      | )          | (0.2 | ) | (1.5 | ) |
| Impairment  of intangible assets      |       | (4.8                                       | )          | —                                    |       | (1.8 | ) | — |   |
| Operating income (loss)               |       | 2.2                                        |       | (6.1                                      | )          | 1.7 |   | 0.8 |   |
| Interest  expense, net                |       | (5.3                                       | )          | (5.2                                      | )          | (5.5 | ) | (6.2 | ) |
| Equity in  earnings of joint ventures |       | 0.8                                        |       | 1.1                                       |       | 0.6 |   | 0.6 |   |
| Minority  interest                    |       | —                                     |       | 0.1                                       |       | (0.1 | ) | 0.1 |   |
| Loss before income taxes              |       | (2.3                                       | )          | (10.1                                     | )          | (3.3 | ) | (4.7 | ) |
| Income tax  (expense) benefit         |       | (0.8                                       | )          | 3.1                                       |       | 0.5 |   | 1.3 |   |
| Net loss                              |       | (3.1                                       | )%         | (7.0                                      | )%         | (2.8 | )% | (3.4 | )% |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| EBITDA                                |       | 8.2                                        | %          | 4.2                                       | %          | 8.1 | % | 9.5 | % |

 

EBITDA,as provided herein, represents net income (loss), adjusted for net interestexpense, income taxes, depreciation and amortization expense. The Company supplementallypresents EBITDA, in addition to operating income, as a measure by which toevaluate the Company’s operating trends. The Company believes that EBITDA is a measure frequently used toevaluate performance of companies with substantial leverage and that all of itsprimary stakeholders (i.e. its bondholders, banks and investors) use EBITDA toevaluate the Company’s period to period performance.   Additionally, management believes thatEBITDA provides a transparent measure of the Company’s recurring operatingperformance and allows management to readily view operating trends, performanalytical comparisons and identify strategies to improve operatingperformance. For this reason, EBITDA is the measure the Company uses to assessperformance for purposes of determining compensation under its incentiveplan.  EBITDA should not be considered analternative to, or more meaningful than, amounts determined in accordance withGAAP including: (a) operating income as an indicator of operatingperformance; or (b) cash flows from operations as a measure of liquidity.As such, the Company’s use of EBITDA, instead of a GAAP measure, haslimitations as an analytical tool, including the inability to determineprofitability or liquidity due to the exclusion of interest expense and theassociated significant cash requirements and the exclusion of depreciation andamortization, which represent significant and unavoidable operating costs giventhe level of indebtedness and capital expenditures needed to maintain theCompany’s business.

 

17

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The following tablereconciles net loss to EBITDA for the periods indicated:

 
| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                      |       | $                                          | (3,726     | )                                         | $          | (4,632 | ) | $ | (8,903 | ) | $ | (8,311 | ) |
| Adjusted  for:                |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense, net         |       | 6,439                                      |       | 3,428                                     |       | 17,305 |   | 15,034 |   |
| Income tax expense (benefit)  |       | 943                                        |       | (2,070                                    | )          | (1,678 | ) | (3,202 | ) |
| Depreciation and amortization |       | 6,148                                      |       | 6,061                                     |       | 18,478 |   | 19,637 |   |
| EBITDA                        |       | $                                          | 9,804      |                                      | $          | 2,787 |   | $ | 25,202 |   | $ | 23,158 |   |

 

Thefollowing table sets forth, by segment and dredging type of work, the Company’scontract revenues for the three and nine months ended and backlog as of theperiods indicated:

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **Revenues (in thousands)** | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dredging:                   |       |                                       |       |                                      |       |   |   |   |   |
| Capital - U.S.              |       | $                                          | 56,100     |                                      | $          | 31,854 |   | $ | 115,878 |   | $ | 80,526 |   |
| Capital - foreign           |       | 16,033                                     |       | 8,743                                     |       | 32,264 |   | 53,904 |   |
| Beach                       |       | 26,081                                     |       | 2,729                                     |       | 70,931 |   | 45,207 |   |
| Maintenance                 |       | 8,139                                      |       | 14,260                                    |       | 56,626 |   | 37,020 |   |
| Demolition                  |       | 13,392                                     |       | 8,887                                     |       | 37,340 |   | 25,867 |   |
|                        |       | $                                          | 119,745    |                                      | $          | 66,473 |   | $ | 313,039 |   | $ | 242,524 |   |

 
| ** **                 | ** ** | **September 30,** | ** ** |
|----------------------------|------------|------------------------|------------|
| **Backlog (in thousands)** | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Dredging:                  |       |                   |       |   |   |
| Capital - U.S.             |       | $                      | 132,470    |   | $ | 206,621 |   |
| Capital - foreign          |       | 104,258                |       | 15,473 |   |
| Beach                      |       | 21,588                 |       | 23,739 |   |
| Maintenance                |       | 7,746                  |       | 33,198 |   |
| Demolition                 |       | 19,004                 |       | 10,981 |   |
|                       |       | $                      | 285,066    |   | $ | 290,012 |   |

 

Consolidatedrevenues for the third quarter of 2005 were $119.7 million, representing anincrease of $53.2 million or 80.1% over third quarter 2004 revenues of $66.5million.  Revenues for the nine monthsended September 30, 2005 were $313.0 million, an increase of $70.5 millionor 29.1% over revenues for the nine months ended September 30, 2004 of $242.5million.  The increase in 2005 revenuesprimarily resulted from improved utilization of the Company’s dredging fleet,particularly relative to the second and third quarters of 2004.  Utilization declined significantly in thesecond and third quarters of 2004 due to the funding constraints experienced bythe Army Corps of Engineers (Corps), which led to a slow down in the domesticdredging bid activity through the first half of 2004 and postponement ofcertain work in the Company’s backlog at that time.  As evidenced by the active 2005 domesticdredging bid market to date, it appears that the funding issues at the Corpsare being moderated.  Therefore, theCompany’s

 

18

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utilizationhas improved throughout 2005, since it has been able to perform on projectsthat had previously been postponed and has performed on numerous projects thatwere subsequently added to backlog. The Company’s third quarter andyear-to-date 2005 revenues have also benefited from increased activity in thedemolition sector.

 

TheCompany’s consolidated gross profit margin for the quarter ended September 30,2005 improved to 13.8%, compared to 6.5% for the same quarter of 2004, as aresult of the higher utilization relative to the level of fixed costs.  However, gross profit margin for the ninemonths ended September 30, 2005 totaled 11.2%, which is approximately thesame as that achieved for the same period of 2004.  The 2005 nine-month margin reflects theimpact of reduced earnings realized in the first quarter when the Companyperformed on a number of dredging projects with lower than typical margins, dueto the highly competitive market conditions when they were bid.

 

Capitalprojects include large port deepenings and other infrastructure projects.  Domestic capital dredging revenue increased $24.2million and $35.4 million in the third quarter and first nine months of 2005,respectively, as compared to the same periods of 2004.  The Company’s domestic capital revenues of $56.1million in the third quarter of 2005 were substantially generated by continuingwork on port deepening projects in Miami, Florida; Oakland, California; ArthurKill Channel, New York; Columbia River, Oregon; and Wilmington, NorthCarolina.  The Company also concluded thedeepening project at Port Jersey, New Jersey, which was substantially performedby a subcontractor.  Foreign capitalrevenue in the third quarter increased $7.3 million, compared to the third quarterof 2004, while the 2005 year-to-date foreign capital revenue declined $21.6million compared to the same 2004 period, as a result of the mix of projects underwayin the corresponding periods.  The 2005 thirdquarter’s foreign revenues were substantially generated by continuing work onthe Durrat land development project in Bahrain, which began in the fourthquarter of 2004 and will continue through 2006. The 2004 period included workon the Hidd terminal project in Bahrain, which was completed in the firstquarter of 2005.

 

Beachnourishment projects include rebuilding of shoreline areas that have beendamaged by storm activity or ongoing erosion. Third quarter 2005 revenues from beach nourishment projects totaled $26.1million, a $23.4 million increase over the same period of 2004, bringingyear-to-date beach revenue to $70.9 million, which is significantly higher thanthe 2004 year-to-date amount of $45.2 million.  The increase is to be expected, given thatbeach nourishment work has represented approximately 40% of the 2005year-to-date bid market, compared to only 15% over the last three years (2002to 2004), because of the extensive damage wrought by hurricanes in 2004. TheCompany’s 2005 third quarter beach revenues were substantially generated bythree projects in Florida, which were added to backlog in 2005. These projectswill conclude in the fourth quarter of 2005.

 

Maintenanceprojects include routine dredging of ports, rivers and channels to remove theregular build up of sediment. Maintenance revenues totaled $8.1 million in the third quarter of 2005, comparedto $14.3 million for the same 2004 period, while year-to-date 2005 maintenancerevenues totaled $56.6 million compared to $37.0 million for the same 2004period, as a result of the mix of projects performed in the correspondingperiods. The 2005 third quarter is lower than recent quarters, because theCompany had sufficient capital and beach nourishment work to occupy its fleet.  The third quarter’s revenues weresubstantially generated by three equipment rental projects along theMississippi River, two of which are continuing into the fourth quarter.

 

TheCompany’s amortization expense declined to $0.2 million for the third quarterof 2005, from $0.7 million for the same quarter of 2004, since the mostsignificant portion of the Company’s intangible assets, related to contractbacklog acquired at the time of the Company’s sale in December 2003, wasprimarily amortized in 2004.   TheCompany performed its annual goodwill impairment assessment in the thirdquarter and recorded a $5.7 million non-cash impairment

 

19

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write-downrelated to its demolition segment.  Atthe time of the sale transaction in December 2003, the Company hadallocated a portion of the total goodwill to the demolition segment and hadrecognized an asset related to the intangible benefit inherent in certaincustomer relationships within the demolition business.  Although NASDI is likely to achieve its 2005forecast and is projected to be cash flow positive going forward, managementdoes not believe that NASDI will achieve the future returns contemplated in the2003 forecasts when the goodwill was allocated. These downward revised projections for the demolition business areattributable to higher anticipated incentive pay to retain a key member of thedemolition business’s management. Additionally, when the original customerrelationship intangible was established, it required estimation of futureannual revenues attributable to certain key customers. Over the past two years,NASDI’s revenues were generated by a greater variety of customers, rather thanbeing as concentrated as anticipated with these key customers.  Therefore, the Company revised its revenueexpectations related to these particular customers, which resulted in awrite-down of this intangible asset.

 

TheCompany’s other general and administrative expenses totaled $7.5 million forthe third quarter of 2005, which compares to $5.7 million for same quarter of2004.  The increase is primarily a resultof higher incentive compensation, driven by the improvement in the dredgingsegment performance, along with the additional incentive compensation requiredin the demolition segment as mentioned above.

 

Netinterest expense for the third quarter and first nine months of 2005 was $6.4 millionand $17.3 million, respectively, compared to $3.4 million and $15.0 million forthe same periods of 2004.  Cash interestexpense increased by approximately $0.7 million in the third quarter of 2005,compared to the same period of 2004, as a result of higher underlying interestrates and larger spreads on the Company’s variable rate debt.  Total interest for the third quarter of 2005 alsoreflects a non-cash expense of $0.8 million due to the valuation of the Company’sfixed-to-floating interest rate swap, which was put in place in February of2004 (as described in Note 3).  Thiscompares to a non-cash interest benefit of $1.5 million for the 2004 quarter onthis same swap.

 

Incometax expense for the third quarter of 2005 was $.9 million and the income taxbenefit for the first nine months of 2005 was $1.7 million which compares to abenefit of $2.1 million and $3.2 million for the first quarter and first ninemonths of 2004, respectively.  Therelative increase in tax expense or reduction in benefit in 2005 is a result ofthe $5.7 million non-cash goodwill and intangibles impairment write-downrecorded in the third quarter of 2005, which is not a deduction for taxpurposes.

 

TheCompany generated a net loss of $3.7 million and $8.9 million for the quarter andnine months ended September 30, 2005, respectively, compared to a net lossof $4.6 million and $8.3 million, for the same 2004 periods.  As mentioned previously, the second and thirdquarters of 2005 have experienced improved utilization and margins, relative to2004, which was significantly impacted by the decline in the bid market andfunding constraints, particularly in the second and third quarters.  However, the improvement in 2005 results isoffset by the impact of the $5.7 million non-cash intangible asset write-downand increased incentive compensation, as mentioned previously.

 

EBITDA(as defined on page 17) was $9.8 million and $25.2 million for the quarterand nine months ended September 30, 2005, respectively, compared to $2.8million and $23.2 million for the same periods of 2004, again reflecting theimprovement in operating results, offset by the impact of the non-cashintangible asset write-down and increased incentive compensation.

 

20

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**Results by segment**

 

***Dredging***

 

Dredgingrevenues for the quarter and nine months ended September 30, 2005 were$106.4 million and $275.7 million, respectively, compared to $57.6 million and$216.7 million for the same periods of 2004, with the increase in 2005 drivenby the improved utilization of the Company’s dredging fleet, as notedpreviously.  Operating incomeattributable to the dredging operations for the quarter and nine months ended September 30,2005 totaled $8.9 million and $8.6 million, respectively, and compares to anoperating loss of $3.5 million and operating income of $1.5 million for thesame periods of 2004, respectively.  The improvementin the 2005 periods was due primarily to the increased revenue generated by thehigher levels of equipment utilization.

 

***Demolition***

 

NASDI’sdemolition revenues for the quarter and nine months ended September 30, 2005totaled $13.4 million and $37.3 million, respectively, compared to $8.9 millionand $25.9 million for the same periods of 2004, with the increase driven by thegeneral market improvement, such that NASDI has experienced less competitionfor the jobs it has bid in recent quarters.  However, the demolition segment generated anoperating loss for the quarter and nine months ended September 30, 2005totaling $6.2 million and $3.3 million, respectively, compared to an operatingloss of $0.6 million and operating income of $0.4 million for the same periodsof 2004, respectively.  While NASDI’srevenue and gross profit margins increased in the 2005 periods, this was offsetby the $5.7 million non-cash intangible asset impairment write-down andadditional incentive compensation, discussed previously.

 

**Bidding Activity and Backlog**

 

TheCompany’s contract backlog represents management’s current estimate of therevenues that will be realized under the portion of the contracts remaining tobe performed.  Such estimates are subjectto fluctuations based upon the amount of material actually dredged, as well asfactors affecting the time required to complete the job. In addition, because asubstantial portion of the Company’s backlog relates to government contracts,the Company’s backlog can be canceled at any time without penalty.  However, the Company can generally recoverthe actual committed costs and profit on work performed up to the date ofcancellation.  Consequently, backlog isnot necessarily indicative of future revenues. The Company’s backlog includesonly those projects for which the Company has obtained a signed contract withthe customer.

 

Thethird quarter 2005 domestic dredging bid market, representing work awardedduring the period, totaled $202 million, bringing the year-to-date bid marketto $571 million, which is in line with the average annual bid market over thelast three years (2002 to 2004).   Thethird quarter’s activity included four capital dredging projects, one being anotherphase of the New York harbor deepening which was won by Great Lakes forapproximately $17 million, and another the next phase of the Port of Oaklanddeepening, which was won by a competitor for approximately $11 million.  The quarter also included a $20 millionnegotiated LNG project which was awarded to Great Lakes, along with a Louisianacoastal restoration project which was won by a competitor for approximately $16million. This project in Louisiana is being administered by the NationalOceanic and Atmospheric Administration (NOAA) to reclaim portions of theLouisiana wetlands in an effort to control coastal erosion in the area.  This project was bid prior to the recenthurricanes; therefore, it is possible that the project may be re-bid as plansfor the post-hurricane restoration work are being re-scoped.   The 2005 third quarter bid market alsoincluded award of

 

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fourbeach nourishment projects, with a total value of $66 million.  This brings year-to-date beach nourishmentawards to $218 million, which is well in excess of typical annual averages ofapproximately $100 million.  Much of the2005 beach work has been funded by an emergency supplemental bill passed in2004 to pay for damage from the severe hurricane season experienced in 2004,particularly along the coasts of Florida. Great Lakes won one of the beach projects awarded in the third quarter,a $14 million project to renourish Captiva and Sanibel Islands in Florida.  Additionally, Great Lakes was low bidder onthree additional beach projects in Florida, which had not been awarded atquarter-end, so are not reflected in the Company’s quarter-end backlog.

 

Competitorscontinued to bid certain projects very aggressively during the third quarter,so the Company’s share of work awarded in this quarter totaled 31%, bringing its2005 year-to-date share to only 24%, which remains below its historical averageannual market share of approximately 40%. The Company continued to bid opportunities with more reasonable marginsfrom the beginning of the year, so it has been winning work with good margins.While the competition has been bidding more aggressively, there appeared to besome moderation in their aggressiveness in the third quarter.  So, management believes that margins willrecover in the industry, allowing the Company to capture its more typicalmarket share. Although the Company’s domestic market share has declined to-datein 2005, the Company has still been able to maintain a solid level of dredgingbacklog, with the inclusion of its foreign backlog.

 

Dredgingbacklog at September 30, 2005 totaled $266.1 million, which compares to $294.9million at June 30, 2005, and $279.0 million at September 30,2004.  The majority of the Company’s September 30,2005 dredging backlog is represented by domestic and foreign capital dredgingwork, including continuing work on deepening projects in New York, Miami,Brunswick and Wilmington, domestically, and other capital projects in Bahrainand Ocean Cay, Bahamas, abroad. The Company’s September 30, 2005 recordedbacklog does not reflect approximately $43 million of low bids pending award,including the three Florida beach nourishment projects noted earlier, or otheroptions pending on projects currently in backlog.  While beach backlog of $26.1 million at September 30,2005 represents a solid level for the Company, it will increase further withthe award of these three projects.  TheCompany’s maintenance backlog totaled only $8.1 million at September 30,2005, as a result of the competitive pricing in this area and the Company’scurrent equipment commitments to capital and beach projects.  Demolition services backlog improved to $19.0million at September 30, 2005, with the addition of an $8.0 millionproject for the demolition and abatement of a former state hospital.  This compares to $16.6 million at June 30,2005 and $11.0 million at September 30, 2004.

 

###### **Market Outlook**

 

TheCorps’ fiscal 2006 budget has not yet been passed, and the Corps, along withother government agencies, is currently operating under a ContinuingResolution, which allows it to operate into fiscal 2006 at fiscal 2005 levelsfor authorized projects.  This has createdsome confusion within the dredging industry as to the level at which the Corps’current projects will be funded over the next several weeks or months.  However, the Corps has operated underContinuing Resolutions in the past and management does not currently believethat the Continuing Resolution will significantly impact funding or scheduledbidding activity.  The ultimate passageof the fiscal 2006 budget is expected to be at a level slightly increased overthe prior year appropriations, which should allow for a dredging market similarin size to fiscal 2005.  However, thereis significant uncertainty as to whether the need to perform emergency workalong the Louisiana coast will require the Corps to shift funds from othercurrent Corps projects in the near-term or over time.

 

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Thefederal government has passed two multi-billion dollar special appropriationbills to address the clean-up and reconstruction efforts along the Gulf coastdue to the destruction from Hurricanes Katrina and Rita.  Approximately $450 million relates to Corps’work but it is not clear at this point how much of these funds will be used fordredging and how much will be used for other purposes such as restoring thelevee systems.  However, the Company,along with five other competitors, has submitted IDIQs (indefinite quantityprequalifications) to pre-qualify the Company to perform work under 19identified potential projects.  Theseprojects may be let for bid on short notice if necessary to perform maintenancedredging along various channels in the affected Gulf coast region.  Currently, three contracts have been let forbid and one is expected to bid shortly from these IDIQ projects.  This work will be funded by the specialappropriation and would be additive to the Corps’ annual budget.  In addition to clean-up and restoration work,the most likely long-term impact to the dredging industry from the hurricanesmay be increased momentum to move forward with the Louisiana CoastalRestoration Plan, which has been discussed for a number of years now. This is along-range plan to restore the coastal wetlands of Louisiana and could generateup to $1 billion of incremental work for the dredging industry over a five to10 year period.

 

TheWater Resources Development Act, or WRDA legislation, which includesauthorization of the Corps’ civil works projects still appears unlikely to passin 2005.  This should not have near termimpact on the industry as projects that have been authorized by previous WRDAbills continue to be bid.   The currentform of the WRDA bill does include authorization for the Louisiana Coastal AreaStudy, which covers projects anticipated by the long-range RestorationPlan.  There is a possibility that thisauthorization request may be moved out of WRDA to increase the likelihood thatit may be passed in the near future.  Ifauthorization for the Louisiana Coastal Area work is removed and WRDA is not otherwisepassed in its current form, there are some additional deepening projects (suchas Miami 50’ work and Port Everglades) that could be added to the current WRDA,accelerating the authorization of these projects, rather than waiting for afuture authorization bill.

 

Thereare a number of Deep Port projects that have been authorized to date, certain ofwhich should generate in excess of $150 million in the bid market over the nextfew quarters.  These include the nextphases of the Columbia River, OR deepening project and the Oakland, CA 50’deepening project, the initial phase of the Port Jersey, NJ 50’ deepeningproject and two other phases of the NY Harbor 50’ deepening project;  along with a Jacksonville Harbor, FLdeepening project, and potentially two port expansion projects in the Tampaarea.

 

The2005 beach nourishment market has benefited from the supplemental federalfunding passed in 2004.  However, to datethis money has been committed and there is continuing concern that there willbe pressures on funding beach nourishment projects going forward, as thecurrent administration has not supported federal funding for this work. Currentbidding schedules continue to indicate an additional $125 million of beach workto be bid through mid-2006.  Fortunately,a number of these projects are sponsored by localities in Florida that havesecured the funding for their projects through bond issues and taxes, recognizingthe cost/benefit to performing this work. To the extent more municipalities devise means to fund their individualprojects, this will help to sustain the beach nourishment market at historicallevels, even if the federal government reduces its commitment to beachnourishment.

 

Thereare also a number of opportunities for dredging services related to thedevelopment of liquefied natural gas (“LNG’) terminals, particularly along theGulf coast of Texas and Louisiana.  TheCompany has outstanding proposals for over $50 million in dredging servicessolicited by private customers, typically large energy companies.  And as was previously discussed, the Company addeda $20 million LNG project in Freeport, TX to its backlog in the third quarter.  With the higher prices of domestically-producednatural gas and the increased

 

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cost-competitivenessof importing LNG, management expects this work will increase in the nearfuture.

 

Withrespect to the Company’s foreign markets, the Company now has two largehydraulic dredges working in Bahrain on the Durrat development project, whichwill provide good utilization for these vessels for the next 18 to 24 months.Also, as was mentioned in the last quarter, the Company is a minority partnerin a consortium that is performing a large land reclamation project to expandthe airport in Doha, Qatar, although the Company is providing only a smallportion of the overall work. In addition the Company continues to follow anumber of large land reclamation projects in the Middle East – particularly inQatar, Saudi Arabia, and Bahrain, countries that generally welcomerelationships with U.S. contractors. Given the volume of work being generated in the region, opportunities foradditional work exist and the Company is bidding to take on some further workto occupy its equipment upon completion of the Durrat project.  The Company will also continue to evaluate ifthere are opportunities to employ additional equipment overseas if thecontracts can cover the mobilization expense and return higher margins then canbe obtained in the U.S.

 

Insummary, the Company’s utilization and earnings continued to improve throughthe third quarter.  While the biddingactivity has been robust through the first nine months of the year, pricing hasremained competitive.  However, given theCompany’s current backlog it has been able to maintain a rational biddingstrategy and has taken on new work with better margins than in 2004 when theCompany, along with others in the industry, had excess capacity.  The Company continues to maintain a solidlevel of backlog due to its recent foreign and domestic awards.  The Company is in the midst of performing thedeepening projects in Arthur Kill, NY; Miami Harbor, FL; Wilmington, NC, andColumbia River, OR, all of which are progressing well.  However, uncertainty continues to exist dueto the fact that the Corps fiscal 2006 budget has not been adopted and due tothe possibility that the reconstruction efforts along the Louisiana coast couldnegatively impact funding for the Corps’ dredging activities in the near-term.

 

###### **Liquidity and CapitalResources**

###### ** **

TheCompany’s principal sources of liquidity are cash flow generated fromoperations and borrowings under its senior credit facility.  The Company’s principal uses of cash are tomeet debt service requirements, finance its capital expenditures, provideworking capital and meet other general corporate purposes.

 

TheCompany’s net cash flows from operating activities for the nine months ended September 30,2005 totaled $8.6 million, compared to $20.6 million for the nine months ended September 30,2004.  The fluctuation is primarily aresult of the normal timing differences on the recognition and billing ofrevenues relative to the current level of activity.  Additionally, in 2004, the Company’s cashflows benefited from the receipt of income tax refunds in connection with the taxdeductions related to the sale of the Company in December of 2003.

 

TheCompany’s net cash flows used in investing activities for the nine months endedSeptember 30, 2005 totaled $4.8 million, compared to $12.0 million for thenine months ended September 30, 2004. The use of cash relates primarily to equipment acquisitions and capitalimprovements to existing equipment.  TheCompany’s 2005 proceeds from dispositions of property and equipment includes$4.4 million for a rock barge constructed by the Company and then sold andleased back under an operating lease in June of 2005.  The Company’s capital expenditures in the2004 period included spending for construction of a barge, which was funded by$2.5 million of escrow proceeds remaining from a like-kind exchange transactionin connection with the sale of two tugboats in 2003.

 

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TheCompany’s net cash flows used in financing activities for the nine months endedSeptember 30, 2005 totaled $2.3 million, compared to $4.2 million for thenine months ended September 30, 2004. In both periods, the Company’s has made net pay-downs of its scheduleddebt, while in 2004, the Company also generated sufficient cash to make a $2.5million voluntary repayment on its term bank loan.

 

TheCompany’s Credit Agreement and Equipment Term Loan (collectively, “seniorcredit agreements”) and its Underwriting and Indemnity Agreement (“bondingagreement”) with its surety provider contain certain provisions that requirethe Company to maintain a minimum net worth and certain other financial ratios,limit payment of dividends and restrict certain other transactions.  In response to the Company’s reduced earningsthrough the first half of 2005, the Company obtained an amendment to its creditagreement to provide additional liquidity to address certain near-term workingcapital needs in June of 2005.  Theamendment increased the Company’s revolver borrowing availability by $5.0million, with an offsetting decrease to the Company’s letter of credit capacityin the same amount.  Fortunately, theCompany has not needed to make use of the additional revolver borrowing capacity,which reverted back to the pre-amendment level of $15.0 million on October 31,2005.  The Company was in compliance withall of the financial covenants under its senior credit agreements and bondingagreement at September 30, 2005.

 

Therequired financial covenant levels under the senior credit agreements and the bondingagreement are restrictive in light of the Company’s current level of earnings,but Company management believes the Company has positive relationships with theits senior lenders and surety provider, should it be necessary to request anadditional amendment or waiver to the financial covenants.  However, if there is a future violation ofany of the financial covenants and the Company is not successful in obtainingan additional amendment or waiver, a default could occur under the Company’ssenior credit agreements or bonding agreement, which could result in a materialadverse impact on the Company’s financial condition.

 

TheCompany has continued to experience some timing issues on certain Corpsreceivables, but Company management believes its anticipated cash flows fromoperations and current available credit under its revolving credit facilitywill be sufficient to fund the Company’s operations and its revised capitalexpenditures, and meet its current annual debt service requirements ofapproximately $22 million for the remainder of the year.  TheCompany’s ability to fund its working capital needs, planned capitalexpenditures and scheduled debt payments, and to comply with all of thefinancial covenants under its senior credit agreements and bonding agreement,depends on its future operating performance and cash flow, which in turn, aresubject to prevailing economic conditions and to financial, business and otherfactors, some of which are beyond the Company’s control.

 

###### **Critical Accounting Policiesand Estimates**

###### ** **

Inpreparing its consolidated financial statements, the Company follows accountingprinciples generally accepted in the United States of America.  The application of these principles requiressignificant judgments or an estimation process that can affect the results ofoperations, financial position and cash flows of the Company, as well as therelated footnote disclosures.  The Companycontinually reviews its accounting policies and financial informationdisclosures.  There have been no materialchanges in policies or estimates since December 31, 2004.

 

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###### **Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Themarket risk of the Company’s financial instruments as of September 30,2005 has not significantly changed since December 31, 2004.  The market risk profile of the Company on December 31,2004 is disclosed in the Company’s 2004 Annual Report on Form 10-K.

 

###### **Item4.  Controls and Procedures**

 

*(a) Evaluation of Disclosure Controls and Procedures*.  Asrequired each quarter, the Company’s management, with the participation of itsChief Executive Officer and Chief Financial Officer, have conducted anevaluation of the effectiveness of disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of the end of the periodcovered by this quarterly report. Based on that evaluation, such officers haveconcluded that the disclosure controls and procedures are effective.

 

*(b) Changes in Internal Controls.*  Therehave been no changes in our internal controls over financial reporting duringthe most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

###### **PART II– Other Information**

 

###### **Item1.  Legal Proceedings**

 

In 1999, the Boston Housing Authority (“BHA”), for whom the Company’sdemolition business, NASDI, had worked, asserted that NASDI and itssubcontractors were responsible for improperly disposing of some contaminatedmaterials.  At the time the Companyacquired NASDI in 2001, it was believed that NASDI had sufficient recourse inthe matter and that any potential liability would be minimal.  However, since 2001, certain of the insurancecarriers that would be responsible for this matter have gone bankrupt.  Negotiations between the parties havecontinued to progress, and in the third quarter of 2004, the case went before ajudge in the Massachusetts court system, who advised NASDI and thesubcontractors to accept a settlement with the BHA.  Therefore, in the third quarter of 2004, theCompany recorded a $1,275 charge for NASDI’s share of this potential settlementliability.   This final settlement amountwas paid out in October, 2005.

 

On August 15, 2003 a claimwas brought in the Landesgericht (District Court) of Berlin, Germany againstGreat Lakes by Hafemeister Erd-und Tiefbau GmbH, a German constructionCompany.  On June 8, 2004 GreatLakes was served with notice of this claim, alleging that in 2000 the Companyalong with a Dutch company wrongfully withdrew from a consortium prior to thesubmission of a tender for a project to be performed in Germany.  The claimant is seeking damages from itsinability to bid on or perform the works in the amount of approximately€21,000.  Great Lakes has filed apetition with the German courts to seek dismissal of the claim for lack offactual and legal merit.  During thethird quarter, a hearing was scheduled for mid-December 2005.  As indicated by the Company’s petition,management does not believe that the claim has merit and does not

 

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expect it to have a material impact on the Company’s financial positionor results of operations.

 

###### **Item6.  Exhibits**

###### ** **

31.1                           Certification Pursuant to Rules 13a-14and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

31.2                           Certification Pursuant to Rules 13a-14and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

32.1         Certification Pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certification Pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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##### **SIGNATURE**

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                                          | Great Lakes Dredge & Dock Corporation  |
|-----------------------------------------------|-------------------------------------------------|
|                                          |                                            |
|                                          |                                            |
| Date:   November 11, 2005 | By:                                             | /s/ |  Deborah A. Wensel |   |
|                                          |                                            |  Deborah A. Wensel |
|                                          |                                            |  Senior Vice  President |
|                                          |                                            |  and Chief Financial  Officer |
|                                          |                                            |
|                                          | (Principal Financial and Accounting Officer and |
|                                          | Duly Authorized Officer)                        |

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Document Description**                                                                                                                                                       |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                           |
| 31.1       |       | Certification Pursuant to Rules 13a-14 and 15d-14 under the  Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 31.2       |       | Certification Pursuant to Rules 13a-14 and 15d-14 under the Securities  Exchange Act of 1934, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
| 32.1       |       | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                  |
| 32.2       |       | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                  |

 

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