** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM10-Q**

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

 

**For thequarterly period ended September 30, 2002**

 

**OR**

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

 

**For thetransition period from**

 

**CommissionFile Number 333-64687**

 

----

 
| **GREAT  LAKES DREDGE & DOCK CORPORATION**                   |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |   |   |
| **Delaware**                                                     |   | **13-3634726** |
| (State or other  jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |   |
| **2122  York Road, Oak Brook, Illinois**                         |   | **60523** |
| (Address of principal  executive offices)                        |   | (Zip Code) |

 

Registrant’s telephonenumber, including area code:  **(630) 574-3000**

 

----

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ý  No o

 

As of November 8, 2002, there were outstanding1,616,982 shares of Class A Common Stock, 3,363,900 shares of Class B CommonStock and 44,857 shares of Preferred Stock.

 

----

** **

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

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

### **Securities Exchange Act of 1934**

### **For the Quarterly Period ended September 30, 2002**

 

 

##### **INDEX**

 
| **Part I**         |   | **Financial Information** |                                                                                                          |   |
|--------------------|--------|---------------------------|---------------------------------------------------------------------------------------------------------------|--------|
|               |   |                      |                                                                                                          |   |   |
|               |   | Item 1                    | Financial Statements (Unaudited)                                                                              |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   |                      | Condensed  Consolidated Balance Sheets at September 30, 2002 and December 31, 2001                            |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   |                      | Condensed  Consolidated Statements of Income for the Three and Nine Months ended  September 30, 2002 and 2001 |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   |                      | Condensed  Consolidated Statements of Cash Flows for the Nine Months ended September 30,  2002 and 2001       |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   |                      | Notes  to Unaudited Condensed Consolidated Financial Statements                                               |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   | Item  2              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   | Item  3                   | Quantitative  and Qualitative Disclosures About Market Risk                                                   |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   | Item 4                    | Controls and  Procedures                                                                                      |   |   |
|               |   |                      |                                                                                                          |   |   |
| **Part II**        |   | **Other Information**     |                                                                                                          |   |
|               |   |                      |                                                                                                          |   |   |
|               |   | Item 1                    | Legal Proceedings                                                                                             |   |   |
|               |   |                      |                                                                                                          |   |   |
|               |   | Item 6                    | Exhibits and  Reports on Form 8-K                                                                             |   |   |
|               |   |                      |                                                                                                          |   |   |
| **Signature**      |   |                      |                                                                                                          |
|               |   |                      |                                                                                                          |   |   |
| **Certifications** |   |                      |                                                                                                          |
|               |   |                      |                                                                                                          |   |   |
| **Exhibit Index**  |   |                      |                                                                                                          |

 

 

1

----

 

**Part I — Financial Information**

** **

**Great Lakes Dredge & DockCorporation and Subsidiaries**

**Condensed ConsolidatedBalance Sheets**

**(Unaudited)**

**(in thousands, except share andper share amounts)**

 
| ** **                                                                                                                                         | ** ** | **September  30,  2002** | ** ** | **December  31,  2001** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **Assets**                                                                                                                                         |       |                     |       |                    |       |
| Current assets:                                                                                                                                    |       |                     |       |                    |       |
| Cash and  equivalents                                                                                                                              |       | $                        | 3,019      |                    | $          | 2,590 |   |
| Accounts  receivable, net                                                                                                                          |       | 45,786                   |       | 30,407                  |       |
| Contract  revenues in excess of billings                                                                                                           |       | 13,286                   |       | 23,215                  |       |
| Inventories                                                                                                                                        |       | 12,256                   |       | 14,291                  |       |
| Prepaid expenses  and other current assets                                                                                                         |       | 18,059                   |       | 18,486                  |       |
| Total current  assets                                                                                                                              |       | 92,406                   |       | 88,989                  |       |
| Property and  equipment, net                                                                                                                       |       | 139,377                  |       | 141,313                 |       |
| Goodwill, net of  amortization of $1,455                                                                                                           |       | 29,405                   |       | 29,405                  |       |
| Inventories                                                                                                                                        |       | 9,504                    |       | 9,229                   |       |
| Investments in  joint ventures                                                                                                                     |       | 5,810                    |       | 6,331                   |       |
| Other assets                                                                                                                                       |       | 5,434                    |       | 6,956                   |       |
| Total assets                                                                                                                                       |       | $                        | 281,936    |                    | $          | 282,223 |   |
|                                                                                                                                               |       |                     |       |                    |       |
| **Liabilities and Stockholders’  Deficit**                                                                                                    |       |                     |       |                    |       |
| Current  liabilities:                                                                                                                              |       |                     |       |                    |       |
| Accounts payable                                                                                                                                   |       | $                        | 27,418     |                    | $          | 30,913 |   |
| Accrued expenses                                                                                                                                   |       | 21,135                   |       | 28,497                  |       |
| Billings in  excess of contract revenues                                                                                                           |       | 7,395                    |       | 4,873                   |       |
| Current  maturities of long-term debt                                                                                                              |       | 12,000                   |       | 11,000                  |       |
| Total current  liabilities                                                                                                                         |       | 67,948                   |       | 75,283                  |       |
| Long-term debt                                                                                                                                     |       | 170,759                  |       | 173,728                 |       |
| Deferred income  taxes                                                                                                                             |       | 45,415                   |       | 45,593                  |       |
| Other                                                                                                                                              |       | 7,639                    |       | 7,917                   |       |
| Total  liabilities                                                                                                                                 |       | 291,761                  |       | 302,521                 |       |
| Minority  interests                                                                                                                                |       | 4,794                    |       | 5,696                   |       |
| Commitments and  contingencies (Note 11)                                                                                                           |       | —                   |       | —                  |       |
| Stockholders’  deficit:                                                                                                                       |       |                     |       |                    |       |
| Preferred stock,  $.01 par value; 250,000 shares authorized: 45,000 issued; 44,857 outstanding  in 2002 and 2001                                   |       | 1                        |       | 1                       |       |
| Common stock,  $.01 par value; 50,000,000 shares authorized: 5,000,000 issued; 4,970,882 and  4,920,882 outstanding in 2002 and 2001, respectively |       | 50                       |       | 50                      |       |
| Additional  paid-in capital                                                                                                                        |       | 50,457                   |       | 50,457                  |       |
| Accumulated  deficit                                                                                                                               |       | (65,367                  | )          | (75,787                 | )          |
| Accumulated  other comprehensive income (loss)                                                                                                     |       | 480                      |       | (407                    | )          |
| Treasury stock,  at cost; 143 preferred shares in 2002 and 2001; 29,118 and 79,118 common  shares in 2002 and 2001, respectively                   |       | (172                     | )          | (222                    | )          |
| Note receivable  from stockholder                                                                                                                  |       | (68                      | )          | (86                     | )          |
| Total  stockholders’ deficit                                                                                                                  |       | (14,619                  | )          | (25,994                 | )          |
| Total  liabilities and stockholders’ deficit                                                                                             |       | $                        | 281,936    |                    | $          | 282,223 |   |

 

See notes tounaudited condensed consolidated financial statements.

 

 

2

----

 

**Great Lakes Dredge & DockCorporation and Subsidiaries**

**Condensed Consolidated Statements of Income**

**(Unaudited)**

**(in thousands)**

 
| ** **                                         | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
|                                               |       | **2002**                               |       | **2001**                              |       | **2002** |   | **2001** |   |
| Contract  revenues                                 |       | $                                      | 100,055    |                                  | $          | 82,680 |   | $ | 263,443 |   | $ | 233,541 |   |
| Costs of  contract revenues                        |       | 80,339                                 |       | 68,108                                |       | 214,715 |   | 190,516 |   |
| Gross profit                                       |       | 19,716                                 |       | 14,572                                |       | 48,728 |   | 43,025 |   |
| General and  administrative expenses               |       | 8,387                                  |       | 6,777                                 |       | 21,713 |   | 18,802 |   |
| Operating income                                   |       | 11,329                                 |       | 7,795                                 |       | 27,015 |   | 24,223 |   |
| Interest  expense, net                             |       | (5,415                                 | )          | (5,789                                | )          | (16,009 | ) | (15,504 | ) |
| Equity in  earnings of joint ventures              |       | 127                                    |       | 482                                   |       | 209 |   | 599 |   |
| Income before  income taxes and minority interests |       | 6,041                                  |       | 2,488                                 |       | 11,215 |   | 9,318 |   |
| Income tax  expense                                |       | (2,682                                 | )          | (1,070                                | )          | (1,697 | ) | (4,089 | ) |
| Minority  interests                                |       | (419                                   | )          | (494                                  | )          | 902 |   | (1,612 | ) |
| Net income                                         |       | $                                      | 2,940      |                                  | $          | 924 |   | $ | 10,420 |   | $ | 3,617 |   |

 

See notes tounaudited condensed consolidated financial statements.

 

 

3

----

 

**Great Lakes Dredge & DockCorporation and Subsidiaries**

**Condensed ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                                           | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                 |       | **2002**                              |       | **2001** |   |
| **Operating  Activities**                                                                            |       |                                  |       |   |   |
| Net income                                                                                           |       | $                                     | 10,420     |   | $ | 3,617 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities:                    |       |                                  |       |   |   |
| Depreciation and  amortization                                                                       |       | 11,755                                |       | 10,935 |   |
| Earnings of  joint ventures                                                                          |       | (209                                  | )          | (599 | ) |
| Minority  interests                                                                                  |       | (902                                  | )          | 1,612 |   |
| Deferred income  taxes                                                                               |       | (506                                  | )          | 724 |   |
| Gain on  dispositions of property and equipment                                                      |       | (428                                  | )          | (292 | ) |
| Other, net                                                                                           |       | 1,325                                 |       | 439 |   |
| Changes in  assets and liabilities:                                                                  |       |                                  |       |   |   |
| Accounts  receivable, net                                                                            |       | (15,379                               | )          | (591 | ) |
| Contract  revenues in excess of billings                                                             |       | 9,929                                 |       | 4,056 |   |
| Inventories                                                                                          |       | 1,760                                 |       | (2,212 | ) |
| Prepaid expenses  and other current assets                                                           |       | 1,760                                 |       | 492 |   |
| Accounts payable  and accrued expenses                                                               |       | (10,187                               | )          | (16,856 | ) |
| Billings in  excess of contract revenues                                                             |       | 2,522                                 |       | (1,113 | ) |
| Net cash flows  from operating activities                                                            |       | 11,860                                |       | 212 |   |
|                                                                                                 |       |                                  |       |   |   |
| **Investing  Activities**                                                                            |       |                                  |       |   |   |
| Purchases of  property and equipment                                                                 |       | (14,862                               | )          | (6,140 | ) |
| Dispositions of  property and equipment                                                              |       | 5,413                                 |       | 606 |   |
| Purchase of  NASDI stock, net of cash acquired of $5,000                                             |       | —                                |       | (30,800 | ) |
| Net cash flows  from investing activities                                                            |       | (9,449                                | )          | (36,334 | ) |
|                                                                                                 |       |                                  |       |   |   |
| **Financing  Activities**                                                                            |       |                                  |       |   |   |
| Repayments of long-term  debt                                                                        |       | (8,000                                | )          | (6,762 | ) |
| Borrowings of  revolving loans, net of repayments                                                    |       | 6,000                                 |       | 5,000 |   |
| Proceeds from  issuance of 11 1/4% subordinated notes                                                |       | —                                |       | 39,700 |   |
| Financing fees                                                                                       |       | —                                |       | (2,500 | ) |
| Repayment on  note receivable from stockholder                                                       |       | 18                                    |       | 15 |   |
| Net cash flows  from financing activities                                                            |       | (1,982                                | )          | 35,453 |   |
| Net change in  cash and equivalents                                                                  |       | 429                                   |       | (669 | ) |
| Cash and  equivalents at beginning of period                                                         |       | 2,590                                 |       | 1,137 |   |
| Cash and  equivalents at end of period                                                               |       | $                                     | 3,019      |   | $ | 468 |   |
|                                                                                                 |       |                                  |       |   |   |
| **Supplemental  Cash Flow Information**                                                              |       |                                  |       |   |   |
| Cash paid for  interest                                                                              |       | $                                     | 19,296     |   | $ | 17,639 |   |
| Cash paid for  taxes                                                                                 |       | $                                     | 4,002      |   | $ | 4,603 |   |
|                                                                                                 |       |                                  |       |   |   |
| **Supplemental  Schedule of Noncash Investing and Financing Activities**                             |       |                                  |       |   |   |
| Issuance of  common stock award to certain members of management; shares issued from  treasury stock |       | $                                     | 50         |   |   |   |

 

See notes tounaudited condensed consolidated financial statements.

 

 

4

----

 

**GREATLAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(dollarsin thousands)**

 

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

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the U.S. forinterim financial information. Accordingly, these financial statements do not include all theinformation in the notes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, the unaudited condensed consolidated financialstatements include all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation of the financial position, resultsof operations and cash flows as of and for the dates presented.  The unaudited condensed consolidatedfinancial statements and notes herein should be read in conjunction with theaudited consolidated financial statements of Great Lakes Dredge & DockCorporation and Subsidiaries (the “Company”) and the notes thereto, included inthe Company’s Annual Report filed on Form 10-K for the year ended December 31,2001.

 

The condensedconsolidated results of operations for the interim periods presented herein arenot necessarily indicative of the results to be expected for the full year.

 

 

**2.****             ****Allocation of equipment cost**

 

The Company canhave significant fluctuations in dredging equipment utilization throughout theyear.  Accordingly, for interimreporting, the Company defers or accrues fixed equipment costs and amortizesthe expenses in proportion to revenues recognized over the year to better matchrevenues and expenses.

 

 

**3.****             ****Comprehensive income**

 

Totalcomprehensive income is comprised of net income and net unrealized gains andlosses on cash flow hedges.  Totalcomprehensive income for the three months ended September 30, 2002 and 2001 was$3,176 and $950, respectively.  Totalcomprehensive income for the nine months ended September 30, 2002 and 2001 was$11,307 and $3,185, respectively.

 

 

**4.****             ****Risk management activities**

 

The Company uses derivative instruments to managecommodity price and foreign currency exchange risks.  Such instruments are not used for trading purposes.   As of September 30, 2002, the Company isparty to various swap arrangements to hedge the price of a portion of itsdiesel fuel purchase requirements for work in its backlog to be performedthrough December 2003.  As of September30, 2002, there were 7.7 million gallons remaining on these contracts.  Under these agreements, the Company will payfixed prices ranging from $0.55 to $0.72 per gallon.  At September 30, 2002 and December 31, 2001, the fair value onthese contracts was estimated to be a gain (loss) of $786 and $(670),respectively, based on quoted market prices.  The fair value at September 30, 2002 and December 31, 2001 is recordedin other current assets and accrued liabilities, respectively.  Ineffectiveness related to these fuel hedgearrangements was determined to be immaterial. The remaining gains included in accumulated other comprehensive incomeat September 30, 2002 will be reclassified into earnings over the next fifteenmonths, corresponding to the period during which the hedged fuel is expected tobe utilized.

 

 

5

----

 

The carrying values of otherfinancial instruments included in current assets and current liabilitiesapproximate fair values due to the short-term maturities of theseinstruments.  The carrying value oflong-term bank debt is a reasonable estimate of its fair value as interest ratesare variable, based on the prevailing market rates.  At September 30, 2002 and December 31, 2001, the Company hadlong-term subordinated notes outstanding with a recorded book value of $154,759and $154,728, respectively.   The fairvalue of these notes was $159,836 and $158,294 at September 30, 2002 andDecember 31, 2001, respectively, based on quoted market prices.  The Company is contingently liable underletters of credit and other financial guarantees.  It is not practicable to estimate the fair value of thesefinancial instruments; however, the Company does not expect any material lossesto result from these financial instruments since performance is not likely tobe required.

 

 

**5.****             ****Acquisition of North American Site Developers, Inc.**

 

                InApril 2001, the Company purchased 80% of the capital stock of North AmericanSite Developers, Inc. (“NASDI”), a demolition service provider located in theBoston, Massachusetts area.  The acquisition was accounted for by thepurchase method of accounting and, accordingly, the results of operations ofNASDI are included in the Company’s consolidated statements of income from thedate of the acquisition.

 

The results of operations for the nine months endedSeptember 30, 2002 include the results of NASDI.   The following pro forma combined results of operations for thenine months ended September 30, 2001 have been prepared assuming theacquisition had occurred as of the beginning of the period.  The pro forma amounts include adjustments toreflect increased interest on debt incurred to finance the acquisition andexclude goodwill amortization. The pro forma operating results have beenprepared for comparative purposes only and are not necessarily indicative ofthe results of operations that may occur in the future or that would haveoccurred had this acquisition been consummated at the beginning of the periodpresented.

 
| ** **                                         | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **Actual  2002**                      | ** ** | **Pro forma  2001** | ** ** |
| Contract  revenues                                 |       | $                                     | 263,443    |   | $ | 242,247 |   |
| Operating income                                   |       | 27,015                                |       | 27,621 |   |
| Income before  income taxes and minority interests |       | 11,215                                |       | 11,493 |   |
| Net income                                         |       | 10,420                                |       | 4,919 |   |
|                                                    |            |                                       |            |  |  |  |  |

 

 

**6.****             ****Accounts receivable**

 

Accounts receivable at September 30, 2002 and December31, 2001 are as follows:

 
| ** **                       | ** ** | **September  30,2002** | ** ** | **December  31,2001** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| Completed  contracts             |       | $                      | 8,854      |                  | $          | 11,776 |   |
| Contracts in  progress           |       | 31,631                 |       | 16,774                |       |
| Retainage                        |       | 6,251                  |       | 3,228                 |       |
|                             |       | 46,736                 |       | 31,778                |       |
| Allowance for  doubtful accounts |       | (950                   | )          | (1,371                | )          |
|                             |       | $                      | 45,786     |                  | $          | 30,407 |   |

 

 

6

----

 

**7.****             ****Contracts in progress**

 

The components of contracts in progress at September30, 2002 and December 31, 2001 are as follows:

 
| ** **                                                                      | ** ** | **September  30,  2002** | ** ** | **December  31,  2001** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Costs and  earnings in excess of billings:                                      |       |                     |       |                    |       |
| Costs and  earnings for contracts in progress                                   |       | $                        | 189,380    |                    | $          | 156,539 |   |
| Amounts billed                                                                  |       | (178,576                 | )          | (136,401                | )          |
| Costs and  earnings in excess of billings for contracts in progress             |       | 10,804                   |       | 20,138                  |       |
| Costs and  earnings in excess of billings for completed contracts               |       | 2,482                    |       | 3,077                   |       |
|                                                                            |       | $                        | 13,286     |                    | $          | 23,215 |   |
|                                                                            |       |                     |       |                    |       |
| Prepaid contract  costs (included in prepaid expenses and other current assets) |       | $                        | 4,110      |                    | $          | 5,390 |   |
|                                                                            |       |                     |       |                    |       |
| Billings in  excess of costs and earnings:                                      |       |                     |       |                    |       |
| Amounts billed                                                                  |       | $                        | (40,219    | )                       | $          | (77,860 | ) |
| Costs and  earnings for contracts in progress                                   |       | 32,824                   |       | 72,987                  |       |
|                                                                            |       | $                        | (7,395     | )                       | $          | (4,873 | ) |

 

 

**8.****             ****Accrued expenses**

 

**               **Accrued expenses at September 30, 2002 and December31, 2001 are as follows:

 
| ** **                     | ** ** | **September  30,  2002** | ** ** | **December  31,  2001** | ** ** |
|--------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Payroll and  employee benefits |       | $                        | 6,077      |                    | $          | 6,273 |   |
| U.S. income and  other taxes   |       | 4,928                    |       | 6,492                   |       |
| Insurance                      |       | 4,735                    |       | 5,386                   |       |
| Interest                       |       | 2,401                    |       | 6,721                   |       |
| Equipment leases               |       | 895                      |       | 1,313                   |       |
| Other                          |       | 2,099                    |       | 2,312                   |       |
|                           |       | $                        | 21,135     |                    | $          | 28,497 |   |

 

 

**9.****             ****Income taxes**

 

**               **The Company’s effective tax rate for thenine months ended September 30, 2002 was 13.0% reflecting a tax deduction forthe write-off of the tax basis of an insurance claim receivable of $11,000related to litigation settlement payments made in 1997.  For bookpurposes, the insurance reimbursement had been assigned to the Company’s formerowner as part of the Company’s recapitalization in 1998 and, therefore, had nobook basis.  The effective tax rate for the comparable nine months endedSeptember 30, 2001 was 48.9%.

 

 

7

----

 

For the three and nine monthperiods ended September 30, 2002, the Company’s income tax provision includesinterest expense of $800 on estimated additional federal income tax for theyears 1995 to 2000 arising from a reduction in actual tax payments made toforeign tax authorities versus amounts previously reported in the Company’sU.S. federal tax returns for those years. This reallocation of tax liabilities from foreign to domestic is expectedto ultimately result in a net tax benefit to the Company of an amountapproximating the interest incurred.

 

 

**10.****      ****Segment information**

** **

                The Company andits subsidiaries operate in two reportable segments: dredging anddemolition.  Prior to the acquisition ofNASDI in April 2001, the Company’s only reportable segment was dredging.  The Company’s financial reporting systemspresent various data for management to run the business, including profit andloss statements prepared according to the segments presented.   Segment information for the periodspresented is as follows:

 
| ** **         | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|--------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
|               |       | **2002**                               |       | **2001**                              |       | **2002** |   | **2001** |   |
| **Dredging**       |       |                                   |       |                                  |       |   |   |   |   |
| Contract  revenues |       | $                                      | 82,223     |                                  | $          | 74,347 |   | $ | 224,573 |   | $ | 216,537 |   |
| Operating income   |       | 7,806                                  |       | 7,444                                 |       | 20,276 |   | 22,953 |   |
|               |       |                                   |       |                                  |       |   |   |   |   |
| **Demolition**     |       |                                   |       |                                  |       |   |   |   |   |
| Contract  revenues |       | $                                      | 17,832     |                                  | $          | 8,333 |   | $ | 38,870 |   | $ | 17,004 |   |
| Operating income   |       | 3,523                                  |       | 351                                   |       | 6,739 |   | 1,270 |   |
|               |       |                                   |       |                                  |       |   |   |   |   |
| **Total**          |       |                                   |       |                                  |       |   |   |   |   |
| Contract  revenues |       | $                                      | 100,055    |                                  | $          | 82,680 |   | $ | 263,443 |   | $ | 233,541 |   |
| Operating income   |       | 11,329                                 |       | 7,795                                 |       | 27,015 |   | 24,223 |   |
|                    |            |                                        |            |                                       |            |  |  |  |  |  |  |  |  |  |

 

 

**11.****      ****Commitments and contingencies**

 

              AtSeptember 30, 2002, the Company is contingently liable, in the normal course ofbusiness, for $11,368 in letters of credit related primarily to contractperformance guarantees.

 

              AmboyAggregates, a joint venture in which the Company has a 50% equity interest, hasa mortgage loan with a bank, which contains certain restrictive covenants,including limitations on the amount of distributions to its joint venturepartners.  The Company has guaranteed50% of the outstanding mortgage principal and accrued interest, which totaled$1,532 at September 30, 2002.

 

              TheCompany has reached an agreement in principle to purchase Ballast Needam’sminority interests in NATCO Limited Partnership and North American TrailingCompany for $4,500.  The purchase wouldgive the Company complete ownership and control of its hopper operations and ispending finalization of the definitive agreements.  The purchase is expected to be completed before year-end.

 

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.

 

 

8

----

 

              In the normal course of business,the Company is a defendant in various legal proceedings.  Resolution of these claims is not expectedto have a material adverse impact on the financial position or operations ofthe Company.

 

 

**12.****      ****Effects of recently issued accounting pronouncements**

 

The Company has adopted Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations” as of January 1,2002.  This statement requires thepurchase method of accounting for business combinations initiated after June30, 2001 and eliminates the pooling-of-interests method.

 

The Company has also adopted SFAS No. 142, “Goodwilland Other Intangible Assets” as of January 1, 2002.  This statement requires that goodwill and other intangible assetswith indefinite useful lives no longer be amortized, but instead be assessedannually for impairment with the initial assessment to be completed within thefirst six months following adoption of the standard.   The required initial impairment evaluation was performed in thefirst quarter of 2002 resulting in no impairment in the value of the Company’sgoodwill.   The Company’s goodwillrelates solely to its acquisition of NASDI, which took place in the secondquarter of 2001. The Company’s earnings for the nine-month period endedSeptember 30, 2001 include goodwill amortization of $927.

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) also issued SFAS No. 143,“Accounting for Asset Retirement Obligations,” which addresses the recognitionand remeasurement of obligations associated with the retirement of tangiblelong-lived assets.   SFAS No. 143 iseffective for financial statements issued for fiscal years beginning after June15, 2002.  The Company is currentlyassessing the impact of adopting this statement, but does not anticipate thatadoption will have a material effect on its financial position or results ofoperations.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets,” which supersedesprevious guidance and provides additional clarification as to when and how tomeasure a loss upon impairment or disposal of long-lived assets.  This standard, which became effective forthe Company on January 1, 2002, had no impact on its financial position orresults of operations upon adoption.

 

In May 2002, the FASB issued SFAS No. 145, “Rescissionof FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections”. Under the provisions of SFAS No. 145, gains and lossesfrom the early extinguishment of debt are no longer classified as anextraordinary item, net of income taxes, but are included in the determinationof pretax earnings.  SFAS No. 145 is effective for fiscal years beginningafter May 15, 2002, with early application encouraged.  Upon adoption, allgains and losses from the extinguishment of debt previously reported as anextraordinary item shall be reclassified to pretax earnings.  It isanticipated that the adoption of SFAS No. 145 will have no impact on thefinancial position or results of operations for the Company.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”.  SFAS No. 146 requires that a liability forcosts associated with an exit or disposal activity be recognized and measuredinitially at fair value only when the liability is incurred.  SFAS No. 146 is effective for exit ordisposal activities that are initiated after December 31, 2002, and as such,the provisions of SFAS No. 146 will be applied prospectively if it impacts theCompany through relevant restructuring activities or other disposal or exitactivities.

 

 

9

----

 

**13.****      ****Supplemental condensed consolidating financial information**

 

Included in the Company’s long-term debt is $155,000of 111⁄4% senior subordinated notes which will mature on August 15, 2008.  The payment obligations of the Company underthe senior subordinated notes are guaranteed by the Company’s wholly owneddomestic subsidiaries and NASDI (the “Subsidiary Guarantors”).  Such guarantees are full, unconditional andjoint and several.  Separate financialstatements of the Subsidiary Guarantors are not presented because the Company’smanagement has determined that they would not be material to investors.  The following supplemental financialinformation sets forth, on a combined basis, the balance sheets, statements ofoperations and statements of cash flows for the Subsidiary Guarantors, theCompany’s non-guarantor subsidiaries and for the Company (“GLD Corporation”).

 

 

10

----

 

**GREAT LAKES DREDGE & DOCK CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands)**

** **

** **

**Condensed Consolidating Balance Sheet at September 30,2002**

** **
| **ASSETS**                                                   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| Current assets:                                              |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Cash and equivalents                                         |       | $                           | 1,077      |                    | $          | 1,942                |       | $                | —     |                     | $          | — |   | $ | 3,019 |   |
| Accounts receivable, net                                     |       | 39,934                      |       | 5,852                   |       | —               |       | —           |       | 45,786                   |       |
| Receivables from affiliates                                  |       | 15,271                      |       | 10,036                  |       | 6,958                |       | (32,265          | )          | —                   |       |
| Current portion of net investment in direct financing leases |       | —                      |       | 362                     |       | —               |       | (362             | )          | —                   |       |
| Contract revenues in excess of billings                      |       | 9,777                       |       | 3,509                   |       | —               |       | —           |       | 13,286                   |       |
| Inventories                                                  |       | 7,693                       |       | 4,563                   |       | —               |       | —           |       | 12,256                   |       |
| Prepaid expenses and other current assets                    |       | 18,368                      |       | (1,323                  | )          | 1,014                |       | —           |       | 18,059                   |       |
| Total current assets                                         |       | 92,120                      |       | 24,941                  |       | 7,972                |       | (32,627          | )          | 92,406                   |       |
| Property and equipment, net                                  |       | 87,015                      |       | 14,215                  |       | 38,147               |       | —           |       | 139,377                  |       |
| Goodwill, net of amortization of $1,455                      |       | 29,405                      |       | —                  |       | —               |       | —           |       | 29,405                   |       |
| Investments in subsidiaries                                  |       | 13,255                      |       | —                  |       | 143,695              |       | (156,950         | )          | —                   |       |
| Notes receivable from affiliates                             |       | 23,851                      |       | —                  |       | 16,500               |       | (40,351          | )          | —                   |       |
| Inventories                                                  |       | 9,504                       |       | —                  |       | —               |       | —           |       | 9,504                    |       |
| Investments in joint ventures                                |       | 5,810                       |       | —                  |       | —               |       | —           |       | 5,810                    |       |
| Other assets                                                 |       | 2,820                       |       | —                  |       | 2,614                |       | —           |       | 5,434                    |       |
|                                                         |       | $                           | 263,780    |                    | $          | 39,156               |       | $                | 208,928    |                     | $          | (229,928 | ) | $ | 281,936 |   |
|                                                         |       |                        |       |                    |       |                 |       |             |       |                     |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)**     |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Current liabilities:                                         |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Accounts payable                                             |       | $                           | 22,774     |                    | $          | 4,637                |       | $                | 7          |                     | $          | — |   | $ | 27,418 |   |
| Payables to affiliates                                       |       | 14,564                      |       | 17,701                  |       | —               |       | (32,265          | )          | —                   |       |
| Accrued expenses                                             |       | 13,722                      |       | 1,835                   |       | 5,578                |       | —           |       | 21,135                   |       |
| Current portion of obligations under capital leases          |       | —                      |       | 362                     |       | —               |       | (362             | )          | —                   |       |
| Billings in excess of contract revenues..                    |       | 6,971                       |       | 424                     |       | —               |       | —           |       | 7,395                    |       |
| Current maturities of long-term debt.                        |       | —                      |       | —                  |       | 12,000               |       | —           |       | 12,000                   |       |
| Total current liabilities                                    |       | 58,031                      |       | 24,959                  |       | 17,585               |       | (32,627          | )          | 67,948                   |       |
| Long-term debt.                                              |       | 3,000                       |       | —                  |       | 167,759              |       | —           |       | 170,759                  |       |
| Notes payable to affiliates..                                |       | 16,500                      |       | —                  |       | 23,851               |       | (40,351          | )          | —                   |       |
| Deferred income taxes..                                      |       | 33,070                      |       | 179                     |       | 12,166               |       | —           |       | 45,415                   |       |
| Other..                                                      |       | 4,948                       |       | 505                     |       | 2,186                |       | —           |       | 7,639                    |       |
| Total liabilities                                            |       | 115,549                     |       | 25,643                  |       | 223,547              |       | (72,978          | )          | 291,761                  |       |
| Minority interests.                                          |       | —                      |       | —                  |       | —               |       | 4,794            |       | 4,794                    |       |
| Stockholders’ equity (deficit)                          |       | 148,231                     |       | 13,513                  |       | (14,619              | )          | (161,744         | )          | (14,619                  | )          |
|                                                         |       | $                           | 263,780    |                    | $          | 39,156               |       | $                | 208,928    |                     | $          | (229,928 | ) | $ | 281,936 |   |

 

 

11

----

 

**GREAT LAKES DREDGE & DOCK CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands)**

** **

** **

**Condensed Consolidating Balance Sheet at December 31,2001**

 
| **ASSETS**                                                   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| Current assets:                                              |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Cash and equivalents.                                        |       | $                           | 2,515      |                    | $          | 75                   |       | $                | —     |                     | $          | — |   | $ | 2,590 |   |
| Accounts receivable, net.                                    |       | 27,629                      |       | 2,778                   |       | —               |       | —           |       | 30,407                   |       |
| Receivables from affiliates                                  |       | 5,051                       |       | 6,613                   |       | 6,000                |       | (17,664          | )          | —                   |       |
| Current portion of net investment indirect financing leases. |       | —                      |       | 1,946                   |       | 1,661                |       | (3,607           | )          | —                   |       |
| Contract revenues in excess of billings..                    |       | 21,120                      |       | 2,095                   |       | —               |       | —           |       | 23,215                   |       |
| Inventories.                                                 |       | 9,691                       |       | 4,600                   |       | —               |       | —           |       | 14,291                   |       |
| Prepaid expenses and other current assets..                  |       | 16,878                      |       | 778                     |       | 830                  |       | —           |       | 18,486                   |       |
| Total current assets                                         |       | 82,884                      |       | 18,885                  |       | 8,491                |       | (21,271          | )          | 88,989                   |       |
| Property and equipment, net..                                |       | 85,942                      |       | 15,118                  |       | 40,253               |       | —           |       | 141,313                  |       |
| Goodwill, net of amortization of $1,455                      |       | 29,405                      |       | —                  |       | —               |       | —           |       | 29,405                   |       |
| Investments in subsidiaries                                  |       | 18,932                      |       | —                  |       | 121,345              |       | (140,277         | )          | —                   |       |
| Notes receivable from affiliate.                             |       | 12,796                      |       | —                  |       | 21,000               |       | (33,796          | )          | —                   |       |
| Inventories..                                                |       | 9,229                       |       | —                  |       | —               |       | —           |       | 9,229                    |       |
| Investments in joint ventures.                               |       | 6,331                       |       | —                  |       | —               |       | —           |       | 6,331                    |       |
| Other assets..                                               |       | 3,651                       |       | —                  |       | 3,305                |       | —           |       | 6,956                    |       |
|                                                         |       | $                           | 249,170    |                    | $          | 34,003               |       | $                | 194,394    |                     | $          | (195,344 | ) | $ | 282,223 |   |
|                                                         |       |                        |       |                    |       |                 |       |             |       |                     |       |
| **LIABILITIES  AND  STOCKHOLDERS’ EQUITY (DEFICIT)**    |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Current liabilities:                                         |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Accounts payable..                                           |       | $                           | 26,294     |                    | $          | 4,619                |       | $                | —     |                     | $          | — |   | $ | 30,913 |   |
| Payables to affiliates.                                      |       | 14,966                      |       | 2,698                   |       | —               |       | (17,664          | )          | —                   |       |
| Accrued expenses                                             |       | 13,887                      |       | 3,951                   |       | 10,659               |       | —           |       | 28,497                   |       |
| Current portion of obligations under capital leases          |       | —                      |       | 3,607                   |       | —               |       | (3,607           | )          | —                   |       |
| Billings in excess of contract revenues..                    |       | 4,873                       |       | —                  |       | —               |       | —           |       | 4,873                    |       |
| Current maturities of long-term debt.                        |       | —                      |       | —                  |       | 11,000               |       | —           |       | 11,000                   |       |
| Total current liabilities                                    |       | 60,020                      |       | 14,875                  |       | 21,659               |       | (21,271          | )          | 75,283                   |       |
| Long-term debt.                                              |       | 3,000                       |       | —                  |       | 170,728              |       | —           |       | 173,728                  |       |
|                                                         |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Note payable to affiliate..                                  |       | 21,000                      |       | —                  |       | 12,796               |       | (33,796          | )          | —                   |       |
| Deferred income taxes..                                      |       | 32,549                      |       | 172                     |       | 12,872               |       | —           |       | 45,593                   |       |
| Other..                                                      |       | 5,090                       |       | 494                     |       | 2,333                |       | —           |       | 7,917                    |       |
| Total liabilities                                            |       | 121,659                     |       | 15,541                  |       | 220,388              |       | (55,067          | )          | 302,521                  |       |
| Minority interests.                                          |       | —                      |       | —                  |       | —               |       | 5,696            |       | 5,696                    |       |
| Stockholders’ equity (deficit)                          |       | 127,511                     |       | 18,462                  |       | (25,994              | )          | (145,973         | )          | (25,994                  | )          |
|                                                         |       | $                           | 249,170    |                    | $          | 34,003               |       | $                | 194,394    |                     | $          | (195,344 | ) | $ | 282,223 |   |

 

 

12

----

 

**GREAT LAKES DREDGE & DOCK CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands)**

** **

** **

**Condensed Consolidating Statement of Income for thethree months ended September 30, 2002**

 
| ** **                                       | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| Contract revenues                                |       | $                           | 89,406     |                    | $          | 18,394               |       | $                | —     |                     | $          | (7,745 | ) | $ | 100,055 |   |
| Costs of contract revenues                       |       | (71,634                     | )          | (15,983                 | )          | (467                 | )          | 7,745            |       | (80,339                  | )          |
| Gross profit (loss)                              |       | 17,772                      |       | 2,411                   |       | (467                 | )          | —           |       | 19,716                   |       |
| General and administrative expenses              |       | (6,829                      | )          | (1,524                  | )          | (34                  | )          | —           |       | (8,387                   | )          |
| Operating income (loss)                          |       | 10,943                      |       | 887                     |       | (501                 | )          | —           |       | 11,329                   |       |
| Interest expense, net                            |       | (1,573                      | )          | (101                    | )          | (3,741               | )          | —           |       | (5,415                   | )          |
| Equity in earnings of subsidiaries               |       | 461                         |       | —                  |       | 6,041                |       | (6,502           | )          | —                   |       |
| Equity in earnings of joint ventures             |       | 127                         |       | —                  |       | —               |       | —           |       | 127                      |       |
| Income before income taxes andminority interests |       | 9,958                       |       | 786                     |       | 1,799                |       | (6,502           | )          | 6,041                    |       |
| Income tax (expense) benefit                     |       | (3,634                      | )          | (189                    | )          | 1,141                |       | —           |       | (2,682                   | )          |
| Minority interests                               |       | —                      |       | —                  |       | —               |       | (419             | )          | (419                     | )          |
| Net income                                       |       | $                           | 6,324      |                    | $          | 597                  |       | $                | 2,940      |                     | $          | (6,921 | ) | $ | 2,940 |   |

 

 

**Condensed Consolidating Statement of Income for thethree months ended September 30, 2001**

 
| ** **                                              | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| Contract revenues                                       |       | $                           | 64,083     |                    | $          | 19,529               |       | $                | —     |                     | $          | (932 | ) | $ | 82,680 |   |
| Costs of contract revenues                              |       | (53,239                     | )          | (15,286                 | )          | (515                 | )          | 932              |       | (68,108                  | )          |
| Gross profit (loss)                                     |       | 10,844                      |       | 4,243                   |       | (515                 | )          | —           |       | 14,572                   |       |
| General and administrative expenses                     |       | (5,049                      | )          | (1,701                  | )          | (27                  | )          | —           |       | (6,777                   | )          |
| Operating income (loss)                                 |       | 5,795                       |       | 2,542                   |       | (542                 | )          | —           |       | 7,795                    |       |
| Interest expense, net                                   |       | (995                        | )          | (107                    | )          | (4,687               | )          | —           |       | (5,789                   | )          |
| Equity in earnings of subsidiaries                      |       | 1,701                       |       | —                  |       | 4,357                |       | (6,058           | )          | —                   |       |
| Equity in earnings of joint ventures                    |       | 482                         |       | —                  |       | —               |       | —           |       | 482                      |       |
| Income (loss) before income taxes andminority interests |       | 6,983                       |       | 2,435                   |       | (872                 | )          | (6,058           | )          | 2,488                    |       |
| Income tax (expense) benefit                            |       | (2,679                      | )          | (187                    | )          | 1,796                |       | —           |       | (1,070                   | )          |
| Minority interests                                      |       | —                      |       | —                  |       | —               |       | (494             | )          | (494                     | )          |
| Net income                                              |       | $                           | 4,304      |                    | $          | 2,248                |       | $                | 924        |                     | $          | (6,552 | ) | $ | 924 |   |

 

 

13

----

 

**GREAT LAKES DREDGE & DOCK CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands)**

** **

** **

**Condensed Consolidating Statement of Income for thenine months ended September 30, 2002**

 
| ** **                                              | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| Contract revenues                                       |       | $                           | 232,817    |                    | $          | 50,510               |       | $                | —     |                     | $          | (19,884 | ) | $ | 263,443 |   |
| Costs of contract revenues                              |       | (183,253                    | )          | (49,945                 | )          | (1,401               | )          | 19,884           |       | (214,715                 | )          |
| Gross profit (loss)                                     |       | 49,564                      |       | 565                     |       | (1,401               | )          | —           |       | 48,728                   |       |
| General and administrative expenses                     |       | (17,010                     | )          | (4,577                  | )          | (126                 | )          | —           |       | (21,713                  | )          |
| Operating income (loss)                                 |       | 32,554                      |       | (4,012                  | )          | (1,527               | )          | —           |       | 27,015                   |       |
| Interest expense, net                                   |       | (2,854                      | )          | (419                    | )          | (12,736              | )          | —           |       | (16,009                  | )          |
| Equity in (loss) earnings of subsidiaries               |       | (3,682                      | )          | —                  |       | 20,355               |       | (16,673          | )          | —                   |       |
| Equity in earnings of joint ventures                    |       | 209                         |       | —                  |       | —               |       | —           |       | 209                      |       |
| Income (loss) before income taxes andminority interests |       | 26,227                      |       | (4,431                  | )          | 6,092                |       | (16,673          | )          | 11,215                   |       |
| Income tax (expense) benefit                            |       | (5,507                      | )          | (518                    | )          | 4,328                |       | —           |       | (1,697                   | )          |
| Minority interests                                      |       | —                      |       | —                  |       | —               |       | 902              |       | 902                      |       |
| Net income (loss)                                       |       | $                           | 20,720     |                    | $          | (4,949               | )          | $                | 10,420     |                     | $          | (15,771 | ) | $ | 10,420 |   |

 

 

**CondensedConsolidating Statement of Income for the nine months ended September 30, 2001**

 
| ** **                                              | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated********Totals** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------------|------------|
| Contract revenues                                       |       | $                           | 192,724    |                    | $          | 50,396               |       | $                | —     |                           | $          | (9,579 | ) | $ | 233,541 |   |
| Costs of contract revenues                              |       | (159,066                    | )          | (39,463                 | )          | (1,566               | )          | 9,579            |       | (190,516                       | )          |
| Gross profit (loss)                                     |       | 33,658                      |       | 10,933                  |       | (1,566               | )          | —           |       | 43,025                         |       |
| General and administrative expenses                     |       | (15,030                     | )          | (3,675                  | )          | (97                  | )          | —           |       | (18,802                        | )          |
| Operating income (loss)                                 |       | 18,628                      |       | 7,258                   |       | (1,663               | )          | —           |       | 24,223                         |       |
| Interest expense, net                                   |       | (1,466                      | )          | (490                    | )          | (13,548              | )          | —           |       | (15,504                        | )          |
| Equity in earnings of subsidiaries                      |       | 4,708                       |       | —                  |       | 13,369               |       | (18,077          | )          | —                         |       |
| Equity in earnings of joint venture                     |       | 599                         |       | —                  |       | —               |       | —           |       | 599                            |       |
| Income (loss) before income taxes andminority interests |       | 22,469                      |       | 6,768                   |       | (1,842               | )          | (18,077          | )          | 9,318                          |       |
| Income tax (expense) benefit.                           |       | (8,984                      | )          | (564                    | )          | 5,459                |       | —           |       | (4,089                         | )          |
| Minority interests                                      |       | —                      |       | —                  |       | —               |       | (1,612           | )          | (1,612                         | )          |
| Net income                                              |       | $                           | 13,485     |                    | $          | 6,204                |       | $                | 3,617      |                           | $          | (19,689 | ) | $ | 3,617 |   |

 

 

14

----

 

**GREAT LAKES DREDGE & DOCK CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands)**

** **

** **

**Condensed Consolidating Statement of Cash Flows for thenine months ended September 30, 2002**

 
|                                                                                   |   | **Guarantor  Subsidiaries** |   | **Other  Subsidiaries** |   | **GLD  Corporation** |   | **Eliminations** |   | **Consolidated  Totals** |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------|--------|-------------------------|--------|----------------------|--------|------------------|--------|--------------------------|--------|
| **Operating Activities**                                                               |   |                        |   |                    |   |                 |   |             |   |                     |   |
| Net income (loss)                                                                      |   | $                           | 20,720 |                    | $      | (4,949               | )      | $                | 10,420 |                     | $      | (15,771 | ) | $ | 10,420 |   |
| Adjustments to reconcile net income (loss) to netcash flows from operating activities: |   |                        |   |                    |   |                 |   |             |   |                     |   |
| Depreciation                                                                           |   | 8,180                       |   | 1,588                   |   | 1,987                |   | —           |   | 11,755                   |   |
| Loss (earnings) of subsidiaries and joint ventures                                     |   | 3,682                       |   | —                  |   | (20,564              | )      | 16,673           |   | (209                     | )      |
| Minority interests                                                                     |   | —                      |   | —                  |   | —               |   | (902             | )      | (902                     | )      |
| Deferred income taxes                                                                  |   | 193                         |   | 7                       |   | (706                 | )      | —           |   | (506                     | )      |
| Gain on dispositions of propertyand equipment                                          |   | (428                        | )      | —                  |   | —               |   | —           |   | (428                     | )      |
| Other, net                                                                             |   | 1,895                       |   | (26                     | )      | (544                 | )      | —           |   | 1,325                    |   |
| Changes in assets and liabilities:                                                     |   |                        |   |                    |   |                 |   |             |   |                     |   |
| Accounts receivable                                                                    |   | (12,305                     | )      | (3,074                  | )      | —               |   | —           |   | (15,379                  | )      |
| Contract revenues in excess of billings                                                |   | 11,343                      |   | (1,414                  | )      | —               |   | —           |   | 9,929                    |   |
| Inventories                                                                            |   | 1,723                       |   | 37                      |   | —               |   | —           |   | 1,760                    |   |
| Prepaid expenses and other current assets                                              |   | (176                        | )      | 2,138                   |   | (202                 | )      | —           |   | 1,760                    |   |
| Accounts payable and accrued expenses                                                  |   | (3,422                      | )      | (2,098                  | )      | (4,667               | )      | —           |   | (10,187                  | )      |
| Billings in excess of contract revenues                                                |   | 2,098                       |   | 424                     |   | —               |   | —           |   | 2,522                    |   |
| Net cash flows from operating activities                                               |   | 33,503                      |   | (7,367                  | )      | (14,276              | )      | —           |   | 11,860                   |   |
|                                                                                   |   |                        |   |                    |   |                 |   |             |   |                     |   |
| **Investing Activities**                                                               |   |                        |   |                    |   |                 |   |             |   |                     |   |
| Purchases of property and equipment                                                    |   | (14,177                     | )      | (685                    | )      | —               |   | —           |   | (14,862                  | )      |
| Dispositions of property and equipment                                                 |   | 5,413                       |   | —                  |   | —               |   | —           |   | 5,413                    |   |
| Net cash flows from investing activities                                               |   | (8,764                      | )      | (685                    | )      | —               |   | —           |   | (9,449                   | )      |
|                                                                                   |   |                        |   |                    |   |                 |   |             |   |                     |   |
| **Financing Activities**                                                               |   |                        |   |                    |   |                 |   |             |   |                     |   |
| Repayments of long-term debt                                                           |   | —                      |   | —                  |   | (8,000               | )      | —           |   | (8,000                   | )      |
| Borrowings of revolving loans, net of repayments                                       |   | —                      |   | —                  |   | 6,000                |   | —           |   | 6,000                    |   |
| Principal receipts (payments) on capital leases                                        |   | —                      |   | (1,661                  | )      | 1,661                |   | —           |   | —                   |   |
| Net change in accounts with affiliates                                                 |   | (26,177                     | )      | 11,580                  |   | 14,597               |   | —           |   | —                   |   |
| Repayment on note receivable from stockholder                                          |   | —                      |   | —                  |   | 18                   |   | —           |   | 18                       |   |
| Net cash flows from financing activities                                               |   | (26,177                     | )      | 9,919                   |   | 14,276               |   | —           |   | (1,982                   | )      |
| Net change in cash and equivalents                                                     |   | (1,438                      | )      | 1,867                   |   | —               |   | —           |   | 429                      |   |
| Cash and equivalents at beginning of period                                            |   | 2,515                       |   | 75                      |   | —               |   | —           |   | 2,590                    |   |
| Cash and equivalents at end of period                                                  |   | $                           | 1,077  |                    | $      | 1,942                |   | $                | — |                     | $      | — |   | $ | 3,019 |   |

 

 

15

----

 

**GREAT LAKES DREDGE & DOCK CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands)**

** **

**Condensed Consolidating Statement of Cash Flows for thenine months ended September 30, 2001**

 
| ** **                                                                      | ** ** | **Guarantor  Subsidiaries** | ** ** | **Other  Subsidiaries** | ** ** | **GLD  Corporation** | ** ** | **Eliminations** | ** ** | **Consolidated  Totals** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|----------------------|------------|------------------|------------|--------------------------|------------|
| **Operating Activities**                                                        |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Net income                                                                      |       | $                           | 13,485     |                    | $          | 6,204                |       | $                | 3,617      |                     | $          | (19,689 | ) | $ | 3,617 |   |
| Adjustments to reconcile net income to netcash flows from operating activities: |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Depreciation and amortization                                                   |       | 7,417                       |       | 1,410                   |       | 2,108                |       | —           |       | 10,935                   |       |
| Earnings of subsidiaries and joint venture                                      |       | (5,191                      | )          | —                  |       | (13,485              | )          | 18,077           |       | (599                     | )          |
| Minority interests                                                              |       | —                      |       | —                  |       | —               |       | 1,612            |       | 1,612                    |       |
| Deferred income taxes                                                           |       | 1,565                       |       | (144                    | )          | (697                 | )          | —           |       | 724                      |       |
| Gain on dispositions of propertyand equipment                                   |       | (292                        | )          | —                  |       | —               |       | —           |       | (292                     | )          |
| Other, net.                                                                     |       | 248                         |       | 67                      |       | 124                  |       | —           |       | 439                      |       |
| Changes in assets and liabilities:                                              |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Accounts receivable.                                                            |       | 5,597                       |       | (6,188                  | )          | —               |       | —           |       | (591                     | )          |
| Contract revenues in excess of billings.                                        |       | 2,768                       |       | 1,288                   |       | —               |       | —           |       | 4,056                    |       |
| Inventories..                                                                   |       | (1,355                      | )          | (857                    | )          | —               |       | —           |       | (2,212                   | )          |
| Prepaid expenses and other current assets..                                     |       | (466                        | )          | 1,032                   |       | (74                  | )          | —           |       | 492                      |       |
| Accounts payable and accrued expenses..                                         |       | (12,697                     | )          | 1,423                   |       | (5,582               | )          | —           |       | (16,856                  | )          |
| Billings in excess of contract revenues                                         |       | (3,036                      | )          | 1,923                   |       | —               |       | —           |       | (1,113                   | )          |
| Net cash flows from operating activities                                        |       | 8,043                       |       | 6,158                   |       | (13,989              | )          | —           |       | 212                      |       |
|                                                                            |       |                        |       |                    |       |                 |       |             |       |                     |       |
| **Investing Activities**                                                        |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Purchases of property and equipment                                             |       | (4,817                      | )          | (1,323                  | )          | —               |       | —           |       | (6,140                   | )          |
| Dispositions of property and equipment                                          |       | 502                         |       | —                  |       | 104                  |       | —           |       | 606                      |       |
| Purchase of NASDI stock, net of cash                                            |       | —                      |       | —                  |       | (30,800              | )          | —           |       | (30,800                  | )          |
| Principal payments (receipts) on directfinancing leases                         |       | —                      |       | 1,257                   |       | (1,257               | )          | —           |       | —                   |       |
| Payments (receipts) on note with affiliate                                      |       | —                      |       | 841                     |       | (841                 | )          | —           |       | —                   |       |
| Net cash flows from investing activities.                                       |       | (4,315                      | )          | 775                     |       | (32,794              | )          | —           |       | (36,334                  | )          |
|                                                                            |       |                        |       |                    |       |                 |       |             |       |                     |       |
| **Financing Activities**                                                        |       |                        |       |                    |       |                 |       |             |       |                     |       |
| Repayments of long-term debt                                                    |       | (262                        | )          | —                  |       | (6,500               | )          | —           |       | (6,762                   | )          |
| Borrowings of revolving loans, net of repayments                                |       | —                      |       | —                  |       | 5,000                |       | —           |       | 5,000                    |       |
| Proceeds from issuance of11 1/4% subordinated notes                             |       | —                      |       | —                  |       | 39,700               |       | —           |       | 39,700                   |       |
| Principal receipts (payments) on capital leases.                                |       | —                      |       | (2,613                  | )          | 2,613                |       | —           |       | —                   |       |
| Net change in accounts with affiliates                                          |       | (2,790                      | )          | (5,665                  | )          | 8,455                |       | —           |       | —                   |       |
| Financing fees                                                                  |       | —                      |       | —                  |       | (2,500               | )          | —           |       | (2,500                   | )          |
| Repayment on note receivable from stockholder                                   |       | —                      |       | —                  |       | 15                   |       | —           |       | 15                       |       |
| Dividends                                                                       |       | 1,600                       |       | (2,000                  | )          | —               |       | 400              |       | —                   |       |
| Contributions from partners                                                     |       | (1,200                      | )          | 1,600                   |       | —               |       | (400             | )          | —                   |       |
| Net cash flows from financing activities                                        |       | (2,652                      | )          | (8,678                  | )          | 46,783               |       | —           |       | 35,453                   |       |
| Net change in cash and equivalents                                              |       | 1,076                       |       | (1,745                  | )          | —               |       | —           |       | (669                     | )          |
| Cash and equivalents at beginning of period                                     |       | (654                        | )          | 1,791                   |       | —               |       | —           |       | 1,137                    |       |
| Cash and equivalents at end of period                                           |       | $                           | 422        |                    | $          | 46                   |       | $                | —     |                     | $          | — |   | $ | 468 |   |

  

 

16

----

 

**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

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

 

Certain information in this quarterly report on Form 10-Q, includingbut not limited to the Management’s Discussion and Analysis of FinancialCondition and Results of Operations, may constitute forward-looking statementsas such term is defined in Section 27A of the Securities Exchange Act of 1933(the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934.  Certain forward-looking statements can beidentified by the use of forward-looking terminology such as, “believes,”“expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,”“plans,” “estimates,” “anticipates,” or “hopeful,” or the negative thereof orother comparable terminology, or by discussions of strategy, plans orintentions.  Forward-looking statementsinvolve risks and uncertainties, including those described in the Risk Factorssection of Item 1 of the Company’s Form S-4 Registration Statement(Registration No. 333-60300), which could cause actual results to be materiallydifferent than those in the forward-looking statements, which speak only as ofthe date hereof.  The Company assumes noobligation to update such information.

 

 

###### **General**

 

The Company is the largest provider of dredging services in the UnitedStates.  Dredging generally involves theenhancement or preservation of the navigability of waterways or the protectionof shorelines through the removal or replenishment of soil, sand or rock.  The U.S. dredging market consists of threeprimary types of work:  Capital,Maintenance and Beach Nourishment, in which the Company experienced an averagecombined U.S. market share of the projects on which it bids (“bid market”) of40% over the last three years.  Inaddition, the Company has continued its role as the only U.S. dredgingcontractor with significant international operations, which averaged 14% of itscontract revenues over the last three years.

 

In April 2001, the Company purchased 80% of the capital stock of NorthAmerican Site Developers, Inc. (“NASDI”), a demolition service provider locatedin the Boston, Massachusetts area.  Thepurchase consideration for the acquisition included (1) $35.0 million in cashpayable to the stockholders of NASDI, and (2) two junior subordinatedpromissory notes totaling $3.0 million from NASDI payable to the NASDImanagement stockholders. The Company issued $40.0 million of its seniorsubordinated notes to fund the cash portion of the acquisition price and payrelated fees and expenses.   The NASDImanagement stockholders retained a 20% non-voting interest in NASDI.

 

The Company’s equity in earnings of joint ventures relates to theCompany’s 50% ownership interest in Amboy Aggregates (“Amboy”) and 20%ownership interest in Riovia S.A. (“Riovia”), which are accounted for using theequity method.  The Company conductscertain hopper dredging activities, primarily maintenance and beach nourishmentprojects, through the operations of NATCO Limited Partnership (“NATCO”) andNorth American Trailing Company (“North American”).  Minority interests reflects Ballast Nedam Group N.V.’s respective25% and 20% interest in NATCO and North American, as well as NASDI managementstockholders’ 20% interest in NASDI.

 

 

17

----

 

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

 

The following table sets forth the components of net income and EBITDAas a percentage of contract revenues for the three and nine months endedSeptember 30, 2002 and 2001:

 
| ** **                                         | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
|                                               |       | **2002**                               |       | **2001**                              |       | **2002** |   | **2001** |   |
| Contract  revenues                                 |       | 100.0                                  | %          | 100.0                                 | %          | 100.0 | % | 100.0 | % |
| Costs of  contract revenues                        |       | (80.3                                  | )          | (82.4                                 | )          | (81.5 | ) | (81.6 | ) |
| Gross profit                                       |       | 19.7                                   |       | 17.6                                  |       | 18.5 |   | 18.4 |   |
| General and  administrative expenses               |       | (8.4                                   | )          | (8.2                                  | )          | (8.2 | ) | (8.0 | ) |
| Operating income                                   |       | 11.3                                   |       | 9.4                                   |       | 10.3 |   | 10.4 |   |
| Interest  expense, net                             |       | (5.4                                   | )          | (7.0                                  | )          | (6.0 | ) | (6.6 | ) |
| Equity in  earnings of joint ventures              |       | 0.1                                    |       | 0.6                                   |       | — |   | 0.2 |   |
| Income before  income taxes and minority interests |       | 6.0                                    |       | 3.0                                   |       | 4.3 |   | 4.0 |   |
| Income tax  expense                                |       | (2.7                                   | )          | (1.3                                  | )          | (0.6 | ) | (1.8 | ) |
| Minority  interests                                |       | (0.4                                   | )          | (0.6                                  | )          | 0.3 |   | (0.7 | ) |
| Net income                                         |       | 2.9                                    | %          | 1.1                                   | %          | 4.0 | % | 1.5 | % |
|                                               |       |                                   |       |                                  |       |   |   |   |   |
| EBITDA                                             |       | 15.2                                   | %          | 14.2                                  | %          | 14.7 | % | 15.1 | % |

 

“EBITDA,” as provided herein, represents earnings from continuingoperations before net interest expense, income taxes and depreciation andamortization expense and excludes equity earnings of joint ventures andminority interests.  EBITDA is notintended to represent cash flows from operations as defined by accountingprinciples generally accepted in the United States of America.  The Company’s EBITDA is included as it is abasis upon which the Company assesses its financial performance, and certaincovenants in the Company’s borrowing arrangements are tied to similarmeasures.  EBITDA should not beconsidered in isolation or as an alternative to net income, cash flows fromcontinuing operations, or other consolidated income or cash flow data preparedin accordance with generally accepted accounting principles in the UnitedStates of America as measures of the Company’s profitability or liquidity.  EBITDA as defined herein may differ fromsimilarly titled measures presented by other companies.

 

 

18

----

 

## **The followingtable sets forth, by segment and dredging type of work, the Company’s contractrevenues for the three and nine months ended and backlog as of the periodsindicated:**

 
| ** **                  | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| **Revenues (in thousands)** |       | **2002**                               |       | **2001**                              |       | **2002** |   | **2001** |   |
| Dredging:                   |       |                                   |       |                                  |       |   |   |   |   |
| Capital — U.S.         |       | $                                      | 35,923     |                                  | $          | 33,379 |   | $ | 80,969 |   | $ | 89,606 |   |
| Capital —  foreign     |       | 14,745                                 |       | 5,106                                 |       | 42,680 |   | 23,953 |   |
| Beach                       |       | 13,335                                 |       | 16,689                                |       | 64,112 |   | 62,879 |   |
| Maintenance                 |       | 18,220                                 |       | 19,173                                |       | 36,812 |   | 40,099 |   |
| Demolition                  |       | 17,832                                 |       | 8,333                                 |       | 38,870 |   | 17,004 |   |
|                        |       | $                                      | 100,055    |                                  | $          | 82,680 |   | $ | 263,443 |   | $ | 233,541 |   |
|                        |       |                                   |       |                                  |       |   |   |   |   |
|                        |       |                                   |       |                                  |       | **September 30,** |   |
| **Backlog  (in thousands)** |       |                                   |       |                                  |       | **2002** |   | **2001** |   |
| Dredging:                   |       |                                   |       |                                  |       |   |   |   |   |
| Capital — U.S.         |       |                                   |       |                                  |       | $ | 239,626 |   | $ | 61,436 |   |
| Capital —  foreign     |       |                                   |       |                                  |       | 64,264 |   | 42,413 |   |
| Beach                       |       |                                   |       |                                  |       | 39,825 |   | 29,822 |   |
| Maintenance                 |       |                                   |       |                                  |       | 13,721 |   | 25,811 |   |
| Demolition                  |       |                                   |       |                                  |       | 18,321 |   | 30,771 |   |
|                        |       |                                   |       |                                  |       | $ | 375,757 |   | $ | 190,253 |   |

 

Third quarter 2002 revenues were $100.0 million, an increase of $17.3million or 21.0%, over third quarter 2001 revenues of $82.7 million.  Revenues for the first nine months of 2002were $263.4 million, an increase of $29.9 million or 12.8% over revenues forthe first nine months of 2001 of $233.5 million.  The increase in third quarter and year to date revenues reflectsincreased foreign dredging revenue and demolition services revenue.  Gross profit margin for the third quarter of2002 was 19.7%, which improved from the gross profit margin of 17.6% in thethird quarter of 2001.   Gross profitmargins for the nine months ended September 30, 2002 and 2001 remainedconsistent at 18.5% and 18.4%, respectively. The improvement in the 2002 third quarter was primarily attributable tohigher margins on the demolition services revenue.  In the third quarter, the Company also achieved strong margins onits domestic capital work, which offset lower margins achieved on certain beachprojects that encountered weather and other operational difficulties, as wellas lower margins typically earned on the foreign dredging revenues.

 

Capital projects includelarge port deepenings and other infrastructure projects.   Domestic capital dredging revenue increasedin the third quarter of 2002 by $2.5 million but declined for the nine-monthperiod by $8.6 million, as compared to the same periods of 2001.  The Company performed on numerous beachnourishment projects during the first half of the year, but in the thirdquarter began shifting more of its resources to domestic capital work, forwhich it has built up significant backlog at the end of September.  The domestic capital market remained strongthrough the third quarter of 2002 as Deep Port projects, authorized by the 1986Water Resource Development Act (“WRDA”) and subsequent bills, continued to bescheduled and let for bid by the Army Corps of Engineers (“Corps”).  In 1997, the Corps announced new Deep Portwork and in subsequent years has expanded existing projects with a combinedrevenue value in excess of 

19

----

 

$2.0 billion, to becompleted through 2005.   Since thistime, numerous projects with a combined revenue value of $1.2 billion have beenlet for bid and awarded through the third quarter of 2002.  The Company has been the low bidder onprojects with a total value of approximately $610 million, representing 50% ofthe total let for bid and awarded.

During the third quarter of 2002, the Company performed on the Area 5Kill Van Kull, New York Deep Port project (“KVK5”), which contributed revenuefor the quarter of approximately $12.0 million.  During the quarter, work also continued on three other deepeningprojects:  Jacksonville Harbor, Florida;St. Lucie Inlet, Florida; and Wilmington Harbor, North Carolina. These projectsall commenced in the second quarter of 2002 and added revenues of $21.8million, collectively, to the third quarter. Additionally, work continued on two foreign capital projects in Bahrainand Ghana, which contributed $11.7 million in total revenue to the quarter.

 

Beach nourishment projects include rebuilding of shoreline areas whichhave been damaged by storm activity or ongoing erosion.  Third quarter revenues from beachnourishment projects decreased $3.4 million from the third quarter of 2001, dueto the shifting of more resources to capital work during the period.  Year to date 2002 beach revenues of $64.1million were comparable to 2001 year to date revenues of $62.9 million. Duringthe third quarter, the Company started a new beach nourishment project inTownsends/Hereford Inlet, New Jersey and performed on projects in Sea Bright,New Jersey and St. Johns County, Florida, which added combined revenue of $13.3million to the quarter.

 

Maintenance projects include routine dredging of ports, rivers andchannels to remove the regular build up of sediment.   Maintenance revenues in the third quarter and first nine monthsof 2002 declined slightly from levels for the same periods of 2001, but wereconsistent with typical maintenance dredging volume, which varies depending onlevels of Midwest precipitation as well as the Company’s available equipmentcapacity.  Third quarter 2002 revenuesfrom maintenance projects included $3.6 million from three private jobs, $5.6million from three Corps river maintenance projects, as well as $7.2 millionfrom three other Corps projects.

 

NASDI’s demolition revenue for the third quarter and first nine monthsof 2002 totaled $17.8 million and $38.9 million, respectively, and compares to$8.3 million for the third quarter of 2001 and $17.0 million earned by NASDIfrom mid-April 2001, the date of acquisition by the Company, through the thirdquarter of 2001.  NASDI’s third quarter2002 revenues included $6.8 million from the Saltonstall interior officebuilding demolition in Boston and $4.1 million from a the asbestos removal anddemolition project at Delta Terminal A in the Boston Airport, with theremaining revenue being generated by numerous other projects.  Demolition activity increased significantlyduring the third quarter and included positive performance on a number of themajor projects in NASDI’s backlog.

 

Third quarter and year to date 2002 revenues of the Company’s NATCOhopper dredging subsidiary decreased $6.4 million and $13.5 million,respectively, over the same periods of 2001, primarily due to adverse weatherand operating conditions encountered on certain beach nourishment projects onwhich NATCO was employed, necessitating downtime of the dredges.   NATCO’s gross profit margins were negativelyimpacted by these projects during the first half of 2002, but improved in thethird quarter due to positive performance on a number of maintenance jobsperformed in the quarter.

 

General andadministrative expenses in the third quarter of 2002 and the first nine monthsof 2002 totaled $8.4 million and $21.7 million, respectively, which representsan increase of $1.6 million and $2.9 million over the same periods of2001.   The third quarter increaseresulted primarily 

 

20

----

 

from $1.3 million indiscretionary bonuses paid to certain members of management for their effortsrelating to the outstanding Chicago flood insurance litigation, which wasconclusively settled in the second quarter.  The 2002 year to date expense also includes approximately $1.1 millionin additional NASDI-related costs for the period, compared to the same 2001period which included NASDI only after the date of acquisition in April 2001.

Net interest expense decreased $0.4 million in the third quarter of2002 compared to the third quarter of 2001 due to a reduction in the Company’sbank borrowings and declining interest rates on this variable rate debt;however, it was approximately $0.5 million higher for the first nine months of2002, as a result of additional interest expense on the $40.0 million ofsubordinated debt issued in April of 2001 to fund the NASDI acquisition.  Minority interest expense for the thirdquarter of 2002 is primarily due to NASDI’s strong performance in the quarter,which resulted in an allocation of earnings to NASDI’s minority interests.   Minority interests for the first ninemonths of 2002 reflects a gain to the Company, primarily due to the allocationof NATCO’s year to date loss to its minority partner.

 

For the thirdquarter and first nine months of 2002, the Company recorded income tax expenseof $2.7 million and $1.7 million, respectively, compared to income tax expenseof $1.1 million and $4.1 million for the same periods of 2001.  Income taxes in 2002 were impacted by a taxdeduction in the second quarter for the write-off of the tax basis of aninsurance claim receivable of $11.0 million related to litigation settlementpayments made in 1997.  For book purposes, the insurance reimbursement hadbeen assigned to the Company’s former owner as part of the Company’srecapitalization in 1998 and, therefore, had no book basis.  Additionally, the income tax provision forthe three and nine months ended September 30, 2002 includes interest expense of$0.8 million on estimated additional federal income tax for the years 1995 to2000 arising from a reduction in actual tax payments made to foreign taxauthorities versus amounts previously reported in the Company's U.S. federaltax returns for those years.  Thisreallocation of tax liabilities from foreign to domestic is expected toultimately result in a net tax benefit to the Company of an amountapproximating the interest incurred.  Asa result of these items, the Company’s effective tax rate for the nine monthsended September 30, 2002 was 13.0%, compared to 48.9% for same period of 2001.

 

Net income was $2.9 million for the third quarter of 2002, compared to$0.9 million for the third quarter of 2001. For the first nine months of 2002, net income totaled $10.4 million,which compares to $3.6 million for the same period of 2001.  The improvement in 2002 third quarter andyear to date net income was primarily a result of higher revenues, as well asthe income tax benefit discussed above.

 

EBITDA (as defined on page 18) was $15.2 million and $38.8 million forthe quarter and nine months ended September 30, 2002 compared to $11.8 millionand $35.2 million for the same periods of 2001.  The third quarter 2002 EBITDA was positively impacted by theincreased revenues, coupled with higher margins achieved on the demolitionservices revenues.  The strong thirdquarter performance also influenced the year to date EBITDA, overcoming theimpact of lower margins experienced on the Company’s foreign work and thenegative affect of adverse weather and operating conditions experienced oncertain of the Company’s domestic east coast dredging projects.

 

 

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

 

The Company’s primary sources of liquidity are cash flows fromoperations and borrowings under the revolving line of credit with the Company’ssenior lenders.  The Company’s primaryuses of cash are funding working capital, capital expenditures and debtservice.

 

The Company’s net cash generated by operating activities for the ninemonths ended September 30, 2002 and 2001 totaled $11.9 million and $0.2million, respectively.  The increasedcash generated by operations in 2002 is primarily a result of higher net incomeduring the period.

 

 

21

----

 

The Company’s net cash flows used in investing activities were $9.4million compared to $36.3 million for the first nine months of 2002 and 2001,respectively.  In the 2001 period, theCompany used cash of $30.8 million to fund the acquisition of NASDI.  The remaining use of cash relates toequipment acquisitions, which increased by $8.7 million in the 2002period.  The 2002 capital expendituresincluded $3.8 million related to construction of a dump barge, which wassubsequently sold and leased back at cost under an operating lease in the thirdquarter, leading to an increase in proceeds for the 2002 period as well.

 

The Company’s net cash flows used in financing activities for the ninemonths ended September 30, 2002 totaled $2.0 million compared to net cash flowsgenerated of $35.5 million in the same period of 2001.   The Company paid down additional bankborrowings in 2002, while the 2001 period reflects approximately $37.0 millionnet proceeds from the subordinated notes issued to fund the NASDI acquisitionin April 2001.   In October 2002, theCompany amended its Credit Agreement to extend the term of its revolving creditfacility to February 2006.

 

The Company agreed in principle to purchase Ballast Needam’s minorityinterests in NATCO Limited Partnership and North American Trailing Company for$4.5 million, which will be funded by revolver borrowings.   The purchase is pending finalization ofdefinitive agreements and is expected to be completed in the fourth quarter of2002.

 

Management believes cash flows from operations and available creditwill be sufficient to finance operations, planned capital expenditures and debtservice requirements for the foreseeable future. The Company’s ability to fundits working capital needs, planned capital expenditures, scheduled debtpayments and to comply with all of the financial covenants under its debtagreements, depends on its future operating performance and cash flows, whichin turn, are subject to prevailing economic conditions and to financial,business and other factors, some of which are beyond the Company’s control.

 

 

###### **Backlog**

 

The Company’s contract backlog represents management’s current estimateof the revenues which will be realized under the portion of the contractsremaining to be performed. Such estimates are subject to fluctuations basedupon the amount of material actually dredged, as well as factors affecting thetime required to complete the job. In addition, because substantially all ofthe Company’s dredging backlog relates to government contracts, the Company’sbacklog can be canceled at any time without penalty.  However, the Company will recover actual committed costs andprofit on work performed up to the date of cancellation.  Consequently, backlog is not necessarilyindicative of future revenues. The Company’s backlog includes only those projectsfor which the customer has provided an executed contract.

 

As of September 30, 2002,the Company had dredging backlog of $357.4 million, which compares to dredgingbacklog of $266.6 million at June 30, 2002 and $159.5 million at September 30,2001.  This is the highest dredgingbacklog in the Company’s history and it is substantially comprised of Deep Portwork, which is generally higher margin work. Additionally, much of the Deep Port work spans up to two years,providing a solid revenue base upon which to build in 2003 and 2004.   While the Corps has been bidding Deep Portprojects which have already been authorized by previous WRDA legislation, thecurrent biannual update, or WRDA 2002 bill, which would provide authorizationfor the start or continuation of various projects in the Corps’ Deep Portprogram in future years, remains stalled in both the House and 

 

 

22

----

 

the Senate, which couldslow down bidding of new Deep Port work. Debate over this bill is not uncommon, but this year’s bill is gettinglittle support as there is no particular high profile project and issues overthe need for review of the economic justification of certain projects andoverall reform at the Corps have increased the likelihood that no bill will bepassed this year.  Since much of theongoing Deep Port work expected to come out for bid during the remainder ofthis year and next year has been authorized under previous WRDA legislation, wewould not expect a delay in the passage of the next WRDA bill to significantlyimpact the Deep Port market in the near term.

 

During the third quarter, domestic projects valued at $336.6 millionwere let for bid, bringing the year to date bid market to approximately $720million, which is more than the annual bid markets for each of the last threeyears, which have averaged approximately $600 million annually.  The Company was a successful bidder on$175.6 million, or 52%, of the domestic work let for bid in the third quarterand has also won approximately $370 million, or 51%, of the year to datemarket.

 

Backlog at September 30, 2002 continues to be concentrated in thecapital market, both domestic and foreign. Domestic capital dredging projects make up $239.6 million or 63.8% ofthe total September 30, 2002 backlog.  In the third quarter of 2002, the New York/New Jersey Port Authorityexpanded the scope of the KVK5 project by awarding to the joint venture inwhich the Company is a 50% partner an additional $98 million project to takethe channel down to 50 feet instead of the original 45 foot requirement.  Therefore, backlog at September 30, 2002includes the Company’s $49 million share for this project, as well asadditional third quarter awards for Deep Port projects in Los Angeles, California;Houston, Texas, and Manatee Harbor, Florida. The Manatee Harbor project was bid on a request-for-proposal basis,which has proven to be advantageous for the Company due to its technicalcapabilities.  Additionally, capitalbacklog includes work remaining on Deep Port projects in Wilmington, NorthCarolina and  Jacksonville, Florida,which were both won in the first half of 2002, also on a request-for-proposalbasis.  Foreign capital project backlog,which comprises $64.3 million or 17.1% of the September 30, 2002 backlog,relates primarily to the long-term projects in Ghana and Bahrain.

 

Beach backlog atSeptember 30, 2002 was $39.8 million, which has improved from the beach backloglevel at September 30, 2001 of $29.8 million.  The beach bid market continued at a good pace in the third quarter of2002, with approximately $46.0 million of beach projects let for bid, bringingthe year to date market to $93.0 million, and schedules provided by the Corpsand local jurisdictions indicate additional bids in the fourth quarter, whichshould provide for a 2002 annual beach nourishment bid market in excess of $100million.   However, beach projectfunding beyond 2002 is more uncertain as the economy has weakened, thefederal/state cost sharing formula continues to be debated, and the Corps’ 2003fiscal year appropriation bill has become stalled before Congress, as have thebills of other federal agencies. Therefore, absent the passage of its budget for the fiscal year 2003,which began October 1, 2002, the Corps is currently operating under a“continuing resolution” which permits spending at the same level as the priorfiscal year.  It is not entirely clearhow beach project funding will be impacted under a continuing resolutionsituation, but it is possible that without specific project appropriations,pending beach projects could be delayed in the near term.

 

Maintenance backlog at September 30, 2002 of $13.7 million declinedfrom the same period of 2001. Although the second and third quarter maintenancemarkets have improved as Midwest precipitation levels have returned to averagelevels, the Company has been selective in bidding upcoming projects since muchof its equipment is utilized throughout the remainder of the year.

 

 

23

----

 

The demolition backlog level at September 30, 2002 was $18.3 million,which has declined from $28.4 million at June 30, 2002 and $30.8 million atSeptember 30, 2001.  Management believesNASDI’s current backlog level should be sufficient to provide a good source ofrevenue and earnings for the remainder of the year and NASDI continues totarget a number of large power plant projects, one of which is likely to be bidin 2003.

#### ** **

#### ** **

#### **Effects of Recently Issued Accounting Standards**

 

The Company has adopted Statement of Financial Accounting Standards(“SFAS”) No. 141, “Business Combinations” as of January 1, 2002.   This statement requires the purchase methodof accounting for business combinations initiated after June 30, 2001 andeliminates the pooling-of-interests method.

 

The Company has also adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” as of January 1, 2002. This statement requires that goodwill and other intangible assets withindefinite useful lives no longer be amortized, but instead be assessedannually for impairment with the initial assessment to be completed within thefirst six months following adoption of the standard.  The required initial impairment evaluation was performed in thefirst quarter of 2002 resulting in no impairment in the value of the Company’sgoodwill.  The Company’s goodwillrelates solely to its acquisition of NASDI, which took place in the secondquarter of 2001.  The Company’s earningsfor the nine-month period ended September 30, 2001 include goodwillamortization of $927.

 

In June 2001, the Financial Accounting Standards Board (“FASB”) alsoissued SFAS No. 143, “Accounting for Asset Retirement Obligations,” whichaddresses the recognition and remeasurement of obligations associated with theretirement of tangible long-lived assets.  SFAS No. 143 is effective for financial statements issued for fiscalyears beginning after June 15, 2002. The Company is currently assessing the impact of adopting thisstatement, but does not anticipate that adoption will have a material effect onits financial position or results of operations.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets,” which supersedes previousguidance and provides additional clarification as to when and how to measure aloss upon impairment or disposal of long-lived assets.  This standard, which became effective forthe Company on January 1, 2002, had no impact on its financial position or resultsof operations upon adoption.

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections”. Under the provisions of SFAS No. 145, gains and losses from theearly extinguishment of debt are no longer classified as an extraordinary item,net of income taxes, but are included in the determination of pretaxearnings.  SFAS No. 145 is effective for fiscal years beginning after May15, 2002, with early application encouraged.  Upon adoption, all gains andlosses from the extinguishment of debt previously reported as an extraordinaryitem shall be reclassified to pretax earnings.  It is anticipated that theadoption of SFAS No. 145 will have no impact on the financial position orresults of operations for the Company.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities”. SFAS No. 146 requires that a liability for costs associated with an exitor disposal activity be recognized and measured initially at fair value onlywhen the liability is incurred.  SFASNo. 146 is effective for exit or disposal activities that are initiated after 

 

 

24

----

 

December 31, 2002, and as such, the provisions of SFAS No. 146 will beapplied prospectively if it impacts the Company through relevant restructuringactivities or other disposal or exit activities.

###### ** **

###### ** **

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

 

The market risk of the Company’s financial instruments as of September30, 2002 has not significantly changed since December 31, 2001.  The market risk profile of the Company onDecember 31, 2001 is disclosed in the Company’s 2001 Annual Report on Form10-K.

 

 

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

 

*(a) Evaluation of Disclosure Controls and Procedures*. The Company’s Chief Executive Officer and Chief Financial Officer haveconducted an evaluation of the effectiveness of disclosure controls andprocedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934, as amended) as of a date within 90 days priorto the filing date of this quarterly report (the “Evaluation Date”).  Based on that evaluation, such officers haveconcluded that the disclosure controls and procedures are effective in ensuringthat all material information required to be filed in this quarterly report hasbeen made known to them in a timely fashion.

 

*(b) Changes in Internal Controls.*  Since theEvaluation Date, there have not been any significant changes in our internalcontrols or in other factors that could significantly affect such controls.

 

 

###### **PART II — Other Information**

 

###### ** **

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

 

As previously reported, on July 31, 2002, Hidrovia S.A. (“Hidrovia”),an Argentine corporation, filed a complaint against the Company alleging thatthe Company tortuously interfered with Hidrovia’s contractual rights relatingto the dredging and maintenance of certain navigable waterways inArgentina.  The complaint seeksinjunctive relief and damages of an unspecified amount.  The Company has a motion to dismiss pendingbefore the court.  The Company continuesto believe it has meritorious defenses and is vigorously defending the case.

 

 

25

----

 

###### **Item 6.  Exhibits and Reports onForm 8-K**

 

*(a)**                              **Exhibits*

 

10.01       Amendment No. 4 and Consent to the CreditAgreement, dated July 22, 2002.

99.1                           Certification Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of

the Sarbanes-Oxley Act of 2002.

99.2                           Certification Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of

the Sarbanes-Oxley Act of 2002.

 

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

 

No reports on Form 8-K were filed during the thirdquarter of 2002.

 

 

26

----

 

##### **SIGNATURE**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                    |   | Great Lakes Dredge & Dock Corporation                                 |
|-------------------------|--------|---------------------------------------------------------------------------|
|                    |   |                                                                      |
|                    |   |                                                                      |
| Date: November 12, 2002 |   | By:                                                                       | /s/Deborah A. Wensel |
|                    |   | Deborah A. Wensel                                                         |
|                    |   | Senior Vice President   and Chief Financial Officer                       |
|                    |   |                                                                      |
|                    |   | (Principal Financial and Accounting Officer and Duly  Authorized Officer) |

 

 

27

----

 

**CERTIFICATIONS****PURSUANT TO**

**SECTION302 OF**

**THESARBANES-OXLEY ACT OF 2002**

 

# ** **

# **CERTIFICATION**

 

I, Douglas B. Mackie,Chief Executive Officer, certify that:

1.                                       I have reviewed this quarterly report onForm 10–Q of Great Lakes Dredge & Dock Corporation;

2.                                       Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.                                       The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a–14 and 15d–14) forthe registrant and we have:

a)                                      designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

b)                                     evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

c)                                      presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5.                                       The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)                                      all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)                                     any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

6.                                       The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: November 12, 2002

 

 
| /s/Douglas B. Mackie    |
|-------------------------|
| Douglas B. Mackie       |
| Chief Executive Officer |

 

 

28

----

 

# **CERTIFICATION**

 

I, Deborah A. Wensel,Chief Financial Officer, certify that:

1.                                       I have reviewed this quarterly report onForm 10–Q of Great Lakes Dredge & Dock Corporation;

2.                                       Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

4.                                       The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a–14 and 15d–14) forthe registrant and we have:

a)                                      designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

b)                                     evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

c)                                      presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5.                                       The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a)                                      all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

b)                                     any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

6.                                       The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: November 12, 2002

 

 
| /s/Deborah A. Wensel    |
|-------------------------|
| Deborah A. Wensel       |
| Chief Financial Officer |

 

 

29

----

 

**EXHIBIT INDEX**

 

 
| **Number** |   | **Document  Description**                                                                                                 |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| 10.01      |   | Amendment No. 4 and Consent to the Credit Agreement,  dated July 22, 2002.*                                               |
|       |   |                                                                                                                      |
| 99.1       |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|       |   |                                                                                                                      |
| 99.2       |   | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|       |   |                                                                                                                      |

 

* Filed herewith.

 

 

30

----