GREAT LAKES DREDGE & DOCK CORP, 10-Q, 1999-11-12

GREAT LAKES DREDGE & DOCK CORP
10-Q, 1999-11-12
HEAVY CONSTRUCTION OTHER THAN BLDG CONST - CONTRACTORS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1999

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File 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)		(I.R.S. Employer Identification No.)
2122 York Road, Oak Brook, Illinois		60523
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, 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 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

As of November 5, 1999, there were outstanding 1,541,800 shares of Class A Common Stock, 3,363,900 shares of Class B Common Stock and 44,675 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, 1999

INDEX

			Page
Part I	Financial Information
	Item 1	Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998	2
		Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 1999 and 1998	3
		Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1999 and 1998	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	22
Part II	Other Information
	Item 1	Legal Proceedings	23
	Item 6	Exhibits and Reports on Form 8-K	23
Signature			24
Exhibit Index			25

Part I—Financial Information

Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

	September 30, 1999			December 31, 1998
Assets
Current assets:
Cash and equivalents	$	2,248		$	758
Accounts receivable, net		33,382			37,396
Contract revenues in excess of billings		17,346			15,936
Inventories		15,610			13,427
Prepaid expenses and other current assets		8,053			7,176

Total current assets		76,639			74,693
Property and equipment, net		134,869			134,237
Inventories		7,765			6,905
Investments in joint ventures		6,743			10,507
Other assets		8,362			8,745

Total assets	$	234,378		$	235,087

Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable	$	20,923		$	26,220
Accrued expenses		17,783			18,630
Billings in excess of contract revenues		9,193			4,842
Current maturities of long-term debt		5,950			2,700

Total current liabilities		53,849			52,392
Long-term debt		163,200			167,700
Deferred income taxes		44,516			45,695
Foreign income taxes		5,157			6,944
Other		6,626			6,496

Total liabilities		273,348			279,227
Minority interests		2,725			4,594
Commitments and contingencies (Note 11)		—			—
Stockholders' deficit:
Preferred stock, $.01 par value; 250,000 shares authorized: 45,000 issued; 44,675 and 45,000 outstanding in 1999 and 1998, respectively		1			1
Common stock, $.01 par value; 50,000,000 shares authorized: 5,000,000 issued; 4,905,700 and 5,000,000 outstanding in 1999 and 1998, respectively		50			50
Additional paid-in capital		50,457			50,457
Accumulated deficit		(91,659	)		(99,242	)
Treasury stock, at cost (1999: 325 preferred shares, 94,300 common shares)		(419	)		—
Notes receivable from stockholders		(125	)		—

Total stockholders' deficit		(41,695	)		(48,734	)

Total liabilities and stockholders' deficit	$	234,378		$	235,087

See notes to unaudited condensed consolidated financial statements.

Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	1999			1998			1999			1998
Contract revenues	$	76,034		$	73,226		$	226,294		$	200,244
Costs of contract revenues		60,765			61,431			183,749			167,364

Gross profit		15,269			11,795			42,545			32,880
General and administrative expenses		5,176			5,256			14,936			15,175
Equity incentive plan and other compensation expenses		—			8,169			—			8,169
Recapitalization related expenses		—			9,521			—			9,521

Operating income (loss)		10,093			(11,151	)		27,609			15
Interest expense, net		(4,595	)		(2,673	)		(13,549	)		(4,798	)
Equity in earnings of joint ventures		140			7			(175	)		421

Income (loss) before income taxes and minority interests		5,638			(13,817	)		13,885			(4,362	)
Income tax (expense) benefit		(2,404	)		3,860			(6,441	)		449
Minority interests		(408	)		(536	)		139			(1,870	)

Income (loss) before extraordinary item		2,826			(10,493	)		7,583			(5,783	)
Extraordinary item (net of income tax benefit of $543)		—			(925	)		—			(925	)

Net income (loss)	$	2,826		$	(11,418	)	$	7,583		$	(6,708	)

See notes to unaudited condensed consolidated financial statements.

Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Nine months ended September 30,
	1999			1998
Operating Activities
Net income	$	7,583		$	(6,708	)
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		8,785			10,980
Earnings of joint ventures		175			(421	)
Minority interests		(139	)		1,870
Deferred income taxes		(1,379	)		(1,175	)
Gain on dispositions of property and equipment		(223	)		—
Compensation expense related to exercise of options		—			5,152
Extraordinary item		—			925
Other, net		456			45
Changes in assets and liabilities:
Accounts receivable		4,014			12,360
Contract revenues in excess of billings		(1,410	)		3,646
Inventories		(3,043	)		(2,726	)
Prepaid expenses and other current assets		(620	)		1,529
Accounts payable and accrued expenses		(7,931	)		(3,592	)
Billings in excess of contract revenues		4,351			1,073

Net cash flows from operating activities		10,619			22,958
Investing Activities
Purchases of property and equipment		(9,503	)		(26,365	)
Dispositions of property and equipment		309			—
Distributions from and investments in joint ventures		3,589			(1,027	)
Distributions to minority interests		(1,730	)		—

Net cash flows from investing activities		(7,335	)		(27,392	)
Financing Activities
Proceeds from long-term debt		—			55,000
Repayments of long-term debt		(1,250	)		—
Borrowings (repayments) of revolving loans, net		—			(43,500	)
Proceeds from 11¹/4% subordinated debt		—			115,000
Exercise of options		—			4,516
Common stock purchased		—			3,552
Issuance of preferred stock		—			34,420
Financing fees		—			(5,947	)
Redemption of shares		—			(159,796	)
Treasury stock activity, net		(544	)		—

Net cash flows from financing activities		(1,794	)		3,245
Net increase (decrease) in cash and equivalents		1,490			(1,189	)
Cash and equivalents at beginning of period		758			1,717

Cash and equivalents at end of period	$	2,248		$	528

Supplemental Cash Flow Information
Cash paid for interest	$	16,443		$	2,877

Cash paid for taxes	$	3,175		$	3,264

See notes to unaudited condensed consolidated financial statements.

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands)

1. Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these financial statements do not include all the information in the notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash flows as of and for the dates presented. The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Great Lakes Dredge & Dock Corporation and Subsidiaries (the Company) and the notes thereto, included in the Company's Special Financial Report filed on Form 10-K for the year ended December 31, 1998.

2. Allocation of equipment cost

The Company can have significant fluctuations in equipment utilization throughout the year. Accordingly, for interim reporting, the Company defers or accrues fixed equipment costs and amortizes the expenses in proportion to revenues recognized over the year to better match revenues and expenses.

3. Change in accounting estimate

Effective January 1, 1999, the Company made changes in the estimated useful lives of certain operating equipment to better reflect the remaining period over which the Company anticipates utilizing this equipment, with normal repairs and maintenance. This change resulted in lower depreciation for the three and nine months ended September 30, 1999 by $731 and $2,194, respectively, than would have been expensed if the prior useful lives had been used.

4. Fair value of financial instruments

The fair value of financial instruments included in current assets and current liabilities approximates fair values due to the short-term maturities of these instruments. The carrying value of long-term bank debt is a reasonable estimate of its fair value as interest rates are variable, based on the prevailing market rates. The fair value of the Company's $115,000 long-term subordinated notes was $116,150 at September 30, 1999, based on quoted market prices. The contract amount of letters of credit and guarantees is a reasonable estimate of their fair value as the value for each is fixed over the life of the commitment.

The Company uses derivative instruments to manage commodity price and foreign currency exchange risks. Such instruments are not used for trading purposes. Gains and losses on these hedges are deferred and are recognized in income as part of the related transaction. In June 1999, the Company entered into two foreign exchange forward contracts with a

notional amount of $4,293 to hedge payments related to its foreign tax liabilities. At September 30, 1999, the fair value of the foreign currency contracts approximates the notional amount, based on quoted market prices.

In May 1999, the Company entered into an arrangement to hedge the price of diesel fuel purchase requirements in its backlog covering the period May 1999 to September 2000. At September 30, 1999, the fair value of this arrangement was estimated to be $762, based on quoted market prices.

5. Accounts receivable

Accounts receivable at September 30, 1999 and December 31, 1998 are as follows:

	September 30, 1999			December 31, 1998
Completed contracts	$	10,050		$	12,682
Contracts in progress		21,780			21,420
Retainage		2,550			4,193

		34,380			38,295
Allowance for doubtful accounts		(998	)		(899	)

	$	33,382		$	37,396

6. Contracts in progress

The components of contracts in progress at September 30, 1999 and December 31, 1998 are as follows:

	September 30, 1999			December 31, 1998
Costs and earnings in excess of billings:
Accumulated costs and earnings for contracts in progress	$	160,136		$	108,064
Amounts billed		(144,215	)		(93,431	)

Costs and earnings in excess of billings for contracts in progress		15,921			14,633
Costs and earnings in excess of billings for completed contracts		1,425			1,303

	$	17,346		$	15,936

Billings in excess of costs and earnings:
Amounts billed	$	(59,124	)	$	(45,808	)
Accumulated costs and earnings for contracts in progress		49,931			40,966

Billings in excess of costs and earnings for contracts in progress	$	(9,193	)	$	(4,842	)

7. Investments in joint ventures

The Company has a 50% ownership interest in Amboy Aggregates Joint Venture (Amboy), whose primary business is the dredge mining and sale of fine aggregate, and a 17% ownership interest in Riovia S.A. (Riovia), a venture whose sole business is the performance of a dredging contract in Argentina and Uruguay. The Company's share of earnings in these joint ventures is included in income as earned. The following presents summarized income statement information for Amboy, based on its significance to the Company's annual pre-tax income.

	Three Months Ended September 30,						Nine Months Ended September 30,
	1999			1998			1999			1998
Revenues	$	4,416		$	5,106		$	11,266		$	12,816
Costs and expenses		(4,167	)		(4,478	)		(11,693	)		(12,527	)

Net income (loss)	$	249		$	628		$	(427	)	$	289

Amboy has a mortgage loan with a bank, which contains certain restrictive covenants, including limitations on the amount of distributions to its joint venture partners. The Company has guaranteed 50% of the outstanding mortgage principal and accrued interest, which totaled $3,776 at September 30, 1999.

8. Accrued expenses

Accrued expenses at September 30, 1999 and December 31, 1998 are as follows:

	September 30, 1999		December 31, 1998
Income and other taxes	$	6,210	$	1,174
Insurance		4,797		5,424
Payroll and employee benefits		3,244		5,817
Interest		1,870		5,195
Other		1,662		1,020

	$	17,783	$	18,630

9. Treasury stock

In June 1999, the Company repurchased 450 and 124,800 shares of its preferred and common stock, respectively, from a former officer of the Company at a total cost of $575.

In July 1999, the Company reissued 125 shares and 30,500 shares of its preferred and common stock, respectively, to certain members of management at a total cost of $156. At September 30, 1999, $125 is receivable and included in stockholders' equity.

10. Segment information

The Company and its subsidiaries operate in one reportable segment of providing dredging services, which includes three primary types of work: capital, maintenance and beach nourishment. Revenues by type of work for the three and nine-month periods ended September 30, 1999 and 1998 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	1999		1998		1999		1998
Capital	$	50,256	$	40,984	$	130,659	$	104,535
Maintenance		18,939		8,810		63,840		42,693
Beach nourishment		6,839		23,417		31,795		51,665
Other		—		15		—		1,351

	$	76,034	$	73,226	$	226,294	$	200,244

11. Commitments and contingencies

At September 30, 1999, the Company is contingently liable, in the normal course of business, for $20,123 in letters of credit related to contract bid or performance guarantees.

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

12. Supplemental condensed consolidating financial information

Included in the Company's long-term debt is $115,000 of 11¹/4% senior subordinated notes which will mature on August 15, 2008. The payment obligations of the Company under the senior subordinated notes are guaranteed by certain of the Company's wholly owned domestic subsidiaries ("Subsidiary Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Subsidiary Guarantors are not presented because the Company's management has determined that they would not be material to investors. The following supplemental financial information sets forth, on a combined basis, the balance sheets, statements of operations and statements of cash flows for the Subsidiary Guarantors, the Company's non-guarantor subsidiaries and for the Company (GLD Corporation). During the fourth quarter of 1998, Great Lakes International, Inc. (GLI), a wholly owned guarantor subsidiary of the Company, was merged into GLD Corporation. Therefore, the 1998 amounts presented in the following columns for GLD Corporation include GLI amounts and activity as if GLI had been merged into GLD Corporation at the beginning of 1998.

Condensed Consolidating Balance Sheet at September 30, 1999

ASSETS	Guarantor Subsidiaries		Other Subsidiaries		GLD Corporation			Eliminations			Consolidated Totals
Current assets:
Cash and equivalents	$	506	$	1,742	$	—		$	—		$	2,248
Accounts receivable, net		31,169		2,207		6			—			33,382
Receivables from affiliates		4,828		7,527		—			(12,355	)		—
Current portion of net investment in direct financing leases		—		5,326		2,679			(8,005	)		—
Contract revenues in excess of billings		16,103		1,243		—			—			17,346
Inventories		12,207		3,403		—			—			15,610
Prepaid expenses and other current assets		6,575		743		697			38			8,053

Total current assets		71,388		22,191		3,382			(20,322	)		76,639
Property and equipment, net		72,187		16,133		46,549			—			134,869
Net investment in direct financing leases		—		4,761		3,923			(8,684	)		—
Investments in subsidiaries		13,501		—		137,351			(150,852	)		—
Notes receivable from affiliates		37,642		689		—			(38,331	)		—
Inventories		7,765		—		—			—			7,765
Investments in joint ventures		6,743		—		—			—			6,743
Other assets		3,579		—		4,783			—			8,362

	$	212,805	$	43,774	$	195,988		$	(218,189	)	$	234,378

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	18,317	$	2,545	$	47		$	14		$	20,923
Payables to affiliates		7,184		3,664		1,507			(12,355	)		—
Accrued expenses		9,586		1,624		6,535			38			17,783
Current portion of obligations under capital leases		—		8,005		—			(8,005	)		—
Billings in excess of contract revenues		7,003		2,190		—			—			9,193
Current maturities of long-term debt		200		—		5,750			—			5,950

Total current liabilities		42,290		18,028		13,839			(20,308	)		53,849
Long-term debt		200		—		163,000			—			163,200
Obligations under capital leases		—		8,684		—			(8,684	)		—
Note payable to affiliate		—		—		38,331			(38,331	)		—
Deferred income taxes		26,210		2,389		15,917			—			44,516
Foreign income taxes		—		—		5,157			—			5,157
Other		4,780		407		1,439			—			6,626

Total liabilities		73,480		29,508		237,683			(67,323	)		273,348
Minority interests		—		—		—			2,725			2,725
Stockholders' equity (deficit)		139,325		14,266		(41,695	)		(153,591	)		(41,695	)

	$	212,805	$	43,774	$	195,988		$	(218,189	)	$	234,378

Condensed Consolidating Balance Sheet at December 31, 1998

ASSETS	Guarantor Subsidiaries		Other Subsidiaries		GLD Corporation			Eliminations			Consolidated Totals
Current assets:
Cash and equivalents	$	490	$	268	$	—		$	—		$	758
Accounts receivable		33,601		3,789		6			—			37,396
Receivables from affiliates		5,664		16,148		111			(21,923	)		—
Current portion of net investment in direct financing leases		—		4,767		3,228			(7,995	)		—
Contract revenues in excess of billings		13,350		2,586		—			—			15,936
Inventories		10,111		3,316		—			—			13,427
Prepaid expenses and other current assets		4,856		168		2,152			—			7,176

Total current assets		68,072		31,042		5,497			(29,918	)		74,693
Property and equipment, net		71,021		16,265		46,951			—			134,237
Net investment in direct financing leases		—		8,829		5,766			(14,595	)		—
Investments in subsidiaries		18,957		—		120,177			(139,134	)		—
Notes receivable from affiliates		27,902		1,204		—			(29,106	)		—
Inventories		6,905		—		—			—			6,905
Investments in joint ventures		10,507		—		—			—			10,507
Other assets		3,647		—		5,098			—			8,745

	$	207,011	$	57,340	$	183,489		$	(212,753	)	$	235,087

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	21,578	$	4,509	$	123		$	10		$	26,220
Payables to affiliates		16,624		2,747		2,552			(21,923	)		—
Accrued expenses		11,757		1,165		5,708			—			18,630
Current portion of obligations under capital leases		—		7,995		—			(7,995	)		—
Billings in excess of contract revenues		3,533		1,309		—			—			4,842
Current maturities of long-term debt		200		—		2,500			—			2,700

Total current liabilities		53,692		17,725		10,883			(29,908	)		52,392
Long-term debt		200		—		167,500			—			167,700
Obligations under capital leases		—		14,595		—			(14,595	)		—
Note payable to affiliate		—		—		29,106			(29,106	)		—
Deferred income taxes		26,833		2,572		16,290			—			45,695
Foreign income taxes		—		—		6,944			—			6,944
Other		4,567		429		1,500			—			6,496

Total liabilities		85,292		35,321		232,223			(73,609	)		279,227
Minority interests		—		—		—			4,594			4,594
Stockholders' equity (deficit)		121,719		22,019		(48,734	)		(143,738	)		(48,734	)

	$	207,011	$	57,340	$	183,489		$	(212,753	)	$	235,087

Condensed Consolidating Statement of Income for the quarter ended September 30, 1999

	Guarantor Subsidiaries			Other Subsidiaries			GLD Corporation			Eliminations			Consolidated Totals
Contract revenues	$	66,052		$	10,749		$	—		$	(767	)	$	76,034
Costs of contract revenues		(53,435	)		(7,896	)		(201	)		767			(60,765	)

Gross profit		12,617			2,853			(201	)		—			15,269
General and administrative expenses		(4,094	)		(1,071	)		(11	)		—			(5,176	)

Operating income (loss)		8,523			1,782			(212	)		—			10,093
Interest expense, net		(56	)		(145	)		(4,394	)		—			(4,595	)
Equity in earnings of subsidiaries		1,027			—			5,435			(6,462	)		—
Equity in earnings of joint ventures		140			—			—			—			140

Income (loss) before income taxes and minority interests		9,634			1,637			829			(6,462	)		5,638
Income tax (expense) benefit		(4,064	)		(337	)		1,997			—			(2,404	)
Minority interests		—			—			—			(408	)		(408	)

Net income	$	5,570		$	1,300		$	2,826		$	(6,870	)	$	2,826

Condensed Consolidating Statement of Income for the quarter ended September 30, 1998

	Guarantor Subsidiaries			Other Subsidiaries			GLD Corporation			Eliminations			Consolidated Totals
Contract revenues	$	62,686		$	10,540		$	—		$	—		$	73,226
Costs of contract revenues		(53,440	)		(7,257	)		(734	)		—			(61,431	)

Gross profit		9,246			3,283			(734	)		—			11,795
General and administrative expenses		(4,292	)		(897	)		(67	)		—			(5,256	)
Equity incentive plan and other compensation expenses		—			—			(8,169	)		—			(8,169	)
Recapitalization related expenses		(5,922	)		—			(3,599	)		—			(9,521	)

Operating income (loss)		(968	)		2,386			(12,569	)		—			(11,151	)
Interest expense, net		(159	)		(32	)		(2,482	)		—			(2,673	)
Equity in earnings of subsidiaries		1,227			—			143			(1,370	)		—
Equity in earnings of joint ventures		(97	)		—			104			—			7

Income before income taxes and minority interests		3			2,354			(14,804	)		(1,370	)		(13,817	)
Income tax (expense) benefit		(191	)		(230	)		4,281			—			3,860
Minority interests		—			—			30			(566	)		(536	)

Net income (loss) before extraordinary item		(188	)		2,124			(10,493	)		(1,936	)		(10,493	)

Extraordinary item (net of income tax benefit of $543)		—			—			(925	)		—			(925	)

Net income (loss)	$	(188	)	$	2,124		$	(11,418	)	$	(1,936	)	$	(11,418	)

Condensed Consolidating Statement of Income for the nine months ended September 30, 1999

	Guarantor Subsidiaries			Other Subsidiaries			GLD Corporation			Eliminations			Consolidated Totals
Contract revenues	$	193,501		$	34,327		$	—		$	(1,534	)	$	226,294
Costs of contract revenues		(154,949	)		(29,955	)		(379	)		1,534			(183,749	)

Gross profit		38,552			4,372			(379	)		—			42,545
General and administrative expenses		(11,186	)		(3,660	)		(90	)		—			(14,936	)

Operating income (loss)		27,366			712			(469	)		—			27,609
Interest expense, net		(201	)		(289	)		(13,059	)		—			(13,549	)
Equity in earnings of subsidiaries		(216	)		—			16,626			(16,410	)		—
Equity in earnings of joint ventures		(175	)		—			—			—			(175	)

Income before income taxes and minority interests		26,774			423			3,098			(16,410	)		13,885
Income tax (expense) benefit		(10,148	)		(778	)		4,485			—			(6,441	)
Minority interests		—			—			—			139			139

Net income (loss)	$	16,626		$	(355	)	$	7,583		$	(16,271	)	$	7,583

Condensed Consolidating Statement of Income for the nine months ended September 30, 1998

	Guarantor Subsidiaries			Other Subsidiaries			GLD Corporation			Eliminations			Consolidated Totals
Contract revenues	$	167,617		$	33,011		$	—		$	(384	)	$	200,244
Costs of contract revenues		(144,090	)		(21,798	)		(1,860	)		384			(167,364	)

Gross profit		23,527			11,213			(1,860	)		—			32,880
General and administrative expenses		(11,793	)		(3,065	)		(317	)		—			(15,175	)
Equity incentive plan and other compensation expenses		—			—			(8,169	)		—			(8,169	)
Recapitalization related expenses		(5,922	)		—			(3,599	)		—			(9,521	)

Operating income (loss)		5,812			8,148			(13,945	)		—			15
Interest expense, net		(391	)		(133	)		(4,274	)		—			(4,798	)
Equity in earnings of subsidiaries		4,093			—			7,240			(11,333	)		—
Equity in earnings of joint ventures		421			—			—			—			421

Income (loss) before income taxes and minority interests		9,935			8,015			(10,979	)		(11,333	)		(4,362	)
Income tax (expense) benefit		(4,052	)		(695	)		5,196			—			449
Minority interests		—			—			—			(1,870	)		(1,870	)

Net income (loss) before extraordinary item		5,883			7,320			(5,783	)		(13,203	)		(5,783	)
Extraordinary item (net of income tax benefit of $543)		—			—			(925	)		—			(925	)

Net income (loss)	$	5,883		$	7,320		$	(6,708	)	$	(13,203	)	$	(6,708	)

Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 1999

	Guarantor Subsidiaries			Other Subsidiaries			GLD Corporation			Eliminations			Consolidated Totals
Operating Activities
Net income (loss)	$	16,626		$	(355	)	$	7,583		$	(16,271	)	$	7,583
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		6,114			2,261			410			—			8,785
Earnings of subsidiaries and joint ventures		391			—			(16,626	)		16,410			175
Minority interests		—			—			—			(139	)		(139	)
Deferred income taxes		(766	)		(183	)		(430	)		—			(1,379	)
Gain (loss) on dispositions of property and equipment		(315	)		92			—			—			(223	)
Other, net		766			—			(310	)		—			456
Changes in assets and liabilities:
Accounts receivable		2,432			1,582			—			—			4,014
Contract revenues in excess of billings		(2,753	)		1,343			—			—			(1,410	)
Inventories		(2,955	)		(88	)		—			—			(3,043	)
Prepaid expenses and other current assets		(2,221	)		(345	)		1,946			—			(620	)
Accounts payable and accrued expenses		(4,119	)		(1,755	)		(2,057	)		—			(7,931	)
Billings in excess of contract revenues		3,470			881			—			—			4,351

Net cash flows from operating activities		16,670			3,433			(9,484	)		—			10,619
Investing Activities
Purchases of property and equipment		(7,281	)		(2,222	)		—			—			(9,503	)
Dispositions of property and equipment		309			—			—			—			309
Investments in and distributions from joint ventures		3,589			—			—			—			3,589
Distributions to minority interests		—			—			—			(1,730	)		(1,730	)
Principal payments (receipts) on direct financing leases		—			3,509			(3,509	)		—			—
Payments (receipts) on note with affiliate		—			516			(516	)		—			—

Net cash flows from investing activities		(3,383	)		1,803			(4,025	)		(1,730	)		(7,335	)
Financing Activities
Repayments of long-term debt		—			—			(1,250	)		—			(1,250	)
Principal receipts (payments) on capital leases		—			(5,901	)		5,901			—			—
Net change in accounts with affiliates		(18,941	)		9,539			9,402			—			—
Treasury stock activity, net		—			—			(544	)		—			(544	)
Dividends		5,670			(7,400	)		—			1,730			—

Net cash flows from financing activities		(13,271	)		(3,762	)		13,509			1,730			(1,794	)

Net increase in cash and equivalents		16			1,474			—			—			1,490
Cash and equivalents at beginning of period		490			268			—			—			758

Cash and equivalents at end of period	$	506		$	1,742		$	—		$	—		$	2,248

Condensed Consolidating Statement of Income for the quarter ended September 30, 1999

	Guarantor Subsidiaries			Other Subsidiaries			GLD Corporation			Eliminations			Consolidated Totals
Operating Activities
Net income (loss)	$	5,883		$	7,320		$	(6,708	)	$	(13,203	)	$	(6,708	)
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		6,470			3,023			1,487			—			10,980
Earnings of subsidiaries and joint ventures		(4,514	)		—			(7,240	)		11,333			(421	)
Minority interests		—			—			—			1,870			1,870
Deferred income taxes		(1,290	)		(25	)		140			—			(1,175	)
Compensation expense related to exercise of options		—			—			5,152			—			5,152
Extraordinary item		—			—			925			—			925
Other, net		697			—			(652	)		—			45
Changes in assets and liabilities:
Accounts receivable		12,293			67			—			—			12,360
Contract revenues in excess of billings		3,581			65			—			—			3,646
Inventories		(2,726	)		—			—			—			(2,726	)
Prepaid expenses and other current assets		3,169			(1,292	)		(348	)		—			1,529
Accounts payable and accrued expenses		(6,984	)		(1,231	)		4,623			—			(3,592	)
Billings in excess of contract revenues		1,073			—			—			—			1,073

Net cash flows from operating activities		17,652			7,927			(2,621	)		—			22,958
Investing Activities
Purchases of property and equipment		(23,089	)		(3,276	)		—			—			(26,365	)
Investments in and distributions from joint venture		(1,027	)		—			—			—			(1,027	)
Principal payments (receipts) on direct financing leases		—			3,035			(3,035	)		—			—
Payments (receipts) on notes with affiliate		—			517			(517	)		—			—

Net cash flows from investing activities		(24,116	)		276			(3,552	)		—			(27,392	)
Financing Activities
Proceeds from long-term debt		—			—			55,000			—			55,000
Repayments of long-term debt		—			—			—			—			—
Borrowings (repayments) of revolving loans, net		—			—			(43,500	)		—			(43,500	)
Proceeds from 11¹/4% subordinated debt		—			—			115,000			—			115,000
Exercise of options		—			—			4,516			—			4,516
Common stock purchased		—			—			3,552			—			3,552
Issuance of preferred stock		—			—			34,420			—			34,420
Financing fees		—			—			(5,947	)		—			(5,947	)
Redemption of shares		—			—			(159,796	)		—			(159,796	)
Principal receipts (payments) on capital leases		—			(5,212	)		5,212			—			—
Net change in accounts with affiliates		5,479			(3,195	)		(2,284	)		—			—

Net cash flows from financing activities		5,479			(8,407	)		6,173			—			3,245

Net decrease in cash and equivalents		(985	)		(204	)		—			—			(1,189	)
Cash and equivalents at beginning of period		1,285			432			—			—			1,717

Cash and equivalents at end of period	$	300		$	228		$	—		$	—		$	528

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Statement Under the Private Securities Litigation Reform Act

Certain information in this quarterly report on Form 10-Q, including but not limited to the Management's Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements as 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 be identified by the use of forward-looking terminology such as, "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates," or "hopeful," or the negative thereof or other comparable terminology, or by discussions of strategy, plans or intentions. Forward-looking statements involve risks and uncertainties, including sales initiatives and those described in the Risk Factors section of Item 1 of the Company's Form S-4 Registration Statement (Registration No. 333-64687), which could cause actual results to be materially different than those in the forward-looking statements, which speak only as of the date hereof. The Company assumes no obligation to update such information.

General

The Company is the largest provider of dredging services in the United States. Dredging generally involves the enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. The U.S. dredging market consists of three primary types of work: Capital, Maintenance (including controlled disposal dredging) and Beach Nourishment, in which the Company experienced a combined bid market share in the U.S. of 52% and 46% in 1998 and the first nine months of 1999, respectively. In addition, the Company has continued its role as the only U.S. dredging contractor with significant international operations, which represented approximately 20% and 10% of its contract revenues for 1998 and the first nine months of 1999, respectively.

Most dredging contracts are obtained through competitive bidding on terms specified by the party inviting the bid. The nature of the specified services dictates the types of equipment, material and labor involved, all of which affect the cost of performing the contract and the price that dredging contractors will bid.

The Company recognizes contract revenues under the percentage-of-completion method, based on the Company's engineering estimates of the physical percentage completed of each project. Billings on contracts are generally submitted after verification with the customers of physical quantities completed. Costs of contract revenues are adjusted to reflect the gross profit percentage expected to be achieved upon ultimate completion of each project. Significant expenditures incurred incidental to major contracts are deferred and recognized as costs of contracts based on contract performance over the duration of the related project. These expenditures are reported as prepaid expenses. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Claims for additional compensation due the Company are not recognized in contract revenues until such claims are settled.

The components of costs of contract revenues are labor, equipment (including depreciation, insurance, fuel, maintenance and supplies), subcontracts, rentals, lease expense and project overhead. Hourly labor is generally hired on a project basis and laid-off upon completion of the project. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized. Generally, Capital projects have the lowest costs of contract revenues as a percent of contract revenues and Beach Nourishment have the highest.

The Company's cost structure includes significant fixed costs, averaging approximately 18% to 20% of total costs of contract revenues. The Company can have significant fluctuations in equipment utilization throughout the year. Accordingly, for interim reporting, the Company prepays or accrues fixed equipment costs and amortizes the expenses in proportion to revenues recognized over the year to better match revenues and expenses. Costs of contract revenues also include the net gain or loss on dispositions of property and equipment.

The Company's equity in earnings of joint ventures relates to the Company's 50% ownership interest in Amboy and 17% ownership interest in Riovia. The Company accounts for its investments in each of Amboy and Riovia using the equity method. The Company conducts certain hopper dredging activities, primarily Maintenance and Beach Nourishment projects, through the operations of NATCO Limited Partnership ("NATCO") and North American Trailing Company ("North American"). Minority interests reflects Ballast Nedam Group N.V.'s respective 25% and 20% interest in NATCO and North American.

Results of Operations

The following table sets forth the components of net income and EBITDA as a percentage of contract revenues for the nine and three-month periods ended September 30, 1999 and 1998:

	Three Months Ended September 30,				Nine Months Ended September 30,
	1999		1998		1999		1998
Contract revenues	100.0	%	100.0	%	100.0	%	100.0	%
Costs of contract revenues	(79.9	)	(83.9	)	(81.2	)	(83.6	)

Gross profit	20.1		16.1		18.8		16.4
General and administrative expenses	(6.8	)	(7.2	)	(6.6	)	(7.6	)
Equity incentive plan and other compensation expenses	—		(11.2	)	—		(4.1	)
Recapitalization related expenses	—		(13.0	)	—		(4.8	)

Operating income (loss)	13.3		(15.3	)	12.2		(0.1	)
Interest expense, net	(6.0	)	(3.6	)	(6.0	)	(2.4	)
Equity in earnings of joint ventures	0.1		—		(0.1	)	0.2

Income (loss) before income taxes and minority interests	7.4		(18.9	)	6.1		(2.3	)
Income tax benefit (expense)	(3.2	)	5.2		(2.8	)	0.2
Minority interests	(0.5	)	(0.7	)	0.1		(0.9	)

Net income (loss) before extraordinary item	3.7		(14.4	)	3.4		(3.0	)
Extraordinary item (net of income tax benefit)	—		(1.2	)	—		(0.4	)

Net income (loss)	3.7	%	(15.6	)%	3.4	%	(3.4	)%

EBITDA*	17.1	%	13.9	%	16.0	%	14.3	%

*: Adjusted for equity incentive plan and other compensation expenses and recapitalization related expenses in 1998.

"EBITDA," as provided herein, represents earnings from continuing operations before net interest expense, income taxes and depreciation expense and excludes equity earnings of joint ventures and minority interests. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles. The Company's EBITDA is included as it is a basis upon which the Company assesses its financial performance, and certain covenants in the Company's borrowing arrangements are tied to similar measures. EBITDA should not be considered in isolation or as an alternative to net income, cash flows from continuing operations, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles as measures of the

Company's profitability or liquidity. EBITDA as defined herein may differ from similarly titled measures presented by other companies.

Components of Contract Revenues

The following table sets forth, by type of work, the Company's contract revenues for the three and nine-month periods ended and backlog as of the period indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
Revenues (in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Revenues (in thousands)	1999		1998		1999		1998
Capital—U.S.	$	45,936	$	29,455	$	107,369	$	58,854
Capital—foreign		4,320		11,529		23,290		45,681
Maintenance		18,939		8,810		63,840		42,693
Beach		6,839		23,417		31,795		51,665
Other		—		15		—		1,351

	$	76,034	$	73,226	$	226,294	$	200,244

	September 30,
Backlog (in thousands)	September 30,
Backlog (in thousands)	1999		1998
Capital—U.S.	$	176,984	$	170,850
Capital—foreign		22,761		9,206
Maintenance		20,585		24,023
Beach		13,234		42,891

	$	233,564	$	246,970

The Company's continued strong performance for the third quarter of 1999 is the result of successfully performing projects from the record-level backlog. This strong backlog represents work bid and won during the preceding twelve month period of continuing market improvement both in volume and margins. Third quarter 1999 revenues of $76.0 million and gross profit of $15.3 million were up 3.8% and 29.4%, respectively, from the third quarter of 1998.

The growth in revenues and earnings continues to be primarily attributable to domestic capital dredging projects, which increased for the three and nine months ended September 30, 1999 by $16.5 million and $48.5 million, respectively, over the same periods of 1998. Capital projects include large port deepenings and other infrastructure projects. The domestic capital dredging market has been expanding since 1998, with the announcement by the Army Corps of Engineers of the scheduling of 18 new Deep Port projects to be completed over the next seven years. The Corps estimates these projects will have an aggregate value in excess of $2.0 billion. Additionally, several new projects have been added under legislation passed in August 1999. During 1998, approximately $80.0 million of Deep Port work was let for bid. The Company was the successful bidder on 64% of this work. Through the third quarter of 1999, Deep Port projects valued at $225.3 million were let for bid. The Company was the successful bidder on 59% of this work. In the third quarter, contract revenues from capital projects included $9.7 million from a deepening and reclamation project in Los Angeles which began work in 1997, and $5.0 million, $9.8 million, $10.7 million, and $5.3 million from channel deepening projects in Boston, Houston, Charleston, and New York, respectively.

Maintenance projects include routine dredging of ports, rivers and channels to remove the regular build up of sediment. Revenues from maintenance projects for the three and nine months ended September 30, 1999 increased $10.1 million and $21.1 million, respectively, over the same periods of 1998. The increase in maintenance dredging revenues through the first three quarters of 1999 was

partly attributed to a large project on the Mississippi River Gulf Outlet, which contributed year to date revenue of $16.5 million and employed the recently-acquired hydraulic dredge "Texas".

Beach nourishment projects include rebuilding of shoreline areas which have been damaged by storm activity or ongoing erosion. Third quarter and year to date 1999 revenues from beach projects decreased $16.6 million and $19.9 million, respectively, compared to the same periods of 1998. This decrease was primarily a result of some key projects being postponed by the project owners to 2000, so fewer projects have been let for bid in the current year.

Year to date 1999 revenues of the Company's NATCO hopper dredging subsidiary declined in comparison to 1998 due to lower than historical emergency Mississippi River work and postponement of certain beach projects. Additionally, certain dredges in the NATCO hopper fleet have experienced down-time due to routine overhauls and project delays, resulting in decreased utilization for the nine months of 1999.

Revenues from foreign operations for the three and nine months ended September 30, 1999, declined $7.2 million and $22.4 million, respectively, compared to the same periods of 1998. The Company's joint venture project in Egypt, which began in the first quarter of 1999, contributed revenue of $2.5 million during the third quarter of 1999 and a total of $11.7 million in the nine month period. Due to the timing of foreign contracts and strength of the domestic markets, 1999 foreign revenues are below historical levels; however, the Company was recently awarded foreign contracts in Dabhol, India and Bhairab, Bangladesh, with a combined value of $11.0 million, which are scheduled to begin in the fourth quarter 1999.

Backlog

The Company's contract backlog represents management's estimate of the revenues which will be realized under the portion of the contracts remaining to be performed based upon current estimates. Such estimates are subject to fluctuations based upon the amount of material actually dredged, as well as factors affecting the time required to complete the job. In addition, because substantially all of the Company's backlog relates to government contracts, the Company's backlog can be canceled at any time without penalty. However, the Company will recover actual committed costs and profit on work performed up to the date of cancellation. Consequently, backlog is not necessarily indicative of future revenues. The Company's backlog includes only those projects for which the customer has provided an executed contract.

As of September 30, 1999, the Company had backlog of $233.6 million, which represents a decrease of $13.4 million, or 5.4% compared to backlog as of September 30, 1998. Domestic capital projects make up $177.0 million or 75.8% of the September 30, 1999 backlog, which is an increase of $6.1 million compared to September 30, 1998. Backlog at September 30, 1999 includes work remaining on significant Deep Port capital projects, as follows: $31.8 million on the San Juan, Puerto Rico project awarded in the third quarter of 1999, $39.5 million on two Houston projects, $31.8 million on two Charleston projects, $12.8 million on the Boston project, and $17.5 million on the New York project, which is employing the newly-constructed backhoe dredge "New York".

Normally, bidding activity in the fourth quarter experiences a seasonal decline, which is anticipated for the fourth quarter of 1999. However, typical bidding activity is expected to resume in the first quarter of 2000.

In the third quarter of 1999, the Company's Board of Directors approved the construction and lease of a new 5,000 cubic meter hopper dredge, to meet the anticipated growth in hopper demand. The Company has secured a commitment for the construction period and long-term lease financing upon completion. Construction is expected to commence in the fourth quarter and be completed within two years.

Results of Operations

Contract Revenues. Contract revenues were $76.0 million in the third quarter of 1999, an increase of 3.8%, from revenues of $73.3 million in the third quarter of 1998. In the nine months ended September 30, 1999, revenues increased 13.0% to $226.3 million from $200.2 in the first nine months of 1998. The increase in 1999 third quarter and nine-month revenues continues to be due primarily to the increased volume of higher margin capital dredging projects.

Costs of Contract Revenues. Costs of contract revenues for the three months ended September 30, 1999 decreased $0.7 million, or 1.1%, over the three months ended September 30, 1998. For the first nine months of 1999, costs of contract revenues increased $16.4 million, or 9.8%, over the same period of 1998. As a percentage of contract revenues, costs of contract revenues were 79.9% and 81.2% for the three and nine months ended September 30, 1999 compared to 83.9% and 83.6% in the respective 1998 periods. The improvement in costs of contract revenues as a percentage of revenues in 1999 has been primarily attributable to the project mix. In both the three and nine month periods of 1999, there were more higher margin capital projects and fewer lower margin beach nourishment and foreign projects.

Gross Profit. Gross profit was $15.3 million for the three months ended September 30, 1999, an increase of $3.5 million or 29.5% over the three months ended September 30, 1998. For the nine months ended September 30, 1999, gross profit increased $9.7 million or 29.4% over gross profit for the same period of 1998. The improvement in 1999 was attributable to the increased volume of higher margin capital dredging work.

General and Administrative Expenses. General and administrative expenses have remained relatively consistent in 1999 when compared to the same periods of 1998.

Operating Income. Operating income was $10.1 million for the three months ended September 30, 1999, an increase of $3.6 million compared to the three months ended September 30, 1998 (excluding nonrecurring recapitalization and equity incentive plan and other compensation expenses totaling $17.7 million related to the recapitalization of the Company in August 1998). For the first nine months of 1999, operating income increased $9.9 million or 55.9% over the same period of 1998 (excluding recapitalization and equity incentive plan and other compensation expenses). The 1999 increase in operating income was primarily a result of the increased volume of higher margin capital dredging work.

EBITDA. EBITDA increased $2.8 million or 27.7%, to $13.0 million for the three months ended September 30, 1999 from $10.2 million (excluding recapitalization and equity incentive plan and other compensation expenses) for the three months ended September 30, 1998. EBITDA for the nine months ended September 30, 1999 increased $7.7 million or 26.9% over EBITDA for the same period of 1998 (excluding recapitalization and equity incentive plan and other compensation expenses). The increase was due to the increased volume of higher margin work in 1999.

Interest Expense, Net. Net interest expense was $4.6 million for the three months ended September 30, 1999, an increase of $1.9 million over the three months ended September 30, 1998. Net interest expense for the nine months ended September 30, 1999 increased $8.8 million or 182.4% over the same period of 1998. The increase in 1999 interest expense was related to interest on the additional debt incurred in connection with the Company's recapitalization effected in August 1998.

Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures was $0.1 for the third quarter of 1999; for the same period of 1998, equity in earnings of joint ventures was essentially break-even. For the first nine months of 1999, equity in earnings of joint ventures was a loss of $0.2 million compared to income of $0.4 million in 1998. The decrease in 1999 was attributable to the continued reduction in demand for Amboy's products, combined with commencement of the

maintenance phase of the Riovia project. The maintenance phase is anticipated to have lower revenues and margins than the capital phase, which was substantially complete at the end of 1998.

Income Tax Expense. Income tax expense for the third quarter of 1999 was $2.4 million compared to a tax benefit of $3.9 million for the same period of 1998. Income tax expense for the nine months ended September 30, 1999 was $6.4 million compared to a benefit of $0.5 million for the nine months ended September 30, 1998. The fluctuation in taxes from 1998 to 1999 was the result of earnings in 1999 compared to losses in 1998 generated by non-recurring expenses associated with the Company's recapitalization in August 1998.

Minority Interests. For the three months ended September 30, 1999, income attributable to minority interests totaled $0.4 million, compared to income of $0.5 million for the three months ended September 30, 1998. For the nine months ended September 30, 1999, earnings attributable to minority interests declined $2.0 million over the same period of 1998. The decrease was due to lower earnings from the NATCO hopper dredging operations during the first nine months of 1999 as compared to the same period of 1998.

Net Income. Net income was $2.8 million for the three months ended September 30, 1999 compared to a loss of $11.4 million for the three months ended September 30, 1998. Year to date, net income was $7.6 million in 1999 compared to a loss of $6.7 million in 1998. The 1999 net income reflects the improved operating earnings resulting from the favorable project mix, while the 1998 losses reflect the additional non-recurring expenses related to the Company's recapitalization in August of 1998.

Liquidity and Capital Resources

The Company's primary sources of liquidity are cash flows from operations and borrowings under the revolving line of credit with the Company's senior lenders. The Company's primary uses of cash are funding working capital, capital expenditures and debt service.

The Company generated net cash flows from operating activities for the nine months ended September 30, 1999 and 1998 of $10.6 million and $23.0 million, respectively. The reduction in cash flows from operating activities for the 1999 period was due to an increase in working capital related to normal fluctuations in working capital requirements, along with more favorable timing in the collection of certain receivables in the 1998 period.

The Company's net cash uses for investing activities for the nine months ended September 30, 1999 and 1998, totaled $7.3 million and $27.4 million, respectively. Additional funds were used in the nine month period ended September 30, 1998 for capital expenditures, including the purchase of certain equipment acquired from a competitor for approximately $13.3 million and costs related to the construction of the Dredge New York of approximately $5.7 million. The Company subsequently refinanced these 1998 acquisitions with operating leases. Funds were used in 1999 to make distributions of $1.7 million to minority interests related to 1998 earnings; such distributions were made during the fourth quarter of 1997 for 1997 earnings. The use of cash for investing activities in the first nine months of 1999 was offset by distributions of $2.8 million received from Riovia and a distribution of earnings from Amboy of approximately $0.8 million.

The Company's net cash flows from financing activities for the nine months ended September 30, 1999 and 1998 were a use of $1.8 million and a source of $3.2 million, respectively. During the nine months ended September 30, 1998, the Company effected a recapitalization which extinguished the debt under the former credit agreement and redeemed the stock of the majority shareholders with proceeds from the new bank term and revolving credit agreement, the issuance of senior subordinated notes, and the equity investments by new shareholders. For the nine months ended September 30, 1999, the financing activity included a scheduled repayment of the term debt as well as the purchase of stock

from a former officer of the Company and a subsequent reissuance of a portion of these shares to certain management employees.

Management believes cash flows from operations and available credit will be sufficient to finance operations, planned capital expenditures and debt service requirements for the foreseeable future. The Company's ability to fund its working capital needs, planned capital expenditures, scheduled debt payments and to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flows, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control.

Year 2000 Issue

Historically, many computer programs have been written using two digits rather than four to define the applicable year, which could result in the program failing to recognize a year that begins with "20" instead of "19". This, in turn, could result in major system failures or miscalculations, and is generally referred to as the "Year 2000 issue".

In June 1996, the Company's MIS Department developed a plan to identify and address issues related to Year 2000 compliance. The Company's internal systems were the primary focus of the plan. At that time, the Company compiled an inventory of its internally developed and third party software. The Company also evaluated various solutions and techniques for making its internally developed databases and programs Year 2000 ready. The Company prioritized the tasks taking into account the likelihood of Year 2000 failure, the impact of Year 2000 failure on the business, and the effort required to complete the task. In March 1997, senior management of the Company reviewed the tasks and approved the plan.

The Company's Year 2000 Plan contemplated four phases—assessment, implementation, testing and release/installation—which overlap to a degree. In 1998 the Company completed all phases for its most critical systems. The Company continued with the implementation, testing and installation phase for its less critical systems through the first half of 1999. The Company believes such systems are not material to its operations.

The Company has also considered and addressed the impact of the Year 2000 on other aspects of the Company's operations, such as equipment navigational systems.

The Company has received information concerning the Year 2000 status of certain critical suppliers and is satisfied such suppliers have remediated issues that have the potential to adversely affect the Company.

The Company currently estimates that the total cost of implementing its Year 2000 Plan, consisting primarily of increased staffing requirements and outside consulting services, will not be material. This is based on actual expenditures incurred and minimal remaining expenditures to be incurred.

If the Company's computer systems fail with respect to the Year 2000 Issue, or if any applications or embedded chips critical to the Company's reporting process are overlooked, there could be a material adverse effect on the business, results of operations or financial condition of the Company. Additionally, there can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted, or that failure to convert by another company would not have material adverse effect on the business, results of operations or financial condition of the Company. The Company has assessed its need for contingency plans and has established a plan for payment of payroll should its third-party service provider be unable to maintain its service. Based on the Company's assessment, no other contingency plans are considered necessary.

Effect of Recently Issued Accounting Standard

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which has been amended to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. SFAS 133 additionally requires changes in the fair value of derivatives be recorded in current earnings or comprehensive income based on the intended use of the derivatives. Management is in the process of evaluating the impact on the Company's financial position from adoption of SFAS 133.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A portion of the Company's current operations are conducted outside of the U.S. Through the first nine months of 1999, approximately 10.3% of contract revenues was attributable to overseas operations. It is the Company's policy to hedge foreign currency exchange risk on contracts denominated in currencies other than the U.S. dollar, if available. Forward currency exchange contracts, typically with durations of less than one year, are used to minimize the impact of foreign currency fluctuations on operations. The Company does not purchase forward exchange contracts for trading purposes. At September 30, 1999, the Company had outstanding foreign currency forward contracts with a notional value of $4.3 million, designated as a hedge of its foreign currency denominated tax liability. The Company expects that gains or losses on the foreign currency forward contracts should offset gains or losses on the underlying tax liability being hedged, such that the impact of a change in the exchange rate would be immaterial to the Company's earnings.

A significant operating cost for the Company is diesel fuel. The Company uses fuel commodity forward contracts, typically with durations of less than one year, to reduce the impacts of changing fuel prices on operations. The Company does not purchase fuel hedges for trading purposes. At September 30, 1999, the Company had an outstanding arrangement to hedge the price of its fuel purchases related to work in backlog. If the market price of fuel were to increase or decrease, the Company anticipates that the resulting gain or loss would be offset by the fuel arrangement. Therefore, changes in the market price of fuel would not have a material impact on future earnings.

Changes in market interest rates from December 31, 1998 did not have a significant impact on the fair value of the Company's term and revolving bank debt or fixed rate debt at September 30, 1999.

Part II

Item 1 Legal Proceedings

The Company is not involved in any pending legal proceedings other than legal proceedings occurring in the normal course of business, which resolution of are not expected to have a material impact on the financial position or operations of the Company.

Item 6 Exhibits and Reports on Form 8-K

(a)		Exhibits
27.01		Financial Data Schedule
(b)		Reports on Form 8-K
		No reports on Form 8-K were filed during the third quarter of 1999.

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 the undersigned thereunto duly authorized.

		GREAT LAKES DREDGE & DOCK CORPORATION
Date: 11-12-99		By:	/s/ DEBORAH A. WENSEL Deborah A. Wensel Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)

EXHIBIT INDEX

Number		Document Description
2.01		Plan and Agreement of Merger dated as of August 19, 1998 between the Company and Great Lakes Dredge & Dock Acquisition, Inc.(1)
3.01		Restated Certificate of Incorporation of the Company.(1)
3.02		Bylaws of the Company.(1)
4.01		Indenture dated as of August 19, 1998 among the Company, the Subsidiary Guarantors and the Bank of New York, as Trustee.(1)
4.02		Form of 11¹/4% Senior Subordinated Note due 2008 (included in Exhibit 4.01).(1)
10.01		Credit Agreement dated as of August 19, 1998 among the Company and the other loan parties thereto, as Borrowers, the financial institutions from time to time party thereto, as Lenders, Bank of Montreal, Chicago Branch, as Documentation Agent, Bank of America National Trust and Savings Association, as Issuing Lender and Administrative Agent and BancAmerica Robertson Stephens, as Lead Arranger.(1)
10.02		Second Amended and Restated Underwriting and Continuing Indemnity Agreement dated August 19, 1998 among the Company, certain of its Subsidiaries, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Insurance Company and Reliance Surety Company.(1)
10.05		Employment Agreement between the Company and Douglas B. Mackie.(2)
10.06		Great Lakes Annual Cash Bonus Plan.(2)
10.07		Securities Purchase and Holders Agreement dated August 19, 1998 among the Company, Vectura and the Management Investors.(2)
10.08		Registration Rights Agreement dated August 19, 1998 among the Company, Vectura, and the Management Investors.(2)
10.09		Employment Agreement between the Company and Richard Lowry.(2)
27.01		Financial Data Schedule (filed only electronically with the SEC).(3)

(1): Incorporated by reference to Form S-4 Registration Statement of the Company (File No. 333-64687) filed with the Commission on September 29, 1998.
(2): Incorporated by reference to Amendment No. 1 to Form S-4 Registration Statement of the Company (File No. 333-64687) filed with the Commission on December 14, 1998.
(3): Filed herewith.
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QuickLinks

Part I—Financial Information
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income

Condensed Consolidated Statements of Cash Flows

NOTES TO 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
Part II
Item 1 Legal Proceedings
Item 6 Exhibits and Reports on Form 8-K
SIGNATURE

EXHIBIT INDEX