FOR PURPOSES OF THIS EXHIBIT 99.3, UNLESS THE CONTEXT OTHERWISE REQUIRES:
- "WE", "US" AND "THE COMPANY" REFER TO GREAT LAKES DREDGE & DOCK
CORPORATION AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS AFTER
THE ACQUISITION OF NORTH AMERICAN SITE DEVELOPERS, INC. ("NASDI")
DESCRIBED BELOW;
- "GREAT LAKES" REFERS TO GREAT LAKES DREDGE & DOCK CORPORATION AND
ITS SUBSIDIARIES ON A CONSOLIDATED BASIS;
- ON APRIL 17, 2001, GREAT LAKES ENTERED INTO AN AGREEMENT TO
PURCHASE 80% OF NASDI (THE "ACQUISITION");
- "BID MARKET SHARE" IS DEFINED AS THE VALUE OF DREDGING CONTRACTS BID
UPON AND WON BY US DIVIDED BY THE VALUE OF ALL DREDGING CONTRACTS
UPON WHICH WE BID, INCLUDING THOSE WE DID NOT WIN, VALUED AT THE PRICE
AT WHICH THE CONTRACTS WERE AWARDED. AS SUCH, BID MARKET SHARE DATA DOES
NOT REFLECT MARKET SHARE DATA FOR ALL DREDGING ACTIVITIES; AND
- PRO FORMA DATA FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 GIVES PRO
FORMA EFFECT TO THE ACQUISITION AND THE FINANCING THEREOF.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE NASDI INTO OUR BUSINESS, WE COULD
INCUR UNANTICIPATED COSTS, OUR OPERATIONS COULD BE DISRUPTED.
The Acquisition will significantly increase our size and diversify our scope
of operations. Our ability to integrate NASDI with our existing business will
impact the future success of our business.
We will only achieve the increased revenues and earnings and other benefits
that we expect to result from the Acquisition if we can successfully integrate
NASDI's administrative, finance, technical and marketing organizations, and
implement appropriate operations, financial and management systems and controls.
The integration of NASDI into our operations will involve a number of risks,
including:
- the possible diversion of our management's attention from other business
concerns;
- the potential inability to successfully pursue some or all of the
anticipated revenue opportunities associated with the Acquisition;
- the possible loss of XXXXX's key professional employees;
- insufficient management resources to accomplish the integration;
- increased complexity and diversity compared to our operations prior to the
Acquisition; and
- unanticipated problems or legal liabilities.
The occurrence of any of the above events, as well as any other difficulties
which may be encountered in the transition and integration process, could have a
material adverse effect on our business, financial condition and results of
operations.
IF WE ARE UNABLE TO RETAIN KEY EXECUTIVES AND OTHER PERSONNEL, OUR GROWTH
MAY BE HINDERED.
Our success is largely dependent on maintaining our staff of qualified
professionals. The market for qualified professionals is competitive and we may
not be able to continue to be successful in our efforts to attract and retain
such professionals. Our future operations could be harmed if any of our senior
executives or other key personnel ceased working for us.
With respect to NASDI, certain executives, including the Chief Executive
Officer, Xxxxxxxxxx Xxxxxxx, and the General Manager, Xxxxxx Xxxxxxx, are key
personnel. Together, Messrs. Xxxxxxx will own 20% of NASDI subsequent to the
Acquisition and will continue in leadership roles with the support of
additional senior leadership and administrative staff from Great Lakes. On
November 6, 2000, Xxxxxx Xxxxxxx pleaded guilty to tax evasion relating to tax
years 1994 and 1995. He has made payments of $1.34 million, which includes
payment of all back taxes, penalties and interest. In connection with the final
resolution of the matter, on April 4, 2001, he was sentenced to 12 months of
work release, beginning May 9, 2001. He is currently working for NASDI on a full
time basis and the terms of his sentence allow him to continue to do so.
Our success depends in part on key customer relationships forged by members
of our senior management. We cannot assure you that we will be able to continue
to maintain these relationships if members of senior management leave the
company.
OUR BUSINESS COULD SUFFER IN THE EVENT OF A WORK STOPPAGE BY OUR UNIONIZED
LABOR FORCE.
A significant portion of our hourly work force is represented by various
unions. Certain of these unions have had strikes from time to time. Future
strikes, employee slowdowns or similar actions by one or more unions could have
a material adverse effect on us.
WE ARE DEPENDENT ON OUR ABILITY TO CONTINUE TO OBTAIN GOVERNMENT DREDGING
CONTRACTS, AND INDIRECTLY, ON THE AMOUNT OF GOVERNMENT FUNDING FOR NEW
GOVERNMENT DREDGING PROJECTS.
Substantially all of our dredging revenues have been, and are expected to
continue to be, attributable to contracts with federal, state and other
government agencies or with companies operating under contracts with such
government agencies. Government contracts are typically subject to termination
at any time, on relatively short notice, at the election of the applicable
government agency involved even if we are performing our contractual
obligations. Cancellation of significant dredging contracts or our failure to
win significant dredging contracts could have a material adverse effect on us.
In addition, our dredging operations depend on project funding by various
government agencies and may be adversely affected by the level and timing of
such funding. Lack of funding has, in the past, substantially delayed scheduled
projects, including projects that have been put up for bid. Recently the Corps
has scheduled in excess of $2.0 billion of dredging projects to be bid on and
completed by 2005. Overall, these projects have been bid and/or executed
according to the published schedules to date; however, there is no assurance
that they will continue to follow the schedules in the future.
Substantially all of our dredging contracts are, and are expected to
continue to be, awarded based on competitive bidding. In the United States,
dredging contracts are awarded to the lowest adequately bonded bidder,
regardless of a bidder's relationship with the project sponsor, work on past
projects, reputation or similar factors. There can be no assurance that our
competitors will not bid more aggressively than us for contracts or that we will
continue to achieve bid market shares at the levels that we have achieved
historically.
Some government dredging contracts are awarded through a negotiated
procurement process in which the contractor submits a proposal and cost and
pricing data to the government, and the contractor and the government negotiate
the contract price. Under such contracts, the government has the right, after
award and/or completion of the contract, to audit the contractor's books and
records, including, the proposal and data available to the contractor during
negotiations to ensure compliance with the contract and applicable federal
legislation, rules and regulations. The government may seek a price adjustment
based on the results of such audit.
WE ARE DEPENDENT ON KEY CUSTOMERS AND LARGE CONTRACTS IN OUR CID ACTIVITIES.
We are dependent on key customer relationships and the ability to obtain
large contracts in our CID business. For the year ended December 31, 2000, 40%
of NASDI's revenues related to one large contract with one customer. This
contract was completed in 2000. NASDI management believes that such
relationships will continue and that similar large contracts will be available
for bid in 2001; however, there can be no assurance that NASDI will be able to
maintain such relationships or successfully obtain such large contracts. The
inability to maintain these relationships and/or obtain such replacement
contracts would have a material adverse effect on NASDI's revenues.
WE ARE DEPENDENT ON OUR ABILITY TO OBTAIN BONDING FOR FUTURE PROJECTS.
We, like all dredging service providers, generally are required to post
bonds in connection with our dredging contracts to insure job completion if we
should fail to finish a project. We have entered into a bonding agreement with
Travelers Property Casualty ("Travelers") pursuant to which Travelers acts as
surety, issues bid bonds, performance bonds and payment bonds and obligates
itself upon other contracts of guaranty required by us in the day-to-day
operations of our dredging and marine construction business. However, Travelers
is not obligated under the bonding agreement to issue bonds for us. No bond
issued on our behalf has ever been drawn upon in our 110-year history. However,
our business would be materially and adversely affected if we were unable to
obtain bonding for future projects.
In addition, if we were to default on a contract, the bonding company would
be required either to complete the contract or to reimburse the project sponsor
for the cost of completion. We would be
obligated to reimburse the bonding company for the amount it expended as a
result of our default. Pursuant to the bonding agreement between us and the
subsidiary guarantors, our obligations and the subsidiary guarantors'
obligations are secured by a security interest in certain of our fixed assets.
NASDI is also an obligor under our bonding agreement. In the event we or any of
the subsidiary guarantors fail or are unable to complete the work under a bonded
contract or breach the bonding agreement, the bonding company may proceed
against the collateral, cause the performance of such bonded contract by
subletting it in our name or in the name of our subsidiary guarantors and seek
reimbursement from us and our subsidiary guarantors for costs incurred on the
subletting or performance of such bonded contract. The bonding agreement
contains financial and operating covenants that limit our ability to incur
indebtedness, create liens, pay dividends and to take certain other corporate
actions. The total amount of bonds outstanding varies with the dollar value of
contracts in process; however, the face amount of outstanding bonds typically
overstates the associated contingent liability to the extent of the portion of
the related projects which we have completed. We estimate that as of
December 31, 2000, approximately $500 million of bonds were outstanding.
THE AMOUNT OF OUR ESTIMATED BACKLOG IS SUBJECT TO CHANGE AND NOT NECESSARILY
INDICATIVE OF FUTURE SALES. OUR PROFITABILITY IS SUBJECT TO INHERENT RISK
BECAUSE OF THE FIXED PRICE NATURE OF MOST OF OUR CONTRACTS.
Our dredging contract backlog represents our estimate of the revenues which
will be realized under contracts remaining to be performed based upon estimates
relating to, among other things, the time required to mobilize the necessary
assets at the project site, the amount of material to be dredged and the time
necessary to demobilize the project assets. However, such estimates are
necessarily subject to fluctuations based upon the amount of material which
actually must be dredged, as well as factors affecting the time required to
complete each job. Consequently, backlog is not necessarily indicative of future
revenues. In addition, because a majority of our dredging backlog relates to
government contracts, our order backlog can be canceled at any time without
penalty, except, in some cases, the recovery of our actual committed costs and
profit on work performed up to the date of cancellation.
Our CID contract backlog represents our estimate of the revenues which will
be realized under contracts remaining to be performed based upon estimates of
the resources and time necessary to complete the projects. However, such
estimates are necessarily subject to fluctuations based upon the actual
resources and time required to complete each job. Consequently, backlog is not
necessarily indicative of future revenues.
Further, the estimated size of any contract is not necessarily indicative of
the profitability of that contract. Substantially all of our contracts with our
customers are fixed-price contracts. Under a fixed-price contract, the customer
agrees to pay a specified price for our performance of the entire contract.
Fixed-price contracts carry inherent risks, including risks of losses from
underestimating costs, operational difficulties and other changes that may occur
over the contract period. One of the most significant factors which can affect
the profitability of a dredging project is the weather at the project site.
Inclement or hazardous weather conditions can result in substantial delays in
dredging and additional contract expenses. There can be no assurance that we
will be able to perform our obligations under such fixed-price contracts without
incurring additional expenses. If we were to significantly underestimate the
cost of one or more significant contracts, the resulting losses could have a
material adverse effect on us.
WE ARE DEPENDENT ON SUBCONTRACTORS IN OUR CID BUSINESS.
We are dependent on subcontractors in our CID business. Our business
activities include interior and exterior demolition and asbestos and other
hazardous substance and material removal. We sometimes subcontract hazardous
substance and material removal and other demolition activities to
licensed, insured subcontractors. We could experience a material adverse effect
on our CID business if: (i) we are unable to find qualified subcontractors in
the future; (ii) subcontractors upon which we rely fail to complete jobs in a
timely manner; and/or (iii) subcontractors upon which we rely for the removal of
asbestos and/or other hazardous substances or materials improperly transport,
treat, store or dispose of such substances and materials. In addition,
disputes with subcontractors that have failed to complete jobs have resulted,
and in the future may result, in litigation. There can be no assurances that
we will not be required to pay significant sums in connection with such
disputes and there can be no assurances as to the outcome of these disputes or
the effect it will have on our CID business.
OUR BUSINESS IS SUBJECT TO SIGNIFICANT OPERATING RISKS.
The businesses of dredging and demolition are generally subject to a number
of risks and hazards, including environmental hazards, industrial accidents,
labor disputes, encountering unusual or unexpected geological formations,
cave-ins of below water tunnels, collisions with fixed objects, disruption of
transportation services and flooding. These risks could result in damage to, or
destruction of, dredges, transportation vessels, other buildings, personal
injury, environmental damage, performance delays, monetary losses and possible
legal liability. For example, in 1992, an underwater utility tunnel located
beneath the Chicago Loop failed adjacent to a construction site completed by
us in the fall of 1991. The failure resulted in a flooding of the tunnel and
building basements serviced by the tunnel. Numerous suits were filed against
us for claims of flood damage and losses due to business interruption.
Although all remaining claims relating to the Chicago flood litigation were
settled in 1997, there can be no assurance that the Company's operations will
not be adversely affected in the future by similar or other conditions
attributable to these or similar risks. Although we maintain insurance within
ranges of coverage consistent with industry practice, we cannot assure you
that such insurance will be available at economically feasible premiums.
WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL OPERATIONS.
Approximately 17% of our dredging revenues over the last three years were
generated by operations conducted abroad. International operations subject us to
risks customarily associated with foreign operations, including:
- currency fluctuations;
- import and export license requirements;
- changes in tariffs and taxes;
- restrictions on repatriating foreign profits back to the United States;
- unfamiliarity with foreign laws and regulations;
- difficulties in staffing and managing international operations; and
- political, cultural and economic uncertainties.
In addition, we have benefited in recent years from the substantial
investment in foreign port infrastructure, particularly in the Pacific Rim.
Because many international dredging contractors have concentrated significant
assets in the Pacific Rim projects, we have enjoyed less competition in areas
such as the Middle East, Africa and South America. However, there can be no
assurances that this favorable competitive dynamic will continue.
OUR DREDGING OPERATIONS MAY FLUCTUATE DUE TO SEASONALITY AND OTHER FACTORS.
Quarterly and yearly dredging results can fluctuate significantly based upon
the number and size of contracts undertaken and the timing of performance of
projects under such contracts. We have historically realized lower contract
revenues and earnings in the first and fourth quarters of each year, due to a
number of factors including variation in weather conditions and government
funding cycles, which affect the timing and execution of projects. We have seen
the trend of this historical seasonality diminish over the past three years,
with the increase in Deep Port work and the impact of
environmental windows, which require that we perform certain work in winter
months to protect wildlife habitats. We have been able to respond to these
changing market factors since we have the flexibility to move our 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 we are not able to be as flexible in utilizing our equipment. Substantial
fluctuations in our results in operations may adversely affect our ability to
service our debt or satisfy other liquidity needs in a particular period, which
could have a material adverse effect on us.
IF OUR DEMOLITION BUSINESS IS UNABLE TO COMPETE EFFECTIVELY, OUR DEMOLITION
REVENUES MAY DECLINE AND WE MAY BE UNABLE TO SUSTAIN OUR GROSS PROFIT MARGINS IN
OUR DEMOLITION BUSINESS.
The CID business is highly competitive. XXXXX's ability to compete depends
heavily on elements outside its control, such as general economic conditions
affecting the construction industry. NASDI's principal competitors include large
construction companies that perform in-house demolition services, large national
demolition companies, regional demolition companies, and smaller independent
demolition businesses. Some of NASDI's competitors are more geographically
diverse, have greater name recognition than NASDI, have greater financial and
other resources available to them and may be substantially less leveraged than
NASDI. There can be no assurance that NASDI will not encounter increased
competition from existing competitors or new market entrants, such as large
construction companies that develop in-house demolition capabilities, that may
be significantly larger and have greater financial resources than NASDI.
Competitive pressures may result in a decline in our demolition revenues and
adversely affect our gross profit margins in our demolition business.
ALTHOUGH WE INSURE AGAINST THE RISK OF CERTAIN LIABILITIES IN OUR BUSINESS,
WE CANNOT BE SURE THAT ACTUAL LIABILITIES WILL NOT EXCEED OUR INSURANCE
COVERAGE.
We insure our own risks up to certain policy limits and subject to certain
deductibles. We make estimates and assumptions that affect the reported amount
of liability and the disclosure of contingent liabilities. As claims develop, it
is possible that the ultimate results of these claims may differ from our
estimates. We cannot assure you that the dollar amount of our liabilities will
not materially exceed the insurance policy limits.
In addition, premiums and deductibles for liability insurance could increase
to the point that such insurance becomes prohibitively expensive, or
unavailable. The failure to obtain adequate insurance could affect our ability
to bid on, or execute, significant projects, or obtain adequate bonding or
financing.
ENVIRONMENTAL MATTERS COULD FORCE US TO INCUR SIGNIFICANT CAPITAL AND
OPERATIONAL COSTS.
Our operations and facilities are subject to various environmental laws and
regulations, relating to dredging operations, the disposal of dredged material,
wetlands, storm and waste water discharges, demolition activities, asbestos
removal, transportation and disposal of certain other hazardous substances and
materials and air emissions. We are also subject to laws designed to protect
certain species and habitats. Compliance with these statutes and regulations can
delay appropriation with respect to, and performance of, particular projects and
increase related expenses.
Our 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 such
substances. While our CID business requires the Company to transport and dispose
of hazardous substances and materials, the Company's risks are limited to the
proper execution of such tasks. The Company's CID 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, we may be liable for resulting damages
that our clients incur.
Based on our experience, we believe 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 our
business, financial condition or results of operations. However, we 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.
A LIMITED NUMBER OF PEOPLE CONTROL OUR COMPANY, AND MAY EXERCISE THEIR
CONTROL IN A MANNER ADVERSE TO YOUR INTERESTS.
Vectura Holding Company LLC owns approximately 53.2% of our outstanding
voting capital stock and all of the non-voting capital stock. Pursuant to the
Stockholders' Agreement among us, Vectura, management investors and certain
other stockholders of the Company, Vectura has the right to appoint up to two
of our five directors.
Vectura and our directors, our executive officers and other employees, whom
we refer to as our management investors and their affiliates, control all of the
voting power represented by our outstanding shares of capital stock. By virtue
of this stock ownership, they have the ability, if acting in concert, to control
the outcome of all matters presented for approval to our stockholders. Such
concentration of ownership may have the effect of preventing a change in
control. Because a limited number of people control us, transactions could be
difficult or impossible to complete without the support of those persons. It is
possible that these persons will exercise control over us in a manner that is
adverse to interests of other security holders.
THE ACQUISITION
On April 17, 2001, we entered into an agreement with NASDI management
stockholders and other stockholders of NASDI to purchase 80% of the capital
stock of NASDI. Under the agreement, we will purchase a portion of the
holdings of NASDI management stockholders and all of the holdings of the
other stockholders of NASDI. The purchase consideration for the Acquisition
will include (1) $35.0 million in cash, subject to certain downward
adjustments, payable to the stockholders of NASDI and (2) two notes totaling
$3.0 million from NASDI payable to the NASDI management stockholders, which
notes will be guaranteed by Great Lakes, but not the subsidiaries of Great
Lakes. We will fund the cash portion of the Acquisition price and the related
fees and expenses, as well as repayment of a portion of our outstanding
borrowings under our revolving credit facility, with the proceeds from a
$40.0 million financing. The closing of the Acquisition is conditioned upon
obtaining adequate financing therefor. We will effect the Acquisition through
a newly-formed acquisition subsidiary. Following consummation of the
Acquisition, the acquisition subsidiary will be merged into NASDI, in which
we will retain an 80% interest, and the NASDI management stockholders will
retain a 20% non-voting interest. NASDI management stockholders Xxxxxxxxxxx
Xxxxxxx and Xxxxxx Xxxxxxx, owned approximately 50% of NASDI prior to the
Acquisition.
NASDI SELLER NOTES
Upon closing, NASDI will issue two junior subordinated promissory notes to
the NASDI management stockholders, in an aggregate principal amount of
$3.0 million. These notes bear interest at the greater of 6% per annum or the
applicable federal rate, payable annually on each anniversary of the notes. All
outstanding principal and unpaid interest on these notes will be payable in a
single installment for each note on March 31, 2004; however, this payment date
may be deferred to December 31, 2004 if XXXXX has failed to meet certain
financial performance levels for each of the three preceding years. NASDI may
prepay the NASDI seller notes at any time without premium or penalty. Great
Lakes, but not the subsidiaries of Great Lakes, will guaranty NASDI's
obligations under the NASDI seller notes.
EMPLOYMENT AGREEMENTS
Each of the two NASDI management stockholders will enter into a
three-year employment agreement with NASDI, containing non-compete
provisions should the NASDI management stockholders leave NASDI. The
employment agreements are renewable on an annual basis, unless sooner
terminated by either party giving 30 days written notice prior to the end of
the then current term. The employment agreements will provide for payment of
salary of $175,000 per year to each of the NASDI management stockholders,
plus substantial incentive bonuses if certain earnings levels are achieved as
well as benefits as provided from time to time to other NASDI senior
executives.
STOCKHOLDERS AGREEMENT
We and the NASDI management stockholders will enter into a stockholders
agreement relating to the ownership of NASDI capital stock. The NASDI
stockholders agreement will contain provisions which, with certain
exceptions, restrict the ability of the NASDI management stockholders to
transfer their NASDI common stock, which will have no voting rights. In
addition, so long as we and the NASDI management stockholders continue to
own, in the aggregate, more than 50% of NASDI, the NASDI management
stockholders will have the right, during the two-month period following April
15, 2006, to require us to acquire their NASDI common stock at a price equal
to the greater of (i) $2.0 million or (ii) a formula based on NASDI's
financial performance. In addition, each NASDI management stockholder will
have the right to require us to purchase his NASDI common stock following a
termination of his employment, at a price based upon certain formulas,
depending upon the reason for the termination. Following an initial public
offering of our common stock, if we and the NASDI management stockholders
continue to own, in the aggregate, more than 50% of NASDI, the NASDI
management stockholders will have the right to exchange their NASDI
common stock for our common stock which is registered in the initial public
offering, at a conversion price based upon XXXXX's financial performance, unless
the initial public offering occurs prior to December 31, 2002, and then based
upon an appraised value.
We will have the right to acquire the NASDI common stock held by each NASDI
management stockholder in the following circumstances:
- termination of employment of such management stockholder;
- we experience certain types of changes of control;
- our initial public offering, where such management stockholder does not
convert his NASDI common stock into our registered shares; or
- for any reason after December 31, 2008.
The purchase price at which we can exercise these call rights will be a
formula based on NASDI's financial performance, an appraised value, or
$2.0 million, depending upon the timing and the event giving rise to the
call.
Under the NASDI stockholders agreement, if we decide to sell NASDI at a
price which would result in the NASDI management stockholders receiving an
aggregate amount of at least $2.0 million, then the NASDI management
stockholders will agree to consent to the sale and tender their NASDI common
stock for such consideration. In addition, the NASDI management stockholders
will have the right to participate in certain sales by us of our NASDI common
stock. The stockholders agreement provides that transactions between us and
NASDI, with certain exceptions, will be on fair and equitable terms. The board
of directors of the acquisition subsidiary and NASDI shall be composed of three
persons nominated by Great Lakes, and so long as the NASDI management
stockholders own at least 5% of the issued and outstanding NASDI capital stock,
the NASDI management stockholders shall designate one board member who shall be
acceptable to Great Lakes.
INTERCOMPANY DEBT
In connection with the closing of the Acquisition, NASDI and Great Lakes
will enter into an intercompany credit agreement. Upon closing of the
Acquisition, NASDI will be deemed to have borrowed from Great Lakes
approximately $32.0 million, which will reflect Acquisition-related
indebtedness. The intercompany note will bear interest at 10% per annum, with
principal and interest payable quarterly and will mature on March 31, 2006.
TAX ALLOCATION AGREEMENT
We will enter into a tax allocation agreement with NASDI. The agreement will
require, in general, that XXXXX's federal and certain state tax liabilities be
payable to us and determined as if NASDI filed its own returns.
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
of the Company consist of an Unaudited Pro Forma Condensed Combined Balance
Sheet as of December 31, 2000 and Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended December 31, 2000, and were
derived from Great Lakes' and NASDI's historical financial statements, as
adjusted to illustrate the effects of the Acquisition and the financing
related thereto.
The Unaudited Pro Forma Condensed Combined Balance Sheet as of December
31, 2000 gives effect to the Acquisition and the financing related thereto as
if such transactions had occurred on December 31, 2000. The Unaudited Pro
Forma Condensed Combined Statement of Operations for the year ended December
31, 2000 gives effect to the Acquisition and the financing related thereto as
if such transactions occurred on January 1, 2000. The unaudited pro forma
adjustments are based upon currently available information and upon certain
assumptions that we believe are reasonable under the circumstances.
Additionally, the unaudited pro forma adjustments assume a $40.0 million
financing. The Unaudited Pro Forma Condensed Combined Financial Statements do
not purport to represent what our actual results of operations, net income or
actual financial position would have been if the Acquisition in fact occurred
on such dates or to project our results of operations or financial position
for any future period or date. The Unaudited Pro Forma Condensed Combined
Financial Statements do not give effect to any other transactions other than
the Acquisition and those related transactions as discussed in the notes to
the Unaudited Pro Forma Condensed Combined Financial Statements set forth
below.
The Unaudited Condensed Combined Financial Statements and accompanying
notes should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
document, Great Lakes' Annual Report on Form 10-K for the year ended
December 31, 2000 that has been filed with the Securities and Exchange
Commission, the historical financial statements of NASDI and related notes
thereto included in this document, and other financial information included
elsewhere in this document.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
NASDI
ACQUISITION
COMPANY NASDI AND FINANCING
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ---------- -------- ----------- ---------
ASSETS
Cash and equivalents............... $ 1.1 $ 1.8 $ 2.9 $ (1.1)(a) $ 1.8
Marketable securities.............. 1.4 1.4 1.4
Accounts receivable, net........... 40.5 9.5 50.0 50.0
Contract revenues in excess of
xxxxxxxx......................... 18.6 1.8 20.4 20.4
Inventories........................ 14.7 14.7 14.7
Other current assets............... 17.2 0.6 17.8 17.8
------ ----- ------ ------ ------
Total current assets............. 92.1 15.1 107.2 (1.1) 106.1
Property and equipment............. 137.7 3.3 141.0 2.1 (b) 143.1
Inventories........................ 6.8 6.8 6.8
Investment in joint venture........ 6.4 6.4 6.4
Other assets and intangibles....... 5.7 0.1 5.8 30.4 (b) 38.5
2.3 (e)
------ ----- ------ ------ ------
Total assets................... $248.7 $18.5 $267.2 $ 33.7 $300.9
====== ===== ====== ====== ======
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable................... $ 37.8 $ 4.3 $ 42.1 $ 42.1
Accrued expenses and other......... 33.5 3.6 37.1 37.1
Current maturities of long-term
debt............................. 9.0 1.0 10.0 10.0
------ ----- ------ ------ ------
Total current liabilities.......... 80.3 8.9 89.2 89.2
Long-term debt..................... 146.0 0.6 146.6 41.1(f) 187.7
Deferred income taxes.............. 44.3 44.3 44.3
Other.............................. 7.0 7.0 7.0
------ ----- ------ ------ ------
Total liabilities................ 277.6 9.5 287.1 41.1 328.2
Minority interests................. 3.4 3.4 1.6 (c) 5.0
Stockholders' equity (deficit)..... (32.3) 9.0 (23.3) (9.0)(d) (32.3)
------ ----- ------ ------ ------
Total liabilities and
stockholders' equity
(deficit)...................... $248.7 $18.5 $267.2 $ 33.7 $300.9
====== ===== ====== ====== ======
------------------------
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
(a) To record distribution of excess cash to prior NASDI stockholders as
required under the purchase agreement for the Acquisition.
(b) Represents purchase accounting adjustments to reflect 80% of NASDI's
property and equipment at the estimated fair market value and to record
excess purchase price as goodwill, as follows:
Purchase price for 80% of NASDI stock:
Cash...................................................... $35.0
NASDI Seller Notes........................................ 3.0
Acquisition costs......................................... 0.8
-----
Total purchase price.................................... 38.8
80% of net assets acquired.................................. (6.3)
Increase property and equipment to estimated fair market
value....................................................... (2.1)
-----
Goodwill.................................................... $30.4
=====
(c) To record remaining 20% of NASDI net assets to minority interests.
(d) To reflect the net impact of pro forma adjustments on stockholders' equity:
Distribution of excess cash to NASDI stockholders........... $(1.1)
80% of net assets acquired.................................. (6.3)
Remaining 20% of NASDI net assets to minority interests..... (1.6)
-----
Total..................................................... $(9.0)
=====
(e) To record costs related to financing the Acquisition and amendment
costs of the bank credit facility.
(f) To record the impact of the Acquisition on debt, as follows:
Issuance of debt............................................ $40.0
Issuance of NASDI Seller Notes.............................. 3.0
Repayment of a portion of borrowings under the revolving
credit facility........................................... (1.9)
-----
Total..................................................... $41.1
=====
UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
NASDI
ACQUISITION
COMPANY NASDI AND FINANCING
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ---------- -------- ------------ ---------
Contract revenues......................... $339.1 $72.6 $411.7 $411.7
Costs of contract revenues................ 281.7 46.3 328.0 328.0
------ ----- ------ ------
Gross profit............................ 57.4 26.3 83.7 83.7
General and administrative expenses....... 22.3 1.8 24.1 2.0 (a) 26.1
Bonuses................................... 20.0 20.0 (17.8)(b) 2.2
------ ----- ------ ----- ------
Operating income........................ 35.1 4.5 39.6 15.8 55.4
Interest income (expense), net............ (18.6) 0.4 (18.2) (5.0)(c) (23.2)
Other expense............................. (0.8) (0.8) (0.8)
------ ----- ------ ----- ------
Income before income taxes and minority
interests............................. 15.7 4.9 20.6 10.8 31.4
Income taxes.............................. (7.4) (0.3) (7.7) (7.0)(d) (14.7)
Minority interests........................ (1.0) (1.0) (1.8)(e) (2.8)
------ ----- ------ ----- ------
Net income................................ $ 7.3 $ 4.6 $ 11.9 $ 2.0 $ 13.9
====== ===== ====== ===== ======
Ratio of earnings to fixed charges (f).... 1.55x
Other data:
Depreciation and amortization........... $ 12.7 $ 1.4 $ 14.1 $ 2.0 (a) $ 16.1
EBITDA (g).............................. 47.8 5.9 53.7 17.8 (b) 71.5
------------------------
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
(a) To record annual amortization of goodwill of $30.4 million related to the
NASDI acquisition, assuming an estimated useful life of fifteen years.
(b) To adjust NASDI historical bonuses to reflect bonuses that would have been
paid based on NASDI performance for the period assuming the contractual
terms of Employment Agreements with NASDI management stockholders were in
effect. The Employment Agreements will be entered into as part of the
purchase agreement for the Acquisition.
(c) To record interest expense on the debt raised in connection with the
Acquisition, interest expense on the Seller Notes, a reduction of interest
expense from the repayment of a portion of borrowings under the revolving
loan facility and amortization of the deferred financing costs and bank
credit facility amendment costs:
Interest expense on $40.0 million of debt................... $ 4.5
Interest expense on Seller Notes of $3.0 million at 6.0%.... 0.2
Reduction of interest expense on $1.9 million reduction of
revolving loan facility at 8.57% average interest rate
over the year............................................. (0.1)
Amortization of deferred offering and amendment costs....... 0.4
-----
Total..................................................... $ 5.0
=====
(d) To record estimated tax effect to change NASDI from Subchapter S-Corporation
to C-Corporation and certain other pro forma adjustments:
Estimate of U.S. federal income tax on NASDI income before
taxes of $4.9 million at 35%.............................. $ 1.7
Pro forma adjustments at estimated effective rate of 41%.... 5.3
-----
Total..................................................... $ 7.0
=====
(e) To record 20% of NASDI pro forma income attributable to minority interest
holders.
(f) Earnings used in computing the ratio of earnings to fixed charges consists
of earnings before income taxes and minority interests. Fixed charges are
defined as interest expense, including the amortization of deferred
financing costs, and preferred stock dividends.
(g) "EBITDA", as provided for herein, represents earnings from continuing
operations before interest expense, net, income taxes and depreciation and
amortization expense and excludes equity in 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. EBITDA is included as it is a basis upon which we
assess our financial performance, and certain covenants in our borrowing
arrangements are tied to similar measures. Pro forma EBITDA, as provided for
herein, reflects EBITDA adjusted for effect of the Acquisition and the
financing related thereto as if such transactions took place on January 1,
2000. Pro forma EBITDA is presented to provide additional information with
respect to our ability to meet future debt service, capital expenditures and
working capital requirements, but is not necessarily a measure of our
ability to fund our cash flow needs. Pro forma EBITDA should not be
considered in isolation or as an alternative to net income, cash flows from
continuing operations, or other consolidated income or cash flow data
prepared in accordance with generally accepted accounting principles as
measures of our profitability or liquidity. Pro forma EBITDA as defined
herein may differ from similarly titled measures presented by other
companies.
SELECTED FINANCIAL DATA
The following tables present selected historical financial and other data
of Great Lakes and NASDI for the periods indicated. The selected financial
data presented below (except for EBITDA and Adjusted EBITDA) were derived
from the audited consolidated financial statements of Great Lakes and audited
financial statements of NASDI for the periods indicated. The following
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this document, Great Lakes' Annual Report on Form 10-K for the
year ended December 31, 2000 that has been filed with the Securities and
Exchange Commission, and XXXXX's financial statements and the related notes
thereto included elsewhere in this document.
GREAT LAKES DREDGE & DOCK CORPORATION
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Contract revenues................................. $235.9 $258.3 $289.2 $302.3 $339.1
Costs of contract revenues........................ (208.7) (228.4) (240.6) (244.8) (281.7)
------ ------ ------ ------ ------
Gross profit.................................... 27.2 29.9 48.6 57.5 57.4
General and administrative expenses............... (16.4) (18.9) (22.6) (21.9) (22.3)
Equity incentive plan and other compensation
expenses........................................ -- -- (8.2) -- --
Recapitalization related expenses................. -- -- (9.5) -- --
------ ------ ------ ------ ------
Operating income................................ 10.8 11.0 8.3 35.6 35.1
Interest expense, net............................. (6.0) (6.0) (9.9) (18.1) (18.6)
Equity (loss) in earnings of joint ventures....... 1.1 3.1 1.2 0.2 (0.8)
------ ------ ------ ------ ------
Income (loss) before income taxes, minority
interests, discontinued operations and
extraordinary item............................ 5.9 8.1 (0.4) 17.7 15.7
Provision for income taxes........................ (2.4) (2.6) (0.7) (8.5) (7.4)
Minority interests................................ (0.4) (1.7) (2.7) 0.5 (1.0)
------ ------ ------ ------ ------
Income (loss) from continuing operations before
extraordinary item............................ 3.1 3.8 (3.8) 9.7 7.3
Discontinued operations, net of tax benefit....... (1.1) -- -- -- --
Extraordinary item, net of income tax benefit..... -- -- (0.9) -- --
------ ------ ------ ------ ------
Net income (loss)............................... $ 2.0 $ 3.8 $ (4.7) $ 9.7 $ 7.3
====== ====== ====== ====== ======
Ratio of earnings to fixed charges.................. 1.9x 2.0x 0.6x 1.4x 1.1x
OTHER DATA:
EBITDA(1)......................................... $ 24.7 $ 24.6 $ 22.2 $ 47.6 $ 47.8
Adjusted EBITDA(1)................................ 26.2 28.8 41.1 -- --
Net cash flows from operating activities.......... 24.7 13.6 20.2 25.3 17.5
Depreciation and amortization(2).................. 13.9 13.6 13.9 12.0 12.7
Maintenance expense(3)............................ 14.7 17.3 22.7 27.2 25.9
Capital expenditures(4)........................... 5.4 11.5 29.1 15.0 14.1
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1.9 $ 1.7 $ 0.8 $ 1.5 $ 1.1
Working capital................................... 22.0 38.4 22.3 13.2 11.8
Total assets...................................... 222.1 245.6 235.1 241.4 248.7
Total debt(5)..................................... 52.4 57.6 170.4 159.2 155.0
Stockholders' equity (deficit).................... 74.4 78.2 (48.7) (39.6) (32.3)
NORTH AMERICAN SITE DEVELOPERS, INC.
YEARS ENDED DECEMBER 31,
------------------------------
1998(6) 1999 2000
-------- -------- --------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Contract revenues......................................... $30.3 $45.5 $72.6
Costs of contract revenues................................ (24.5) (34.3) (46.3)
----- ----- -----
Gross profit............................................ 5.8 11.2 26.3
General and administrative expenses....................... (1.6) (1.5) (1.8)
Bonuses................................................... (4.6) (7.6) (20.0)
----- ----- -----
Income (loss) from operations........................... (0.4) 2.1 4.5
Other income, net......................................... 0.1 -- 0.4
----- ----- -----
Income (loss) before income taxes....................... (0.3) 2.1 4.9
State income taxes........................................ -- (0.2) (0.3)
----- ----- -----
Net income (loss)....................................... $(0.3) $ 1.9 $ 4.6
===== ===== =====
OTHER DATA:
Adjusted EBITDA(1)........................................ $ 5.0 $10.1 $23.3
Net cash flow from operating activities................... (1.0) 4.9 4.2
Depreciation and amortization............................. 1.3 1.4 1.4
Capital expenditures...................................... 0.9 0.9 1.0
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 0.7 $ 1.2 $ 1.8
Working capital........................................... 3.8 4.7 6.2
Total assets.............................................. 14.5 19.9 18.5
Total debt(5)............................................. 1.9 2.1 1.6
Stockholders' equity...................................... 4.2 6.1 9.0
------------------------
(1) "EBITDA", as provided for herein, represents earnings from continuing
operations before net interest expense, income taxes and depreciation and
amortization expense and excludes equity in 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. EBITDA is included as it is a basis upon which we
assess our financial performance, and certain covenants in our borrowing
arrangements are tied to similar measures. "Adjusted EBITDA" excludes the
effects of certain items on our historical EBITDA that are not expected to
recur in our ongoing activities. Adjusted EBITDA is presented to provide
additional information with respect to our ability to meet future debt
service, capital expenditures and working capital requirements, but is not
necessarily a measure of our ability to fund our cash needs. EBITDA and
Adjusted EBITDA should not be considered in isolation or as an alternative
to net income, cash flows from continuing operations, or other consolidated
income or cash flow data prepared in accordance with generally accepted
accounting principles as measures of our profitability or liquidity. EBITDA
and Adjusted EBITDA as defined herein may differ from similarly titled
measures presented by other companies.
The components of EBITDA and Adjusted EBITDA are set forth below for the
periods indicated.
YEAR END DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
GREAT LAKES DREDGE & DOCK CORPORATION
Operating income......................................... $10.8 $11.0 $ 8.3 $35.6 $35.1
Depreciation and amortization............................ 13.9 13.6 13.9 12.0 12.7
----- ----- ----- ----- -----
EBITDA................................................... 24.7 24.6 22.2 47.6 47.8
Management fees paid to former stockholder(a)............ 0.5 0.5 0.3
Legal and other expenses related to the Chicago flood
litigation(b).......................................... 0.6 1.8
Disposed operations(c)................................... 1.5 1.9 0.9
Other corporate charges(d)............................... (1.1)
Equity incentive plan and other compensation
expenses(e)............................................ 8.2
Recapitalization related expenses(f)..................... 9.5
----- ----- ----- ----- -----
Adjusted EBITDA.......................................... $26.2 $28.8 $41.1 $47.6 $47.8
===== ===== ===== ===== =====
YEAR END DECEMBER 31,
------------------------------
1998(6) 1999 2000
-------- -------- --------
(DOLLARS IN MILLIONS)
NORTH AMERICAN SITE DEVELOPERS, INC.
Operating income (loss)..................................... $(0.4) $ 2.1 $ 4.5
Depreciation and amortization............................... 1.3 1.4 1.4
----- ----- -----
EBITDA...................................................... 0.9 3.5 5.9
Bonuses(g).................................................. 4.1 6.6 17.4
----- ----- -----
Adjusted EBITDA............................................. $ 5.0 $10.1 $23.3
===== ===== =====
------------------------
(a) MANAGEMENT FEES PAID TO FORMER STOCKHOLDER. During the periods
presented, we paid a management fee to a former stockholder. In 1998, we
effected a recapitalization of the Company and have not paid such a fee
as of that date.
(b) LEGAL AND OTHER EXPENSES RELATED TO THE CHICAGO FLOOD LITIGATION. In
1992, an underwater utility tunnel located beneath the Chicago Loop
failed adjacent to a construction site completed by us in the fall of
1991. The failure resulted in a flooding of the tunnel and building
basements served by the tunnel. Numerous suits were filed against us for
claims of flood damage and losses due to business interruption. We
incurred substantial legal expenses along with other expenses as a result
of the Chicago flood litigation. During 1997, all remaining claims were
settled relating to the Chicago flood litigation.
(c) DISPOSED OPERATIONS. In 1996, we sold a marine construction business.
The adjustments reflect the elimination of the impact on EBITDA
attributable to the disposal of this business.
(d) OTHER CORPORATE CHARGES. In 1996, we offered a voluntary early
retirement program and incurred a charge of $0.6 million relating
thereto. Additionally, in that year we terminated our defined benefit
pension plan and recognized a net gain of $1.7 million.
(e) EQUITY INCENTIVE PLAN AND OTHER COMPENSATION EXPENSES. In 1998, options
granted in a prior year were exercised. A portion of these shares was
then sold to Vectura in connection with a recapitalization resulting in
$5.2 million in non-cash compensation expense. Additionally, we approved
and paid bonuses of $3.0 million to certain members of our management.
(f) RECAPITALIZATION RELATED EXPENSES. In 1998, pursuant to the terms of an
agreement for recapitalization, we paid fees and expenses of
$3.6 million and bonuses to certain members of management of
$5.9 million.
(g) BONUSES. In 1998, 1999 and 2000, XXXXX paid discretionary bonuses to
all stockholders, including bonuses to management stockholders in
excess of amounts required under their employment agreements then in
effect. We do not intend to pay such discretionary bonuses subsequent
to the purchase of NASDI.
(2) Effective January 1, 1999, we made changes in the estimated useful lives of
certain dredging equipment to better reflect the remaining period over which
we anticipate utilizing this equipment with normal repairs and maintenance.
Thus, depreciation for 1999 and 2000 is approximately $2.9 million less than
it would have been using the previous lives.
(3) Represents amount expended for maintenance included in costs of contract
revenues.
(4) Capital expenditures in 1998 included $19.3 million for certain dredging
assets acquired from a competitor and construction related to a new backhoe
dredge. We subsequently financed these acquisitions through sale-leaseback
arrangements.
(5) Total debt includes long-term debt and the current maturities of long-term
debt and excludes contingent obligations.
(6) Amounts presented for 1998 are for the eleven-months ended December 31,
1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS
DOCUMENT, PARTICULARLY IN "RISK FACTORS." SEE "RISK FACTORS." THE FOLLOWING
DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH GREAT LAKES'
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 THAT HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND THE HISTORICAL
FINANCIAL STATEMENTS OF NASDI AND RELATED NOTES THERETO WHICH APPEAR
ELSEWHERE IN THIS DOCUMENT.
GREAT LAKES DREDGE & DOCK CORPORATION
GENERAL
We are 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, and we have experienced a
combined bid market share in the U.S. of 37% in 2000 in these areas. In
addition, we have continued our role as the only U.S. dredging contractor with
significant international operations, which represented an average of 17% of our
contract revenues over the past three years.
Most dredging contracts are obtained through competitive bidding on terms
specified by the party inviting the bid. The nature of the specified services
dictates the types of equipment, material and labor involved, all of which
affect the cost of performing the contract and the price that dredging
contractors will bid.
We recognize contract revenues under the percentage-of-completion method,
based on our engineering estimates of the physical percentage completed of each
project. Costs of contract revenues are adjusted to reflect the gross profit
percentage expected to be achieved upon ultimate completion of each project.
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. Billings on
contracts are generally submitted after verification with the customers of
physical quantities completed 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 xxxxxxxx
or xxxxxxxx in excess of contract revenues. 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 generally is hired on a per 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 lowest costs of contract revenues as a
percent of contract revenues and beach nourishment projects have the highest.
Our cost structure includes significant fixed costs, averaging approximately
20% to 22% of total costs of contract revenues. We can have significant
fluctuations in equipment utilization throughout the year. Accordingly, for
interim reporting, we prepay or accrue fixed equipment costs and amortize the
expenses in proportion to revenues recognized over the year to better match
revenues and expenses. Costs of contract revenues also includes the net gain or
loss on dispositions of property and equipment.
We conduct certain xxxxxx dredging activities, primarily maintenance and
beach nourishment projects through the operation of NATCO Limited Partnership
("NATCO") and North American Trailing Company. Minority interests reflect
Ballast Nedam Group N.V.'s respective 25% and 20% interest in NATCO and North
American.
RESULTS OF OPERATIONS--QUARTERLY BASIS
The following table sets forth the components of net income and EBITDA
(as defined) on a quarterly basis for the years ended December 31, 1999 and
2000.
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
1999
Contract revenues.......................................... $ 72.3 $ 78.0 $ 76.0 $ 76.0
Costs of contract revenues................................. (59.1) (63.9) (60.7) (61.1)
------ ------ ------ ------
Gross profit............................................. 13.2 14.1 15.3 14.9
General and administrative expenses........................ (4.9) (4.8) (5.2) (7.0)
------ ------ ------ ------
Operating income......................................... 8.3 9.3 10.1 7.9
Interest expense, net...................................... (4.4) (4.6) (4.6) (4.5)
Equity in (loss) earnings of joint ventures................ (0.3) -- 0.1 0.4
------ ------ ------ ------
Income before income taxes and minority interests........ 3.6 4.7 5.6 3.8
Provision for income taxes................................. (1.6) (2.5) (2.4) (2.0)
Minority interests......................................... 0.2 0.4 (0.4) 0.3
------ ------ ------ ------
Net income............................................... $ 2.2 $ 2.6 $ 2.8 $ 2.1
====== ====== ====== ======
EBITDA................................................... $ 11.2 $ 12.2 $ 13.0 $ 11.2
====== ====== ====== ======
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
2000
Contract revenues.......................................... $ 88.9 $ 85.5 $ 81.1 $ 83.6
Costs of contract revenues................................. (72.9) (73.4) (70.1) (65.3)
------ ------ ------ ------
Gross profit............................................. 16.0 12.1 11.0 18.3
General and administrative expenses........................ (5.3) (5.2) (5.2) (6.5)
------ ------ ------ ------
Operating income......................................... 10.7 6.9 5.8 11.8
Interest expense, net...................................... (4.5) (4.7) (4.9) (4.6)
Equity in (loss) earnings of joint ventures................ (0.2) -- 0.1 (0.7)
------ ------ ------ ------
Income before income taxes and minority interests........ 6.0 2.2 1.0 6.5
Provision for income taxes................................. (2.7) (1.0) (0.6) (3.1)
Minority interests......................................... (0.7) -- 0.5 (0.8)
------ ------ ------ ------
Net income............................................... $ 2.6 $ 1.2 $ 0.9 $ 2.6
====== ====== ====== ======
EBITDA................................................... $ 13.7 $ 10.1 $ 9.1 $ 14.9
====== ====== ====== ======
RESULTS OF OPERATIONS--FISCAL YEARS
The following table sets forth the components of net income and EBITDA
(as defined) as a percentage of contract revenues for the years ended
December 31:
1998 1999 2000
-------- -------- --------
Contract revenues........................................... 100.0% 100.0% 100.0%
Costs of contract revenues.................................. (83.2) (81.0) (83.1)
------ ------ ------
Gross profit.............................................. 16.8 19.0 16.9
General and administrative expense.......................... (7.8) (7.2) (6.6)
Equity incentive plan and other compensation expenses....... (2.8) -- --
Recapitalization related expenses........................... (3.3) -- --
------ ------ ------
Operating income.......................................... 2.9 11.8 10.3
Interest expense, net....................................... (3.4) (6.0) (5.5)
Equity in (loss) earnings of joint ventures................. 0.4 -- (0.2)
------ ------ ------
Income (loss) before income taxes, minority interests, and
extraordinary item...................................... (0.1) 5.8 4.6
Provision for income taxes.................................. (0.2) (2.8) (2.2)
Minority interests.......................................... (1.0) 0.2 (0.3)
------ ------ ------
Income (loss) from continuing operations before
extraordinary item...................................... (1.3) 3.2 2.1
Extraordinary item, net of applicable income tax benefit.... (0.3) -- --
------ ------ ------
Net income (loss)......................................... (1.6)% 3.2% 2.1%
====== ====== ======
EBITDA (as defined)......................................... 7.7% 15.7% 14.1%
====== ====== ======
Adjusted EBITDA(1).......................................... 13.8% 15.7% 14.1%
====== ====== ======
------------------------
(1) EBITDA for 1998 has been adjusted for equity incentive plan and other
compensation expenses and recapitalization related expenses.
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:
1998 1999 2000
-------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Capital--U.S................................................ $ 88.6 $152.9 $161.3
Beach nourishment........................................... 81.0 40.5 33.2
Maintenance................................................. 62.0 78.2 72.8
Capital--foreign............................................ 57.6 30.7 71.8
------ ------ ------
$289.2 $302.3 $339.1
====== ====== ======
BACKLOG
Capital--U.S................................................ $149.0 $136.1 $100.2
Beach nourishment........................................... 19.3 8.3 31.1
Maintenance................................................. 33.0 22.6 4.4
Capital--foreign............................................ 33.9 100.1 62.6
------ ------ ------
$235.2 $267.1 $198.3
====== ====== ======
The Company's overall growth in 2000 revenues is the result of increased
U.S. and foreign capital work, relating to the Deep Port projects and specific
international projects in Ghana and India.
Domestic capital dredging project revenues increased $8.4 million or 5.5% in
2000, when compared to 1999 revenues. Capital projects include large port
deepenings and other infrastructure projects. Due to the significant volume of
capital projects announced and bid in 1999 and 2000, the Company has allocated
more of its resources to these higher margin projects.
In 2000, contract revenues from capital projects included $19.5 million
generated from a large project in Los Angeles, which began work in 1997, and
$26.9 million for the Houston Deep Port project, which was awarded in 1998. Jobs
awarded in 1999 related to Deep Port work in San Xxxx, Charleston, and New York
generated 2000 contract revenues of $18.8 million, $16.4 million, and
$10.7 million, respectively. Additionally, two Deep Port projects in Wilmington,
which were awarded in the third quarter of 2000, contributed $11.8 million to
2000 contract revenues.
Beach nourishment projects include rebuilding of shoreline areas which have
been damaged by storm activity or ongoing erosion. In 2000, revenues from beach
projects decreased $7.3 million or 18.0%, compared to 1999. This decrease
continued to be primarily a result of the deferral of some key projects by
customers, so that fewer projects were let for bid than in prior years. Despite
the overall decline, the bid market for beach work improved dramatically in the
third and fourth quarters of 2000 when $70 million of new projects were bid. The
Company expects to see additional growth in beach nourishment projects over the
next few years due to growing awareness of the importance of the tourism revenue
to the local economies. Several projects contributed to 2000's beach revenues,
including beach nourishment projects in Brevard, Florida; Tybee Island, Georgia;
and Egg Harbor/Xxxx Beach, New Jersey, which contributed revenues of
$11.4 million, $6.5 million, and $7.3 million, respectively.
Maintenance projects include routine dredging of ports, rivers and channels
to remove the regular build up of sediment. Revenues from maintenance projects
for the year ended December 31, 2000 decreased $5.4 million or 6.9%, over 1999.
The 2000 maintenance market saw a decline over prior years due to lower than
typical precipitation levels in the Midwest, which affects the Mississippi River
schoaling and dredging from St. Louis south to the Gulf. Significant maintenance
revenues in 2000 were related to projects in Xxxxxxxx/Wilmington, North
Carolina; South Pass, Louisiana; and Mississippi/Memphis river rentals, which
generated revenues of $6.9 million, $10.0 million, and $11.6 million,
respectively.
Revenues of the Company's NATCO xxxxxx dredging subsidiary for 2000
approximated 1999 levels; however, margins improved by $1.0 million, or 9.5% due
to receipt of claim revenue on the Long Beach project, which was substantially
performed in 1999 and 2000. This project had experienced performance problems in
its early stages since NATCO encountered more compacted material than was
included in the specifications provided by the Corps. The Company expects
NATCO's utilization in 2001 to be comparable to levels experienced in 2000.
However, the xxxxxx market is expected to continue to be highly competitive,
with pricing being impacted by increased restrictions imposed by environmental
windows coupled with the decline in emergency dredging opportunities on the
Mississippi.
Revenues from foreign operations in 2000 increased $41.1 million or 133.8%
compared to 1999. Key foreign projects which contributed to 2000 revenues
included the Company's joint venture project in Egypt, which began in the first
quarter of 1999 and was completed in mid-2000, a project in Dabhol, India which
began in the third quarter of 1999 and will continue into 2001, and a long-term
project in Ghana, West Africa which began in the first quarter of 2000 and is
expected to be completed in 2003. These projects contributed revenue of
$10.2 million, $22.7 million, and $29.0 million, respectively, during 2000.
BACKLOG
Our 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
our backlog relates to government contracts, our backlog can be canceled at any
time without penalty, except, in some cases, the recovery of our actual
committed costs and profit on work performed up to the date of cancellation.
Consequently, backlog is not necessarily indicative of future results. Our
backlog includes only those projects for which the customer has provided an
executed contract.
Backlog at December 31, 2000 of $198.3 million, while still strong from a
historical perspective, declined 25.8% from our record year-end backlog level of
$267.1 million at December 31, 1999. This decline in backlog reflects the
overall dynamics of the 2000 bid market, which was characterized by an uneven
flow of bidding opportunities. During the first, second and fourth quarters of
fiscal 2000, the dredging industry experienced intensely competitive bidding due
to a reduced number of projects bid. As a result, several projects let for bid
during these quarters were won by our competitors at prices that were lower than
we considered acceptable. During the third quarter, the number of projects let
for bid comprised more than 50% of the total bids for 2000. We won 62% of this
work at more favorable pricing.
The largest portion of our backlog continues to be capital work. The Deep
Port and foreign markets have continued to provide numerous and attractive
project opportunities, which is expected to continue into 2001, as a result of
updates to the WRDA legislation approving and authorizing additional Deep Port
work and the expected commencement of certain significant foreign projects,
particularly in the Middle East. At December 31, 2000, the Company had been low
bidder on additional work valued at $32.5 million which was still pending award,
and therefore excluded from backlog.
Additional significant revenues in backlog at December 31, 2000 relate to
two capital projects in Wilmington for $54.0 million, and capital projects in
San Xxxx, Puerto Rico for $13.9 million, in Baltimore for $16.0 million, and in
Ghana for $52.6 million. The increase in backlog from beach nourishment work
reflects revenues from bids won in the third and fourth quarters of 2000,
including projects in Sunny Isles, Florida for $14.4 million, Brevard, Florida
for $7.1 million and Xxxxxxx Air Force Base, Florida for $4.0 million.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
CONTRACT REVENUES. Contract revenues increased $36.8 million or 12.2% from
$302.3 million in 1999 to $339.1 million in 2000. The increase in 2000 is due
primarily to a higher level of foreign project activity in 2000, which offset
slight declines in revenues from beach nourishment and maintenance projects.
COSTS OF CONTRACT REVENUES. Costs of contract revenues increased
$36.9 million or 15.1%, from $244.8 million in 1999 to $281.7 million in 2000.
Costs of contract revenues as a percentage of contract revenues was 83.1% in
2000 and 81.0% in 1999. The increase in costs of contract revenues as a
percentage of revenues in 2000 was attributable to a higher mix of lower margin
foreign projects, as well as certain domestic projects which operated below
margin levels experienced in recent years due to competitive pricing pressures
experienced in the first half of the year.
GROSS PROFIT. Gross profit remained level at $57.4 million and
$57.5 million in 2000 and 1999, respectively, due to the impact of the increase
in foreign work and certain capital projects on costs of contract revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $22.3 million and $21.9 million in 2000 and 1999, respectively. As a
percent of sales, general and administrative expenses remained relatively
consistent as 6.6% of sales in 2000 compared to 7.2% in 1999.
OPERATING INCOME. Operating income was $35.1 million in 2000, compared to
$35.6 million in 1999. Operating income declined as a percent of revenues, due
to the reasons stated above.
EBITDA. EBITDA increased only $0.2 million, to $47.8 million for the year
ended December 31, 2000 from $47.6 million for the year ended December 31, 1999.
Although revenues increased 12.2% in 2000, EBITDA as a percentage of revenue
declined due to the higher mix of lower margin foreign work, as well as the
impact of certain domestic projects, which operated below margin levels
experienced in recent years due to competitive pricing pressures encountered in
the first half of the year.
INTEREST EXPENSE, NET. Net interest expense increased $0.5 million or 3.1%,
from $18.1 million in 1999 to $18.6 million in 2000. The increase was due to a
combination of higher working capital investment on the foreign projects and an
increase in the borrowing rates on variable rate debt.
EQUITY IN (LOSS) EARNINGS OF JOINT VENTURES. Equity in (losses) earnings of
joint ventures declined $1.0 million from earnings of $0.2 million in 1999 to a
loss $0.8 million in 2000. In 2000, Xxxxx recorded additional costs related to
its efforts to obtain new permits and incurred expenses resulting from an
unfavorable outcome on certain litigation.
INCOME TAX EXPENSE. Income taxes decreased $1.1 million, to $7.4 million in
2000 from $8.5 million in 1999. The decrease was a result of decreased taxable
earnings in 2000.
MINORITY INTERESTS. Income attributable to minority interests increased the
Company's allocation to minority interests to $1.0 million in 2000 from a credit
from minority interests of $0.5 million in 1999. The 2000 expense was due to
higher earnings from the NATCO xxxxxx dredging operations in 2000 compared to
losses incurred in 1999.
NET INCOME. Net income decreased $2.4 million, to $7.3 million in 2000 from
$9.7 million in 1999. The 2000 net income reflects the lower margins on the
increased foreign work as well as the reduced margins obtained on certain
domestic projects which were bid at lower margins due to the competitive bid
market in 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
CONTRACT REVENUES. Contract revenues increased $13.1 million or 4.5% from
$289.2 million in 1998 to $302.3 million in 1999. The increase in 1999 is due
primarily to the increased volume of higher margin capital dredging projects
which offset a decline in revenues from beach nourishment and foreign projects.
COSTS OF CONTRACT REVENUES. Costs of contract revenues increased
$4.2 million or 1.8%, from $240.6 million in 1998 to $244.8 million in 1999.
Costs of contract revenues as a percentage of contract revenues was 81.0% in
1999 and 83.2% in 1998. The improvement in costs of contract revenues as a
percentage of revenues in 1999 is primarily attributable to the project mix.
Throughout 1999, there were more higher margin capital dredging projects and
fewer lower margin beach nourishment and foreign projects.
GROSS PROFIT. Gross profit increased $8.8 million or 18.2%, from
$48.6 million in 1998 to $57.5 million in 1999. The improvement in 1999 was
attributable to the increased volume of higher margin capital dredging work.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
remained relatively consistent as 7.2% of sales in 1999 compared to 7.8% in
1998.
OPERATING INCOME. Operating income was $35.6 million in 1999, an increase
of $9.6 million compared to 1998 (excluding nonrecurring recapitalization and
equity incentive plan and other compensation expenses totaling $17.7 million
related to the recapitalization of the Company in August 1998). The 1999
increase in operating income was primarily a result of the increased volume of
higher margin capital dredging work.
EBITDA. EBITDA increased $7.7 million or 19.2%, to $47.6 million for the
year ended December 31, 1999 from $39.9 million (excluding recapitalization and
equity incentive plan and other compensation expenses) for the year ended
December 31, 1998. The increase was due to the increased volume of higher margin
work in 1999.
INTEREST EXPENSE, NET. Net interest expense increased $8.2 million or
83.5%, from $9.9 million in 1998 to $18.1 million in 1999. The increase was
related to interest on the additional debt incurred in connection with the
Company's recapitalization effected in August 1998.
EQUITY IN EARNINGS OF JOINT VENTURES. Equity in earnings of joint ventures
declined $1.0 million or 85.0%, from $1.2 million in 1998 to $0.2 million in
1999. The decrease was due to the continued reduction in demand for Amboy
Aggregate's products, combined with commencement of the maintenance phase of the
Riovia S.A. project. The maintenance phase is anticipated to have lower revenues
and margins than the capital phase, which was substantially complete at the end
of 1998. Further, at October 1, 1999, we began accounting for our investment in
Riovia S.A. using the cost method. Equity earnings for Riovia S.A. in 1999 were
insignificant.
INCOME TAX EXPENSE. Income taxes increased $7.8 million, to $8.5 million in
1999 from $0.7 million in 1998. The increase is a result of taxable earnings in
1999 of approximately $17.7 million compared to a loss in 1998 of $0.4 million
which resulted from the inclusion of significant nonrecurring expenses related
to our recapitalization.
MINORITY INTERESTS. Income attributable to minority interests declined to a
loss of $0.5 million in 1999 from income of $2.7 million in 1998. The decrease
was due to lower earnings from the NATCO xxxxxx dredging operations in 1999
compared to 1998.
NET INCOME (LOSS). Net income increased $14.4 million, to $9.7 million in
1999 from a loss of $4.7 million in 1998. The 1999 net income reflects the
improved operating earnings resulting from the favorable project mix, while the
1998 losses reflect the additional nonrecurring expenses related to our
recapitalization in 1998.
SEASONALITY
Prior to the last three years, we have 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.
We have seen the trend of this historical seasonality diminish over the past
three years, with the increase in Deep Port work and the impact of environmental
windows, which require that certain work be performed in winter months to
protect wildlife habitats. We have been able to respond to these changing market
factors since we have the flexibility to move our 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 we may
not be able to be as flexible in utilizing our equipment.
INFLATION
We do not believe that inflation has had a material impact on our operations
in the years ended December 31, 2000, 1999 and 1998.
NORTH AMERICAN SITE DEVELOPERS, INC.
GENERAL
NASDI, founded in 1976, is one of the three largest providers of
commercial and industrial demolition services in the United States according
to the ENGINEERING NEWS RECORD (based on 1999 revenues). Nationally, the
demolition and related services industry is comprised mostly of small,
regional companies. 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 has established a network of local
contacts with developers and prime contractors that act as referral sources
and frequently enable NASDI to procure jobs on a sole-source basis. XXXXX
maintains a strong reputation and is one of the few firms with the capability
to execute large projects. For these reasons, if it is not the lowest bidder
on a contract, NASDI may still be awarded a project based on its
qualifications.
XXXXX'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. NASDI owns and maintains a multitude of specialized demolition
and material handling equipment to enable it to perform a comprehensive array
of services. Other business activities include site development and asbestos
and other hazardous material removal. NASDI contracts hazardous material
removal to insured subcontractors and does not take possession of hazardous
materials, which remain the property of the site owner.
CONTRACT REVENUES
Contract revenues will typically include some or all of the following
activities: demolition, asbestos or other hazardous substance and material
removal and site development. Due to their complexity and requirement for
specialized equipment and services, larger CID projects typically generate
higher contract margins. A majority of NASDI's projects are negotiated as
fixed price contracts whereby NASDI provides a contract estimate to a
potential customer for the total cost of the project. Other contracts are
obtained through the competitive bidding process on terms specified by the
party inviting the bid. In all cases, 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 charged by XXXXX.
Additionally, NASDI generates a significant amount of revenue from change
orders, particularly on larger projects, which are negotiated with the
customer. These change orders are typically executed after the project has
commenced and often command higher margins than the underlying base contract.
NASDI may also receive incentive payments such as bonuses for early
completion of a project.
Contract revenues are generally recognized on a percentage of completion
basis. Contracts generally provide for monthly invoicing, retainage ranging from
5% to 10% of the invoiced amount and 30 day payment terms. Additionally, certain
larger projects may include terms for an advanced payment from the customer.
Provisions for contract losses are made in the periods in which such losses are
determined; however, claims for additional compensation due NASDI are not
recognized in contract revenues until such claims are settled.
COSTS OF CONTRACT REVENUES
The largest component of NASDI's costs of contract revenues is its payments
to subcontractors, which NASDI makes on a percentage of completion method.
NASDI's costs of contract revenues also include depreciation and amortization
related to demolition equipment, direct labor (salaries and wages to hourly
workers), material, cost of rental equipment used, other direct costs and
allocated overhead. The hourly labor generally is hired on a project basis and
is laid-off upon the completion of the contract. Costs of contract revenues vary
significantly depending on the type and location of work performed and assets
utilized.
GENERAL AND ADMINISTRATIVE EXPENSES
NASDI's general and administrative costs include back office and
administrative expenses such as payroll, human resources, accounting,
information technology and marketing.
BONUSES
Bonuses primarily represent amounts paid to NASDI stockholders. In addition
to amounts paid to management stockholders pursuant to their existing employment
agreements, discretionary bonuses were paid to all NASDI stockholders based on
the results of operations.
OTHER INCOME, NET
Other income consists of dividend and interest income generated by NASDI's
investments in marketable securities, net of interest expense related to NASDI's
equipment financing arrangements and other borrowing facilities.
ADJUSTED EBITDA
Adjusted EBITDA is defined as operating income (loss) plus depreciation
and amortization plus bonuses paid to management and investor stockholders
which were in excess of amounts required under their employment agreements then
in effect.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
information relating to XXXXX's historical operations expressed as percentages
of contract revenues for the period:
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
-------- -------- --------
Contract revenues........................................... 100.0 % 100.0 % 100.0 %
Costs of contract revenues.................................. (80.9) (75.4) (63.8)
----- ----- -----
Gross profit................................................ 19.1 24.6 36.2
General and administrative expenses......................... (5.0) (3.3) (2.5)
Bonuses..................................................... (15.4) (16.7) (27.5)
----- ----- -----
Operating income (loss)..................................... (1.3) 4.6 6.2
Other income, net........................................... 0.3 -- 0.6
Provision for state taxes................................... -- (0.4) (0.4)
----- ----- -----
Net income (loss)........................................... (1.0)% 4.2 % 6.4 %
===== ===== =====
Adjusted EBITDA(1).......................................... 16.5 % 22.2 % 32.1 %
------------------------
(1) Adjusted EBITDA in 1998, 1999 and 2000 reflects EBITDA (as defined)
adjusted for discretionary bonuses paid to all stockholders, including
bonuses to management stockholders in excess of amounts required under
their employment agreements then in effect. We do not intend to pay such
discretionary bonuses subsequent to the purchase of NASDI.
BACKLOG
XXXXX's backlog represents management's estimate of the revenues which will
be realized under contracts remaining to be performed based upon current
estimates of the resources and time necessary to complete the projects. However,
such estimates are necessarily subject to fluctuations based upon the actual
resources and time required to complete each job. Consequently, backlog is not
necessarily
indicative of future revenues. XXXXX's backlog includes only those projects for
which the customer has provided an executed contract.
Backlog at December 31, 2000 of $23.3 million represents the work remaining
on contracts in progress. The actual revenue generated by NASDI's contracts
often increases from initial contract prices due to change orders.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
CONTRACT REVENUES. Contract revenues increased $27.1 million or 59.6% from
$45.5 million for the year ended December 31, 1999 to $72.6 million for the year
ended December 31, 2000. Revenues increased in 2000 in part due to several large
new CID projects which were awarded and commenced in 2000. In addition, two
existing contracts generated a total of $21.0 million more in revenue in 2000
than in 1999, due primarily to revenue generated from change orders. These two
projects were completed in 2000.
COSTS OF CONTRACT REVENUES. Costs of contract revenues increased
$12.0 million or 35.0% from $34.3 million for the year ended December 31, 1999
to $46.3 million for the year ended December 31, 2000. Costs of contract
revenues as a percentage of contract revenues was 75.4% in 1999 and 63.8% in
2000. The decrease in cost as a percentage of revenues in 2000 is primarily
related to change orders on two large projects, which were negotiated and
completed in 2000.
GROSS PROFIT. Gross profit increased $15.1 million or 134.8% from
$11.2 million for the year ended December 31, 1999 to $26.3 million for the year
ended December 31, 2000. The increase is due to the reasons stated above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.3 million or 20.0% from $1.5 million for the year ended
December 31, 1999 to $1.8 million for the year ended December 31, 2000. The
change is related to the increase in 2000 contract activity.
BONUSES. Bonuses increased $12.4 million from $7.6 million for the year
ended December 31, 1999 to $20.0 million for the year ended December 31,
2000. The change is related to the increase in earnings.
OPERATING INCOME. Operating income increased $2.4 million or 114.3% from
$2.1 million for the year ended December 31, 1999 to $4.5 million for the year
ended December 31, 2000, due to the reasons discussed above.
NET INCOME. Net income increased $2.7 million or 142.1% from $1.9 million
for the year ended December 31, 1999 to $4.6 million for the year ended
December 31, 2000, due to the reasons discussed above.
ADJUSTED EBITDA. Adjusted EBITDA increased $13.2 million or 130.7% from
$10.1 million for the year ended December 31, 1999 to $23.3 million for the year
ended December 31, 2000, due to the reasons stated above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO ELEVEN MONTHS ENDED DECEMBER 31, 1998
(YEAR ENDED 1998).
CONTRACT REVENUES. Contract revenues increased $15.2 million or 50.2% from
$30.3 million for the year ended December 31, 1998 to $45.5 million for the year
ended December 31, 1999. The increase is primarily related to two large
industrial demolition contracts, which were awarded and commenced in 1999 and
contributed approximately $14.1 million in contract revenue.
COSTS OF CONTRACT REVENUES. Costs of contract revenues increased
$9.8 million or 40.0% from $24.5 million for the year ended December 31, 1998 to
$34.3 million for the year ended December 31, 1999. Costs of contract revenues
as a percentage of contract revenues was 80.9% in 1998 and 75.4% in 1999. The
decrease in costs as a percentage of revenues in 1999 is related to the award
and commencement of two large industrial demolition contracts, which were
performed at higher margins than typical smaller contracts.
GROSS PROFIT. Gross profit increased $5.4 million or 93.1% from
$5.8 million for the year ended December 31, 1998 to $11.2 million for the year
ended December 31, 1999, due to the reasons stated above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
remained consistent at $1.5 million for the respective years.
BONUSES. Bonuses increased $3.0 million from $4.6 million for the year
ended December 31, 1998 to $7.6 million for the year ended December 31, 1999.
The change is related to the increase in 1999 earnings.
OPERATING INCOME (LOSS). Operating income (loss) increased $2.5 million,
from a loss of $0.4 million for the year ended December 31, 1998 to income of
$2.1 million for the year ended December 31, 1999, due to the reasons discussed
above.
NET INCOME (LOSS). Net income increased $2.2 million from a net loss of
$(0.3) million for the year ended December 31, 1998 to $1.9 million for the year
ended December 31, 1999. The increase in net income is due to the reasons stated
above.
ADJUSTED EBITDA. Adjusted EBITDA increased $5.1 million or 102.0% from
$5.0 million for the year ended December 31, 1998 to $10.1 million for the year
ended December 31, 1999. The increase in Adjusted EBITDA is attributed to the
reasons discussed above.
SEASONALITY
We do not believe that seasonality has had a material impact on NASDI's
operations in the eleven months ended December 31, 1998 and in the years ended
December 31, 1999 and December 31, 2000.
INFLATION
We do not believe that inflation has had a material impact on XXXXX's
operations in the eleven months ended December 31, 1998 and in the years ended
December 31, 1999 and December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
GREAT LAKES DREDGE & DOCK CORPORATION
CASH FLOWS. Our primary sources of liquidity are cash flows from operations
and borrowings under the revolving line of credit provided by the Credit
Agreement. Our primary uses of cash are funding working capital, capital
expenditures and debt service.
Our net cash flows from operating activities for the years ended
December 31, 2000, 1999 and 1998 were $17.5 million, $25.3 million and
$20.2 million, respectively. The decrease in cash flows from operating
activities in 2000 compared to 1999 was due to additional working capital
requirements for certain foreign projects, as well as the normal fluctuations in
working capital requirements inherent in our operations. The increase in cash
flows from operating activities in 1999 compared to 1998 was due to favorable
contract operations in 1999 over 1998 and a decrease in working capital
resulting primarily
from normal fluctuations in working capital requirements, along with an increase
in xxxxxxxx received in advance of revenue recognition on our Ghana project.
Our net cash flows used in investing activities for the years ended
December 31, 2000, 1999 and 1998, were $13.7 million, $12.8 million, and
$10.6 million, respectively. Uses in 2000 and 1999 relate primarily to capital
expenditures; however, 1999 also included $3.6 million in distributions from
joint ventures, which was offset by $1.7 million paid out as distributions to
minority interests. In 1999, there was an increase in capital additions of
$6.0 million compared to the net capital additions in 1998. Capital expenditures
in 1998 included $13.6 million for two hydraulic dredges and certain support
vessels acquired from a competitor. In December 1998, we entered into a sale
lease-back transaction for this equipment and received proceeds of
$14.5 million. Additionally, in 1998, we contracted to build a new backhoe
dredge to cost approximately $18.0 million. Capital expenditures in 1998
included $5.7 million in costs related to the construction of this dredge. In
October 1998, we sold the $5.7 million in related construction in progress and
entered into a construction agency agreement to complete the backhoe and a long
term operating lease to operate the dredge upon completion.
Our net cash flows used in financing activities for the years ended
December 31, 2000, 1999 and 1998, were $4.2 million, $11.7 million, and
$10.6 million, respectively. The 2000 use of cash related to the scheduled
payments of our term senior debt, offset by net borrowings on our revolver
arrangement. The 1999 use of cash related primary to payments on the term loan
portion of the Credit Agreement, which was amended in October 1999 to allow for
prepayment of a portion of the term loan and increased capacity under the
revolving loan. The use of cash related to financing activities in 1998 is
explained by the recapitalization effected in August of 1998, which extinguished
the debt under the former credit agreement and redeemed the stock of the
majority stockholders with the proceeds from the new credit agreement, issuance
of senior subordinated notes and equity investments by new stockholders.
Distributions from and contributions to both Amboy Aggregates and Riovia are
subject to the unanimous consent of the partners in such joint venture. We
received distributions from the joint ventures totaling $0.2 million and
$3.6 million in 2000 and 1999, respectively. No distributions were received from
joint ventures in 1998. In 2000, we made an additional investment in the Riovia
joint venture of $0.3 million representing our share of the cost to buy out one
of the joint venture partners. We recorded (losses) earnings from joint ventures
of $(0.8) million, $0.2 million and $1.2 million in 2000, 1999, and 1998,
respectively. In the first half of 1999, we made distributions to minority
interests of $1.7 million, related to 1998 earnings; such distributions were
made during the fourth quarter of 1997 for 1997 earnings and no distributions
have been made for 1999 or 2000 earnings. We recorded minority interest income
(expense), attributable to subsidiary results, of $(1.0) million, $0.5 million,
and $(2.7) million in 2000, 1999, and 1998, respectively.
We have entered into operating lease agreements for certain dredging
assets and office space, which require annual lease payments through 2011. In
the fourth quarter of 1999, we secured construction and long-term lease
financing for a new 5,000 cubic meter xxxxxx dredge, expected to be delivered
by the end of 2001. Additionally, we expect to incur annual maintenance
expenses of approximately $25 to $27 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 $12 to
$15 million annually for the foreseeable future.
In connection with the closing of the Acquisition, we will enter into an
intercompany agreement with NASDI, under which NASDI will be deemed to have
borrowed from us approximately $32.0 million, which will reflect the
Acquisition-related indebtedness. NASDI will be required to service
this debt with its excess cash until repaid. Cash flow in excess of principal
and interest payments and all cash flow after the debt is fully repaid is
expected to be available for distribution to the Company and the minority
interest management stockholders according to their ownership interests. We
and the NASDI management stockholders will enter into a stockholders
agreement relating to the ownership of NASDI capital stock. In accordance
with the stockholders agreement, so long as we and the NASDI management
stockholders continue to own, in the aggregate, more than 50% of NASDI, the
NASDI management stockholders will have the right, during the two-month
period following April 15, 2006, to require us to acquire their NASDI common
stock at a price equal to the greater of (i) $2.0 million or (ii) a formula
based on NASDI's financial performance. In addition, each NASDI management
stockholder will have the right to require us to purchase his NASDI common
stock following a termination of his employment, at a price based upon
certain formulas, depending upon the reason for the termination.
We believe cash flows from operations and available credit will be
sufficient to finance operations, planned capital expenditures and debt service
requirements for the foreseeable future. Our ability to fund our working capital
needs, planned capital expenditures and scheduled debt payments, to refinance
indebtedness and to comply with all of the financial covenants under our debt
agreements, depends on our 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 our control.
NORTH AMERICAN SITE DEVELOPERS, INC.
NASDI's primary source of liquidity has been cash flows from operations.
XXXXX's primary uses of cash have been the funding of working capital, capital
expenditures and stockholder distributions.
XXXXX's net cash flows from operating activities for the years ended
December 31, 2000, 1999 and 1998 were sources of $4.2 million, $4.9 million and
a use of $1.0 million, respectively. The slight decrease in cash flows from
operating activities in 2000 compared to 1999 is the result of normal
fluctuations in working capital requirements inherent in NASDI's operations. The
increase in cash flows from operating activities in 1999 compared to 1998 was
due to contract operations in 1999 over 1998.
XXXXX's net cash flows from investing activities for the years ended
December 31, 2000, 1999 and 1998 were nil, a use of $2.5 million and a use of
$0.9 million, respectively. The change in cash flows from investing activities
between the years 2000, 1999 and 1998 is primarily related to the purchase and
sale of marketable securities. NASDI periodically invests excess cash generated
from operating activities in marketable securities. Capital expenditures for
years ended 2000, 1999 and 1998 were $1.0 million, $0.9 million and
$0.9 million, respectively.
XXXXX's net cash flows from financing activities for the years ended
December 31, 2000, 1999 and 1998 were uses of $3.6 million, $1.8 million and a
source of $0.8 million, respectively. The change in cash flows from financing
activities between years 2000 and 1999 is largely attributed to a $1.7 million
increase in distributions to stockholders. The change in cash flows from
financing activities between the years 1999 and 1998 is related to stockholder
advances provided for working capital requirements and subsequent repayments
thereof.
NASDI has entered into operating lease agreements for certain machinery and
equipment, which require annual lease payments through 2003.
Planned capital expenditures, which primarily include machinery and
equipment, are expected to require annual spending of approximately $1.0
million to $1.5 million in 2001 and 2002.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended, which requires that all
derivative instruments be reported in the balance sheet at the fair value and
established criteria for designation and effectiveness of hedge relationships.
The adoption of SFAS 133 resulted in a pre-tax reduction to other comprehensive
income of $1,200 ($626 after tax) related to our fuel hedge arrangements, which
are designated as cash flow xxxxxx. The losses included in accumulated other
comprehensive income as of January 1, 2001 will be reclassified into earnings
over the next thirteen months, the remaining term of the hedge arrangements.
XXXXX's adoption of SFAS 133 did not have an impact on its financial position or
operating results.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which summarizes certain of the SEC staff's views in applying
U.S. generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB 101B, which delayed
the implementation date of SAB 101 until no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. Adoption of this
SAB has not had a material impact on the Company's financial statements or
those of NASDI.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of our current dredging operations are conducted outside of the
U.S. In 2000 and 1999, 21% and 10%, respectively, of contract revenues were
attributable to overseas operations. It is our 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. We do not purchase forward exchange contracts for
trading purposes. At December 31, 2000 and 1999, we had outstanding foreign
currency forward contracts with a notional value of $2.0 million and
$4.3 million, respectively, designated as xxxxxx of our foreign currency
denominated tax liabilities. We expect that gains or losses on the foreign
currency forward contracts should offset gains or losses on the underlying tax
liability being hedged, such that the impact of a change in the exchange rate
would be immaterial to our earnings.
Our obligations under the senior credit facility expose earnings to changes
in short-term interest rates since interest rates on bank debt are variable. If
the variable rates on our outstanding bank debt were to increase by 10% from the
rates at December 31, 2000, for the full year 2001, assuming scheduled principle
payments are made, interest expense would increase $0.4 million and assuming a
38% marginal tax rate, net income would decrease $0.2 million.
The fair value of our fixed rate debt was $114.4 million and $120.2 million
at December 31, 2000 and 1999, respectively, based on quoted market prices.
Assuming a 10% decrease in interest rates from the rates at December 31, 2000,
the fair value of this fixed rate debt would have increased by $7.0 million.
One of our significant operating costs is diesel fuel. During 2000 and 1999,
fuel expenditures represented 5.4% and 4.6%, respectively, of dredging costs of
contract revenues. We use fuel commodity forward contracts, typically with
durations of less than eighteen months, to reduce the impacts of changing fuel
prices on operations. We do not purchase fuel xxxxxx for trading purposes. Based
on our 2001 projected fuel consumption, a one cent change in the average annual
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, 2000.
At December 31, 2000 and 1999, we had outstanding arrangements to hedge the
price of a portion of its fuel purchases related to work in backlog,
representing approximately 59% of its projected fuel requirements for 2001 and
2000, respectively.
BUSINESS
GENERAL
We are 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 dredging work: Capital, Maintenance and Beach Nourishment, in which
activities we achieved a combined U.S. bid market share of 37% in 2000. In
addition, we are the only U.S. dredging contractor with significant
international operations, which represented approximately 21% of our dredging
contract revenues in 2000. Our fleet of 28 dredges, 31 material transportation
barges, 3 drillboats, and 163 other specialized support vessels is the largest
and most diverse fleet in the U.S. We believe that our fleet would have a
replacement cost in excess of $750 million.
On April 17, 2001 we agreed to acquire 80% of NASDI. According to the
ENGINEERING NEWS RECORD, NASDI is one of the three largest providers of
commercial and industrial demolition ("CID") services in the United States,
based on 1999 revenues. We believe that the Acquisition will provide us with the
following benefits:
- STRENGTHENS AND DIVERSIFIES OUR BUSINESS. The Acquisition enables us to
increase our revenues and cashflow by utilizing our core competencies in a
related business segment and also diversifies our customer base. Similar
to our dredging activities, NASDI's CID activities involve the removal,
transportation and disposal of materials using specialized equipment,
employing a unionized workforce and requiring special operating permits,
licenses and skills. Many of the larger and more complex demolition
projects that make up a majority of NASDI's revenue require sophisticated
estimating methods and systems that are also required in our estimation of
dredging projects. The Acquisition also provides us with exposure to the
attractive market dynamics of the CID business. NASDI's customers are
generally non-government entities for whom CID is a critical function
although a small component of total project cost. NASDI is also a leader
in the developing market for the demolition of aging industrial
infrastructure, particularly power generation plants, to allow for the
construction of new and more efficient replacements on the same site.
- POSITIONS NASDI FOR INCREASED GROWTH. By integrating and supplementing
certain of NASDI's administrative functions (such as contract cost and
performance tracking, contract administration, and risk management), we
can better enable the management of NASDI to focus on exploiting new
business opportunities, which will further contribute to our combined
revenues and earnings.
For the year ended December 31, 2000, after giving pro forma effect to the
Acquisition, we generated revenues of $411.7 million and EBITDA (as defined) of
$71.5 million. In addition, as of December 31, 2000, we had a dredging contract
backlog in excess of $198.0 million and a CID contract backlog in excess of
$23.3 million.
DREDGING ACTIVITIES
Over our 110-year life, we have grown to be the leader in each of our
primary dredging activities in the U.S., including:
- CAPITAL--U.S. AND FOREIGN (approximately 57% of pro forma 2000 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"), which initially authorized
the deepening of 39 ports. Subsequent WRDA bills, most
recently in December 2000, have authorized additional port deepening
projects and expanded previously authorized projects. We achieved a 60%
cumulative bid market share of Deep Port projects over the past five
years. Our bid market share of total U.S. capital projects was 35% in
2000.
- MAINTENANCE (approximately 18% of pro forma 2000 revenues). Maintenance
dredging consists of the redredging 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 continuous source of
dredging work that is typically non-deferrable if optimal navigability is
to be maintained. Our bid market share of U.S. maintenance projects was
27% in 2000.
- BEACH NOURISHMENT (approximately 8% of pro forma 2000 revenues). Beach
nourishment dredging projects generally involve moving sand from the ocean
floor to shoreline locations when erosion has progressed to a stage that
threatens substantial shoreline assets. Our bid market share of U.S. beach
nourishment projects was 53% in 2000.
We believe that we benefit from a number of favorable trends in the U.S.
dredging market:
- DEEP PORT CAPITAL PROJECTS. The average controlling depth of the ten
largest U.S. ports (as measured by annual container volume) is 40.4 feet,
compared to 52.7 feet for the ten largest non-U.S. ports. Without
significant deepening efforts, most major U.S. ports risk being unable to
efficiently accommodate larger cargo vessels, which renders them less
competitive. In 1997, the United States Army Corps of Engineers (the
"Corps"), which has the primary responsibility for maintaining and
improving the nation's waterways, ports and shorelines, announced new Deep
Port projects and the expansion of existing projects with an estimated
aggregate revenue value in excess of $2.0 billion to be completed through
2005.
- 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
tourist industry. To date, a significant amount of funding has been
allocated by local governments to restore and preserve eroding beachfront.
- ADDITIONAL SIGNIFICANT LONG TERM OPPORTUNITIES. There are significant
dredging opportunities related to projects to contain the erosion of
wetlands and coastal marshes (particularly in Louisiana) and to provide
land reclamation for the San Francisco airport expansion. These long term
projects have the potential to add substantial revenue to the dredging
market over the next several years.
COMMERCIAL AND INDUSTRIAL DEMOLITION ACTIVITIES
CID activities conducted by NASDI accounted for approximately 18% of our pro
forma 2000 revenues. NASDI offers a comprehensive array of specialized services,
including: interior and exterior demolition of commercial and industrial
buildings; salvage and recycling of related materials; and removal of hazardous
substances and materials. NASDI's specialized fleet of rented and owned
demolition equipment includes excavators equipped with shears, pulverizers,
processors, grapples and hydraulic hammers. Because NASDI satisfies a
significant amount of its equipment needs through rental and utilizes hourly
workers on a project basis, NASDI has a highly variable cost structure, which
provides the flexibility to adjust costs to the level of project activity. From
1998 to 2000, NASDI increased its contract revenue and Adjusted EBITDA (as
defined) at compound annual growths rates of 54.8% and 115.9%, respectively. For
the fiscal year ended December 31, 2000, NASDI generated contract revenue of
$72.6 million and Adjusted EBITDA (as defined) of $23.3 million.
NASDI's operations have historically been concentrated in the New England
region where NASDI has a significant share of the Massachusetts CID market. We
believe that NASDI is one of the few
CID providers in its region of operation with the required licenses, operating
expertise, equipment fleet and access to bonding to execute larger, highly
profitable industrial projects such as demolition related to the construction of
new power generation facilities on existing sites.
COMPETITIVE STRENGTHS
We possess a number of competitive strengths that have allowed us to develop
and maintain our leading position within the dredging industry, including the
following:
FLEXIBLE PORTFOLIO OF DREDGING ASSETS. Our dredging fleet is the largest in
the United States and one of the largest in the world. Our U.S. fleet consists
of over 200 pieces of equipment, including the largest number of xxxxxx dredges,
most of the large hydraulic dredges, the only two large electric dredges, and
the only drillboat capable of operating in offshore conditions in U.S. waters.
The size, versatility and technical capabilities of our fleet improve our
competitiveness as they generally permit us to select the most efficient
equipment for a particular job. To maintain the value and effectiveness of our
fleet, we emphasize proactive maintenance that results in less downtime,
increased profitability, enhanced vessel life and relatively low capital
expenditure requirements. To this end, in 2000, we incurred $25.9 million of
maintenance expense (which is included in costs of contract revenues) in
addition to capital expenditures of $14.1 million.
FAVORABLE COMPETITIVE DYNAMIC. We are the largest U.S. provider of dredging
services and have maintained the largest cumulative bid market share in the
industry since 1991. In 2000, we had a 37% bid market share, which was
substantially greater than our nearest competitor's share of those contracts. In
addition, we believe that we benefit from:
- FAVORABLE COMPETITIVE ENVIRONMENT. The requirements of the Dredging Act of
1906 and the Xxxxx Act of 1920 effectively prohibit foreign dredges and
foreign-owned dredging companies from competing in the U.S. In addition,
we believe that we are one of only four dredging providers that can obtain
performance bonds in an amount greater than $50 million, which we believe
provides us with a competitive advantage in bidding for larger projects
due to the job bonding requirements imposed by many state and federal
agencies. Moreover, there is a long lead time and a high capital cost
associated with the construction of a new dredge, which we estimate to be
two years and between $18.0 million and $50.0 million, respectively.
- STRONG REPUTATION AND UNEQUALLED EXPERTISE. We have never failed to
complete a project over our 110-year operating history. Our long history
as a leader in the industry has enabled us to develop a proprietary
database that contains detailed bidding and technical information on most
domestic dredging projects since 1970, which our management believes
allows us, among other things, to be more accurate than our competitors in
predicting contract costs prior to bidding.
SPECIALIZED CAPABILITY IN CAPITAL PROJECTS. We believe that we are the
leader in capital dredging projects which generally require specialized
engineering expertise and specific combinations of equipment and experience in
performing complex projects.
PROVEN EXPERIENCED MANAGEMENT TEAM. Our senior managers have an average of
20 years of experience in the dredging industry. We believe that our experienced
management team provides us with a significant advantage over our competitors,
many of whom are family owned and managed. Our management group owns
approximately 14% of our issued and outstanding common stock.
BUSINESS STRATEGY
Our strategy is to continue to grow contract revenues and cash flow and
strengthen our competitive position worldwide. The principal elements of our
strategy include:
CONTINUE TO GROW IN DOMESTIC DREDGING MARKETS. We expect to strengthen our
domestic leadership position by leveraging (i) the size, diversity and technical
capabilities of our fleet, (ii) our industry-leading operating experience,
(iii) our engineering expertise, and (iv) our efficient and safe project
management practices.
CAPITALIZE ON OPPORTUNITIES CREATED BY STRATEGIC ASSET ACQUISITIONS. During
the last several years, we have successfully acquired several key pieces of
equipment which will further enhance our operating capabilities by providing
additional tools for capital projects and strengthening our ability to perform
maintenance and beach nourishment projects. These acquisitions include:
- certain hydraulic dredging assets, including the dredge "Texas", which we
acquired in 1998. In 2000, we increased the cutter power of the dredge
Texas, making it the most powerful cutter dredge in the U.S., capable of
handling the type of rock work expected in certain of the upcoming port
deepening projects;
- the dredge "New York", a newly-built backhoe dredge, which we took
delivery of under a long-term lease in July 1999. The "New York" has
performed successfully on the Kill Xxx Xxxx channel deepening in New York
and will be working on the Wilmington, North Carolina and San Xxxx, Puerto
Rico channel deepening projects in 2001;
- the drillboat "Apache" which we constructed in 2000. The "Apache" has
increased drilling efficiency and capacity, is capable of working in
offshore conditions and is the only drillboat of its type in use in U.S.
waters; and
- the dredge "Liberty Island", a new 5,000 cubic meter xxxxxx dredge, to
accommodate anticipated growth in domestic xxxxxx dredging attributable to
the reduction of the Corps' xxxxxx fleet, additional Deep Port work and
related maintenance dredging, potential increased beach nourishment work,
and the aging of the industry's xxxxxx fleet. The new xxxxxx dredge is
expected to be delivered by the end of 2001 under a long-term lease.
GROW ESTABLISHED FOREIGN DREDGING MARKET BASE. Since the early 1990s, a
consolidation among certain foreign competitors, together with an increase in
foreign governments' port infrastructure investments, have resulted in new
overseas dredging opportunities for us. In 2000, we recorded approximately
$71.8 million in revenue from non-U.S. dredging projects. We intend to continue
to selectively pursue international opportunities that offer us the potential to
increase the utilization of our asset base, to leverage our project management
capabilities and to increase our international revenues.
EXPLOIT GROWTH OPPORTUNITIES IN CID MARKET. We believe that our
experience in bidding for and completing large projects in multiple markets
and our significant infrastructure will be particularly valuable in helping
NASDI to execute large CID projects and increase its market share. In
particular, our national presence, purchasing power and administrative
capabilities will facilitate NASDI's ability to obtain licenses and
pre-qualifications necessary to operate in new geographic markets. Thus, we
believe that under our ownership NASDI will be well positioned to selectively
enter attractive new geographic markets, generally with a contracted project
from an existing customer.
CUSTOMERS
DREDGING. Our dredging 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 United States Coast Guard and the United States Navy
are responsible for awarding federal contracts with respect to their own
facilities. In 2000, approximately 67% of our contract 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 21% of our 2000 contract revenues were earned from contracts with
foreign governments or companies operating under contracts with foreign
governments.
CID SERVICES. NASDI provides demolition services primarily in the private
market, with customers primarily in the construction and power generation
industries. NASDI also provides services to municipal and other entities. NASDI
benefits from key relationships with certain customers. NASDI negotiates the
majority of its demolition contracts as fixed price ("lump sum") contracts with
certain other projects negotiated on a time and expense ("T&E") basis. NASDI
frequently receives revenues from change orders on existing contracts. The
majority of CID services work is currently concentrated in New England. In 2000,
approximately 40% of NASDI's revenues were earned from a contract with one
customer.
BIDDING PROCESS
DREDGING. Most dredging contracts are obtained through competitive bidding
on terms specified by the party inviting the bid. The nature of the specified
services dictates the types of equipment, material and labor involved, all of
which affect the cost of performing the contract and the price that dredging
contractors will bid.
For contracts under its jurisdiction, the Corps typically prepares a cost
estimate based on its understanding of the availability of contractors and their
equipment. The Corps will award the bid to a responsible bidder (i.e., a bidder
that generally has the necessary equipment and experience to successfully
complete the project) submitting 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 such bid is no greater than the amount of
funds that are available for such project.
Substantially all of our contracts are competitively bid. However, some
government contracts are awarded by a sole source procurement process through
negotiation between the contractor and the government. Prior to negotiations,
the contractor submits a proposal and cost and pricing data to the government.
Under such contracts, the government has the right, after award and, or
completion of the contract, to audit the contractor's books and records,
including the proposal and data available to the contractor during negotiations,
to ensure compliance with the contract and applicable federal legislation, rules
and regulations. The government may seek a price adjustment based on the results
of such audit. The Corps has recently bid certain projects through a "request
for proposal" (RFP) process. The RFP process is likely to be advantageous for
us, as it allows the project award to be based on technical capability, as well
as prices.
We have operated for 110 years and maintain an extensive historical database
of dredging production records from our own and our competitors' activities and
past bidding results. These prior
production records help us predict sediment composition and optimum equipment
requirements. We believe that our extensive database and our accumulated
estimating and bidding expertise allow us to be more accurate than our
competitors in predicting dredging costs prior to bidding for contracts.
CID SERVICES. NASDI has established a network of local contacts with
developers and prime contractors that act as referral sources and frequently
enable NASDI to procure jobs on a sole-source basis. When NASDI bids a project,
it evaluates the contract specifications and develops a cost estimate to which
it adds profit for the final bid price. NASDI maintains a strong reputation and
is one of the few firms with the capability to execute large projects. For these
reasons, if it is not the lowest bidder on a contract, NASDI may still be
awarded a project based on its qualifications.
NASDI management reviews the cost estimate, including a summary of labor,
equipment and materials for each required task, and bid price of all of the
demolition projects. Cost estimates are based on historical cost reports and
experienced knowledge of demolition requirements.
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. These bonds are:
- BID BOND. 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.
- PERFORMANCE BOND. 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.
- PAYMENT BOND. 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.
Our dredging projects had been bonded by Reliance until mid-2000, at which
time Travelers purchased the surety business of Reliance. We have never
experienced difficulty in obtaining bonding from Reliance for any of our
dredging projects and expect this good relationship to continue with Travelers,
a major surety provider. If we were to fail to complete a project, the bonding
company would be required to either permit the customer to complete the job and
reimburse the customer for the cost of completion or complete the defaulted
contract utilizing our equipment and labor force or a third party service
provider. In the event the bonding company were to complete the defaulted
contract, it would be entitled to be paid the contract price directly by the
customer. Additionally, the bonding company would be entitled to be paid by us
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 our
credit agreement with our senior secured lenders, 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.
CID SERVICES. NASDI's contracts are primarily with private, non-government
customers; thus, it often is not required to secure bonding. Those NASDI
projects that have required bonding have been
successfully completed. NASDI's bonding requirements going forward, will be
obtained through Travelers.
COMPETITION
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 entities, servicing the inland, as opposed to coastal, waterways and
therefore do not compete with us. Competition in the dredging 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. Currently, we and three competitors are
the only dredging companies which independently bid on jobs with values in
excess of $50.0 million.
Up until very recently, most dredging competitors have concentrated their
efforts in certain regions and operated only one type of dredge. Regional
concentrations do not allow these competitors to respond to opportunities in
other regions or to diversify their risks in the event of a temporary decline in
the market in their area. In the dredging industry, the unique nature of each
project requires a matching of the equipment to the specific project. While a
dredging company may sometimes bid on a project contemplating the use of
equipment that is not ideal for the job, the bidder with the most appropriate
equipment is most likely to be the low bidder and earn a profit on the contract.
A company with a variety of equipment, such as ours, is better able to respond
to changes in demand for certain types of dredges and can select the most
suitable equipment for any particular project, minimizing its project completion
cost. Additionally, with our extensive fleet and engineering expertise we can
readily meet applicable certification, government and bonding requirements.
In recent years, the consolidation within the domestic dredging market has
allowed two competitors to obtain additional dredging assets, which has enabled
them to expand operations across regions, and bid more competitively. This is
apparent in the Deep Port bid market in which our market share, while still
strong, has declined in the past two years due to the more aggressive
competition presented by these entities.
CID SERVICES. The U.S. demolition and related services industry is
highly fragmented and is comprised mostly of small regional companies.
According to the ENGINEERING NEWS RECORD, NASDI is one of the three largest
providers of commercial and industrial demolition services in the U.S., based
on 1999 revenues. NASDI believes that it competes in the demolition and
related services industry primarily on the basis of its experience,
reputation, equipment and key client relationships.
EQUIPMENT
DREDGING. Our 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: xxxxxx dredges, hydraulic dredges and mechanical
dredges.
- XXXXXX DREDGES. Xxxxxx dredges are 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 bottom dump the material or pump the
material from the hoppers through a pipeline to the designated site.
Xxxxxx dredges can operate in rough waters, are less likely to interfere
with ship traffic and can move quickly from one project to another. We
operate the largest xxxxxx fleet in the U.S., which gives us 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. We
operate the only two large electric hydraulic dredges in the U.S., which
makes us 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. We have 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.
We are committed to preventive maintenance, which we believe is reflected in
the long lives of most of our equipment and its low level of downtime on jobs.
Effective January 1, 1999, we increased the estimated useful lives of certain
operating equipment to better reflect the period over which we anticipate
utilizing this equipment with normal repairs and maintenance. In 2000, we
incurred $25.9 million in maintenance expenditures (which are included in costs
of contract revenues), in addition to $14.1 million on capital expenditures.
Our domestic 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 our fleet enables us to move equipment in response to changes in
demand. We believe that on average, our dredge equipment capacity utilization
based on actual operating time is among the highest in the industry. Our fleet
includes assets currently positioned internationally in the Middle East, India,
Africa, the Caribbean and Central America.
We are continually assessing the need to upgrade and expand our fleet to
take advantage of improving technology and to address the changing needs of the
dredging market. We believe that our recent significant additions to our fleet's
dredging capacity will enhance our ability to compete for and execute future
Deep Port projects.
CID SERVICES. 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
The U.S. Coast Guard's certification of equipment and the America Bureau of
Shipping's establishment of the permissible loading capacity are important
factors in our business. Federal regulations provide that many projects, such as
beach nourishment projects with offshore sand, dredging projects in exposed
entrance channels, and dredging projects with offshore disposal areas may
be performed only by dredges or scows that have U.S. Coast Guard certification
and a load line established by the America Bureau of Shipping. The
certifications indicate that the dredge is structurally capable of operating in
open waters. We have more certified vessels than any domestic competitor and we
make substantial investments to maintain these certifications.
PROPERTIES
DREDGING. Our 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 xxxxxx fleet and most of the large hydraulic dredges in
the U.S.
The following table provides a listing of our current fleet of dredging
equipment.
TYPES OF EQUIPMENT QUANTITY
------------------ --------
Hydraulic Dredges................................. 13
Xxxxxx Dredges.................................... 7
Clamshell Dredges................................. 8
Unloaders......................................... 1
Drill Boats....................................... 3
Dump Barges....................................... 22
Xxxxxx Barges..................................... 9
Deck Barges....................................... 34
Other Barges...................................... 31
Booster Pumps..................................... 6
Tugs.............................................. 10
Launches.......................................... 29
Derricks.......................................... 6
Cranes............................................ 13
Loaders/Dozers.................................... 13
Survey Boats...................................... 20
---
Total............................................. 225
===
A significant portion of our dredging equipment is subject to liens by our
senior lenders and the bonding company.
We lease approximately 40,000 square feet of office facilities in Oak Brook,
Illinois, which serves as our principal administrative facility. The primary
lease for this property will expire in the year 2008. We also lease waterfront
properties in Baltimore, Maryland, and Green Cove Springs, Florida. These
locations serve as mooring sites for idle equipment and inventory storage.
Annual rental payments on our real estate and equipment leased during the
year ended December 31, 2000 totaled $17.8 million, including other short-term
rentals.
CID SERVICES. The following table summarizes the primary equipment used in
NASDI's demolition operations.
TYPES OF EQUIPMENT QUANTITY
------------------ --------
Excavators........................................ 14
Loaders........................................... 12
Bobcats........................................... 15
Dozers............................................ 4
Backhoes.......................................... 3
Trucks/Trailers................................... 34
--
Total............................................. 82
==
NASDI rents its primary office facility in Allston, Massachusetts, and a
garage and maintenance facility in Everett, Massachusetts, as well as various
pieces of operating equipment. For the year ended December 31, 2000, NASDI's
rent expense, including operating equipment rentals, totaled $4.4 million.
GOVERNMENT REGULATIONS
We are 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 Xxxxx 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.
Our operations and facilities are subject to a variety of federal and state
environmental statutes and regulations. In addition, we are required to comply
with federal and state statutes designed to protect certain species and
habitats.
BACKLOG
Our contract backlog represents our current estimate of the revenues which
will be realized under the portion of our contracts remaining to be performed.
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 our backlog relates to
government contracts, our backlog can be canceled at any time without penalty,
except, in some cases, the recovery of our actual committed costs and profit on
work performed up to the date of cancellation. Consequently, backlog is not
necessarily indicative of future results. Our backlog includes only those
projects for which the customer has provided an executed contract.
EMPLOYEES
DREDGING. We employ approximately 300 full-time salaried personnel, with
additional hourly personnel, most of whom are unionized and hired on a
project-by-project basis. During 2000, we employed an average of approximately
575 hourly personnel to meet project requirements. Crews are generally available
for hire on relatively short notice.
We are party to more than twenty collective bargaining agreements that
govern our relationships with our hourly personnel. Four primary agreements
apply to more than ninety percent of such employees. We have not experienced any
significant labor disputes in the past five years and believe we have good
relationships with our significant unions; however, there can be no assurances
that we will not experience labor strikes or disturbances in the future.
CID SERVICES. Currently, NASDI employs thirteen 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. We, along with our partner, a New Jersey aggregates
company, each own 50% of Amboy Aggregates. Amboy Aggregates 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. Our
dredging expertise together with our partner's knowledge of the aggregate market
formed the basis for the joint venture. Our investment in Amboy Aggregates is
accounted for using the equity method.
Amboy Aggregates is the only east coast aggregate producer to mine sand from
the ocean floor. In 1988, Amboy Aggregates built a specially designed dredge at
a cost of $9.0 million for sand mining, de-watering and dry delivery. No other
vessel of this type operates in the U.S. Amboy Aggregate'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.
Amboy Aggregates performs its mining operations pursuant to permits granted
to Amboy Aggregates by the federal government and the states of New York and New
Jersey. In recent years, Amboy Aggregates has failed to obtain approval for new
permits to mine sand in new borrow areas. These new sources would have contained
aggregate more closely meeting the specifications for concrete sand which would
require less blending with other materials, thereby reducing the cost of the
final product and improving margins. Despite these recent setbacks, Amboy
Aggregates continues to pursue other avenues for obtaining new permits, but it
is likely that the current sand supply will continue to require additional
blending, and hence additional costs, for the next few years. In 1999, Amboy
Aggregates partnered in a venture intended to provide a steady supply of grit,
the material which is blended with its dredged aggregate. To date, this venture
has performed poorly which has further impacted Amboy Aggregates' performance.
Amboy Aggregates is also pursuing other alternative uses for its current supply
of sand in an effort to provide an additional earnings stream.
ARGENTINE JOINT VENTURE. At December 31, 2000, we 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 given us
the opportunity to work with these other international dredging companies to
design, manage and execute this project. During 1999, upon completion of the
capital works portion, Riovia entered into the maintenance phase of the dredging
contract which is expected to continue until 2007. We currently account for our
investment in Riovia at cost.
LEGAL PROCEEDINGS
Although we are subject to various claims and legal actions that arise in
the ordinary course of business, we believe that the outcome of such actions,
proceedings or claims will not have a material adverse effect on our business,
financial condition or results of operations.
ENVIRONMENTAL MATTERS
Our operations and facilities are subject to various environmental laws
and regulations, relating to dredging operations, the disposal of dredged
material, wetlands, storm and waste water discharges, demolition activities,
asbestos removal, transportation and disposal of certain other hazardous
substances and materials and air emissions. We are also subject to laws
designed to protect certain species and habitats. Compliance with these
statutes and regulations can delay appropriation with respect to, and
performance of, particular projects and increase related expenses.
Our 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
such substances. While our CID business requires us to transport and dispose
of hazardous substances and materials, our risks are limited to the proper
execution of such tasks. Our CID 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, we may be liable
for resulting damages that our clients incur.
Based on our experience, we believe 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 our
business, financial condition or results of operations. However, we 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.
RECENT OPERATING RESULTS
Great Lakes' revenues and operating income for the quarter ended March
31, 2001 were $72.6 million and $8.6 million compared to $88.9 million and
$10.6 million, respectively, for the quarter ended March 31, 2000.
Depreciation for the quarter ended March 31, 2001 was $3.2 million compared to
$3.1 million for the quarter ended March 31, 2000, resulting in EBITDA for
the respective periods of $11.8 million and $13.7 million.
NASDI is in the process of finalizing operating results for the quarter
ended March 31, 2001. Based on NASDI's books and records, NASDI expects to
have first quarter revenues of $8.7 million, operating income of $2.6
million, and EBITDA of $2.9 million, which amounts do not reflect accruals for
stockholder bonuses relating to first quarter earnings under pre-Acquisition
employment agreements. Such quarterly results are not necessarily indicative
of Great Lakes' or NASDI's annual results.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
North American Site Developers, Inc.
We have audited the accompanying balance sheets of North American Site
Developers, Inc. as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' equity and cash flows for the years ended
December 31, 2000, 1999 and the eleven months ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North American Site
Developers, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the years ended December 31, 2000, 1999 and
the eleven months ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States of America.
/s/ X'Xxxxxx & Xxxx P.C.
Quincy, Massachusetts
March 16, 2001
NORTH AMERICAN SITE DEVELOPERS, INC.
BALANCE SHEETS
DECEMBER 31,
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 1,819,735 $ 1,171,256
Marketable securities..................................... 1,391,061 2,359,475
Contract receivables, including retainage................. 9,469,284 11,750,062
Costs and estimated earnings in excess of xxxxxxxx on
uncompleted contracts................................... 1,820,611 321,464
Prepaid expenses.......................................... 639,881 460,792
----------- -----------
Total Current Assets.................................... 15,140,572 16,063,049
PROPERTY AND EQUIPMENT, NET................................. 3,393,886 3,840,098
OTHER ASSETS................................................ 7,500 44,142
----------- -----------
TOTAL ASSETS................................................ $18,541,958 $19,947,289
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,091,367 $ 1,123,197
Accounts payable.......................................... 4,269,100 4,594,006
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 2,085,630 3,905,297
Accrued expenses and other payables....................... 445,144 667,009
Accrued workers compensation.............................. 763,000 909,116
Accrued corporate taxes................................... 323,750 191,000
----------- -----------
TOTAL CURRENT LIABILITIES............................... 8,977,991 11,389,625
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt............................................ 557,516 974,851
Advances from stockholders................................ -- 1,499,527
----------- -----------
TOTAL LONG-TERM LIABILITIES............................. 557,516 2,474,378
----------- -----------
TOTAL LIABILITIES....................................... 9,535,507 13,864,003
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; Authorized 1,000 shares, 400
shares issued and outstanding........................... 4,000 4,000
Additional paid-in capital................................ 7,542 7,542
Retained earnings......................................... 9,032,977 6,120,481
Accumulated comprehensive loss............................ (38,068) (48,737)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.............................. 9,006,451 6,083,286
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $18,541,958 $19,947,289
=========== ===========
The accompanying notes are an integral part of these financial statements.
NORTH AMERICAN SITE DEVELOPERS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000 and 1999
and the Eleven Months Ended December 31, 1998
2000 1999 1998
----------- ----------- -----------
CONTRACT REVENUES EARNED.............................. $72,642,284 $45,478,260 $30,334,788
Cost of Revenues Earned............................... 46,372,884 34,325,342 24,583,810
----------- ----------- -----------
GROSS PROFIT ON CONTRACTS............................. 26,269,400 11,152,918 5,750,978
General and Administrative Expenses................... 1,726,281 1,475,727 1,520,598
Bonuses............................................... 19,998,255 7,631,282 4,597,506
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS......................... 4,544,864 2,045,909 (367,126)
----------- ----------- -----------
Other Income (Expenses):
Dividends and interest.............................. 450,073 165,235 101,531
Interest and finance charges........................ (102,208) (106,758) (114,420)
Gain on sale of investments......................... 1,064 11,229 62,040
----------- ----------- -----------
Net Other Income.................................. 348,929 69,706 49,151
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR STATE INCOME
TAXES............................................... 4,893,793 2,115,615 (317,975)
Provision for State Income Taxes...................... 316,637 190,500 --
----------- ----------- -----------
NET INCOME (LOSS)..................................... $ 4,577,156 $ 1,925,115 $ (317,975)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
NORTH AMERICAN SITE DEVELOPERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000 and 1999
and the Eleven Months Ended December 31, 1998
ADDITIONAL ACCUMULATED
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS TOTAL
-------- ---------- ----------- ------------- -----------
STOCKHOLDERS' EQUITY, FEBRUARY 1,
1998.............................. $4,000 $7,542 $ 4,513,341 $ (8) $ 4,524,875
Comprehensive Loss:
Net loss.......................... -- -- (317,975) -- (317,975)
Unrealized net holding losses on
marketable securities........... -- -- -- (676) (676)
-----------
TOTAL COMPREHENSIVE LOSS............ -- -- -- -- (318,651)
------ ------ ----------- -------- -----------
STOCKHOLDERS' EQUITY, DECEMBER 31,
1998.............................. 4,000 7,542 4,195,366 (684) 4,206,224
Comprehensive Income:
Net income........................ -- -- 1,925,115 -- 1,925,115
Unrealized net holding losses on
marketable securities........... -- -- -- (59,282) (59,282)
Reclassification of unrealized
holding gains................... -- -- -- 11,229 11,229
-----------
TOTAL COMPREHENSIVE INCOME.......... -- -- -- -- 1,877,062
------ ------ ----------- -------- -----------
STOCKHOLDERS' EQUITY, DECEMBER 31,
1999.............................. 4,000 7,542 6,120,481 (48,737) 6,083,286
Comprehensive Income:
Net income........................ -- -- 4,577,156 -- 4,577,156
Unrealized net holding gains on
marketable securities........... -- -- -- 9,605 9,605
Reclassification of unrealized
holding gains................... 1,064 1,064
-----------
TOTAL COMPREHENSIVE INCOME.......... -- -- -- -- 4,587,825
-----------
Stockholder distributions........... -- -- (1,664,660) -- (1,664,660)
------ ------ ----------- -------- -----------
STOCKHOLDERS' EQUITY, DECEMBER 31,
2000.............................. $4,000 $7,542 $ 9,032,977 $(38,068) $ 9,006,451
====== ====== =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
NORTH AMERICAN SITE DEVELOPERS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 and 1999
and the Eleven Months Ended December 31, 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 4,577,156 $ 1,925,115 $ (317,975)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by (applied to) operating activities:
Depreciation and amortization...................... 1,413,362 1,381,014 1,276,778
(Gain) loss on sale of property and equipment...... (6,201) 960 --
Net realized gains on sale of marketable
securities....................................... (1,064) (11,229) (62,040)
Changes in assets and liabilities:
Contract receivables............................. 2,280,778 (3,112,512) (3,163,821)
Costs and estimated earnings in excess of
xxxxxxxx on uncompleted contracts.............. (1,499,147) (53,048) 884,557
Prepaid expenses................................. (179,089) (120,959) 257,519
Refundable taxes................................. -- 929,800 (929,800)
Other assets..................................... 36,642 (38,863) (2,279)
Accounts payable................................. (324,906) 1,409,128 (617,135)
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (1,819,667) 2,331,860 819,756
Accrued expenses and other payables.............. (221,865) (425,926) 654,033
Accrued workers compensation..................... (146,116) 465,017 444,099
Accrued corporate taxes.......................... 132,750 191,000 (270,449)
----------- ----------- -----------
Net Adjustments.................................. (334,523) 2,946,242 (708,782)
----------- ----------- -----------
Net Cash Provided by (Applied to) Operating
Activities..................................... 4,242,633 4,871,357 (1,026,757)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on sale of marketable securities............ 2,949,676 3,058,171 394,477
Purchases of marketable securities................... (1,969,527) (5,238,346) (396,075)
Purchases of property and equipment.................. (973,901) (865,643) (940,875)
Proceeds on sale of property and equipment........... 12,950 1,000 --
Insurance proceeds on newly acquired destroyed
equipment.......................................... -- 514,500 --
----------- ----------- -----------
Net Cash Provided by (Applied to) Investing
Activities..................................... 19,198 (2,530,318) (942,473)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt......................... $ 1,191,228 $ 378,446 $ --
Payments on long-term debt........................... (1,640,393) (1,689,132) (958,562)
Proceeds from stockholders........................... -- 3,034,331 1,909,887
Distributions to stockholders........................ (1,664,660) -- --
Payments to stockholders............................. (1,499,527) (3,571,056) (144,577)
----------- ----------- -----------
Net Cash Provided By (Applied to) Financing
Activities..................................... (3,613,352) (1,847,411) 806,748
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS........ 648,479 493,628 (1,162,482)
Cash and Equivalents, Beginning of Period.............. 1,171,256 677,628 1,840,110
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD.................... $ 1,819,735 $ 1,171,256 $ 677,628
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The principal business of North American Site Developers, Inc. consists
of the interior and exterior demolition of commercial and industrial
buildings, salvage and recycling of related materials and hazardous material
removal. Revenue is recognized using the percentage-of-completion method of
accounting for long-term construction contracts as noted below. The Company
operates primarily in the state of Massachusetts, and in recent years has
expanded to the states of California, Rhode Island and Michigan.
REVENUE AND COST RECOGNITION
The Company records costs and revenues of long-term fixed price and modified
fixed price contracts on the percentage-of-completion method, determined by
ratio of cost incurred to date to management's estimates of total anticipated
costs. That method is used because management considers total cost to be the
best available measure of progress on the contracts. Because of inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used will change within the near term. If estimated total costs on any
contract indicates a loss, the entire amount of the estimated loss is
immediately recognized. Since certain contracts can extend over one or more
years, revisions in costs and earnings estimated during the course of the work
are reflected in the accounting period in which the facts requiring the revision
become known. The difference between amounts billed and costs and estimated
earnings is reflected in the balance sheets as either costs and estimated
earnings in excess of xxxxxxxx or xxxxxxxx in excess of costs and estimated
earnings. Revenue from time-and-materials contracts is recognized currently as
the work is performed. Claims are included in revenues when received.
Retainage provisions of certain long-term contracts provide for amounts to
be withheld from payment by the customer until completion of the work. It is the
Company's policy to invoice such amounts and include them in accounts receivable
after work has been completed and the amounts withheld are due.
Costs charged to contracts include direct labor, material, subcontract
costs, other direct costs and applicable indirect costs. Selling, general and
administrative expenses are charged to expense as incurred.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The actual outcome of the estimates could differ from the
estimates made in the preparation of the financial statements.
CLASSIFICATION OF CURRENT ASSETS AND LIABILITIES
The Company includes in current assets and liabilities amounts realizable
and payable in the normal course of contract completion, which may extend beyond
one year.
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND EQUIVALENTS
For financial statement purposes, the Company considers all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents.
MARKETABLE SECURITIES
The Company's marketable equity securities are generally considered
available for sale and, as such, are accounted for at fair market value.
Unrealized gains and losses are recognized as a component of stockholders'
equity. Realized gains and losses are recognized in results of operations.
INVESTMENT IN JOINT VENTURE
In 1998, the Company entered into a 50% general partnership joint venture
to fulfill a contract obligation. The Company records its interest in the
joint venture using the equity method. The contract was substantially
completed in 1998 and terminated in 1999, however, during 2000 and 1999, the
Company was charged approximately $40,000 and $72,000, respectively, which
represented the Company's proportionate share of cost overruns and final
allocation of the joint venture's loss on the contract.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
accelerated methods over the assets' estimated useful lives of five to seven
years for financial statement purposes. Amortization of leasehold improvements
is included within depreciation expense.
INCOME TAXES
The shareholders have elected, for Federal and state income tax purposes, to
have the Company taxed as a small business corporation ("S" Corporation). This
election provides for the net income or loss of the Company to be reported on
the personal Federal and state income tax returns of the individual
shareholders. The Company pays no income tax on its profits and receives no
income tax benefit from its losses. The Company is taxed at the corporate level
for state income tax purposes in accordance with current state tax laws.
CHANGES IN YEAR-END
The Company changed from a January 31, fiscal year-end to a calendar
year-end in 1998.
ADVERTISING
The Company charges the cost of advertising to expense as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative financial
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instruments and requires recognition of all derivatives as either assets or
liabilities measured at fair value. Initially, the effective date of SFAS 133
was for all fiscal quarters for fiscal years beginning after June 15, 1999;
however, in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instrument and Hedging
Activities--Deferral of the Effective Date of FASB Statements No. 133--an
amendment of FASB Statement No. 133", which deferred the effective date of
SFAS 133 for one year so that it will be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. Management does not anticipate
adoption of SFAS 133 to have a material impact on the Company's results of
operations, financial position or cash flows.
RECLASSIFICATIONS
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
NOTE 2--MARKETABLE SECURITIES
At December 31, investments in marketable securities consisted of the
following:
2000 1999
---------- ----------
Marketable equity securities, at cost................ $1,429,129 $2,408,212
Gross unrealized gains............................... 79,047 9,615
Gross unrealized losses.............................. (117,115) (58,352)
---------- ----------
Marketable equity securities, at market value........ $1,391,061 $2,359,475
========== ==========
Proceeds and gross realized gains and losses from the sale of marketable
securities available for sale for the periods ended December 31, were as
follows:
2000 1999 1998
---------- ---------- --------
Gross Proceeds............................. $2,949,676 $3,058,171 $394,477
========== ========== ========
Gross Realized Gains....................... $ 10,847 $ 11,520 $ 67,669
========== ========== ========
Gross Realized Losses...................... $ 9,783 $ 291 $ 5,629
========== ========== ========
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 3--CONTRACT RECEIVABLES
Contract receivables consists of the following at December 31,:
2000 1999
---------- -----------
Billed Contracts Receivables:
Completed contracts............................... $2,338,118 $ 5,591,578
Contracts-in-progress............................. 3,951,436 3,708,352
Retained in accordance with contract provisions... 3,052,607 2,450,132
Unbilled Contracts Receivables:
Completed contracts............................... 127,123 --
---------- -----------
$9,469,284 $11,750,062
========== ===========
NOTE 4--COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of xxxxxxxx and xxxxxxxx in excess of
costs and estimated earnings on uncompleted contracts at December 31, are as
follows:
2000 1999
----------- -----------
Costs incurred on uncompleted contracts............ $28,693,285 $13,487,687
Estimated earnings............................... 6,858,722 4,992,940
----------- -----------
35,552,007 18,480,627
Less xxxxxxxx to date.............................. 35,817,026 $22,064,460
----------- -----------
Total............................................ $ (265,019) $(3,583,833)
=========== ===========
These amounts are included in the accompanying balance sheets under the
following captions:
2000 1999
----------- -----------
Costs and estimated earnings in excess of xxxxxxxx
on uncompleted contracts......................... $ 1,820,611 $ 321,464
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (2,085,630) (3,905,297)
----------- -----------
Total.......................................... $ (265,019) $(3,583,833)
=========== ===========
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 5--PROPERTY AND EQUIPMENT
A summary of the property and equipment at December 31, is as follows:
2000 1999
---------- ----------
Machinery and equipment.............................. $8,470,200 $8,082,847
Vehicles............................................. 902,061 823,849
Trailers............................................. 335,153 325,753
Furniture and fixtures............................... 172,115 169,413
Leasehold improvements............................... 151,110 151,110
---------- ----------
10,030,639 9,552,972
Less: accumulated depreciation....................... 6,636,753 5,712,874
---------- ----------
$3,393,886 $3,840,098
========== ==========
NOTE 6--DEBT OBLIGATIONS
LINES OF CREDIT
The Company has an equipment line of credit, for one million dollars
($1,000,000) at the applicable constant maturing two year treasury bill rate
plus 2%. The loan is secured by all business assets. The line of credit is
available for 36 months and reviewed annually.
The Company also has an additional secured line of credit for five million
dollars ($5,000,000) and two million five hundred thousand dollars ($2,500,000),
at prime less one half percent, at December 31, 2000 and 1999, respectively. The
loan is secured by all corporate assets and is available through June 30, 2001
and reviewed on an annual basis.
As of December 31, 2000 and 1999, the prime rate was 9.5% and 8.5%,
respectively, and there were no balances outstanding on each of the respective
lines of credit.
LETTER OF CREDIT
In January 1999, the Company obtained a letter of credit from the same
financial institution of approximately $397,000. This amount was increased to
$763,000 during the year 2000. The purpose of the letter of credit is to finance
the potential amounts due under a workers' compensation insurance policy. The
letter of credit expires in January 2001, but was subsequently renewed through
January 2002.
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 6--DEBT OBLIGATIONS (CONTINUED)
LONG-TERM DEBT
Long-term debt at December 31, is as follows:
2000 1999
---------- ----------
Various notes payable, payable in monthly installments
ranging from $4,017 to $18,317, including interest of 7.5%
to 9.3%, maturing at various times from January, 2001 to
June, 2001; collateralized by certain machinery and
equipment................................................. $ 107,236 $ 281,367
Various notes payable, payable in monthly installments
ranging from $2,928 to $15,059, including interest of 5.4%
to 6.5%, maturing at various times from June, 2000 to
April, 2003; collateralized by certain machinery and
equipment................................................. 1,131,444 1,456,766
Various notes payable, payable in monthly installments
ranging from $37,848 to $58,774, including interest of
0.09% to7.9%, maturing at various times from September,
2000 to June, 2001........................................ 344,653 264,912
Various note payables, payable in monthly installments
ranging from $7,308 to $7,283, non-interest bearing note,
maturing at various times from December, 2000 to
September, 2001, collateralized by certain equipment...... 65,550 95,003
---------- ----------
1,648,883 2,098,048
Less current portion........................................ 1,091,367 1,123,197
---------- ----------
Long-Term Debt.............................................. $ 557,516 $ 974,851
========== ==========
Long-term debt maturities for each of the next three years:
YEAR ENDED AMOUNT
---------- ----------
2001........................................................ $1,091,367
2002........................................................ 511,329
2003........................................................ 46,187
----------
Total....................................................... $1,648,883
==========
NOTE 7--RELATED PARTY TRANSACTIONS
ADVANCES FROM STOCKHOLDERS
Advances from stockholders consists of operating advances. The advances from
the stockholders were repaid during 2000.
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 7--RELATED PARTY TRANSACTIONS (CONTINUED)
OPERATING LEASES
The Company rents its primary office facility as a tenant at will from a
trust related by common ownership and requires monthly payments of $2,375.
The agreement also requires that the Company pay all insurance costs on the
property.
The Company leased equipment from other companies related by common
ownership, on an "as-needed" basis. Equipment rentals from these companies
totaled $130,000, $60,312 and $94,900 for the years ended December 31, 2000
and 1999 and the eleven months ended December 31, 1998, respectively.
Total rent expense for the years December 31, 2000 and 1999 and the eleven
months ended December 31, 1998 was $145,093, $99,886 and $133,244, respectively.
NOTE 8--PROFIT SHARING PLAN
The Company has a prescribed profit sharing plan which covers the Company's
administrative employees. The Plan was amended to include a money purchase plan.
The Company made contributions of $138,500 to the Plan during the year ended
December 31, 2000 and $100,000 for the year ended December 31, 1999 and the
eleven months ended December 31, 1998.
NOTE 9--CASH FLOW INFORMATION
During 2000, 1999 and the eleven months ended 1998, the Company paid
$102,208, $106,758 and $114,420, respectively, for interest. Additionally,
during 2000, 1999 and the eleven months ended December 31, 1998 the Company paid
$190,237, $197,368 and $270,449, respectively, for income taxes.
The Company recorded net unrealized holding gains (losses) on available
for-sale securities of $9,605, $(59,282) and $(676) at December 31, 2000, 1999
and the eleven months ended 1998, respectively.
In 2000, 1999 and 1998, the Company obtained certain equipment and insurance
policies through long-term debt in the amount of $1,396,677, $1,564,631 and
$1,518,825, respectively. Included in the acquisition of equipment through
long-term debt, the Company traded in certain equipment with a cost of $693,557,
$264,898 and $236,751 and related debt obligations of $233,169, $101,400 and
$217,854, respectively.
NOTE 10--CONCENTRATIONS AND UNCERTAINTIES
FINANCIAL INSTRUMENTS
Other financial instruments, which potentially subject the Company to
concentration of credit risk, include contract receivables and marketable
securities. Contract receivables are generally not collateralized. The credit
risk results from the failure of a certain company or companies to meet the
responsibility of this payment. To date, the Company has not experienced such
failure.
UNION CONTRACTS
Substantially all of the Company's non-management employees are covered by
collective bargaining agreements. Certain of these agreements between the
Company and various unions are due to expire
NORTH AMERICAN SITE DEVELOPERS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 10--CONCENTRATIONS AND UNCERTAINTIES (CONTINUED)
within the next year. Failure to successfully renegotiate the union contracts
may have an adverse effect on the Company's operations. Management anticipates
all of the union agreements to be renewed.
LAWSUITS
The Company is involved in various claims and lawsuits against and for the
Company arising in the normal course of business. Management has vigorously
defended its case and believes that any financial responsibility that may be
incurred in settlements of such litigation would not be material to the
Company's financial position.
CONCENTRATIONS
The Company had contract revenues earned from one customer representing 40%
and 22% during December 31, 2000 and 1999, respectively. At December 31, 2000,
there was no outstanding contract receivable from this customer. Included in
contract receivables from this customer was approximately $3,785,000 at
December 31, 1999.
NOTE 11--SUBSEQUENT EVENT
Currently, the stockholders are negotiating the proposed sale of 100% of the
common stock of the Company.
