UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2004

 

or

 

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

 

For the transition period from                 to                 

 

Commission file number:

333-64687

 

Great Lakes Dredge & Dock Corporation

(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, IL		60523
(Address of principal executive offices)		(Zip Code)

 

(630) 574-3000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:                               NONE

 

Securities registered pursuant to section 12(g) of the Act:                                NONE

 

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.

ý   Yes     o   No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

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

Yes   o     No   ý

 

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

 

As of March 28, 2005, there were outstanding 1,000 shares of Common Stock and zero shares of Preferred Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

TABLE OF CONTENTS

 

PART I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information
PART III
Item 10.	Directors and Executive Officers
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accounting Fees and Services
PART IV
Item 15.	Exhibits, Financial Statement Schedules
SIGNATURES

 

 

This Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, including but not limited to the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains or may contain forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Readers are cautioned not to place undue reliance on such statements because they are subject to numerous uncertainties and factors relating to the Company’s operations and business environment, all of which are difficult to predict and many of which are beyond the Company’s control.  Forward-looking statements include information concerning the Company’s possible or assumed future results of operations.  When used in this Report, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “should” and similar expressions or the negative thereof or other comparable terminology or discussions of strategy, plans, or intentions, identify such forward-looking statements.  These statements are based on assumptions that have been made in light of the Company’s experience in the industry as well as its perceptions of historical trends, current conditions, expected future developments and other factors that the Company believes are appropriate under the circumstances.  These statements are not guarantees of performance or results.  Although the Company believes that these forward-looking statements are based on reasonable assumptions, many factors could affect the Company’s actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.  Some of these factors include:

 

•                   A loss of government dredging contracts could have a negative impact on the Company’s business, financial condition and results of operation.

 

•                   The Company’s dredging revenues are heavily dependent on revenues from the Army Corps of Engineers and may be negatively impacted by reductions in the amount appropriated or funded for dredging services.

 

•                   Significant operating risks and hazards (including environmental hazards, industrial accidents, encountering unusual or unexpected geological formations, cave-ins below water levels, disruption of transportation services and flooding) could result in damage or destruction to persons or property, which could result in losses or liabilities to the Company.

 

•                   Although the Company insures against the risk of loss in its business, actual liabilities may exceed the Company’s insurance coverage.

 

•                   The Company’s inability to obtain bonding for future projects would limit the amount of dredging contracts that the Company could perform.

 

•                   The Company’s growth may be hindered if it is unable to retain key executives and other personnel.

 

•                   The Company is exposed to political, economic and other risks related to its international operations.

 

•                   The Company’s operations may be adversely affected by weather conditions and natural disasters.

 

1

 

•                   The amount of the Company’s estimated backlog is subject to change and not necessarily indicative of future sales.

 

•                   Because of the fixed-price nature of most of its contracts, the Company is subject to risks of losses from underestimating costs, operational difficulties and other changes that may occur over the contract period.

 

•                   The Company’s dredging operations may fluctuate due to seasonality and other factors that may adversely affect its cash flow.

 

•                   The Company’s business could suffer in the event of a work stoppage by its unionized labor force.

 

•                   Environmental matters could force the Company to incur significant capital and operational costs.

 

•                   If the Company’s demolition business is unable to compete effectively, its demolition revenues may decline and it may be unable to sustain its gross profit margins in its demolition business.

 

•                   The loss of key customers and large contracts in its demolition activities could have a material impact on the Company’s business, financial condition and results of operations.

 

•                   The Company depends on subcontractors in its demolition business, and an inability to find quality subcontractors could cause disruptions in its demolition business.

 

Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.  The forward-looking statements made in this Report or incorporated by reference into this Report relate only to events as of the date on which the statements are made.  The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

Part I

 

Item  1. - Business

 

Organization

 

Great Lakes Dredge & Dock Corporation (the “Company” or “Great Lakes”), a Delaware corporation, is the largest provider of dredging services in the United States.  The Company was founded in 1890 as Lydon & Drews Partnership and contracted its first project in Chicago, Illinois.  The Company changed its name to Great Lakes Dredge & Dock Company in 1905 and was involved in a number of marine construction and landfill projects along the Chicago lakefront and in the surrounding Great Lakes’ region. The Company was listed on the NYSE in 1971, and in 1985, purchased through a friendly stock offer by ITEL. Throughout this period, the Company expanded geographically, providing marine construction and dredging services throughout the U.S. and in certain international markets.  In 1991, the Company was purchased by an affiliate of Blackstone Capital Partners, who owned the Company until 1998, at which

 

2

---

 

time it was sold to Vectura Holding Company LLC (“Vectura”), a portfolio company of Citigroup Venture Capital, Ltd.

 

On December 22, 2003, Madison Dearborn Capital Partners IV, L.P. (“MDP”), an affiliate of Chicago-based private equity investment firm Madison Dearborn Partners, LLC, acquired control of Great Lakes from its former owner, Vectura, for approximately $361.6 million, including fees and expenses, in a transaction accounted for as a purchase. The acquisition was effected by a new company established for this purpose, GLDD Acquisitions Corp., which acquired 100% of the equity securities of the Company. Certain members of GLDD’s management own approximately 15% of outstanding common stock of GLDD Acquisitions Corp. and MDP and certain of its co-investors own the remaining 85%.  The acquisition was financed by new equity contributions of $97.0 million; term loan and revolver borrowings under a new senior credit facility of $60.3 million and $2.0 million, respectively; the issuance of $175.0 million of 7¾% senior subordinated notes due 2013; the rollover of term loan borrowings under a new equipment financing facility of $23.4 million; the rollover of approximately $1.6 million of capital leases; and cash on hand of $2.3 million.

 

On April 24, 2001, the Company purchased 80% of the capital stock of North American Site Developers, Inc. (“NASDI”), a demolition services provider located in the Boston, Massachusetts area.   The purchase consideration for the acquisition included $35.0 million in cash payable to the stockholders of NASDI and two senior subordinated notes totaling $3.0 million payable to the NASDI management stockholders.  In 2003, the Company increased its ownership in NASDI to 85%.  One NASDI management stockholder retains a 15% non-voting interest in NASDI.  With the acquisition of NASDI, the Company now operates in two reportable segments: dredging and demolition.  Financial information about the Company’s segments is provided in Note 16, “Segment information” in the Notes to the Consolidated Financial Statements.

 

Dredging Operations

 

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, beach nourishment and maintenance.  The Company’s bid market is defined as the population of projects on which it bid or could have bid if not for capacity constraints (“bid market”). The Company achieved a combined U.S. market share of the projects awarded within its bid market of 43%, 31% and 49% in 2004, 2003 and 2002, respectively.  In addition, the Company is the only U.S. dredging service provider with significant international operations, which averaged 18% of its dredging contract revenues over the last three years.  The Company’s fleet of 26 dredges, 25 material transportation barges, two drillboats, and numerous other specialized support vessels is the largest and most diverse fleet in the U.S.  The Company believes its fleet would cost in excess of $1.0 billion to build in the current market.

 

Domestic Dredging Operations.  Over its 114-year life, the Company has grown to be the leader in each of its primary dredging activities in the U.S., including:

 

•                   Capital (approximately 45% of 2004 dredging revenues). Capital dredging projects are primarily port expansion projects, which involve the deepening of channels to allow access

 

3

 

by larger, deeper draft ships and the providing of land fill for building additional port facilities.  Capital projects also include other land reclamations, trench digging for pipes, tunnels and cables, and other dredging related to the construction of breakwaters, jetties, canals and other marine structures.  Although capital revenue can be impacted by budgetary constraints and economic conditions, these projects typically generate an immediate economic benefit to the ports and surrounding communities.  The Company’s bid market share of total U.S. capital projects averaged 56% over the last three years.

 

The U.S. capital market includes “Deep Port” projects authorized under the 1986 Water Resource Development Act (“WRDA”) as amended and supplemented, most recently in December 2000.  Without significant deepening efforts, many major U.S. ports risk losing their competitive position as a result of being unable to accommodate larger cargo vessels.  The WRDA legislation provides authorization for the deepening of certain major domestic ports.  In 1997, the U.S. Army Corps of Engineers (the “Corps”), which has the primary responsibility for maintaining and improving the nation’s waterways, ports and shorelines, announced Deep Port work, authorized by the WRDA, to be completed through 2005, with an aggregate value in excess of $2.0 billion, and supplemental authorizations have increased this amount to approximately $4.0 billion, with work to be completed through 2010. Currently, over $2.3 billion of these authorized Deep Port projects have yet to be let for bid.  Deep Port work has comprised a substantial portion of recent bid markets, averaging 35% of the bid market over the last three years.  The Company’s bid market share of Deep Port projects averaged 64% over the last three years.

 

•                   Beach Nourishment (approximately 16% of 2004 dredging revenues).  Beach nourishment projects generally involve moving sand from the ocean floor to shoreline locations when erosion has progressed to a stage that threatens substantial shoreline assets. Beach nourishment is often viewed as a better response to erosion than trapping sand through the use of sea walls and jetties, or relocating buildings and other assets from the shoreline.  Beach nourishment also facilitates shoreline real estate development and recreational activities. Generally, beach nourishment projects take place during the fall and winter months to minimize interference with bird and marine life migration and breeding patterns and coastal recreation activities. The Company’s bid market share of U.S. beach nourishment projects averaged 44% over the last three years.

 

•                   Maintenance (approximately 19% of 2004 dredging revenues).  Maintenance dredging consists of the re-dredging of previously deepened waterways and harbors to remove silt, sand and other accumulated sediments. Due to natural sedimentation, active channels generally require maintenance dredging every one to three years, thus creating a recurring source of dredging work that is typically non-deferrable if optimal navigability is to be maintained.  The Company’s bid market share of U.S. maintenance projects averaged 26% over the last three years.

 

Foreign Dredging Operations (approximately 20% of 2004 dredging revenues).   Foreign capital projects typically relate to channel deepening and port infrastructure development.   Beginning in the early 1990s, consolidation among foreign competitors, along with an increase in foreign governments’ investments in infrastructure, created new overseas dredging opportunities for the Company.  Since this time, the Company has targeted opportunities that are well suited to its equipment and where competition from its European competitors is reduced.  While the

 

4

 

Company has only a minor share of the international dredging market, it has maintained its presence in the foreign markets to enable it to diversify, particularly at times when there is anticipation of a decrease in the domestic market.  Over the last ten years, the Company has worked in Europe, the Middle East, Africa, India, Mexico and South America.  In recent years, the Middle East region has presented the most attractive prospects.  Therefore, the Company currently has certain dredging assets located in Middle East; however, these assets are mobile and may be repositioned according to project requirements. Revenues from foreign capital projects averaged 18% of the Company’s dredging revenues over the last three years.

 

The Company believes that it benefits from a number of long-term favorable trends in the U.S. dredging market:

 

•                   Deep Port capital projects.  Historically, the average controlling depth of the 10 largest U.S. ports has been 40 feet, as measured by annual container volume, compared to over 50 feet for the ten largest non-U.S. ports worldwide.  Without significant deepening efforts, most major U.S. ports risk being unable to accommodate the larger cargo vessels increasingly in use throughout the world, which renders them less competitive with deeper ports.  Funding for Deep Port projects has represented a significant portion of recent years’ markets, and the Company continues to believe that Deep Port work will provide significant opportunities for the domestic dredging industry.

 

•                   Increasing need for beach nourishment .   Beach erosion is a continuous problem and there is a growing awareness among state and local governments as to the importance of beachfront assets to the multi-billion dollar tourism industry.  Beach projects are generally funded by both federal and state and local monies; therefore, a downturn in the economy can impact the amount of available funding, particularly from state and local sources.  The recent annual beach bid markets, however, have remained strong with annual bid revenues averaging $100 million, and recent bid schedules provided by project owners identify beach projects for 2005 bidding valued in excess of $200 million.

 

•                   Additional significant long-term opportunities.  Other capital projects make consistent contributions to the Company’s annual revenues, and, although not part of the Deep Port program, require similar technical expertise and equipment capabilities.  For instance, the Company has recently submitted proposals for over $50 million in dredging services solicited by private customers, primarily for development of liquified natural gas (“LNG”) terminals along the Gulf Coast of Texas.  This private market appears to be gaining momentum as the global supply of LNG has increased and importation of the fuel becomes more cost-competitive, given the higher prices of domestically-produced natural gas.  Therefore, it is likely that some of this work will materialize in the near future as the private contractors work to develop the infrastructure necessary for the LNG terminals.  Additionally, there are significant capital dredging opportunities related to projects to contain the erosion of wetlands and coastal marshes (particularly in Louisiana), provide land reclamation for the San Francisco airport expansion and clean-up contaminated inland waterways such as the Fox River in Wisconsin and the Hudson River in New York.  These long-term projects have the potential to add substantial revenue to the dredging market, beginning as soon as 2005 and continuing for approximately eight to 10 years thereafter.

 

5

 

While these market trends have represented key opportunities within the domestic dredging industry over the past ten years and are expected to represent the key opportunities for the Company over at least the next ten years, the domestic industry has experienced some negative funding developments over the past 18 months.  Beginning in the second half of 2003 and into the first half of 2004, the domestic dredging bid activity declined.  Although the Corps’ fiscal year 2003 and 2004 budgets were approved at similar levels to preceding years, it appeared that funds were not being distributed to the Corps’ districts. Based on conversations with Corps’ representatives and others in the industry, the Company’s management attributes the decline to budgetary pressures given the state of the deficit and the diversion of funds to support the nation’s efforts in Iraq.  Additionally, during this time period the Corps had been undergoing reorganization of certain of its administration functions which may also have delayed its ability to request and receive funding.  In 2004, the Corps also requested the Company to defer work on certain projects in backlog due to lack of funding.  As a result of these funding issues, the industry’s dredging fleet was underutilized through much of the second and third quarters of 2004, leading to intense competition and pricing pressures for work that was bid during this period.  Bidding did accelerate in the second half of 2004 and the year concluded with a solid bid market totaling in excess of $700 million.   While the industry’s fleet utilization improved by year-end, pricing has continued to be competitive in recent bids and is likely to remain competitive until the industry participants regain confidence in the market.

 

Also in 2004, there were renewed efforts by the federal government to eliminate the federal portion of beach nourishment funding, and the Corps’ fiscal year 2005 budget was passed with no appropriation for beach nourishment.  Therefore, the beach work that has recently come out for bid and that which is expected to bid in the near term is being funded by an emergency supplemental bill passed towards the end of 2004, which contained $372 million for the Corps to pay for much of the damage from the hurricanes experienced in 2004.  Of this, $56 million has been identified for emergency beach restoration.  Although no funds were appropriated in the annual 2005 budget, the Company remains hopeful that Congress will push to restore some level of federal funding for beach nourishment, given the relative low-cost versus the justifiable benefits attributable to the tourism and development along their State’s coastlines; however, in the context of the recent funding pressures the outcome is unclear.

 

In summary, the current industry market is unlike any experienced in recent years.  While there are a number of factors contributing to uncertainty regarding project funding and timing, the necessity for the dredging work remains.  At some point in the future, all the work deferred currently will need to be performed.  The Deep Port projects underway are not fully functional until all parts of the channels are taken to their final depths, and other authorized projects have been proven to be necessary to accommodate the deeper draft vessels in use throughout the world.  Similarly, the maintenance dredging, if not performed currently, will accumulate and grow in volume as channels continue to fill with sedimentation, eventually to the point were ships can no longer safely navigate into the ports, and beach nourishment work will reach a point of urgency as waterfront assets and recreational communities become jeopardized.  Therefore, Company management believes that the current environment represents only a deferral of work, and not any permanent reduction in the industry.

 

6

 

Demolition Operations

 

NASDI, founded in 1976, is a major U.S. provider of commercial and industrial demolition services. The majority of NASDI’s work is performed in the New England area; however NASDI recently expanded into Florida and is pursuing opportunities in that market as well.  NASDI’s core business is exterior and interior demolition.  Exterior demolition involves the complete dismantling and demolition of structures and foundations. Interior demolition involves removing specific structures within a building.  Other business activities include site development and asbestos and other hazardous material removal. NASDI generally contracts hazardous material removal to insured subcontractors and does not take possession of hazardous materials, which remain the property of the site owner. In a given year, NASDI performs numerous small projects (each generating revenue of $0.1 million to $0.5 million) but NASDI is one of a few providers in New England with the required licenses, operating expertise, equipment fleet and access to bonding to execute larger, complex industrial demolition projects.  For instance, in recent years, NASDI has successfully performed three large demolition projects involving the dismantling and disposal of aging power generation plants, as well as large projects at Logan Airport and various Boston-area office buildings and former manufacturing facilities.

 

Competitive Strengths

 

The Company possesses a number of competitive strengths that have allowed it to develop and maintain its leading position within the dredging industry.

 

•                   Favorable competitive dynamic .  The Company benefits from significant advantages relative to both existing and potential competitors, including (i) the requirements of the Foreign Dredge Act of 1906 (the “Dredging Act”) and Section 27 of the Merchant Marine Act of 1920 (the “Jones Act”), which effectively prohibit foreign dredges and, to a certain extent, foreign-owned dredging companies from competing in the U.S (see “Business – Government Regulations”); (ii) the relatively long lead time and high capital cost associated with the construction of a new dredge, which the Company estimates to be two years and between $20 to $60 million, depending on the type of dredge; and (iii) the Company’s reputation for quality and customer service built up over its 114-year operating history, during which time it has never failed to complete a project.

 

•                   Largest and most diverse dredging fleet .  The Company operates the largest and most diverse dredging fleet in the U.S., with over 200 pieces of equipment, including the largest hopper fleet and the largest hydraulic dredges in the U.S.  The size, versatility and technical capabilities of the fleet improves the Company’s competitiveness by affording the Company the flexibility to select the most efficient equipment for a particular job and enabling the Company to perform multiple projects at the same time.  To maintain the value and effectiveness of its fleet, the Company emphasizes preventative maintenance to minimize downtime, increase profitability, extend vessel life and reduce replacement capital expenditure requirements.

 

•                   Specialized capability in capital projects . The Company has also been a leader in U.S. capital dredging, which generally requires specialized engineering expertise, specific combinations of equipment and experience in executing complex projects. The Company

 

7

 

believes its extensive experience performing complex projects significantly enhances its ability to bid for and complete these contracts profitably. Additionally, the Company believes it has a significant advantage over its competitors in projects bid as “requests for proposal”. For further information regarding the request for proposal process, see “– Bidding Process.”

 

•                   Proprietary and proven project costing methodologies .  Over the course of its 114-year operating history, the Company has developed an extensive proprietary database of publicly-available dredging production records from its own and its competitors’ activities and past bidding results.  The Company believes that its extensive proprietary database combined with its accumulated estimating and bidding expertise is a significant competitive advantage in bidding for new dredging contracts.

 

•                   Diversified revenue base. The Company benefits from a dredging revenue base that is broadly diversified across the three dredging sectors, which have different demand drivers.  Capital projects primarily consist of port expansion work, which is driven by growth in U.S. trade and commerce.  Beach nourishment and maintenance projects are more heavily influenced by weather, natural sedimentation and erosion.  Revenue within each of the Company’s dredging sectors comes from a portfolio of separate contracts, which helps to mitigate project-specific risk.   For the year ended December 31, 2004, the Company’s revenues were derived from over 50 separate dredging contracts, and no contract represented more than 10% of its revenues. The Company’s foreign dredging operations and demolition operations further diversify its revenue and customer base.

 

•                   Proven, experienced management team .  The Company’s top executive management team has an average of 20 years of experience in the dredging industry. The Company believes that this experience provides it with a significant advantage over its competitors. Certain members of management own approximately 15% of the Company’s common stock.

 

Customers

 

Dredging. The dredging industry’s customers include federal, state, and local governments, foreign governments, and both domestic and foreign private concerns such as utilities and oil companies.  Most dredging projects are competitively bid, with the award going to the lowest qualified bidder.  There are generally few economical substitutes that customers can use for dredging services. The Corps is the largest dredging customer in the U.S. and has responsibility for federally funded projects related to navigation and flood control.  In addition, the U.S. Coast Guard and the U.S. Navy are responsible for awarding federal contracts with respect to their own facilities.   In 2004, approximately 75% of the Company’s dredging revenues were earned from contracts with federal government agencies or companies operating under contracts with federal government agencies.

 

Foreign governments are the primary dredging customers in international markets, generally for capital projects relating to infrastructure development.  Approximately 20% of the Company’s

 

8

 

2004 dredging revenues were earned from contracts with foreign governments or companies operating under contracts with foreign governments.

 

Demolition . NASDI’s customers include general contractors who subcontract demolition services, corporations that commission projects, non-profit institutions such as universities and hospitals, and local government and municipal agencies.  NASDI benefits from key relationships with certain customers in the general contracting and public infrastructure industries. NASDI negotiates the majority of its demolition contracts as fixed price (“lump sum”) contracts with other projects negotiated on a time-and-materials (“T&M”) basis. NASDI frequently receives revenues from change orders on existing contracts. The majority of the demolition services are concentrated in New England, although NASDI now has limited operations in Florida as well.   In 2004, no customer contributed more than 15% to NASDI’s annual revenues.

 

Bidding Process

 

Dredging.   Most of the Company’s 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 service providers will bid.

 

For contracts under its jurisdiction, the Corps typically prepares a cost estimate based on the specifications of the project.  To be successful, a bidder must be determined by the Corps to be a responsible bidder (i.e., a bidder that generally has the necessary equipment and experience to successfully complete the project) and submit the lowest responsive bid that does not exceed 125% of an estimate determined by the Corps to be fair and reasonable.  Contracts for projects that are not administered by the Corps are generally awarded to the lowest qualified bidder, provided the bid is no greater than the amount of funds that are available for the project.

 

Substantially all of the Company’s dredging contracts are competitively bid.  However, some government contracts are awarded by a sole source procurement process through negotiation between the contractor and the government, while other projects have been recently bid by the Corps through a “request for proposal” (“RFP”) process.  The RFP process allows the project award to be based on the technical capability of the contractor’s equipment and methodology, as well as price, and has, therefore, been advantageous for the Company since it has the technical engineering expertise and equipment versatility to comply with the project specifications.

 

Demolition .  NASDI has established a network of local contacts with developers and prime contractors that act as referral sources and frequently enable NASDI to procure demolition jobs on a sole-source basis.  When NASDI bids on a project, it evaluates the contract specifications and develops a cost estimate to which it adds profit for the final bid price.  While there are numerous competitors in the demolition services market, NASDI benefits from its relationships and reputation.  Therefore, there are occasions where NASDI is not the lowest bidder on a contract, but is still awarded the project based on its reputation and qualifications.

 

9

 

Bonding and Foreign Project Guarantees

 

Dredging .  For most domestic projects and some foreign projects, dredging service providers are required to obtain three types of bonds, which are typically provided by large insurance companies.  A bid bond is required to serve as a guarantee that if a service provider’s bid is chosen, the service provider will sign the contract.  The amount of the bond is typically 20% of the service provider’s bid, up to a maximum bond of $3.0 million.  After a contract is signed, the bid bond is replaced by a performance bond, the purpose of which is to guarantee that the job will be completed.  A performance bond typically covers 100% of the contract value with no maximum bond amounts.  If the service provider fails to complete a job, the bonding company assumes such obligation and pays to complete the job, generally by using the equipment of the defaulting company. A company’s ability to obtain performance bonds with respect to a particular contract depends upon the size of the contract, as well as the size of the service provider and its financial position. A payment bond is also required to protect the service provider’s suppliers and subcontractors in the event that the service provider cannot make timely payments.  Payment bonds are generally written at 100% of the contract value.

 

Great Lakes’ projects are currently bonded by St. Paul’s/Travelers (“Travelers”).  The Company has never experienced difficulty in obtaining bonding for any of its projects.  If the Company were to default on a project, the bonding company would complete the defaulted contract and would be entitled to be paid the contract price directly by the customer. Additionally, the bonding company would be entitled to be paid by the Company for any costs incurred in excess of the contract price.  Travelers has been granted a security interest in a substantial portion of the Company’s operating equipment as collateral for its surety obligations.

 

For most foreign dredging projects, letters of credit or bank guarantees issued by foreign banks, which are secured by letters of credit issued under the Company’s credit agreement with its senior secured lenders (the “Credit Agreement”), are required as security for the bid, performance and, if applicable, advance payment.  Foreign bid guarantees are usually 2% to 5% of the service provider’s bid.  Foreign performance and advance payment guarantees are each typically 5% to 10% of the contract value.

 

Demolition .  NASDI’s contracts are primarily with private, non-government customers; thus, it often is not required to secure bonding.  When NASDI does have bonding requirements, the bonds are also provided by Travelers.

 

Competitive Environment

 

Dredging .  Competition in the Company’s market is determined primarily on the basis of price, and competition is often limited by the size of the job, equipment requirements, bonding requirements, certification requirements, or government regulations.  Great Lakes and four other key competitors perform the majority of the work within the Company’s domestic dredging bid market, with other entities obtaining a 21% share, on average, over the last three years.  Since the Deep Port projects are typically of significant value and there is a large volume of projects remaining in the program, some of these other entities, which are primarily smaller dredging companies or marine-oriented construction companies, have made equipment investments,

 

10

 

rationalized by the opportunities in the Deep Port market and encouraged by the Corps in an effort to increase competition.  While some of these other entities have won a few major Deep Port projects, they have generally not performed well on these projects.  In fact, for the most recently bid Deep Port project, they did not price their bids as competitively as in the past, so it is unclear whether they will pose the same degree of competition in the future.

 

The Dredging Act and the Jones Act provide a significant barrier to entry with respect to foreign competition.  Together the two regulations prohibit foreign-built, chartered or operated vessels from competing in the U.S.  See “ – Government Regulations.”

 

Company management recently learned that one of the Company’s key competitors will be commissioning a new hopper dredge at the end of 2005.  This dredge is over two-times the size of the Company’s most recently constructed hopper dredge and is well-suited for the maintenance rental market along the Mississippi Gulf Outlet, so it is likely to have some impact on bidding dynamics within this market once it commences operations.

 

Demolition .  The U.S. demolition and related services industry is also highly fragmented and is comprised mostly of small regional companies.  Unlike many of its competitors, NASDI is able to perform both the small and large projects and competes in the demolition and related services industry primarily on the basis of its experience, reputation, equipment, key client relationships and price.

 

Equipment

 

Dredging .  Great Lakes’ fleet of dredges, material barges and other specialized equipment is the largest and most diverse in the U.S.  There are three principal types of dredging equipment:  hopper dredges, hydraulic dredges and mechanical dredges.

 

•                   Hopper Dredges . Hopper dredges are typically self-propelled and have the general appearance of an ocean-going vessel.  The dredge has hollow hulls, or “hoppers”, into which material is suctioned hydraulically through drag-arms and deposited.  Once the hoppers are filled, the dredge sails to the designated disposal site and either (i) bottom dumps the material or (ii) pumps the material from the hoppers through a pipeline to the designated site.  Hopper dredges can operate in rough waters, are less likely than other types of dredges to interfere with ship traffic, and can move quickly from one project to another.  Great Lakes operates the largest hopper fleet in the U.S., affording it flexibility to quickly respond to time-sensitive projects.

 

•                   Hydraulic Dredges .  Hydraulic dredges remove material using a revolving cutterhead which cuts and churns the sediment on the ocean floor and hydraulically pumps the material by pipe to the disposal location.  These dredges are very powerful and can dredge some types of rock.  Certain materials can be directly pumped as far as seven miles with the aid of a booster pump.  Hydraulic dredges work with an assortment of support equipment, which help with the positioning and movement of the dredge, handling of the pipelines, and the placement of the dredged material.  Great Lakes operates the only two large electric hydraulic dredges in the U.S., which makes the Company particularly competitive in markets with stringent emissions standards, such as California and Houston.

 

11

 

•                   Mechanical Dredges .  There are two basic types of mechanical dredges operating in the U.S.:  clamshell and backhoe.  In all cases, the dredge uses a bucket to excavate material from the ocean floor.  The dredged material is placed by the bucket into material barges, or “scows”, for transport to the designated disposal area.  The scows are emptied by bottom-dumping, direct pump-out or removal by a crane with a bucket.  Mechanical dredges are capable of removing hardpacked sediments and debris and can work in tight areas such as along docks or terminals.  Clamshell dredges with specialized buckets are ideally suited to handle material requiring controlled disposal.  The Company has the largest fleet of material barges in the industry, which provides cost advantages when dredged material is required to be disposed far offshore or when material requires controlled disposal. Additionally, the Company recently converted one of its clamshell dredges to electric power to better compete in those markets with stringent emissions standards.

 

Great Lakes’ domestic dredging fleet is typically positioned on the East and Gulf Coasts, with a smaller number of vessels on the West Coast and on inland rivers.  The mobility of the fleet enables the Company to move equipment in response to changes in demand.  Great Lakes’ fleet also includes assets currently positioned internationally in the Middle East.

 

The Company continually assesses its need to upgrade and expand its dredging fleet to take advantage of improving technology and to address the changing needs of the dredging market.  The Company is also committed to preventive maintenance, which it believes is reflected in the long lives of most if its equipment and its low level of unscheduled downtime on jobs.  As such,  the Company spent an average of $25.5 million on maintenance and $26.4 million on capital additions and enhancements, annually over the last three years. During this period, the Company’s capital expenditures included $15.0 million to buy out certain operating equipment previously under operating lease, as well as $17.1 million on equipment that was funded from the proceeds of sale-leasebacks under operating leases or the proceeds from the sale of certain equipment under a like-kind exchange transaction.  Therefore, in a typical year, the Company generally funds $13 to $18 million of capital expenditures with cash flow from its operations.

 

Demolition .  NASDI owns and operates specialized demolition equipment, including a fleet of excavators equipped with shears, pulverizers, processors, grapples, and hydraulic hammers that provide high-capacity processing of construction and demolition debris for recycling and reclamation. NASDI also owns and maintains a large number of skid-steer loaders, heavy-duty large-capacity loaders, cranes, recycling crushers, off-highway hauling units and a fleet of tractor-trailers for transporting equipment and materials to and from job sites. NASDI rents additional equipment on a project-by-project basis, which allows NASDI flexibility to adjust costs to the level of project activity.

 

Equipment Certification

 

Certification of equipment by the U.S. Coast Guard and establishment of the permissible loading capacity by the American Bureau of Shipping (“A.B.S.”) are important factors in Great Lakes’ dredging business.  Many projects, such as beach nourishment projects with offshore sand borrow sites, dredging projects in exposed entrance channels, and dredging projects with offshore disposal areas, are restricted by federal regulations to be performed only by dredges or

 

12

---

 

scows that have U.S. Coast Guard certification and a load line established by the A.B.S.  The certifications indicate that the dredge is structurally capable of operating in open waters.  The Company has more certified vessels than any domestic competitor and makes substantial investments to maintain these certifications.

 

Seasonality

 

Seasonality does not currently have a significant impact on the Company’s dredging operations.  Some east coast beach nourishment projects are limited by environmental windows, which require that certain work be performed in winter months to protect wildlife habitats.  However, in recent years, this has been mitigated by the increased volume of Deep Port work in the market, which can generally be performed throughout the year.  The Company has been able to respond to these market factors since it has the flexibility to move its equipment around as environmental restrictions and project requirements dictate.  However, in the future, seasonality may become more of a factor if the project mix changes and the Company is unable to be as flexible in utilizing its equipment.   The Company’s demolition operations are not significantly impacted by seasonality.

 

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.  Such estimates are subject to fluctuations based upon the amount of material actually dredged or scope of demolition services to be provided as well as factors affecting the time required to complete the job.  In addition, because a substantial portion of the Company’s backlog relates to government contracts, the Company’s backlog can be canceled at any time without penalty; however, the Company can generally recover actual committed costs and profit on work performed up to the date of cancellation. Consequently, backlog is not necessarily indicative of future results.  The Company’s backlog includes only those projects for which the customer has provided an executed contract.  The components of the Company’s backlog are addressed in more detail in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Employees

 

Dredging .  At December 31, 2004, the Company employed approximately 270 full-time salaried personnel, with additional hourly personnel, most of whom are unionized and hired on a project-by-project basis.  During 2004, the Company employed an average of 380 hourly personnel to meet project requirements.  Crews are generally available for hire on relatively short notice.

 

Demolition .  At December 31, 2004, NASDI employed approximately 20 full-time salaried administrative employees, in addition to approximately 105 unionized employees who are party to four union agreements.  The unionized employees are hired on a project-by-project basis and are generally available for hire on relatively short notice.

 

13

 

The Company is a party to numerous collective bargaining agreements that govern its relationships with its unionized hourly personnel.  However, four primary agreements apply to approximately 80% of such employees.  The Company has not experienced any major labor disputes in the past five years and believes it has good relationships with its significant unions; however, there can be no assurances that the Company will not experience labor strikes or disturbances in the future.

 

Joint Ventures

 

Amboy Aggregates

 

The Company and a New Jersey aggregates company each own 50% of Amboy Aggregates (“Amboy”).  Amboy was formed in December 1984 to mine sand from the entrance channel to the New York Harbor and to provide sand and aggregate for use in road and building construction.  Great Lakes’ dredging expertise and its partner’s knowledge of the aggregate market formed the basis for the joint venture.  The Company’s investment in Amboy is accounted for using the equity method.

 

Amboy is the only East Coast aggregate producer to mine sand from the ocean floor.  Amboy has a specially designed dredge for sand mining, de-watering and dry delivery.  No other vessel of this type operates in the U.S.  Amboy’s ocean-based supply of sand provides a long-term competitive advantage in the Northeast as land-based sand deposits are depleted or rendered less cost competitive by escalating land values.

 

Mining operations are performed pursuant to permits granted to Amboy by the federal government and the states of New York and New Jersey.  In 2002, Amboy was successful in obtaining approval for a new permit allowing it to mine deeper in its sand borrow areas.  Amboy’s revenues have increased over the past three years due to improvement in the construction market, the primary market for Amboy’s product.  See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Commitments and Contingencies.”

 

Government Regulations

 

The Company is subject to government regulations pursuant to the Dredging Act, the Jones Act, and the vessel documentation laws set forth in Chapter 121 of Title 46 of the United States Code (the “Vessel Documentation Act”).  These statutes require vessels engaged in dredging in the navigable waters of the United States to be documented with a coastwise endorsement, to be owned and controlled by U.S. citizens, to be manned by U.S. crews, and to be built in the United States.  The U.S. citizenship ownership and control standards require the vessel-owning entity to be at least 75% U.S.-citizen owned and prohibit the chartering of the vessel to any entity that does not meet the 75% U.S. citizen ownership test.  These statutes, together with similar requirements for other sectors of the maritime industry, are collectively referred to as “cabotage” laws.

 

14

 

Certain of the above requirements were made applicable to the dredging industry in 1992, when Congress amended the Dredging Act to bring it into conformity with the U.S. citizenship requirements of the rest of the nation’s cabotage laws.  At that time, Congress included grandfather clauses to protect certain existing dredge operations affected by the change in law. A grandfather provision exempted the hopper dredge STUYVESANT from the 75% ownership and control requirement. The STUYVESANT is chartered to Stuyvesant Dredging Company, Inc., a foreign corporation and wholly-owned subsidiary of Royal Boskalis Westminster, NV, a Dutch company, the largest dredging service provider in the world.  In early 1999, the Stuyvesant Dredging Company exploited a loophole in grandfather provision and expanded its control of additional dredging vessels through a joint-venture, Bean Stuyvesant LLC, in which it has a 50% ownership interest.  As of December 31, 2004, at least seven dredges plus other ancillary vessels operating in the United States were foreign controlled under this grandfather provision.

 

A coalition of U.S.-citizen dredging companies, labor unions, U.S. maritime operating companies and U.S. shipbuilders have joined together in an attempt to close the STUYVESANT grandfather clause loophole.  In late 2003, one of the industry’s domestic dredging companies protested a bid award by the Corps in favor of Bean Stuyvesant LLC on the grounds that Bean Stuyvesant LLC was neither a U.S. citizen for the purpose of operating vessels in the coastwise trade nor eligible to charter the vessels at issue under the specific terms of the grandfather provision.  The U.S. Court of Federal Claims agreed and enjoined the Corps from awarding the contract to Bean Stuyvesant LLC.  On appeal, the U.S. Court of Appeals for the Federal Circuit overturned the Court of Federal Claims decision in the second quarter of 2004.  The domestic competitor has since petitioned the U.S. Supreme Court for a writ of certiorari to review the case, with a broad coalition of domestic maritime interests filing a supporting amicus brief.  Depending on the outcome of this litigation, the marine industry is prepared to pursue a legislative solution in an effort to ensure more equitable treatment among the industry participants.

 

Environmental Matters

 

The Company’s operations and facilities are subject to various environmental laws and regulations related to, among other things: dredging operations; the disposal of dredged material; protection of wetlands; storm water and waste water discharges; demolition activities; asbestos removal; transportation and disposal of other hazardous substances and materials; and air emissions.  The Company is also subject to laws designed to protect certain marine species and habitats.  Compliance with these statutes and regulations can delay appropriation with respect to, and performance of, particular projects and increase related expenses.

 

The Company’s projects may involve demolition, excavation, transportation, management and disposal of hazardous waste and other hazardous substances and materials.  Various laws strictly regulate the removal, treatment and transportation of hazardous water and other hazardous substances and materials and impose liability for human health effects and environmental contamination caused by these materials. The Company’s demolition business, for example, requires it to transport and dispose of hazardous substances and materials, such as asbestos.   The Company takes steps to limit its potential liability by hiring qualified asbestos abatement subcontractors to remove such materials from its projects, and some project contracts require the client to retain liability for hazardous waste generation.

 

15

 

Services rendered in connection with hazardous substance and material removal and site development may involve professional judgments by licensed experts about the nature of soil conditions and other physical conditions, including the extent to which hazardous substances and materials are present, and about the probable effect of procedures to mitigate problems or otherwise affect those conditions. If the judgments and the recommendations based upon those judgments are incorrect, the Company may be liable for resulting damages that its clients incur, which may be material.

 

Based on the Company’s experience, its management believes that the future cost of compliance with existing environmental laws and regulations (and liability for known environmental conditions) will not have a material adverse effect on its business, financial condition or results of operations. However, the Company cannot predict what environmental legislation or regulations will be enacted in the future; how existing or future laws or regulations will be enforced, administered or interpreted; or the amount of future expenditures that may be required to comply with these environmental or health and safety laws or regulations or to respond to future cleanup matters or other environmental claims.   In January 2005, the Company received a request for information from the U.S. Environmental Protection Agency (the “EPA”), with respect to its Port of Los Angeles Deepening Project.  See “Legal Proceedings” for additional information.

 

Item  2. – Properties

 

Dredging .  Great Lakes’ dredging fleet is the largest in the U.S. and one of the largest fleets in the world.  The fleet consists of over 200 pieces of equipment, including the largest hopper fleet and most of the large hydraulic dredges in the U.S., and is sufficient to meet the Company’s project requirements.

 

The following table provides a listing of the Company’s fleet of dredging equipment as of December 31, 2004, including equipment under long-term operating leases.

 

Type of Equipment		Quantity
Hydraulic Dredges		12
Hopper Dredges		8
Mechanical Dredges		6
Unloaders		2
Drillboats		2
Material Barges		25
Other Barges		62
Booster Pumps		7
Tugs		6
Launches and Survey Boats		51
Other ancillary equipment		33
Total		214

 

16

---

 

A significant portion of the Company’s operating equipment is subject to liens by the Company’s senior lenders and bonding company.  See Note 6, “Property and Equipment,” and Note 11, “Long-term Debt,” in the Notes to the Consolidated Financial Statements.

 

The Company leases approximately 40,000 square feet of office facilities in Oak Brook, Illinois, which serves as its principal administrative facility.  The primary lease for this property will expire in the year 2008.  The Company also leases waterfront properties in Baltimore, Maryland, and Green Cove Springs, Florida.  These locations serve as mooring sites for idle equipment and inventory storage.

 

Demolition .   NASDI rents its primary office facility in Allston, Massachusetts, and a garage and maintenance facility in Everett, Massachusetts.  NASDI maintains a fleet of operating equipment including excavators, loaders, trucks, and similar equipment, sufficient to meet its project requirements.  Certain pieces of equipment are obtained under capital lease arrangements.

 

Item  3. – Legal Proceedings

 

Although the Company is subject to various claims and legal actions that arise in the ordinary course of business, except as described below, the Company is not currently a party to any material legal proceedings or environmental claims.

 

The Company or its former subsidiary, NATCO Limited Partnership, are named as defendants in approximately 280 lawsuits, the majority of which were filed between 1989 and 2000, and eighteen of which were filed in the last three years.  In these lawsuits, the plaintiffs allege personal injury, primarily fibrosis or asbestosis, from exposure to asbestos on our vessels.  The vast majority of these lawsuits have been filed in the Northern District of Ohio and a few in the Eastern District of Michigan.  These cases have been transferred to the asbestos multi-district litigation pending in the Eastern District of Pennsylvania.  The Company cannot determine its potential liability in these cases because the claims generally do not specify the amount of damages sought.  No discovery has been sought by plaintiffs in any of these cases, and none of these cases has been litigated to date as to the Company.  Management does not believe that these cases will have a material adverse impact on the business.

 

On February 10, 2004, the Company was served with a subpoena to produce documents in connection with a federal grand jury convened in the United States District Court for the District of South Carolina.  The Company believes the grand jury has been convened to investigate the United States dredging industry in connection with work performed for the U.S. Army Corp of Engineers. The Company continues to comply with the Justice department’s requests and Company management believes that it has provided substantially all of the documents that have been requested to this point.  In addition to the documents requested, certain employees of the Company have been interviewed by attorneys from the Department of Justice and been subpoenaed to testify before the grand jury.

 

In 1999, the Boston Housing Authority (“BHA”), for whom the Company’s demolition business, NASDI, had worked, asserted that NASDI and its subcontractors were responsible for improperly disposing of some contaminated materials. At the time the Company acquired NASDI in 2001, it was believed that NASDI had sufficient recourse in the matter and that any

 

17

---

 

potential liability would be minimal.  However, since 2001, certain of the insurance carriers that would be responsible for this matter have gone bankrupt.  Negotiations between the parties have continued to progress, and in the third quarter of 2004, the case went before a judge in the Massachusetts court system who advised NASDI and the subcontractors to accept a settlement with the BHA. While NASDI could continue to pursue the matter, it was determined that settlement may be more cost effective.  Therefore, in the third quarter of 2004, the Company recorded a $1.3 million charge for NASDI’s share of this potential settlement liability.

 

On January 19, 2005, the Company, along with its joint-venture partners on the Port of Los Angeles Deepening Project received a request for information from the EPA pursuant to section 308(a) of the Clean Water Act. The EPA is investigating alleged dredging of unauthorized material and unauthorized discharge of that material at various locations in federally regulated waters of the U.S. relating to this project.  The Company intends to comply with the request for information.  The Company is performing this project under a contract with the Los Angeles district of the Corps and believes it is in compliance with the contract specifications.

 

Item  4. – Submission of Matters to a Vote of Security Holders

 

None.

 

18

---