**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2004**

** **

**OR**

 

**o********                            ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from         to        **

 

**Commissionfile number:**

**333-64687**

 

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

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     | **13-3634726**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                             |                                  |
| **2122 York  Road, Oak Brook, IL**                               | **60523**                             |
| (Address of principal  executive offices)                        | (Zip Code)                            |
|                                                             |                                  |
| **(630)  574-3000**                                              |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý  Yes  o  No

 

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

o  Yes  ý  No

 

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

 

As of November 12, 2004, there were outstanding 1,000 shares of CommonStock and zero shares of Preferred Stock.

 

 

----

 

**Great Lakes Dredge & Dock Corporation and Subsidiaries**

**Quarterly Report Pursuant to Section 13 or15(d) of the**

### **SecuritiesExchange Act of 1934**

### **For theQuarterly Period ended September 30, 2004**

 

##### **INDEX**

 
| ** **        | ** **                | **Page**                                                                                                          |
|-------------------|---------------------------|-------------------------------------------------------------------------------------------------------------------|
| **Part I**        | **Financial Information** |                                                                                                              |
|              |                      |                                                                                                              |
|              | Item 1                    | Financial Statements  (Unaudited)                                                                                 |   |
|              |                      |                                                                                                              |   |
|              |                      | Condensed  Consolidated Balance Sheets at September 30, 2004 and December 31, 2003                                | 2 |
|              |                      |                                                                                                              |   |
|              |                      | Condensed  Consolidated Statements of Operations for the Three and Nine Months ended  September 30, 2004 and 2003 | 3 |
|              |                      |                                                                                                              |   |
|              |                      | Condensed  Consolidated Statements of Cash Flows for the Nine Months ended September 30,  2004 and 2003           | 4 |
|              |                      |                                                                                                              |   |
|              |                      | Notes  to Unaudited Condensed Consolidated Financial Statements                                                   | 5 |
|              |                      |                                                                                                              |   |
|              | Item  2              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       | 17 |
|              |                      |                                                                                                              |   |
|              | Item  3              | Quantitative  and Qualitative Disclosures About Market Risk                                                       | 27 |
|              |                      |                                                                                                              |   |
|              | Item 4                    | Controls and  Procedures                                                                                          | 27 |
|              |                      |                                                                                                              |   |
| **Part II**       | **Other Information**     |                                                                                                              |
|              |                      |                                                                                                              |
|              | Item 1                    | Legal Proceedings                                                                                                 | 27 |
|              |                      |                                                                                                              |   |
|              | Item 6                    | Exhibits                                                                                                          | 27 |
|              |                      |                                                                                                              |   |
| **Signature**     | 28                        |
|              |                      |
| **Exhibit Index** | 29                        |

 

----

 

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

 

**Great Lakes Dredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Balance Sheets**

**(Unaudited)**

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

** **
| ** **                                                         | ** ** | **Successor Basis**     | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| **Assets**                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Current assets:                                                    |       |                    |       |   |   |
| Cash and equivalents                                               |       | $                       | 7,198      |   | $ | 2,775 |   |
| Accounts receivable, net                                           |       | 46,458                  |       | 64,869 |   |
| Contract revenues in excess of billings                            |       | 12,500                  |       | 11,236 |   |
| Inventories                                                        |       | 15,185                  |       | 13,603 |   |
| Prepaid expenses and other current assets                          |       | 22,362                  |       | 21,178 |   |
| Total current assets                                               |       | 103,703                 |       | 113,661 |   |
| Property and equipment, net                                        |       | 264,978                 |       | 264,132 |   |
| Goodwill                                                           |       | 103,514                 |       | 103,917 |   |
| Other intangible assets, net                                       |       | 3,799                   |       | 7,441 |   |
| Inventories                                                        |       | 11,278                  |       | 10,968 |   |
| Investments in joint ventures                                      |       | 7,559                   |       | 7,551 |   |
| Other assets                                                       |       | 11,742                  |       | 15,274 |   |
| Total assets                                                       |       | $                       | 506,573    |   | $ | 522,944 |   |
|                                                               |       |                    |       |   |   |
| **Liabilities  and Stockholder’s Equity**                     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Current liabilities:                                               |       |                    |       |   |   |
| Accounts payable                                                   |       | $                       | 36,470     |   | $ | 36,991 |   |
| Accrued expenses                                                   |       | 16,376                  |       | 15,456 |   |
| Billings in excess of contract revenues                            |       | 7,571                   |       | 8,808 |   |
| Current maturities of long-term debt                               |       | 1,950                   |       | 1,950 |   |
| Total current liabilities                                          |       | 62,367                  |       | 63,205 |   |
| Long-term debt                                                     |       | 252,788                 |       | 256,750 |   |
| Deferred income taxes                                              |       | 92,537                  |       | 96,626 |   |
| Other                                                              |       | 7,601                   |       | 7,632 |   |
| Total liabilities                                                  |       | 415,293                 |       | 424,213 |   |
| Minority interest                                                  |       | 1,627                   |       | 1,731 |   |
| Commitments and contingencies (Note 9)                             |       | —                  |       | — |   |
| Stockholder’s equity:                                         |       |                    |       |   |   |
| Common stock, $.01 par value; 1,000 shares  issued and outstanding |       | —                  |       | — |   |
| Additional paid-in capital                                         |       | 97,000                  |       | 97,000 |   |
| Accumulated deficit                                                |       | (8,311                  | )          | — |   |
| Accumulated other comprehensive income                             |       | 964                     |       | — |   |
| Total stockholder’s equity                                    |       | 89,653                  |       | 97,000 |   |
| Total liabilities and stockholder’s equity                    |       | $                       | 506,573    |   | $ | 522,944 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

2

----

 

**Great Lakes Dredge & Dock Corporation and Subsidiaries**

### **CondensedConsolidated Statements of Operations**

**(Unaudited)**

**(in thousands)**

** **
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**               | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **                          | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                |       |                                  |       |                                 |       |   |   |   |   |
| Contract revenues                   |       | $                                     | 66,473     |                                 | $          | 98,104 |   | $ | 242,524 |   | $ | 302,161 |   |
| Costs of contract revenues          |       | 62,144                                |       | 80,001                               |       | 215,951 |   | 250,912 |   |
| Gross profit                        |       | 4,329                                 |       | 18,103                               |       | 26,573 |   | 51,249 |   |
| General and administrative expenses |       | 5,719                                 |       | 6,768                                |       | 18,234 |   | 20,208 |   |
| Subpoena-related expenses           |       | 698                                   |       | —                               |       | 1,563 |   | — |   |
| Demolition litigation expense       |       | 1,275                                 |       | —                               |       | 1,275 |   | — |   |
| Amortization of intangible assets   |       | 730                                   |       | —                               |       | 3,642 |   | — |   |
| Operating income (loss)             |       | (4,093                                | )          | 11,335                               |       | 1,859 |   | 31,041 |   |
| Interest expense, net               |       | (3,428                                | )          | (5,181                               | )          | (15,034 | ) | (15,374 | ) |
| Equity in earnings of joint venture |       | 727                                   |       | 319                                  |       | 1,558 |   | 1,063 |   |
| Minority interests                  |       | 92                                    |       | (72                                  | )          | 104 |   | (2 | ) |
| Income (loss) before income taxes   |       | (6,702                                | )          | 6,401                                |       | (11,513 | ) | 16,728 |   |
| Income tax benefit (expense)        |       | 2,070                                 |       | (2,836                               | )          | 3,202 |   | (7,183 | ) |
| Net income (loss)                   |       | $                                     | (4,632     | )                                    | $          | 3,565 |   | $ | (8,311 | ) | $ | 9,545 |   |
|                                     |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

Seenotes to unaudited condensed consolidated financial statements.

 

3

----

 

**Great Lakes Dredge & Dock Corporation and Subsidiaries**

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

**(Unaudited)**

**(in thousands)**

** **
| ** **                                                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                             | ** ** | **Successor  Basis**                 | ** ** | **Predecessor  Basis** | ** ** |
| ** **                                                                                             | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **Operating Activities**                                                                               |       |                                 |       |   |   |
| Net income (loss)                                                                                      |       | $                                    | (8,311     | ) | $ | 9,545 |   |
| Adjustments to reconcile net income (loss)  to net cash flows from operating activities:               |       |                                 |       |   |   |
| Depreciation and amortization                                                                          |       | 19,637                               |       | 12,202 |   |
| Earnings of joint ventures                                                                             |       | (1,558                               | )          | (1,063 | ) |
| Minority interests                                                                                     |       | (104                                 | )          | 2 |   |
| Deferred income taxes                                                                                  |       | (4,333                               | )          | 1,567 |   |
| Gain on dispositions of property and  equipment                                                        |       | (357                                 | )          | (805 | ) |
| Other, net                                                                                             |       | 1,255                                |       | 1,824 |   |
| Changes in assets and liabilities:                                                                     |       |                                 |       |   |   |
| Accounts receivable                                                                                    |       | 18,411                               |       | (7,307 | ) |
| Contract revenues in excess of billings                                                                |       | (1,264                               | )          | (1,639 | ) |
| Inventories                                                                                            |       | (1,892                               | )          | (1,913 | ) |
| Prepaid expenses and other current assets                                                              |       | (1,550                               | )          | 3,158 |   |
| Accounts payable and accrued expenses                                                                  |       | 399                                  |       | 2,707 |   |
| Billings in excess of contract revenues                                                                |       | (1,237                               | )          | (6,103 | ) |
| Other noncurrent assets and liabilities                                                                |       | (26                                  | )     | — |   |
| Net cash flows from operating activities                                                               |       | 19,070                               |       | 12,175 |   |
|                                                                                                   |       |                                 |       |   |   |
| **Investing Activities**                                                                               |       |                                 |       |   |   |
| Purchases of property and equipment                                                                    |       | (15,691                              | )          | (14,179 | ) |
| Dispositions of property and equipment                                                                 |       | 675                                  |       | 838 |   |
| Reclass of cash held in escrow to fund  construction of a barge under a like-kind exchange transaction |       | 2,451                                |       | — |   |
| Adjustment to acquisition price of  Predecessor common and preferred shares                            |       | 527                                  |       | — |   |
| Distribution from Amboy joint venture                                                                  |       | 1,550                                |       | — |   |
| Disposition of interest in Riovia  investment                                                          |       | —                               |       | 1,200 |   |
| Purchase portion of minority interests’  share in North American Site Developers, Inc.            |       | —                               |       | (75 | ) |
| Equity investment in land                                                                              |       | —                               |       | (1,047 | ) |
| Net cash flows from investing activities                                                               |       | (10,488                              | )          | (13,263 | ) |
|                                                                                                   |       |                                 |       |   |   |
| **Financing Activities**                                                                               |       |                                 |       |   |   |
| Repayments of long-term debt                                                                           |       | (3,962                               | )          | (9,238 | ) |
| Borrowings under revolving loans, net of  repayments                                                   |       | —                               |       | 10,000 |   |
| Financing fees                                                                                         |       | (197                                 | )          | (403 | ) |
| Repayment on notes receivable from  stockholders                                                       |       | —                               |       | 19 |   |
| Net cash flows from financing activities                                                               |       | (4,159                               | )          | 378 |   |
| Net change in cash and equivalents                                                                     |       | 4,423                                |       | (710 | ) |
| Cash and equivalents at beginning of period                                                            |       | 2,775                                |       | 1,456 |   |
| Cash and equivalents at end of period                                                                  |       | $                                    | 7,198      |   | $ | 746 |   |
|                                                                                                   |       |                                 |       |   |   |
| **Supplemental Cash Flow Information**                                                                 |       |                                 |       |   |   |
| Cash paid for interest                                                                                 |       | $                                    | 9,666      |   | $ | 18,777 |   |
| Cash paid for taxes                                                                                    |       | $                                    | —     |   | $ | 6,294 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

 

4

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GREATLAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollarsin thousands)

 

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples 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 Report filed on Form10-K for the year ended December 31, 2003.

 

The acquisition of the Company by Madison DearbornCapital Partners IV, L.P. in December 2003 was accounted for as a purchase inaccordance with Statement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations,” resulting in a new basis of accounting subsequent to thetransaction.  For presentation herein,the financial statements up to the date of the sale are denoted as PredecessorBasis, while the financial statements prepared subsequent to the sale aredenoted as Successor Basis. See Note 4 for a description of the transaction.

 

The condensed consolidated results of operations forthe interim periods presented herein are not necessarily indicative of theresults to be expected for the full year.

 

 

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

 

Total comprehensive income (loss) comprises netincome (loss) and net unrealized gains and losses on cash flow hedges.  Total comprehensive income (loss) for thethree months ended September 30, 2004 and 2003 was $(3,937) and $3,436,respectively. Total comprehensive income (loss) for the nine months endedSeptember 30, 2004 and 2003 was $(7,347) and $9,489, respectively.

 

 

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

 

The Company uses derivativeinstruments to manage commodity price, interest rate, and foreign currencyexchange risks.  Such instruments are notused for trading purposes.  As ofSeptember 30, 2004, the Company is party to various swap arrangements to hedgethe price of a portion of its diesel fuel purchase requirements for work in itsbacklog to be performed through September 2005. As of September 30, 2004, there were 5.8 million gallons remaining onthese contracts.  Under these agreements,the Company will pay fixed prices ranging from $0.75 to $1.10 per gallon.  At September 30, 2004 and December 31, 2003,the fair value on these contracts was estimated to be $2,091 and $509,respectively, based on quoted market prices, and is recorded in other currentassets. Ineffectiveness related to these fuel hedge arrangements was determinedto be immaterial.  The remaining gainsincluded in accumulated other comprehensive 

 

5

----

 

income at September 30, 2004will be reclassified into earnings over the next twelve months, correspondingto the period during which the hedged fuel is expected to be utilized.

 

In February 2004, theCompany entered into an interest rate swap arrangement to swap a notionalamount of $50 million from a fixed rate of 7.75% to a floating LIBOR-based ratein order to manage the interest rate paid with respect to the Company’s 73⁄4%senior subordinated debt.  The fair valueof the swap at September 30, 2004 was $(235) and is recorded in accruedexpenses.  The swap is not accounted foras a hedge; therefore, the changes in fair value are recorded as adjustments tointerest expense in each reporting period.

 

The carrying values of other financial instruments included in currentassets and current liabilities approximate fair values due to the short-termmaturities of these instruments.  Thecarrying value of long-term bank debt is a reasonable estimate of its fairvalue as interest rates are variable, based on the prevailing marketrates.  The fair value of the Company’s$175,000 of 73⁄4% senior subordinated notes was $151,375 and $180,250 atSeptember 30, 2004 and December 31, 2003, respectively, based on quoted marketprices.

 

 

**4.****             ****Sale transaction**

 

On December 22, 2003, theCompany was acquired by Madison Dearborn Capital Partners IV, L.P. (MDP), anaffiliate of Chicago-based private equity investment firm Madison DearbornPartners, LLC.  The initial purchaseprice totaled $362,111, including fees and expenses, and was financed by newequity contributions of $97,000; term loan and revolver borrowings under a newsenior credit facility of approximately $60,300 and $2,000, respectively; theissuance of $175,000 of 7.75% Senior Subordinated Notes due 2013; the rolloverof term loan borrowings under a new equipment financing facility of $23,400;the rollover of approximately $1,558 million of capital leases; and cash onhand of $2,853.  The purchase price wassubject to certain working capital and debt adjustments to be finalizedapproximately three months subsequent to the transaction, as defined per themerger agreement.  The adjustments werefinalized in April of 2004, resulting in a decrease to the initial purchaseprice of $527.

 

The acquisition wasaccounted for by the purchase method of accounting and, accordingly, thepurchase price was allocated to the Company’s assets and liabilities based ontheir fair values at the date of acquisition. The allocation of purchase price to property and equipment andidentifiable intangible assets has been prepared on a preliminary basis, usingvaluation information that was available up to the point of financial statementpreparation.  This allocation istherefore subject to adjustment.

 

At September 30, 2004, thenet book value of intangible assets identified with respect to the transactionis as follows:  

 
| ** **                        | ** ** | **Estimated  Life** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-----------------------------------|------------|---------------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| Customer contract backlog         |       | 13-15 mos.          |       | $        | 4,237      |                          | $          | 3,324   |       | $ | 913 |   |
| Demolition customer relationships |       | 7-10 years          |       | 1,995    |       | 213                           |       | 1,782   |       |
| Software and databases            |       | 7 years             |       | 1,209    |       | 105                           |       | 1,104   |       |
|                              |       |                |       | $        | 7,441      |                          | $          | 3,642   |       | $ | 3,799 |   |

 

6

----

 

The following pro formaresults for the three and nine months ended September 30, 2003 have beenprepared as if the acquisition took place at the beginning of the period andinclude certain adjustments such as additional depreciation and amortizationcharges resulting from the allocation of purchase price to property andequipment and intangible assets, and reductions to interest expense resultingfrom the terms of the new debt structure. The pro forma operating results have been prepared for comparativepurposes only and are not necessarily indicative of the results of operationsthat may occur in the future or that would have occurred had this acquisitionbeen consummated at the beginning of the period presented. 

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **Actual  2004**                      | ** ** | **Pro forma  2003**                  | ** ** | **Actual  2004** | ** ** | **Pro forma  2003** | ** ** |
| Contract revenues                 |       | $                                     | 66,473     |                                 | $          | 98,104 |   | $ | 242,524 |   | $ | 302,161 |   |
| Operating income (loss)           |       | (4,093                                | )          | 9,337                                |       | 1,859 |   | 23,595 |   |
| Income (loss) before income taxes |       | (6,702                                | )          | 4,805                                |       | (11,513 | ) | 10,434 |   |
| Net income (loss)                 |       | (4,632                                | )          | 2,611                                |       | (8,311 | ) | 5,781 |   |
|                                   |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

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

 

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

 
| ** **                      | ** ** | **Successor Basis**     | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Completed contracts             |       | $                       | 16,296     |   | $ | 15,962 |   |
| Contracts in progress           |       | 22,572                  |       | 40,737 |   |
| Retainage                       |       | 8,494                   |       | 8,969 |   |
|                            |       | 47,362                  |       | 65,668 |   |
| Allowance for doubtful accounts |       | (904                    | )          | (799 | ) |
|                            |       |                    |       |   |   |
|                            |       | $                       | 46,458     |   | $ | 64,869 |   |

 

7

----

 

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

 

The components of contracts in progress at September30, 2004 and December 31, 2003 are as follows:

 
| ** **                                                                      | ** ** | **Successor Basis**     | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Costs and earnings in excess of billings:                                       |       |                    |       |   |   |
| Costs and earnings for contracts in  progress                                   |       | $                       | 254,336    |   | $ | 261,013 |   |
| Amounts billed                                                                  |       | (242,139                | )          | (251,034 | ) |
| Costs and earnings in excess of billings  for contracts in progress             |       | 12,197                  |       | 9,979 |   |
| Costs and earnings in excess of billings  for completed contracts               |       | 303                     |       | 1,257 |   |
|                                                                            |       |                    |       |   |   |
|                                                                            |       | $                       | 12,500     |   | $ | 11,236 |   |
|                                                                            |       |                    |       |   |   |
| Prepaid contract costs (included in prepaid  expenses and other current assets) |       | $                       | 923        |   | $ | 570 |   |
|                                                                            |       |                    |       |   |   |
| Billings in excess of costs and earnings:                                       |       |                    |       |   |   |
| Amounts billed                                                                  |       | $                       | (173,672   | ) | $ | (180,096 | ) |
| Costs and earnings for contracts in  progress                                   |       | 166,101                 |       | 171,288 |   |
|                                                                            |       |                    |       |   |   |
|                                                                            |       | $                       | (7,571     | ) | $ | (8,808 | ) |
|                                                                                 |            |                         |            |  |  |  |  |  |  |  |

 

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

 

Accrued expenses at September 30, 2004 and December31, 2003 are as follows:

 
| ** **                         | ** ** | **Successor Basis**     | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| Interest                           |       | $                       | 4,217      |   | $ | 339 |   |
| Insurance                          |       | 3,631                   |       | 4,736 |   |
| Payroll and employee benefits      |       | 2,539                   |       | 6,658 |   |
| U.S. income and other taxes        |       | 2,460                   |       | 1,252 |   |
| Litigation settlement (demolition) |       | 1,275                   |       | — |   |
| Equipment leases                   |       | 839                     |       | 882 |   |
| Interest rate swap liability       |       | 235                     |       | — |   |
| Other                              |       | 1,180                   |       | 1,589 |   |
|                               |       |                    |       |   |   |
|                               |       | $                       | 16,376     |   | $ | 15,456 |   |

 

8

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

 

The Company and its subsidiaries operate in tworeportable segments: dredging and demolition. The Company’s financial reporting systems present various data formanagement to run the business, including profit and loss statements preparedaccording to the segments presented. Segment information for the periods presented is as follows:

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**               | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **              | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Dredging**            |       |                                  |       |                                 |       |   |   |   |   |
| Contract revenues       |       | $                                     | 57,586     |                                 | $          | 88,028 |   | $ | 216,657 |   | $ | 274,225 |   |
| Operating income (loss) |       | (3,479                                | )          | 9,879                                |       | 1,482 |   | 29,002 |   |
|                    |       |                                  |       |                                 |       |   |   |   |   |
| **Demolition**          |       |                                  |       |                                 |       |   |   |   |   |
| Contract revenues       |       | $                                     | 8,887      |                                 | $          | 10,076 |   | $ | 25,867 |   | $ | 27,936 |   |
| Operating income (loss) |       | (614                                  | )          | 1,456                                |       | 377 |   | 2,039 |   |
|                    |       |                                  |       |                                 |       |   |   |   |   |
| **Total**               |       |                                  |       |                                 |       |   |   |   |   |
| Contract revenues       |       | $                                     | 66,473     |                                 | $          | 98,104 |   | $ | 242,524 |   | $ | 302,161 |   |
| Operating income (loss) |       | (4,093                                | )          | 11,335                               |       | 1,859 |   | 31,041 |   |
|                         |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

 

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

 

At September 30, 2004, the Company is contingentlyliable, in the normal course of business, for $13,912 in undrawn letters ofcredit, relating to contract performance guarantees or covering the Company’sinsurance payment 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 September 30, 2004.

 

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

 

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 

 

9

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September 30, 2004.  Additionally, the Company obtains itsperformance and bid bonds through a bonding agreement with a surety companythat has been granted a security interest in a substantial portion of theCompany’s operating equipment with a net book value of approximately $87,000 atSeptember 30, 2004.  The Company also hasan equipment term loan, which is secured by a first lien mortgage on certainoperating equipment with a net book value of approximately $22,000 at September30, 2004.  These agreements containcertain provisions that require the Company to maintain a minimum net worth andcertain other financial ratios, limit payment of dividends and restrict certainother transactions.  Effective September30, 2004, the Company amended its Credit Agreement and equipment term loan toallow additional flexibility in its leverage and interest coverage ratios,including replacement of the total leverage ratio with a required minimumEBITDA, as defined in the aforementioned agreements, through 2005. In exchange,the Company’s capital spending limits were reduced and the Company’s borrowingavailability under its Credit Agreement was reduced to $35 million (with asub-limit of $25 million for letters of credit and $15 million for revolverborrowings), until such time that the Company achieves certain definedfinancial measures.  The bondingagreement was also amended to revise the minimum net worth requirements.  The Company was in compliance with all suchcovenants at September 30, 2004.

 

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 between $5 to $10 million.  Performance bonds typically cover 100% of thecontract value with no maximum bond amounts. At September 30, 2004, the Company had outstanding performance bondsvalued at approximately $571 million; however the revenue value remaining inbacklog related to these projects totaled approximately $259 million atSeptember 30, 2004.

 

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.

 

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 potential liabilityof the Company is mitigated by insurance, shared responsibilities withconsortium partners, and/or recourse to owner-provided specifications.

 

As is customary with negotiated contracts with thefederal government, the government has the right to audit the books and recordsof the Company to ensure compliance with such contracts and applicable federallaws.  The government has the ability toseek a price adjustment based on the results of such audit.  Any such audits have not had and are notexpected to have a material adverse impact on the financial position oroperations of the Company.

 

In the normal course of business, the Companyis a defendant in various legal proceedings. Except as described below, the Company is not currently a party to anymaterial legal proceedings or environmental claims.

 

In 1999, the Boston Housing Authority (BHA),for whom North American Site Developers (NASDI) had worked, asserted that NASDIand its subcontractors were responsible for improperly disposing of somecontaminated materials.  At the time theCompany acquired NASDI in 2001, it was believed that NASDI had sufficientrecourse in the matter and that any potential liability would be minimal.  However, in the meantime, certain of theinsurance carriers that would be responsible for this matter have gone bankrupt.  Negotiations between the parties havecontinued to progress, and in the third quarter of 2004, the case went before ajudge in the 

 

10

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Massachusetts court system whoadvised NASDI and the subcontractors to accept a settlement with the BHA.  While NASDI could continue to pursue thematter, it was determined that settlement may be more cost effective.  Therefore, in the third quarter of 2004, theCompany recorded a $1.3 million charge for NASDI’s share of this potentialsettlement liability.

 

A joint venture in which the Company holds anapproximately 36% interest was subject to a counterclaim filed by the Red SeaPorts Authority relating to a contract performed in Al Sukhna, Egypt between1999 and 2001. The joint venture instituted arbitration proceedings against theRed Sea Ports Authority for monetary claims arising out of the contract andsought approximately $40 million in damages. The Red Sea Ports Authority counterclaimed for $74 million in damages,alleging environmental damage from the project, including damage to coastline,fisheries and coral reefs, and misuse of the designated disposal site.  In July 2003, an arbitration hearing was heldin Egypt regarding the joint venture’s claim and the Red Sea Ports Authority’scounterclaim.  A decision was rendered inJune of 2004, whereby the joint venture was awarded approximately $8 millionfor its claims, including approximately $4 million for outstanding invoicesthat had previously been settled through non-payment risk insurance.  All counterclaims against the joint venturewere dismissed.  The Company recognized$1.3 million of revenue in the second quarter of 2004 related to thissettlement.

 

**10.****                ****Federal subpoena**

 

As mentioned in the Company’s 2003 Annual Reportfiled on form 10-K, on February 10, 2004, the Company was served with asubpoena to produce documents in connection with a federal grand jury convenedin the United States District Court for the District of South Carolina.  The Company believes the grand jury has beenconvened to investigate the United States dredging industry.  The Company continues to comply with theJustice department’s requests and management believes that the Company hasprovided substantially everything that has been requested to this point. Inconnection with the investigation, the Company has incurred significant legaland document production costs, totaling $698 and $1,563 for the three and ninemonths ended September 30, 2004, respectively.

 

**11.****                ****Supplemental condensedconsolidating financial information**

 

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

 

11

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**Condensed Consolidating Balance Sheet at September 30, 2004**

** **

**SuccessorBasis**

 
| ** **                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| **ASSETS**                                    |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Current assets:                               |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Cash and equivalents                          |       | $                           | 7,190      |                  | $          | 8                    |       | $                | —     |                     | $          | — |   | $ | 7,198 |   |
| Accounts receivable, net                      |       | 46,458                      |       | —                |       | —               |       | —           |       | 46,458                   |       |
| Receivables from affiliates                   |       | 3,269                       |       | 2,928                 |       | 4,540                |       | (10,737          | )          | —                   |       |
| Contract revenues in excess of billings       |       | 12,500                      |       | —                |       | —               |       | —           |       | 12,500                   |       |
| Inventories                                   |       | 15,185                      |       | —                |       | —               |       | —           |       | 15,185                   |       |
| Prepaid expenses and other current assets     |       | 20,738                      |       | —                |       | 1,624                |       | —           |       | 22,362                   |       |
| Total current assets                          |       | 105,340                     |       | 2,936                 |       | 6,164                |       | (10,737          | )          | 103,703                  |       |
| Property and equipment, net                   |       | 250,551                     |       | —                |       | 14,427               |       | —           |       | 264,978                  |       |
| Goodwill                                      |       | 103,514                     |       | —                |       | —               |       | —           |       | 103,514                  |       |
| Other intangible assets, net                  |       | 3,799                       |       | —                |       | —               |       | —           |       | 3,799                    |       |
| Investments in subsidiaries                   |       | 2,936                       |       | —                |       | 284,772              |       | (287,708         | )          | —                   |       |
| Notes receivable from affiliates              |       | —                      |       | —                |       | 23,837               |       | (23,837          | )          | —                   |       |
| Inventories                                   |       | 11,278                      |       | —                |       | —               |       | —           |       | 11,278                   |       |
| Investments in joint ventures                 |       | 7,559                       |       | —                |       | —               |       | —           |       | 7,559                    |       |
| Other assets                                  |       | 319                         |       | —                |       | 11,423               |       | —           |       | 11,742                   |       |
|                                          |       | $                           | 485,296    |                  | $          | 2,936                |       | $                | 340,623    |                     | $          | (322,282 | ) | $ | 506,573 |   |
|                                          |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY** | ** ** | ** **                  | ** ** | ** **            | ** ** | ** **           | ** ** | ** **       | ** ** | ** **               | ** ** |
| Current liabilities:                          |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Accounts payable                              |       | $                           | 36,470     |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 36,470 |   |
| Payables to affiliates                        |       | —                      |       | —                |       | 6,199                |       | (6,199           | )          | —                   |       |
| Accrued expenses                              |       | 9,775                       |       | —                |       | 6,601                |       | —           |       | 16,376                   |       |
| Billings in excess of contract revenues       |       | 7,571                       |       | —                |       | —               |       | —           |       | 7,571                    |       |
| Current maturities of long-term debt          |       | 6,490                       |       | —                |       | —               |       | (4,540           | )          | 1,950                    |       |
| Total current liabilities                     |       | 60,306                      |       | —                |       | 12,800               |       | (10,739          | )          | 62,367                   |       |
| Long-term debt                                |       | 19,988                      |       | —                |       | 232,800              |       | —           |       | 252,788                  |       |
| Notes payable to affiliates                   |       | 23,837                      |       | —                |       | —               |       | (23,837          | )          | —                   |       |
| Deferred income taxes                         |       | 87,210                      |       | —                |       | 5,327                |       | —           |       | 92,537                   |       |
| Other                                         |       | 6,917                       |       | —                |       | 684                  |       | —           |       | 7,601                    |       |
| Total liabilities                             |       | 198,258                     |       | —                |       | 251,611              |       | (34,576          | )          | 415,293                  |       |
| Minority interests                            |       | —                      |       | —                |       | —               |       | 1,627            |       | 1,627                    |       |
| Stockholder’s equity                     |       | 287,038                     |       | 2,936                 |       | 89,012               |       | (289,333         | )          | 89,653                   |       |
|                                          |       | $                           | 485,296    |                  | $          | 2,936                |       | $                | 340,623    |                     | $          | (322,282 | ) | $ | 506,573 |   |
|                                               |            |                             |            |                       |            |                      |            |                  |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

12

----

** **

**Condensed Consolidating Balance Sheet at December 31, 2003**

** **

**Successor Basis**

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

 

13

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

** **

**Successor Basis**

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

** **

** **

**Condensed Consolidating Statement of Operations for the three monthsended September 30, 2003**

** **

**Predecessor Basis**

 
| ** **                                | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                      |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract revenues                         |       | $                           | 98,104     |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 98,104 |   |
| Costs of contract revenues                |       | (79,719                     | )          | (15                   | )          | (267                 | )          | —           |       | (80,001                  | )          |
| Gross profit (loss)                       |       | 18,385                      |       | (15                   | )          | (267                 | )          | —           |       | 18,103                   |       |
| General and administrative expenses       |       | (6,738                      | )          | (16                   | )          | (14                  | )          | —           |       | (6,768                   | )          |
| Operating income (loss)                   |       | 11,647                      |       | (31                   | )          | (281                 | )          | —           |       | 11,335                   |       |
| Interest expense, net                     |       | (613                        | )          | —                |       | (4,568               | )          | —           |       | (5,181                   | )          |
| Equity in earnings (loss) of subsidiaries |       | (27                         | )          | —                |       | 6,519                |       | (6,492           | )          | —                   |       |
| Equity in earnings of joint ventures      |       | 319                         |       | —                |       | —               |       | —           |       | 319                      |       |
| Minority interests                        |       | —                      |       | —                |       | —               |       | (72              | )          | (72                      | )          |
| Income (loss) before income taxes         |       | 11,326                      |       | (31                   | )          | 1,670                |       | (6,564           | )          | 6,401                    |       |
| Income tax (expense) benefit              |       | (4,716                      | )          | 13                    |       | 1,867                |       | —           |       | (2,836                   | )          |
| Net income (loss)                         |       | $                           | 6,610      |                  | $          | (18                  | )          | $                | 3,537      |                     | $          | (6,564 | ) | $ | 3,565 |   |
|                                           |            |                             |            |                       |            |                      |            |                  |            |                          |            |  |  |  |  |  |  |

 

14

----

** **

** CondensedConsolidating Statement of Operations for the nine months ended September 30,2004**

** **

**Successor Basis**

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

 

**Condensed Consolidating Statement of Operations for the ninemonths ended September 30, 2003**

** **

**Predecessor Basis**

 
| ** **                                | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                      |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Contract revenues                         |       | $                           | 302,161    |                  | $          | —               |       | $                | —     |                     | $          | — |   | $ | 302,161 |   |
| Costs of contract revenues                |       | (249,866                    | )          | (47                   | )          | (889                 | )          | (110             | )          | (250,912                 | )          |
| Gross profit (loss)                       |       | 52,295                      |       | (47                   | )          | (889                 | )          | (110             | )          | 51,249                   |       |
| General and administrative expenses       |       | (20,104                     | )          | (38                   | )          | (66                  | )          | —           |       | (20,208                  | )          |
| Operating income (loss)                   |       | 32,191                      |       | (85                   | )          | (955                 | )          | (110             | )          | 31,041                   |       |
| Interest expense, net                     |       | (1,950                      | )          | —                |       | (13,424              | )          | —           |       | (15,374                  | )          |
| Equity in earnings (loss) of subsidiaries |       | (78                         | )          | —                |       | 18,554               |       | (18,476          | )          | —                   |       |
| Equity in earnings of joint ventures      |       | 1,063                       |       | —                |       | —               |       | —           |       | 1,063                    |       |
| Minority interests                        |       | —                      |       | —                |       | —               |       | (2               | )          | (2                       | )          |
| Income (loss) before income taxes         |       | 31,226                      |       | (85                   | )          | 4,175                |       | (18,588          | )          | 16,728                   |       |
| Income tax (expense) benefit              |       | (12,702                     | )          | 36                    |       | 5,483                |       | —           |       | (7,183                   | )          |
| Net income (loss)                         |       | $                           | 18,524     |                  | $          | (49                  | )          | $                | 9,658      |                     | $          | (18,588 | ) | $ | 9,545 |   |
|                                           |            |                             |            |                       |            |                      |            |                  |            |                          |            |  |  |  |  |  |  |  |  |

 

15

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

 

**Successor Basis**

 
| ** **                                                                                             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Operating Activities**                                                                               |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net cash flows from operating activities                                                               |       | $                           | 15,097     |                  | $          | (39                  | )          | $                | 4,012      |                     | $          | — |   | $ | 19,070 |   |
|                                                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Investing Activities**                                                                               |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Purchases of property and equipment                                                                    |       | (15,691                     | )          | —                |       | —               |       | —           |       | (15,691                  | )          |
| Dispositions of property and equipment                                                                 |       | 650                         |       | 25                    |       | —               |       | —           |       | 675                      |       |
| Reclass of cash held in escrow to fund  construction of a barge under a like-kind exchange transaction |       | 2,451                       |       | —                |       | —               |       | —           |       | 2,451                    |       |
| Adjustment to acquisition price of  Predecessor common and preferred shares.                           |       | 527                         |       | —                |       | —               |       | —           |       | 527                      |       |
| Distribution from Amboy joint venture                                                                  |       | 1,550                       |       | —                |       | —               |       | —           |       | 1,550                    |       |
| Net cash flows from investing activities                                                               |       | (10,513                     | )          | 25                    |       | —               |       | —           |       | (10,488                  | )          |
|                                                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Financing Activities**                                                                               |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Repayments of long-term debt                                                                           |       | (1,462                      | )          | —                |       | (2,500               | )          | —           |       | (3,962                   | )          |
| Net change in accounts with affiliates                                                                 |       | 1,302                       |       | 13                    |       | (1,315               | )          | —           |       | —                   |       |
| Financing fees                                                                                         |       | —                      |       | —                |       | (197                 | )          | —           |       | (197                     | )          |
| Net cash flows from financing activities                                                               |       | (160                        | )          | 13                    |       | (4,012               | )          | —           |       | (4,159                   | )          |
|                                                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net change in cash and equivalents                                                                     |       | 4,424                       |       | (1                    | )          | —               |       | —           |       | 4,423                    |       |
| Cash and equivalents at beginning of period                                                            |       | 2,766                       |       | 9                     |       | —               |       | —           |       | 2,775                    |       |
| Cash and equivalents at end of period                                                                  |       | $                           | 7,190      |                  | $          | 8                    |       | $                | —     |                     | $          | — |   | $ | 7,198 |   |
|                                                                                                        |            |                             |            |                       |            |                      |            |                  |            |                          |            |  |  |  |  |  |  |  |  |

 

 

**Condensed Consolidating Statement of CashFlows for the nine months ended September 30, 2003**

 

**Predecessor Basis**

 
| ** **                                                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiary** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
|                                                                                       |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Operating Activities**                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net cash flows from operating activities                                                   |       | $                           | 23,941     |                  | $          | (24                  | )          | $                | (11,742    | )                        | $          | — |   | $ | 12,175 |   |
|                                                                                       |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Investing Activities**                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Purchases of property and equipment                                                        |       | (14,179                     | )          | —                |       | —               |       | —           |       | (14,179                  | )          |
| Dispositions of property and equipment                                                     |       | 838                         |       | —                |       | —               |       | —           |       | 838                      |       |
| Disposition of interest in Riovia  investment                                              |       | 1,200                       |       | —                |       | —               |       | —           |       | 1,200                    |       |
| Purchase portion of minority interests’  share in North American Site Developers, Inc |       | (75                         | )          | —                |       | —               |       | —           |       | (75                      | )          |
| Equity investment in land acquistion                                                       |       | (1,047                      | )          | —                |       | —               |       | —           |       | (1,047                   | )          |
| Net cash flows from investing activities                                                   |       | (13,263                     | )          | —                |       | —               |       | —           |       | (13,263                  | )          |
|                                                                                       |       |                        |       |                  |       |                 |       |             |       |                     |       |
| **Financing Activities**                                                                   |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Repayments of long-term debt                                                               |       | —                      |       | —                |       | (9,238               | )          | —           |       | (9,238                   | )          |
| Borrowings of revolving loans, net of  repayments                                          |       | —                      |       | —                |       | 10,000               |       | —           |       | 10,000                   |       |
| Net change in accounts with affiliates                                                     |       | (11,414                     | )          | 31                    |       | 11,383               |       | —           |       | —                   |       |
| Financing fees                                                                             |       | —                      |       | —                |       | (403                 | )          | —           |       | (403                     | )          |
| Repayments on note receivable from  stockholder                                            |       | 19                          |       | —                |       | —               |       | —           |       | 19                       |       |
| Net cash flows from financing activities                                                   |       | (11,395                     | )          | 31                    |       | 11,742               |       | —           |       | 378                      |       |
|                                                                                       |       |                        |       |                  |       |                 |       |             |       |                     |       |
| Net change in cash and equivalents                                                         |       | (717                        | )          | 7                     |       | —               |       | —           |       | (710                     | )          |
| Cash and equivalents at beginning of period                                                |       | 1,451                       |       | 5                     |       | —               |       | —           |       | 1,456                    |       |
| Cash and equivalents at end of period                                                      |       | $                           | 734        |                  | $          | 12                   |       | $                | —     |                     | $          | — |   | $ | 746 |   |

 

16

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

 

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

 

Certain information in this quarterly reporton Form 10-Q, including but not limited to the Management’s Discussion andAnalysis of Financial Condition and Results of Operations, may constituteforward-looking statements as such term is defined in Section 27A of theSecurities Exchange Act of 1933 (the “Securities Act”) and Section 21E of theSecurities Exchange Act of 1934.  Certainforward-looking statements can be identified by the use of forward-lookingterminology such as, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,”“intends,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negativethereof or other comparable terminology, or by discussions of strategy, plansor intentions.  Forward-lookingstatements involve risks and uncertainties, including those described in theRisk Factors section of the Company’s Form S-4 Registration Statement(Registration No. 333-114059), which could cause actual results to bematerially different than those in the forward-looking statements, which speakonly as of the date hereof.  The Companyassumes no obligation to update such information.

 

###### **General**

 

The Company is the largest provider ofdredging services in the United States. Dredging generally involves the enhancement or preservation of thenavigability of waterways or the protection of shorelines through the removalor replenishment of soil, sand or rock. The U.S. dredging market consists of three primary types of work:  Capital, Maintenance and Beach Nourishment,in which the Company experienced an average combined U.S. bid market share of42% over the last three fiscal years (2001 to 2003).  The Company’s bid market is defined as thepopulation of projects on which it bid or could have bid if not for capacityconstraints (“bid market”).  In addition,the Company has continued its role as the only U.S. dredging contractor withsignificant international operations, which averaged 13% of its contractrevenues over the last three fiscal years.

 

The Company was acquired by Madison DearbornCapital Partners IV, L.P. (“MDP”) in December 2003.  In accordance withU.S. generally accepted accounting principles, a new basis of accounting resultedfrom the acquisition.  Therefore, within this report, the three and ninemonth periods ended September 30, 2004 have been identified as the SuccessorBasis and the three and nine month periods ended September 30, 2003 as thePredecessor Basis.  The significant differences between periods as aresult of the new basis of accounting are discussed in the following Results ofOperations section.

 

The Company also owns 85% of the capitalstock of North American Site Developers, Inc. (“NASDI”), a demolition serviceprovider 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.

 

The Company’s equity in earnings of jointventures relates to the Company’s 50% ownership interest in Amboy Aggregates (“Amboy”),which is accounted for using the equity method.

 

17

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

 

The following table sets forth the componentsof net income (loss) and EBITDA as a percentage of contract revenues for thethree and nine months ended September 30, 2004 and 2003:   

 
| ** **                           | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | ** **                                | ** ** |
| ** **                           | ** ** | **Successor  Basis**                      | ** ** | **Predecessor  Basis**                   | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **                           | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| Contract revenues                    |       | 100.0                                     | %          | 100.0                                    | %          | 100.0 | % | 100.0 | % |
| Costs of contract revenues           |       | (93.5                                     | )          | (81.5                                    | )          | (89.0 | ) | (83.0 | ) |
| Gross profit                         |       | 6.5                                       |       | 18.5                                     |       | 11.0 |   | 17.0 |   |
| General and administrative expenses  |       | (8.6                                      | )          | (6.9                                     | )          | (7.5 | ) | (6.7 | ) |
| Subpoena-related expenses            |       | (1.0                                      | )          | —                                   |       | (0.7 | ) | — |   |
| Litigation settlement                |       | (1.9                                      | )          | —                                   |       | (0.5 | ) | — |   |
| Amortization of intangible assets    |       | (1.1                                      | )          | —                                   |       | (1.5 | ) | — |   |
| Operating income (loss)              |       | (6.1                                      | )          | 11.6                                     |       | 0.8 |   | 10.3 |   |
| Interest expense, net                |       | (5.2                                      | )          | (5.3                                     | )          | (6.2 | ) | (5.1 | ) |
| Equity in earnings of joint ventures |       | 1.1                                       |       | 0.3                                      |       | 0.6 |   | 0.3 |   |
| Minority interest                    |       | 0.1                                       |       | (0.1                                     | )          | 0.1 |   | — |   |
| Income (loss) before income taxes    |       | (10.1                                     | )          | 6.5                                      |       | (4.7 | ) | 5.5 |   |
| Income tax benefit (expense)         |       | 3.1                                       |       | (2.9                                     | )          | 1.3 |   | (2.4 | ) |
| Net income (loss)                    |       | (7.0                                      | )%         | 3.6                                      | %          | (3.4 | )% | 3.1 | % |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| EBITDA                               |       | 4.2                                       | %          | 16.0                                     | %          | 9.5 | % | 14.7 | % |

 

 “EBITDA,” as provided herein, representsearnings from continuing operations before net interest expense, income taxes,depreciation and amortization expense. EBITDA should not be considered an alternative to, or more meaningfulthan, amounts determined in accordance with GAAP including: (a) operatingincome as an indicator of operating performance; or (b) cash flows fromoperations as a measure of liquidity. The Company presents EBITDA as additional information because it isamong the bases upon which the Company assesses its financial performance, andcertain covenants in its borrowing arrangements are tied to similar measures.The Company believes EBITDA is a useful measure for the users of its financialstatements because it provides information that can be used to evaluate theeffectiveness of the Company’s business from an operational perspective,exclusive of costs to finance its activities, income taxes, depreciation ofoperating assets and amortization of intangible assets, none of which isdirectly relevant to the efficiency of its operations.  EBITDA is not calculated identically by allcompanies; therefore, the Company’s presentation of EBITDA may not becomparable to similarly titled measures of other companies.  The following table reconciles net income(loss) to EBITDA for the periods indicated:

 

18

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| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**               | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| ** **                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                          |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)             |       | $                                     | (4,632     | )                                    | $          | 3,565 |   | $ | (8,311 | ) | $ | 9,545 |   |
| Adjusted for:                 |       |                                  |       |                                 |       |   |   |   |   |
| Interest expense, net         |       | 3,428                                 |       | 5,181                                |       | 15,034 |   | 15,374 |   |
| Income tax expense (benefit)  |       | (2,070                                | )          | 2,836                                |       | (3,202 | ) | 7,183 |   |
| Depreciation and amortization |       | 6,061                                 |       | 4,067                                |       | 19,637 |   | 12,202 |   |
| EBITDA                        |       | $                                     | 2,787      |                                 | $          | 15,649 |   | $ | 23,158 |   | $ | 44,304 |   |

 

 

The following table sets forth, by segmentand dredging type of work, the Company’s contract revenues for the three andnine months ended and backlog as of the periods indicated:

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **Successor  Basis**                  | ** ** | **Predecessor  Basis**               | ** ** | **Successor  Basis** | ** ** | **Predecessor  Basis** | ** ** |
| **Revenues (in thousands)** | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dredging:                   |       |                                  |       |                                 |       |   |   |   |   |
| Capital - U.S.              |       | $                                     | 31,854     |                                 | $          | 54,717 |   | $ | 80,526 |   | $ | 165,145 |   |
| Capital - foreign           |       | 8,743                                 |       | 21,459                               |       | 53,904 |   | 51,010 |   |
| Beach                       |       | 2,729                                 |       | 298                                  |       | 45,207 |   | 31,371 |   |
| Maintenance                 |       | 14,260                                |       | 11,554                               |       | 37,020 |   | 26,699 |   |
| Demolition                  |       | 8,887                                 |       | 10,076                               |       | 25,867 |   | 27,936 |   |
|                        |       | $                                     | 66,473     |                                 | $          | 98,104 |   | $ | 242,524 |   | $ | 302,161 |   |

 
| ** **                 | ** ** | **September 30,**   | ** ** |
|----------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **Successor Basis** | ** ** |
| **Backlog (in thousands)** | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Dredging:                  |       |                |       |   |   |
| Capital - U.S.             |       | $                   | 206,621    |   | $ | 139,198 |   |
| Capital - foreign          |       | 15,473              |       | 32,371 |   |
| Beach                      |       | 23,739              |       | 30,356 |   |
| Maintenance                |       | 33,198              |       | 16,345 |   |
| Demolition                 |       | 10,981              |       | 11,686 |   |
|                       |       | $                   | 290,012    |   | $ | 229,956 |   |

 

Consolidated revenues for the third quarterof 2004 were $66.5 million, representing a decrease of $31.6 million or 32.2%over third quarter 2003 revenues of $98.1 million.  Revenues for the nine months ended September30, 2004 were $242.5 million, a decrease of $59.7 million or 19.7% overrevenues for the same period of 2003 of $302.2 million.  The decline in 2004 revenues is due to theslow-down in domestic dredging bid activity that began in the second half of2003 and continued through the first half of 2004.  This lower level of bid activity led tointense competition within the industry for work that has been bid this year,which has significantly 

 

19

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compressed margins.  Most of the decline in revenues is due toreduced levels of domestic capital dredging revenues.  Capital dredging work continues to comprisethe largest percent of the Company’s backlog; however, performance on certainof these projects has been postponed by the Army Corps of Engineers (“Corps”)due to a lack of current funding.  Thiscombination of the reduced bid market and the postponement of work within theCompany’s backlog resulted in decreased utilization of the Company’s fleetduring the second and third quarters of 2004.

 

The Company’s gross profit margin declined to6.5% and 11.0% for the quarter and nine months ended September 30, 2004,respectively, compared to 18.5% and 17.0% for the same periods of 2003.  The margin decline is partly attributable tosome reduction in contract margin resulting from the mix of projects performed,some of which were further impacted by operating delays caused by thehurricanes in the Southeast.  However,the margins decline is also a result of the impact of fixed costs relative tothe reduced level of utilization, as well as the impact of approximately $1.2 millionand $3.6 million of additional depreciation for the quarter and nine monthsended September 30, 2004 resulting from the revaluation of the Company’soperating assets in connection with the purchase of the Company in December of2003.

 

Capital projects include large port deepenings and other infrastructureprojects.  Domestic capital dredgingrevenue declined $22.9 million and $84.6 million in the third quarter and firstnine months of 2004, respectively, as compared to the same periods of 2003.  As mentioned previously, this is a result ofa slow-down in domestic bidding activity, coupled with the postponement ofcertain capital project work within backlog. As discussed in previous filings, the capital market includes “Deep Port”projects that have been authorized by the 1986 Water Resource Development Act (“WRDA”)and subsequent bills.  In 1997, the Corpsannounced Deep Port work, authorized by WRDA, to be completed through 2005,with an aggregate value in excess of $2.0 billion, and supplementalauthorizations have increased this amount to approximately $4.0 billion, withwork to be completed through 2010. Currently, approximately $2.4 billion of these authorized Deep Portprojects have yet to be let for bid.  DeepPort work has comprised a substantial portion of recent bid markets, averaging36% of the bid market over the last three fiscal years (2001 to 2003).  The Company’s bid market share of Deep Portprojects averaged 45% over the last three years.

 

During the third quarter of 2004, the Company’sdomestic capital revenues included continuing work on Deep Port projects inKill Van Kull, New York; Houston, Texas; Manatee Harbor, Florida; and LosAngeles, California, and mobilization revenue on the new project in Brunswick,Georgia, which was awarded in July 2004. These projects contributed combinedrevenue to the quarter of $19.3 million.  Two other domestic capital projects, includingthe dredging project along the Providence River and harbor in the Rhode Islandarea and a port terminal project in New Jersey, added another $6.5 million ofrevenue to the quarter.  Foreign capitalrevenues in the third quarter of 2004 totaled $8.7 million, which was generatedprimarily by the ongoing port terminal project in Bahrain and a maintenancedredging project in Alexandria, Egypt. This maintenance project is the second phase of a channel project for aliquid natural gas plant.  The Companycompleted the initial deepening phase of this project in 2003.

 

Beach nourishment projects include rebuildingof shoreline areas that have been damaged by storm activity or ongoingerosion.  Third quarter 2004 revenuesfrom beach nourishment projects totaled $2.7 million, which primarily relatedto subcontract work to construct erosion control structures on the $22 million AbseconIsland project in New Jersey.

 

Maintenance projects include routine dredgingof ports, rivers and channels to remove the regular build up of sediment.  Maintenance revenues totaled $14.3 million inthe third quarter of 2004, 

 

20

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and included $4.5 million generated by theproject in Tampa Harbor and the Alafia River, whose scope had been expandedsince the second quarter.  Additionally,the Company commenced dredging on the Oakland/Richmond Harbor maintenanceproject in California and completed a maintenance project along the entrance tothe Columbia River and Coos Bay in Oregon. These two projects contributed $4.6 million to the quarter’s revenues.

 

NASDI’s demolition revenues for the thirdquarter of 2004 totaled $8.9 million, most of which was generated by numeroussmall projects, including a variety of demolition projects for Boston-areacolleges and universities.  The NewEngland construction market appears to strengthening, which has enabled NASDIto take on a variety of small-to-mid size demolition projects to prepare sitesor facilities for various renovation or new construction projects.

 

In the third quarter of 2004, the Companyrecorded a $1.3 million charge for NASDI’s share of the anticipated cost tosettle an ongoing claim against NASDI, as further discussed in Footnote 9 tothe Financial Statements and Part II – Item 1. “Legal Proceedings.”

 

Asmentioned in the Company’s 2003 Annual Report filed on form 10-K, on February10, 2004, the Company was served with a subpoena to produce documents inconnection with a federal grand jury convened in the United States DistrictCourt for the District of South Carolina. The Company believes the grand jury has been convened to investigate theUnited States dredging industry.  TheCompany continues to comply with the Justice department’s requests andmanagement believes that the Company has provided substantially everything thathas been requested to this point.  Inconnection with the investigation, the Company has incurred significant legal anddocument-reproduction costs, totaling $0.7 million and $1.6 million for thethree and nine months ended September 30, 2004, respectively.

 

Net interest expense for the quarter and nine months ended September30, 2004 was $3.4 million and $15.0 million, respectively, compared to $5.2million and $15.4 million for the same periods of 2003.  The Company’s 2004 cash interest expenserelated to its senior and subordinated debt has remained relatively consistentwith the 2003 expense, due to the lower-interest-rate debt put into place atthe time of the Company’s purchase in December 2003.  In February 2004, the Company entered into aninterest rate swap arrangement to swap a portion of its fixed-rate debt tofloating, to manage the interest rate paid with respect to the Company’s 73⁄4%senior subordinated debt.  To date, thisswap has been positive from a cash flow perspective, but the earnings for eachquarter can be impacted by the non-cash adjustment of the swap to fair valuebased on anticipated future rates.  Inthe third quarter of 2004, the Company recorded a non-cash benefit to interestexpense of $1.5 million, to adjust the swap to its fair value at September 30,2004.

 

The Company generated a net loss of $4.6million and $8.3 million for the quarter and nine months ended September 30,2004, respectively, compared to net income of $3.6 million and $9.5 million forthe same periods of 2003.  The net lossin the 2004 periods reflects the reduced dredging volume and the impact offixed costs relative to the levels of revenue generated, given the lower thantypical utilization levels for the Company. The 2004 periods also include additional depreciation and amortizationexpense resulting from the revaluation of the Company’s assets and liabilitiesin connection with sale of the Company in December of 2003, as well as theimpact of the claim settlement charge and subpoena-related costs mentionedpreviously.  EBITDA (as defined on page18) was $2.8 million and $23.2 million for the quarter and nine months ended September30, 2004, compared to $15.6 million and $44.3 million for the same periods of2003.  EBITDA declined due to thereduction in revenues and earnings as discussed previously.

 

21

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**Backlog**

 

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

 

The third quarter 2004 domestic dredging bidmarket, representing work awarded during the period, totaled $291 million,reflecting a significant improvement over the prior two quarters, which on acombined basis, totaled just over $220 million. The Company won 65% of the quarters’ awards (including the $66 millionBrunswick project which was finally awarded in the third quarter), bringing itsyear-to-date bid market share to 51%. The year-to-date domestic dredging bid market now totals approximately$520 million.  As such, if biddingcontinues at a similar pace through the fourth quarter, the annual market maybe on track to reach the average level of $650 million achieved from 1998 to2002. The improvement in the bid market experienced in the third quarterappears to be an indication that the factors that impacted funding in priorquarters are being minimized.  Managementremains hopeful that the bidding activity will continue to improve; however, itis likely that the pricing for work bid in the near-term will remaincompetitive until the industry’s dredging fleet returns to historical levels ofutilization, and participants regain confidence in the market.

 

As a result of the improved domestic dredging bid market during thequarter, the Company’s dredging backlog increased to $279.0 million atSeptember 30, 2004.  This represents avery solid level for the Company and compares to $129.1 million at June 30,2004 and $218.3 million at September 30, 2003. Almost 75% of the September 30, 2004 dredging backlog is represented bydomestic capital dredging work, which has traditionally been the mostprofitable type of work for the Company. This includes the work remaining on Deep Port capital projects in Los Angeles,California; Houston, Texas; Wilmington, North Carolina; Manatee Harbor,Florida; and Port Jersey Channel, New Jersey. September 30 backlog also reflects the award of the $66 millionBrunswick project, as well as two other Deep Port projects bid and won by theCompany in the third quarter.  The firstof these was a $26 million project in Oakland, California and the second was a$38 million project in Miami, Florida that was bid by request-for-proposal, orRFP.  The Company will start dredging onthe Brunswick and Oakland projects in the fourth quarter of 2004 and on theMiami project in early 2005.  Two othersmall Deep Port projects in San Diego, California and Norfolk, Virginia werebid during the quarter and won by competitors. Although the Deep Port projects most recently bid have been won at lowerthan historical margins given the intense competition in the industry, theseprojects provide opportunities for the Company to utilize some of its keydredges and substantial amounts of ancillary plant, and in the past, theCompany has sometimes been able to realize efficiencies beyond thoseanticipated in the original estimates for these types of projects.

 

As mentioned previously, the final phase ofthe 43 foot Deep Port project in Arthur Kill, New York was bid in the secondquarter of 2004.  Award of this projectis still pending the outcome of a protest; however the Company remainsconfident that it will still perform a significant portion of this work.  This Arthur Kill work, along with other lowbids pending award and options pending on projects in backlog, has thepotential to add an additional $119 million to the Company’s backlog, onceawarded.  In the meantime, the Company’sbackhoe dredge New York will begin working in the fourth quarter under subcontractto another contractor, to complete a portion of the rock dredging on the firstArthur Kill project.

 

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Beachbacklog at September 30, 2004 totaled $23.7 million, the majority of which wasadded during the third quarter.  Beachwork is often bid in the second half of the year, since the work is generallyperformed between the months of September to March, due to environmentalrestrictions.  During the quarter, fivebeach nourishment projects were bid and awarded with a value of approximately$35 million, bringing the year-to-date beach bid market to $66 million.  The Company won three of these projects withtotal value of $26 million, including a $13 million project along Dewey andRehobeth beaches in Delaware.  There arestill a number of issues outstanding with respect to the future of the federalfunding of beach projects, as further discussed in the “Market Outlook” whichfollows.  However, management believesthe fact that a number of attractive beach opportunities did bid in the thirdquarter bodes well for the industry as it demonstrates that the federal portionof funding is being made available. Additionally, the recent hurricanesexperienced along the Gulf and East coasts have demonstrated the importance ofmaintaining sufficient beachfront in order to protect waterfront assets andminimize damage from such storms.  Whilethe direction of future beach renourishment funding is uncertain, this shouldonly help to support the argument of its necessity.  In October 2004, the Senate passed anemergency supplemental bill that contained $372 million for the Corps to payfor much of the damage from the recent hurricanes, of which $56 million hasbeen identified for emergency beach restoration in Florida.  While it is likely that additional time willbe needed to obtain approvals and permits for this work, the Corps districtshave identified over $100 million of emergency beach projects, or projects thathad previously been identified and are likely to be expedited, in Florida andAlabama which are anticipated for fourth quarter 2004 or first quarter 2005bidding.  Additionally, another $50million of projects in Florida and South Carolina not specifically attributedto the hurricanes remain scheduled for 2005 bidding.

 

Maintenancebacklog at September 30, 2004 was $33.2 million, which includes $13 million fora maintenance project in Baltimore Harbor, Maryland, which was bid and won bythe Company in the third quarter. Including the Baltimore project, there were approximately 30 maintenanceprojects bid during the quarter, bringing the year-to-date maintenance bidmarket to $225 million, in excess of the five-year average (1999 to 2003)annual market of approximately $200 million. Some of the maintenance work mayhave been expedited given increased shoaling resulting from the hurricanes inthe Southeast.  The quarter’s maintenanceand beach awards included a number of projects to be performed by the industry’shopper dredges, equipment that was largely idle during the second and thirdquarters of 2004.

 

Foreign capital project backlog at September30, 2004 totaled $15.5 million and relates primarily to work remaining on thelong-term HIDD terminal project in Bahrain and the maintenance phase of theproject for a liquid natural gas plant in Egypt.  Additionally, the Company signed a contractfor a land development project in Durrat, Bahrain.  The notice to proceed with the full scope ofthis contract is pending permit approvals; however the initial $5 million phasewas awarded and will begin in the fourth quarter.  Upon approval of the full scope, the projectwill provide employment for the hydraulic dredge Carolina for a two-yearperiod, after it concludes its work on the HIDD project at the end of2004.  The Durrat contract will beperformed in a joint-venture with the same Bahraini contractor that the Companypartnered with for the HIDD contract and this company will perform the civilworks.  In October 2004, the Company wasawarded the $30 million LNG terminal project in Ocean Cay, Bahamas.  The inclusion of the Ocean Cay project andthe full scope of the Durrat project will significantly increase the Company’sforeign backlog.

 

The demolition services backlog at September 30, 2004 was $11.0million, compared to $12.6 million at June 30, 2004 and $11.7 million atSeptember 30, 2003.  The September 30backlog includes nine projects with over $0.5 million of revenue remaining, aswell as a typical complement of mid-size projects. As mentioned previously, thedemolition bidding activity has increased in recent months, as the New Englandconstruction market appears to be improving.

 

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NASDI’s management has identified numerous demolition projects in the$1 to $5 million range to be bid in the next six months, which managementbelieves should enable NASDI to increase its backlog and improve margins.

###### ** **

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

 

Despite the uncertainties that have recentlyexisted with respect to funding of work within the Army Corps of Engineers’program, the acceleration of bid activity in the third quarter appears todemonstrate that the Corps is working through these issues.  The Corps’ fiscal year 2005 budget (whichruns from October 1 to September 30) has not yet been passed, and the Corps,along with other government agencies, is currently operating under a ContinuingResolution through November 20, which allows them to operate into fiscal year2005 at fiscal year 2004 levels for authorized projects.  At this point, it seems likely that thefiscal year 2005 budget will not be finalized after the November elections.

 

As discussed in the previous Form 10-Q, thecurrent version of the budget legislation also targeted changes to beachnourishment funding, proposing that the administration no longer honor anycost-sharing agreements for shoreline protection.  Thus, the local communities and Stateagencies would be required to fund and administer these projects in the future.  The Federal funding of shoreline protectionhas often been the target of administrations seeking to control spending, butthe resulting congressional lobbies generally have been successful in amendingthe budget and restoring federal funding. Fortunately, the language in the Continuing Resolution under which theCorps is now operating explicitly prohibits the administration from enforcingits proposed policy to stop funding periodic beach renourishment, and theindustry remains hopeful that similar language will become part of the finalappropriations bill, whenever it may be passed.

 

Despite the uncertainty surrounding thefunding environment, authorizations for future work continue to moveforward.  The WRDA legislation, whichforms the basis for authorizing the Corps’ civil works projects, including theDeep Port projects, is generally enacted every other year.  The most recent WRDA bill was passed byCongress in 2000 and the recent Deep Port work that has come out for bid andthose projects expected for 2004 and 2005 bidding have already been authorizedby this or prior WRDA legislation.  Whileno bill was passed in 2002 or 2003, a 2004 WRDA was introduced but has notpassed the Senate at this point. The 2004 WRDA bill includes a change toincrease the federal cost sharing percentages as ports are brought to greaterdepths, which should provide some incentive for certain state legislatures topush for its adoption.  However, the billin its current form includes a provision that would create additionalenvironmental regulations for beach nourishment projects, so passage in itscurrent form would not be positive for the dredging industry.  While there were previously expectations thatthe bill may be tabled until next year, Congress will be reconvening for a lameduck session after the November elections to deal with appropriation bills, sothere is still an opportunity for a 2004 WRDA to be enacted.  There may be the possibility to enact iteither as its own bill with an amendment to the unfavorable beach provision, oras an attachment to the omnibus appropriations bill or some other bill, inwhich case fewer changes may be required to get a version passed that will notbe unfavorable to the industry.  Regardless of the outcome of this WRDA bill,Deep Port projects valued at approximately $250 million, which have alreadybeen authorized by prior WRDA legislation, remain scheduled for 2005 bidding,and given the recent improvement in the bid market, management has no reason toexpect that these projects will not bid as planned, pending permits and othertypical short-term delays.  The Deep Portprojects underway are not fully functional until all parts of the channels aretaken to their final depths, and the other authorized projects have been provento be necessary to accommodate the deeper draft vessels in use throughout theworld.

 

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In summary, while the Company has experienceda significant decline in earnings during the second and third quarters of 2004,management remains hopeful, given the current increase in bidding activity,that the industry conditions are improving. However, even if the bidding activity has normalized, it will take sometime for pricing to return to historical levels as the industry achieveshistorical occupancy and the participants regain confidence in a morepredictable market.  The Company’sdredging fleet should be highly utilized in the fourth quarter, as it performswork currently in backlog; however the margins on this work are lower thanhistorical levels, given the competitive environment in which it was bid.  Management is also optimistic that additionalDeep Port and beach work, if bid as scheduled, coupled with the Company’scurrent backlog can provide solid utilization of the Company’s fleet into 2005.

###### ** **

###### **Liquidity and Capital Resources**

 

The Company’s principal sources of liquidityare cash flow generated from operations and borrowings under its new seniorcredit facility.  The Company’s principaluses of cash are to meet debt service requirements, finance its capitalexpenditures, provide working capital and meet other general corporatepurposes.

 

The Company’s net cash generated by operatingactivities for the nine months ended September 30, 2004 and 2003 totaled $19.1million and $12.2 million, respectively. The fluctuation between periods results from the normal timingdifferences on the recognition and billing of revenues relative to the currentlevel of activity.  Additionally, in2004, the Company received income tax refunds in connection with the payment ofexpenses related to the sale in December of 2003 and collected significantamounts on accounts receivable in the third quarter of 2004, both of whichcontributed to the increase in cash generated by operations in the 2004 period.

 

The Company’s net cash flows used in investingactivities were $10.5 million compared to $13.3 million for first nine monthsof 2004 and 2003, respectively.  The useof cash relates primarily to equipment acquisitions and capital improvements toexisting equipment.  With respect to the2004 equipment acquisitions, approximately $2.5 million was funded by proceedsreceived in 2003 from the sale of two tugboats as part of like-kind exchangetransaction, and the Company intends to offset approximately $5.1 million ofits year-to-date spending on construction of two new barges with the proceedsfrom a sale-leaseback transaction to take place in the fourth quarter. Additionally,the year-to-date spending includes $3.2 million related to capital improvementson the dredge New York.  In November2004, the Company restructured the long-term operating lease for this dredge,and the new lessor reimbursed the Company for these improvements within the newlease arrangement.  In May 2004, theCompany received cash of approximately $0.5 million from its former shareholders,representing the final adjustment to the purchase price with respect to theacquisition of the Company by MDP in December 2003.  In September 2004, the Company received a$1.6 million distribution of earnings from its Amboy joint venture.  In the 2003 period, the Company also utilized$1.0 million to purchase 50% of a real estate interest related to its Amboyjoint venture and received proceeds of $1.2 million related to the sale of itsinterest in the Riovia S.A. joint venture.

 

The Company’s net cash used in financingactivities for nine months ended September 30, 2004 totaled $4.2 million,compared to a source of cash of $0.4 million for the nine months endedSeptember 30, 2003.  In the 2004 period,the Company paid down debt, while it borrowed funds in the 2003 period, basedon its working capital needs in the respective periods.

 

Given the reduced level of earnings theCompany has experienced to date in 2004, the Company has taken measures toreduce discretionary capital and overhead spending and believes its anticipatedcash flows from operations and available credit under its revolving creditfacility will be sufficient to fund the Company’s operations and its revisedcapital expenditures, and meet its 

 

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current debt service requirements ofapproximately $20 million for the year.  TheCompany’s Credit Agreement and Equipment Term Loan (collectively, “seniorcredit agreements”) and bonding agreement with its surety provider containcertain provisions that require the Company to maintain a minimum net worth andcertain other financial ratios, limit payment of dividends and restrict certainother transactions.  Mid-way through thethird quarter, management became concerned that the Company may not meet itstotal leverage ratio at the end of the quarter, so management expediteddiscussions with its senior lenders and bonding company to develop revisedcovenants which would satisfy them, but allow the Company maximum flexibilityto work through this challenging period of uncertainty.  The amended senior credit agreements, whichwere effective September 30, 2004, allow additional flexibility in the Company’sleverage and interest coverage ratios, including replacement of the totalleverage ratio with a required minimum EBITDA, as defined in the senior creditagreements, through 2005.  In exchange,the Company’s capital spending limits were reduced and the Company’s borrowingavailability under its Credit Agreement was reduced to $35 million (with a sub-limitof $25 million for letters of credit and $15 million for revolver borrowings),until such time that the Company achieves certain defined financial measures.The bonding agreement was also amended to revise the minimum net worthrequirements.  At September 30, 2004, theCompany was in compliance with all of the revised covenants and expects toremain in compliance through the rest of the year.  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 would occur under the Company’ssenior credit agreements, which could result in a material adverse impact onthe Company’s financial condition.

 

The Company’s ability to fund its workingcapital needs, planned capital expenditures and scheduled debt payments, and tocomply with all of the financial covenants under its senior credit agreementsand bonding agreement, depends on its future operating performance and cashflow, which in turn, are subject to prevailing economic conditions and tofinancial, business and other factors, some of which are beyond the Company’scontrol.

 

The Company is still evaluatingthe impact of the American Jobs Creation Act of 2004 (the Act) and does notexpect that the changes brought about by the Act will have a significant impacton its results of operations or financial position.

 

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

 

In preparing its consolidated financialstatements, the Company follows accounting principles generally accepted in theUnited States of America.  Theapplication of these principles requires significant judgments or an estimationprocess that can affect the results of operations, financial position and cashflows of the Company, as well as the related footnote disclosures.  The Company continually reviews itsaccounting policies and financial information disclosures.  There have been no material changes inpolicies or estimates since December 31, 2003.

 

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###### **Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

The market risk of the Company’s financialinstruments as of September 30, 2004 has not significantly changed sinceDecember 31, 2003.  The market riskprofile of the Company on December 31, 2003 is disclosed in the Company’s 2003Annual Report on Form 10-K.

 

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

 

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

 

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

 

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

 

###### **Item 1.  Legal Proceedings**

 

In1999, the Boston Housing Authority (BHA), for whom NASDI had worked, assertedthat NASDI and its subcontractors were responsible for improperly disposing ofsome contaminated materials.  At the timethe Company acquired NASDI in 2001, it was believed that NASDI had sufficientrecourse in the matter and that any potential liability would be minimal.  However, in the meantime, certain of theinsurance carriers that would be responsible for this matter have gonebankrupt.  Negotiations between theparties have continued to progress, and in the third quarter of 2004, the casewent before a judge in the Massachusetts court system who advised NASDI and thesubcontractors to accept a settlement with the BHA.  While NASDI could continue to pursue thematter, it was determined that settlement may be more cost effective.  Therefore, in the third quarter of 2004, theCompany recorded a $1.3 million charge for NASDI’s share of this potentialsettlement liability.

 
| **Item 6. Exhibits** |
|----------------------|
| ** **           |
| 31.1                 | Certification  Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of  1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                 | Certification  Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of  1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1                 | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
| 32.2                 | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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##### **SIGNATURE**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | Great Lakes Dredge &  Dock Corporation                                 |
|--------|----------------------------------------------------------------------------|
|   |                                                                       |
|   |                                                                       |
| Date:  | November 15, 2004                                                          | By: | /s/ Deborah A. Wensel |   |
|   | Deborah A. Wensel                                                          |
|   | Senior Vice President  and Chief Financial Officer                         |
|   |                                                                       |
|   | (Principal Financial and  Accounting Officer and  Duly Authorized Officer) |
|        |                                                                            |  |  |  |  |

 

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**EXHIBITINDEX**

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

 

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