**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|------------|----------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended****June 30, 2004**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**For the transition period from           to          **

 

**Commission file number:333-64687**

 

### **Great Lakes Dredge & Dock Corporation**

(Exactname 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý Yes  o  No

 

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

o Yes      ý   No

 

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

 

As of August 10, 2004,there were outstanding 1,000 shares of Common Stock and zero shares ofPreferred Stock.

 

 

----

 

**GreatLakes Dredge & Dock Corporation and Subsidiaries**Quarterly Report Pursuant toSection 13 or 15(d) of theSecurities Exchange Act of 1934For the Quarterly Period ended June 30, 2004

 

**INDEX**

 
| **Part I**         | **Financial Information** |                                                                                                             |
|--------------------|---------------------------|------------------------------------------------------------------------------------------------------------------|
|               |                      |                                                                                                             |   |
|               | Item  1                   | Financial  Statements (Unaudited)                                                                                |   |
|               |                      |                                                                                                             |   |
|               |                      | Condensed  Consolidated Balance Sheets at June 30, 2004 and December 31, 2003                          | 2 |
|               |                      |                                                                                                             |   |
|               |                      | Condensed  Consolidated Statements of Operations for the Three and Six Months ended  June 30, 2004 and 2003 | 3 |
|               |                      |                                                                                                             |   |
|               |                      | Condensed  Consolidated Statements of Cash Flows for the Six Months ended June 30,  2004 and 2003           | 4 |
|               |                      |                                                                                                             |   |
|               |                      | Notes  to Unaudited Condensed Consolidated Financial Statements                                                  | 5 |
|               |                      |                                                                                                             |   |
|               | Item 2                    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                      | 17 |
|               |                      |                                                                                                             |   |
|               | Item 3                    | Quantitative and Qualitative  Disclosures About Market Risk                                                      | 26 |
|               |                      |                                                                                                             |   |
|               | Item 4                    | Controls and Procedures                                                                                          | 26 |
|               |                      |                                                                                                             |   |
| **Part II**        | **Other  Information**    |                                                                                                             |
|               |                      |                                                                                                             |   |
|               | Item 6                    | Exhibits and Reports on Form 8-K                                                                                 | 27 |
|               |                      |                                                                                                             |   |
| **Signature**      | ** **                |                                                                                                             | 27 |
|               |                      |                                                                                                             |   |
| **Exhibit  Index** |                      |                                                                                                             | 28 |

 

----

 

**PART I****– Financial Information**

 

**GreatLakes Dredge & Dock Corporation and SubsidiariesCondensed Consolidated BalanceSheets****(Unaudited)(in thousands, except share and per share amounts)**

 
| ** **                                                         | ** ** | **Successor Basis**     | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| **Assets**                                                         |       |                    |       |   |   |
| Current assets:                                                    |       |                    |       |   |   |
| Cash and equivalents                                               |       | $                       | 720        |   | $ | 2,775 |   |
| Accounts receivable, net                                           |       | 47,212                  |       | 64,869 |   |
| Contract revenues in excess of billings                            |       | 18,112                  |       | 11,236 |   |
| Inventories                                                        |       | 15,080                  |       | 13,603 |   |
| Prepaid expenses and other current assets                          |       | 20,662                  |       | 21,178 |   |
| Total current assets                                               |       | 101,786                 |       | 113,661 |   |
| Property and equipment, net                                        |       | 263,132                 |       | 264,132 |   |
| Goodwill                                                           |       | 103,972                 |       | 103,917 |   |
| Other intangible assets, net                                       |       | 4,529                   |       | 7,441 |   |
| Inventories                                                        |       | 11,266                  |       | 10,968 |   |
| Investments in joint ventures                                      |       | 8,382                   |       | 7,551 |   |
| Other assets                                                       |       | 12,122                  |       | 15,274 |   |
| Total assets                                                       |       | $                       | 505,189    |   | $ | 522,944 |   |
|                                                               |       |                    |       |   |   |
| **Liabilities and Stockholder’s Equity**                      |       |                    |       |   |   |
| Current liabilities:                                               |       |                    |       |   |   |
| Accounts payable                                                   |       | $                       | 31,482     |   | $ | 36,991 |   |
| Accrued expenses                                                   |       | 12,967                  |       | 15,456 |   |
| Billings in excess of contract revenues                            |       | 6,577                   |       | 8,808 |   |
| Current maturities of long-term debt                               |       | 1,950                   |       | 1,950 |   |
| Total current liabilities                                          |       | 52,976                  |       | 63,205 |   |
| Long-term debt                                                     |       | 254,275                 |       | 256,750 |   |
| Deferred income taxes                                              |       | 94,515                  |       | 96,626 |   |
| Other                                                              |       | 8,113                   |       | 7,632 |   |
| Total liabilities                                                  |       | 409,879                 |       | 424,213 |   |
| Minority interest                                                  |       | 1,719                   |       | 1,731 |   |
| Commitments and contingencies (Note 9)                             |       | —                  |       | — |   |
| Stockholder’s equity:                                         |       |                    |       |   |   |
| Common stock, $.01 par value; 1,000 shares issued  and outstanding |       | —                  |       | — |   |
| Additional paid-in capital                                         |       | 97,000                  |       | 97,000 |   |
| Accumulated deficit                                                |       | (3,679                  | )          | — |   |
| Accumulated other comprehensive income                             |       | 270                     |       | — |   |
| Total stockholder’s equity                                    |       | 93,591                  |       | 97,000 |   |
| Total liabilities and stockholder’s equity                    |       | $                       | 505,189    |   | $ | 522,944 |   |

 

See notes tounaudited condensed consolidated financial statements.

 

2

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**GreatLakes Dredge & Dock Corporation and SubsidiariesCondensed Consolidated Statementsof Operations****(Unaudited)(in thousands)**

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**              | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Contract revenues                   |       | $                                     | 72,104     |                                | $          | 104,364 |   | $ | 176,051 |   | $ | 204,057 |   |
| Costs of contract revenues          |       | 66,259                                |       | 89,256                              |       | 153,807 |   | 170,911 |   |
| Gross profit                        |       | 5,845                                 |       | 15,108                              |       | 22,244 |   | 33,146 |   |
| General and administrative expenses |       | 6,257                                 |       | 6,499                               |       | 13,380 |   | 13,440 |   |
| Amortization of intangible assets   |       | 1,120                                 |       | —                              |       | 2,912 |   | — |   |
| Operating income (loss)             |       | (1,532                                | )          | 8,609                               |       | 5,952 |   | 19,706 |   |
| Interest expense, net               |       | (6,996                                | )          | (5,137                              | )          | (11,606 | ) | (10,193 | ) |
| Equity in earnings of joint venture |       | 682                                   |       | 677                                 |       | 831 |   | 744 |   |
| Minority interests                  |       | 6                                     |       | 91                                  |       | 12 |   | 70 |   |
| Income (loss) before income taxes   |       | (7,840                                | )          | 4,240                               |       | (4,811 | ) | 10,327 |   |
| Income tax benefit (expense)        |       | 2,403                                 |       | (1,747                              | )          | 1,132 |   | (4,347 | ) |
| Net income (loss)                   |       | $                                     | (5,437     | )                                   | $          | 2,493 |   | $ | (3,679 | ) | $ | 5,980 |   |

 

See notes to unaudited condensedconsolidated financial statements.

 

3

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**GreatLakes Dredge & Dock Corporation and SubsidiariesCondensed Consolidated Statementsof Cash Flows****(Unaudited)(in thousands)**

 
| ** **                                                                               | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                               | ** ** | **Successor  Basis**                | ** ** | **Predecessor  Basis** | ** ** |
| ** **                                                                               | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **Operating  Activities**                                                                |       |                                |       |   |   |
| Net income (loss)                                                                        |       | $                                   | (3,679     | ) | $ | 5,980 |   |
| Adjustments to reconcile net income (loss)  to net cash flows from operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                            |       | 13,576                              |       | 8,135 |   |
| Earnings of joint ventures                                                               |       | (831                                | )          | (744 | ) |
| Minority interests                                                                       |       | (12                                 | )          | (70 | ) |
| Deferred income taxes                                                                    |       | (2,069                              | )          | 495 |   |
| Gain on dispositions of property and  equipment                                          |       | (144                                | )          | (110 | ) |
| Other, net                                                                               |       | 820                                 |       | 665 |   |
| Changes in assets and liabilities:                                                       |       |                                |       |   |   |
| Accounts receivable                                                                      |       | 17,657                              |       | (9,745 | ) |
| Contract revenues in excess of billings                                                  |       | (6,876                              | )          | (1,389 | ) |
| Inventories                                                                              |       | (1,775                              | )          | (1,929 | ) |
| Prepaid expenses and other current assets                                                |       | 408                                 |       | 2,442 |   |
| Accounts payable and accrued expenses                                                    |       | (7,998                              | )          | 8,602 |   |
| Billings in excess of contract revenues                                                  |       | (2,231                              | )          | (6,781 | ) |
| Other noncurrent assets and liabilities                                                  |       | 2,931                               |       | — |   |
| Net cash flows from operating activities                                                 |       | 9,777                               |       | 5,551 |   |
|                                                                                     |       |                                |       |   |   |
| **Investing  Activities**                                                                |       |                                |       |   |   |
| Purchases of property and equipment                                                      |       | (9,892                              | )          | (9,337 | ) |
| Dispositions of property and equipment                                                   |       | 144                                 |       | 129 |   |
| Adjustment to acquisition price of  Predecessor common and preferred shares              |       | 527                                 |       | — |   |
| Disposition of interest in Riovia  investment                                            |       | —                              |       | 1,200 |   |
| Equity investment in land                                                                |       | —                              |       | (843 | ) |
| Net cash flows from investing activities                                                 |       | (9,221                              | )          | (8,851 | ) |
|                                                                                     |       |                                |       |   |   |
| **Financing  Activities**                                                                |       |                                |       |   |   |
| Repayments of long-term debt                                                             |       | (3,475                              | )          | (6,475 | ) |
| Borrowings under revolving loans, net of  repayments                                     |       | 1,000                               |       | 10,000 |   |
| Financing fees                                                                           |       | (136                                | )          | (403 | ) |
| Repayment on notes receivable from  stockholders                                         |       | —                              |       | 19 |   |
| Net cash flows from financing activities                                                 |       | (2,611                              | )          | 3,141 |   |
| Net change in cash and equivalents                                                       |       | (2,055                              | )          | (159 | ) |
| Cash and equivalents at beginning of period                                              |       | 2,775                               |       | 1,456 |   |
| Cash and equivalents at end of period                                                    |       | $                                   | 720        |   | $ | 1,297 |   |
|                                                                                     |       |                                |       |   |   |
| **Supplemental Cash  Flow Information**                                                  |       |                                |       |   |   |
| Cash paid for interest                                                                   |       | $                                   | 8,557      |   | $ | 9,528 |   |
| Cash paid for taxes                                                                      |       | $                                   | —     |   | $ | 6,010 |   |

 

See notes to unaudited condensedconsolidated financial statements.

 

4

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GREAT LAKES DREDGE &DOCK CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)(dollars in thousands)

 

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

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the U.S. for interim financialinformation.  Accordingly, these financialstatements do not include all the information in the notes required bygenerally 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 endedDecember 31, 2003.

 

The acquisition of the Company by MadisonDearborn Capital Partners IV, L.P. in December 2003 was accounted for as apurchase in accordance with Statement of Financial Accounting Standards (SFAS)No. 141, “Business Combinations,” resulting in a new basis of accountingsubsequent to the transaction.  Forpresentation herein, the financial statements up to the date of the sale aredenoted as Predecessor Basis, while the financial statements preparedsubsequent to the sale are denoted as Successor Basis. See Note 4 for adescription of the transaction.

 

The condensed consolidated results ofoperations for the interim periods presented herein are not necessarilyindicative of the results to be expected for the full year.

 

**2.****             ****Comprehensive income (loss)**

 

Total comprehensive income (loss) comprisesnet income (loss) and net unrealized gains and losses on cash flow hedges.  Total comprehensive income (loss) for thethree months ended June 30, 2004 and 2003 was $(5,155) and $2,534,respectively.  Total comprehensive income(loss) for the six months ended June 30, 2004 and 2003 was $(3,410) and$6,053, respectively.

 

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

 

TheCompany uses derivative instruments to manage commodity price and foreigncurrency exchange risks.  Suchinstruments are not used for trading purposes.  As of June 30, 2004, the Company is party to various swaparrangements to hedge the price of a portion of its diesel fuel purchaserequirements for work in its backlog to be performed throughSeptember 2005.  As of June 30,2004, there were 9.0 million gallons remaining on these contracts.  Under these agreements, the Company will payfixed prices ranging from $0.75 to $0.92 per gallon.  At June 30, 2004 and December 31,2003, the fair value on these contracts was estimated to be $950 and $509,respectively, based on quoted market prices, and is recorded in other currentassets. Ineffectiveness related to these fuel hedge arrangements was determinedto be immaterial.  The remaining gains includedin accumulated other comprehensive income at June 30, 2004 will bereclassified into earnings over the next fifteen months, corresponding to theperiod during which the hedged fuel is expected to be utilized.

 

5

----

 

InFebruary 2004, the Company entered into an interest rate swap arrangementto swap a notional amount of $50 million from a fixed rate of 7.75% to afloating LIBOR-based rate in order to manage the interest rate paid withrespect to the Company’s 73⁄4% senior subordinated debt.  The fair value of the swap at June 30,2004 was $(1,757) and is recorded in accrued expenses.  The swap is not accounted for as a hedge;therefore, the changes in fair value are recorded as adjustments to interestexpense in each reporting period.

 

Thecarrying values of other financial instruments included in current assets andcurrent liabilities approximate fair values due to the short-term maturities ofthese instruments.  The carrying value oflong-term bank debt is a reasonable estimate of its fair value as interestrates are variable, based on the prevailing market rates.  The fair value of the Company’s $175,000 of73⁄4% senior subordinated notes was $148,750 and $180,250 at June 30, 2004and December 31, 2003, respectively, based on quoted market prices.

 

**4.     Saletransaction**

 

OnDecember 22, 2003, the Company was acquired by Madison Dearborn CapitalPartners IV, L.P. (MDP), an affiliate of Chicago-based private equityinvestment firm Madison Dearborn Partners, LLC. The initial purchase price totaled $362,111, including fees andexpenses, and was financed by new equity contributions of $97,000; term loanand revolver borrowings under a new senior credit facility of approximately$60,300 and $2,000, respectively; the issuance of $175,000 of 7.75% SeniorSubordinated Notes due 2013; the rollover of term loan borrowings under a newequipment financing facility of $23,400; the rollover of approximately $1,558million of capital leases; and cash on hand of $2,853.  The purchase price was subject to certainworking capital and debt adjustments to be finalized approximately three monthssubsequent to the transaction, as defined per the merger agreement.  The adjustments were finalized inApril of 2004, resulting in a decrease to the initial purchase price of$527.

 

Theacquisition was accounted for by the purchase method of accounting and,accordingly, the purchase price was allocated to the Company’s assets andliabilities based on their fair values at the date of acquisition.  The allocation of purchase price to propertyand equipment and identifiable intangible assets has been prepared on apreliminary basis, using valuation information that was available up to thepoint of financial statement preparation. This allocation is therefore subject to adjustment.

 

AtJune 30, 2004, the net book value of intangible assets identified withrespect to the transaction is as follows: 

 
| ** **                        | ** ** | **Estimated  Life** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-----------------------------------|------------|---------------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| Customer contract backlog         |       | 13-15 mos.          |       | $        | 4,237      |                          | $          | 2,700   |       | $ | 1,537 |   |
| Demolition customer relationships |       | 7-10 years          |       | 1,995    |       | 142                           |       | 1,853   |       |
| Software and databases            |       | 7 years             |       | 1,209    |       | 70                            |       | 1,139   |       |
|                              |       |                |       | $        | 7,441      |                          | $          | 2,912   |       | $ | 4,529 |   |

 

6

----

 

Thefollowing pro forma results for the three and six months ended June 30,2003 have been prepared as if the acquisition took place at the beginning ofthe period and include certain adjustments such as additional depreciation andamortization charges resulting from the allocation of purchase price toproperty and equipment and intangible assets, and reductions to interestexpense resulting from the terms of the new debt structure.  The pro forma operating results havebeen prepared for comparative purposes only and are not necessarily indicativeof the results of operations that may occur in the future or that would haveoccurred had this acquisition been consummated at the beginning of the periodpresented.

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **Actual  2004**                      | ** ** | **Pro forma  2003**                 | ** ** | **Actual  2004** | ** ** | **Pro forma  2003** | ** ** |
| Contract revenues                 |       | $                                     | 72,104     |                                | $          | 104,364 |   | $ | 176,051 |   | $ | 204,057 |   |
| Operating income (loss)           |       | (1,532                                | )          | 6,045                               |       | 5,952 |   | 14,258 |   |
| Income (loss) before income taxes |       | (7,840                                | )          | 2,054                               |       | (4,811 | ) | 5,628 |   |
| Net income (loss)                 |       | (5,437                                | )          | 1,186                               |       | (3,679 | ) | 3,170 |   |
|                                   |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

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

 

Accountsreceivable at June 30, 2004 and December 31, 2003 are as follows:

 
| ** **                      | ** ** | **Successor Basis**     | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Completed contracts             |       | $                       | 19,819     |   | $ | 15,962 |   |
| Contracts in progress           |       | 21,770                  |       | 40,737 |   |
| Retainage                       |       | 6,498                   |       | 8,969 |   |
|                            |       | 48,087                  |       | 65,668 |   |
| Allowance for doubtful accounts |       | (875                    | )          | (799 | ) |
|                            |       |                    |       |   |   |
|                            |       | $                       | 47,212     |   | $ | 64,869 |   |

 

7

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

 

The components of contracts in progress atJune 30, 2004 and December 31, 2003 are as follows:

 
| ** **                                                                      | ** ** | **Successor Basis**     | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Costs and earnings in excess of billings:                                       |       |                    |       |   |   |
| Costs and earnings for contracts in progress                                    |       | $                       | 213,239    |   | $ | 261,013 |   |
| Amounts billed                                                                  |       | (196,764                | )          | (251,034 | ) |
| Costs and earnings in excess of billings for  contracts in progress             |       | 16,475                  |       | 9,979 |   |
| Costs and earnings in excess of billings for  completed contracts               |       | 1,637                   |       | 1,257 |   |
|                                                                            |       |                    |       |   |   |
|                                                                            |       | $                       | 18,112     |   | $ | 11,236 |   |
|                                                                            |       |                    |       |   |   |
| Prepaid contract costs (included in prepaid  expenses and other current assets) |       | $                       | 1,842      |   | $ | 570 |   |
|                                                                            |       |                    |       |   |   |
| Billings in excess of costs and earnings:                                       |       |                    |       |   |   |
| Amounts billed                                                                  |       | $                       | (182,218   | ) | $ | (180,096 | ) |
| Costs and earnings for contracts in progress                                    |       | 175,641                 |       | 171,288 |   |
|                                                                            |       |                    |       |   |   |
|                                                                            |       | $                       | (6,577     | ) | $ | (8,808 | ) |

 

**7.****             ****Accrued expenses**

 

Accruedexpenses at June 30, 2004 and December 31, 2003 are as follows:

 
| ** **                    | ** ** | **Successor Basis**     | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Insurance                     |       | $                       | 3,274      |   | $ | 4,736 |   |
| Payroll and employee benefits |       | 2,472                   |       | 6,658 |   |
| U.S. income and other taxes   |       | 2,429                   |       | 1,252 |   |
| Interest rate swap liability  |       | 1,757                   |       | — |   |
| Interest                      |       | 1,095                   |       | 339 |   |
| Equipment leases              |       | 885                     |       | 882 |   |
| Foreign income taxes          |       | 80                      |       | 210 |   |
| Other                         |       | 975                     |       | 1,379 |   |
|                          |       |                    |       |   |   |
|                          |       | $                       | 12,967     |   | $ | 15,456 |   |

 

8

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**8.****             ****Segment information**

 

The Company and its subsidiaries operate in two reportable segments:dredging and demolition.  The Company’sfinancial reporting systems present various data for management to run thebusiness, including profit and loss statements prepared according to thesegments presented.   Segment informationfor the periods presented is as follows:

 
| ** **              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**              | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **              | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Dredging**            |       |                                  |       |                                |       |   |   |   |   |
| Contract revenues       |       | $                                     | 62,271     |                                | $          | 94,828 |   | $ | 159,071 |   | $ | 186,197 |   |
| Operating income (loss) |       | (2,275                                | )          | 8,825                               |       | 4,961 |   | 19,123 |   |
|                    |       |                                  |       |                                |       |   |   |   |   |
| **Demolition**          |       |                                  |       |                                |       |   |   |   |   |
| Contract revenues       |       | $                                     | 9,833      |                                | $          | 9,536 |   | $ | 16,980 |   | $ | 17,860 |   |
| Operating income (loss) |       | 743                                   |       | (216                                | )          | 991 |   | 583 |   |
|                    |       |                                  |       |                                |       |   |   |   |   |
| **Total**               |       |                                  |       |                                |       |   |   |   |   |
| Contract revenues       |       | $                                     | 72,104     |                                | $          | 104,364 |   | $ | 176,051 |   | $ | 204,057 |   |
| Operating income (loss) |       | (1,532                                | )          | 8,609                               |       | 5,952 |   | 19,706 |   |

 

**9.****             ****Commitments andcontingencies**

 

AtJune 30, 2004, the Company is contingently liable, in the normal course ofbusiness, for $15,182 in undrawn letters of credit, relating to contractperformance guarantees or covering the Company’s insurance payment liabilities.

 

AmboyAggregates, a joint venture in which the Company has a 50% equity interest, hasa $2,000 revolving credit facility with a bank, which contains certainrestrictive covenants, including limitations on the amount of distributions toits joint venture partners.  The Companyhas guaranteed 50% of the outstanding borrowings and accrued interest, whichtotaled $200 at June 30, 2004.

 

TheCompany finances certain key vessels used in its operations with operatinglease arrangements with unrelated lessors, requiring annual rentals decreasingfrom $14 to $9 million over the next five years.  These operating leases contain defaultprovisions which are triggered by an acceleration of debt maturity under theterms of the Company’s Credit Agreement. Additionally, the leases typicallycontain provisions whereby the Company indemnifies the lessors for the taxtreatment attributable to such leases based on the tax rules in place at leaseinception. The tax indemnifications do not have a contractual dollarlimit.  It is impractical to develop anestimate of the maximum potential exposure under these lease indemnificationarrangements, since it is entirely dependent on the unique tax circumstances ofeach lessor.  The Company has additionalrental commitments for office facilities and dozer leases totalingapproximately $1 million to $2 million, annually.

 

Borrowingsunder the Company’s Credit Agreement are secured by first lien mortgages oncertain operating equipment of the Company with a net book value of $77,845 atDecember 31, 2003. Additionally, the Company obtains its performance andbid bonds through a bonding

 

9

----

 

agreementwith a surety company that has been granted a security interest in asubstantial portion of the Company’s operating equipment with a net book valueof approximately $92,340 at December 31, 2003. The net book value ofequipment serving as collateral under these agreements at June 30, 2004does not materially differ from the values at December 31, 2003.  Both the Credit Agreement and bondingagreement contain certain provisions and covenants; the Company is incompliance with such covenants at June 30, 2004.  The performance and bid bonds are customarilyrequired for dredging and marine construction projects, as well as somedemolition projects.  Bid bonds aregenerally obtained for a percentage of bid value and aggregate amountsoutstanding typically range between $5 to $10 million.  Performance bonds typically cover 100% of thecontract value with no maximum bond amounts. At June 30, 2004, the Company had outstanding performance bondsvalued at approximately $490 million; however the revenue value remaining inbacklog related to these projects totaled approximately $235 million atJune 30, 2004.

 

Certainforeign projects performed by the Company have warranty periods, typicallyspanning no more than three to five years beyond project completion, wherebythe Company retains responsibility to maintain the project site to certainspecifications during the warranty period. Generally, any potential liability of the Company is mitigated byinsurance, shared responsibilities with consortium partners, and/or recourse toowner-provided specifications.

 

TheCompany considers it unlikely that it would have to perform under any of theseaforementioned contingent obligations and performance has never been requiredin any of these circumstances in the past.

 

Asis customary with negotiated contracts with the federal government, the governmenthas the right to audit the books and records of the Company to ensurecompliance with such contracts and applicable federal laws.  The government has the ability to seek aprice adjustment based on the results of such audit.  Any such audits have not had and are notexpected to have a material adverse impact on the financial position oroperations of the Company.

 

In the normal course ofbusiness, the Company is a defendant in various legal proceedings.  Except as described below, the Company is notcurrently a party to any material legal proceedings or environmental claims.

 

A joint venture in which theCompany holds an approximately 36% interest was subject to a counterclaim filedby the Red Sea Ports Authority relating to a contract performed in Al Sukhna,Egypt between 1999 and 2001. The joint venture instituted arbitrationproceedings against the Red Sea Ports Authority for monetary claims arising outof the contract and sought approximately $40 million in damages.  The Red Sea Ports Authority counterclaimedfor $74 million in damages, alleging environmental damage from the project,including damage to coastline, fisheries and coral reefs, and misuse of thedesignated disposal site.  InJuly 2003, an arbitration hearing was held in Egypt regarding the jointventure’s claim and the Red Sea Ports Authority’s counterclaim.  A decision was rendered in June of 2004,whereby the joint venture was awarded approximately $8 million for its claims,including approximately $4 million for outstanding invoices which hadpreviously been settled through non-payment risk insurance.  All counterclaims against the joint venturewere dismissed.  The Company recognized$1.3 million of revenue in the second quarter of 2004 related to thissettlement.

 

10

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**10.****      ****Supplemental condensedconsolidating financial information**

 

Included in the Company’s long-term debt is $175,000of 73⁄4% senior subordinated notes which will mature on December 15,2013.  The payment obligations of theCompany under the senior subordinated notes are guaranteed by the Company’sdomestic subsidiaries (the “Subsidiary Guarantors”).  Such guarantees are full, unconditional andjoint and several.  Separate financialstatements of the Subsidiary Guarantors are not presented because the Company’smanagement has determined that they would not be material to investors.  The following supplemental financialinformation sets forth, on a combined basis, the balance sheets, statements ofoperations and statements of cash flows for the Subsidiary Guarantors, theCompany’s non-guarantor subsidiary and for the Company (“GLD Corporation”).

 

11

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**Condensed ConsolidatingBalance Sheet at June 30, 2004**

 

**Successor Basis**

 
| ** **                                     | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| **ASSETS**                                     |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Current assets:                                |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Cash and equivalents                           |       | $                           | 712        |                  | $          | 8                    |       | $                | —     |                     | $          | — |   | $ | 720 |   |
| Accounts receivable, net                       |       | 47,212                      |       | —                |       | —               |       | —           |       | 47,212                   |       |
| Receivables from affiliates                    |       | 3,555                       |       | 2,922                 |       | 4,540                |       | (11,017          | )          | —                   |       |
| Contract revenues in excess of billings        |       | 18,112                      |       | —                |       | —               |       | —           |       | 18,112                   |       |
| Inventories                                    |       | 15,080                      |       | —                |       | —               |       | —           |       | 15,080                   |       |
| Prepaid expenses and other current assets      |       | 17,801                      |       | —                |       | 2,861                |       | —           |       | 20,662                   |       |
| Total current assets                           |       | 102,472                     |       | 2,930                 |       | 7,401                |       | (11,017          | )          | 101,786                  |       |
| Property and equipment, net                    |       | 248,366                     |       | 19                    |       | 14,747               |       | —           |       | 263,132                  |       |
| Goodwill                                       |       | 103,972                     |       | —                |       | —               |       | —           |       | 103,972                  |       |
| Other intangible assets                        |       | 4,529                       |       | —                |       | —               |       | —           |       | 4,529                    |       |
| Investments in subsidiaries                    |       | 2,944                       |       | —                |       | 285,369              |       | (288,313         | )          | —                   |       |
| Notes receivable from affiliates               |       | —                      |       | —                |       | 24,972               |       | (24,972          | )          | —                   |       |
| Inventories                                    |       | 11,266                      |       | —                |       | —               |       | —           |       | 11,266                   |       |
| Investments in joint ventures                  |       | 8,382                       |       | —                |       | —               |       | —           |       | 8,382                    |       |
| Other assets                                   |       | 329                         |       | —                |       | 11,793               |       | —           |       | 12,122                   |       |
|                                           |       | $                           | 482,260    |                  | $          | 2,949                |       | $                | 344,282    |                     | $          | (324,302 | ) | $ | 505,189 |   |
|                                           |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **LIABILITIES AND  STOCKHOLDER’S EQUITY** |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Current liabilities:                           |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Accounts payable                               |       | $                           | 31,482     |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 31,482 |   |
| Payables to affiliates                         |       | —                      |       | —                |       | 6,477                |       | (6,477           | )          | —                   |       |
| Accrued expenses                               |       | 8,174                       |       | —                |       | 4,793                |       | —           |       | 12,967                   |       |
| Billings in excess of contract revenues        |       | 6,577                       |       | —                |       | —               |       | —           |       | 6,577                    |       |
| Current maturities of long-term debt           |       | 6,490                       |       | —                |       | —               |       | (4,540           | )          | 1,950                    |       |
| Total current liabilities                      |       | 52,723                      |       | —                |       | 11,270               |       | (11,017          | )          | 52,976                   |       |
| Long-term debt                                 |       | 20,475                      |       | —                |       | 233,800              |       | —           |       | 254,275                  |       |
| Notes payable to affiliates                    |       | 24,972                      |       | —                |       | —               |       | (24,972          | )          | —                   |       |
| Deferred income taxes                          |       | 89,059                      |       | 5                     |       | 5,451                |       | —           |       | 94,515                   |       |
| Other                                          |       | 7,429                       |       | —                |       | 684                  |       | —           |       | 8,113                    |       |
| Total liabilities                              |       | 194,658                     |       | 5                     |       | 251,205              |       | (35,989          | )          | 409,879                  |       |
| Minority interests                             |       | —                      |       | —                |       | —               |       | 1,719            |       | 1,719                    |       |
| Stockholder’s equity                      |       | 287,602                     |       | 2,944                 |       | 93,077               |       | (290,032         | )          | 93,591                   |       |
|                                           |       | $                           | 482,260    |                  | $          | 2,949                |       | $                | 344,282    |                     | $          | (324,302 | ) | $ | 505,189 |   |

 

12

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**Condensed ConsolidatingBalance Sheet at December 31, 2003**

 

**Successor Basis**

 
| ** **                                     | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| **ASSETS**                                     |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Current assets:                                |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Cash and equivalents                           |       | $                           | 2,766      |                  | $          | 9                    |       | $                | —     |                     | $          | — |   | $ | 2,775 |   |
| Accounts receivable, net                       |       | 64,869                      |       | —                |       | —               |       | —           |       | 64,869                   |       |
| Receivables from affiliates                    |       | 7,867                       |       | 2,941                 |       | 4,540                |       | (15,348          | )          | —                   |       |
| Contract revenues in excess of billings        |       | 11,236                      |       | —                |       | —               |       | —           |       | 11,236                   |       |
| Inventories                                    |       | 13,603                      |       | —                |       | —               |       | —           |       | 13,603                   |       |
| Prepaid expenses and other current assets      |       | 14,558                      |       | —                |       | 6,620                |       | —           |       | 21,178                   |       |
| Total current assets                           |       | 114,899                     |       | 2,950                 |       | 11,160               |       | (15,348          | )          | 113,661                  |       |
| Property and equipment, net                    |       | 241,594                     |       | 38                    |       | 22,500               |       | —           |       | 264,132                  |       |
| Goodwill                                       |       | 103,917                     |       | —                |       | —               |       | —           |       | 103,917                  |       |
| Other intangible assets                        |       | 7,441                       |       | —                |       | —               |       | —           |       | 7,441                    |       |
| Investments in subsidiaries                    |       | 2,976                       |       | —                |       | 281,967              |       | (284,943         | )          | —                   |       |
| Note receivable from affiliate                 |       | —                      |       | —                |       | 27,242               |       | (27,242          | )          | —                   |       |
| Inventories                                    |       | 10,968                      |       | —                |       | —               |       | —           |       | 10,968                   |       |
| Investments in joint ventures                  |       | 7,551                       |       | —                |       | —               |       | —           |       | 7,551                    |       |
| Other assets                                   |       | 3,605                       |       | —                |       | 11,669               |       | —           |       | 15,274                   |       |
|                                           |       | $                           | 492,951    |                  | $          | 2,988                |       | $                | 354,538    |                     | $          | (327,533 | ) | $ | 522,944 |   |
|                                           |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **LIABILITIES AND  STOCKHOLDER’S EQUITY** |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Current liabilities:                           |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Accounts payable                               |       | $                           | 36,911     |                  | $          | —               |       | $                | 80         |                     | $          | — |   | $ | 36,991 |   |
| Payables to affiliates                         |       | 9                           |       | —                |       | 10,919               |       | (10,928          | )          | —                   |       |
| Accrued expenses                               |       | 14,587                      |       | —                |       | 869                  |       | —           |       | 15,456                   |       |
| Billings in excess of contract revenues        |       | 8,808                       |       | —                |       | —               |       | —           |       | 8,808                    |       |
| Current maturities of long-term debt           |       | 6,490                       |       | —                |       | —               |       | (4,540           | )          | 1,950                    |       |
| Total current liabilities                      |       | 66,805                      |       | —                |       | 11,868               |       | (15,468          | )          | 63,205                   |       |
| Long-term debt                                 |       | 21,450                      |       | —                |       | 235,300              |       | —           |       | 256,750                  |       |
| Note payable to affiliate                      |       | 27,242                      |       | —                |       | —               |       | (27,242          | )          | —                   |       |
| Deferred income taxes                          |       | 86,927                      |       | 12                    |       | 9,687                |       | —           |       | 96,626                   |       |
| Other                                          |       | 6,949                       |       | —                |       | 683                  |       | —           |       | 7,632                    |       |
| Total liabilities                              |       | 209,373                     |       | 12                    |       | 257,538              |       | (42,710          | )          | 424,213                  |       |
| Minority interests                             |       | —                      |       | —                |       | —               |       | 1,731            |       | 1,731                    |       |
| Stockholder’s equity                      |       | 283,578                     |       | 2,976                 |       | 97,000               |       | (286,554         | )          | 97,000                   |       |
|                                           |       | $                           | 492,951    |                  | $          | 2,988                |       | $                | 354,538    |                     | $          | (327,533 | ) | $ | 522,944 |   |

 

13

----

 

**Condensed ConsolidatingStatement of Operations for the three months ended June 30, 2004**

 

**Successor Basis**

 
| ** **                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract revenues                   |       | $                           | 72,104     |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 72,104 |   |
| Costs of contract revenues          |       | (66,578                     | )          | (9                    | )          | 328                  |       | —           |       | (66,259                  | )          |
| Gross profit (loss)                 |       | 5,526                       |       | (9                    | )          | 328                  |       | —           |       | 5,845                    |       |
| General and administrative expenses |       | (6,243                      | )          | (15                   | )          | 1                    |       | —           |       | (6,257                   | )          |
| Amortization of intangible assets   |       | (1,120                      | )          | —                |       | —               |       | —           |       | (1,120                   | )          |
| Operating income (loss)             |       | (1,837                      | )          | (24                   | )          | 329                  |       | —           |       | (1,532                   | )          |
| Interest expense, net               |       | (967                        | )          | —                |       | (6,029               | )          | —           |       | (6,996                   | )          |
| Equity in loss of subsidiaries      |       | (16                         | )          | —                |       | (3,751               | )          | 3,767            |       | —                   |       |
| Equity in earnings of joint venture |       | 682                         |       | —                |       | —               |       | —           |       | 682                      |       |
| Minority interests                  |       | —                      |       | —                |       | —               |       | 6                |       | 6                        |       |
| Income (loss) before income taxes   |       | (2,138                      | )          | (24                   | )          | (9,451               | )          | 3,773            |       | (7,840                   | )          |
| Income tax (expense) benefit        |       | 538                         |       | 8                     |       | 3,969                |       | (2,112           | )          | 2,403                    |       |
| Net income (loss)                   |       | $                           | (1,600     | )                     | $          | (16                  | )          | $                | (5,482     | )                        | $          | 1,661 |   | $ | (5,437 | ) |

 

**Condensed ConsolidatingStatement of Operations for the three months ended June 30, 2003**

 

**Predecessor Basis**

 
| ** **                                | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                      |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract revenues                         |       | $                           | 104,364    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 104,364 |   |
| Costs of contract revenues                |       | (88,974                     | )          | (16                   | )          | (266                 | )          | —           |       | (89,256                  | )          |
| Gross profit (loss)                       |       | 15,390                      |       | (16                   | )          | (266                 | )          | —           |       | 15,108                   |       |
| General and administrative expenses       |       | (6,464                      | )          | (13                   | )          | (22                  | )          | —           |       | (6,499                   | )          |
| Operating income (loss)                   |       | 8,926                       |       | (29                   | )          | (288                 | )          | —           |       | 8,609                    |       |
| Interest expense, net                     |       | (654                        | )          | —                |       | (4,483               | )          | —           |       | (5,137                   | )          |
| Equity in earnings (loss) of subsidiaries |       | (28                         | )          | —                |       | 5,581                |       | (5,553           | )          | —                   |       |
| Equity in earnings of joint ventures      |       | 677                         |       | —                |       | —               |       | —           |       | 677                      |       |
| Minority interests                        |       | —                      |       | —                |       | —               |       | 91               |       | 91                       |       |
| Income (loss) before income taxes         |       | 8,921                       |       | (29                   | )          | 810                  |       | (5,462           | )          | 4,240                    |       |
| Income tax (expense) benefit              |       | (3,583                      | )          | 12                    |       | 1,824                |       | —           |       | (1,747                   | )          |
| Net income (loss)                         |       | $                           | 5,338      |                  | $          | (17                  | )          | $                | 2,634      |                     | $          | (5,462 | ) | $ | 2,493 |   |

 

14

----

 

**Condensed ConsolidatingStatement of Operations for the six months ended June 30, 2004**

 

**Successor Basis**

 
| ** **                                | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                      |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract revenues                         |       | $                           | 176,051    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 176,051 |   |
| Costs of contract revenues                |       | (154,311                    | )          | (19                   | )          | 523                  |       | —           |       | (153,807                 | )          |
| Gross profit (loss)                       |       | 21,740                      |       | (19                   | )          | 523                  |       | —           |       | 22,244                   |       |
| General and administrative expenses       |       | (13,267                     | )          | (30                   | )          | (83                  | )          | —           |       | (13,380                  | )          |
| Amortization of intangible assets         |       | (2,912                      | )          | —                |       | —               |       | —           |       | (2,912                   | )          |
| Operating income (loss)                   |       | 5,561                       |       | (49                   | )          | 440                  |       | —           |       | 5,952                    |       |
| Interest expense, net                     |       | (2,091                      | )          | —                |       | (9,515               | )          | —           |       | (11,606                  | )          |
| Equity in earnings (loss) of subsidiaries |       | (32                         | )          | —                |       | 2,306                |       | (2,274           | )          | —                   |       |
| Equity in earnings of joint venture       |       | 831                         |       | —                |       | —               |       | —           |       | 831                      |       |
| Minority interests                        |       | —                      |       | —                |       | —               |       | 12               |       | 12                       |       |
| Income (loss) before income taxes         |       | 4,269                       |       | (49                   | )          | (6,769               | )          | (2,262           | )          | (4,811                   | )          |
| Income tax (expense) benefit              |       | (2,000                      | )          | 17                    |       | 2,843                |       | 272              |       | 1,132                    |       |
| Net income (loss)                         |       | $                           | 2,269      |                  | $          | (32                  | )          | $                | (3,926     | )                        | $          | (1,990 | ) | $ | (3,679 | ) |

 

**Condensed ConsolidatingStatement of Operations for the six months ended June 30, 2003**

 

**Predecessor Basis**

 
| ** **                                | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                      |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract revenues                         |       | $                           | 204,057    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 204,057 |   |
| Costs of contract revenues                |       | (170,147                    | )          | (32                   | )          | (622                 | )          | (110             | )          | (170,911                 | )          |
| Gross profit (loss)                       |       | 33,910                      |       | (32                   | )          | (622                 | )          | (110             | )          | 33,146                   |       |
| General and administrative expenses       |       | (13,366                     | )          | (22                   | )          | (52                  | )          | —           |       | (13,440                  | )          |
| Operating income (loss)                   |       | 20,544                      |       | (54                   | )          | (674                 | )          | (110             | )          | 19,706                   |       |
| Interest expense, net                     |       | (1,337                      | )          | —                |       | (8,856               | )          | —           |       | (10,193                  | )          |
| Equity in earnings (loss) of subsidiaries |       | (51                         | )          | —                |       | 12,035               |       | (11,984          | )          | —                   |       |
| Equity in earnings of joint ventures      |       | 744                         |       | —                |       | —               |       | —           |       | 744                      |       |
| Minority interests                        |       | —                      |       | —                |       | —               |       | 70               |       | 70                       |       |
| Income (loss) before income taxes         |       | 19,900                      |       | (54                   | )          | 2,505                |       | (12,024          | )          | 10,327                   |       |
| Income tax (expense) benefit              |       | (7,986                      | )          | 23                    |       | 3,616                |       | —           |       | (4,347                   | )          |
| Net income (loss)                         |       | $                           | 11,914     |                  | $          | (31                  | )          | $                | 6,121      |                     | $          | (12,024 | ) | $ | 5,980 |   |

 

15

----

 

**Condensed ConsolidatingCash Flows for the six months ended June 30, 2004**

 

**Successor Basis**

 
| ** **                                                                  | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Operating  Activities**                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net cash flows from operating activities                                    |       | $                           | 7,305      |                  | $          | (20                  | )          | $                | 2,492      |                     | $          | — |   | $ | 9,777 |   |
|                                                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Investing  Activities**                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Purchases of property and equipment                                         |       | (10,077                     | )          | —                |       | —               |       | —           |       | (10,077                  | )          |
| Dispositions of property and equipment                                      |       | 329                         |       | —                |       | —               |       | —           |       | 329                      |       |
| Adjustment to acquisition price of  Predecessor common and preferred shares |       | 527                         |       | —                |       | —               |       | —           |       | 527                      |       |
| Net cash flows from investing activities                                    |       | (9,221                      | )          | —                |       | —               |       | —           |       | (9,221                   | )          |
|                                                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Financing  Activities**                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Repayments of long-term debt                                                |       | (975                        | )          | —                |       | (2,500               | )          | —           |       | (3,475                   | )          |
| Borrowings under revolving loans, net of  repayments                        |       | —                      |       | —                |       | 1,000                |       | —           |       | 1,000                    |       |
| Net change in accounts with affiliates                                      |       | 837                         |       | 19                    |       | (856                 | )          | —           |       | —                   |       |
| Financing fees                                                              |       | —                      |       | —                |       | (136                 | )          | —           |       | (136                     | )          |
| Net cash flows from financing activities                                    |       | (138                        | )          | 19                    |       | (2,492               | )          | —           |       | (2,611                   | )          |
|                                                                        |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net change in cash and equivalents                                          |       | (2,054                      | )          | (1                    | )          | —               |       | —           |       | (2,055                   | )          |
| Cash and equivalents at beginning of period                                 |       | 2,766                       |       | 9                     |       | —               |       | —           |       | 2,775                    |       |
| Cash and equivalents at end of period                                       |       | $                           | 712        |                  | $          | 8                    |       | $                | —     |                     | $          | — |   | $ | 720 |   |

 

**Condensed ConsolidatingStatement of Cash Flows for the six months ended June 30, 2003**

 

**Predecessor Basis**

 
| ** **                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                                 |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Operating  Activities**                            |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net cash flows from operating activities             |       | $                           | 12,369     |                  | $          | (10                  | )          | $                | (6,808     | )                        | $          | — |   | $ | 5,551 |   |
|                                                 |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Investing  Activities**                            |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Purchases of property and equipment                  |       | (9,337                      | )          | —                |       | —               |       | —           |       | (9,337                   | )          |
| Dispositions of property and equipment               |       | 129                         |       | —                |       | —               |       | —           |       | 129                      |       |
| Disposition of interest in Riovia  investment        |       | 1,200                       |       | —                |       | —               |       | —           |       | 1,200                    |       |
| Equity investment in land acquistion                 |       | (843                        | )          | —                |       | —               |       | —           |       | (843                     | )          |
| Net cash flows from investing activities             |       | (8,851                      | )          | —                |       | —               |       | —           |       | (8,851                   | )          |
|                                                 |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Financing  Activities**                            |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Repayments of long-term debt                         |       | —                      |       | —                |       | (6,475               | )          | —           |       | (6,475                   | )          |
| Borrowings under revolving loans, net of  repayments |       | —                      |       | —                |       | 10,000               |       | —           |       | 10,000                   |       |
| Net change in accounts with affiliates               |       | (3,769                      | )          | 83                    |       | 3,686                |       | —           |       | —                   |       |
| Financing fees                                       |       | —                      |       | —                |       | (403                 | )          | —           |       | (403                     | )          |
| Repayments on notes receivable from  stockholders    |       | 19                          |       | —                |       | —               |       | —           |       | 19                       |       |
| Net cash flows from financing activities             |       | (3,750                      | )          | 83                    |       | 6,808                |       | —           |       | 3,141                    |       |
|                                                 |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net change in cash and equivalents                   |       | (232                        | )          | 73                    |       | —               |       | —           |       | (159                     | )          |
| Cash and equivalents at beginning of period          |       | 1,451                       |       | 5                     |       | —               |       | —           |       | 1,456                    |       |
| Cash and equivalents at end of period                |       | $                           | 1,219      |                  | $          | 78                   |       | $                | —     |                     | $          | — |   | $ | 1,297 |   |

 

16

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**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

###### **StatementUnder the Private Securities Litigation Reform Act**

 

Certain information in this quarterly report on Form 10-Q, includingbut not limited to the Management’s Discussion and Analysis of FinancialCondition and Results of Operations, may constitute forward-looking statementsas such term is defined in Section 27A of the Securities Exchange Act of1933 (the “Securities Act”) and Section 21E of the Securities Exchange Actof 1934.  Certain forward-lookingstatements can be identified by the use of forward-looking terminology such as,“believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,”“intends,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negativethereof or other comparable terminology, or by discussions of strategy, plansor intentions.  Forward-lookingstatements involve risks and uncertainties, including those described in theRisk Factors section of the Company’s Form S-4 Registration Statement(Registration No. 333-114059), which could cause actual results to bematerially different than those in the forward-looking statements, which speakonly as of the date hereof.  The Companyassumes no obligation to update such information.

 

###### **General**

 

TheCompany is the largest provider of dredging services in the United States.  Dredging generally involves the enhancementor preservation of the navigability of waterways or the protection ofshorelines through the removal or replenishment of soil, sand or rock.  The U.S. dredging market consists of threeprimary types of work:  Capital,Maintenance and Beach Nourishment, in which the Company experienced an averagecombined U.S. bid market share of 42% over the last three years (2001 to2003).  The Company’s bid market isdefined as the population of projects on which it bid or could have bid if notfor capacity constraints (“bid market”). In addition, the Company has continued its role as the only U.S. dredgingcontractor with significant international operations, which averaged 13% of itscontract revenues over the last three years.

 

TheCompany was acquired by Madison Dearborn Capital Partners IV, L.P. (“MDP”) inDecember 2003.  In accordance with U.S. generally accepted accountingprinciples, a new basis of accounting resulted from the acquisition. Therefore, within this report, the three and six month periods endedJune 30, 2004 have been identified as the Successor Basis and the threeand six month periods ended June 30, 2003 as the Predecessor Basis. The significant differences between periods as a result of the new basis ofaccounting are discussed in the following Results of Operations section.

 

TheCompany also owns 85% of the capital stock of North American Site Developers,Inc. (“NASDI”), a demolition service provider located in the Boston,Massachusetts area.  NASDI’s principalservices consist of interior and exterior demolition of commercial and industrialbuildings, salvage and recycling of related materials, and removal of hazardoussubstances and materials.  One NASDImanagement stockholder retains a 15% non-voting interest in NASDI, which isreflected as a minority interest within the financial statements.

 

TheCompany’s equity in earnings of joint ventures relates to the Company’s 50%ownership interest in Amboy Aggregates (“Amboy”) which is accounted for usingthe equity method.

 

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###### **Resultsof Operations**

 

Thefollowing table sets forth the components of net income (loss) and EBITDA as apercentage of contract revenues for the three and six months endedJune 30, 2004 and 2003:

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**              | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **                           | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Contract revenues                    |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Costs of contract revenues           |       | (91.9                                 | )          | (85.5                               | )          | (87.4 | ) | (83.8 | ) |
| Gross profit                         |       | 8.1                                   |       | 14.5                                |       | 12.6 |   | 16.2 |   |
| General and administrative expenses  |       | (8.6                                  | )          | (6.2                                | )          | (7.6 | ) | (6.6 | ) |
| Amortization of intangible assets    |       | (1.6                                  | )          | —                              |       | (1.6 | ) | — |   |
| Operating income (loss)              |       | (2.1                                  | )          | 8.3                                 |       | 3.4 |   | 9.6 |   |
| Interest expense, net                |       | (9.6                                  | )          | (4.9                                | )          | (6.6 | ) | (5.0 | ) |
| Equity in earnings of joint ventures |       | 0.9                                   |       | 0.6                                 |       | 0.5 |   | 0.4 |   |
| Minority interest                    |       | —                                |       | —                              |       | — |   | — |   |
| Income (loss) before income taxes    |       | (10.8                                 | )          | 4.0                                 |       | (2.7 | ) | 5.0 |   |
| Income tax benefit (expense)         |       | 3.3                                   |       | (1.6                                | )          | 0.6 |   | (2.1 | ) |
| Net income (loss)                    |       | (7.5                                  | )%         | 2.4                                 | %          | (2.1 | )% | 2.9 | % |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| EBITDA                               |       | 7.8                                   | %          | 12.9                                | %          | 11.6 | % | 14.0 | % |

 

 “EBITDA,” as provided herein,represents earnings from continuing operations before net interest expense,income taxes, depreciation and amortization expense.  EBITDA should not be considered analternative to, or more meaningful than, amounts determined in accordance withGAAP including: (a) operating income as an indicator of operating performance;or (b) cash flows from operations as a measure of liquidity.   The Company presents EBITDA as additionalinformation because it is among the bases upon which the Company assesses itsfinancial performance, and certain covenants in its borrowing arrangements aretied to similar measures. The Company believes EBITDA is a useful measure forthe users of its financial statements because it provides information that can beused to evaluate the effectiveness of the Company’s business from anoperational perspective, exclusive of costs to finance its activities, incometaxes, depreciation of operating assets and amortization of intangible assets,none of which is directly relevant to the efficiency of its operations.  EBITDA is not calculated identically by allcompanies; therefore, the Company’s presentation of EBITDA may not becomparable to similarly titled measures of other companies.  The following table reconciles net income(loss) to EBITDA for the periods indicated:

 

18

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| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**              | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **                    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                          |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)             |       | $                                     | (5,437     | )                                   | $          | 2,493 |   | $ | (3,679 | ) | $ | 5,980 |   |
| Adjusted for:                 |       |                                  |       |                                |       |   |   |   |   |
| Interest expense, net         |       | 6,996                                 |       | 5,137                               |       | 11,606 |   | 10,193 |   |
| Income tax expense (benefit)  |       | (2,403                                | )          | 1,747                               |       | (1,132 | ) | 4,347 |   |
| Depreciation and amortization |       | 6,451                                 |       | 4,068                               |       | 13,576 |   | 8,135 |   |
| EBITDA                        |       | $                                     | 5,607      |                                | $          | 13,445 |   | $ | 20,371 |   | $ | 28,655 |   |

 

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

 
| ** **                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**              | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| **Revenues  (in thousands)** | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dredging:                    |       |                                  |       |                                |       |   |   |   |   |
| Capital - U.S.               |       | $                                     | 22,753     |                                | $          | 56,615 |   | $ | 48,672 |   | $ | 110,428 |   |
| Capital - foreign            |       | 17,395                                |       | 19,514                              |       | 45,161 |   | 29,551 |   |
| Beach                        |       | 12,120                                |       | 11,283                              |       | 42,478 |   | 31,073 |   |
| Maintenance                  |       | 10,003                                |       | 7,416                               |       | 22,760 |   | 15,145 |   |
| Demolition                   |       | 9,833                                 |       | 9,536                               |       | 16,980 |   | 17,860 |   |
|                         |       | $                                     | 72,104     |                                | $          | 104,364 |   | $ | 176,051 |   | $ | 204,057 |   |

 
| ** **                  | ** ** | **June 30,**   | ** ** |
|-----------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **Successor Basis** | ** ** |
| **Backlog  (in thousands)** | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Dredging:                   |       |                |       |   |   |
| Capital - U.S.              |       | $                   | 94,953     |   | $ | 177,126 |   |
| Capital - foreign           |       | 19,165              |       | 50,677 |   |
| Beach                       |       | 3,660               |       | 2,883 |   |
| Maintenance                 |       | 11,274              |       | 13,989 |   |
| Demolition                  |       | 12,596              |       | 15,492 |   |
|                        |       | $                   | 141,648    |   | $ | 260,167 |   |

 

Consolidatedrevenues for the second quarter of 2004 were $72.1 million, representing adecrease of $32.3 million or 30.9% over second quarter 2003 revenues of $104.4million.  Revenues for the first half of2004 were $176.1 million, a decrease of $28.0 million or 13.7% over revenuesfor the first half of 2003 of $204.1 million.  The decline in 2004 revenues was anticipated due to the slow-down indomestic dredging bid activity that began in the second half of 2003 and hascontinued through the first half of 2004. This continuing lower level of bid activity has led to intensecompetition within the industry for work that has been bid this year, which has

 

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significantlycompressed margins.  Most of the declinein revenues is due to reduced levels of domestic capital dredgingrevenues.  Although the Company hascontinued to maintain a higher percentage of capital dredging work in backlog,performance on certain of these projects is being postponed by the Army Corpsof Engineers (“Corps”) due to a lack of current funding.  This combination of the reduced bid marketand the postponement of work within the Company’s backlog resulted in decreasedutilization of the Company’s fleet.

 

TheCompany’s gross profit margin declined to 8.1% and 12.6% for the quarter andsix months ended June 30, 2004, respectively, compared to 14.5% and 16.2%for the same periods of 2003.  The margindecline is partly attributable to some reduction in contract margin resultingfrom the mix of work, including a higher percentage of foreign work, which istypically bid and performed at lower margins. However, more significantly, the margin decline is a result of theimpact of fixed costs relative to the reduced level of utilization, as well asthe impact of approximately $1.3 million of additional quarterly depreciationin 2004 resulting from the revaluation of the Company’s operating assets inconnection with the sale of the Company in December of 2003.

 

Capital projects include large portdeepenings and other infrastructure projects. Domestic capital dredging revenue declined $33.9 million and $61.8million in the second quarter and first half of 2004, respectively, as comparedto the same periods of 2003.  Asmentioned previously, this is a result of a slow-down in domestic biddingactivity, coupled with the postponement of certain capital project work withinbacklog.  As discussed in previousfilings, the capital market includes “Deep Port” projects that have beenauthorized by the 1986 Water Resource Development Act (“WRDA”) and subsequentbills.  In 1997, the Corps announced DeepPort work, authorized by WRDA, to be completed through 2005, with an aggregatevalue in excess of $2.0 billion, and supplemental authorizations have increasedthis amount to approximately $4.0 billion, with work to be completed through2010.  Currently, over $2.4 billion ofthese authorized Deep Port projects have yet to be let for bid.  Deep Port work has comprised a substantialportion of recent bid markets, averaging 36% of the bid market over the lastthree years (2001 to 2003).  TheCompany’s bid market share of Deep Port projects averaged 45% over the lastthree years.

 

Duringthe second quarter of 2004, the Company’s domestic capital revenues includedcontinuing work on Deep Port projects in Kill Van Kull, New York; Houston,Texas; and Manatee Harbor, Florida. These projects contributed combined revenue to the quarter of $15.6million.  The new work capital projectalong the Providence River and harbor in the Rhode Island area added another$5.5 million of revenue to the quarter. Foreign capital revenues in the second quarter of 2004 totaled $17.4million, which was generated by a number of projects in the Middle East,including the ongoing port terminal project in Bahrain and a maintenanceproject performed in Umm Qasr, Iraq, which is the second project the Companyhas completed in that country. Additionally, the Company recorded revenue of $1.3 million relating tothe second quarter 2004 settlement of certain claims with respect to the AlSukhna, Egypt joint venture project which was concluded in 2001.

 

Beachnourishment projects include rebuilding of shoreline areas that have beendamaged by storm activity or ongoing erosion. Second quarter 2004 revenues from beach nourishment projects totaled$12.1 million, which primarily relates to a single project performed in AbseconIsland/Atlantic Beach, New Jersey.

 

Maintenanceprojects include routine dredging of ports, rivers and channels to remove theregular build up of sediment. Maintenance revenues totaled $10.0 million in the second quarter of2004, reflecting a typical level for the Company.  The second quarter maintenance revenuesincluded $2.9 million generated by a project in Tampa Harbor and the AlafiaRivers, as well as $1.1 million in mobilization revenue on the Oakland/RichmondHarbor project. This is a three-year

 

20

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maintenanceproject, and the Company will perform the current years’ portion of the work inthe second half of 2004.

 

NASDI’sdemolition revenues for the second quarter of 2004 totaled $9.8 million, whichis consistent with the comparable period of 2003. NASDI’s second quarterrevenues were generated by numerous small projects; however, a few largerprojects made a significant contribution to the quarter, including $1.1 millionfor the ongoing take-down of the South Boston power plant and receipts for thesale of steel and metal scrap salvaged from this project; $1.3 million from twodemolition projects recently won in Florida; and $2.1 million from the firstphase of a $3 million project entailing select interior demolition and asbestosremoval within a Boston office building.

 

Netinterest expense for the second quarter and first half of 2004 was $7.0 millionand $11.6 million, respectively, compared to $5.1 million and $10.2 million forthe same periods of 2003.  As a result ofthe sale transaction in December 2003, the Company’s debt level increasedto approximately $260 million at December 31, 2003, compared toapproximately $173 million at the beginning of 2003.  However, despite the increased debt level,the 2004 cash interest expense related to the Company’s senior and subordinateddebt has remained relatively consistent with the 2003 expense, due tosignificantly lower interest rates on the new debt structure.  In February 2004, the Company enteredinto an interest rate swap arrangement to swap a portion of its fixed-rate debtto floating, to manage the interest rate paid with respect to the Company’s 73⁄4%senior subordinated debt.  AtJune 30, 2004, the fair value accounting for the swap resulted in $1.8million of an additional non-cash charge to interest expense.

 

TheCompany generated a net loss of $5.4 million and $3.7 million for the secondquarter and first six months of 2004, respectively, compared to net income of$2.5 million and $6.0 million for the same periods of 2003.  The net loss in the 2004 periods reflects thereduced dredging volume and the impact of fixed costs relative to the levels ofrevenue generated, given the lower than typical utilization levels for theCompany. The 2004 periods also include additional depreciation and amortizationexpense resulting from the revaluation of the Company’s assets and liabilitiesin connection with sale of the Company in December of 2003, as well asnon-cash interest expense resulting from the interest rate swap arrangement,mentioned above.  EBITDA (as defined onpage 18) was $5.6 million and $20.4 million for the quarter and six monthsended June 30, 2004, compared to $13.4 million and $28.7 million for thesame periods of 2003.  EBITDA declineddue to the reduction in revenues and earnings as discussed previously.

 

**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.

 

TheCompany’s backlog continues to be impacted by the slow domestic dredging bidmarket.  Due to the minimal backlog addedduring the quarter, dredging backlog declined to $129.1 million atJune 30, 2004 as the Company primarily worked off backlog during thesecond quarter.  This compares to $189.2million at March 31, 2004 and $244.7 million at June 30, 2003.  The second quarter 2004 domestic dredging bidmarket, representing work awarded during the period, totaled $113 million andbrings the year-to-date market to $221 million.   The 2004 bidding

 

21

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activityhas remained sluggish, coming off a low bid market for 2003 which totaled only$425 million.  This compares to adomestic bid market of over $900 million in 2002, and an average over the fivepreceding years (1998 to 2002) of approximately $650 million.  Although the Corps’ budgets have remained atsimilar levels in recent years, management continues to believe that the marketis being impacted by the diversion of Corps’ personnel and financial resourcesto the reconstruction efforts in Iraq, as well as distractions related toreorganization within the Corps and general uncertainty surrounding theupcoming elections and the impact on the Corps’ 2005 fiscal year budget.

 

Thedecline in the current bid market has significantly impacted pricing in theshort-term, as competition within the industry has increased for the work thatis being bid.   In fact, some of the workrecently bid has been won by competitors at prices equal to the Company’s cashcosts.   The Company, however, isselective in its bidding and its does not want to take on work and put wear andtear on its equipment without some level of recovery.  Thus, for the second quarter, Great Lakes wasawarded only $5 million for two small maintenance projects, representing only4% of the quarters’ awards.   During thequarter, the final phase of the 43 foot Arthur Kill Deep Port project was bid.  This was the only Deep Port project bid duringthe quarter, and the Company was the successful low bidder at $66 million.  Award of the project is pending approval ofGreat Lakes’ disposal plans, as is typical for this type of project.  In the meantime, a competitor protested awardof this project to the Company; however, the protest has since been dismissedby the Corps and the Company still anticipates receiving award of this projectin the third quarter.  Additionally, atthe end of July 2004, the Company was awarded the $66 million BrunswickInner Channel project, which the Company bid in 2002 and recently obtainedcourt resolution in the its favor on its disagreement with the Corps’estimate.   Dredging is expected tocommence on both of these projects in the fourth quarter of 2004.

 

AtJune 30, 2004, over 65% of backlog is comprised of domestic capitaldredging projects, which are generally higher margin work.  This includes the work remaining on Deep Portcapital projects in Kill Van Kull, New York; Los Angeles, California; Houston,Texas; Wilmington, North Carolina; Manatee Harbor, Florida; and Port JerseyChannel, New Jersey.   As mentionedabove, the Company was low bidder on a $66 million Deep Port project in ArthurKill, New York, and the Company received a positive court ruling on the $66million Brunswick, Georgia Deep Port project. These projects, along with anadditional $48 million of low bids pending award and other options pending onprojects in backlog, will significantly increase the Company’s domesticbacklog, once awarded.

 

Foreigncapital project backlog, which comprises $19.2 million or 14% of theJune 30, 2004 backlog, relates primarily to work remaining on thelong-term port terminal project in Bahrain and the channel deepening projectfor a liquid natural gas plant in Egypt.  In July 2004, the Company received a signed letter of intent foraward of a $30 million LNG terminal project in Ocean Cay Bahamas.  This project will increase foreign backlog,once the final contract is signed.

 

Beach backlog at June 30, 2004 declinedto $3.7 million, as the Company performed on work in its year-end backlog.  Beach work is often bid in the second half ofthe year, since the work is generally performed between the months ofSeptember to March, due to environmental restrictions.  During the quarter, only three beachnourishment projects were bid and awarded with a value of approximately $19million, all of which were won by competitors.

 

Maintenance backlog at June 30, 2004 was$11.3 million, which includes the first year’s portion of the $31 millionOakland Harbor project, as well as remaining work on a few smallerprojects.  There were over fifteenmaintenance projects bid during the quarter, the majority of which was won bycompetitors.  The pricing of maintenancework bid recently has been very low, as the industry attempts to employ itsassets that are not currently employed on capital or beach projects.

 

22

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The demolition services backlog at June 30,2004 was $12.6 million, compared to $14.7 million at March 31, 2004 and$15.5 million at June 30, 2003.  TheJune backlog includes five projects with over $1 million of revenueremaining, as well as a typical complement of mid-size projects.  The New England demolition market continuesto be competitive; however, the demolition bidding activity has increased inrecent months.  NASDI’s managementanticipates that a few larger projects will be awarded within the next sixmonths, which should enable NASDI to maintain its operations at a levelconsistent with the first half of 2004.

 

###### **MarketOutlook**

 

Theslow down in the domestic dredging bid market that began in 2003 and hascontinued through the second quarter of 2004 has led to increasing uncertaintywith respect to funding of all projects in the Corps’ program.  Additionally, there is ongoing debate on theCorps’ budget for fiscal year 2005. In February of 2004, the Presidentpresented his Civil Works Budget for 2005, announcing lower budget levels.Then, as typically happens when it reached the House appropriations committee,the committee added an additional $700 million to the appropriation request,but the bill’s increased funding may face opposition as it moves through thefull House and Senate for final approval. Even if the appropriation level is agreed to, it is unclear whether abudget will even be passed in the current year due to the impending elections,in which case the Corps will be forced to operate under a continuingresolution, as was the case going into 2003.

 

Thecurrent legislation also targets changes to beach nourishment funding,proposing that the administration no longer honor any cost-sharing agreementsfor shoreline protection and no longer provide funding for investigations,studies or the preparation of plans and specifications for such projects.  Thus, the local communities and Stateagencies would be required to fund and administer these projects in the future.  The federal funding of shoreline protectionhas often been the target of administrations seeking to control spending, butthe resulting congressional lobbies generally have been successful in amendingthe budget and restoring federal funding. However, given the state of the deficit and the diversion of funds tosupport the nation’s efforts in Iraq, many continue to be concerned for thefuture of the beach program.  Althoughfunds have been appropriated for the fiscal year 2004 program, the Companycontinues to receive indications that projects are on hold pending a decisionon funding.  If the current legislationis successful and federal funding is not made available, in management’s view,the local agencies are not prepared either financially or administratively toexecute their contracts in the near term. The effects on the industry of this uncertain funding environmentcontinue to be evident entering the third quarter, and it appears that most ofthe industry’s hopper dredge fleet may remain idle through the third quarter.

 

Despitethe uncertainty surrounding the current bid market and funding environment,authorizations for future work continue to move forward.  The WRDA legislation, which forms the basisfor authorizing the Corps’ civil works projects, including the Deep Port projects,is generally enacted every other year. The most recent WRDA bill was passed by Congress in 2000 and the recentDeep Port work that has come out for bid and those projects expected for 2004and 2005 bidding have already been authorized by this or prior WRDAlegislation. While no bill was passed in 2002 or 2003, a 2004 WRDA has beenintroduced. The 2004 WRDA bill includes a change to increase the federal costsharing percentages as ports are brought to greater depths, which shouldprovide some incentive for certain state legislatures to push for its adoption.However, the bill in its current form as approved by the Senate Environment andPublic Works Committee, includes a proposal to create additional environmentalregulations for beach nourishment projects. This provision was apparently added to the bill even though theCommittee held no hearings on the environmental effects of beach nourishmentprojects. Thus, the American Shore and Beach Preservation Association hasobjected to the legislation and has requested that such provision be removedfrom the bill.  Given the controversialnature of this

 

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newlanguage, it is expected that the bill will be tabled in hopes the politicalenvironment will be more friendly next year for passage of a WRDA bill.

 

As discussed in the Company’s 2003 Form 10-K,in an effort to provide a more level playing field for all competitors, theindustry has been pursuing a legislative solution to close the grandfatherclause loophole which has allowed Bean/Stuyvesant to expand its domesticdredging operations, despite its control by Boskalis, a Dutch company and oneof the largest dredging contractors in the world.   In the third quarter of 2003, one of theindustry’s domestic dredging companies protested a bid which it lost toBean/Stuyvesant on the grounds that the bid couldn’t be awarded toBean/Stuyvesant, since they are operating illegally in the U.S., on the basisthat they are less than 75% owned by U.S. citizens.  The case was heard in the court of claims whereit was decided that Bean/Stuyvesant was not operating under the intent of thelaw.  As expected, Bean/Stuyvesantappealed this decision.  The appeal washeard in the second quarter of 2004 and the ruling was overturned.   The domestic competitor has requested arehearing, but it is unclear as to whether the courts will respond.  Therefore, the industry will continue topursue a legislative solution to this matter.

 

Insummary, the Company is currently operating in an industry market unlike anyexperienced in recent years.  While thereare a number of factors contributing to uncertainty regarding project fundingand timing, the work continues to be required. At some point in the future, all the work deferred currently will needto be performed.  The Deep Port projectsunderway are not fully functional until all parts of the channels are taken totheir final depths, and other authorized projects have been proven to benecessary to accommodate the deeper draft vessels in use throughout the world.  Similarly, the maintenance dredging, if notperformed currently, will accumulate and grow in volume as channels continue tofill with sedimentation, eventually to the point were ships can no longersafely navigate into the ports, and beach nourishment work will reach a pointof urgency as waterfront assets and recreational communities becomejeopardized.  Therefore, Companymanagement believes that the current environment represents only a deferral ofwork, and not any permanent reduction in the industry.  In fact, at a recent Corps industry meeting,the Corps expressed concern as to whether private industry has sufficientcapacity to take on all the work that is in the pipeline.   However, it still remains unclear as to howlong this deferral will continue.

 

Giventhe continued uncertainty in the industry, it is apparent that the thirdquarter of 2004 will also be impacted by the reduced bid market and slow downin funding, with the Company’s utilization levels expected to be similar tolevels experienced in the second quarter. Although the Company has a solid backlog level going into the thirdquarter and has recently won a couple of major projects to be added to backlog,given the timing of the bidding and awards, and requested deferral of certainprojects such as the Wilmington and Los Angeles deepening projects, much of theCompany’s backlog cannot be performed until the fourth quarter of 2004 andfuture quarters.

 

###### **Liquidityand Capital Resources**

 

TheCompany’s principal sources of liquidity are cash flow generated fromoperations and borrowings under its new 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 generated by operating activities for the six months endedJune 30, 2004 and 2003 totaled $9.8 million and $5.6 million,respectively.  The fluctuation betweenperiods results from the normal timing differences on the recognition andbilling of revenues relative to the current level of activity, as well as thereceipt of income tax refunds in connection with the

 

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paymentof expenses related to the sale in December of 2003, which also increasedthe cash generated by operations in the 2004 period.

 

TheCompany’s net cash flows used in investing activities were $9.2 millioncompared to $8.9 million for first half of 2004 and 2003, respectively.  The use of cash relates primarily toequipment acquisitions and capital improvements to existing equipment.  With respect to the 2004 equipmentacquisitions, approximately $1.9 million was funded by proceeds received in2003 from the sale of two tugboats as part of like-kind exchange transaction,and the Company intends to offset approximately $3.1 million of itsyear-to-date spending on construction of two new barges with the proceeds froma sale-leaseback transaction to take place in the fourth quarter.  In May of 2004, the Company received cash ofapproximately $0.5 million from its former shareholders, representing the finaladjustment to the purchase price with respect to the acquisition of the Companyby MDP in December 2003.  In the2003 period, the Company also utilized $0.8 million to purchase 50% of a realestate interest related to its Amboy joint venture and received proceeds of$1.2 million related to the sale of its interest in the Riovia S.A. jointventure.

 

TheCompany’s net cash used in financing activities for six months endedJune 30, 2004 totaled $2.6 million, compared to a source of cash of $3.1million for the six months ended June 30, 2003.  In the 2004 period, the Company paid downdebt, while it borrowed funds in the 2003 period, based on its working capitalneeds in the respective periods.

 

InFebruary 2004, the Company entered into an interest rate swap arrangementto swap a notional amount of $50 million from a fixed rate of 7.75% to afloating LIBOR-based rate in order to manage the interest rate paid withrespect to the Company’s 73⁄4% senior subordinated debt.  At June 30, 2004, the fair valueaccounting for the swap resulted in $1.8 million of an additional non-cashcharge to interest expense.  While thisrepresents the current fair value of the swap arrangement based on the anticipatedfuture rates, the Company did receive a payment of approximately $0.3 millionin the second quarter on this swap arrangement, such that cash flow has beenpositively impacted to date.

 

Giventhe current uncertainty surrounding the bidding and funding environmentdiscussed previously, the Company has begun taking steps to reducediscretionary overhead and maintenance costs and capital spending.  With these reductions, the Company believesthe anticipated cash flows from operations and available credit under itsrevolving credit facility will be sufficient to fund the Company’s operationsand its revised capital expenditures, and meet its current debt servicerequirements of approximately $20 million for the year.  The Company is currently in compliance withall financial covenants contained in its Credit Agreement and Equipment TermLoan (collectively, “senior credit agreements”) at June 30, 2004 andexpects to be in the compliance at the end of the third quarter as well.  However, if the difficult market conditionscontinue through the remainder of 2004, the Company may not remain incompliance with all of the financial covenants contained in its senior creditagreements beginning with the financial covenants for the fourth quarter of2004.  Therefore, the Company hascommenced discussions with its senior lenders to seek an amendment or waiver toavoid violating these financial covenants for the fourth quarter through2005.  Based on these initialdiscussions, the Company anticipates that its senior lenders will provide suchan amendment or waiver, if necessary. However, if there is a violation of any of the financial covenants andthe Company is not successful in obtaining an amendment or waiver, a defaultwould occur under the Company’s senior credit agreements, which could result ina material adverse impact on the Company’s financial condition.

 

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 debt agreements, depends on its future operatingperformance and cash flow, which in turn, are subject

 

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toprevailing economic conditions and to financial, business and other factors, someof which are beyond the Company’s control.

 

###### **CriticalAccounting Policies and 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.  TheCompany continually reviews its accounting policies and financial informationdisclosures.  There have been no materialchanges in policies or estimates since December 31, 2003.

 

###### **Item 3**. Quantitative and Qualitative Disclosures About Market Risk

 

Themarket risk of the Company’s financial instruments as of June 30, 2004 hasnot significantly changed since December 31, 2003.  The market risk profile of the Company onDecember 31, 2003 is disclosed in the Company’s 2003 Annual Report on Form10-K.

 

###### **Item 4**.  Controlsand Procedures

 

*(a) Evaluation of Disclosure Controls and Procedures*.  TheCompany’s management, with the participation of its Chief Executive Officer andChief Financial Officer, have conducted an evaluation of the effectiveness ofdisclosure controls and procedures (as such term is defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this quarterly report. Based on that evaluation,such officers have concluded that the disclosure controls and procedures areeffective in ensuring that all material information required to be filed inthis quarterly report has been made known to them in a timely fashion.

 

*(b) Changes in Internal Controls.* There have been no changes in our internalcontrols over financial reporting during the most recent fiscal quarter thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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###### **PART II** – Other Information

 

###### **Item 6**.  Exhibitsand Reports on Form 8-K

 
| *(a)*  |   | *Exhibits*                                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                        |
| 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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*  Filed or furnished herein.

 

*(b)**                              **Reports on Form 8-K*

 

1.               A Current Report on Form 8-K filed onApril 21, 2004 regarding a press release announcing earnings informationfor the quarter ended March 31, 2004.

 

##### **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:   August 12,  2004 |                                                                       | 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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*Filed or furnished herewith.

 

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