**UNITED STATES**

**SECURITIES 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 the quarterly period ended June 30, 2005**

 

**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**

 

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

(Exact name of registrant as specified in its charter)

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

 

**(630)574-3000**

(Registrant’s telephone number, including area code)

 

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

 

ý  Yes   o  No 

 

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

 

o  Yes   ý  No

 

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

 

As of August 9, 2005,there were outstanding 1,000 shares of Common Stock and zero shares ofPreferred Stock.

 

 

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**Great LakesDredge & Dock Corporation and Subsidiaries**

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

### **SecuritiesExchange Act of 1934**

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

###  

##### **INDEX**

##### ** **

| ** **             | ** **                 | **Page**                                                                                                         |
|------------------------|----------------------------|------------------------------------------------------------------------------------------------------------------|
| **Part I**        | **Financial  Information** |                                                                                                             |
|                   |                       |                                                                                                             |   |
|                   | Item 1                     | Financial Statements (Unaudited)                                                                                 |   |
|                   |                       |                                                                                                             |   |
|                   |                       | Condensed  Consolidated Balance Sheets at  June 30, 2005 and December 31, 2004                         | 2 |
|                   |                       |                                                                                                             |   |
|                   |                       | Condensed  Consolidated Statements of Operations for the  Three and Six Months ended June 30, 2005 and 2004 | 3 |
|                   |                       |                                                                                                             |   |
|                   |                       | Condensed  Consolidated Statements of Cash Flows for the  Six Months ended June 30, 2005 and 2004           | 4 |
|                   |                       |                                                                                                             |   |
|                   |                       | Notes to  Unaudited Condensed Consolidated Financial Statements                                                  | 5 |
|                   |                       |                                                                                                             |   |
|                   | Item 2                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 16 |
|                   |                       |                                                                                                             |   |
|                   | Item 3                     | Quantitative and  Qualitative Disclosures About Market Risk                                                      | 24 |
|                   |                       |                                                                                                             |   |
|                   | Item 4                     | Controls and Procedures                                                                                          | 24 |
|                   |                       |                                                                                                             |   |
| **Part II**       | **Other  Information**     |                                                                                                             |
|                   |                       |                                                                                                             |   |
|                   | Item 6                     | Exhibits                                                                                                         | 25 |
|                   |                       |                                                                                                             |   |
| **Signature**          | 26                         |
|                   |                       |                                                                                                             |   |
| **Exhibit Index** | 27                         |

 

----

 

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

###### ** **

**Great LakesDredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Balance Sheets**

**(Unaudited)**

**(in thousands, except share and per share amounts)**

 
| ** **                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **Assets**                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                                   |       |              |       |                  |       |
| Cash and  equivalents                                              |       | $                 | 371        |                  | $          | 1,962 |   |
| Accounts  receivable, net                                          |       | 65,820            |       | 65,762                |       |
| Contract  revenues in excess of billings                           |       | 19,518            |       | 12,439                |       |
| Inventories                                                        |       | 17,965            |       | 16,497                |       |
| Prepaid  expenses and other current assets                         |       | 23,517            |       | 15,654                |       |
| Total  current assets                                              |       | 127,191           |       | 112,314               |       |
| Property and  equipment, net                                       |       | 247,529           |       | 256,594               |       |
| Goodwill                                                           |       | 103,563           |       | 103,563               |       |
| Other  intangible assets, net                                      |       | 2,867             |       | 3,267                 |       |
| Inventories                                                        |       | 11,278            |       | 11,278                |       |
| Investments  in joint ventures                                     |       | 8,227             |       | 7,965                 |       |
| Other assets                                                       |       | 12,817            |       | 13,654                |       |
| Total assets                                                       |       | $                 | 513,472    |                  | $          | 508,635 |   |
|                                                               |       |              |       |                  |       |
| **Liabilities  and Stockholder’s Equity**                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                              |       |              |       |                  |       |
| Accounts  payable                                                  |       | $                 | 51,811     |                  | $          | 46,770 |   |
| Accrued  expenses                                                  |       | 19,178            |       | 17,676                |       |
| Billings in  excess of contract revenues                           |       | 7,993             |       | 6,706                 |       |
| Current  maturities of long-term debt                              |       | 1,950             |       | 1,950                 |       |
| Total  current liabilities                                         |       | 80,932            |       | 73,102                |       |
| Long-term  debt                                                    |       | 256,325           |       | 252,300               |       |
| Deferred  income taxes                                             |       | 87,868            |       | 90,429                |       |
| Other                                                              |       | 4,983             |       | 5,314                 |       |
| Total  liabilities                                                 |       | 430,108           |       | 421,145               |       |
| Minority  interest                                                 |       | 1,819             |       | 1,599                 |       |
| 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                                               |       | (16,264           | )          | (11,087               | )          |
| Accumulated  other comprehensive income (loss)                     |       | 809               |       | (22                   | )          |
| Total stockholder’s  equity                                   |       | 81,545            |       | 85,891                |       |
| Total  liabilities and stockholder’s equity                   |       | $                 | 513,472    |                  | $          | 508,635 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

2

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**Great LakesDredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Statements of Operations**

**(Unaudited)**

**(in thousands)**

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                            | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                   |       |                 |       |   |   |   |   |
| Contract  revenues                    |       | $                      | 93,391     |                 | $          | 72,104 |   | $ | 193,294 |   | $ | 176,051 |   |
| Costs of  contract revenues           |       | 81,958                 |       | 66,259               |       | 174,821 |   | 153,807 |   |
| Gross profit                          |       | 11,433                 |       | 5,845                |       | 18,473 |   | 22,244 |   |
| General and  administrative expenses  |       | 6,982                  |       | 5,405                |       | 13,737 |   | 12,515 |   |
| Subpoena-related  expenses            |       | 931                    |       | 852                  |       | 1,810 |   | 865 |   |
| Amortization  of intangible assets    |       | 220                    |       | 1,120                |       | 400 |   | 2,912 |   |
| Operating  (loss) income              |       | 3,300                  |       | (1,532               | )          | 2,526 |   | 5,952 |   |
| Interest  expense, net                |       | (4,593                 | )          | (6,996               | )          | (10,866 | ) | (11,606 | ) |
| Equity in  earnings of joint ventures |       | 928                    |       | 682                  |       | 762 |   | 831 |   |
| Minority  interests                   |       | (192                   | )          | 6                    |       | (220 | ) | 12 |   |
| Loss before  income taxes             |       | (557                   | )          | (7,840               | )          | (7,798 | ) | (4,811 | ) |
| Income tax  benefit                   |       | 52                     |       | 2,403                |       | 2,621 |   | 1,132 |   |
| Net loss                              |       | $                      | (505       | )                    | $          | (5,437 | ) | $ | (5,177 | ) | $ | (3,679 | ) |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

3

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**Great LakesDredge & Dock Corporation and Subsidiaries**

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

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **June 30,**    | ** ** |
| ** **                                                                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
| **Operating  Activities**                                                       |       |                 |       |   |   |
| Net loss                                                                        |       | $                    | (5,177     | ) | $ | (3,679 | ) |
| Adjustments  to reconcile net loss to net cash flows from operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                  |       | 12,330               |       | 13,576 |   |
| Earnings of  joint ventures                                                     |       | (762                 | )          | (831 | ) |
| Distribution  from equity joint ventures                                        |       | 500                  |       | — |   |
| Minority  interests                                                             |       | 220                  |       | (12 | ) |
| Deferred  income taxes                                                          |       | (3,170               | )          | (2,069 | ) |
| Gain on  dispositions of property and equipment                                 |       | (98                  | )          | (144 | ) |
| Other, net                                                                      |       | 837                  |       | 820 |   |
| Changes in  assets and liabilities:                                             |       |                 |       |   |   |
| Accounts  receivable                                                            |       | (58                  | )          | 17,657 |   |
| Contract  revenues in excess of billings                                        |       | (7,079               | )          | (6,876 | ) |
| Inventories                                                                     |       | (1,468               | )          | (1,775 | ) |
| Prepaid  expenses and other current assets                                      |       | (6,459               | )          | 408 |   |
| Accounts  payable and accrued expenses                                          |       | 6,385                |       | (7,998 | ) |
| Billings in  excess of contract revenues                                        |       | 1,287                |       | (2,231 | ) |
| Other  noncurrent assets and liabilities                                        |       | 54                   |       | 480 |   |
| Net cash  flows from operating activities                                       |       | (2,658               | )          | 7,326 |   |
|                                                                            |       |                 |       |   |   |
| **Investing  Activities**                                                       |       |                 |       |   |   |
| Purchases of  property and equipment                                            |       | (7,082               | )          | (9,892 | ) |
| Dispositions  of property and equipment                                         |       | 4,665                |       | 144 |   |
| Adjustment  to acquisition price of Predecessor common and preferred shares     |       | —               |       | 527 |   |
| Cash  released from equipment escrow                                            |       | —               |       | 2,451 |   |
| Net cash  flows from investing activities                                       |       | (2,417               | )          | (6,770 | ) |
|                                                                            |       |                 |       |   |   |
| **Financing  Activities**                                                       |       |                 |       |   |   |
| Repayments  of long-term debt                                                   |       | (975                 | )          | (3,475 | ) |
| Borrowings  under revolving loans, net of repayments                            |       | 5,000                |       | 1,000 |   |
| Repayment of  capital lease debt                                                |       | (541                 | )          | — |   |
| Financing  fees                                                                 |       | —               |       | (136 | ) |
| Net cash  flows from financing activities                                       |       | 3,484                |       | (2,611 | ) |
| Net change  in cash and equivalents                                             |       | (1,591               | )          | (2,055 | ) |
| Cash and  equivalents at beginning of period                                    |       | 1,962                |       | 2,775 |   |
| Cash and  equivalents at end of period                                          |       | $                    | 371        |   | $ | 720 |   |
|                                                                            |       |                 |       |   |   |
| **Supplemental  Cash Flow Information**                                         |       |                 |       |   |   |
| Cash paid  for interest                                                         |       | $                    | 9,946      |   | $ | 8,557 |   |
| Cash paid  (refunded) for taxes                                                 |       | $                    | 244        |   | $ | (4,829 | ) |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

4

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GREAT LAKES DREDGE & DOCKCORPORATION AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollars inthousands)

 

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the U.S. for interim financialinformation.  Accordingly, thesefinancial statements do not include all the information in the notes requiredby generally accepted accounting principles for complete financialstatements.  In the opinion of management,the unaudited condensed consolidated financial statements include alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation of the financial position, results of operations andcash flows as of and for the dates presented. The unaudited condensed consolidated financial statements and notesherein should be read in conjunction with the audited consolidated financialstatements of Great Lakes Dredge & Dock Corporation and Subsidiaries(the “Company”) and the notes thereto, included in the Company’s Annual Reportfiled on Form 10-K for the year ended December 31, 2004.

 

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

 

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

 

Total comprehensive loss comprisesthe Company’s net loss and net unrealized gains and losses on cash flowhedges.  Total comprehensive loss for thethree months ended June 30, 2005 and 2004 was $713 and $5,155,respectively.  Total comprehensive lossfor the six months ended June 30, 2005 and 2004 was $4,346 and $3,410,respectively.

 

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

 

The Company uses derivative instruments to managecommodity price, interest rate, and foreign currency exchange risks.  Such instruments are not used for tradingpurposes.  As of June 30, 2005, theCompany was party to various swap arrangements to hedge the price of a portionof its diesel fuel purchase requirements for work in its backlog to beperformed through January 2006.  As of June 30,2005, there were 4.6 million gallons remaining on these contracts.  Under these agreements, the Company will payfixed prices ranging from $0.92 to $1.56 per gallon.  At June 30, 2005 and December 31, 2004,the fair value on these contracts was estimated to be $1,333 and $(36),respectively, based on quoted market prices, and is recorded in other currentassets and accrued liabilities, respectively. Ineffectiveness related to thesefuel hedge arrangements was determined to be immaterial.   The remaining gains included in accumulatedother comprehensive income at June 30, 2005 will be reclassified intoearnings over the next seven months, corresponding to the period during whichthe hedged fuel is expected to be utilized.

 

In February 2004, the Company entered into aninterest rate swap arrangement to swap a notional amount of $50 million from afixed rate of 7.75% to a floating LIBOR-based rate in order to manage theinterest rate paid with respect to the Company’s 73⁄4% senior subordinateddebt.  The fair value of the swap at June 30,2005 and December 31, 2004 was $(717) and $(662), respectively, and isrecorded in accrued expenses.  The swapis not accounted for as a hedge;

 

5

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therefore, the changes in fair value are recorded asadjustments to interest expense in each reporting period.

 

The carrying values of otherfinancial instruments included in current assets and current liabilitiesapproximate fair values due to the short-term maturities of theseinstruments.  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 $138,250 and $157,938 at June 30, 2005and December 31, 2004, respectively, based on quoted market prices.

 

**4.****             ****Accounts receivable**

 

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

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Completed  contracts             |       | $                 | 21,345     |                  | $          | 13,971 |   |
| Contracts in  progress           |       | 36,011            |       | 43,088                |       |
| Retainage                        |       | 9,008             |       | 9,211                 |       |
|                             |       | 66,364            |       | 66,270                |       |
| Allowance  for doubtful accounts |       | (544              | )          | (508                  | )          |
|                             |       |              |       |                  |       |
|                             |       | $                 | 65,820     |                  | $          | 65,762 |   |

 

**5.****             ****Contracts in progress**

 

The components of contractsin progress at June 30, 2005 and December 31, 2004 are as follows:

 
| ** **                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Costs and  earnings in excess of billings:                                      |       |              |       |                  |       |
| Costs and  earnings for contracts in progress                                   |       | $                 | 143,365    |                  | $          | 232,994 |   |
| Amounts  billed                                                                 |       | (127,208          | )          | (221,243              | )          |
| Costs and  earnings in excess of billings for contracts in progress             |       | 16,157            |       | 11,751                |       |
| Costs and  earnings in excess of billings for completed contracts               |       | 3,361             |       | 688                   |       |
|                                                                            |       |              |       |                  |       |
|                                                                            |       | $                 | 19,518     |                  | $          | 12,439 |   |
|                                                                            |       |              |       |                  |       |
| Prepaid  contract costs (included in prepaid expenses and other current assets) |       | $                 | 1,434      |                  | $          | 718 |   |
|                                                                            |       |              |       |                  |       |
| Billings in  excess of costs and earnings:                                      |       |              |       |                  |       |
| Amounts  billed                                                                 |       | $                 | (131,978   | )                     | $          | (196,639 | ) |
| Costs and  earnings for contracts in progress                                   |       | 123,985           |       | 189,933               |       |
|                                                                            |       |              |       |                  |       |
|                                                                            |       | $                 | (7,993     | )                     | $          | (6,706 | ) |

 

6

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**6.****             ****Intangible assets**

 

The net book value of intangible assets is asfollows:

 
| ** **                         | ** ** | **Estimated** | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                         | ** ** | **Life**      | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| As of June 30,  2005:         |       |          |       |       |       |             |       |       |       |
|                               |       |          |       |       |       |             |       |       |       |
| Customer  contract backlog         |       | 13-24 mos.    |       | $          | 4,237      |             | $          | 3,933      |       | $ | 304 |   |
| Demolition  customer relationships |       | 7 years       |       | 1,995      |       | 428              |       | 1,567      |       |
| Software and  databases            |       | 7-10 years    |       | 1,209      |       | 213              |       | 996        |       |
|                               |       |          |       | $          | 7,441      |             | $          | 4,574      |       | $ | 2,867 |   |
| As of December 31,  2004:     |       |          |       |       |       |             |       |       |       |
|                               |       |          |       |       |       |             |       |       |       |
| Customer  contract backlog         |       | 13-24 mos.    |       | $          | 4,237      |             | $          | 3,747      |       | $ | 490 |   |
| Demolition  customer relationships |       | 7 years       |       | 1,995      |       | 285              |       | 1,710      |       |
| Software and  databases            |       | 7-10 years    |       | 1,209      |       | 142              |       | 1,067      |       |
|                               |       |          |       | $          | 7,441      |             | $          | 4,174      |       | $ | 3,267 |   |

 

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

 

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

 
| ** **                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Insurance                      |       | $                 | 6,073      |                  | $          | 5,022 |   |
| Payroll and  employee benefits |       | 4,510             |       | 4,700                 |       |
| U.S. income  and other taxes   |       | 3,790             |       | 2,564                 |       |
| Demolition  litigation expense |       | 1,275             |       | 1,275                 |       |
| Equipment  leases              |       | 913               |       | 719                   |       |
| Interest                       |       | 826               |       | 799                   |       |
| Interest  rate swap liability  |       | 717               |       | 662                   |       |
| Other                          |       | 1,074             |       | 1,935                 |       |
|                           |       |              |       |                  |       |
|                           |       | $                 | 19,178     |                  | $          | 17,676 |   |

 

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

 

The Company operates in two reportablesegments: dredging and demolition.  TheCompany’s financial reporting systems present various data for management torun the business, including profit and loss statements prepared according tothe segments presented.   Segmentinformation for the periods presented is as follows:

 

7

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| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **               | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Dredging**             |       |                   |       |                 |       |   |   |   |   |
| Contract  revenues       |       | $                      | 81,082     |                 | $          | 62,271 |   | $ | 169,346 |   | $ | 159,071 |   |
| Operating  income (loss) |       | 1,175                  |       | (2,275               | )          | (343 | ) | 4,961 |   |
|                     |       |                   |       |                 |       |   |   |   |   |
| **Demolition**           |       |                   |       |                 |       |   |   |   |   |
| Contract  revenues       |       | $                      | 12,309     |                 | $          | 9,833 |   | $ | 23,948 |   | $ | 16,980 |   |
| Operating  income        |       | 2,125                  |       | 743                  |       | 2,869 |   | 991 |   |
|                     |       |                   |       |                 |       |   |   |   |   |
| **Total**                |       |                   |       |                 |       |   |   |   |   |
| Contract  revenues       |       | $                      | 93,391     |                 | $          | 72,104 |   | $ | 193,294 |   | $ | 176,051 |   |
| Operating  income (loss) |       | 3,300                  |       | (1,532               | )          | 2,526 |   | 5,952 |   |

 

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

 

At June 30, 2005, the Company was contingentlyliable, in the normal course of business, for $13,694 in undrawn letters ofcredit, relating to foreign contract performance guarantees and insurancepayment liabilities.

 

Amboy Aggregates (“Amboy”), a joint venture in whichthe Company has a 50% equity interest, has a $2,000 revolving credit facilitywith a bank, which contains certain restrictive covenants, includinglimitations on the amount of distributions to its joint venture partners.  The Company has guaranteed 50% of theoutstanding borrowings and accrued interest. Amboy had no outstanding borrowings at June 30, 2005.

 

The Company finances certain key vessels used in itsoperations with operating lease arrangements with unrelated lessors, requiringannual rentals decreasing from $14,000 to $11,000 over the next fiveyears.  These operating leases containdefault provisions that are triggered by an acceleration of debt maturity underthe terms 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 atlease inception. The tax indemnifications do not have a contractual dollarlimit.  To date, no lessors have assertedany claims against the Company under these tax indemnification provisions.  The Company has additional rental commitmentsfor office facilities and dozer leases totaling approximately $1,000 to $2,000,annually.

 

Borrowings under the Company’s Credit Agreement aresecured by first lien mortgages on certain operating equipment of the Companywith a net book value of approximately $86,000 at December 31, 2004.  Additionally, the Company obtains itsperformance and bid bonds through an underwriting and indemnity agreement witha surety company that has been granted a security interest in a substantialportion of the Company’s operating equipment with a net book value ofapproximately $88,000 at December 31, 2004.  The Company also has an equipment term loan,which is secured by a first lien mortgage on certain operating equipment with anet book value of approximately $22,000 at December 31, 2004. The net bookvalue of equipment serving as collateral under these agreements at June 30,2005 does not materially differ from the values at December 31, 2004.  These agreements contain provisions requiringthe Company to maintain certain financial ratios and restricting the Company’sability to pay dividends, incur indebtedness, create liens, and take certainother actions.  Effective June 13,2005, the Company amended its Credit Agreement to increase its revolverborrowing availability by $5,000, with an offsetting

 

8

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decrease to its letter of credit capacity in the same amount.  The additional revolver borrowing capacity isavailable until the earlier of October 31, 2005 or such time that theCompany collects on a defined contract receivable, at which time, the revolverborrowing availability and letter of credit capacity revert back to the pre-amendmentterms.  The amendment also revised theCompany’s senior leverage ratio for the quarter ended June 30, 2005 to3:30 to 1:00 to allow it to utilize the additional borrowing capacity.  As a result of the Company’s net loss in thesecond quarter, the Company’s net worth remained below the minimum levelrequired in its underwriting and indemnity agreement with its surety company.The Company has obtained a waiver of this requirement for the quarter ended June 30,2005 from its surety company.  Therefore,the Company was in compliance with all required covenants at June 30, 2005.

 

The performance and bid bonds issued under thebonding agreement are customarily required for dredging and marine constructionprojects, as well as some demolition projects. Bid bonds are generally obtained for a percentage of bid value andaggregate amounts outstanding typically range from $5,000 to $10,000.  Performance bonds typically cover 100% of thecontract value with no maximum bond amounts. At June 30, 2005, the Company had outstanding performance bondsvalued at approximately $349,000; however the revenue value remaining inbacklog related to these projects totaled approximately $153,000 at June 30,2005.

 

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

 

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

 

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

 

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

 

On February 10, 2004, the Company was served with a subpoena toproduce documents in connection with a federal grand jury convened in theUnited States District Court for the District of South Carolina.  The Company believes the grand jury has beenconvened to investigate the United States dredging industry in connection withwork performed for the U.S. Army Corp of Engineers. The Company continues tocomply with the Justice department’s requests and Company management believesthat it has provided substantially all of the documents that have beenrequested to this point.  In addition tothe documents requested, seven employees or former employees of the Companyhave now been interviewed or have testified before the grand jury.  In connection with the investigation, theCompany continues to incur legal expenses, which totaled $900 and $1,800 forthe three and six months ended June 30, 2005.

 

In 1999, the Boston Housing Authority (“BHA”), for whom the Company’sdemolition business, NASDI, had worked, asserted that NASDI and itssubcontractors were responsible for improperly disposing of some contaminatedmaterials.  At the time the Companyacquired

 

9

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NASDIin 2001, it was believed that NASDI had sufficient recourse in the matter andthat any potential liability would be minimal. However, since 2001, certain of the insurance carriers that would beresponsible for this matter have gone bankrupt. Negotiations between the parties have continued to progress, and in thethird quarter of 2004, the case went before a judge in the Massachusetts courtsystem, who advised NASDI and the subcontractors to accept a settlement withthe BHA.  While NASDI could continue topursue the matter, it was determined that settlement may be more costeffective.  Therefore, in the thirdquarter of 2004, the Company recorded a $1,300 charge for NASDI’s share of thispotential settlement liability.

 

On January 19, 2005, the Company, along with its joint-venturepartners on the Port of Los Angeles Deepening Project, received a request forinformation from the United States Environmental Protection Agency (“EPA”)pursuant to section 308(a) of the Clean Water Act.  The EPA is investigating alleged dredging ofunauthorized material and unauthorized discharge of that material at variouslocations in federally regulated waters of the U.S. relating to thisproject.   The Company performed thisproject under a contract with the Los Angeles district of the Corps andbelieves it was in compliance with the contract specifications.  The Company has complied with the request forinformation and has received no further response from the EPA.  It is management’sunderstanding that the Corps is currently addressing this matter withthe EPA, as this is an industry-wide issue.

 

**10.   Supplemental condensed consolidating financial information**

 

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

 

10

----

 

**CondensedConsolidating Balance Sheet at June 30, 2005**

 
| ** **                                     | ** ** | **Guarantor**    | ** ** | **Other**        | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                     | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| **ASSETS**                                     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  assets:                               |       |             |       |             |       |            |       |             |       |             |       |
| Cash and  equivalents                          |       | $                | 366        |             | $          | 5               |       | $                | —     |             | $          | — |   | $ | 371 |   |
| Accounts  receivable, net                      |       | 65,820           |       | —           |       | —          |       | —           |       | 65,820           |       |
| Receivables  from affiliates                   |       | 8,234            |       | 2,876            |       | 4,540           |       | (15,650          | )          | —           |       |
| Contract  revenues in excess of billings       |       | 19,518           |       | —           |       | —          |       | —           |       | 19,518           |       |
| Inventories                                    |       | 17,965           |       | —           |       | —          |       | —           |       | 17,965           |       |
| Prepaid  expenses and other current assets     |       | 21,751           |       | —           |       | 1,766           |       | —           |       | 23,517           |       |
| Total  current assets                          |       | 133,654          |       | 2,881            |       | 6,306           |       | (15,650          | )          | 127,191          |       |
| Property and  equipment, net                   |       | 234,341          |       | —           |       | 13,188          |       | —           |       | 247,529          |       |
| Goodwill                                       |       | 103,563          |       | —           |       | —          |       | —           |       | 103,563          |       |
| Other intangible  assets, net                  |       | 2,867            |       | —           |       | —          |       | —           |       | 2,867            |       |
| Investments  in subsidiaries                   |       | 2,904            |       | —           |       | 284,944         |       | (287,848         | )          | —           |       |
| Notes  receivable from affiliates              |       | —           |       | —           |       | 22,702          |       | (22,702          | )          | —           |       |
| Inventories                                    |       | 11,278           |       | —           |       | —          |       | —           |       | 11,278           |       |
| Investments  in joint ventures                 |       | 8,227            |       | —           |       | —          |       | —           |       | 8,227            |       |
| Other assets                                   |       | 2,041            |       | —           |       | 10,776          |       | —           |       | 12,817           |       |
|                                           |       | $                | 498,875    |             | $          | 2,881           |       | $                | 337,916    |             | $          | (326,200 | ) | $ | 513,472 |   |
|                                           |       |             |       |             |       |            |       |             |       |             |       |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                          |       |             |       |             |       |            |       |             |       |             |       |
| Accounts  payable                              |       | $                | 51,811     |             | $          | —          |       | $                | —     |             | $          | — |   | $ | 51,811 |   |
| Payables to  affiliates                        |       | 2,313            |       | —           |       | 8,797           |       | (11,110          | )          | —           |       |
| Accrued  expenses                              |       | 14,157           |       | —           |       | 5,021           |       | —           |       | 19,178           |       |
| Billings in  excess of contract revenues       |       | 7,993            |       | —           |       | —          |       | —           |       | 7,993            |       |
| Current  maturities of long-term debt          |       | 6,490            |       | —           |       | —          |       | (4,540           | )          | 1,950            |       |
| Total  current liabilities                     |       | 82,764           |       | —           |       | 13,818          |       | (15,650          | )          | 80,932           |       |
| Long-term  debt                                |       | 18,525           |       | —           |       | 237,800         |       | —           |       | 256,325          |       |
| Notes  payable to affiliates                   |       | 22,702           |       | —           |       | —          |       | (22,702          | )          | —           |       |
| Deferred  income taxes                         |       | 83,013           |       | (23              | )          | 4,878           |       | —           |       | 87,868           |       |
| Other                                          |       | 4,299            |       | —           |       | 684             |       | —           |       | 4,983            |       |
| Total  liabilities                             |       | 211,303          |       | (23              | )          | 257,180         |       | (38,352          | )          | 430,108          |       |
| Minority  interests                            |       | —           |       | —           |       | —          |       | 1,819            |       | 1,819            |       |
| Stockholder’s  equity                     |       | 287,572          |       | 2,904            |       | 80,736          |       | (289,667         | )          | 81,545           |       |
|                                           |       | $                | 498,875    |             | $          | 2,881           |       | $                | 337,916    |             | $          | (326,200 | ) | $ | 513,472 |   |

 

11

----

 

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

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

 

12

----

 

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

 
| ** **                                 | ** ** | **Guarantor**    | ** ** | **Other**      | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Subsidiaries** | ** ** | **Subsidiary** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| ** **                                 | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Contract  revenues                         |       | $                | 93,391     |           | $          | —          |       | $                | —     |             | $          | — |   | $ | 93,391 |   |
| Costs of  contract revenues                |       | (81,992          | )          | —         |       | 34              |       | —           |       | (81,958          | )          |
| Gross profit                               |       | 11,399           |       | —         |       | 34              |       | —           |       | 11,433           |       |
| General and  administrative expenses       |       | (6,613           | )          | (15            | )          | (354            | )          | —           |       | (6,982           | )          |
| Subpoena-related  expenses                 |       | (931             | )          | —         |       | —          |       | —           |       | (931             | )          |
| Amortization  of intangible assets         |       | (220             | )          | —         |       | —          |       | —           |       | (220             | )          |
| Operating  income (loss)                   |       | 3,635            |       | (15            | )          | (320            | )          | —           |       | 3,300            |       |
| Interest  expense, net                     |       | (1,030           | )          | —         |       | (3,563          | )          | —           |       | (4,593           | )          |
| Equity in  (loss) earnings of subsidiaries |       | (10              | )          | —         |       | 2,111           |       | (2,101           | )          | —           |       |
| Equity in  earnings of joint ventures      |       | 928              |       | —         |       | —          |       | —           |       | 928              |       |
| Minority  interests                        |       | —           |       | —         |       | —          |       | (192             | )          | (192             | )          |
| Income  (loss) before income taxes         |       | 3,523            |       | (15            | )          | (1,772          | )          | (2,293           | )          | (557             | )          |
| Income tax  (expense) benefit              |       | (1,219           | )          | 5              |       | 303             |       | 963              |       | 52               |       |
| Net income  (loss)                         |       | $                | 2,304      |           | $          | (10             | )          | $                | (1,469     | )                | $          | (1,330 | ) | $ | (505 | ) |

 

**CondensedConsolidating Statement of Operations for the three months ended June 30,2004**

 
| ** **                           | ** ** | **Guarantor**    | ** ** | **Other**        | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                           | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **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 |       | (5,391           | )          | (15              | )          | 1               |       | —           |       | (5,405           | )          |
| Subpoena-related  expenses           |       | (852             | )          | —           |       | —          |       | —           |       | (852             | )          |
| 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  benefit                  |       | 538              |       | 8                |       | 3,969           |       | (2,112           | )          | 2,403            |       |
| Net loss                             |       | $                | (1,600     | )                | $          | (16             | )          | $                | (5,482     | )                | $          | 1,661 |   | $ | (5,437 | ) |

 

13

----

 

**Condensed Consolidating Statementof Operations for the six months ended June 30, 2005**

 
| ** **                                 | ** ** | **Guarantor**    | ** ** | **Other**      | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Subsidiaries** | ** ** | **Subsidiary** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| ** **                                 | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Contract  revenues                         |       | $                | 193,294    |           | $          | —          |       | $                | —     |             | $          | — |   | $ | 193,294 |   |
| Costs of  contract revenues                |       | (175,005         | )          | —         |       | 184             |       | —           |       | (174,821         | )          |
| Gross profit                               |       | 18,289           |       | —         |       | 184             |       | —           |       | 18,473           |       |
| General and  administrative expenses       |       | (13,340          | )          | (30            | )          | (367            | )          | —           |       | (13,737          | )          |
| Subpoena-related  expenses.                |       | (1,810           | )          |           |       |            |       |             |       | (1,810           | )          |
| Amortization  of intangible assets         |       | (400             | )          | —         |       | —          |       | —           |       | (400             | )          |
| Operating  income (loss)                   |       | 2,739            |       | (30            | )          | (183            | )          | —           |       | 2,526            |       |
| Interest  expense, net                     |       | (1,994           | )          | —         |       | (8,872          | )          | —           |       | (10,866          | )          |
| Equity in  earnings (loss) of subsidiaries |       | (20              | )          | —         |       | 808             |       | (788             | )          | —           |       |
| Equity in  earnings of joint ventures      |       | 762              |       | —         |       | —          |       | —           |       | 762              |       |
| Minority  interests                        |       | —           |       | —         |       | —          |       | (220             | )          | (220             | )          |
| Income  (loss) before income taxes         |       | 1,487            |       | (30            | )          | (8,247          | )          | (1,008           | )          | (7,798           | )          |
| Income tax  (expense) benefit              |       | (421             | )          | 10             |       | 2,609           |       | 423              |       | 2,621            |       |
| Net income  (loss)                         |       | $                | 1,066      |           | $          | (20             | )          | $                | (5,638     | )                | $          | (585 | ) | $ | (5,177 | ) |

 

**Condensed Consolidating Statement ofOperations for the six months ended June 30, 2004**

 
| ** **                                 | ** ** | **Guarantor**    | ** ** | **Other**      | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Subsidiaries** | ** ** | **Subsidiary** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **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       |       | (12,402          | )          | (30            | )          | (83             | )          | —           |       | (12,515          | )          |
| Subpoena-related  expenses                 |       | (865             | )          |           |       |            |       |             |       | (865             | )          |
| 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 ventures      |       | 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 | ) |

 

14

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**Condensed Consolidating Cash Flowsfor the six months ended June 30, 2005**

 
| ** **                                        | ** ** | **Guarantor**    | ** ** | **Other**      | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **Subsidiaries** | ** ** | **Subsidiary** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| ** **                                        | ** ** | ** **       | ** ** | ** **     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Operating  Activities**                         |       |             |       |           |       |            |       |             |       |             |       |
| Net cash  flows from operating activities         |       | $                | 853        |           | $          | (30             | )          | $                | (3,481     | )                | $          | — |   | $ | (2,658 | ) |
|                                              |       |             |       |           |       |            |       |             |       |             |       |
| **Investing  Activities**                         |       |             |       |           |       |            |       |             |       |             |       |
| Purchases of  property and equipment              |       | (7,082           | )          | —         |       | —          |       | —           |       | (7,082           | )          |
| Dispositions  of property and equipment           |       | 4,665            |       | —         |       | —          |       | —           |       | 4,665            |       |
| Net cash  flows from investing activities         |       | (2,417           | )          | —         |       | —          |       | —           |       | (2,417           | )          |
|                                              |       |             |       |           |       |            |       |             |       |             |       |
| **Financing  Activities**                         |       |             |       |           |       |            |       |             |       |             |       |
| Repayments  of long-term debt                     |       | (975             | )          | —         |       | —          |       | —           |       | (975             | )          |
| Borrowings  of revolving loans, net of repayments |       | —           |       | —         |       | 5,000           |       | —           |       | 5,000            |       |
| Net change  in accounts with affiliates           |       | 1,489            |       | 30             |       | (1,519          | )          | —           |       | —           |       |
| Repayment of  capital lease debt                  |       | (541             | )          | —         |       | —          |       | —           |       | (541             | )          |
| Net cash  flows from financing activities         |       | (27              | )          | 30             |       | 3,481           |       | —           |       | 3,484            |       |
|                                              |       |             |       |           |       |            |       |             |       |             |       |
| Net change  in cash and equivalents               |       | (1,591           | )          | —         |       | —          |       | —           |       | (1,591           | )          |
| Cash and  equivalents at beginning of period      |       | 1,957            |       | 5              |       | —          |       | —           |       | 1,962            |       |
| Cash and  equivalents at end of period            |       | $                | 366        |           | $          | 5               |       | $                | —     |             | $          | — |   | $ | 371 |   |

 

**Condensed Consolidating Statement of CashFlows for the six months ended June 30, 2004**

 
| ** **                                                                  | ** ** | **Guarantor**    | ** ** | **Other**        | ** ** | **GLD**         | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                  | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Corporation** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
|                                                                        |       |             |       |             |       |            |       |             |       |             |       |
| **Operating  Activities**                                                   |       |             |       |             |       |            |       |             |       |             |       |
| Net cash  flows from operating activities                                   |       | $                | 4,854      |             | $          | (20             | )          | $                | 2,492      |             | $          | — |   | $ | 7,326 |   |
|                                                                        |       |             |       |             |       |            |       |             |       |             |       |
| **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              |       |
| Cash  released from equipment escrow                                        |       | 2,451            |       | —           |       | —          |       | —           |       | 2,451            |       |
| Net cash  flows from investing activities                                   |       | (6,770           | )          | —           |       | —          |       | —           |       | (6,770           | )          |
|                                                                        |       |             |       |             |       |            |       |             |       |             |       |
| **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 |   |

 

15

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

 

###### **Statement Underthe Private Securities Litigation Reform Act**

###### ** **

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

 

###### **General**

###### ** **

TheCompany is the largest provider of dredging services in the United States.  Dredging generally involves the 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 43% over the last three fiscal years (2002 to2004).  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.dredging contractor with significant international operations, which averaged 16%of its contract revenues over the last three fiscal years.

 

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

 

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

 

16

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

###### ** **

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

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                            | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                   |       |                 |       |   |   |   |   |
| Contract  revenues                    |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Costs of  contract revenues           |       | (87.8                  | )          | (91.9                | )          | (90.4 | ) | (87.4 | ) |
| Gross profit                          |       | 12.2                   |       | 8.1                  |       | 9.6 |   | 12.6 |   |
| General and  administrative expenses  |       | (7.5                   | )          | (7.5                 | )          | (7.2 | ) | (7.1 | ) |
| Subpoena-related  expenses            |       | (1.0                   | )          | (1.1                 | )          | (0.9 | ) | (0.5 | ) |
| Amortization  of intangible assets    |       | (0.2                   | )          | (1.6                 | )          | (0.2 | ) | (1.6 | ) |
| Operating income  (loss)              |       | 3.5                    |       | (2.1                 | )          | 1.3 |   | 3.4 |   |
| Interest  expense, net                |       | (4.9                   | )          | (9.6                 | )          | (5.6 | ) | (6.6 | ) |
| Equity in  earnings of joint ventures |       | 1.0                    |       | 0.9                  |       | 0.4 |   | 0.5 |   |
| Minority  interest                    |       | (0.2                   | )          | —               |       | (0.1 | ) | — |   |
| Loss before  income taxes             |       | (0.6                   | )          | (10.8                | )          | (4.0 | ) | (2.7 | ) |
| Income tax  benefit                   |       | 0.1                    |       | 3.3                  |       | 1.3 |   | 0.6 |   |
| Net loss                              |       | (0.5                   | )%         | (7.5                 | )%         | (2.7 | )% | (2.1 | )% |
|                                  |       |                   |       |                 |       |   |   |   |   |
| EBITDA                                |       | 10.9                   | %          | 7.8                  | %          | 8.0 | % | 11.6 | % |

 

 “EBITDA,” as provided herein, represents net lossadjusted for net interest expense, income taxes, depreciation and amortizationexpense.  EBITDA should not be consideredan alternative to, or more meaningful than, amounts determined in accordancewith GAAP including: (a) operating income as an indicator of operatingperformance; or (b) cash flows from operations as a measure ofliquidity.   The Company presents EBITDAas additional information because it is among the bases upon which the Companyassesses its financial performance, and certain covenants in its borrowingarrangements are tied to similar measures. The Company believes EBITDA is auseful measure for the users of its financial statements because it providesinformation that can be used to evaluate the effectiveness of the Company’sbusiness from an operational perspective, exclusive of costs to finance itsactivities, income taxes, depreciation of operating assets and amortization ofintangible assets, none of which is directly relevant to the efficiency of itsoperations.  EBITDA is not calculatedidentically by all companies; therefore, the Company’s presentation of EBITDAmay not be comparable to similarly titled measures of other companies.  The following table reconciles net loss toEBITDA for the periods indicated:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                     | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                           |       |                   |       |                 |       |   |   |   |   |
| Net loss                       |       | $                      | (505       | )                    | $          | (5,437 | ) | $ | (5,177 | ) | $ | (3,679 | ) |
| Adjusted  for:                 |       |                   |       |                 |       |   |   |   |   |
| Interest  expense, net         |       | 4,593                  |       | 6,996                |       | 10,866 |   | 11,606 |   |
| Income tax  benefit            |       | (52                    | )          | (2,403               | )          | (2,621 | ) | (1,132 | ) |
| Depreciation  and amortization |       | 6,185                  |       | 6,451                |       | 12,330 |   | 13,576 |   |
| EBITDA                         |       | $                      | 10,221     |                 | $          | 5,607 |   | $ | 15,398 |   | $ | 20,371 |   |

 

17

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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** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **Revenues (in thousands)** | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dredging:                   |       |                   |       |                 |       |   |   |   |   |
| Capital -  U.S.             |       | $                      | 30,121     |                 | $          | 22,753 |   | $ | 59,778 |   | $ | 48,672 |   |
| Capital -  foreign          |       | 10,328                 |       | 17,395               |       | 16,231 |   | 45,161 |   |
| Beach                       |       | 22,439                 |       | 12,120               |       | 44,850 |   | 42,478 |   |
| Maintenance                 |       | 18,194                 |       | 10,003               |       | 48,487 |   | 22,760 |   |
| Demolition                  |       | 12,309                 |       | 9,833                |       | 23,948 |   | 16,980 |   |
|                        |       | $                      | 93,391     |                 | $          | 72,104 |   | $ | 193,294 |   | $ | 176,051 |   |

 
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **June 30,** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| **Backlog (in thousands)** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Dredging:                  |       |       |       |       |       |              |       |   |   |
| Capital -  U.S.            |       |       |       |       |       | $                 | 142,078    |   | $ | 94,953 |   |
| Capital -  foreign         |       |       |       |       |       | 115,846           |       | 19,165 |   |
| Beach                      |       |       |       |       |       | 31,039            |       | 3,660 |   |
| Maintenance                |       |       |       |       |       | 5,970             |       | 11,274 |   |
| Demolition                 |       |       |       |       |       | 16,581            |       | 12,596 |   |
|                       |       |       |       |       |       | $                 | 311,514    |   | $ | 141,648 |   |

 

Consolidatedrevenues for the second quarter of 2005 were $93.4 million, representing anincrease of $21.3 million or 29.5% over second quarter 2004 revenues of $72.1million.  Revenues for the first half of2005 were $193.3 million, an increase of $17.2 million or 9.8% over revenuesfor the first half of 2004 of $176.1 million.  The increase in 2005 revenues primarilyresulted from improved utilization of the Company’s dredging fleet,particularly relative to the second quarter of 2004.  Utilization declined significantly in thesecond quarter of 2004 due to the funding constraints experienced by the ArmyCorps of Engineers (Corps), which led to a slow down in the bidding activitythrough the first half of 2004 and postponement of certain work in the Company’sbacklog at that time.  As evidenced bythe active 2005 domestic bid market to date, it appears that the funding issuesat the Corps are being moderated; therefore, the Company’s utilization hasimproved through the first half of 2005 as it has been able to perform onprojects that had previously been postponed or have since been added tobacklog. The Company’s second quarter and year-to-date 2005 revenues have alsobenefited from increased activity in the demolition sector in recent months.

 

TheCompany’s gross profit margin for the quarter ended June 30, 2005 improvedto 12.2%, compared to 8.1% for the same quarter of 2004, primarily as a resultof the higher utilization relative to the level of fixed costs, as well as improvedmargins inherent in the dredging projects performed during the 2005period.  However, gross profit margin forthe six months ended June 30, 2005 totaled 9.6%, compared to 12.6% for thesame period of 2004.  The 2005 six-monthmargin reflects the impact of reduced earnings realized in the first quarterwhen the Company performed on a number of projects with lower than typicalmargins, due to the highly competitive market conditions when they were bid.

 

Capitalprojects include large port deepenings and other infrastructure projects.  Domestic capital dredging revenue increased$7.4 million and $11.1 million in the second quarter and first half of 2005,respectively, as compared to the same periods of 2004.  The Company’s domestic capital

 

18

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revenues of $30.1 million in the second quarter of 2005 were substantiallygenerated by continuing work on port deepening projects in Oakland, California;Arthur Kill Channel, New York; Port Jersey, New Jersey, which is beingperformed by a subcontractor; and Wilmington, North Carolina, which had beenpreviously postponed due to the Corps’ funding issues.  During the quarter, the Company also begandrilling and blasting for the Miami, Florida harbor deepening project andcommenced the first phase of the Columbia River deepening project inOregon.  Foreign capital revenue in the secondquarter and first half of 2005 decreased $7.1 million and $28.9 million,respectively, compared to the same 2004 periods as a result of the mix ofprojects underway in the corresponding periods.  The 2005 second quarter’s foreign revenueswere substantially generated by continued work on the Durrat land developmentproject in Bahrain, which began in the fourth quarter of 2004 and will continuethrough 2006, along with work performed in Barcelona, Spain by ourforeign-based hopper dredge.  The 2004quarter included work on the Hidd terminal project in Bahrain, which wascompleted in the first quarter of 2005.

 

Beachnourishment projects include rebuilding of shoreline areas that have beendamaged by storm activity or ongoing erosion. Second quarter 2005 revenues from beach nourishment projects totaled$22.4 million, a $10.3 million increase over the same period of 2004, bringingyear-to-date beach revenue to $44.9 million, which is slightly increased overthe 2004 year-to-date amount of $42.5 million.  The increase is to be expected, given thatbeach nourishment work has represented approximately 40% of the 2005year-to-date bid market, compared to only 15% over the last three years (2002to 2004), in part because of the extensive damage wrought by hurricanes in 2004.During the 2005 second quarter, the Company substantially completedrenourishment of the Rehobeth and Dewey beaches in Delaware, which were inbacklog at year-end, and worked on four beach projects in Florida, which wereadded to backlog in the first half of 2005. Of these, the two smaller projectswere concluded during the quarter, but work on the larger Broward and St. John’sCounty beaches will continue into the fourth quarter of 2005.

 

Maintenanceprojects include routine dredging of ports, rivers and channels to remove theregular build up of sediment. Maintenance revenues totaled $18.2 million in the second quarter of 2005,compared to $10.0 million for the same 2004 period. The 2005 quarter is on parwith recent quarters, which have generally been higher than in previous yearssince the Company has taken on more maintenance work to fill in while thecapital work has declined due to the Corp’s funding difficulties. The secondquarter’s revenues were substantially generated by the harbor maintenanceproject in Tampa, Florida and two equipment rental projects along theMississippi River, all of which were completed in the quarter.

 

NASDI’sdemolition revenues for the second quarter and first six months of 2005 totaled$12.3 million and $23.9 million, respectively, compared to $9.8 million and $17.0million for the same periods of 2004, with the increase driven by the generalmarket improvement, such that NASDI has experienced less competition for thejobs its been bidding.  NASDI’s revenuesfor the quarter were generated by a number of small to mid-size projects, aswell as three larger projects begun in 2005 which each contributed in excess of$1.0 million to the quarter.

 

TheCompany’s general and administrative expenses totaled $7.0 million for the secondquarter of 2005, which compares to $5.4 million for same period of 2004,primarily as a result of increased incentive compensation, which had beenreduced in the 2004 period as the Company’s 2004 performance expectationsdeclined.  In the second quarter of 2005,the Company incurred $0.9 million of legal expenses related to the federalsubpoena matter, as discussed further in Note 9 to the Financial Statements.

 

TheCompany’s amortization expense declined to $0.2 million for the second quarterof 2005, from $1.1 million for the same quarter of 2004, since the mostsignificant portion of the

 

19

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Company’sintangible assets, related to contract backlog acquired at the time of theCompany’s sale in December 2003, was primarily amortized in 2004.

 

Netinterest expense for the second quarter and first half of 2005 was $4.6 millionand $10.9 million, respectively, compared to $7.0 million and $11.6 million forthe same periods of 2004.  Cash interestexpense increased by approximately $1.0 million in the second quarter of 2005,compared to the same period of 2004, as a result of higher underlying interestrates and larger spreads on the Company’s variable rate debt, coupled with moreaverage outstanding borrowings on the Company’s revolver facility.  Total interest for the second quarter of 2005 alsoreflects a non-cash benefit of $1.0 million due to the valuation of the Company’sfixed-to-floating interest rate swap, which was put in place in February of2004 (as described in Note 3).  Thiscompares to a non-cash interest expense of $2.4 million for the 2004 quarter onthis same swap.

 

TheCompany generated a net loss of $0.5 million and $5.2 million for the quarter andsix months ended June 30, 2005, respectively, compared to a net loss of$5.4 million and $3.7 million, for the same 2004 periods.  As mentioned previously, the second quarterof 2005 experienced improved utilization and margins, relative to the secondquarter of 2004, which was significantly impacted by the decline in the bidmarket and funding constraints at that time.  However, on a year-to-date basis, the 2005six-month period reflects the reduced earnings from the first quarter, whilethe 2004 six-month period benefited from the strong 2004 first quarter resultsachieved as the Company performed work from its backlog that had not beenaffected by the decline in the bid market and funding conditions.

 

EBITDA(as defined on page 17) was $10.2 million and $15.4 million for thequarter and six months ended June 30, 2005, respectively, compared to $5.6million and $20.4 million for the same periods of 2004, with the fluctuationsfrom period to period also attributable to the variations in utilization andmargins, as discussed previously.

 

**Bidding Activity and Backlog**

 

TheCompany’s contract backlog represents management’s current estimate of therevenues that will be realized under the portion of the contracts remaining tobe performed.  Such estimates are subjectto fluctuations based upon the amount of material actually dredged, as well asfactors affecting the time required to complete the job. In addition, because asubstantial portion of the Company’s backlog relates to government contracts,the Company’s backlog can be canceled at any time without penalty.  However, the Company can generally recoverthe actual committed costs and profit on work performed up to the date of cancellation.  Consequently, backlog is not necessarilyindicative of future revenues. The Company’s backlog includes only thoseprojects for which the Company has obtained a signed contract with thecustomer.

 

The2005 second quarter domestic dredging bid market, representing work awardedduring the period, totaled $154 million, bringing the year-to-date bid marketto $369 million, which is in line with the average annual bid market over thelast three years (2002 to 2004) of approximately $690 million.  Over a third of the second quarter’s bidsrelated to seven beach nourishment projects, which was consistent with the firstquarter and was expected given the severe hurricane season experienced in 2004and the need to replenish numerous beaches along the Florida coastlines.  Great Lakes won two of these projects,including a $15 million project in St. John’s County, Florida, and theremainder was won by competitors.  Thequarter’s activity also included the first phase of the Columbia Riverdeepening project, which the Company won for approximately $11 million.  This project was originally bid with a largerscope, and then cancelled when the bids were in excess of the Corp’s allowable costestimate.  The Company was low bidderunder the original scope and again under the final awarded contract.  This project incurred numerous environmentaldelays, but those issues appear to have been addressed and the

 

20

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work is moving forward.   Despite the volume of work that has now comeout for bid in the first and second quarters, much of the beach and maintenancework was again won by competitors at relatively low pricing.  As a result, the Company won only 21% of thesecond quarter’s awards, as it has continued to bid these opportunities with whatit believes to be more reasonable margins. While the pricing was very low for work let for bid in the first quarterand continuing into the second quarter, certain projects bid towards the end ofthe second quarter and into July have been bid with better pricing.  Thus, it appears that the Company’s competitorsmay be bidding more rationally.  TheCompany won two beach nourishment bids in July with higher margins thanexperienced in recent quarters. Management also believes that there are anumber of domestic capital opportunities scheduled for bidding over theremainder of the year, for which the Company’s equipment should be well-suited.

 

Despitethe continued competitive domestic bidding environment, the Company has beenable to maintain a solid dredging backlog with contract margins improving fromthe levels experienced in recent quarters. Dredging backlog at June 30, 2005 increased to $294.9 million.  This compares to $241.7 million at March 31,2005 and $129.1 million at June 30, 2004. The Company’s dredging backlog at June 30, 2005 includesapproximately $83 million for the two-year Durrat dredging and reclamationproject in Bahrain, since the full scope of this project was awarded in thesecond quarter.  The Company’s June 30,2005 recorded backlog does not reflect approximately $22 million of low bidspending award and other options pending on projects currently in backlog.  Demolition services backlog improved to $16.6million at June 30, 2005, compared to $15.5 million at March 31, 2005and $12.6 million at June 30, 2004, again indicative of the improvingmarket for demolition services in the greater-Boston area.

 

Themajority of the Company’s June 30, 2005 dredging backlog is represented bydomestic and foreign capital dredging work, and the Company expects to performon a number of these projects over the remainder of the year, including the deepeningprojects at Arthur Kill, Wilmington, Miami and the Columbia River, domestically,and other capital projects in Bahrain and Ocean Cay, Bahamas, abroad.   Additionally,the Company is hopeful that it may begin the second phase of the port deepeningproject in Brunswick, Georgia in the fourth quarter of 2005, whereas previouslythis work was not expected to commence until the fall of 2006, due to the Corps’funding constraints.  Beach backlog of$31.0 million at June 30, 2005 also represents a solid level for theCompany and will increase further with award of the two projects won inJuly.  The Company’s maintenance backlogdeclined to $6.0 million at June 30, 2005, as a result of the competitivepricing in this area and the Company’s current equipment commitments to capitaland beach projects.

 

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

###### ** **

TheWater Resources Development Act (“WRDA”) forms the basis for authorizing theCorps’ civil works projects, including the “Deep Port” projects, a number ofwhich were authorized by the 1986 WRDA and subsequent bills.  No act was passed in 2004, but a 2005 versionof the WRDA has already been introduced and passed a House vote in July.  This version includes authorization ofadditional federal cost sharing to 53 feet for on-going port deepeningprojects, which could encourage some ports to pursue additional deepeningprojects as they would get more federal funding.  The 2005 version of the bill has beenintroduced in the Senate, and its passage is still possible in the currentyear, but management believes it is likely to receive lower priority than othermeasures currently before the Senate.   Passage of a new WRDA is not critical at thispoint with respect to project authorizations

 

Asnoted previously, the Company won the first phase of the Columbia Riverdeepening project in Oregon and expects to complete this project in the thirdquarter of this year.   A number of otherauthorized Deep Port projects valued in excess of $100 million are stillscheduled to bid

 

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overthe remainder of 2005, including the next phase of the Columbia Riverdeepening, the initial phase of the Port Jersey, New Jersey 50’ deepeningproject, a project to deepen the entrance to the Ambrose Channel in New York to53’, and the next two phases of the Oakland, California 50’ deepening project.

 

TheCorps’ fiscal year 2006 budget, which runs from October 1, 2005 to September 30,2006, has now passed both the House and Senate. The bill originally passed the House at a reduced level from fiscal year2005, but was marked up by the Senate and now stands at $5.3 billion, which isa slight increase over the prior year appropriations.  Although dredging only makes up a portion ofthe Corps’ total appropriations, feedback from industry associations has beenpositive, as the bill, as currently drafted, provides funds for various newstudies, which provide the basis for future new construction.  Additionally, the bill provides sustainedlevels of funding for construction projects for ports, navigation channels, andbeach and environmental restoration, and reaffirms congressional support forfederal funding of the beach nourishment program.

 

Asanticipated, a large volume of beach work was bid through the first half of2005.  Much of the work in Florida isbeing funded by the emergency supplemental bill passed towards the end of 2004to pay for damage from the 2004 hurricanes. Those funds have now been committed, but current bidding schedulescontinue to indicate an additional $100 million of beach work to be bid throughthe remainder of 2005.  Given the statusof the Corps’ fiscal year 2006 budget, it appears that the federal portion ofthe funding is being appropriated, which bodes well for the bid market forbeach nourishment projects.  Manycounties and localities have secured their portion of the funding and are eagerto see these projects through.

 

Withrespect to the Company’s foreign markets, as mentioned previously, the Companywas awarded the full scope of work related to the Durrat land developmentproject in Bahrain.  The initial phase ofthis project began in the fourth quarter of 2004, and the full scope of the projectwill provide work for two years for two large hydraulic dredges and one smallhydraulic dredge.  The contract is beingperformed in a joint-venture with the same Bahraini contractor that the Companypartnered with for the HIDD contract in Bahrain, and this company is performingthe civil works.  Also, the Company is aminority partner in a consortium that won a large land reclamation project toexpand the airport in Doha, Qatar. However, due to scheduling conflicts, little of the Company’s equipmentis planned for the execution of the project. The Company continues to follow bidding prospects for a number of largeland reclamation projects in the Middle East – particularly in Qatar, Oman, andBahrain.  The Company often partners withforeign construction or dredging firms to bid on this work, and these projectsoften take a significant amount of time and effort to negotiate the final termsand scope.

 

Insummary, the Company’s utilization and earnings did improve through the secondquarter, as it had anticipated.  Whilethe bidding activity was robust through the first half of the year, pricing hasremained competitive.  Given the Company’scurrent backlog level, it has been able to maintain a rational bidding strategyand has taken on new work with improving margins compared to those on certainprojects won in 2004, when the Company, along with others in the industry, hadexcess capacity.   The Company continuesto maintain a solid level of backlog, with its recent foreign and domesticawards, and is in the midst of performing the deepening projects in ArthurKill, New York; Miami Harbor; Florida; Wilmington, North Carolina; and theColumbia River, all of which are progressing well.  Despite this, it does appear that the Corpsdistricts are still being constrained with respect to funding new andcontinuing projects, and it is unclear where they stand in their internalreorganization efforts and what demands on their funds and resources may stillbe coming from the reconstruction efforts in Iraq.  However, assuming that the bidding activitycontinues at a similar pace through the second half of 2005, the Company shouldbe able to take on additional backlog at better margin levels then experiencedrecently.

 

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

###### ** **

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

 

TheCompany’s net cash flows used in operating activities for the six months ended June 30,2005 were $2.7 million, compared to a source of cash of $7.3 million for the sixmonths ended June 30, 2004.  Thefluctuation is a result of reduced earnings in the 2005 period, as well as thenormal timing differences on the recognition and billing of revenues relativeto the current level of activity.  Additionally,in 2004, the Company’s cash flows benefited from the receipt of income taxrefunds in connection with the tax deductions related to the sale of theCompany in December of 2003.

 

TheCompany’s net cash flows used in investing activities for the six months ended June 30,2005 totaled $2.4 million, compared to $6.8 million for the six months ended June 30,2004.  The use of cash relates primarilyto equipment acquisitions and capital improvements to existing equipment.  The Company’s 2005 proceeds from dispositionsof property and equipment includes $4.4 million for a rock barge constructed bythe Company and then sold and leased back under an operating lease in June of2005.  The Company’s capital expendituresin the 2004 period included spending for construction of a barge, which wasfunded by $2.5 million of escrow proceeds remaining from a like-kind exchangetransaction in connection with the sale of two tugboats in 2003.

 

TheCompany’s net cash flows generated by financing activities for the six monthsended June 30, 2005 totaled $3.5 million, as a result of net borrowingsunder its revolver necessary to fund working capital needs during the period.  This compares to a use of cash of $2.6million for the six months ended June 30, 2004, since the Company generatedsufficient cash during this period to make a $2.5 million voluntary repaymenton its term bank loan.

 

TheCompany’s Credit Agreement and Equipment Term Loan (collectively, “seniorcredit agreements”) and its Underwriting and Indemnity Agreement (“bondingagreement”) with its surety provider contain certain provisions that requirethe Company to maintain a minimum net worth and certain other financial ratios,limit payment of dividends and restrict certain other transactions.  Given the Company’s reduced earnings throughthe first half of 2005, coupled with increased working capital investmentrequired by certain projects, in early June, Company management becomeconcerned that it may require additional liquidity to meet its cash needsthrough the latter part of June. Therefore, effective June 13, 2005, the Company amended its CreditAgreement to increase its revolver borrowing availability by $5.0 million, withan offsetting decrease to its letter of credit capacity in the sameamount.  The additional revolverborrowing capacity is available until the earlier of October 31, 2005 orsuch time that the Company collects on a defined contract receivable, at whichtime, the revolver borrowing availability and letter of credit capacity revertback to the pre-amendment terms.  Theamendment also revised the Company’s senior leverage ratio for the quarterended June 30, 2005 to 3:30 to 1:00 to allow it to utilize the additionalborrowing capacity.  Subsequent to theamendment, the Company was able to accelerate collection of certain receivablesby the end of the month so that at June 30, its revolver borrowingstotaled only $5.0 million, which was lower than had been anticipated, so it hasnot yet needed to make use of the additional capacity made available by the amendment.

 

Asa result of the Company’s net loss in the second quarter, the Company’s networth remained below the minimum level required in its bonding agreement withits surety company.  Therefore,

 

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the Company obtained a waiver of this requirement from its surety company forthe quarter ended June 30, 2005. The Company was otherwise in compliance with all of the financialcovenants under its senior credit agreements and bonding agreement at June 30,2005.

 

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

 

TheCompany believes its anticipated cash flows from operations and currentavailable credit under its revolving credit facility will be sufficient to fundthe Company’s operations and its revised capital expenditures, and meet itscurrent debt service requirements of approximately $20 million for the year.  TheCompany’s ability to fund its working capital needs, planned capitalexpenditures and scheduled debt payments, and to comply with all of thefinancial covenants under its senior credit agreements and bonding agreement,depends on its future operating performance and cash flow, which in turn, aresubject to prevailing economic conditions and to financial, business and otherfactors, some of which are beyond the Company’s control.

 

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

###### ** **

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

 

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

###### ** **

Themarket risk of the Company’s financial instruments as of June 30, 2005 hasnot significantly changed since December 31, 2004.  The market risk profile of the Company on December 31,2004 is disclosed in the Company’s 2004 Annual Report on Form 10-K.

 

###### **Item 4.**  Controls and Procedures

###### ** **

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

 

*(b) Changes in Internal Controls.*  Pursuantto an internal investigation conducted in the first quarter of 2005, Companymanagement discovered that an employee, whose responsibilities were

 

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primarily related to contractual issues includingsubcontractors, agents and claims on certain foreign projects, had embezzled fundsfrom the Company over a period from 2001 to 2004.   The employee, who was not an officer of theCompany, was terminated on April 4, 2005. The loss resulting from the employee’s embezzlement was covered byinsurance, subject to a $50,000 deductible, and the Company collected the fullinsurance proceeds relating to this matter in June of 2005.

 

Inresponse to these control deficiencies, during the quarter ended June 30,2005, the Company revised certain of its internal control procedures relatingto its vendor payments and expenditure review process and reissued certainexisting procedures to reinforce their consistent application.

 

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

###### ** **

###### **Item 6.** Exhibits

###### ** **

| 10.1 |   | Third Amendment to Credit Agreement dated  as of August 1, 2005, by and among Great Lakes Dredge & Dock  Company (the “Borrower”), Great Lakes Dredge & Dock Corporation (the  “Guarantor”), and General Electric Capital Corporation (the “Lender”). |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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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##### **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 10, 2005                           | By: | /s/ Deborah A. Wensel |   |
|   |                                           |   | Deborah A. Wensel |
|   |                                           |   | Senior Vice President |
|   |                                           |   | and Chief Financial Officer |
|   |                                           |   |   |
|   |                                           | (Principal Financial and Accounting Officer and |
|   |                                           | Duly Authorized Officer) |
|        |                                                |  |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Document  Description**                                                                                                                                                                                                                                                                                  |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                 |
| 10.1       |       | Third Amendment to Credit Agreement dated  as of August 1, 2005, by and among Great Lakes Dredge & Dock  Company (the “Borrower”), Great Lakes Dredge & Dock Corporation (the  “Guarantor”), and General Electric Capital Corporation (the “Lender”). |
| 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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