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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002

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:

Great Lakes Dredge & Dock Corporation

(630) 574-3000

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.    Yes x    Noo

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.    x

    The registrant’s stock is not publicly traded, and therefore, there is no ascertainable market value of voting stock held by non-affiliates.

    As of March 21, 2003, there were outstanding 1,616,982 shares of Class A Common Stock, 3,363,900 shares of Class B Common Stock and 44,857 shares of Preferred Stock.

DOCUMENTS INCORPORATED BY REFERENCE

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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. When used in this Report, the words “anticipate,” “believe,” “estimate,” “except,” “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. Such forward-looking statements are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including, in addition to any risks and uncertainties disclosed in the text surrounding such statements or elsewhere in the Report, risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company’s customers, suppliers, business partners and competitors and legislative, regulatory, judicial and other governmental authorities and officials. Should the Company’s assumptions or estimates prove to be incorrect, or should one or more of these risks or uncertainties materialize, actual amounts, results, events and circumstances may vary significantly from those reflected in such forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date hereof. We assume no obligation to update such information.

Part I

Item 1. — Business

Organization and recapitalization

Great Lakes Dredge & Dock Corporation (the “Company” or “Great Lakes”) is the largest provider of dredging services in the United States. In 1998, the Company effected a recapitalization, whereby the common stock held by the former owner, Blackstone Limited Partnerships was redeemed using a portion of the proceeds from $115.0 million of senior subordinated debt, the Company’s bank credit facility, and preferred stock and common stock sold to Vectura Holding Company, LLC (“Vectura”) and certain members of management. As a result of the recapitalization and subsequent stock activity, certain members of Company management currently own approximately 15% of the outstanding common stock and Vectura owns approximately 84%.

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 from NASDI payable to the NASDI management stockholders. The Company issued $40.0 million of its senior subordinated notes to fund the cash portion of the acquisition price and the related fees and expenses. The NASDI management stockholders retained a 20% non-voting interest in NASDI.

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With the acquisition of NASDI, the Company now operates in two reportable segments: dredging and demolition. Financial information about the Company’s segments for 2002 and 2001 is provided in Note 14, “Segment Information and Concentrations of Risk” 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, Maintenance and Beach Nourishment. 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 within its bid market of 49% and 39% in 2002 and 2001, respectively. In addition, the Company is the only U.S. dredging contractor with significant international operations, which averaged 16% of its dredging contract revenues over the last three years. The Company’s fleet of 28 dredges, 31 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 $900 million to build in the current market.

Over its 112-year life, the Company has grown to be the leader in each of its primary dredging activities in the U.S., including:

•		Capital — U.S. and Foreign (approximately 56% of 2002 dredging revenues). Capital dredging projects are primarily port expansion projects, which involve the deepening of channels to allow access by larger, deeper draft ships and the providing of land fill for building additional port facilities, thereby enhancing port profitability and competitiveness.
		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. The WRDA legislation provides authorization for the deepening of certain major domestic ports. In 1997, the U.S. Army Corps of Engineers (the “Corps”) announced Deep Port work, authorized by WRDA, to be completed through 2005, with a value in excess of $2.0 billion, and supplemental authorizations have increased this amount to over $3.0 billion. Since the 1997 announcement, projects valued at over $1.3 billion have been let for bid through the end of 2002. Deep Port work has comprised a substantial portion of recent bid markets, averaging 45% of the bid market over the last three years. The Company’s bid market share of Deep Port projects was 65% and 23% in 2002 and 2001, respectively.
		Capital projects also include land reclamations, trench digging, and other construction related dredging. The Company’s bid market share of total U.S. capital projects (including Deep Port projects) was 64% and 24% in 2002 and 2001, respectively. Foreign capital projects typically relate to channel deepening and port infrastructure development. While the Company has only a minor share of the international dredging market, revenues from foreign capital projects represented 17% and 10% of the Company’s dredging revenues in 2002 and 2001, respectively.

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•		Maintenance (approximately 16% of 2002 dredging revenues). Maintenance dredging consists of the redredging of 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 continuous 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 was 23% and 34% in 2002 and 2001, respectively.
•		Beach Nourishment (approximately 28% of 2002 dredging revenues). Beach nourishment dredging generally involves moving sand from the ocean floor to shoreline locations when erosion has progressed to a stage that threatens substantial shoreline assets. The Company’s 2002 and 2001 bid market share of U.S. beach nourishment projects was 38% and 71%, respectively.

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

•		Deep Port capital projects. Historically, the average controlling depth of the ten largest U.S. ports, as measured by annual container volume, has been approximately 10 feet less than the average controlling depth of the ten largest non-U.S. ports worldwide. Without significant deepening efforts, most major U.S. ports risk being unable to accommodate larger cargo vessels, which renders them less competitive with deeper ports. The Corps has the primary responsibility for maintaining and improving the nation’s waterways, ports and shorelines. Funding for announced projects has increased significantly in recent years due to increased federal funding, authorized through the WRDA legislation, and increased cost sharing of capital projects by local governments.
•		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. To date, a significant amount of funding has been allocated by local governments to restore and preserve eroding beachfront. The 2002 beach bid market remained strong with bid revenues of approximately $100 million and recent bid schedules provided by project owners indicate that a number of significant projects should be forthcoming in 2003. Beach projects are generally funded by both federal and state and local monies. However, the impact of the recent economic downturn on state and local funding is uncertain at this point.
•		Additional significant long-term opportunities. 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 Hudson River in New York and the Fox River in Wisconsin. These long-term projects have the potential to add substantial revenue to the dredging market, possibly as soon as 2004 and for approximately eight to ten years thereafter.

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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.

•		Flexible portfolio of dredging assets. The Company operates the largest and most diverse dredging fleet in the U.S. The size, versatility and technical capabilities of the fleet improves the Company’s competitiveness as it generally permits the Company to select the most efficient equipment for a particular job. To maintain the value and effectiveness of its fleet, the Company emphasizes proactive maintenance that results in less downtime, increased profitability, enhanced vessel life and relatively low capital expenditure requirements.
•		Favorable competitive dynamic. The Company benefits from significant advantages relative to both existing and potential competitors, including (i) the requirements of the Dredging Act of 1906 and the Jones Act of 1920, 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 112-year operating history, during which time it has never failed to complete a project.
•		Specialized capability in capital projects. The Company has also been a leader in capital dredging, which generally requires specialized engineering expertise, specific combinations of equipment and experience in performing complex projects. The Company believes its extensive experience on complex projects significantly enhances its ability to profitably bid and complete these contracts.
•		Proven experienced management team. Our senior managers have 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 issued and outstanding common stock.

Demolition Operations

NASDI, founded in 1976, is a major U.S. provider of commercial and industrial demolition services. 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. NASDI is one of a few providers in the Massachusetts area with the required licenses, operating expertise, equipment fleet and access to bonding to execute larger, more complex industrial demolition projects. In recent years, NASDI has successfully performed on three demolition projects involving the dismantling and disposal of aging power generation plants. NASDI continues to actively pursue

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additional opportunities in this developing market of taking down aging industrial infrastructure, often to allow for the construction of new and more efficient replacements on the same site.

Business Strategy

The Company’s strategy is to continue to profitably grow contract revenues and cash flows and strengthen its competitive position worldwide by providing services at the highest quality and safest means possible, while utilizing the most efficient equipment and technologically advanced methods. The principal elements of this strategy include:

•		Continuing to maintain preeminence in domestic markets. The Company expects to maintain its domestic leadership position by leveraging (i) the size, diversity and technical capabilities of its fleet, (ii) its industry-leading operating experience, (iii) its engineering expertise, and (iv) its efficient and safe project management practices.
•		Enhancing operating capabilities. During the last few years, the Company has acquired or constructed several key pieces of equipment which have enhanced its dredging capabilities by providing additional tools for capital projects and strengthening its ability to perform maintenance and beach nourishment projects. These additions include:

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•		Continued presence in foreign markets. Increases in foreign governments’ port infrastructure investments continue to present new overseas dredging opportunities for Great Lakes. The Company intends to continue to selectively pursue international opportunities that offer it the potential to increase the utilization of its asset base.
•		Growth opportunities in the commercial and industrial demolition market. The Company believes that its experience in bidding for and completing large projects and its significant infrastructure will be particularly valuable in helping NASDI to execute large demolition projects and potentially increase its market share. In particular, the Company’s national presence, purchasing power and administrative capabilities will facilitate NASDI’s ability to take on more volume and larger projects, specifically targeting projects to dismantle and dispose of aging power generation plants.

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 2002, approximately 59% 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 17% of the Company’s 2002 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 currently concentrated in New England. In 2002, approximately 51% of NASDI’s annual revenues were earned from contracts with two private customers.

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

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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.

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.

Great Lakes has operated for over 112 years and maintains an extensive historical database of dredging production records from its own and its competitors’ activities and past bidding results. Prior production records help the Company predict sediment composition and optimum equipment requirements. Management believes that its extensive database and its accumulated estimating and bidding expertise allow the Company to be more accurate than its competitors in predicting dredging cost prior to bidding for contracts.

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 is one of the few firms in its region of operation with the capability to execute large projects, which often limits its competition. For these reasons, if it is not the lowest bidder on a contract, NASDI may still be awarded a project based on its qualifications.

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

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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 Travelers Property Casualty (“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.

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. The U.S. dredging industry is highly fragmented but has experienced significant consolidation in recent years. Approximately 180 entities in the U.S. presently operate more than 600 dredges, most of which are smaller and service the inland, as opposed to coastal, waterways and therefore, do not generally compete with Great Lakes. 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. The Company’s dredging market is dominated by the Company and four other major competitors, with smaller dredging companies obtaining a 14% 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 smaller dredging companies have made equipment investments, rationalized by the opportunities in the Deep Port market and encouraged by the Corps in an effort to increase competition. While these smaller competitors have won some major Deep Port projects, they have generally not performed well on these projects so it is unclear whether they will pose the same degree of competition in the future.

Demolition. The U.S. demolition and related services industry is highly fragmented and is comprised mostly of small regional companies, many of which are not able to perform some of the large, complex infrastructure projects on which NASDI excels. Unlike many of its competitors, NASDI is able to perform both the small and large projects and competes in the

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demolition and related services industry primarily on the basis of its experience, reputation, equipment and key client relationships.

Equipment

Dredging. Great Lakes’ fleet of dredges, material barges and other specialized equipment is the largest and most versatile in the U.S. There are three primary 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 into which material is suctioned hydraulically through drag-arms and deposited. Once the hollow hulls or “hoppers” are filled, the dredge will sail to the designated disposal site and either (i) bottom dump the material or (ii) pump the material from the hoppers through a pipeline to the designated site. Hopper dredges can operate in rough waters, are less likely 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.
•		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 which excavates the 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 provide cost advantages when dredged material is required to be disposed far offshore or when material requires controlled disposal.

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

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The Company is continually assessing 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. As mentioned previously, the Company has recently made some significant additions to its dredging capacity which it believes will enhance its ability to compete for and execute future Deep Port projects.

The Company is committed to preventive maintenance, which it believes is reflected in the long lives of most if its equipment and its low level of downtime on jobs. The Company spent $25.9 million on maintenance in 2002, in addition to $14.5 million on capital expenditures (which is net of $3.8 million of proceeds received on a scow which was constructed in 2001 and 2002, then sold and leased back under an operating lease in 2002).

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 multitude 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 America Bureau of Shipping (“A.B.S.”) are important factors in Great Lakes’ dredging business. Many projects, such as beach nourishment projects with offshore sand, 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 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

Prior to the last several years, the Company had historically realized lower contract revenues and earnings in the first and fourth quarters of each year. This trend was due to a number of factors including variation in weather conditions and government funding cycles, which affected the timing and execution of projects. In recent years, seasonality has not had a significant impact on the Company’s dredging operations, with the increased volume of Deep Port work in the market and the impact of environmental windows, which require that certain work be performed in winter months to protect wildlife habitats. The Company has been able to respond to these market factors since it has the flexibility to move its equipment around as weather conditions and environmental restrictions dictate. However, in the future, seasonality may become more of a factor if the project mix changes and the Company is not able 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 based upon current estimates. 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

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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. Currently, the Company employs approximately 300 full-time salaried personnel, with additional hourly personnel, most of whom are unionized and hired on a project-by-project basis. During 2002, the Company employed an average of approximately 625 hourly personnel to meet project requirements. Crews are generally available for hire on relatively short notice.

The Company is a party to numerous collective bargaining agreements that govern its relationships with its hourly personnel. However, three primary agreements apply to more than ninety percent 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. In 2001, the Company’s dredging project in Ghana was disrupted for approximately two months due to labor-related issues not uncommon to developing nations, such as Ghana. The disruption did not have significant impact on the Company’s operations.

Demolition. Currently, NASDI employs 16 full-time salaried administrative employees, in addition to approximately 150 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.

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. After much delay, in 2002, Amboy was successful in obtaining approval for a new permit allowing it to mine deeper in its sand borrow

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areas. This new sand source is expected to be of better quality, thereby requiring less blending with other materials, which should enable Amboy to reduce the cost of its final product and improve margins. See also “Management’s Discussion and Analysis – Off-Balance Sheet Commitments and Contingencies.”

Argentine Joint Venture

At December 31, 2002, Great Lakes had a 20% interest in Riovia S.A. (“Riovia”), a joint venture with four European dredging firms, to dredge the Rio Via channel linking Buenos Aires, Argentina, and Montevideo, Uruguay, which is important for shipping to Argentina and Uruguay. This venture was established in 1996, with six other partners originally, and has afforded Great Lakes the opportunity to work with these other international dredging companies to design, manage and execute this project. In 2002, the Company received an offer by a venture partner to acquire the Company’s remaining interest in Riovia. The Company has accepted the offer, which is in excess of the carrying value of its Riovia investment. The sale is expected to be completed early in the second quarter of 2003.

Government Regulations

The Company is subject to government regulations pursuant to the dredging statute (46 U.S.C. Section 292) which protects the United States dredging industry from competition from foreign-built dredges. The law prohibits foreign-built vessels (absent special legislative action) from competing in the United States dredging market. Dredges operating in the navigable waters of the United States must also meet the coastwise trade requirements of the Jones Act (Section 27 of the Merchant Marine Act, 1920) and Section 2 of the Shipping Act, 1916, as amended, and must have a coastwise endorsement pursuant to the Vessel Documentation Act (46 U.S.C. Section 12101 et seq.). These acts prohibit vessels owned or controlled by entities which are less than 75% owned and controlled by United States citizens from transporting dredged material between points in the United States.

In 1992, Congress amended the U.S. dredging laws to bring them into conformity with the U.S. citizenship requirements of the rest of the nation’s maritime laws. In so doing, Congress included the customary grandfather clauses to protect certain existing dredging operators affected by the change in law. The language of the grandfather clauses exempted from the 75% ownership standard the Dredge Stuyvesant. The Stuyvesant is owned by a wholly-owned subsidiary of Royal Boskalis Westminister, N.V., a Dutch company (“Bos Kalis”) and the largest dredging contractor in the world. In early 1999, Bos Kalis exploited a loophole in the Stuyvesant grandfather clause expanding its control of additional dredging vessels. As of December 31, 2002, Bos Kalis controlled at least thirteen dredging vessels including two hopper dredges, one hydraulic dredge, three mechanical dredges, six dump barges and one booster barge. A coalition of U.S. citizen dredging companies, labor unions, U.S. Maritime operating companies, and U.S. shipbuilders have joined together to close the Stuyvesant grandfather clause loophole. Although the attention of Congress has recently been diverted to other matters of national security, the coalition continues to actively pursue this issue.

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The Company’s operations and facilities are subject to a variety of federal and state environmental statutes and regulations. In addition, the Company is required to comply with federal and state statutes designed to protect certain species and habitats.

Environmental Matters

The Company’s operations and facilities are subject to a variety of federal and state environmental statutes and regulations, including those regulating dredging operations, the disposal of dredged material, wetlands, storm and waste water discharges, demolition activities, asbestos removal, transportation and disposal of other hazardous substances and materials and air emissions. In addition, the Company is required to comply with federal and state statutes designed to protect certain species and habitats. Such compliance can delay the authorization of, appropriation with respect to, and performance of, particular projects and increase expenses in connection therewith.

The Company’s projects may involve demolition, excavation, transportation, disposal and management of hazardous waste substances and materials. Various laws strictly regulate the removal, treatment and transportation of hazardous substances and materials and impose liability for contamination caused by these substances. While the Company’s demolition business requires it to transport and dispose of hazardous substances and materials, its risks are limited to the proper execution of these tasks. The Company’s demolition customers and the hazardous waste sites retain the risks associated with the remediation of the materials. Additionally, the transportation of the hazardous waste material is typically performed by other entities which accept the risks associated with these tasks.

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 toxic and 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. 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 which 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.

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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.

The following table provides a listing of the Company’s current fleet of equipment, including equipment under long-term operating leases.

A significant portion of the Company’s operating equipment is subject to liens by the Company’s senior lenders and bonding company. See Note 5, “Property and Equipment,” and Note 8, “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.

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Item 3. — Legal Proceedings

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

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

None.

Part II

Item 5. — Market for the Registrant’s Common Equity and Related Stockholder Matters

There is no established public offering market for the outstanding common equity of the Company. At December 31, 2002, Vectura Holding Company, LLC (“Vectura”) owns approximately 84% of the outstanding common equity of the Company and certain members of the Company’s management own in aggregate approximately 15% of the outstanding common equity of the Company. Vectura’s membership interests are owned by 399 Venture Partners, Inc., an affiliate of Citicorp Venture Capital Ltd., and certain other investors.

The ability of the Company to pay dividends is restricted by certain covenants contained in the Company’s senior credit facility, as well as certain restrictions contained in the Company’s indenture relating to its subordinated debt.

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Item 6. — Selected Financial Data

The following table sets forth certain financial data regarding the Company and should be read in conjunction with the consolidated financial statements and notes thereto (see Item 14, “Financial Statements” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). The income statement and balance sheet data presented below have been derived from the Company’s consolidated financial statements.

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“EBITDA,” as provided herein, represents earnings from continuing operations before net interest expense, income taxes and depreciation and amortization 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 in the United States of America. 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 in the United States of America as measures of the Company’s profitability or liquidity. EBITDA as defined herein may differ from similarly titled measures presented by other companies.

EBITDA can be reconciled to net cash flows from operating activities, its most directly comparable GAAP measure, as follows:

Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Great Lakes 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 and Beach Nourishment, in which areas the Company has experienced an average combined bid market share in the U.S. of 42% over the past three years. In addition, the Company has continued its role as the only U.S. dredging contractor with significant international operations, which represented an average of 16% of its contract revenues over the past three years.

In April 2001, the Company purchased 80% of the capital stock of North American Site Developers, Inc. (“NASDI”), a demolition service 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 junior subordinated promissory notes totaling $3.0 million from NASDI payable to the NASDI management stockholders. The Company issued $40.0

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million of its 11 1/4% senior subordinated notes due 2008 to fund the cash portion of the acquisition price and pay related fees and expenses.

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 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 for dredging projects and using a cost-to-cost approach for demolition projects. For dredging projects, costs of contract revenues are adjusted to reflect the gross profit percentage expected to be achieved upon ultimate completion of each dredging project. For demolition projects, contract revenues are adjusted to reflect the estimated gross profit percentage. 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. Billings on contracts are generally submitted after verification with the customers of physical progress and may not match the timing of revenue recognition. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Change orders are often negotiated when a change in conditions from the original contract specifications is encountered, necessitating a change in project performance methodology and/or material disposal. 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.

The components of costs of contract revenues are labor, equipment, subcontracts, rentals, lease expense, other assets employed (including depreciation, insurance, fuel, maintenance and supplies) and project overhead. The hourly labor is generally hired on a project basis and laid off upon the 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 highest margins due to the complexity of the projects, while beach nourishment projects have the most volatile margins because they are most often exposed to weather conditions.

The Company’s cost structure includes significant fixed costs, averaging approximately 22% 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.

Through November 2002, the Company conducted certain hopper dredging activities, primarily maintenance and beach nourishment projects, through the operation of NATCO Limited Partnership (“NATCO”) and North American Trailing Company (“North American”). On November 25, 2002, the Company purchased its foreign minority partner’s interests in NATCO and North American for $4.5 million. As of the end of 2002, these subsidiary entities have been dissolved and all hopper dredging operations will be conducted by Great Lakes Dredge & Dock

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Company, a wholly-owned dredging subsidiary of the Company. Therefore, minority interests solely reflects NASDI management stockholders’ 20% interest in NASDI.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are discussed in the notes to the financial statements. The application of certain of these policies requires significant judgments or an estimation process that can affect the results of operations, financial position and cash flows of the Company, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results.

Percentage-of-completion method of revenue recognition – The Company’s contract revenues are recognized under the percentage-of-completion method, which is by its nature based on an estimation process. For dredging projects, the Company uses engineering estimates of the physical percentage of completion. For demolition projects, the Company uses estimates of remaining costs to complete to determine percent complete. In preparing its estimates, the Company draws on its extensive experience in the dredging and demolition business and its database of historical information to assure that its estimates are as accurate as possible, given current circumstances. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Claims for additional compensation are not recognized in contract revenues until such claims are settled. It is reasonably possible that cost and profit estimates may be revised in the near-term to reflect changes in project performance.

Valuation of long-lived assets and goodwill – In assessing the recoverability of the Company’s long-lived assets, primarily operating equipment and goodwill, the Company makes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. As it relates to its operating equipment, the Company may estimate cash flows and make assumptions regarding useful lives based on internal historical operating data. If these estimates or their related assumptions change the fair value of these assets in the future, the Company may be required to record impairment charges.

Self-insurance accruals – The Company self-insures estimated costs associated with workers’ compensation claims, hull and equipment liability and general business liabilities, up to certain limits. Insurance reserves are established for estimates of the loss that the Company will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. In determining its estimates, the Company incorporates historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in determination of such reserves.

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Quarterly Results of Operations

The following table sets forth the components of net income and EBITDA on a quarterly basis for the years ended December 31, 2002 and 2001.

(1)

Includes the results of NASDI since its acquisition in April, 2001.

Results of Operations – Fiscal Years

     The following table sets forth the components of net income and EBITDA as a percentage of contract revenues for the years ended December 31:

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Components of Contract Revenues and Backlog

     The following table sets forth, by type of work, the Company’s contract revenues for the years ended and backlog as of December 31:

(1)

NASDI was acquired in April, 2001.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

The Company’s 2002 revenues totaled $362.6 million compared to $318.8 million in 2001. The 2002 period reflects increased revenues from domestic beach dredging, foreign dredging and demolition services activities. The Company’s gross profit margin was 18.8% for 2002, which improved slightly over the 2001 margin of 18.3%. The Company’s gross profit margins improved in the second half of 2002 with an increasing level of higher margin domestic capital dredging revenues, which offset the lower margins obtained on certain of the Company’s east coast dredging projects which were negatively impacted by adverse weather and operating conditions. The impact on 2002 margins from foreign dredging projects, which are typically performed at lower margins, was offset by the strong margins obtained on the demolition services revenues during the year.

Capital dredging projects include large port deepenings and other infrastructure projects. Domestic capital dredging project revenues decreased $7.1 million or 5.5%, from $129.3 million in 2001 to $122.2 million in 2002. There were lower levels of capital work in the first half of 2002, but capital activity picked up in the second half as the Company performed on certain Deep Port projects bid and won in 2002. In 2002, contract revenues from capital projects included $41.8 million, $32.1 million and $15.2 million generated from Deep Port projects in Wilmington, North Carolina; New York, New York; and Jacksonville, Florida, respectively. In addition, two

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other new work capital projects in St. Lucie, Florida and Boston, Massachusetts contributed combined revenue of $20.0 million in 2002.

Beach nourishment projects include rebuilding of shoreline areas which have been damaged by storm activity or ongoing erosion. In 2002, revenues from beach nourishment projects increased $9.3 million or 11.9%, compared to 2001, as the Company performed on numerous beach projects won in 2001 and 2002. The majority of the 2002 beach nourishment revenues, $43.9 million, was generated by seven projects performed on Florida beaches, while another $35.5 million was attributed to a number of beach projects performed in the New York/New Jersey area.

Maintenance projects include routine dredging of ports, rivers and channels to remove the regular build-up of sediment. Revenues from maintenance projects for the year ended December 31, 2002 decreased $7.0 million or 12.1%, over 2001 but were consistent with typical maintenance dredging volume, which varies depending on levels of Midwest precipitation experienced during the winter months as well as the Company’s available equipment capacity. Significant maintenance revenues in 2002 included $19.1 million from six river maintenance projects which were performed on an equipment rental basis, and $5.9 million and $5.0 million from projects in Oregon Inlet, North Carolina and on the Columbia River/Coos Bay in Oregon, respectively.

Revenues from foreign dredging operations in 2002 increased $22.9 million or 78.1% compared to 2001. The key foreign projects contributing to 2002 revenues included the Company’s long-term project in Ghana, West Africa, which began in the first quarter of 2000 and is expected to be completed in 2003, and a port terminal project in Bahrain, which began late in 2001 and is expected to be completed in 2004.

NASDI’s 2002 demolition revenues totaled $49.5 million compared to 2001 revenues of $23.7 million achieved subsequent to the acquisition by the Company in April 2001. In 2002, NASDI performed on a number of large projects, including a large industrial plant demolition, interior demolitions of an office building and courthouse, and demolition of a terminal at Logan Airport.

General and administrative expenses increased $4.6 million, from $25.2 million in 2001 to $29.8 million in 2002. The 2002 increase was due to the inclusion of NASDI for the full year, additional incentive compensation and profit sharing costs resulting from the higher level of earnings, as well as higher legal fees relating to arbitration matters in the normal course of business. In addition, 2002 includes $1.3 million in bonuses paid to certain members of management for their efforts relating to the ongoing Chicago flood insurance litigation, which was conclusively settled in the second quarter of 2002.

Interest expense increased $0.2 million in 2002, as a result of an entire year’s interest on the additional $40.0 million of subordinated notes issued in April 2001 to fund the NASDI acquisition. This increase was offset by improved variable interest rates on the Company’s senior bank debt, which was reduced throughout 2002.

The Company’s effective tax rate was 24.3% in 2002 compared to 42.7% in 2001. The improvement in 2002 is primarily the result of a tax deduction taken in the second quarter for the write-off of the tax basis of an insurance claim receivable of $11.0 million related to litigation settlement payments made in 1997. For book purposes, the insurance reimbursement had been

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assigned to the Company’s former owner as part of its recapitalization in 1998, and therefore, had no book basis.

Net income was $13.0 million in 2002 compared to $6.5 million in 2001. Net income increased in 2002 due to higher earnings as well as the favorable impact of the significant tax deduction just discussed.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

The Company’s 2001 revenues totaled $318.8 million compared to $339.1 million in 2000. The decline in 2001 revenues was due primarily to a reduction in foreign dredging revenues by $42.4 million, offset by the addition of demolition revenues from NASDI, included since its acquisition in April 2001. The Company’s gross profit margin was 18.3% for 2001, which compares favorably to 16.9% in 2000. The margin was positively impacted by the mix of projects, with 2001 benefiting from good margins obtained on the increased level of beach nourishment and maintenance projects while revenues from lower margin foreign dredging projects declined.

Domestic capital dredging project revenues decreased $32.0 million or 19.9%, from $161.3 million in 2000 to $129.3 million in 2001. As a result of the decline in capital work, the Company’s dredging assets were utilized to perform an increased amount of beach nourishment work. In 2001, contract revenues from capital projects included $48.1 million, $15.8 million, $10.3 million and $6.2 million generated from Deep Port projects in North Carolina; San Juan, Puerto Rico; Charleston, South Carolina; and New York, respectively. In addition, a new work capital project in Baltimore, Maryland which was not part of the Deep Port program contributed $22.0 million to 2001 revenues.

In 2001, revenues from beach nourishment projects increased $44.9 million or 135.0%, compared to 2000, as the Company performed on numerous beach projects won in the latter half of 2000 and throughout 2001. Several projects contributed to 2001’s beach revenues, including beach nourishment projects in Sunny Isles, Florida; San Diego, California; Brevard County, Florida; and Fire Island, New York, which contributed revenues of $16.8 million, $12.3 million, $11.2 million, and $5.8 million, respectively.

Revenues from maintenance projects for the year ended December 31, 2001 decreased $14.4 million or 19.9%, over 2000. The maintenance market overall had a solid year in 2001 and contributed good margins. The upcoming market in 2002 is dependent on precipitation levels experienced during the winter months. Significant maintenance revenues in 2001 included $14.8 million from four Mississippi River rental projects, and $7.9 million and $5.4 million from projects on the Mississippi River Gulf Outlet and Calcasieu River, respectively.

Revenues from foreign dredging operations in 2001 decreased $42.4 million or 59.1% compared to 2000. Key foreign projects that contributed to 2001 revenues included the Company’s long-term project in Ghana, West Africa and a project in Dabhol, India, which began in the third quarter of 1999 for which the dredging component was completed in early 2001. These projects contributed revenue of $15.4 million and $9.5 million, respectively, during 2001.

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NASDI’s 2001 demolition revenues, since the acquisition by the Company in April 2001, totaled $23.7 million. NASDI’s 2001 revenues fell short of budget expectations because of owner delays in the start-up of two significant projects in NASDI’s backlog. Some of the key projects contributing to NASDI’s 2001 revenues included a large power plant project, a parking garage demolition, and the demolition of residential buildings and site preparation for the building of a new hotel, all in the Boston area.

General and administrative expenses increased $2.9 million, from $22.3 million in 2000 to $25.2 million in 2001. The main components of this increase were $1.5 million of amortization of goodwill arising from the NASDI acquisition, as well as additional expenses of $1.5 million attributable to NASDI’s operations.

Non-operating expenses increased in 2001 as a result of interest expense on the additional $40.0 million subordinated debt issuance used to fund the NASDI acquisition, partially offset by a decline in the variable interest rates on the Company’s senior bank debt. The Company’s equity in earnings of joint ventures increased $1.6 million, from a loss of $0.8 million in 2000 to earnings of $0.8 million in 2001, due to Amboy’s improved operations in 2001 and the absence of certain legal and permitting charges incurred by Amboy in 2000.

The Company’s effective tax rate was 42.7% in 2001 compared to 47.8% in 2000. In 2001, the Company did not have a significant foreign component in its tax provision as it had in prior years, which resulted in the improvement in the 2001 effective tax rate.

Net income was $6.5 million in 2001 compared to $7.3 million in 2000. Net income in 2001 has declined due to the impact of goodwill amortization and additional interest and financing costs resulting from the NASDI acquisition.

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 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 the 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.

Dredging. As a result of the Company’s successful bidding performance in 2002, its bid market share increased to 49%, compared to an average of 42% over the last three years. Since the 2002 annual bid market was substantial, exceeding $900 million, the Company was able to achieve a dredging backlog level at December 31, 2002 of $350.5 million, which compares to $208.5 million at December 31, 2001. The December 2002 level is a historically high year-end level and is largely comprised of Deep Port work, which is generally higher margin work. Over half of the 2002 bidding activity, approximately $470 million, was attributable to Deep Port work, which has comprised an average of $240 million of the annual bid markets for each of the prior

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three years. The Company successfully bid and won approximately 65% of the 2002 Deep Port work. Although the level of bidding activity seen in 2002 is unlikely to continue at the same pace in 2003, much of the Deep Port work the Company has won spans up to two years, providing a solid revenue base upon which to build in 2003 and 2004.

The current biannual update, or WRDA 2002 bill, which would provide authorization for the start or continuation of various projects in the Corps’ Deep Port program in future years, was not passed by Congress in 2002. The WRDA legislation, which forms the basis for authorizing the Corps’ civil works projects, is generally enacted every other year. While it’s the Company’s understanding that some lawmakers and trade groups hope that a water resources measure will be enacted in 2003, which would normally be an off year, it is more probable that passage will be delayed until 2004. Since the recent Deep Port work that has come out for bid and those projects expected for 2003 bidding have been authorized under previous WRDA legislation, it is not expected that a delay in the passage of the next WRDA bill would significantly impact the Deep Port market in the near term.

Foreign capital backlog declined as the Company continued to work on the projects in Ghana and Bahrain through 2002. While no new significant foreign projects were added to backlog in 2002, the Company continues to pursue numerous opportunities that have the potential to contribute to 2003 backlog. The terminal project in Bahrain is expected to continue through 2004; however, the project may be affected if actions are taken against Iraq and the region is deemed to be unstable. While the Company has plans in place to ensure the safety of its employees and equipment operating in the Middle East, the impact of such a disruption on the project operations and its profitability is uncertain.

As mentioned previously, 2002 was a solid year for the beach nourishment market with over $100 million let for bid, of which the Company bid and won approximately 38%. Funding for the 2003 beach nourishment bid market was uncertain at the end of 2002, with the delay in the passage of the budget appropriation bill for the Corps’ 2003 fiscal year. However, the budget was passed in the first quarter of 2003, so 2003 has the potential to be another strong year for beach nourishment work as long as state and local matching funds are made available.

At December 31, 2002, the Company was low bidder on additional domestic work valued at $25.7 million, most of which related to option work on the Manatee Harbor, Florida Deep Port project, for which award remains pending due to resolution of funding issues for that portion of the work.

Demolition. The Company’s demolition backlog at December 31, 2002 totaled $15.2 million compared to $31.1 million at December 31, 2001. NASDI continues to take on sufficient smaller projects to generate solid earnings, while targeting several longer-term projects which would provide additional work for 2003 and 2004. NASDI’s upcoming project opportunities include several large power plant take-downs and a number of significant interior demolition projects in the Boston area, each valued in excess of $5.0 million.

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Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flows from operations and borrowings under the revolving line of credit provided by the Credit Agreement (see Note 8, “Long-term Debt” in the Notes to the Consolidated Financial Statements). The Company’s primary uses of cash are funding working capital, capital expenditures and debt service.

The Company’s net cash flows from operating activities for the years ended December 31, 2002, 2001 and 2000 were $28.4 million, $20.1 million and $17.5 million, respectively. The increase in cash flows from operating activities in 2002 was due primarily to the increase in net income as well as the normal fluctuations in working capital requirements inherent in the Company’s operations. The Company anticipates that it may require additional working capital investment in 2003 as it continues to perform on certain of its major Deep Port projects.

The Company’s net cash flows used in investing activities for the years ended December 31, 2002, 2001 and 2000 were $17.2 million, $42.9 million and $13.7 million, respectively. In 2002, the Company made typical capital expenditures and also used $4.5 million to purchase the minority partner’s interests in NATCO and North American, as discussed previously in “Management’s Discussion and Analysis.” In 2001, $30.5 million was used to purchase the capital stock of NASDI.

The Company’s net cash flows from financing activities for the years ended December 31, 2002, 2001 and 2000 were a use of $12.2 million, a source of $24.2 million, and a use of $4.2 million, respectively. The uses of cash in 2002 and 2000 related to the scheduled payments of the Company’s term senior debt, offset by net borrowings on its revolver arrangement. In 2001, the Company received net proceeds of $39.7 million from its senior subordinated notes issued to fund the NASDI acquisition, which was offset by related financing fees as well as payments of its term and revolver senior debt.

The Company has entered into operating lease agreements for certain dredging assets and office space, which require annual operating lease payments of approximately $17 to $18 million through the next four years. See Note 12, “Lease Commitments” in the Notes to the Consolidated Financial Statements. Additionally, the Company expects to incur annual

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maintenance expenses of approximately $26 to $28 million. Amounts expended for operating leases and maintenance expenses are charged to operations on an annual basis. Planned capital expenditures, which primarily include support equipment and equipment upgrades, are expected to require spending of approximately $16 to $18 million annually for the foreseeable future.

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 is exploring options to reduce its interest expense, including refinancing of certain operating lease agreements and repurchase of a portion of its subordinated notes. The Company’s ability to fund its working capital needs, planned capital expenditures and scheduled debt payments, to refinance indebtedness and to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flow, 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.

Contractual Obligations

The following table summarizes the Company’s contractual cash obligations at December 31, 2002. Additional information related to these obligations can be found in Notes 8 and 12 to the Consolidated Financial Statements.

Other Off-Balance Sheet and Contingent Obligations

The Company has guaranteed 50% the outstanding principal and interest of Amboy’s bank loan, which totaled $0.8 million at December 31, 2002. Additionally, the Company’s outstanding letters of credit, relating primarily to contract performance guarantees, totaled $10.4 million at December 31, 2002. All were undrawn at year-end.

The Company’s Credit Agreement contains provisions that require the Company to maintain a minimum net worth and certain other financial ratios, limit payment of dividends and restrict certain other transactions. Additionally, annual prepayments of principal may be required to the extent that the Company has excess cash, as defined. The Company has also granted liens on certain of its operating equipment with net book values at December 31, 2002 of $35.9 million as security for borrowings under its Credit Agreement.

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As mentioned previously, the Company finances certain key vessels used in its operations with off-balance sheet lease arrangements with unrelated lessors, requiring annual rentals of $17 to $18 million over the next four years. These off-balance sheet leases contain default provisions which are triggered by an acceleration of debt maturity under the terms of the Company’s Credit Agreement. Additionally, the leases typically contain provisions whereby the Company indemnifies the lessors for the tax treatment attributable to such leases based on the tax rules in place at lease inception.

Performance and bid bonds are customarily required for dredging and marine construction projects, as well as some demolition projects. The Company obtains its performance and bid bonds through a bonding agreement with a surety company that has been granted a security interest in a substantial portion of the Company’s operating equipment with a net book value of approximately $60.8 million at December 31, 2002. The bonding agreement contains financial and operating covenants that limit the ability of the Company to incur indebtedness, create liens and take certain other actions. Bid bonds are generally obtained for a percentage of bid value and amounts outstanding typically range between $5 to $10 million. At December 31, 2002, the Company had outstanding performance bonds valued at approximately $290 million, based on the estimated remaining revenue value of bonded projects.

Certain foreign projects performed by the Company have warranty periods, typically spanning no more than three to five years beyond project completion, whereby the Company retains responsibility to maintain the project site to certain specifications during the warranty period. Generally, any potential liability of the Company is mitigated by insurance, shared responsibilities with consortium partners, and/or recourse to owner-provided specifications.

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

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Effect of Recently Issued Accounting Standards

The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” as of January 1, 2002. This statement requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be assessed annually for impairment, with the initial assessment to be completed within the first six months following adoption of the standard. The required initial impairment evaluation was performed in the first quarter of 2002 and the annual assessment was performed in the third quarter of 2002, resulting in no impairment in the value of the Company’s goodwill.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses the recognition and remeasurement of obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of this statement is not expected to have a material effect on the Company’s financial position or results of operations.

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

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others.” The interpretation expands the disclosures to be made by a guarantor in

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its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under guarantee, with certain exceptions. The disclosure requirements of FIN No. 45 are effective for the Company as of December 31, 2002 and the recognition requirements are to be applied prospectively for guarantees issued or modified after December 31, 2002. The Company does not expect the recognition requirements of FIN No. 45 to have a material impact on results of operations or financial position.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities) and how to determine when and which business enterprise should consolidate the variable interest entities. The transitional disclosure requirements of FIN No. 46 take effect immediately and are required in all financial statements issued after January 31, 2003, if certain conditions are met. Additionally, the provisions of FIN No. 46 apply immediately to all enterprises with variable interests in variable interest entities created after January 31, 2003, and they apply in the first fiscal year beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not expect adoption of this interpretation to have a material impact on results of operations or financial position.

Item 7A. — Quantitative and Qualitative Disclosures about Market Risk

A portion of the Company’s current dredging operations are conducted outside of the U.S. In 2002 and 2001, 17% and 10%, respectively, of dredging contract revenues were 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 and had no foreign currency forward contracts outstanding at December 31, 2002.

The Company’s obligations under the Credit Agreement expose earnings to changes in short-term interest rates since interest rates on bank debt are variable. If the variable rates on the Company’s outstanding bank debt were to increase by 10% from the rates at December 31, 2002, for the full year 2003, assuming scheduled principal payments are made, interest expense would increase $0.1 million and, assuming a 38% marginal tax rate, the decrease to net income would be insignificant.

At December 31, 2002 and 2001, the Company had long-term subordinated notes outstanding with a recorded book value of $154.8 million and $154.7 million, respectively. The fair value of these notes, which bear interest at a fixed rate, was $161.4 million and $158.3 million at December 31, 2002 and 2001, respectively, based on quoted market prices. Assuming a 10% decrease in interest rates from the rates at December 31, 2002, the fair value of this fixed rate debt would have increased by $9.2 million.

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A significant operating cost for the Company is diesel fuel. During 2002 and 2001, fuel expenditures represented 6.7% and 8.1%, respectively, of costs of contract revenues. The Company uses fuel commodity forward contracts, typically with durations of less than two years, to reduce the impacts of changing fuel prices on operations. The Company does not purchase fuel hedges for trading purposes. Based on the Company’s 2003 projected fuel consumption, a one cent change in the average price per gallon of fuel would impact its net income by less than $0.1 million, after the effect of fuel commodity contracts in place as of December 31, 2002. If the fuel forward rates underlying the outstanding fuel contracts increased by 10%, the fair value of these contracts would increase by $0.7 million. At December 31, 2002 and 2001, the Company had outstanding arrangements to hedge the price of a portion of its fuel purchases related to work in backlog, representing approximately 46% and 50% of its projected fuel requirements for 2003 and 2002, respectively.

Item 8. — Financial Statements and Supplementary Data

The consolidated financial statements (including financial statement schedules listed under Item 14(a) of this report) of the Company called for by this Item, together with the Independent Auditors’ Report dated January 28, 2003, are set forth on pages F-1 to F-29 inclusive, of this Report, and are hereby incorporated by reference into this Item. Financial statement schedules not included in this Report have been omitted because they are not applicable or because the information called for is shown in the consolidated financial statements or notes thereto.

Item 9. — Change In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Part III

Item 10. — Directors and Executive Officers

Set forth below are the names, ages and positions of the persons who serve as the directors and executive officers of the Company.

Douglas B. Mackie – Mr. Mackie has been President, Chief Executive Officer and Director of the Company since 1995. Mr. Mackie joined the Company in 1978 as Corporate Counsel. In 1987 he was named Senior Vice President.

Richard M. Lowry – Mr. Lowry has been the Executive Vice President and Chief Operating Officer of the Company since 1995. Mr. Lowry joined the Company in 1978 as a Project Engineer and has since held positions of increasing responsibility in the engineering and operating areas of the Company. In 1990 he was named Senior Vice President and Chief Engineer.

Deborah A. Wensel – Ms. Wensel has been the Vice President, Chief Financial Officer and Treasurer of the Company since April 1999 and was named Senior Vice President in 2002. Ms. Wensel joined the Company in 1987 as Accounting and Financial Reporting Supervisor. In 1989, she was named Controller and Chief Accounting Officer.

William F. Pagendarm – Mr. Pagendarm has been a Vice President and Division Manager of the Company since 1985. He joined the Company in 1979 as Project Superintendent.

Steven F. O’Hara – Mr. O’Hara has been a Vice President and Division Manager of the Company since 1988. He joined the Company in 1978 as Cost Accountant.

Bradley T. J. Hansen – Mr. Hansen has been a Vice President and Division Manager of the Company since 1994. Mr. Hansen joined the Company in 1977 as an Area Engineer. He was named Vice President & General Superintendent of the Company in 1991.

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Daniel L. Hussin – Mr. Hussin has been Vice President – Manager of U.S. Business Development since 1995. Mr. Hussin joined the Company in 1972 as an Estimator. He was named Vice President and Division Manager of the Company in 1993.

Messrs. Gillespie, Johnson, Karas and Simonelli were promoted to Vice Presidents of the Company in 2002. All have worked with the Company for an average of 20 years and have held positions of increasing responsibility in the areas of engineering, estimating and domestic and international operations.

Michael A. Delaney – Mr. Delaney became a director of the Company upon consummation of the recapitalization on August 19, 1998. Mr. Delaney has been a Managing Director of 399 Venture Partners, Inc. and its affiliate Citicorp Venture Capital Ltd. since 1997. From 1989 through 1997, he was a Vice President of Citicorp Venture Capital Ltd. and 399 Venture Partners, Inc. From 1986 through 1989, he was Vice President of Citicorp Mergers and Acquisitions. Mr. Delaney is also a director of Palomar Technologies, Inc., MSX International, Delco Remy International, Inc., Chip PAC Inc., and ERICO Corporation.

David Wagstaff III – Mr. Wagstaff became a director of the Company upon consummation of the recapitalization on August 19, 1998. Mr. Wagstaff has served as President and Chief Executive Officer of Vectura Group, Inc. since 1993 and is currently Chief Executive Officer of Hoover Group Inc. He was previously the Principal in a private consulting business and has worked in various executive capacities at the Equitable Life Assurance Company and Citicorp. Mr. Wagstaff is also a Director of Anvil Knitware, Inc.; Barcalounger, Inc.; DavCo Restaurants, Inc.; Hayden Inc.; and Zaterains.

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Item 11. — Executive Compensation

The following table sets forth certain information regarding the compensation for 2002, 2001 and 2000 of Great Lakes’ Chief Executive Officer and the next four highest paid executive officers of the Company (collectively, the “Named Executive Officers”):