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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION   FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 or [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-16857 HORIZON OFFSHORE, INC.  Delaware
    
    76-0487309(State or other jurisdiction
    
    (I.R.S. employerof incorporation or organization)
    
    identification no.)
 2500 CityWest Boulevard, Suite 2200
Houston, Texas 77042
(Address of principal executive offices)
(Zip code) (713) 361-2600
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [  ] The number of shares of the registrants common stock, $1.00 par value per
share, outstanding as of April 29, 2004 was 27,066,729.




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS Description
    

    PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    27Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    28Signature
    
    
    29First Amendment to Consulting AgreementCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I.  FINANCIAL INFORMATION 
 Item 1.Financial Statements HORIZON OFFSHORE, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands, except share data)
 March 31,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    11,159
    
    
    $
    10,115Accounts receivable-Contract receivables
    
    
    95,377
    
    
    
    101,153Costs in
excess of billings, net
    
    
    37,458
    
    
    
    34,697Affiliated parties
    
    
    3
    
    
    
    170Income tax refund receivable
    
    
    200
    
    
    
    200Other current assets
    
    
    1,836
    
    
    
    2,616Total current assets
    
    
    146,033
    
    
    
    148,951PROPERTY AND EQUIPMENT, net
    
    
    238,511
    
    
    
    239,411RESTRICTED CASH
    
    
    5,335
    
    
    
    INVENTORY
    
    
    8,246
    
    
    
    8,250OTHER ASSETS
    
    
    21,472
    
    
    
    12,929$
    419,597
    
    
    $
    409,541LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    33,230
    
    
    $
    31,271Accrued liabilities
    
    
    6,131
    
    
    
    3,321Accrued job costs
    
    
    39,436
    
    
    
    56,346Billings in excess of costs
    
    
    17,023
    
    
    
    5,834Current maturities of long-term debt
    
    
    31,971
    
    
    
    9,651Current portion of subordinated notes
    
    
    30,971
    
    
    
    Related party debt
    
    
    
    
    
    
    15,000Current taxes payable
    
    
    1,649
    
    
    
    1,421Total current liabilities
    
    
    160,411
    
    
    
    122,844LONG-TERM DEBT, net of current maturities
    
    
    94,407
    
    
    
    146,886SUBORDINATED NOTES, net of current portion and discount
    
    
    17,380
    
    
    
    OTHER LIABILITIES
    
    
    1,577
    
    
    
    Total liabilities
    
    
    273,775
    
    
    
    269,730COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, $1 par value, 5,000,000 shares authorized,
none
issued and outstanding
    
    
    
    
    
    
    Common stock, $1 par value, 35,000,000 shares authorized,
27,840,926 and 27,290,582 shares issued, respectively
    
    
    17,134
    
    
    
    16,583Additional paid-in capital
    
    
    198,615
    
    
    
    182,687Accumulated deficit
    
    
    (64,849
    )
    
    
    (54,151
    )Treasury stock, 774,197 and 809,269 shares, respectively
    
    
    (5,078
    )
    
    
    (5,308
    )Total stockholders equity
    
    
    145,822
    
    
    
    139,811$
    419,597
    
    
    $
    409,541
 The accompanying notes are an integral part of these consolidated financial statements. 3




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In thousands, except share and per share data)
 Three Months EndedMarch 31,2004
    
    2003CONTRACT REVENUES
    
    $
    42,483
    
    
    $
    67,061COST OF CONTRACT REVENUES
    
    
    42,607
    
    
    
    64,527Gross profit (loss)
    
    
    (124
    )
    
    
    2,534SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    5,841
    
    
    
    5,418Operating loss
    
    
    (5,965
    )
    
    
    (2,884
    )OTHER:Interest expense, net of amount capitalized
    
    
    (3,737
    )
    
    
    (1,543
    )Interest income
    
    
    14
    
    
    
    11Loss on debt extinguishment
    
    
    (165
    )
    
    
    Other income (expense), net
    
    
    (58
    )
    
    
    (42
    )NET LOSS BEFORE INCOME TAXES
    
    
    (9,911
    )
    
    
    (4,458
    )INCOME TAX PROVISION (BENEFIT)
    
    
    787
    
    
    
    (1,510
    )NET LOSS
    
    $
    (10,698
    )
    
    $
    (2,948
    )EARNINGS PER SHARE  BASIC AND DILUTED:Net loss per share  basic and diluted
    
    $
    (0.40
    )
    
    $
    (0.11
    )WEIGHTED AVERAGE SHARES USED IN COMPUTING
NET LOSS PER SHARE:BASIC AND DILUTED
    
    
    26,542,622
    
    
    
    26,387,565
 The accompanying notes are an integral part of these consolidated financial statements. 4




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands)
 Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (10,698
    )
    
    $
    (2,948
    )Adjustments to reconcile net loss to net cash used in operating activities-Depreciation and amortization
    
    
    4,042
    
    
    
    4,135Deferred income tax benefit
    
    
    
    
    
    
    (1,563
    )Paid in-kind interest on subordinated notes
    
    
    610
    
    
    
    Amortization of subordinated debt discount recorded as interest expense
    
    
    266
    
    
    
    Amortization of deferred loan fees recorded as interest expense
    
    
    344
    
    
    
    241Expense recognized for issuance of treasury stock for 401(k) plan contributions
    
    
    110
    
    
    
    116Stock compensation
expense
    
    
    
    
    
    
    56Changes in operating assets and liabilities-Restricted cash
    
    
    (5,335
    )
    
    
    Accounts receivable
    
    
    5,943
    
    
    
    8,052Costs in excess of billings
    
    
    (2,761
    )
    
    
    (7,706
    )Billings in excess of costs
    
    
    11,189
    
    
    
    2Inventory
    
    
    4
    
    
    
    (128
    )Other assets
    
    
    (1,288
    )
    
    
    (653
    )Accounts payable
    
    
    3,936
    
    
    
    25Accrued and other liabilities
    
    
    139
    
    
    
    (1,864
    )Accrued job costs
    
    
    (16,910
    )
    
    
    (9,814
    )Current taxes payable
    
    
    228
    
    
    
    Net cash used in operating activities
    
    
    (10,181
    )
    
    
    (12,049
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and additions to property and equipment
    
    
    (2,050
    )
    
    
    (7,787
    )Net cash used in investing activities
    
    
    (2,050
    )
    
    
    (7,787
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on term debt
    
    
    (2,409
    )
    
    
    (2,072
    )Borrowings on revolving credit facilities
    
    
    6,650
    
    
    
    42,000Payments on revolving credit facilities
    
    
    (34,400
    )
    
    
    (23,500
    )Proceeds from issuance of subordinated notes
    
    
    44,898
    
    
    
    Deferred loan fees
    
    
    (1,470
    )
    
    
    Stock option and warrant transactions and other
    
    
    6
    
    
    
    Net cash provided by financing activities
    
    
    13,275
    
    
    
    16,428NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,044
    
    
    
    (3,408
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    10,115
    
    
    
    6,073CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    11,159
    
    
    $
    2,665SUPPLEMENTAL DISCLOSURES:Cash paid for interest
    
    $
    2,831
    
    
    $
    1,329Cash paid for income taxes
    
    $
    559
    
    
    $
    53NON-CASH INVESTING AND FINANCING ACTIVITIES:Repayment of debt with proceeds of additional term
debt
    
    $
    15,000
    
    
    $
    Capital expenditures for property and equipment included in accrued
liabilities
    
    $
    2,450
    
    
    $
    1,518Payment of deferred loan fees and warrant issuance costs with proceeds of additional term debt
    
    $
    5,502
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 5




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated interim financial statements included herein have been
prepared by Horizon Offshore, Inc. (a Delaware corporation) and its
subsidiaries (references to Horizon, we or us are intended to refer to Horizon
Offshore, Inc. and its subsidiaries), and are unaudited. In the opinion of
management, the unaudited consolidated interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position as of March 31, 2004, the
statements of operations for the three months ended March 31, 2004 and 2003,
and the statements of cash flows for the three months ended March 31, 2004 and
2003. Although management believes the unaudited interim related disclosures
in these consolidated interim financial statements are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in annual audited financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules of the Securities and Exchange Commission. The
results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 2004. The consolidated interim financial statements included
herein should be read in conjunction with the audited consolidated financial
statements and notes thereto included in our 2003 Annual Report on Form 10-K. Organization Horizon provides marine construction services for the offshore oil and gas
and other energy related industries domestically in the U.S. Gulf of Mexico and
Northeastern U.S. and internationally in Latin America, Southeast Asia and West
Africa, and recently expanded operations to the Mediterranean. These services
generally consist of laying, burying or repairing marine pipelines for the
transportation of oil and gas; and installing and salvaging production
platforms and other marine structures. Work is performed primarily on a
fixed-price or day-rate basis or a combination thereof. From time to time,
work is also performed under cost-reimbursement contracts. Significant Customers We have domestic and international operations in one industry segment, the
marine construction services industry for offshore oil and gas companies and
energy companies. Customers accounting for more than 10% of consolidated
revenues for the three months ended March 31, 2004 and 2003 are as follows: Three Months EndedMarch 31,Customer
    
    2004
    
    2003Customer A
    
    
    26
    %
    
    
    10
    %Customer B
    
    
    13
    %
    
    
    5
    %Customer C
    
    
    11
    %
    
    
    1
    %Customer D
    
    
    11
    %
    
    
    
    %Customer E
    
    
    
    %
    
    
    59
    %
 The amount of revenue accounted for by a customer depends on the level of
construction services required by the customer based on the size of their
capital expenditure budget and our ability to bid for and obtain their work.
Consequently, customers that account for a significant portion of contract
revenues in one year may represent an immaterial portion of contract revenues
in subsequent years. Based upon our interpretation of the requirements of
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About
Segments of an Enterprise and Related Information, we have domestic and
international operations in one industry segment, the marine construction
services industry for oil and gas companies and energy companies. We
currently operate in four geographic segments and have recently
expanded to a fifth. Geographic
information has been provided in Note 8 of these consolidated interim financial
statements. 6




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Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Management must apply significant judgments in
this process. Among the factors, but not fully inclusive of all factors, that
may be considered by management in these processes are: the range of
accounting policies permitted by accounting principles generally accepted in
the United States; managements understanding of our business; expected rates
of business and operational change; sensitivity and volatility associated with
the assumptions used in developing estimates; and whether historical trends are
expected to be representative of future trends. Among the most subjective
judgments employed in the preparation of these financial statements are
estimates of expected costs to complete construction projects, the
collectibility of contract receivables and claims, the fair value of salvage
inventory, the depreciable lives of and future cash flows to be provided by our
equipment, the period and extent of maintenance and repairs of dry-docking
activity, estimates for the number and magnitude of self-insurance reserves
needed for potential medical claims and Jones Act obligations, judgments
regarding the outcomes of pending and potential litigation and certain
judgments regarding the nature of income and expenditures for tax purposes. We
review all significant estimates on a recurring basis and record the effect of
any necessary adjustments prior to publication of our financial statements.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Because of the inherent uncertainties in
this process, actual future results could differ from those expected at the
reporting date. Revenue Recognition Construction contract revenues are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred
to date to the total estimated costs for each construction contract. This
percentage is applied to the estimated revenue at completion to calculate
revenues earned to date. We consider the percentage-of-completion method to be
the best available measure of progress on these contracts. We follow the
guidance of American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, for our accounting
policy relating to the use of the percentage-of-completion method, estimated
costs and claim recognition for construction contracts. Contract revenue
reflects the original contract price adjusted for agreed upon change orders and
unapproved claims. We recognize unapproved claims only when the collection is
deemed probable and if the amount can be reasonably estimated for purposes of
calculating total profit or loss on long-term contracts. We record revenue and
the unbilled receivable for claims to the extent of costs incurred and to the
extent we believe related collection is probable and include no profit on
claims recorded. Changes in job performance, job conditions and estimated
profitability, including those arising from final contract settlements, may
result in revisions to costs and revenues and are recognized in the period in
which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. The asset Costs in excess of billings represents costs and
estimated earnings recognized as revenue in excess of amounts billed as
determined on an individual contract basis. The liability Billings in excess
of costs represents amounts billed in excess of costs and estimated earnings
recognized as revenue on an individual contract basis. For certain service contracts, revenues are recognized under SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, and No. 104, Revenue Recognition, when all of the following
criteria are met; persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the sellers price is fixed or
determinable; and collectibility is reasonably assured. Cost Recognition Cost of contract revenues includes all direct material and labor costs and
certain indirect costs, which are allocated to contracts based on utilization,
such as supplies, tools, repairs and depreciation. Selling, general and
administrative costs are charged to expense as incurred. 7




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Interest Capitalization Interest is capitalized on the average amount of accumulated expenditures
for equipment that is undergoing major modifications and refurbishment prior to
being placed into service. Interest is capitalized using an effective rate
based on related debt until the equipment is placed into service. There was no
interest capitalized for the three months ended March 31, 2004 and $110,000 of
interest capitalized for the three months ended March 31, 2003. Cash and Cash Equivalents Cash and cash equivalents include interest bearing demand deposits and
highly liquid investments with original maturities of three months or less. Accounts Receivable We have significant investments in billed and unbilled receivables as of
March 31, 2004. Billed receivables represents amounts billed upon the
completion of small contracts and progress billings on large contracts in
accordance with contract terms and milestones. Unbilled receivables on
fixed-price contracts, which are included in costs in excess of
billings, arise
as revenues are recognized under the percentage-of-completion method. Unbilled
amounts on cost-reimbursement contracts represent recoverable costs and accrued
profits not yet billed. Allowances for doubtful accounts and estimated
nonrecoverable costs primarily provide for losses that may be sustained on
unapproved change orders and claims. We evaluate our contract receivables and
costs in excess of billings and thoroughly review historical collection
experience, the financial condition of our customers, billing disputes and
other factors. During the fourth quarter of 2003, we recorded a $33.1 million
reserve for unapproved claims against Pemex. During the first quarter of 2004,
there was no change in our reserve for the Pemex unapproved claims. There were
no other reserves recorded during the first quarter of 2004. We negotiate change orders and unapproved claims with our customers. In
particular, unsuccessful negotiations relating to unapproved claims would
result in decreases in estimated contract profit or additional contract losses,
while successful claims negotiations would result in increases in estimated
contract profit or recovery of previously recorded contract losses. Any future
significant losses on receivables would adversely affect our financial
position, results of operations and our overall liquidity. Restricted Cash Restricted cash represents the amount used to establish an escrow account
required to secure a performance bond required under our
$53 million contract for Pemex awarded in March 2004. In connection with the award of the Pemex
contract, we obtained a performance bond to secure a portion of our obligations
under this contract in accordance with Pemexs customary requirements. We were required to use cash to
secure the performance bond, which we previously had been able to obtain without cash collateral. Amounts
restricted under this escrow account will be converted to a warranty bond after
the completion and acceptance of the project, which is estimated to be
substantially complete in late third quarter to fourth quarter of 2004. Upon completion of the twelve-month
warranty period, the restriction on these funds will be released, which is
estimated to be in late third quarter to fourth quarter of 2005. If
we secure additional
financing from Elliott Associates, L.P., one of our largest
stockholders (Elliott Associates),
and other holders of the 16% subordinated secured notes that we
issued on March 11, 2004, we will assign a
second priority security interest in the $5.3 million cash to secure
the new loan. See Note 9. Restricted cash is not considered as cash
or cash equivalents for purposes of the accompanying consolidated balance
sheets and statements of cash flows. Other Assets Other assets consist principally of capitalized dry-dock costs, deferred
loan fees, goodwill and deposits. Dry-dock costs are direct costs associated with scheduled major
maintenance on our marine vessels and are capitalized and amortized over the
five-year cycle to the next scheduled dry-docking. In April 2004, the FASB
decided not to approve the issuance of the proposed SOP, Accounting for
Certain Costs and Activities Related to Property, Plant, and Equipment issued
by the AICPA on June 29, 2001, which would have required us to expense
regulatory maintenance cost on our vessels as incurred, and has no definitive
plans to further consider this SOP. We incurred and capitalized dry-dock costs
of $3.0 million and $0.2 million for the three months ended March 31, 2004 and
2003, respectively. As of March 31, 2004, capitalized dry-dock costs totaled
$13.5 million. 8




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Loan fees paid in connection with new loan facilities are deferred and
amortized over the term of the respective loans. The amortization of the
deferred loan fees is recorded as interest expense in the accompanying
consolidated statements of operations. In connection with the issuance of the
subordinated secured notes in March 2004, we incurred and capitalized loan fees of $6.3
million. Inventory Inventory consists of production platforms and other marine structures
received from time to time as partial consideration from salvage projects
performed in the U.S. Gulf of Mexico. No significant non-cash consideration
was received during the three months ended March 31, 2004 and 2003. These
structures are held for resale. The inventory is valued at amounts not in
excess of the fair value of services provided. We assess the net realizable
value of our inventory items at each balance sheet date. Inventory is
classified as long-term due to the uncertain timing of its sale. There were no
significant sales of inventory during the three months ended March 31, 2004 or
for the year ended December 31, 2003. Stock-Based Compensation At March 31, 2004, we had two stock-based compensation plans. Pursuant to
SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure  an
amendment of SFAS No. 123, we have elected to account for stock-based employee
compensation under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. In January 2003, we granted options to
three former directors to purchase 15,320 shares of common stock at an exercise
price equal to the market price of the common stock on the date of grant. These
options vested immediately, and $56,000 was recorded as compensation expense in
the statements of operations during the first quarter of 2003. Except for the
compensation expense recorded above, no stock-based employee compensation cost
is reflected in net income (loss), as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. For stock-based compensation grants to non-employees, we
recognize as compensation expense the fair market value of such grants as
calculated pursuant to SFAS No. 123, amortized ratably over the lesser of the
vesting period of the respective option or the individuals expected service
period. The following table illustrates the effect on net income (loss) and
earnings per share if we had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation (in thousands, except per
share data). Three Months Ended March 31,2004
    
    2003Net loss, as reported
    
    $
    (10,698
    )
    
    $
    (2,948
    )Add: Total stock-based compensation cost, net of related
tax effects, included in net
loss
    
    
    
    
    
    
    37Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of
related tax effects
    
    
    (406
    )
    
    
    (519
    )Pro forma net loss
    
    $
    (11,104
    )
    
    $
    (3,430
    )Earnings per share  Basic and Diluted:As reported
    
    $
    (0.40
    )
    
    $
    (0.11
    )Pro forma
    
    $
    (0.42
    )
    
    $
    (0.13
    )
 To determine pro forma information as if we had accounted for employee
stock options under the fair-value method as defined by SFAS No. 123, we used
the Black-Scholes method, assuming no dividends, as well as the weighted
average assumptions included in the following table: 2004
    
    2003Expected option life (in years)
    
    
    7
    
    
    
    7Expected volatility
    
    
    76.7
    %
    
    
    77.5
    %Risk-free interest rate
    
    
    3.52
    %
    
    
    3.52
    %
 9




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The FASB has recently proposed to mandate expense recognition for stock
options and other types of equity-based compensation based on the fair value of
the options at the grant date. Additionally, the FASB is evaluating how to
develop a measure of the fair value of an option. Based on the final outcome of
the FASB proposal, we may be required to recognize expense related to stock
options and other types of equity-based compensation in future periods.
Additionally, we may be required to change our method for determining the fair
value of stock options. Income Taxes We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which requires the recognition of income tax expense for the
amount of taxes payable or refundable for the current year and for deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entitys financial statements or tax returns. We must make
significant assumptions, judgments and estimates to determine our current
provision for income taxes and also our deferred tax assets and liabilities and
any valuation allowance to be recorded against our net deferred tax asset. The
current provision for income tax is based upon the current tax laws and our
interpretation of these laws, as well as the probable outcomes of any foreign
or domestic tax audits. The value of our net deferred tax asset is dependent
upon our estimates of the amount and category of future taxable income and is
reduced by the amount of any tax benefits that are not expected to be realized.
For the three months ended March 31, 2004, a valuation allowance against the
net deferred tax assets that are not expected to be realized due to the
uncertainty of future taxable income in the amount of $4.0 million was charged
as income tax expense. Our valuation allowance as of March 31, 2004 is
approximately $27.1 million. Actual operating results and the underlying
amount and category of income in future years could render our current
assumptions, judgments and estimates of recoverable net deferred taxes
inaccurate, thus materially impacting our financial position and results of
operations. Reclassifications Certain prior period amounts have been reclassified to conform to the
presentation shown in the consolidated interim financial statements as of March
31, 2004. Reclassifications in 2003 had no effect on net income (loss) or
total shareholders equity and relate all within cash used in operating
activities in the consolidated statement of cash flows. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Barges, vessels, and related equipment
    
    $
    258,489
    
    
    $
    256,653Land and buildings
    
    
    19,742
    
    
    
    19,732Machinery and equipment
    
    
    245
    
    
    
    245Office furniture and equipment
    
    
    6,276
    
    
    
    6,116Leasehold improvements
    
    
    4,206
    
    
    
    4,191288,958
    
    
    
    286,937Less  accumulated depreciation
    
    
    (50,447
    )
    
    
    (47,526
    )Property and equipment, net
    
    $
    238,511
    
    
    $
    239,411
 During the three months ended March 31, 2004, we incurred $2.0 million of
capital expenditures primarily related to the upgrades of the Sea Horizonand
Canyon Horizon. We use the units-of-production method to calculate depreciation on our
major barges, vessels and related equipment to accurately reflect the wear and
tear of normal use. The useful lives of our major barges and vessels range
from 15 years to 18 years. Depreciation expense calculated under the
units-of-production method may be different than depreciation expense
calculated under the straight-line method in any period. The annual
depreciation based on utilization of each vessel will not be less than 25% of
annual straight-line depreciation, and the cumulative depreciation based on
utilization of each vessel will not be less than 50% of cumulative
straight-line depreciation. If we alternatively applied only a straight-line 10




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depreciation method, less depreciation expense would be recorded in
periods of high vessel utilization and more depreciation expense would be
recorded in periods of low vessel utilization. When events or changes in circumstances indicate that assets may be
impaired, we evaluate the carrying value of the asset. Changes in our business
plans, a change in the physical condition of a long-lived asset or the extent
or manner in which it is being used, or a severe or sustained downturn in the
oil and gas industry are considered triggering events. The carrying value of
each vessel is compared to the estimated undiscounted future net cash flows for
that vessel. If the carrying value of any vessel is more than the estimated
undiscounted future net cash flows expected to result from the use of the
vessel, a write-down of the vessel to estimated fair market value must be made.
When quoted market prices are not available, fair value must be determined
based upon other valuation techniques. This could include appraisals or present
value calculations of estimated future cash flows. In the calculation of fair
market value, including the discount rate used and the timing of the related
cash flows, as well as undiscounted future net cash flows, we apply judgment in
our estimates and projections, which could result in varying levels of
impairment recognition. For the three months ended March 31, 2004 and 2003,
there were no losses on impairment of long-lived assets. 3. STOCKHOLDERS EQUITY Earnings Per Share Earnings per share data for all periods presented have been computed
pursuant to SFAS No. 128, Earnings Per Share that requires a presentation of
basic earnings per share (basic EPS) and diluted earnings per share (diluted
EPS). Basic EPS excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised or converted into common stock. As of March 31, 2004, we
had outstanding options covering an aggregate of 3,369,850 shares of common
stock, of which 2,733,265 shares were exercisable. We also had outstanding
warrants covering an aggregate of 4,732,956 shares of common stock, all of
which were exercisable. Excluded from the computation of diluted EPS as of
March 31, 2004 are 4,732,956 outstanding warrants, each with a remaining
exercise price of $0.01, and options to purchase 3,369,850 shares of common
stock at a weighted average price of $7.35 per share as they would be
anti-dilutive. Excluded from the computation of diluted EPS as of March 31,
2003 are options to purchase 3,483,070 shares of common stock at a weighted
average price of $7.42 per share, as they would be anti-dilutive. Warrants On March 11, 2004, we issued $65.4 million principal amount of 16%
subordinated secured notes due March 31, 2007 (Subordinated Notes) to a group
of investors in a private placement. In connection with this issuance, we
issued to the holders of the Subordinated Notes warrants to purchase an
aggregate of 5,283,300 shares of our common stock for an aggregate exercise
price of $1.00 per share, expiring March 11, 2009, of which 550,344 warrants
have been exercised as of March 31, 2004. Holders paid the initial exercise
price of $0.99 per share upon issuance of the warrants and may fully exercise
them by paying the remaining $0.01 of the per share exercise price. Elliott
Associates purchased $15.0 million of the Subordinated Notes but did not receive any
warrants in the offering. The Subordinated Notes were initially recorded net of a discount totaling
approximately $17.3 million, which represents the fair value of the warrants
issued determined using the Black-Scholes method, assuming no dividends, as
well as the following weighted average assumptions: Warrant life
    
    5 yearsExpected volatility
    
    
    76.6
    %Risk-free interest rate
    
    
    2.66
    %
 The
discount, plus the discount related to offering costs, are
amortized as a non-cash charge to interest expense over the term of the
Subordinated Notes using the effective interest rate method. 11




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Treasury Stock During the three months ended March 31, 2004, we contributed 35,072 shares
of treasury stock to our 401(k) Plan. As of March 31, 2004, our treasury stock
consisted of 774,197 shares at a cost of $5.1 million. 4. RELATED PARTY TRANSACTIONS In August 1998, we entered into a master services agreement with Odyssea
Marine, Inc. (Odyssea), an entity wholly-owned by Elliott Associates and
Elliott International, L.P., collectively our largest stockholder, to charter
certain marine vessels from Odyssea. As of March 31, 2004, we owed Odyssea $1.5
million for charter services compared to $3.9 million at March 31, 2003.
Odyssea billed Horizon and Horizon paid Odyssea for services rendered under the
agreement as follows (in millions). Three Months Ended March 31,2004
    
    2003Amount billed to Horizon
    
    $
    2.2
    
    
    $
    5.3Amount paid to Odyssea
    
    $
    1.8
    
    
    $
    5.6
 In June 2003, we secured a $15.0 million term loan due June 30, 2004 from
Elliott Associates. All amounts of principal and interest under this loan were
repaid with a portion of the proceeds received from the issuance of the
Subordinated Notes in March 2004. Of the $65.4 million principal amount of the
Subordinated Notes issued, Elliott Associates purchased $15.0 million aggregate
principal amount. We
are finalizing terms and documents for obtaining a loan from Elliott
Associates and other holders of the Subordinated Notes of at least $10 million and up to $20 million. See Note 9. On May 1, 2004, we amended our consulting agreement with Edward L. Moses,
Jr., one of our directors. Under the terms of this amended agreement, Mr.
Moses will serve as a liaison with the senior management of Pemex Exploracion
y Produccion, a division of Petróleos Mexicanos (Pemex) on the collection of
our contractual claims against Pemex. He will also generally promote our
interests in Mexico, assist in the establishment of an office facility in
Mexico City for our Mexican affiliate and search for a candidate to represent
us in Mexico. We will pay Mr. Moses an aggregate $125,000 for his services for
the remainder of the agreement which terminates on September 30, 2004. 5. DEBT At March 31, 2004, we had approximately $191.7 million in total
outstanding debt before debt discount of $17.0 million. This represents an approximate increase of $20.2 million from
December 31, 2003. This increase in debt is primarily due to the Subordinated
Notes issued in March 2004 to meet current working capital needs offset by the
repayment of our $15.0 million term loan with Elliott Associates and net
repayment of approximately $27.8 million of indebtedness under our three
revolving credit facilities. Of the $174.7
million of outstanding net debt reflected in the accompanying consolidated balance sheet at March 31, 2004, $48.3 million represents borrowings on our three
revolving credit facilities, $78.0 million represents outstanding balances on
eight term-debt facilities and $48.4 million represents the outstanding balance
on our Subordinated Notes (net of $17.0 million representing the unamortized
portion of the original $17.3 million debt discount recorded related to the warrants issued). The total
obligation under our Subordinated Notes at March 31, 2004 was $65.4 million.
At March 31, 2004, we had $0.1 million available borrowing capacity under our
revolving credit facilities. Our available borrowing capacity has been limited as a result of decreased levels of
project activity and associated customer billings and the exclusion of certain significantly aged
receivables from our borrowing base calculation. We expect to be able to utilize
the entire capacity of our revolving credit facilities in the future as we
perform both domestic and international projects and begin to bill for our
work, which we expect will provide additional availability for us to re-borrow funds
during 2004. Interest rates vary from the one-month commercial paper rate plus
2.45% to 16%, and our average interest rate at March 31, 2004, including
amortization of the debt discount on our Subordinated Notes, was 11.5%.
Our term-debt borrowings currently require approximately $803,000 in total
monthly principal payments. On March 11, 2004, we issued $65.4 million principal amount of 16%
Subordinated Notes due March 31, 2007. We issued the Subordinated Notes in
order to meet our immediate working capital needs. We received net proceeds of
approximately $44.9 million from the offering of the Subordinated Notes, net of 12




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offering costs and proceeds used to repay all amounts of
principal and interest under the $15.0 million term loan from Elliott Associates.
Elliott Associates purchased $15.0 million aggregate principal amount of the
Subordinated Notes. We also substantially reduced our indebtedness under our
revolving credit facilities with Southwest Bank of Texas N.A.
(Southwest Bank). In order to meet our working
capital needs in the future, however, we will be required to re-borrow funds
under these revolving credit facilities. Interest at 16% on the Subordinated Notes is due quarterly beginning June
30, 2004. We are required by our existing loan agreements to issue to the
Subordinated Note holders additional Subordinated Notes equal to the amount of
interest due on any quarterly payment date beginning June 30, 2004. Accrued
interest that will be paid in-kind as of March 31, 2004 was $610,000. Upon an
event of default under the Subordinated Notes or if we fail to take certain
actions following the issuance of the Subordinated Notes, the interest on the
Subordinated Notes increases up to 19%. The Subordinated Notes are
collateralized by the Pemex and Williams receivables and claims, a second lien
on the Pecos Horizon, a second mortgage on our Port Arthur marine base and
certain other assets, and are subordinate and junior to our existing debt.
Collections on the Pemex and Williams claims and receivables must be remitted
immediately upon collection as a prepayment of the Subordinated
Notes. If we secure the
additional financing from Elliott Associates and other Subordinated
Note holders as described in Note 9, the portion of the
Pemex EPC 64 claim
not related to interruptions due to adverse weather conditions will then collateralize the new loan and the Subordinated Note holders would retain a second priority
security interest in such claim. Although
the Subordinated Notes mature in 2007, the portion equivalent to the carrying
value of the pledged Pemex and Williams claims and receivables will be
classified as current until collected. At March 31, 2004, $30.9 million was
classified as current related to the portion of the Subordinated Notes
collateralized by our Pemex and Williams claims and receivables. The Subordinated Notes have covenants that restrict our ability to enter
into any other agreements which would prohibit us from prepaying the
Subordinated Notes from the proceeds of an equity offering, entering into
certain affiliate transactions, incurring additional indebtedness other than
refinancing our existing term and revolving debt, and disposing of assets other
than in the ordinary course of business, and would also prohibit our
subsidiaries from making certain payments. In addition, in connection with our
Subordinated Note offering, we amended the financial covenants in all of our
existing loan agreements. At March 31, 2004, we were in compliance with these
financial covenants required by our credit facilities. Our credit facilities
require:  a ratio of current assets to current liabilities of 0.90 to 1 for the
period ending March 31, 2004 (actual was 1.06 at March 31, 2004), 0.90
to 1 for the period ending June 30, 2004, 1.05 to 1 for the period
ending September 30, 2004, 1.10 to 1 for the period ending December 31,
2004 and 1.10 to 1 for the period ending March 31, 2005 and each period
thereafter, each computed by excluding our revolving credit facilities
from current liabilities;  a fixed charge coverage ratio of 1.50 to 1 for the three-month period
ending September 30, 2004, 1.40 to 1 for the six-month period ending
December 31, 2004, 1.33 to 1 for the nine-month period ending March 31,
2005, and 1.33 to 1 for each period thereafter on a rolling four quarter
basis;  a tangible net worth in an amount not less than the sum of $110
million plus 75% of our consolidated net income for each fiscal quarter
which has been completed as of the date of calculation, commencing with
the fiscal quarter ending March 31, 2004 plus 90% of the net proceeds of
any common stock or other equity issued after December 31, 2003 (actual
was $138 million at March 31, 2004); and  the sum of our net income before gains and losses on sales of assets
(to the extent such gains and losses are included in earnings), plus
interest expense, plus tax expense, plus depreciation and amortization,
plus restructuring charges, (including costs of our and our lenders or
other creditors professional advisors not to exceed $1,600,000 for the
fiscal year ended December 31, 2004) to be greater than negative $(2.5)
million for the three-month period ending March 31, 2004 (actual was
negative $(1.7) million at March 31, 2004), negative $(4.5) million for
the six-month period ending June 30, 2004, positive $8 million for the
nine-month period ending September 30, 2004, and positive $20 million
for the twelve-month period ending December 31, 2004. Events of default under the Subordinated Notes occur upon our failure to
pay principal and interest under the Subordinated Notes, our insolvency, a
change of control or breach of the Subordinated Note covenants and our other
debt covenants, including the financial covenants described above. Three
holders of the Subordinated Notes for as long as they are holders of such notes
each have the right to designate one observer to our board of directors and its
committees. None of the observers shall have any right to vote at 13




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any such board or committee meetings. Two holders of the Subordinated
Notes also have the right to each designate one individual to be nominated by
our board of directors as a member of our board. In March 2004, we extended the maturity of our revolving credit facilities
with Southwest Bank to January 2005. Based on the maturity of
these facilities, this debt is classified as current as of March 31, 2004. We
reduced our indebtedness under these facilities with a portion of the net
proceeds from our Subordinated Note issuance in March 2004. We must secure an
alternate credit facility to replace the Southwest Bank credit facilities by
January 21, 2005, the extended maturity date, in order to repay these
borrowings when they become due. We have received a revocable commitment letter
from a large financing company to provide such a replacement credit facility,
but have not yet completed that refinancing. Management believes that it can
obtain replacement financing in an amount that will be sufficient to meet our
future needs in the third or fourth quarter of 2004. However, there can be no
assurance that we will be successful in this regard. Our
loans are collateralized by mortgages on our vessels and property
and by accounts receivable. Advances under our revolving credit facilities may
be obtained in accordance with a borrowing base defined as a percentage of
accounts receivable balances and costs in excess of billings. The loans contain
customary default and cross-default provisions and some require us to maintain
financial ratios at quarterly determination dates. The loan agreements also
contain covenants that limit our ability to incur additional debt, pay
dividends, create liens, sell assets and make capital expenditures. Since
the issuance of the Subordinated Notes and our filing of our Form 10-K, our liquidity has been
impacted by unanticipated cash requirements needed to complete a significant
project in the U.S. Gulf of Mexico and delays in billing and collecting the
receivables for this project ($3 million), because we did not reach an agreement
in our dispute with Iroquois and collect the associated receivable (which we expected would provide
us with a net cash inflow of approximately $13 million), because our
creditors have required us to satisfy payables earlier than was customary for
us prior to completing the 16% Subordinated Notes offering (with an effect of approximately
$13 million) and a reduction in our anticipated available borrowing capacity
due to a decrease in project activity and associated billings ($7 million). In addition, since late March
2004, we have been required to pledge cash to obtain routine performance bonds
and letters of credit securing our obligations, which we previously had been
able to obtain without cash collateral. We were required to secure a
performance bond pursuant to our new Pemex contract, which is collateralized by
$5.3 million cash. Also, we are required to obtain a $9.1 million letter of
credit to secure a portion of our obligations under our recently awarded Israel
Electric Corporation contract, which we are required to secure with cash. As a
result of the factors described above, we currently do not have the cash
resources to secure the letter of credit for the
Israel Electric Corporation contract. We are also currently limited to a
maximum level of performance bonds and letters of credit pursuant to our debt
covenants. As
of March 31, 2004, we were
not in compliance with our covenant requiring that our total
commitments for performance bonds and letters of
credit shall not exceed $15 million. In May 2004, we obtained waivers of compliance from all lenders
regarding this covenant and received consents to obtain additional performance bonds and
letters of credit in excess of $15 million. For the
quarter ended March 31, 2004, we were in compliance with all other covenants required
by our credit facilities. Based on managements current projections, including obtaining
the additional financing from Elliott Associates and other holders of
the Subordinated Notes (see Note 9),
we expect
to be in compliance with our debt covenants through December 31, 2004, and if successful in
refinancing our Southwest Bank revolving credit facilities prior to their maturity in January 2005, for at
least the next twelve
months. However, in the event that we do not meet our financial covenants in
the future, and we are unsuccessful in obtaining waivers of any
future non-compliance that might arise, our
lenders would have the right to accelerate our debt with them, and
cross-default provisions could result in acceleration of our other
indebtedness, including the Subordinated Notes. There can be no assurance that we will be able to complete the
additional financing with Elliott Associates and other Subordinated
Note holders (see Note 9) or obtain waivers from our lenders if we are unable to comply
with our financial covenants in the future. If we are unsuccessful in obtaining the first tranche of
financing, we anticipate that we may not be able to obtain the letter of credit
for the Israel Electric Corporation contract and, therefore, would need to seek other means to satisfy the contract. If we
are unable to find other means to satisfy the contract, we would not be able to
perform the Israel Electric Corporation project. If we are unable to perform
this contract, or immediately obtain additional contract awards to replace the
Israel Electric Corporation project, we may not generate sufficient cash flows
from operations to meet our existing liquidity needs or to service our debt
requirements. Additionally, we may not be able to meet our financial covenants
for the quarter ended June 30, 2004. Our ability to continue as a going concern is dependent on generating sufficient
cash flows from operations for meeting our liquidity needs, servicing
our debt requirements and meeting financial covenants. Accordingly, we may have
to consider alternatives to settle our existing liabilities with our limited resources, including a potential restructuring of our company or
seeking protection from creditors through bankruptcy filings. 6. LOSS ON DEBT EXTINGUISHMENT Loss on debt extinguishment relates to the write-off of deferred loan
fees of $165,000 for the early payment of our $15.0 million term loan with
Elliott Associates during the first quarter of 2004 in connection with the
issuance of the Subordinated Notes in March 2004. There were no losses on debt
extinguishment during the first quarter of 2003. 7. SEVERANCE CHARGES During the second quarter of 2003, we incurred approximately $680,000 in
charges related to severance and other costs in connection with the resignation
of a key employee, which was reflected in selling, general and administrative
expenses in the consolidated statements of operations in the second quarter of
2003. We recorded liabilities of $382,000 for severance and other benefits to
be paid pursuant to the employees separation agreement through August 31,
2004. This amount will be paid ratably each month through the term of the
agreement. In addition, we incurred a non-cash charge of approximately $156,000
related to the remeasurement of the employees options and a non-cash charge of
approximately $142,000 related to the forgiveness of the employees loan
pursuant to conditions in his separation agreement. During the first quarter of
2004, we paid $75,000 of the recorded liability resulting in a $156,000
remaining liability at March 31, 2004. All charges are reflected in our
domestic region. 8. GEOGRAPHIC INFORMATION Horizon operates in a single industry segment, the marine construction
services industry, and currently operates in four geographic segments. Information
relating to Horizons geographic segments follows (in millions): Three Months EndedMarch 31,2004
    
    2003Revenues:Domestic
    
    $
    21.2
    
    
    $
    52.1Latin America
    
    
    5.3
    
    
    
    3.6West Africa
    
    
    11.0
    
    
    
    6.9
 14




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##### Table of Contents



Three Months EndedMarch 31,2004
    
    2003Southeast Asia
    
    
    5.0
    
    
    
    4.1Other
    
    
    
    
    
    
    0.4Total
    
    $
    42.5
    
    
    $
    67.1Gross Profit:Domestic
    
    $
    (0.9
    )
    
    $
    1.0Latin America
    
    
    (1.1
    )
    
    
    (0.3
    )West Africa
    
    
    1.0
    
    
    
    1.5Southeast Asia
    
    
    0.9
    
    
    
    0.1Other
    
    
    
    
    
    
    0.2Total
    
    $
    (0.1
    )
    
    $
    2.5
 As ofMarch 31,
    
    December 31,2004
    
    2003Long-lived assets (1):Domestic
    
    $
    170.2
    
    
    $
    171.7Latin America
    
    
    0.2
    
    
    
    0.2West Africa
    
    
    19.2
    
    
    
    19.7Southeast Asia
    
    
    41.2
    
    
    
    40.1Other
    
    
    7.7
    
    
    
    7.7Total
    
    $
    238.5
    
    
    $
    239.4
   (1)
    
    Long-lived assets include vessels, property and related marine
equipment. Amounts reflect the location of the assets at March 31,
2004 and December 31, 2003. Equipment location changes as necessary to
meet working requirements. Other identifiable assets include inventory
and other long-term assets, and are primarily located in the domestic
region. Goodwill is associated with the Latin America region. 
 9. SUBSEQUENT EVENTS We
are finalizing terms and documents for obtaining a loan from Elliott Associates and other holders of the
Subordinated Notes of at least $10 million and up to
$20 million, which if finalized, will be advanced in two
tranches. We are also in the process of obtaining all required lender consents
to finalize this loan transaction. If we obtain
these consents and finalize this loan transaction, the first
tranche of $10 million will be used to secure the letter of credit
for the Israel Electric Corporation contract that we were awarded in
March 2004 and expect to commence performance of in June 2004.
Following receipt of all required lender consents and finalizing the
loan transaction, the second
tranche of up to $10 million would be funded in the sole discretion of Elliott Associates
and other participating holders of the Subordinated Notes and contingent upon the consent of the Export-Import Bank
of the United States (EXIM), which guarantees one of our revolving credit
facilities with Southwest Bank. Any funds advanced in the second
tranche will be used to meet future liquidity needs. Management believes that additional funding
from this new loan if it is finalized, our cash flows from operations for the remainder of 2004
and available borrowing capacity under our revolving credit facilities,
together with the successful refinancing of our Southwest Bank revolving credit
facilities prior to their maturity in January 2005, should be sufficient to
finance our working capital and other capital requirements for at least the
next 12 months. There can be no assurance that we will be able to
obtain all required lender consents or complete this financing transaction or that the terms of the loan transaction
will not change. If we are unsuccessful in obtaining the first tranche of
financing, we anticipate that we may not be able to obtain the letter of credit
for the Israel Electric Corporation contract and, therefore, would need to seek other means to satisfy the contract. If we
are unable to find other means to satisfy the contract, we would not be able to
perform the Israel Electric Corporation project. If we are unable to perform
this contract, or immediately obtain additional contract awards to replace the
Israel Electric Corporation project, we may not generate sufficient cash flows
from operations to meet our existing liquidity needs or to service our debt
requirements. Additionally, we may not be able to meet our financial covenants
for the quarter ended June 30, 2004. If this occurs and we are unable to
obtain waivers from our lenders, we will default under our loan agreements and,
as a result of cross-default provisions, we will also default on the Subordinated Notes. Our lenders
would then have the ability to accelerate all or a portion of our indebtedness.
There can be no assurance that we will be able obtain waivers from our lenders
if we are unable to comply with our financial covenants. Our ability to
continue as a going concern is dependent on generating sufficient cash flows
from operations for meeting our liquidity needs and servicing our debt requirements,
and meeting financial covenants. Accordingly, if we are unable to perform the
Israel Electric Corporation project, we may have to consider alternatives to
settle our existing liabilities with our limited resources, including a
potential restructuring of our company or seeking protection from creditors
through bankruptcy proceedings. In
order to finalize the new loan from Elliott Associates and the
other participating Subordinated Note holders, we have agreed to pay to them
interest on the amount of funds actually advanced at 18% per annum, payable
quarterly and in-kind, and a 5% closing fee on amounts advanced,
payable in-kind. The loan will mature on March 31, 2007. In order to obtain the consent
of the Subordinated Note holders to release their first priority
security interest in the Pemex EPC 64
claim not related to interruptions due to adverse weather conditions, which
will collateralize the new loan, we are required to issue to the holders an
additional $6.5 million of subordinated secured notes with the same terms as those
issued in March 2004. The Subordinated Note holders will retain a
second priority security interest in this claim. We
are also currently seeking EXIMs consent to release the Iroquois claim, all
or a portion of which will collateralize the new loan based upon the amounts
advanced under the second tranche. Upon EXIMs consent of the release of the
Iroquois claim and if Elliott Associates and other holders of the
Subordinated Notes advance at least $5 million of the second
tranche of funds, we will be required to reduce the borrowing capacity under our
domestic revolving credit facility with Southwest Bank from $20 million to $15
million and the interest rate for such facility will be increased by one
percent to Southwest Banks prime rate plus two percent. We have
agreed that until we receive EXIM's consent and obtain at least
$5 million from Elliott Associates and other holders of the
Subordinated Notes, we will not draw down in excess of
$15 million under such facility. There can be no assurance that we will be able to obtain EXIMs
consent and even upon receiving such consent, that Elliott Associates
and the other participating holders of the Subordinated Notes will
elect to provide additional funding under the second tranche. If we are unable to obtain such consent or if Elliott
Associates and the other participating holders of the Subordinated
Notes do not elect to provide the second tranche of funding, we will be required to meet our liquidity needs from
cash flows from operations. The timing of the collection of progress payments
and our ability to stay on budget and meet our cash flow forecasts for our projects will be of critical
importance for the remainder of 2004 to provide cash from operations and
position us to reduce our financial leverage. Item 2.Managements Discussion And Analysis Of Financial Condition And Results Of Operations You should read the following discussion and analysis together with our
consolidated financial statements and notes thereto and the discussion
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our 2003 Annual Report onForm 10-K. The following
information contains forward-looking statements, which are subject to risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
actual results may differ from those expressed or implied by the
forward-looking statements. General We provide marine construction services for the offshore oil and gas and
other energy related industries in the U.S. Gulf of Mexico, Northeastern U.S.,
Latin America, Southeast Asia and West Africa, and recently expanded our
operations to the Mediterranean with the award of our first project offshore
Israel. We have eleven operational vessels in our marine fleet, including five
pipelay and pipebury vessels, two diving support vessels, one dedicated
pipebury vessel, two derrick barges and one combination pipelay and derrick
vessel. Our primary services include:  
    
    installing pipelines;  
    
    providing pipebury, hook-up and commissioning services;  
    
    installing production platforms and other structures; and  
    
    disassembling and salvaging production platforms and other structures. 15




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The demand for offshore construction services depends largely on the
condition of the oil and gas industry and, in particular, the level of capital
expenditures by oil and gas companies for developmental construction. These
expenditures are influenced by:  
    
    the price of oil and gas and industry perception of future prices;  
    
    the ability of the oil and gas industry to access capital;  
    
    expectations about future demand and prices;  
    
    the cost of exploring for, producing and developing oil and gas
reserves;  
    
    sale and expiration dates of offshore leases in the United States and
abroad;  
    
    discovery rates of new oil and gas reserves in offshore areas;  
    
    local and international political and economic conditions;  
    
    governmental regulations; and  
    
    the availability and cost of capital. Historically, oil and gas prices and the level of exploration and
development activity have fluctuated substantially, impacting the demand for
pipeline and marine construction services. Factors affecting our profitability
include competition, equipment and labor productivity, contract estimating,
weather conditions and other risks inherent in marine construction. The marine
construction industry in the U.S. Gulf of Mexico and offshore Mexico is highly
seasonal as a result of weather conditions with the greatest demand for these
services occurring during the second and third calendar quarters of the year.
International shallow water areas offshore Southeast Asia and West Africa are
less cyclical and are not impacted seasonally to the degree the U.S. Gulf of
Mexico and offshore Mexico is impacted. Overview We had an operating loss for the first quarter of 2004 of $(6.0) million
and negative cash flows from operations of $(10.2) million for the three months
ended March 31, 2004. For discussion of our current liquidity
position, see Liquidity and Capital Resources herein. For the three months ended March 31, 2004, our domestic and Latin America
operations generated losses as we did not have a sufficient level of contract activity
and associated revenues to support our operating cost structure in those
geographic areas. This was primarily the result of continuing low levels of
vessel utilization due to competitive market conditions in the U.S. Gulf of
Mexico and the decreased work in Latin America until the recently
awarded contract for Pemex. Also,
productivity on execution of certain projects during the first quarter of 2004
was less than initially estimated when the projects were bid. Our inability to collect significant outstanding receivables and claims
from Pemex, Iroquois and Williams has continued to impact our liquidity and
cause us to closely manage cash during 2004. However, we were able to
meet our immediate cash needs from the financing secured
with the issuance of our $65.4 million Subordinated Notes in March 2004. For the three months ended March 31, 2004, revenues related to our
two-year pipeline and structural installation program in Nigeria accounted for
26% of our consolidated revenues. Construction activities under this contract
were substantially complete at March 31, 2004. Our customer in Nigeria has an
option, expiring in September 2004 pursuant to the contract, for a third year
of work which would begin in October 2004. Our customer has not exercised its
option. Revenues recognized under our recently awarded Pemex contract
represented 13% of consolidated revenues for the three months ended March 31,
2004. In the U.S. Gulf of Mexico, we commenced and completed both a pipeline

project and platform installation project for a single customer which accounted
for 11% of consolidated revenues for the three months ended March 31, 2004.
Also during the first quarter of 2004, work on a pipeline installation project
in Southeast Asia accounted for 11% of consolidated revenues. Construction
activities under this contract in Southeast Asia have been 16




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separated into two phases based on the customers scheduling.
Construction activities of each phase are approximately 50% of the total
contract. The first phase of the project required installation of three
pipelines of varying diameters totaling approximately 16 miles. Work for the
first phase began in February 2004 and was completed in April 2004. Work for
the second phase is expected to begin in January 2005. In March 2004, we were awarded significant contracts offshore Mexico for
Pemex and offshore Israel for the Israel Electric Corporation. We commenced
work under the Pemex contract in March 2004. The Atlantic Horizonand Lonestar
Horizon, which will be used for the Pemex project, are scheduled to begin
mobilization in June 2004 and July 2004, respectively, for the pipeline
installation phase of the project. Pursuant to the Israel Electric
Corporation contract, we are required to obtain a $9.1 million
letter of credit to secure a portion of our obligations under the
contract. In order to secure this letter of credit, we are finalizing
terms and documents for obtaining a loan from Elliott Associates and other Subordinated Note holders
of at least $10 million and up to $20 million. See
Liquidity and Capital Resources herein for discussion of
this transaction. Work offshore Israel is estimated to begin
in June 2004. In accordance with our contract with the Israel Electric
Corporation, we have issued an advanced billing of $9.0 million for
mobilization to the Mediterranean, which is reflected in billings in excess of
costs in the consolidated balance sheet as of March 31, 2004.
Collection of the billing to the Israel Electric Corporation is
expected in late May 2004. The Gulf Horizon
and Canyon Horizon, which will be used for the Israel Electric Corporation
project, are scheduled to begin mobilization in May 2004. We believe future
available liquidity under our revolving credit facilities and future cash
provided by operations from these two significant projects, as well as other
domestic and international projects, will be sufficient to fund our debt
service requirements, working capital needs and vessel modifications and
maintenance throughout 2004. We continue to negotiate with and use our best efforts to resolve our EPC
64 contract claims with Pemex. The total claims that we submitted to Pemex
approximated $78 million and included unapproved claims for extra work related
to interferences, interruptions and other delays as well as claims for
additional scope of work performed. The unapproved claims recorded as revenue
to the extent of costs incurred through December 31, 2002 do not include any
profit and are substantially less than the actual claims submitted to Pemex. Of
the $78 million of claims submitted, the carrying value at March 31, 2004 is
$25.5 million and is included in costs in excess of billings. If we are
unsuccessful in resolving our EPC 64 contract claims against Pemex, we intend
to submit some or all of the claims to arbitration in Mexico in accordance with
the Rules of Arbitration of the International Chamber of Commerce. Our
unreserved net claim receivable as of March 31, 2004 of approximately $25.5
million is our best estimate of the amount we believe we will collect on our
EPC 64 contract claims. A failure to recover any amount from Pemex in
negotiations or possible arbitration could result in a loss of up to our
carrying value of $25.5 million. It is possible that the EPC 64 claim could be
settled for an amount in excess of our recorded balance, which could result in
a gain recognized in the period settlement is reached. The process for
resolving these claims could continue into 2005 and beyond. Collection of
amounts related to these claims would be remitted directly as prepayment of the new loan and our
Subordinated Notes issued in March 2004. As of April 30, 2004, our backlog totaled approximately $180 million
compared to our backlog at April 30, 2003 of approximately $112 million. Our
expansion into the Mediterranean and the Pemex project offshore Mexico have
increased our backlog. Of the total backlog as of April 30, 2004, approximately
$23 million is not expected to be earned until after March 2005. Critical Accounting Policies Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. We must apply significant, subjective and complex
estimates and judgments in this process. Among the factors, but not fully
inclusive of all factors, that may be considered by management in these
processes are: the range of accounting policies permitted by accounting
principles generally accepted in the United States; managements understanding
of our business; expected rates of business and operational change; sensitivity
and volatility associated with the assumptions used in developing estimates;
and whether historical trends are expected to be representative of future
trends. Among the most subjective judgments employed in the preparation of
these financial statements are estimates of expected costs to complete
construction projects, the collectibility of contract receivables and claims,
the fair value of salvage inventory, the depreciable lives of and future cash
flows to be provided by our equipment, the period and extent of maintenance and
repairs for dry-docking activity, estimates for the number and related costs of
insurance claims for medical care and Jones Act obligations, judgments
regarding the outcomes of pending and potential litigation and certain
judgments regarding the nature of income and expenditures for 17




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tax purposes. We review all significant estimates on a recurring basis and
record the effect of any necessary adjustments prior to publication of our
financial statements. Adjustments made with respect to the use of estimates
often relate to improved information not previously available. Because of the
inherent uncertainties in this process, actual future results could differ from
those expected at the reporting date. Our significant accounting policies are described in Note 1 of our notes
to consolidated financial statements. We consider certain accounting policies
to be critical policies due to the significant judgments, subjective and
complex estimation processes and uncertainties involved for each in the
preparation of our consolidated financial statements. We believe the following
represent our critical accounting policies. We have discussed our critical accounting policies and estimates, together
with any changes therein, with the audit committee of our board of directors. Revenue Recognition Contract revenues for construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred
to date to the total estimated costs at completion for each contract. This
percentage is applied to the estimated revenue at completion to calculate
revenues earned to date. We consider the percentage-of-completion method to be
the best available measure of progress on these contracts. We follow the
guidance of AICPA Statement of Position (SOP) 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts relating to the use
of the percentage-of-completion method, estimating costs and claim recognition
for construction contracts. Estimating costs to complete each contract pursuant
to SOP 81-1 is a significant variable in determining the amount of revenues
earned to date. We continually analyze the costs to complete each contract and
recognize the cumulative impact of revisions in total cost estimates in the
period in which the changes become known. In determining total costs to
complete each contract, we apply judgment in the estimating process. Contract
revenue reflects the original contract price adjusted for agreed upon change
orders and unapproved claims. For contract change orders, claims or similar
items, we apply judgment in estimating the amounts and assessing the potential
for realization. We recognize unapproved claims only when the collection is
deemed probable and if the amount can be reasonably estimated for purposes of
calculating total profit or loss on long-term contracts. We record revenue and
the unbilled receivable for claims to the extent of costs incurred and to the
extent we believe related collection is probable and include no profit on
claims recorded. Changes in job performance, job conditions and estimated
profitability, including those arising from claims and final contract
settlements, may result in revisions to estimated costs and revenues and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. The asset Costs in excess of billings represents the
costs and estimated earnings recognized as revenue in excess of amounts billed
as determined on an individual contract basis. The liability Billings in
excess of costs represents amounts billed in excess of costs and estimated
earnings recognized as revenue on an individual contract basis. For certain service contracts, revenues are recognized under SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, and No. 104, Revenue Recognition, when all of the following
criteria are met; persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the sellers price is fixed or
determinable; and collectibility is reasonably assured. Revenues from salvage
projects sometimes include non-cash values assigned to structures that are
received from time to time as partial consideration for services performed. In
assigning values to structures received, we apply judgment in estimating the
fair value of salvage inventory. The complexity of the estimation process and all issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage of completion methodologies affect the amounts reported in our
financial statements. If our business conditions were different, or if we used
different assumptions in the application of this accounting policy, it is
likely that materially different amounts could be reported in our financial
statements. If we used the completed contract method to account for our
revenues, our results of operations would reflect greater variability in
quarterly revenues and profits as no revenues or costs would be recognized on
projects until the projects were substantially complete, which for larger
contracts may involve deferrals for several quarters. 18




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Accounts Receivable We have significant investments in billed and unbilled receivables as of
March 31, 2004. Billed receivables represents amounts billed upon the
completion of small contracts and progress billings on large contracts in
accordance with contract terms and milestones. Unbilled receivables on
fixed-price contracts, which are included in costs in excess of billings, arise
as revenues are recognized under the percentage-of-completion method. Unbilled
amounts on cost-reimbursement contracts represent recoverable costs and accrued
profits not yet billed. Allowances for doubtful accounts and estimated
nonrecoverable costs primarily provide for losses that may be sustained on
unapproved change orders and claims. We evaluate our contract receivables and
costs in excess of billings and thoroughly review historical collection
experience, the financial condition of our customers, billing disputes and
other factors. During the fourth quarter of 2003, we recorded a $33.1 million
reserve for unapproved claims against Pemex. During the first quarter of 2004,
there was no change in our reserve for the Pemex unapproved claims. We negotiate change orders and unapproved claims with our customers. In
particular, unsuccessful negotiations of unapproved claims could result in
decreases in estimated contract profit or additional contract losses, while
successful claims negotiations could result in increases in estimated contract
profit or recovery of previously recorded contract losses. Any future
significant losses on receivables would adversely affect our financial
position, results of operations and our overall liquidity. Our unreserved net claim receivable remaining from Pemex at March 31, 2004
of approximately $25.5 million, which includes approximately $19.1 million of
unapproved claims and $6.4 million of additional scope of work, is our best
estimate of the amount we believe we will collect on our EPC 64 contract
claims. Final resolution of this matter could reasonably be expected to vary
from $25.5 million. A failure to recover any amounts from Pemex in negotiations
or possible arbitration could result in a further loss of up to our carrying
value of $25.5 million. It is possible that the EPC 64 claim could be settled
for an amount in excess of our recorded balance, which could result in a gain
recognized in the period settlement is reached. The process for resolving these
claims could continue into 2005 and beyond. Collection of amounts related to
these claims would be remitted directly as prepayment of the new loan
if finalized and our Subordinated Notes
issued in March 2004. At March 31, 2004, our unreserved contract receivables of $27.2 million
from Iroquois is our best estimate of the amount we believe we will collect. On
January 20, 2004, we filed a lawsuit for breach of contract and wrongful
withholding of amounts due to us for services performed under our contract with
Iroquois. Iroquois has filed counter-claims against us for alleged damage to
its pipeline, extra costs to complete work due to alleged breach of
contract, indemnity for certain damage to third parties and alleged failure to
perform efficiently. We believe these counter-claims have no merit and intend
to vigorously defend against them. Given the early stages of negotiations, we
cannot predict whether a negotiated resolution of this dispute will occur or,
if such a resolution does occur, the precise terms of such a resolution. We
could incur a loss for uncollectible amounts of up to the carrying value of
$27.2 million. Collection of the Iroquois contract receivables
at their recorded carrying value would provide net proceeds of
approximately $13 million after payments to subcontractors on this project, which would be remitted
directly as prepayment of the new loan if finalized subject to the funding of the second tranche. At March 31, 2004, our unreserved contract receivables of $5.5 million
from Williams is our best estimate of the amount we believe we will collect.
On September 12, 2003, we filed a lawsuit for breach of contract and wrongful
withholding of amounts due to us for services performed under our contract with
Williams. Williams has filed a counter-claim against us for alleged breach of
contract. We believe that this counter-claim has no merit and intend to
vigorously defend against it. Given the early stages of negotiations, we
cannot predict whether a negotiated resolution of this dispute will occur or,
if such a resolution does occur, the precise terms of such a resolution. We
could incur a loss for uncollectible amounts of up to the carrying value of
$5.5 million. Collection of amounts related to these receivables would be
remitted directly as prepayment of our Subordinated Notes issued in March 2004. Other Assets Other assets consist principally of capitalized dry-dock costs, deferred
loan fees, goodwill and deposits. Dry-dock costs are direct costs associated with scheduled major
maintenance on our marine vessels and are capitalized and amortized over the
five-year cycle to the next scheduled dry-docking. In April 2004, the FASB
decided not to approve the issuance of the proposed SOP, Accounting for
Certain Costs and Activities Related to Property, Plant, and Equipment issued
by the AICPA on June 29, 2001, which would have required us to expense
regulatory maintenance cost on our vessels as incurred, and has no 19




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definitive plans to further consider this SOP. We incurred and capitalized
dry-dock costs of $3.0 million and $0.2 million for the three months ended
March 31, 2004 and 2003, respectively. As of March 31, 2004, capitalized
dry-dock costs totaled $13.5 million. Loan fees paid in connection with new loan facilities are deferred and
amortized over the term of the respective loans. The amortization of the
deferred loan fees is recorded as interest expense in the consolidated statements of operations. In connection with the issuance of the
Subordinated Notes in March 2004, we incurred and capitalized loan fees of $6.3
million. Property and Equipment We use the units-of-production method to calculate depreciation on our
major barges and vessels to approximate the wear and tear of normal use. The
annual depreciation based on utilization of each vessel will not be less than
25% of annual straight-line depreciation, and the cumulative depreciation based
on utilization of each vessel will not be less than 50% of cumulative
straight-line depreciation. Accelerated depreciation methods are used for tax
purposes. The useful lives of our major barges and vessels range from 15 years
to 18 years. Upon sale or retirement, the cost of the equipment and accumulated
depreciation are removed from the accounts and any gain or loss is recognized.
If we alternatively applied only a straight-line depreciation method, less
depreciation expense would be recorded in periods of high vessel utilization
and more depreciation expense would be recorded in periods of low vessel
utilization. We believe the method we use better matches costs with the
physical use of the equipment. When events or changes in circumstances indicate that assets may be
impaired, we evaluate the carrying value of the asset. Changes in our business
plans, a change in the physical condition of a long-lived asset or the extent
or manner in which it is being used, or a severe or sustained downturn in the
oil and gas industry are considered triggering events. The carrying value of
each vessel is compared to the estimated undiscounted future net cash flows for
that vessel. If the carrying value of any vessel is more than the estimated
undiscounted future net cash flows expected to result from the use of the
vessel, a write-down of the vessel to estimated fair market value must be made.
When quoted market prices are not available, fair value must be determined
based upon other valuation techniques. This could include appraisals or present
value calculations of estimated future cash flows. In the calculation of fair
market value, including the discount rate used and the timing of the related
cash flows, as well as undiscounted future net cash flows, we apply judgment in
our estimates and projections, which could result in varying levels of
impairment recognition. Stock-Based Compensation We have elected the method that requires disclosure of stock-based
compensation pursuant to SFAS No. 123, Accounting for Stock-Based
Compensation. Because of this election, we account for stock-based employee
compensation under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
loss, except for the compensation expense recorded below, as all options
granted had an exercise price equal to the market value of the underlying
common stock on the date of grant. Additionally, for stock-based compensation
grants to non-employees, we recognize as compensation expense the fair market
value of such grants as calculated pursuant to SFAS No. 123, amortized ratably
over the lesser of the vesting period of the respective option or the
individuals expected service period. In January 2003, we granted options to three former directors to purchase
15,320 shares of common stock at an exercise price equal to the market price of
the common stock on the date of grant. These options vested immediately, and
$56,000 was recorded as compensation expense in the statement of operations
during the first quarter of 2003. The FASB has recently proposed to mandate expense recognition for stock
options and other types of equity-based compensation based on the fair value of
the options at the grant date. Additionally, the FASB is evaluating how to
develop a measure of the fair value of an option. Based on the final outcome of
the FASB proposal, we may be required to recognize expense related to stock
options and other types of equity-based compensation in future periods.
Additionally, we may be required to change our method for determining the fair
value of stock options. 20




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Income Taxes We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which requires the recognition of income tax expense for the
amount of taxes payable or refundable for the current year and for deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entitys financial statements or tax returns. We must make
significant assumptions, judgments and estimates to determine our current
provision for income taxes and also our deferred tax assets and liabilities and
any valuation allowance to be recorded against our net deferred tax asset. The
current provision for income tax is based upon the current tax laws and our
interpretation of these laws, as well as the probable outcomes of any foreign
or domestic tax audits. The value of our net deferred tax asset is dependent
upon our estimates of the amount and category of future taxable income and is
reduced by the amount of any tax benefits that are not expected to be realized.
For the three months ended March 31, 2004, a valuation allowance against the
net deferred tax assets that are not expected to be realized due to the
uncertainty of future taxable income in the amount of $4.0 million was charged
as income tax expense. Our valuation allowance as of March 31, 2004 is
approximately $27.1 million. Actual operating results and the underlying
amount and category of income in future years could render our current
assumptions, judgments and estimates of recoverable net deferred taxes
inaccurate, thus materially impacting our financial position and results of
operations. Results of Operations Information relating to Horizons operations follows (in millions): Three Months Ended March 31,2004
    
    2003Revenues:Domestic
    
    $
    21.2
    
    
    $
    52.1Latin America
    
    
    5.3
    
    
    
    3.6West Africa
    
    
    11.0
    
    
    
    6.9Southeast Asia
    
    
    5.0
    
    
    
    4.1Other
    
    
    
    
    
    
    0.4Total
    
    $
    42.5
    
    
    $
    67.1Gross Profit:Domestic
    
    $
    (0.9
    )
    
    $
    1.0Latin America
    
    
    (1.1
    )
    
    
    (0.3
    )West Africa
    
    
    1.0
    
    
    
    1.5Southeast Asia
    
    
    0.9
    
    
    
    0.1Other
    
    
    
    
    
    
    0.2Total
    
    $
    (0.1
    )
    
    $
    2.5
 Quarter Ended March 31, 2004 Compared to the Quarter Ended March 31, 2003 Contract Revenues. Contract revenues were $42.5 million for the quarter
ended March 31, 2004, compared to $67.1 million for the quarter ended March 31,
2003. The decline in revenues is primarily a result of the sustained difficult
economic environment and depressed market in the marine construction industry
for the U.S. Gulf of Mexico and the reduced level of our work in the
Northeastern U.S. For the first three months of 2004, revenues generated in
the Northeastern U.S. accounted for 8% of consolidated revenues compared to 59%
for the first three months of 2003. The decline in revenues is also
attributable to a decrease in pricing of services for marine construction in
the U.S. Gulf of Mexico due to the highly competitive market. Gross Profit. Gross profit was a $(0.1) million loss for the quarter ended
March 31, 2004, compared to gross profit of $2.5 million (3.8% of contract
revenues) for 2003. Our domestic and Latin America operations generated
losses as we did not have a sufficient level of contract activity and associated
revenues to support our operating cost structure in those geographic areas. In addition, domestic 21




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gross profit was negative as a result of the continuing low levels of
vessel utilization due to competitive market conditions in the U.S. Gulf of
Mexico. Also, productivity on execution of projects during the first quarter
of 2004 was less than initially estimated when the work was bid. Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.8 million (13.7% of contract revenues) for the
three months ended March 31, 2004, compared with $5.4 million (8.1% of contract
revenues) for the first quarter of 2003. Selling, general and administrative
expenses increased for the three months ended March 31, 2004 primarily due to
professional advisor fees and costs related to the restructuring of our debt
covenants for our credit facilities in connection with the issuance of our
Subordinated Notes in March 2004. Also, our selling, general and
administrative expenses have increased due to legal costs associated with our
ongoing contract disputes and related litigation and costs incurred as we
implement Section 404 of the Sarbanes-Oxley Act. Interest Expense. Interest expense was $3.7 million for the three months
ended March 31, 2004 and $1.5 million for the same period last year. Our total
outstanding debt was $191.7 million before debt discount of $17.0 million at March 31, 2004, compared to $114.8
million at March 31, 2003. Interest expense increased due to higher average
outstanding debt balances, higher interest rates and other financing costs. Interest expense
also increased due to the amortization of the debt discount associated with the
Subordinated Notes and additional amortization of deferred loan fees. Interest Income. Interest income on cash investments for the three months
ended March 31, 2004 was $14,000 compared to $11,000 for the three months ended
March 31, 2003. Cash investments consist of interest bearing demand deposits. Loss on Debt Extinguishment.Loss on debt extinguishment relates to the
write-off of deferred loan fees of $165,000 for the early payment during the
first quarter of 2004 of our $15.0 million term loan with Elliott Associates.
In March 2004, we issued $65.4 million of Subordinated Notes and used a portion
of the proceeds to repay our outstanding loan with Elliott Associates. Elliott
Associates purchased $15 million aggregate principal amount of the Subordinated
Notes. There were no losses on debt extinguishment during the first quarter of
2003. Other Income (Expense), Net. Other income (expense) for the quarter ended
March 31, 2004 primarily consisted of approximately $72,000 of foreign currency
loss due to activity in West Africa denominated in Nigerian naira and a decline
of the U.S. dollar compared to the Nigerian naira. Other income (expense) for
the three months ended March 31, 2003, primarily consisted of approximately
$47,000 of foreign currency loss due to activity in Mexico denominated in
Mexican pesos and a decline of the U.S. dollar compared to the Mexican peso. Income Taxes.We use the liability method of accounting for income taxes.
For the quarter ended March 31, 2004, we recorded an income tax provision of
$0.8 million on pre-tax net loss of $(9.9) million.
For the quarter ended March 31, 2003, we recorded a federal income tax benefit
of $(1.5) million, at a net effective rate of 33.9% on pre-tax net loss of
$(4.5) million. The provision for 2004 relates to foreign taxes on income
generated from international operations. There was no tax benefit recorded on
pre-tax losses due to the recording of additional valuation allowance
of $4.3 million to fully
offset our net deferred tax assets that are not expected to be realized due to
the uncertainty of future taxable income. Net Loss. Net loss for the quarter ended March 31, 2004 was $(10.7)
million, or $(0.40) per share-diluted. This compares with net loss of $(2.9)
million, or $(0.11) per share-diluted for the quarter ended March 31, 2003. Liquidity and Capital Resources During the past two years and for the first three months of 2004, we have
experienced operating and net losses. During the first quarter of 2004, our
liquidity continued to be significantly impacted by our inability to collect
outstanding receivables and claims from Pemex, Iroquois and Williams and to
generate sufficient revenues to support our operating cost structure as a
result of decreased levels of project activity during this period. The
decrease in project activity and associated customer billings, together with
the exclusion of certain significantly aged receivables from other
customers totaling approximately
$27.5 million at March 31, 2004 from our borrowing base
calculation, decreased our available borrowing capacity under our revolving
credit facilities, which further impacted our liquidity during the first
quarter of 2004. Recent Events On March 11, 2004, in order to address our then present liquidity problems
and to provide us with sufficient funds to meet our immediate cash needs during
the first quarter of 2004, we issued $65.4 million principal amount of 16%
Subordinated Notes due March 31, 2007 to a group of investors in a private
placement. We received net proceeds of $44.9 million from the Subordinated
Notes offering, net of offering costs and proceeds used to repay all amounts of
principal and interest under our $15.0 million term loan from Elliott
Associates. Elliott Associates purchased $15.0 million aggregate principal
amount of the Subordinated Notes. We also substantially reduced our
indebtedness under our revolving credit facilities with Southwest Bank. 22




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Since
the issuance of the Subordinated Notes and our filing of our Form 10-K, our liquidity has been
impacted by unanticipated cash requirements needed to complete a significant
project in the U.S. Gulf of Mexico and delays in billing and collecting the
receivables for this project ($3 million), because we did not reach an agreement
in our dispute with Iroquois and collect the associated receivable (which we expected would provide
us with a net cash inflow of approximately $13 million), because our
creditors have required us to satisfy payables earlier than was customary for
us prior to completing the 16% Subordinated Notes offering (with an effect of approximately
$13 million) and a reduction in our anticipated available borrowing capacity
due to a decrease in project activity and associated billings ($7 million). In addition, since late March
2004, we have been required to pledge cash to obtain routine performance bonds
and letters of credit securing our obligations, which we previously had been
able to obtain without cash collateral. We were required to secure a
performance bond pursuant to our new Pemex contract, which is collateralized by
$5.3 million cash. Also, we are required to obtain a $9.1 million letter of
credit to secure a portion of our obligations under our recently awarded Israel
Electric Corporation contract, which we are required to secure with cash. As a
result of the factors described above, we currently do not have the cash
resources to secure the letter of credit for the
Israel Electric Corporation contract. We are also currently limited to a
maximum level of performance bonds and letters of credit pursuant to our debt
covenants. We
are finalizing terms and documents for obtaining a loan from Elliott Associates and other holders of the
Subordinated Notes of at least $10 million and up to
$20 million, which if finalized, will be advanced in two tranches. We are also in the process of
obtaining all required lender consents to
finalize this loan transaction. If we obtain these consents and finalize
this loan transaction, the first
tranche of $10 million will be used to secure the letter of credit
for the Israel Electric Corporation project. Following receipt of all required lender consents and finalizing the loan transaction,
the second tranche of up to
$10 million would be funded
in the sole discretion of Elliott Associates and other participating
holders of the Subordinated Notes and contingent upon the consent of the Export-Import Bank of the United States
(EXIM), which guarantees one of our revolving credit facilities with Southwest
Bank. Any funds advanced in the second tranche will be used to meet
future liquidity needs. Management believes that additional funding from this new loan
if it is finalized, our cash
flows from operations for the remainder of 2004 and available borrowing
capacity under our revolving credit facilities, together with the successful
refinancing of our Southwest Bank revolving credit facilities prior to their
maturity in January 2005, should be sufficient to finance our working capital
and other capital requirements for at least the next 12 months. There
can be no assurance that we will be able to
obtain all required lender consents or complete this financing transaction or that the terms of the loan transaction
will not change. If we are unsuccessful in obtaining the first tranche of
financing, we anticipate that we may not be able to obtain the letter of credit
for the Israel Electric Corporation contract and, therefore, would need to seek other means to satisfy the contract. If we
are unable to find other means to satisfy the contract, we would not be able to
perform the Israel Electric Corporation project. If we are unable to perform
this contract, or immediately obtain additional contract awards to replace the
Israel Electric Corporation project, we may not generate sufficient cash flows
from operations to meet our existing liquidity needs or to service our debt
requirements. Additionally, we may not be able to meet our financial covenants
for the quarter ended June 30, 2004. If this occurs and we are unable to
obtain waivers from our lenders, we will default under our loan agreements and,
as a result of cross-default provisions, we will also default on the Subordinated Notes. Our lenders
would then have the ability to accelerate all or a portion of our indebtedness.
There can be no assurance that we will be able obtain waivers from our lenders
if we are unable to comply with our financial covenants. Our ability to
continue as a going concern is dependent on generating sufficient cash flows
from operations for meeting our liquidity needs and servicing our debt requirements,
and meeting financial covenants. Accordingly, if we are unable to perform the
Israel Electric Corporation project, we may have to consider alternatives to
settle our existing liabilities with our limited resources, including a
potential restructuring of our company or seeking protection from creditors
through bankruptcy proceedings. During
the course of discussions with our lenders regarding the terms of
the additional financing, we discovered that our total commitment on
performance bonds and letters of credit exceeded the maximum allowed by certain
of our lenders because we failed to include in our calculation regarding this
covenant performance bonds and letters of credit that remain outstanding from
completed construction projects. We obtained waivers of this default and consents to
obtain additional performance bonds and letters of credit in excess of $15
million. Should we be required to secure additional performance bonds and
letters of credit on projects in the future, we may be required to obtain
additional waivers from our lenders. Since we have obtained these waivers and
there have been no other defaults, we believe that the long-term portion of our
Subordinated Notes and our other revolving and
term debt facilities are properly classified as non-current. The
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary in the event of such
an acceleration or if we are unable to continue as a going concern. In
order to finalize the new loan from Elliott Associates and the
other participating Subordinated Note holders, we have agreed to pay to them
interest on the amount of funds actually advanced at 18% per annum, payable
quarterly and in-kind, and a 5% closing fee on amounts advanced,
payable in-kind. The loan will mature on March 31, 2007. In order to obtain the consent
of the Subordinated Note holders to release their first priority
security interest in the Pemex EPC 64
claim not related to interruptions due to adverse weather conditions, which
will collateralize the new loan, we are required to issue to the holders an
additional $6.5 million of subordinated notes with the same terms as those
issued in March 2004. The Subordinated Note holders will retain
a second priority security interest in this claim. We
are also currently seeking EXIMs consent to release the Iroquois claim, all
or a portion of which will collateralize the new loan based upon the amounts
advanced under the second tranche. Upon EXIMs consent of the release of the
Iroquois claim and if Elliott Associates and other holders of the
Subordinated Notes advance at least $5 million of the second
tranche of funds, we will be required to reduce the borrowing capacity under our
domestic revolving credit facility with Southwest Bank from $20 million to $15
million and the interest rate for such facility will be increased by one
percent to Southwest Banks prime rate plus two percent. We have
agreed that until we receive EXIM's consent and obtain at least
$5 million from Elliott Associates and other holders of the
Subordinated Notes, we will not draw down in excess of
$15 million under such facility. There can be no assurance that we will be able to obtain EXIMs
consent and even upon receiving such consent, that Elliott Associates
and the other participating holders of the Subordinated Notes will
elect to provide additional funding under the second tranche. If we are unable to obtain such consent or if Elliott
Associates and the other participating holders of the Subordinated
Notes do not elect to provide the second tranche of funding, we will be required to meet our liquidity needs from
cash flows from operations. The timing of the collection of progress payments
and our ability to stay on budget and meet our cash flow forecasts for our projects will be of critical
importance for the remainder of 2004 to provide cash from operations and
position us to reduce our financial leverage. 23




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Cash Flows At March 31, 2004, we had $11.2 million of cash and cash equivalents, and
we had $0.1 million available borrowing capacity under our revolving credit
facilities, which was limited based on the borrowing base calculation. We
expect to be able to utilize the entire borrowing capacity of our revolving
credit facilities in the future as a result of an anticipated increase in
revenues generated from an increase in project activity and associated customer
billings. We will need access to the entire borrowing capacity of our revolving
credit facilities in order to meet our working capital needs in the future. In
addition, we will need to complete the refinancing of our revolving credit
facilities maturing in January 2005. Management believes that additional
funding from the new loan, our cash flows from operations for the remainder of
2004 and available borrowing
capacity under our revolving credit facilities, together with the
successful refinancing of our Southwest Bank revolving credit facilities prior
to their maturity in January 2005, should be sufficient to finance our working
capital and other capital requirements for at least the next 12 months. Based
on the maturity of the Southwest Bank revolving credit facilities due in
January 2005, these facilities are classified as current at March 31, 2004. If
market conditions do not improve, our operating results will not support any
additional indebtedness. Accordingly, management believes that we will need to
consummate an equity offering to refinance all or a portion of our Subordinated
Notes prior to their maturity in March 2007. Cash
used in operations was $(10.2) million for the three months ended
March 31, 2004 compared to cash used in operations of $(12.0) million for the
three months ended March 31, 2003. Cash used in operations is primarily
attributable to our pre-tax loss of $(9.9) million for the quarter ended March
31, 2004 and payments to vendors as funds became available from financing
activities. Cash used in operations for the quarter ended March 31, 2003 is
primarily attributable to the reduction in accrued job cost and our pre-tax
loss of $(4.5) million. Cash used in investing activities was $(2.1) million for the three months
ended March 31, 2004 compared to cash used in investing activities of $(7.8)
million for the same period of 2003. The decrease in cash used in investing
activities is attributable to a decline in our capital expenditures during 2004
due to the substantial completion of major upgrades on the Sea Horizonin 2003. Cash provided by financing activities was $13.3 million for the three
months ended March 31, 2004 compared to cash provided by financing activities
of $16.4 million for same period of 2003. Funds provided by financing
activities for the first quarter of 2004 included $44.9 million from the
issuance of our Subordinated Notes, offset by net $27.8 million used to reduce
our indebtedness under our three revolving credit facilities. Funds provided
by financing activities for the first quarter of 2003 is attributable to net
borrowings under our revolving credit facilities to meet working capital needs. Working Capital As of March 31, 2004 we had a working capital deficit of $(14.4) million
compared to $26.1 million of working capital at December 31, 2003. The decrease
in working capital was primarily attributable to our pre-tax loss for the three
months ended March 31, 2004, the current classification of our revolving credit
facilities maturing in January 2005 and the current classification of a portion
of the Subordinated Notes. Although our Subordinated Notes mature in March
2007, the portion collateralized by our Pemex and Williams receivables and
claims has been classified as a current liability in the consolidated balance
sheet as of March 31, 2004. Indebtedness At March 31, 2004, we had approximately $191.7 million in total
outstanding debt
before debt discount of $17.0 million. This represents an approximate
increase of $20.2 million from December 31, 2003. This increase in debt is
primarily due to the Subordinated Notes issued in March 2004 to meet current
working capital needs offset by the repayment of our $15.0 million term loan
with Elliott Associates and net repayment of approximately $27.8 million of
indebtedness under our three revolving credit facilities. Of the $174.7 million
of outstanding net debt reflected in the consolidated balance sheet at March 31,
2004, $48.3 million represents borrowings on our three revolving credit
facilities, $78.0 million represents outstanding balances on eight term-debt
facilities and $48.4 million represents the outstanding balance on our
Subordinated Notes (net of $17.0 million representing the unamortized portion
of the original $17.3 million debt discount recorded related to the warrants
issued). The total obligation under our Subordinated Notes at March 31, 2004
was $65.4 million. Interest rates vary from the one-month commercial paper
rate plus 2.45% to 16%, and our average interest rate at March 31, 2004,
including amortization of the debt discount on our Subordinated Notes, was
11.5%. Our term-debt borrowings currently require approximately $803,000 in
total monthly principal payments. Indebtedness classified as current
liabilities at March 31, 2004 was $62.9 million, including $22.3 million
related to revolving credit facilities due in January 2005, $9.7 million of
current maturities of long-term debt and $30.9 million of the current portion
of Subordinated Notes collateralized by our Pemex and Williams claims and
receivables. Our loans are collateralized by mortgages on our vessels and property and
by accounts receivable. Advances under our revolving credit facilities may be
obtained in accordance with a borrowing base defined as a percentage of
accounts receivable balances and costs in excess of billings. The loans contain
customary default and cross-default provisions and some require us to maintain
certain financial ratios at quarterly determination dates. The loan agreements
also contain certain covenants that limit our ability to incur additional debt,
pay dividends, create certain liens, sell assets and make capital expenditures. As
of March 31, 2004, we were not in compliance with our covenant
requiring that our total commitments for performance bonds and
letters of credit shall not exceed $15 million. In May 2004, we obtained waivers of compliance from all
lenders regarding this covenant and obtained consents to obtain additional
performance bonds and letters of credit in excess of $15 million. For the
quarter ended March 31, 2004, we were in compliance with all other covenants
required by our credit facilities. See Note 5 of our notes to consolidated
financial statements for details of our financial covenants. Claims and Litigation We continue to negotiate with and use our best efforts to resolve our EPC
64 contract claims against Pemex but we have been unsuccessful in resolving
these claims. The total claims that we submitted to Pemex approximated $78
million and included unapproved claims for extra work related to interferences,
interruptions and other delays as well as claims for additional scope of work
performed. The unapproved claims recorded as revenue to the extent of costs
incurred through December 31, 2002 do not include any
profit and are substantially less than the actual claims submitted to
Pemex. Of the $78 million of claims submitted, the carrying value at March 31,
2004 is $25.5 million and is included in costs in excess of billings. 24




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The carrying value at March 31, 2004 reflects a $33.1 million reserve for the Pemex
EPC 64 claims recorded in the fourth quarter of 2003. If we are unsuccessful
in resolving our EPC 64 contract claims against Pemex, we intend to submit some
or all of the claims to arbitration in Mexico in accordance with the Rules of
Arbitration of the International Chamber of Commerce. Our unreserved net claim
receivable as of March 31, 2004 of approximately $25.5 million is our best
estimate of the amount we believe we will collect on our EPC 64 contract
claims. A failure to recover any amount from Pemex in negotiations or possible
arbitration could result in a loss of up to our carrying value of $25.5
million. It is possible that the EPC 64 claim could be settled for an amount in
excess of our recorded balance, which could result in a gain recognized in the
period settlement is reached. The process for resolving these claims could
continue into 2005 and beyond. Collection of amounts related to these claims
would be remitted directly as prepayment of the new loan if finalized and our Subordinated
Notes issued in March 2004. We continue to pursue collection of approximately $27.2 million of
unreserved contract receivables from Iroquois and $5.5 million of unreserved
contract receivables from Williams. We have filed suit against Iroquois in the
Supreme Court of the State of New York, New York County, for breach of contract
and for damages for failure to pay for work performed. We have filed suit
against Williams in the 295th Judicial District of the District Court for
Harris County, Texas for breach of contract and wrongful withholding of amounts
due to us for services. Both Iroquois and Williams have filed counter-claims
against us. If these counter-claims are decided unfavorably to us, the result
could either reduce our recovery on our valid claims, or if all of our claims
are unsuccessful, result in a recovery by Iroquois or Williams, which would
have a material adverse impact on our results of operations and financial
position. Collection of the Iroquois contract receivables at their
recorded carrying value would provide net
proceeds of approximately $13 million after payments to subcontractors on
this project, which would be remitted directly as prepayment of the new loan
if finalized subject to the funding of the second tranche. Collection of amounts related to
the Williams receivables would be remitted directly as prepayment of our
Subordinated Notes issued in March 2004. Contractual Obligations
and Capital Expenditures We have fixed debt service and lease payment obligations under notes
payable and operating leases for which we have material contractual cash
obligations. Interest rates on our debt vary from commercial paper plus 2.45%
to a fixed 16%. The following table summarizes our long-term material
contractual cash obligations (in millions): Remainderof 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterPrincipal and
interest payments
on debt
    
    $
    11,608
    
    
    $
    76,474
    
    
    $
    17,401
    
    
    $
    111,019
    
    
    $
    5,493
    
    
    $
    24,628Operating
leases
    
    
    1,989
    
    
    
    2,504
    
    
    
    2,341
    
    
    
    2,347
    
    
    
    2,168
    
    
    
    320$
    13,597
    
    
    $
    78,978
    
    
    $
    19,742
    
    
    $
    113,366
    
    
    $
    7,661
    
    
    $
    24,948
 We do not have any off-balance sheet arrangements. Planned capital expenditures for the remainder of 2004 are estimated to
range from approximately $5 million to $7 million primarily related to vessel
improvements. These expenditures will depend upon available funds, work awarded
and future operating activity. Despite our current liquidity issues, our
long-term strategy is to expand our operating capabilities and operations into
additional selected international areas. To the extent we are successful in
identifying opportunities to expand our market share in those areas, we will
likely require additional equity. Forward-Looking Statements In addition to historical information, Managements Discussion and
Analysis of Financial Condition and Results of Operations includes certain
forward-looking statements regarding events and financial trends that may
affect our future operating results and financial position. Some important
factors that could cause actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements include the following:  our substantial current indebtedness could adversely affect our
financial condition and the availability of cash to fund our operating
needs;  we will need additional financing in the future; 
closing both tranches of funding from Elliott Associates and other
Subordinated Note Holders; 25




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 we have had operating losses for 2002, 2003 and first quarter of 2004
and may incur additional operating losses in the future;  Pemexs approval of claims and the outcome of any claims submitted to
arbitration;  the outcome of litigation with Iroquois and Williams;  industry volatility, including the level of capital expenditures by
oil and gas companies due to fluctuations in the price, and perceptions
of the future price of oil and gas;  contract bidding risks, including those involved in performing
projects on a fixed-price basis and extra work outside the original
scope of work, and the successful negotiation and collection of such
contract claims; 
our ability to obtain performance bonds and letters of credit
required to secure our performance under contracts;  the highly competitive nature of the marine construction business;  operating hazards, including the unpredictable effect of natural
occurrences on operations and the significant possibility of accidents
resulting in personal injury and property damage;  seasonality of the offshore construction industry in the U.S. Gulf of
Mexico;  risks involved in the expansion of our operations into international
offshore oil and gas producing areas, where we have previously not been
operating including our recently awarded contract in the Mediterranean
for the Israel Electric Corporation;  dependence on the continued strong working relationships with
significant customers operating in the U.S. Gulf of Mexico;  ability to realize carrying values of salvaged structures;  contract bidding risks;  percentage-of-completion accounting;  continued active participation of our executive officers and key
operating personnel;  the effect on our performance of regulatory programs and
environmental matters;  risks involved in joint venture operations, including difficulty in
resolving disputes with present partners or reaching agreements with
future partners;  compliance with the Sarbanes-Oxley Act of 2002 and the significant
expansion of securities law regulation of corporate governance,
accounting practices, reporting and disclosure that affects publicly
traded companies, particularly related to Section 404 dealing with our
system of internal controls;  a possible terrorist attack or armed conflict could harm our
business; and 
the potential of receiving an audit opinion with a going
concern explanatory paragraph from our independent auditors. Many of these factors are beyond our ability to control or predict. We
caution investors not to place undue reliance on forward-looking statements.
We disclaim any intent or obligation to update the forward-looking statements
contained in this report, whether as a result of receiving new information, the
occurrence of future events or otherwise. These and other uncertainties related to the business are described in
detail under the heading Cautionary Statements in our 2003 Annual Report on
Form 10-K. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk 26




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Our market risk exposures primarily include interest rate and exchange
rate fluctuation on financial instruments as detailed below. Our market risk
sensitive instruments are classified as other than trading. The following
sections address the significant market risks associated with our financial
activities during the three months ended March 31, 2004. Our exposure to market
risk as discussed below includes forward-looking statements and represents
estimates of possible changes in fair values, future earnings or cash flows
that would occur assuming hypothetical future movements in foreign currency
exchange rates or interest rates. As of March 31, 2004, the carrying value of our debt, including $0.7
million of accrued interest, was approximately $175.4 million. The fair value
of this debt approximates the carrying value because most of the interest rates
are based on floating rates identified by reference to market rates. Our $65.4
million of Subordinated Notes are fixed at a 16% interest rate. A hypothetical
1% increase in the applicable interest rates as of March 31, 2004 would
increase annual interest expense by approximately $1.3 million. We collect revenues and pay local expenses in foreign currency. We manage
foreign currency risk by attempting to contract as much foreign revenue as
possible in U.S. dollars. Approximately 90% of revenues from foreign contracts
are denominated in U.S. dollars. We monitor the exchange rate of our foreign
currencies in order to mitigate the risk from foreign currency fluctuations.
We receive payment in foreign currency equivalent to the U.S. dollars billed,
which is converted to U.S. dollars that day or the following day. We
recognized a $72,000 foreign currency loss due to activity in foreign areas
denominated in local currency and a decline of the U.S. dollar compared to
these local currencies for the three months ended March 31, 2004. The level of construction services required by a customer depends on the
size of its capital expenditure budget for construction for the year.
Consequently, customers that account for a significant portion of contract
revenues in one year may represent an immaterial portion of contract revenues
in subsequent years. 
 Item 4.Controls and Procedures As of March 31, 2004, an evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as defined in Rule
13a-15(e) of the rules promulgated under the Securities Exchange Act of 1934,
as amended. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective to provide reasonable assurance that such disclosure controls and procedures will meet their objectives. There have been no significant changes
in our internal controls over financial reporting or in other factors during
our most recent fiscal quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect these internal controls
over financial reporting. Subsequent
to March 31, 2004, we identified in discussion with our lenders that
an error had been made in our computation of compliance with a loan
covenant which limited the amount of performance bonds and letters of
credit which could be outstanding at any point in time. This resulted
in a failure to timely identify a loan covenant violation. We have
taken subsequent steps to ensure that such computations are done
correctly on a prospective basis. Management, including our Chief
Executive Officer and Chief Financial Officer, will review monthly,
and as new projects requiring performance bonds are bid on, all
outstanding performance bonds and letters of credit to determine that
all such amounts are properly included and do not exceed the maximum
allowed under our loan covenants. Management, including our Chief Executive Officer and Chief Financial
Officer, do not expect that our internal controls over financial reporting will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met due to numerous factors, ranging from
errors to conscious acts of an individual, or individuals acting together. In
addition, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of inherent limitations in a cost-effective control
system, misstatement due to error and/or fraud may occur and not be detected. 
 PART II. OTHER INFORMATION 
 Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities On March 11, 2004, we issued $65.4 million principal amount of 16%
subordinated secured notes due March 31, 2007 (Subordinated Notes) to a group
of accredited investors in a private placement under Rule 506 of Regulation D
of the Securities Act of 1933. We received net proceeds of $44.9 million from
the offering of the Subordinated Notes, after considering offering costs of
$5.5 million and proceeds used to repay all amounts of principal and interest
under the $15 million term loan from Elliott Associates. We also used a
portion of the proceeds to reduce our indebtedness under our revolving credit
facilities and used 27




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the remainder for immediate working capital needs. Interest at 16% on the
Subordinated Notes is due quarterly beginning June 30, 2004. We are required by
our existing loan agreements to issue to the Subordinated Note holders
additional Subordinated Notes equal to the amount of interest due on any
quarterly payment date. Warrants that are immediately exercisable were issued
to the holders of the Subordinated Notes (other than Elliott Associates) to
purchase an aggregate of 5,283,300 shares of our common stock for an aggregate
exercise price of $1.00 per share, expiring March 11, 2009. Holders paid the
initial exercise price of $0.99 per share upon issuance of the warrants and may
fully exercise them by paying the remaining $0.01 of the per share exercise
price. As of March 31, 2004, 550,344 warrants have been exercised. In connection with the issuance of the Subordinated Notes, we are
prohibited from declaring, paying or making any dividend or distribution (in
cash, property or obligations) on any shares of any class of our equity
securities or on any warrants, options or other rights in respect of any class
of our equity securities. We are prohibited from applying any of our funds,
property or assets to the purchase, redemption, sinking fund or other
retirement of any shares of any class of our stock, or making any deposit for
any of the foregoing. 
 Item 6.Exhibits and Reports on Form 8-K  (a)
    
    Exhibits3.1
    
    Amended and Restated Certificate of Incorporation of the Company (1)3.2
    
    Bylaws of the Company (1)10.1
    
    First Amendment to Consulting Agreement dated as of May 1, 2004
between the Company and Edward L. Moses (2) *31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (2)31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (2)32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (2)32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(2)(b)
    
    Reports on Form 8-K:  On January 29, 2004, we filed a report on Form 8-K, announcing that
we have reached agreement with the lenders on two of our existing
credit facilities to amend our loan agreements under items 5 and 7.On March 12, 2004, we filed a report on Form 8-K, announcing the
completion of a financing, the signing of a commitment letter with
Israel Electric Corporation, and the award of a Pemex contract in
Mexico under items 5 and 7.On March 15, 2004, we filed a report on Form 8-K, reporting results
for the year ended December 31, 2003 under items 5, 7 and 12.   1
    
    Incorporated by reference to our Registration Statement on Form S-1
(Registration Statement No. 333-43965).2
    
    Filed herewith.*
    
    Management Contract or Compensatory Plan or Arrangement. 28




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. HORIZON OFFSHORE, INC.Date: May 17, 2004
    /s/ David W. SharpDavid W. SharpExecutive Vice President and
Chief Financial Officer 29




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INDEX TO EXHIBITS  Exhibit
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Company (1)3.2
    
    Bylaws of the Company (1)10.1
    
    First Amendment to Consulting Agreement dated as of May 1, 2004
between the Company and Edward L. Moses (2) *31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2)32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
   1
    
    Incorporated by reference to our Registration Statement on Form S-1
(Registration Statement No. 333-43965).2
    
    Filed herewith.*
    
    Management Contract or Compensatory Plan or Arrangement.