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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 Form 10-K (Mark One) þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2003
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number 001-16857   Horizon Offshore, Inc. (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    76-0487309(I.R.S. Employer Identification No.)2500 CityWest Boulevard
Suite 2200
Houston, Texas(Address of principal executive offices)
    
    77042(Zip Code)
 Registrants telephone number, including area code: (713) 361-2600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
Preferred Stock Purchase Rights 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ 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 þ No o The aggregate market value of the voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was last sold as of the last business day of the registrants most recently
completed second fiscal quarter (June 30, 2003), was approximately $109
million. The number of shares of the registrants common stock, $1.00 par value per
share, outstanding as of February 20, 2004 was 26,493,352. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement prepared in
connection with the registrants 2004 annual meeting of stockholders have been
incorporated by reference into Part III of this Form 10-K.    1




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HORIZON OFFSHORE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS  
 PART IItems 1. and 2.
    
    Business and Properties
    
    
    3Item 3.
    
    Legal Proceedings
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Item 4A.
    
    Executive Officers of the Registrant
    
    
    16PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    33Item 8.
    
    Financial Statements and Supplementary Data
    
    
    33Item 9.
    
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    33Item 9A.
    
    Controls and Procedures
    
    
    34PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    34Item 11.
    
    Executive Compensation
    
    
    34Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    34Item 13.
    
    Certain Relationships and Related Transactions
    
    
    34Item 14.
    
    Principal Accountant Fees and Services
    
    
    34PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    35Financial Statements
    
    
    36Signatures
    
    
    61Exhibit Index
    
    
    62Form of WarrantConsulting Agreement - Edward L. MossPurchase AgreementAmend.No.1 to Registration Rights AgreementRegistration Rights AgreementSixth Amendmant to Loan AgreementFifth Amendment to EXIM Guaranteed Loan AgreementSeventh Amendment to Loan AgreementSixth Amendment to EXIM Guaranteed Loan AgreementAmendment No.1 to Loan AgreementAmendment No.9 to Loan AgreementLoan AgreementAmend. #3 to Credit AgreementCode of Ethics and Business ConductSubsidiaries of the CompanyConsent of PricewaterhouseCoopers LLPCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I 
 Items 1. and 2.Business And Properties 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
Middle East. We have eleven vessels in our marine fleet which are currently
operational, including five pipelay and pipebury vessels, one dedicated
pipebury vessel, two derrick barges, two support vessels 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;
    
    disassembling and salvaging production platforms and other structures; and
    
    performing pipe spooling services. We have our principal executive offices at 2500 CityWest Boulevard, Suite
2200, Houston, Texas 77042. Our telephone number is (713) 361-2600. Our
Internet address is www.horizonoffshore.com. Copies of the annual, quarterly
and current reports we file with the SEC, and any amendments to those reports,
are available on our web site free of charge. The information posted on our
web site is not incorporated into this Annual Report. SCOPE OF OPERATIONS We are a leading provider of marine construction services in the U.S. Gulf
of Mexico and have expanded our international operations to areas offshore
Mexico, Southeast Asia and West Africa. We also provide marine construction
services in the Northeastern U.S, and have recently expanded our operations to
the Middle East. Our operating results are directly tied to industry demand
for our services, and, to a lesser degree, seasonal impact. The demand for our
services depends on the level of capital expenditures by oil and gas companies
for developmental construction. Due to the time required to drill a well and
fabricate a production platform, demand for our services usually lags
exploratory drilling by nine to eighteen months and sometimes longer. Our fleet consists of thirteen vessels including the eleven vessels which
are currently operational, and one pipelay/pipebury barge and one derrick barge
that are not currently operational. Our fleet of six pipelay and pipebury vessels and one combination vessel
install and bury pipelines with an outside diameter (including concrete
coating) of up to 39-inches. Our pipelay vessels employ conventional S-lay
technology that is appropriate for operating on the U.S. continental shelf and
the international areas where we currently operate. Conventional pipeline
installation involves the sequential assembly of pieces of pipe through an
assembly line of welding stations that run the length of the pipelay vessel.
Welds are then inspected and coated on the deck of the pipelay barge. The pipe
is then supported off the stern and into the water via a ramp that is referred
to as a pontoon or stinger. The ramp supports the pipe to some distance
under the water and prevents over-stressing as it curves into a horizontal
position toward the sea floor. The barge is then moved forward by its anchor
winches and the pipeline is laid on the sea floor. The suspended pipe forms an
elongated S shape as it undergoes a second bend above the contact point.
During the pipelay process, divers regularly inspect the pipeline to ensure
that the ramp is providing proper support and that the pipeline is settling
correctly. Pipelines installed on the U.S. continental shelf or located in water
depths of 200-feet or less are required by the regulations of the United States
Department of Interiors Minerals Management Service to be buried at least
three feet below the sea floor. Jet sleds towed behind pipelay/pipebury barges
are used to bury pipelines on smaller pipe installation 3




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projects. Towed jet sleds are less likely to damage the pipeline being laid or
any existing pipelines that the pipeline may cross. Towed jet sleds use a
high-pressure stream of air and water that is pumped from the barge to create a
trench into which the pipe settles. For larger pipe burying projects, or where
deeper trenching is required, we use the Canyon Horizon, our dedicated bury
barge. It is one of only two dedicated pipebury barges operating in the U.S.
Gulf of Mexico and can bury pipelines more efficiently and to greater depths
than any other vessel in the Gulf. We match our burying approach to the
requirements of each specific contract by using the Canyon Horizonfor larger
projects and our towed jet sleds behind pipelay barges for smaller projects. We
also use the Pecos Horizonfor larger pipebury projects. The Cajun Horizon, a
pipelay/pipebury barge, is currently not operational as a result of the decline
in vessel utilization due to increased competition and the sustained depressed
market in the marine construction industry for the U.S. Gulf of Mexico. Our fleet also includes two diving support vessels that are currently not
working on projects as a result of the sustained difficult economic environment
and depressed market in the marine construction industry. The Pearl Horizonis
a multi-purpose vessel capable of performing diving support services such as
connecting pipelines to platforms and other pipelines (tie-ins) and filling
pipelines with water under pressure to test the integrity of the system. The
Pearl Horizonscapabilities also permit it to tow other vessels. The
Stephaniturmis our dynamically positioned diving support vessel. Although it
has undergone scheduled maintenance and is available for charter hire, we are
currently marketing this vessel for sale. We also install and remove or salvage offshore fixed platforms. We have
three derrick barges equipped with cranes designed to lift and place platforms,
structures or equipment into position for installation. In addition, they are
used to disassemble and remove platforms and prepare them for salvage or
refurbishment. We currently operate two derrick barges, the Pacific Horizon
with a lift capacity of 1,000-tons, and the Atlantic Horizonwith a 550-ton
lift capacity. Our third derrick barge, the Phoenix Horizon, is currently not
operational. We decided not to make capital improvements to it that are
required to place the vessel into service due to the availability of other
operational assets as a result of the sustained difficult economic environment
and depressed market in the marine construction industry for the U.S. Gulf of
Mexico. Our fleet also includes the Sea Horizon, which is our 360-feet long
and 100-feet wide combination vessel that has both pipelay and derrick
capabilities. The Sea Horizonis utilized to install and remove offshore fixed
platforms and its lift capacity was upgraded from 800-tons to 1200-tons. During 2003, we laid 326-miles of pipe of various diameters in various
depths pursuant to a total of 27 pipeline construction contracts. Also in
2003, we installed or removed 34 offshore platforms. 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. These structures are held for resale. Our customers award contracts by means of a highly competitive bidding
process. In preparing a bid, we must consider a variety of factors, including
estimated time necessary to complete the project, the recovery of equipment
costs and the location and duration of current and future projects. We have
placed a strong emphasis on attempting to sequentially structure scheduled work
in adjacent areas. Sequential scheduling reduces mobilization and
demobilization time and costs associated with each project and increases
profitability. We employ core groups of experienced offshore personnel that
work together on particular types of projects to increase our bidding accuracy.
We often obtain the services of workers outside of our core employee groups by
subcontracting with other parties. Our management examines the results of each
bid submitted, reevaluates bids, and implements a system of controls to
maintain and improve the accuracy of the bidding process. The accuracy of the
various estimates in preparing a bid is critical to our profitability. Our contracts are typically of short duration in the U.S. Gulf of Mexico,
being completed in periods as short as several days to periods of up to several
months for projects involving our larger pipelay vessels. International
construction projects typically have longer lead times and extended job
durations. We perform most of our projects on a fixed-price or day rate basis
or a combination thereof, although a few projects are performed on a
cost-reimbursement basis. Under a fixed-price contract, the price stated in the
contract is subject to adjustment only for change orders approved by the
customer. As a result, we are responsible for all cost overruns. Furthermore,
our profitability under a fixed-price contract is reduced when the contract
takes longer to complete than estimated. Similarly, our profitability will be
increased if we can perform the contract ahead of schedule. Under
cost-reimbursement arrangements, we receive a specified fee in excess of direct
labor and material cost and are protected against cost overruns, but unless
cost savings incentives are provided, we generally do not benefit directly from
improved performance. 4




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MARINE EQUIPMENT The following table describes our marine vessels. MaximumMaximum
    
    PipelayLength
    
    Derrick Lift
    
    DiameterVessel
    
    Vessel Type
    
    (feet)
    
    (tons)
    
    (inches)American Horizon
    
    Pipelay/Pipebury
    
    
    180
    
    
    
    
    
    
    
    18Cajun Horizon (1)
    
    Pipelay/Pipebury
    
    
    140
    
    
    
    
    
    
    
    12Lone Star Horizon
    
    Pipelay/Pipebury
    
    
    320
    
    
    
    
    
    
    
    39Gulf Horizon
    
    Pipelay/Pipebury
    
    
    350
    
    
    
    
    
    
    
    36Brazos Horizon
    
    Pipelay/Pipebury
    
    
    210
    
    
    
    
    
    
    
    18Pecos Horizon
    
    Pipelay/Pipebury
    
    
    250
    
    
    
    
    
    
    
    24Canyon Horizon
    
    Pipebury
    
    
    330
    
    
    
    
    
    
    Pearl Horizon
    
    Diving Support Vessel
    
    
    184
    
    
    
    
    
    
    Stephaniturm
    
    Diving Support Vessel
    
    
    230
    
    
    
    
    
    
    Atlantic Horizon
    
    Derrick Barge
    
    
    420
    
    
    
    550
    
    
    Pacific Horizon
    
    Derrick Barge
    
    
    350
    
    
    
    1,000
    
    
    Phoenix Horizon (1)
    
    Derrick Barge
    
    
    300
    
    
    
    250
    
    
    Sea Horizon
    
    Derrick/Pipelay
    
    
    360
    
    
    
    1,200
    
    
    
    36
   (1)
    
    These vessels are not currently operational. We own all of our marine vessels and have placed mortgages on them to
collateralize our debt. See Note 5 of our notes to our consolidated financial
statements and Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources. Under governmental
regulations and our insurance policies, we are required to maintain the vessels
in accordance with standards of seaworthiness, safety and health prescribed by
governmental regulations and applicable vessel classification societies. We
believe we are in compliance with all governmental regulations and insurance
policies regarding the operation and maintenance of our vessels. In the normal course of our operations, we also lease or charter other
vessels, such as diving support vessels, tugboats, cargo barges, utility boats
and support vessels. ALLIANCES AND JOINT VENTURES In November 1998, we formed an alliance with Cal Dive International, Inc.
(Cal Dive) in the U.S. Gulf of Mexico. Under this alliance, Cal Dive provided
us with surface diving services, which include inspecting pipeline as it is
being laid, monitoring pipebury activities, connecting pipelines to production
platforms and assisting derrick barges in the installation and removal of
structures. Our alliance with Cal Dive expired on March 1, 2004, and we now
subcontract our surface diving services on a competitive bid basis. In March 2001, we formed a joint venture, 50% owned by us, with Cal Dive
to perform small diameter, deepwater reel pipelaying projects in the U.S. Gulf
of Mexico with the Intrepid, a vessel owned by Cal Dive. In January 2004, we
notified Cal Dive of our intent to withdraw from the joint venture in
accordance with its terms. To date, no operations were commenced under the
joint venture. The carrying value of our investment in this dormant
joint venture was $45,000 at December 31, 2003. SAFETY AND QUALITY ASSURANCE We believe that the safety and health of our employees, the protection of
the environment and our assets, while consistently providing products and
services to our customers satisfaction and within regulatory guidelines is a
key component of our overall financial success. We maintain stringent safety
assurance programs to reduce the possibility of costly incidents and to attract
and retain new employees and customers. Our Health, Safety, Environmental and
Quality Department establishes and regularly updates these programs to ensure
compliance with all applicable state, federal, foreign and customer safety
regulations as well as the quality requirements for providing an end product
that satisfies client and regulatory specifications. 5




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In 2003, our worldwide Health, Safety and Environmental Management System
maintained OHSAS-18001 certification with the Norwegian classification society
Det Norske Veritas (DNV), which certifies that our health and safety processes
meet or exceed international standards. Additionally, DNV granted our marine
operations in North America ISO 9001:2000 accreditation, which is an
internationally recognized accreditation. We achieved this accreditation by
demonstrating that our Quality Management System consistently provides products
and services that meet customer and applicable regulatory requirements. Our
Houston support department and Southeast Asia operations have already achieved
ISO 9001:2000 accreditation. SEASONALITY, CYCLICALITY AND FACTORS AFFECTING DEMAND The marine construction industry in the U.S. Gulf of Mexico and Latin
America historically has been highly seasonal with contracts typically awarded
in the spring and early summer and performed before the onset of adverse
weather conditions in the winter. The scheduling of much of our work is
affected by weather conditions and other factors, and many projects are
performed within a relatively short period of time. We have attempted to offset
the seasonality of our core operations in the U.S. Gulf of Mexico and Mexico by
expanding our operations to international areas offshore Southeast Asia and
West Africa. We believe the locations of these regions and the timing of
customers awards will provide some measure of counter-seasonal balance to our
operations in the U.S. Gulf of Mexico and Mexico, but we cannot ensure that
expansion into these areas will offset the seasonality of the work in the U.S.
Gulf of Mexico and Mexico. Our contracts are typically of short duration in
the U.S. Gulf of Mexico, being completed in periods as short as several days to
periods of up to several months for projects involving our larger pipelay
vessels. International construction projects typically have longer lead times
and extended job durations. The level and volatility of oil and gas prices have a strong effect on
exploration and production activities offshore which ultimately affect the
demand for our services. Capital expenditures by oil and gas companies
operating in the U.S. Gulf of Mexico remained at reduced levels during 2003 due
to the slow down in the U.S. economy and concerns over U.S. natural gas pricing
trends. Capital expenditures of oil and gas companies 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. CUSTOMERS AND GEOGRAPHIC INFORMATION We have domestic and international operations in one industry, the marine
construction service industry for offshore oil and gas companies and
energy companies. We provide
marine construction services for domestic customers in the U.S. Gulf of Mexico
and Northeastern U.S. and foreign customers in Latin America, Southeast Asia
and West Africa. The percentages of consolidated revenues from domestic and
foreign customers for each of the last three years are as follows: 2003
    
    2002
    
    2001Domestic
    
    
    75
    %
    
    
    55
    %
    
    
    47
    %Foreign
    
    
    25
    %
    
    
    45
    %
    
    
    53
    %
 6




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See Note 13 of our notes to consolidated financial statements for financial
information on our geographic regions. In 2003, we provided offshore marine construction services to
approximately 48 customers. Customers accounting for more than 10% of
consolidated revenues for each of the last three years are as follows: 2003
    
    2002
    
    2001Iroquois Gas Transmission LP
    
    
    25
    %
    
    
    20
    %
    
    
    Algonquin Gas Transmission Company
    
    
    15
    %
    
    
    
    
    
    
    Brunei Shell Petroleum Company
    
    
    10
    %
    
    
    
    
    
    
    Petróleos Mexicanos (Pemex)
    
    
    1
    %
    
    
    31
    %
    
    
    52
    %
 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 for construction for the year 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. We continue to negotiate with and use our best efforts to resolve our EPC
64 contract claims against Pemex. The Pemex personnel responsible for
the EPC 64 contract at the time it was ongoing are no longer
participating in the
settlement negotiations of these claims, which has hindered our
ability to resolve them. From November 2002 through March 2004, we engaged a consulting
firm in Mexico to assist us in the administration of our Pemex claims. After complying
with Pemex's requirements, we formally submitted these claims in July 2003. Upon the
formal submission of such claims, we expected to resolve them by the end of the fourth quarter of
2003. However, during the fourth quarter of 2003, it became apparent
that the current management at Pemex was resistant to accepting responsibility
for resolving these claims due to the changes in personnel
negotiating these claims on behalf of Pemex and to the operating
structure of Pemex. Prior to that time, Pemex personnel had given us
assurances that our properly supported claims would be paid, and our
consulting firm from Mexico indicated they believed we would be able
to collect the carrying value of our claims. At December 31,
2003, since there was no final resolution of these claims and the
ultimate amount and timing of payment of these claims was uncertain, we
reserved $33.1 million related to our previously recorded outstanding
unapproved claims against 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 December 31, 2003, prior to the reserve recorded, consisted of $52.2 million of
unapproved claims and $8.5 million of additional scope of work. 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.
As of December 31, 2003, we had remaining unreserved contract receivables of $2.1 million and costs in excess
of billings of $25.5 million from Pemex, totaling $27.6 million. We subsequently collected the $2.1 million
of contract receivables that were outstanding as of December 31, 2003 related to work performed as additional scope of
work.
Our unreserved net claim receivable remaining from December 31, 2003 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.
We based our best current estimate of
ultimate collectibility on the limited indications from Pemex
during the fourth quarter of 2003 of suggested settlements on the portion of the claims not related to interferences and interruptions.
Pemex officials involved in the negotiation of the claims have failed
to indicate to us the amounts of which they might settle
the claims related to interferences and interruptions. Settlement of
this amount and final resolution could reasonably be expected to vary
from $25.5 million.
Had we not estimated a portion of the interferences and interruptions
claims that would be collected, the loss would be greater. 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
our Subordinated Notes issued in March 2004. As of December 31, 2003, we had contract receivables of $25.9 million and
costs in excess of billings of $1.3 million from Iroquois Gas Transmission LP
(Iroquois) totaling $27.2 million. We have subsequently billed the amounts
included in costs in excess of billings as of December 31, 2003. 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.
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. This lawsuit, if adversely adjudicated,
could result in a loss of up to our carrying value of $27.2 million. See Item 3. Legal Proceedings
for a detailed discussion of this litigation. As
of December 31, 2003, we had total claims of $7.6 million
against Williams Oil Gathering LLC (Williams) and had recognized
revenue to the extent of cost representing $5.5 million in
unreserved contract receivables. 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. 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. This lawsuit,
if adversely adjudicated, could result in a loss of up to our carrying value of $5.5 million.
Collection of amounts related to these claims would be remitted directly as repayment of
our Subordinated Notes issued in March 2004. See
Item 3. Legal Proceedings for a detailed
discussion of this litigation. 7




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BACKLOG As of March 12, 2004, our backlog supported by written agreements totaled
approximately $203 million. As of December 31, 2003, our backlog supported
by written agreements totaled approximately $42 million, compared to our
backlog at December 31, 2002 of approximately $123.6 million. Our expansion
into the Middle East and an increase in new Pemex project activity in Mexico
has increased our backlog. Of the total backlog as of March 12, 2004,
approximately $29 million is expected to be earned after 2004. Our backlog has
typically been lower in the fourth and first quarters of the year due to the
seasonality and weather conditions in the U.S. Gulf of Mexico during the winter
months. As we increase the scope of our international operations, where
projects tend to have longer lead times and result in earlier awards, our
backlog may increase. Because of contract lead times, durations and seasonal
issues, we do not consider backlog amounts to be a reliable indicator of annual
revenues. INSURANCE Our operations are subject to the inherent risks of offshore marine
activity, including accidents resulting in injuries, the loss of life or property, damage
to property, environmental mishaps, mechanical failures and collisions. We
insure against these risks at levels we believe are consistent with industry
standards. Our insurance premiums required to cover these risks significantly
increased during 2002 and 2003 due to losses in the insurance industry. Builders Risk insurance is required to provide coverage for property
while under construction. Builders Risk covers the contractors interest in materials at the job site before they are installed, materials
in transit intended for the job and the value of the property being constructed until it is completed and accepted by the owner. Builders
Risk deductibles and premiums have significantly increased during 2002 and 2003. In some
cases, we may be responsible for part or all of the deductible. We may be required
pursuant to contract terms to obtain and carry Builders Risk
insurance which will be factored into our contract bid pricing. Offshore employees, including marine crews, are covered by an insurance policy which covers Jones
Act exposures. Our self insured retention on the Jones Act program
for employees is currently $100,000 per claim. We believe that our insurance is adequate to cover the cost of replacing
any of our vessels that are lost and most other offshore risks. However,
certain risks are either not insurable or insurance is available only at rates
that are not economical. We cannot assure that any such insurance will be
sufficient or effective under all circumstances or against all hazards to which
we may be subject. COMPETITION The marine construction industry is highly competitive. Competition is
influenced by such factors as price, availability and capability of equipment
and personnel, and reputation and experience of management. Contracts for work
in the U.S. Gulf of Mexico are typically awarded on a competitive bid basis one
to three months prior to commencement of operations. Customers usually request
bids from companies they believe are technically qualified to perform the
project. Our marketing staff contacts offshore operators known to have projects
scheduled to ensure an opportunity to bid for these projects. Although we
believe customers consider, among other things, the availability and technical
capabilities of equipment and personnel, the condition of equipment and the
efficiency and safety record of the contractor, price is the primary factor in
determining which qualified contractor is awarded the contract. Because of the
lower degree of complexity and capital costs involved in shallow water marine
construction activities, there are a number of companies with one or more
pipelay barges capable of installing pipelines in shallow water. We currently
compete in the Gulf in water depths of 200 feet or less primarily with Global
Industries, Ltd., Torch Offshore, Inc. and a few other smaller contractors. In
projects in water depths of 200 feet or more or where a higher degree of
complexity is involved, competition generally is limited to Global Industries,
Ltd. and from time to time other international companies that may have vessels
operating in the U.S. Gulf of Mexico. We compete primarily with Global
Industries, Ltd. and Offshore Specialty Fabricators, Inc. for the installation
and removal of production platforms. We believe that our reputation,
experienced management and competitive pricing are key advantages. Internationally, the marine construction industry is dominated by a small
number of major international construction companies and government owned or
controlled companies that operate in specific areas or on a joint venture basis
with one or more of the major international construction companies. Our major
competitors internationally are Global Industries, Ltd., J. Ray McDermott, S.A.
and Hyundai Heavy Industries Company Ltd. REGULATION Many aspects of the offshore marine construction industry are subject to
extensive governmental regulation. Our United States operations are subject to
the jurisdiction of the United States Coast Guard, the National Transportation
Safety Board and the Customs Service, as well as private industry organizations
such as the American Bureau of Shipping. The Coast Guard and the National
Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards, and the
Customs Service is authorized to inspect vessels at will. 8




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We are required by various governmental and quasi-governmental agencies to
obtain permits, licenses and certificates in connection with our operations. We
believe that we have obtained or will be able to obtain, when required, all
permits, licenses and certificates necessary to conduct our business. In addition, we depend on the demand for our services from the oil and gas
industry and, therefore, our business is affected by laws and regulations, as
well as changing taxes and policies relating to the oil and gas industry. In
particular, the exploration and development of oil and gas properties located
on the continental shelf of the United States is regulated primarily by the
Minerals Management Service. The Minerals Management Service must approve and
grant permits in connection with drilling and development plans submitted by
oil and gas companies. Delays in the approval of plans and issuance of permits
by the Minerals Management Service because of staffing, economic, environmental
or other reasons could adversely affect our operations by limiting demand for
services. Complying with changing laws, regulations
and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002,
new SEC regulations and changes to the NASDAQ rules, will require us to expend significant resources. As a
result, we will continue to invest necessary resources to comply with evolving laws, regulations and standards, and
this investment may result in increased general and administrative expenses. Certain of our employees are covered by provisions of the Jones Act, the
Death on the High Seas Act and general maritime law. These laws make liability
limits under state workers compensation laws inapplicable and permit these
employees to bring suit for job related injuries with generally no limits on
our potential liability. See Insurance under this Item for a discussion of insurance coverage. Environmental Regulation Our operations are affected by numerous federal, state and local laws and
regulations relating to protection of the environment, including the Outer
Continental Shelf Lands Act, the Federal Water Pollution Control Act of 1972
and the Oil Pollution Act of 1990. The technical requirements of these laws and
regulations are becoming increasingly complex and stringent, and compliance is
becoming increasingly difficult and expensive. Certain environmental laws
provide for strict liability for remediation of spills and releases of
hazardous substances and some provide liability for damages to natural
resources or threats to public health and safety. Sanctions for noncompliance
may include revocation of permits, corrective action orders, administrative or
civil penalties, and criminal prosecution. It is possible that changes in the
environmental laws and enforcement policies, or claims for damages to persons,
property, natural resources or the environment could result in substantial
costs and liabilities. Our insurance policies provide liability coverage for
sudden and accidental occurrences of pollution and/or clean up and containment
of the foregoing in amounts that are in accordance with customary industry
practices. EMPLOYEES As of January 31, 2004, we had approximately 700 employees, including 385
operating personnel and 315 corporate, administrative and management personnel.
Of our total employees, approximately 530 are employed domestically and
approximately 170 are employed internationally. As of January 31, 2004, we had
no employees that were unionized or employed subject to any collective
bargaining or similar agreements. However, we may, in the future, employ union
laborers if required by project specific labor agreements. We believe our
relationship with our employees is good. Our ability to further expand our operations internationally and meet any
increased demand for our services depends on our ability to increase our
workforce. A significant increase in the wages paid by competing employers
could result in a reduction in the skilled labor force, and/or increases in the
wage rates paid. If either of these circumstances takes place to the extent
that such wage increases could not be passed on to our customers, our
profitability could be impaired. PROPERTIES Our corporate headquarters is located in Houston, Texas, in approximately
94,000 square feet of leased space under leases expiring from 2006 to 2008. In
addition, we lease approximately 40,000 square feet of office space in various
international locations under leases expiring from 2004 to 2006. These offices
support our marine construction activities. We own and operate a marine support and spool base and storage facility
(for marine structures that may be salvaged by our marine fleet) on
approximately 23 acres with approximately 6,000 feet of waterfront on a
peninsula in Sabine Lake near Port Arthur, Texas with direct access to the
Gulf. The facility has more than 3,000 feet of deepwater access for docking
barges and vessels. We also own and operate a marine support base located on
26 acres of waterfront property in Sabine, Texas. This marine base includes
1,700 feet of bulkhead, 59,000 square feet of office and warehouse 9




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space, and two heliports.We also lease approximately 19,250 square feet of
land in Morgan City, Louisiana for inventory storage on a month-to-month basis. CAUTIONARY STATEMENTS Certain statements made in this Annual Report that are not historical
facts are intended to be forward-looking statements. Such forward-looking
statements may include statements that relate to:  
    
    our business plans or strategies, and projected or anticipated
benefits or other consequences of such plans or strategies;
    
    our objectives;
    
    projected or anticipated benefits from future or past acquisitions;
    
    projections involving anticipated capital expenditures or
revenues, earnings or other aspects of capital projects or operating
results; and
    
    financing. Also, you can generally identify forward-looking statements by such
terminology as may, will, expect, believe, anticipate, project,
estimate or similar expressions. We caution you that such statements are only
predictions and not guarantees of future performance or events. In evaluating
these statements, you should consider various risk factors, including but not
limited to the risks listed below. These risk factors may affect the accuracy
of the forward-looking statements and the projections on which the statements
are based. All phases of our operations are subject to a number of uncertainties,
risks and other influences, many of which are beyond our control. Any one of
such influences, or a combination, could materially affect the results of our
operations and the accuracy of forward-looking statements made by us. 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 of approximately $204.6
million as of March 11, 2004 could adversely affect our financial
condition and the availability of cash to fund our operating needs;
    
    we will need additional financing in the future;
    
    we have had two consecutive years of operating losses 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;
    
    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; 10




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
    
    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;
    
    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; and
    
    a possible terrorist attack or armed conflict could harm our
business. 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. A more detailed discussion of the foregoing factors follows: Our substantial indebtedness could adversely affect our financial health We currently have a significant amount of indebtedness. As of December
31, 2003, we had total indebtedness of approximately $171.5 million. On March
11, 2004, we issued $65.4 million of subordinated secured notes
(Subordinated Notes) in a private
placement resulting in us having total indebtedness of approximately $204.6
million. This total amount of indebtedness is net of a $17.3 million discount
representing the fair value of the warrants issued and the repayment of
principal and interest under the $15.0 million term loan from Elliott
Associates, L.P. (Elliott Associates), which together with Elliott
International, L.P. owns 15.8% of our outstanding common stock. Our high level of debt could have important consequences including
the following:  
    
    inability of our current cash generation level to support
future interest and principal payments on this high level of debt;
    
    inadequate cash for other purposes, such as capital
expenditures and other business activities since we will need to use
a significant portion of our operating cash flow to pay principal and
interest on our outstanding debt;
    
    increase our vulnerability to general adverse economic and
industry conditions, including the continued difficult economic
environment and depressed market in the marine construction industry
in the U.S. Gulf of Mexico;
    
    limit our flexibility in planning for, or reacting to,
changes in demand for our services in international areas, including
mobilizing vessels between market areas;
    
    place us at a greater competitive disadvantage compared to
our competitors that have less debt;
    
    limit, along with the financial and other restrictive
covenants in our indebtedness, among other things, our ability to
borrow additional funds or dispose of assets; and
    
    the potential of receiving an audit opinion with a
going concern explanatory paragraph from our independent
auditors. Our ability to service our existing debt, provide working capital and fund
our capital expenditure requirements will depend on our ability to generate
cash in the future. Our ability to generate cash in the future is subject to
demand for construction services by the oil and gas industry as a result of
increased levels of capital expenditures by oil and gas companies, the resolution of collection
issues on various receivables, claims and the outcome of litigation, and to
competitive, general economic, financial, and many other factors that may be
beyond our control. 11




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We
will need additional financing, and the future funding of our capital
needs is uncertain

We
require substantial working capital to fund our business and meet
debt service and other obligations.
As
of March 12, 2004, we had cash of
$29 million. With the
completion of the Subordinated Note placement, we believe that cash
provided by operations and available liquidity will be sufficient to
fund our debt service requirements, working capital and vessel
maintenance expenditures until at least December 31, 2004,
barring any unforeseen circumstances. However, we do not believe that
our available cash resources will be sufficient to retire our
existing debt maturing in 2005, and we will be required to obtain
additional financing. In addition, depending on our success in
obtaining construction projects, we expect to continue to experience
periodic cash demands that exceed our cash flow and may require
additional external financing. Our current plan is to refinance our existing
revolving credit facilities with other lenders during 2004 and,
depending on market conditions, to repay all or a portion of the
Subordinated Notes from the issuance of additional equity securities.
To obtain any additional financing, we will evaluate all available
financing sources, including, but not limited to, the issuance of
equity or debt securities, corporate alliances and joint ventures.
Funds raised through the issuance of additional equity may have
negative effects on our stockholders, such as a dilution in
percentage of ownership, and the rights, preferences or privileges of
the new security holders may be senior to those of the common
stockholders. Our ability to meet our debt service and other
obligations and our ability to obtain advances under revolving credit
facilities will depend in significant part on the extent to which we
can successfully perform projects in 2004 and collect our outstanding
contractual claims and amounts receivable for future projects.
However, there can be no assurance that we can obtain financing on
favorable terms, if at all. If we are unable to obtain additional
financing, management may be required to explore alternatives to
reduce cash used by operating activities, including not pursuing
construction projects that may otherwise appear to be promising to
us due to the amount of working capital required to support
the project. Failure to generate sufficient revenues, obtain
additional financing or reduce cash used by operating activities
would have a material adverse effect on our business, results of
operations and financial condition.

We
have had two consecutive years of operating losses and may incur
additional operating losses in the future

We
reported operating losses of $69.7 million and $1.3 million for the
years ended December 31, 2003 and 2002, respectively. As of
December 31, 2003, we had an accumulated deficit of
approximately $54.2 million. We expect to continue to incur
losses for at least the first half of 2004. We may not be profitable
in the future. If we do achieve profitability in any period, we may
not be able to sustain or increase such profitability on a quarterly or
annual basis. We had negative cash flows from operations in 2003.
Insufficient cash flows may adversely affect our ability to fund
capital expenditures and pay debt service and other contractual
obligations. If revenue generated from our existing backlog or any
new projects awarded is less than estimated, we experience difficulty
in collecting contractual amounts, or operating expenses exceed our
expectations, our business, results of operations and financial
condition will be materially and adversely affected.

The approval and timing of collection of receivables and claims from Pemex,
litigation against Iroquois and Williams for the collection of outstanding
receivables and the outcome of any future arbitration and litigation may
adversely affect our liquidity and financing requirements

Our inability to collect our receivables from Pemex continues to impact
our liquidity. We have been unsuccessful in resolving our EPC 64 contract
claims that we submitted to Pemex of approximately $78 million.
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. The carrying
value of our claims consisted of approximately $57.0 million of unapproved
claims and approximately $8.5 million of additional scope of work performed.
We have collected approximately $4.8 million of the $57.0
million of claims as of December 31,
2003 related to our delays. Subsequent to December 31, 2003, we collected
approximately $2.1 million related to additional scope of work performed.
Pemex substantially increased the scope of our operations under this contract
during 2000 to 2002, which subjected the project to greater interruptions due
to adverse weather conditions and standby time as other contractors completed
their work. We continue to negotiate with and use our best efforts to resolve
our EPC 64 contract claims against Pemex. We previously anticipated that these
claims would be resolved by the end of the fourth quarter of 2003. As of
December 31, 2003, however, since there was no final resolution of these claims
and the ultimate amount of timing and payment of the claims was uncertain, we
have recorded a $33.1 million reserve for unapproved claims
against Pemex. The carrying
value of our claims as of December 31, 2003 is $25.5 million and consists of
$19.1 million of unapproved claims and $6.4 million remaining of additional
scope of work. 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. However, due to the size of the dispute and inherent
uncertainties with respect to arbitration, 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. An adverse outcome from
negotiations or possible arbitration could result in a further loss of up to
$25.5 million.

Our
liquidity also has been impacted by delay in collecting approximately
$27.2 million of receivables from Iroquois and $5.5 million
of the 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. Iroquois has advised that it intends to assert
counter-claims, which we intend to contest vigorously. 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. Williams has advised that it intends to file a
counter-claim, which we intend to contest vigorously. Any adverse outcome from
these lawsuits could result in a loss up to the respective carrying value of
our claims.
See Item 3. Legal Proceedings for a detailed discussion of
this litigation.

Our ability to service our existing debt, provide working capital and fund
our capital expenditure requirements has been adversely affected by the
inability to collect our Pemex receivables and claims and our Iroquois and
Williams receivables. In addition, our inability to collect these
receivables contributed to our need to issue the Subordinated Notes. Continued delays in collecting these amounts will place
additional pressure on our liquidity. See the discussion of risk
factors under the caption Our substantial indebtedness could
adversely affect our financial health concerning liquidity.

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Industry volatility may adversely affect results of operations The
demand for our services, which was at substantially lower levels in
the U.S. Gulf of Mexico during 2003, depends on the level of capital expenditures
by oil and gas companies for developmental construction. As a result, the
cyclical nature of the oil and gas industry has a significant effect on our
revenues and profitability. Historically, prices of oil and gas, as well as the
level of exploration and developmental activity, have fluctuated substantially.
Even though oil and gas prices were higher in 2003, the demand for
our services did not increase due to low levels of exploration and
development activities. Any significant decline in the worldwide demand for oil and gas, or prolonged
low oil or gas prices in the future, will likely depress development activity.
We are unable to predict future oil and gas prices or the level of oil and gas
industry activity. Capital expenditures by oil and gas companies operating in
the U.S. Gulf of Mexico remained at reduced levels during 2003 due to the slow
down in the U.S. economy and concerns over U.S. natural gas pricing trends.
The low levels of activity in drilling and exploration in the U.S. Gulf of
Mexico during 2003 resulted in decreased vessel utilization and profit margins
in the U.S. Gulf of Mexico and adversely affected our revenues and
profitability. Any continued low level of activity in offshore drilling and
exploration will further adversely affect our revenues and profitability. We incur risks associated with contract bidding and the performance of extra work outside the original scope of work Most of our projects are performed on a fixed-price basis. We also perform
projects on a day rate basis or cost-reimbursement basis. Changes in offshore
job conditions and variations in labor and equipment productivity may affect
the revenue and costs on a contract. These variations may affect our gross
profits. In addition, typically during the summer construction season, and
occasionally during the winter season, we bear the risk of interruptions,
interferences and other delays caused by adverse weather conditions and other
factors beyond our control. If the customer substantially increases the scope
of our operations under the contract we are subjected to greater risk of
interruptions, interferences and other delays as was the case with the EPC 64
contract. Pemex substantially increased the scope of our operations under this
contract during 2000 to 2002, which subjected the project to greater
interruptions due to adverse weather conditions and standby time as other
contractors completed their work. When we perform extra work outside of the
scope of the contract, 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 and adversely affect our financial position, results of operations and
our overall liquidity as is the case with respect to our current claims against
Pemex, Iroquois and Williams. We operate in a highly competitive industry Our business is highly competitive because construction companies
operating offshore compete vigorously for available projects, which are
typically awarded on a competitive bid basis. This competitive bid process
could adversely affect our international expansion strategy and being awarded
projects in areas where we have not performed operations. Several of our competitors and potential competitors are larger and have
greater financial and other resources. Competitors with greater financial
resources may be willing to sustain losses on certain projects to prevent
further market entry by other competitors. In addition, marine construction
vessels have few alternative uses and high maintenance costs, whether they are
operating or not. As a result, some companies may bid contracts at rates below
our rates. These factors may adversely affect the number of contracts that are
awarded to us and the profit margins on those contracts that are awarded to us.
Additionally, as a result of the competitive bidding process, our significant
customers vary over time. Operating hazards may increase our operating costs; we have limited insurance coverage Offshore construction involves a high degree of operational risk. Risks of
vessels capsizing, sinking, grounding, colliding and sustaining damage from
severe weather conditions are inherent in offshore operations. These hazards
may cause significant personal injury or property damage, environmental damage,
and suspension of operations. In addition, we may be named as a defendant in
lawsuits involving potentially large claims as a result of such occurrences.
Our insurance premiums required to cover these risks have significantly
increased during 2002 and 2003 due to losses in the insurance
industry and the recent increase in our loss experience. We
maintain what we believe is prudent insurance protection. However, we cannot
assure that our insurance will be sufficient or effective under all
circumstances. A successful claim for which we are not fully insured may have a
material adverse effect on our revenues and profitability. 13




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The seasonality of the marine construction industry may adversely affect our operations Historically, the greatest demand for marine construction services in the
U.S. Gulf of Mexico has been during the period from May to September. This
seasonality of the construction industry in the U.S. Gulf of Mexico is caused
both by weather conditions and by the historical timing of capital expenditures
by oil and gas companies which accompanies this. As a result, revenues are
typically higher in the summer months and lower in the winter months. Although
we are pursuing business opportunities in international areas that we believe
will offset the seasonality in the U.S. Gulf of Mexico, we cannot assure that
such expansion will offset the seasonality of our operations in the U.S. Gulf
of Mexico. Our international operations are subject to significant risks A key element of our strategy has been to expand our operations
into selected international oil and gas producing areas, which we will continue
to do. These international operations are subject to a number of risks inherent
in any business operating in foreign countries including, but not limited to:  
    
    political, social, and economic instability;
    
    potential seizure or nationalization of assets;
    
    increased operating costs;
    
    modification or renegotiating of contracts;
    
    import-export quotas;
    
    other forms of government regulation which are beyond our control; and
    
    war or terrorist activity. In
2003, our operations were affected by the civil unrest in the Niger
Delta of West Africa. Our operations there were temporarily suspended which
negatively impacted revenues and gross profit during the second and third
quarters of 2003. We were not able to resume work offshore West Africa until
late October 2003. As our international operations expand, the exposure to the
above mentioned risks will increase. As a result, we could, at any one time,
have a significant amount of our revenues generated by operating activity in a
particular country. Therefore, our results of operations could be susceptible
to adverse events beyond our control that could occur in the particular country
in which we are conducting such operations. Additionally, our competitiveness in international areas may be adversely
affected by regulations, including but not limited to regulations requiring:  
    
    the awarding of contracts to local contractors;
    
    the employment of local citizens; and
    
    the establishment of foreign subsidiaries with significant
ownership positions reserved by the foreign government for local
citizens. We cannot predict what types of the above events may occur. We utilize percentage-of-completion accounting Since our contract revenues are recognized on a percentage-of-completion
basis, we periodically review contract revenue and cost estimates as the work
progresses. Accordingly, adjustments are reflected in income in the period when
such revisions are determined. These adjustments could result in a
revision
of previously reported profits, which may be significant. 14




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We are dependent on key personnel Our success depends on, among other things, the continued active
participation of our executive officers and certain of our other key operating
personnel. Our officers and personnel have extensive experience in the marine
construction industry, both domestic and international. The loss of the
services of any one of these persons could adversely impact our ability to
implement our expansion strategy. We may incur additional expenditures to comply with governmental regulations Our operations are subject to various governmental regulations, violations
of which may result in civil and criminal penalties, injunctions, and cease and
desist orders. In addition, some environmental statutes may impose liability
without regard to negligence or fault. Although our cost of compliance with
such laws has to date been immaterial, such laws are changed frequently.
Accordingly, it is impossible to predict the cost or impact of such laws on our
future operations. We depend on demand for our services from the oil and gas industry, and
this demand may be affected by changing tax laws and oil and gas regulations.
As a result, the adoption of laws that curtail oil and gas production in our
areas of operation may adversely affect us. We cannot determine to what extent
our operations may be affected by any new regulations or changes in existing
regulations. Recently enacted and
proposed regulatory changes may cause us to incur increased costs Recently
enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act
of 2002, will increase our expenses as we evaluate the implications
of new rules and devote resources to respond to the new requirements.
In particular, we expect to incur additional general and
administrative expense as we implement Section 404 of the
Sarbanes-Oxley Act, which requires management to report on, and our
independent auditors to attest to, our internal controls. The
compliance requirements of these new rules could also result in continued
diversion of management's time and attention, which could prove to be
disruptive to normal business operations. Further, the impact of
these events could also make it more difficult for us to attract and
retain qualified persons to serve on our board of directors or as
executive officers, which could harm our business. We
are presently evaluating and monitoring regulatory developments and
cannot estimate the timing or magnitude of additional costs we may
incur as a result. A possible terrorist attack or armed conflict could harm our business Terrorist activities, anti-terrorist efforts and other armed conflict
involving the U.S. may adversely affect the U.S. and global economies and could
prevent us from meeting our debt service, financial and other
contractual obligations. If any of these
events occur, the resulting political instability and societal disruption could
reduce overall demand for marine construction services. Oil and gas
related facilities and assets, including our marine equipment, could
be direct targets for terrorists attacks, and our operations could be
adversely impacted if infrastructure integral to our customers'
operations is damaged or destroyed. Costs for insurance and other
security may increase as a result of these threats, and some
insurance coverage may become more difficult to obtain, if available
at all. Our efforts to expand internationally, especially into the
Middle East, may increase these risks. 
 Item 3.Legal Proceedings If we are unsuccessful in resolving our EPC 64 contract claims, we intend to submit some
or all of these claims against Pemex to arbitration in Mexico in
accordance with the Rules of Arbitration of the International Chamber of
Commerce. We have submitted claims to Pemex of approximately $78 million.
The unapproved claims recorded as revenue to the extent of costs
incurred through December 31, 2002 of $52.2 million do not include any profit
and are substantially less than the actual claims submitted to Pemex.
Our
claims relate to unapproved extra work for interferences, interruptions and
other delays during performance of the EPC 64 contract and other additional
scopes of work. Pemex substantially increased the scope of our operations
under this contract from 2000 through 2002, which subjected the project to
greater interruptions due to adverse weather conditions and standby time as
other contractors completed their work. We previously anticipated that these
claims would be resolved by the end of the fourth quarter of 2003. At December
31, 2003, however, since there was no final resolution of these claims and the
ultimate amount and timing of payment of these claims and the resolution of any
possible arbitration proceedings were uncertain, we have recorded a $33.1
million reserve. Due to the size of the dispute and inherent uncertainties
with respect to arbitration, 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. An adverse outcome from negotiations or possible
arbitration could result in a further loss of up to the remaining $25.5 million
carrying value of our claim. On January 20, 2004, we filed a lawsuit in the Supreme Court in the State
of New York, New York County, against Iroquois for whom we provided marine
construction services. The lawsuit asserts a claim for damages for breach of
contract and wrongful withholding of amounts due to us totaling $40 million for
services performed under our contract with Iroquois. The lawsuit seeks
specific compensatory damages and fees and costs. The
$40.0 million of claims includes $27.2 million of
receivables as of December 31, 2003 and amounts relating to cost
of capital, compensatory damages, fees, and other costs. If all our
claims are denied, we could incur a loss of up to the carrying value of our claim of
$27.2 million. In February 2004, we were
presented a letter from Iroquois declaring its intent to file a counter-claim
for alleged damage to its pipeline, extra costs to complete the work due to
alleged breach of contract, indemnity for certain damage to third parties and
alleged failure to perform efficiently. We believe this action has no merit
and intend to vigorously defend against any formal claim. However, if
these counter-claims are filed and 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,
which would have a material adverse impact on our results of
operations and financial position. Given the early
stages of this litigation, 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. 15




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On September 12, 2003, we filed a lawsuit in the 295th Judicial District
of the District Court for Harris County, Texas against Williams for whom we
provided marine construction services. The lawsuit asserts a claim for damages
for breach of contract and wrongful withholding of amounts due to us totaling
$7.6 million for services performed under our contract with Williams. The
lawsuit seeks specific compensatory damages and fees and costs. The court has
ordered the parties to this lawsuit to engage in an alternative dispute
resolution with a mediator by September 14, 2004, and trial is set for November
15, 2004. If all our claims are denied, we could incur a loss of up to the carrying value of our claim of
$5.5 million. In addition, Williams has advised it intends to file a
counter-claim of approximately $4.0 million against us for alleged breach of
contract. We believe that this counter-claim has no merit and intend to
vigorously defend against it. However, if
these counter-claims are filed and 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 Williams,
which would have a material adverse impact on our results of
operations and financial position. Given the early stages of this lawsuit, 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 are involved in various routine legal proceedings primarily involving
claims for personal injury under the Jones Act and general maritime laws which
we believe are incidental to the conduct of our business. We believe that none
of these proceedings, if adversely determined, would have a material adverse
effect on our business or financial condition. 
 Item 4.Submission Of Matters To A Vote Of Security Holders None. 
 Item 4A.Executive Officers Of The Registrant Listed below are the names, ages and offices held by our executive officers as
of March 1, 2004. NAME
    
    AGE
    
    OFFICES HELDBill J. Lam
    
    
    37
    
    
    President, Chief Executive Officer and DirectorDavid W. Sharp
    
    
    50
    
    
    Executive Vice President and Chief Financial OfficerWilliam B. Gibbens, III
    
    
    55
    
    
    Executive Vice President and General Counsel
 Our executive officers are appointed by our board of directors, subject to
their rights under employment agreements. Bill J. Lamis our President, Chief Executive Officer and a Director. Mr.
Lam has served as our President and Chief Executive Officer since December
1997. From July 1997 to November 1997, Mr. Lam was our Vice
President  Operations. Prior to being employed by us, Mr. Lam held various
supervisory positions for the following providers of marine construction
services to the offshore oil and gas industry: Lowe Offshore, Inc. (from
January 1997 to July 1997), J. Ray McDermott, S.A. (from January 1995 to
January 1997), and OPI International, Inc. (from August 1990 to January 1995). David W. Sharpis an Executive Vice President and our Chief Financial
Officer. Mr. Sharp has served as our Executive Vice President and Chief
Financial Officer since December 1997. From October 1996 to November 1997, Mr.
Sharp was Vice President  Finance. He held various positions from January 1995
to October 1996 with J. Ray McDermott, S.A., including worldwide project leader
for the implementation of accounting and financial systems. He was
controller-Atlantic Division and Director of Management Information of OPI
International, Inc. from November 1990 to January 1995. William
B. Gibbens, IIIhas served as an Executive Vice President and
our General Counsel since July 2003. From August 1999 to June
2003, he was a Vice President and
our General Counsel. Prior to being employed by us,
Mr. Gibbens was a partner in private practice with various law firms from March
1983 to July 1999 where his practice focused on the offshore energy industry. 16




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##### Table of Contents



PART II 
  Item 5.
    Market For Registrants Common Equity, Related Stockholder Matters And
Issuer Purchases Of Equity Securities Our common stock is traded on the NASDAQ National Market under the symbol
HOFF. At February 20, 2004, we had approximately 42 holders of record of our
common stock. The following table sets forth the high and low closing bid prices per
share of our common stock, as reported by the NASDAQ National Market, for the
periods indicated. 2003
    
    2002Fiscal Quarter
    
    High
    
    Low
    
    High
    
    LowFirst
    
    $
    5.05
    
    
    $
    2.88
    
    
    $
    11.82
    
    
    $
    6.05Second
    
    $
    5.71
    
    
    $
    3.31
    
    
    $
    13.12
    
    
    $
    7.77Third
    
    $
    5.03
    
    
    $
    3.37
    
    
    $
    8.15
    
    
    $
    4.21Fourth
    
    $
    5.00
    
    
    $
    3.50
    
    
    $
    6.14
    
    
    $
    4.62
 We intend to retain all of the cash our business generates to meet our
working capital requirements, fund operations and reduce our substantial
indebtedness. We do not plan to pay cash dividends on our common stock in the
foreseeable future. In addition, our debt agreements prevent us from paying dividends or making other
distributions to our stockholders. Equity Compensation Plan Information The following table provides information regarding common stock authorized
for issuance under our equity compensation plans as of December 31, 2003: Number of
    
    
    
    
    
    Number of SecuritiesSecurities to be
    
    
    
    
    
    Remaining AvailableIssued Upon
    
    Weighted-Average
    
    For Future IssuanceExercise of
    
    Exercise Price
    
    Under EquityOutstanding
    
    of Outstanding
    
    Compensation PlansOptions, Warrants
    
    Options, Warrants
    
    (excluding securitiesand Rights
    
    and Rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)(2)Equity compensation plans
approved by security holders
    
    
    3,422,684
    
    
    $
    7.34
    
    
    
    1,614,536Equity compensation plans not
approved by security holders (1)
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,422,684
    
    
    $
    7.34
    
    
    
    1,614,536
   (1)
    
    Our equity compensation program does not include any equity compensation
plans (including individual compensation arrangements) under which common
stock is authorized for issuance that was adopted without the approval of
shareholders.(2)
    
    Of the shares remaining for issuance under the Companys equity
compensation plans, no more than 200,000 shares may be issued as restricted
stock or other stock based awards (which awards are valued in whole or in
part on the value of the shares of common stock under each plan). Issuer Purchases Of Equity Securities None. 17




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##### Table of Contents



Item 6.Selected Financial Data The selected financial data for the five-year period ended December 31,
2003 are derived from our audited financial statements. You should read the
information below together with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial
statements and notes thereto included in this Annual Report. The Consolidated Financial Statements for 1999 through 2001 were audited
by Arthur Andersen LLP (Andersen), which has ceased operations. A copy of the
auditors report previously issued by Andersen on our financial statements as
of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001 is included elsewhere in this report. Andersen did not
reissue its report. YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands, except per share data)INCOME STATEMENT DATA:Contract revenues
    
    $
    270,313
    
    
    $
    283,410
    
    
    $
    272,208
    
    
    $
    160,532
    
    
    $
    89,015Cost of contract revenues
    
    
    263,812
    
    
    
    253,016
    
    
    
    237,175
    
    
    
    136,146
    
    
    
    72,181Gross profit
    
    
    6,501
    
    
    
    30,394
    
    
    
    35,033
    
    
    
    24,386
    
    
    
    16,834Selling, general and administrative expenses
    
    
    21,749
    
    
    
    21,845
    
    
    
    13,771
    
    
    
    9,401
    
    
    
    9,043Pemex EPC 64
reserve
    
    
    33,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment of property and equipment
    
    
    21,332
    
    
    
    9,852
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (69,672
    )
    
    
    (1,303
    )
    
    
    21,262
    
    
    
    14,985
    
    
    
    7,791Other:Interest expense, net of amount capitalized
    
    
    (9,542
    )
    
    
    (4,585
    )
    
    
    (5,381
    )
    
    
    (7,730
    )
    
    
    (5,759
    )Interest income
    
    
    67
    
    
    
    91
    
    
    
    403
    
    
    
    718
    
    
    
    480Loss on debt extinguishment
    
    
    (868
    )
    
    
    
    
    
    
    (874
    )
    
    
    
    
    
    
    Gain (loss) on sale of assets
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    6
    
    
    
    10Other income (expense), net
    
    
    (88
    )
    
    
    (2,831
    )
    
    
    (184
    )
    
    
    (84
    )
    
    
    158Net income (loss) before income taxes and cumulative effect of
accounting change
    
    
    (80,103
    )
    
    
    (8,628
    )
    
    
    15,204
    
    
    
    7,895
    
    
    
    2,680Income tax provision (benefit)
    
    
    (7,599
    )
    
    
    (3,079
    )
    
    
    4,511
    
    
    
    2,902
    
    
    
    1,001Net income (loss) before cumulative effect of accounting change
    
    
    (72,504
    )
    
    
    (5,549
    )
    
    
    10,693
    
    
    
    4,993
    
    
    
    1,679Cumulative effect of accounting change, net of taxes of $743
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,381
    
    
    
    Net income (loss)
    
    $
    (72,504
    )
    
    $
    (5,549
    )
    
    $
    10,693
    
    
    $
    6,374
    
    
    $
    1,679Earnings per share  basic:Net income (loss) before cumulative effect of accounting change
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.48
    
    
    $
    0.27
    
    
    $
    0.09Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.07
    
    
    
    Net income (loss)  basic
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.48
    
    
    $
    0.34
    
    
    $
    0.09Earnings per share  diluted:Net income (loss) before cumulative effect of accounting change
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.46
    
    
    $
    0.26
    
    
    $
    0.09Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.07
    
    
    
    Net income (loss)  diluted
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.46
    
    
    $
    0.33
    
    
    $
    0.09STATEMENT OF CASH FLOW DATA:Net cash provided by (used in) operating activities
    
    $
    (53,065
    )
    
    $
    48,487
    
    
    $
    (43,994
    )
    
    $
    8,723
    
    
    $
    12,627Net cash used in investing activities
    
    
    (14,683
    )
    
    
    (59,752
    )
    
    
    (53,223
    )
    
    
    (18,178
    )
    
    
    (23,397
    )Net cash provided by financing activities
    
    
    71,790
    
    
    
    9,474
    
    
    
    95,838
    
    
    
    10,581
    
    
    
    9,238OTHER FINANCIAL DATA:Depreciation and amortization
    
    $
    19,718
    
    
    $
    15,959
    
    
    $
    12,935
    
    
    $
    9,591
    
    
    $
    7,574Capital expenditures
    
    
    17,797
    
    
    
    58,752
    
    
    
    54,828
    
    
    
    19,268
    
    
    
    24,396
 18




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##### Table of Contents



DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999BALANCE SHEET DATA:Working capital
    
    $
    26,107
    
    
    $
    30,385
    
    
    $
    78,055
    
    
    $
    9,952
    
    
    $
    3,978Property and equipment, net
    
    
    239,411
    
    
    
    257,847
    
    
    
    221,446
    
    
    
    176,895
    
    
    
    163,353Total assets
    
    
    409,541
    
    
    
    420,533
    
    
    
    393,584
    
    
    
    239,425
    
    
    
    202,401Long-term debt, net of current maturities
    
    
    146,886
    
    
    
    90,062
    
    
    
    111,414
    
    
    
    78,415
    
    
    
    68,986Stockholders equity
    
    
    139,811
    
    
    
    211,675
    
    
    
    185,690
    
    
    
    104,035
    
    
    
    97,100OTHER NON-GAAP FINANCIAL DATA:Adjusted EBITDA (1)
    
    $
    (29,578
    )
    
    $
    21,677
    
    
    $
    33,117
    
    
    $
    24,498
    
    
    $
    15,533Adjusted EBITDA calculation is as follows:Net income (loss)
    
    $
    (72,504
    )
    
    $
    (5,549
    )
    
    $
    10,693
    
    
    $
    6,374
    
    
    $
    1,679Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,381
    )
    
    
    Income tax provision (benefit)
    
    
    (7,599
    )
    
    
    (3,079
    )
    
    
    4,511
    
    
    
    2,902
    
    
    
    1,001Net interest expense
    
    
    9,475
    
    
    
    4,494
    
    
    
    4,978
    
    
    
    7,012
    
    
    
    5,279Depreciation and amortization
    
    
    19,718
    
    
    
    15,959
    
    
    
    12,935
    
    
    
    9,591
    
    
    
    7,574Non-cash impairment of property and equipment
    
    
    21,332
    
    
    
    9,852
    
    
    
    
    
    
    
    
    
    
    
    Adjusted EBITDA
    
    $
    (29,578
    )
    
    $
    21,677
    
    
    $
    33,117
    
    
    $
    24,498
    
    
    $
    15,533
   (1)
    
    Horizon calculates Adjusted EBITDA (adjusted earnings before
interest, income taxes, depreciation and amortization) as net income
or loss excluding income taxes, net interest expense, depreciation
and amortization, cumulative effect of accounting change and
impairment of property and equipment. Net income or loss includes revenues for
services for which non-cash consideration is received. Adjusted
EBITDA is not calculated in accordance with Generally Accepted
Accounting Principles (GAAP), but is a non-GAAP measure that is
derived from items in Horizons GAAP financials and is used as a
measure of operational performance. A reconciliation of the
non-GAAP measure to Horizons income statement is included. Horizon
believes Adjusted EBITDA is a commonly applied measurement of
financial performance by investors. Horizon believes Adjusted EBITDA is useful
to investors because it gives a measure of operational performance
without taking into account items that Horizon does not believe
relate directly to operations or that are subject to variations that are not
caused by operational performance. This non-GAAP measure is not intended to be a substitute for
GAAP measures, and investors are advised to review this non-GAAP
measure in conjunction with GAAP information provided by Horizon. 
 Item 7. 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 included in this Annual
Report. 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. See Cautionary Statements. General We provide marine construction services for the offshore oil and gas
industry in the U.S. Gulf of Mexico, Northeastern U.S., Latin America,
Southeast Asia and West Africa, and have recently expanded our operations to
the Middle East. We have eleven vessels in our marine fleet that are currently
operational. The primary services we provide include:  
    
    installing pipelines;
    
    providing pipebury, hook-up and commissioning services; 19




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##### Table of Contents




    
    installing production platforms and other structures;
    
    disassembling and salvaging production platforms and other structures; and
    
    performing pipe spooling services. 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 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
have had two years of operating losses, and as of December 31,
2003, we had an accumulated deficit of $54.2 million. We
reported operating losses of $69.7 million and $1.3 million
for 2003 and 2002, respectively. The operating loss for 2003
includes a $33.1 million reserve for unapproved claims from
Pemex and a $21.3 million impairment loss on the Phoenix
Horizon, two diving support vessels, one small construction
vessel, a cargo barge and related marine equipment. We had negative
cash flows from operations of $(53.1) million for 2003. Our
negative cash flows from operations and the inability to collect
receivables and claims from Pemex, Iroquois and Williams severely
impacted our liquidity during 2003, requiring us to obtain additional
financing and amend our existing debt covenants. During the second
quarter of 2003, we secured $55 million in secured asset based
financing from three lenders, including a $15 million term loan
from Elliott Associates. In March 2004, we issued $65.4 million
of Subordinated Notes to meet immediate working capital needs. We
believe that with the issuance of the Subordinated Notes, cash
provided by operations and available liquidity will be sufficient to
fund our debt service requirements, working capital and vessel
maintenance until at least December 31, 2004. Had we not been
able to secure the additional financing and successfully amend loan
covenants on existing debt, we would not have had sufficient cash to
fund operating requirements. During 2003, revenues related to our pipeline installation and burial
project in the Northeastern U.S. for Iroquois accounted for 25% of our consolidated
revenues. Our liquidity has been impacted by the delay in collecting
approximately $27.2 million of receivables from Iroquois for the
performance of this project. Construction activities under our contract for this project were
completed during October 2003. We also completed a pipeline inspection and
pipetrenching project in the Northeastern U.S. during the third quarter of
2003, which accounted for 15% of our consolidated revenues during 2003.
Additionally, operations in the Southeast Asia region contributed significant
revenues during 2003, accounting for 18% of our consolidated revenues. Work on
a structural and pipeline installation project in Brunei was completed during
the third quarter of 2003 and construction activities on a pipeline and
structural installation project in Malaysia were completed in the fourth
quarter of 2003. In the U.S. Gulf of Mexico, work on an 83-mile pipeline
installation and burial project accounted for 9% of our consolidated revenues
for 2003. 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. Capital
expenditures by oil and gas companies operating in the U. S. Gulf of Mexico
remained at reduced levels during 2003 due to the slow down in the U. S.
economy and concerns over U.S. natural gas pricing trends. The resulting
competitive market conditions in response to lower levels of developmental
construction have decreased vessel utilization and profit margins in the U.S.
Gulf of Mexico and offshore Mexico and adversely affected our
revenues and profitability. In general, our profit margins for marine
construction have declined over the past five years. Also, lower margins on projects in the Northeastern U.S., downtime on
vessels operating in the northern U.S. Gulf of Mexico because of unanticipated
inclement weather conditions, and schedule slippage in several major projects
in the U.S. Gulf of Mexico and West Africa contributed to a decrease in gross
profit for 2003. In late March 2003, our customer in Nigeria temporarily
suspended operations of our two-year pipeline and structural installation
program due to ethnic unrest in the Niger Delta. Due to the temporary
suspension of operations followed by the adverse weather season in this region
from May through September, our work on this project did not resume until late
October 2003, which negatively impacted revenues and gross profit during the
second and third quarters of 2003. We continue to negotiate with and use our best efforts to resolve our EPC
64 contract claims against Pemex. We previously anticipated that these claims
would be resolved by the end of the fourth quarter of 2003. During the fourth
quarter of 2003, however, since there was no final resolution of these claims
and the ultimate amount and timing of payment of these claims was uncertain, we
recorded a $33.1 million reserve for unapproved claims from Pemex. Cumulative
revenues recognized from 2000 through 2003 on all Pemex projects in Mexico
totaled $291 million, including $57.0 million of claims made under three Pemex contracts for extra work related
to interferences, interruptions and other delays. Of the $57.0 million of
claims, $54.2 million related to our second major project for
Pemex, EPC 64, of which we have collected $2.0 million.
The remaining $2.8 million of claims related to two more recent projects for
Pemex and have been collected in full. These two more recent projects were performed subsequent to
the EPC 64 contract under the current senior management at
Pemex. Unapproved claims related to the Pemex projects arise primarily from
client delays and changes in the initial scope of work. A summary of the balance of claims remaining in costs in excess of
billings related to the Pemex projects are as follows (in millions): Claims included in 2001 revenue
    
    $
    42.8Claims included in 2002 revenue
    
    
    14.2Total claims
    
    
    57.0Claims billed to Pemex in 2002
    
    
    (4.0
    )Claims included in costs in excess
of billings as of December 31, 2002
    
    $
    53.0Claims billed to Pemex in 2003
    
    
    (0.8
    )Reserve for claims in 2003
    
    
    (33.1
    )Claims included in costs in excess
of billings as of December 31, 2003
    
    $
    19.1
 There were no claims related to Pemex included in revenues for the year
ended December 31, 2003. If we are unsuccessful in resolving our outstanding 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. The carrying value of our uncollected receivables remaining from
December 31, 2003 of approximately $25.5 million, which includes $19.1 million
of unapproved claims and $6.4 million of additional scope of work, is our best
estimate of the amount we believe will be collected. In
March 2004, we were awarded a contract for approximately
$100 million with the Israel
Electric Corporation for the installation of a 30 diameter natural gas
transmission system pipeline. The project calls for the transportation,
installation, burial and precommissioning of approximately 90 km of 30
pipeline with landfalls at three locations, along with a lateral 5 km of 12
diameter pipeline. The project also calls for the landfalls to be installed by
horizontal directional drilling techniques. The installation work is scheduled
to commence in the second quarter of 2004 and is estimated to be completed by
year-end 2004. The lay barge Gulf Horizonand the dedicated bury barge Canyon
Horizonare expected to be utilized on this project. Also
in March 2004, we were awarded a contract for approximately $50 million
with Pemex, under the current senior management, for the engineering, procurement and construction of
several pipelines in the Bay of Campeche. We expect to commence the project to lay and trench pipelines ranging in
size from 10 to 24 diameter and expect to perform one shore approach, end
connections, topside piping and testing. The derrick barge Atlantic Horizon
and lay barge Lone Star Horizonwill be utilized on the project. Offshore
construction is scheduled to begin in the second quarter of 2004. As
of March 12, 2004, our backlog totaled approximately $203 million
compared to our backlog at March 7, 2003 of approximately $100 million. Our
expansion into the Middle East and an increase in new Pemex project activity in
Mexico have increased our backlog. Of the total backlog as of March 12, 2004,
approximately $29 million is not expected to be earned until
after 2004. Critical Accounting Policies And Estimates 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 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. 20




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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 could involve deferrals for several quarters. Accounts Receivable We have significant investments in billed and unbilled receivables as of
December 31, 2003. 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 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 21




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excess of billings and thoroughly review historical collection experience, the
financial condition of our customers, billing disputes and other factors.
Prior to the fourth quarter of 2003, we had not experienced any significant
losses on receivables. 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. We continue to negotiate with and use our best efforts to resolve our EPC
64 contract claims against Pemex. The Pemex personnel responsible for
the EPC 64 contract at the time it was ongoing are no longer
participating in the
settlement negotiations of these claims, which has hindered our
ability to resolve them. From November 2002 through March 2004, we engaged a consulting
firm in Mexico to assist us in the administration of our Pemex claims. After complying
with Pemex's requirements, we formally submitted these claims in July 2003. Upon the
formal submission of such claims, we expected to resolve them by the end of the fourth quarter of
2003. However, during the fourth quarter of 2003, it became apparent
that the current management at Pemex was resistant to accepting responsibility
for resolving these claims due to the changes in personnel
negotiating these claims on behalf of Pemex and to the operating
structure of Pemex. Prior to that time, Pemex personnel had given us
assurances that our properly supported claims would be paid, and our
consulting firm from Mexico indicated they believed we would be able
to collect the carrying value of our claims. At December 31,
2003, since there was no final resolution of these claims and the
ultimate amount and timing of payment of these claims was uncertain, we
reserved $33.1 million related to our previously recorded outstanding
unapproved claims against 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 December 31, 2003, prior to the reserve recorded, consisted of $52.2 million of
unapproved claims and $8.5 million of additional scope of work. 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.
As of December 31, 2003, we had remaining unreserved contract receivables of $2.1 million and costs in excess
of billings of $25.5 million from Pemex, totaling $27.6 million. We subsequently collected the $2.1 million
of contract receivables that were outstanding as of December 31, 2003 related to work performed as additional scope of
work.
Our unreserved net claim receivable remaining from December 31, 2003 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.
We based our best current estimate of
ultimate collectibility on the limited indications from Pemex
during the fourth quarter of 2003 of of suggested settlements on the portion of the claims not related to interferences and interruptions.
Pemex officials involved in the negotiation of the claims have failed
to indicate to us the amounts of which they might settle
the claims related to interferences and interruptions. Settlement of
this amount and final resolution could reasonably be expected to vary
from $25.5 million.
Had we not estimated a portion of the interferences and interruptions
claims that would be collected, the loss would be greater. 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
our Subordinated Notes issued in March 2004. As of December 31, 2003, we had unreserved contract receivables of $25.9
million and costs in excess of billings of $1.3 million from Iroquois totaling
$27.2 million. We have subsequently billed the amounts included in costs in
excess of billings as of December 31, 2003. 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. 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 accounts of up to the carrying value of $27.2 million. As
of December 31, 2003, we had total claims of $7.6 million
against Williams and had recognized revenue to the extent of
cost representing $5.5 million in unreserved contract receivables. 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. 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 accounts of up
to the carrying value of $5.5
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 22




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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. Based on our analysis of the estimated undiscounted future net cash flows
for our long-term assets during the fourth quarter of 2003, we determined that
five of our marine vessels and related equipment were impaired
under Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets and recognized a loss of
$21.3 million to reflect the fair market value of these impaired assets. The
impairment loss included the write-off of $2.3 million of
capitalized dry-dock
costs associated with these impaired vessels. Due to lower expected utilization
levels, the value of the Phoenix Horizon, two diving support
vessels, one small construction vessel, a
cargo barge and related marine equipment has been impaired. We previously
recognized a $9.9 million impairment loss related to the Phoenix Horizonfor
the year ended December 31, 2002. The impairment of the
Phoenix Horizonin 2003 was a
result of a further decline in its fair market value and managements decision
not to make capital improvements that are required to place the vessel into
service due to the availability of other operational assets. The sustained
difficult economic environment, depressed market for the marine construction
industry and increased competition for marine construction projects awarded
throughout 2003 have decreased the utilization of our vessels, triggering the
impairment of the other vessels, the cargo barge and related marine equipment. Other Assets Dry-dock costs are direct costs associated with scheduled major
maintenance on our marine construction vessels in accordance with certain
regulations and are capitalized and amortized over the five-year cycle to the next
scheduled dry-docking. We wrote-off $2.3 million of capitalized dry-dock costs
during the fourth quarter of 2003 related to the impairment of three small
construction vessels under SFAS No. 144. On June 29, 2001, the AICPA issued an
exposure draft of a proposed SOP, Accounting for Certain Costs and Activities
Related to Property, Plant, and Equipment. If adopted, we would be required
to expense dry-docking costs on our vessels as incurred. We incurred and
capitalized dry-dock costs of $4.9 million in 2003, $5.8 million in 2002 and
$7.1 million in 2001. As of December 31, 2003, capitalized dry-dock costs totaled
$11.4 million. Expensing dry-dock costs would likely result in greater
variability of our quarterly operating results as a substantial portion of our
dry-dock activities take place during the first and fourth quarters and would
aversely affect our financial position and results of operation. 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 income
(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 statements of operations during the first
quarter of 2003. Also, we recorded an additional $156,000 as
compensation expense in the statements of operations during the
second quarter of 2003 related to the remeasurement of options in
connection with the resignation of a key employee. 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 predictions 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.
As of December 31, 2003, 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 $23.1 million was charged as income tax
expense. 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. Recent Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which revises current guidance with respect to gains and losses
on early extinguishment of debt. Under SFAS No. 145, gains and losses on early
extinguishment of debt will no longer be treated as extraordinary items unless
they meet the criteria for extraordinary treatment in Accounting Principles
Board (APB) Opinion No. 30. We were required to adopt SFAS No. 145 effective
January 1, 2003. Upon adoption, we reclassified the extraordinary loss on
early extinguishment of debt of $874,000 from extraordinary items to other
expense 23




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for the year ended December 31, 2001, as this amount no longer qualified
for extraordinary treatment under SFAS No. 145. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
In December 2003, the FASB issued a revised version of this interpretation,
FIN 46(R). FIN 46(R) addresses the requirements for business enterprises to
consolidate certain variable interest entities who are the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 and FIN
46(R) are
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. The revised provisions of the interpretation
will become applicable for the first reporting period ending after March 15,
2004 for variable interest entities created before February 1, 2003. The
adoption of FIN 46 and FIN 46(R) is not anticipated to have a material effect
on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes how an issuer classifies and measures certain
financial instruments that have characteristics of both liabilities and equity.
The statement requires that an issuer classify financial instruments that are
within its scope as a liability and requires disclosure regarding the terms of
those instruments and settlement alternatives. Previously, many of these
instruments were classified as equity or as mezzanine instruments (between the
liabilities and the equity section). SFAS No. 150 is effective immediately for
qualifying financial instruments issued after May 31, 2003 and was effective
for existing issuances as of the third quarter ended September 30, 2003.
Adoption of SFAS No. 150 did not have a material effect on our results of
operations or financial position. 24




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Results Of Operations Information relating to Horizons operations follows (in millions): Year Ended December 31,2003
    
    2002
    
    2001Revenues:Domestic
    
    $
    201.7
    
    
    $
    156.6
    
    
    $
    128.1Latin America
    
    
    3.9
    
    
    
    106.3
    
    
    
    142.2West Africa
    
    
    16.2
    
    
    
    1.4
    
    
    
    Southeast Asia
    
    
    48.1
    
    
    
    17.3
    
    
    
    Other
    
    
    0.4
    
    
    
    1.8
    
    
    
    1.9Total
    
    $
    270.3
    
    
    $
    283.4
    
    
    $
    272.2Gross Profit:Domestic
    
    $
    0.8
    
    
    $
    12.4Latin America
    
    
    (0.7
    )
    
    
    18.4West Africa
    
    
    (1.4
    )
    
    
    (2.8
    )Southeast Asia
    
    
    8.1
    
    
    
    1.6Other
    
    
    (0.3
    )
    
    
    0.8Unallocated costs
    
    
    
    
    
    
    Total
    
    $
    6.5
    
    
    $
    30.4
 Gross
profit data was not monitored on a geographic basis during 2001 and
is therefore not presented herein. Year Ended December 31, 2003 Compared To The Year Ended December 31, 2002 Contract Revenues. Contract revenues were $270.3 million for 2003, compared to $283.4 million
for 2002. Revenues decreased 4.6% compared with last year. The decline in
revenues is attributable to a decrease in pricing of services for marine
construction in the U.S. Gulf of Mexico due to a highly competitive market
during 2003. Our customer mix in 2003 changed significantly compared to the
mix of customers in 2002. The significant decline in revenues from Pemex from
52% of our total revenues in 2001 to 31% in 2002 to 1% in 2003 have impacted
our total revenues, gross profit and the change in customer mix. In 2003, we
completed the remainder of a contract for Pemex and recognized $3.9 million of
revenues. This reduction in revenues in 2003 for Latin America was offset by
our expansion into other international areas. We completed two large projects
in Southeast Asia, offshore Brunei and Malaysia, as well as began work on a
major project in West Africa, offshore Nigeria. We also completed two large
projects in the Northeastern U.S. during 2003, further offsetting the decrease
in revenue in Latin America. Work performed in the Northeastern U.S. is
included in our Domestic operations. Gross Profit. Gross profit was $6.5 million (2.4% of contract revenues) for 2003
compared with a gross profit of $30.4 million (10.7% of contract revenues) for
2002. In general, our gross profits for marine construction have declined over
the past five years. Lower gross profits on projects in the Northeastern U.S.,
reduced vessel utilization and unusually adverse weather conditions during
2003, and resulting downtime and revenues recorded for such events, lowered
gross profit. Our various projects in the Northeastern U.S., which in total
accounted for approximately 40% of revenues, were primarily performed by
subcontracted vessels rather than our own vessels, and as such, lower gross
profits were recorded. The gross profits on the Pemex projects, which
accounted for a greater percentage of revenues in 2002, were higher than gross
profits on other contracts in 2003. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $21.7 million (8.0% of
contract revenues) for 2003, compared with $21.8 million (7.7% of contract
revenues) for 2002. The slight decrease primarily relates to the reversal of
accrued costs associated with our Pemex claims, offset by increases in costs
associated with international operations, additional depreciation expense for
corporate fixed assets placed into service during the second half of 2002 and
first quarter of 2003, and severance and other charges due to the resignation
of a key employee in 2003. 25




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Pemex EPC 64 Reserve. During
the fourth quarter of 2003, we recorded a reserve of $33.1 million
related to our outstanding EPC 64 contract claims against Pemex
since we have been unsuccessful in resolving such claims.
Since the ultimate amount and timing of payment of these claims is uncertain, we
recorded this reserve for the outstanding receivable to reflect our best
estimate of the amount that we believe we will collect. We did not record any
reserve related to this Pemex receivable during 2002 or 2001. Impairment of Property and Equipment. A $21.3 million impairment loss was recognized under SFAS No. 144 during
2003 on several of our marine construction vessels. Due to lower expected
utilization levels, the value of the Phoenix Horizon, two
diving support vessels, one small construction
vessel, a cargo barge and related marine equipment has been impaired. We previously recognized a $9.9
million impairment loss related to the Phoenix Horizonfor the year ended
December 31, 2002. The impairment of the Phoenix Horizonin 2003 is a result of a
further decline in its fair market value and managements determination not to make
capital improvements required to place the vessel into service due to the
availability of other operational assets. The sustained difficult economic
environment, depressed market for the marine construction industry and
increased competition for construction projects throughout 2003 has resulted in
a decline in the utilization of our vessels, triggering the impairment of the
other vessels and the cargo barge. The impairment losses were based upon the
cost of the vessels in excess of their estimated fair value based
upon expected sales prices as determined by broker quotations or orderly
liquidation value appraisals from third parties. Interest Expense. Interest expense for 2003 was $9.5 million, net of $0.1 million of
capitalized interest. Interest expense for 2002 was $4.6 million, net of $1.6
million of capitalized interest. Total outstanding debt was $171.5 million at
December 31, 2003 compared with $98.3 million at December 31, 2002. Interest
expense increased due to higher average outstanding debt balances, higher
interest rates and other costs associated with the additional financing secured
during the second quarter of 2003. Interest Income. Interest income includes interest from cash investments for the years
ended December 31, 2003 and 2002 of $67,000 and $91,000, respectively.
Interest income declined as we have closely managed our cash position during
2003, and we were required to borrow funds to meet working capital
requirements. Loss On Debt Extinguishment. Loss on debt extinguishment relates to a prepayment penalty of $569,000
and the write-off of deferred loan fees of $299,000 for the early retirement of
debt during the second quarter of 2003. In June 2003, we refinanced the Sea
Horizonwith another lender and used a portion of the proceeds to repay and
extinguish our previous lenders debt resulting in the loss on debt
extinguishment. This refinancing secured in 2003 provided additional
liquidity and working capital to fund operations due to our inability
to collect our Pemex receivables and claims. There were no losses on debt extinguishment during 2002. Other Income (Expense). Other income (expense) for 2003 primarily consisted of $115,000 of net
foreign currency loss due to activity in Mexico denominated in Mexican pesos
and a weakening of the Mexican peso compared to the U.S. dollar. Included in other income (expense) for 2002 is a $2.0 million loss related
to a fire on the Lone Star Horizon, and $0.8 million of foreign currency loss
due to activity denominated in Mexican pesos and a weakening of the Mexican
peso compared to the U.S. dollar. 26




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Income Taxes (Benefit). We use the liability method of accounting for income taxes. We recorded a
federal income tax benefit of $(7.6) million, at a net effective rate of 9.5%
on a pre-tax loss of $(80.1) million for 2003. We recorded a federal income
tax benefit of $(3.1) million, at a net effective rate of 35.7% on a pre-tax
loss of $(8.6) million for 2002. The difference in the effective tax rate and
the statutory tax rate for 2003 is primarily due to the valuation allowance of
$23.1 million recorded during the fourth quarter of 2003 to fully offset the
net deferred tax asset. The utilization of any net operating loss carryforwards
is dependent on the future profitability of the company. Accordingly, no
assurance can be given regarding the ultimate realization of such loss
carryforwards. The difference from the statutory tax rate for 2002 is due to
the application of the extraterritorial income exclusion for income earned
primarily in Mexico from January 1, 2002 to December 31, 2002. The exclusion
allows us to exclude a portion of income earned outside the United States for
tax purposes. The impact of this exclusion on future periods will vary
depending upon the amount of income earned outside the United States. Changes
in our ownership levels, future, current and past, may result in limitations on our
annual and aggregate ability to utilize net operating losses. Net Income. Net loss was $(72.5) million, or $(2.74) per share-diluted, for 2003,
compared to a net loss for 2002 of $(5.5) million, or $(0.22) per
share-diluted. Year Ended December 31, 2002 Compared To The Year Ended December 31, 2001 Contract Revenues. Contract revenues were $283.4 million for 2002, compared to $272.2 million
for 2001. Revenues increased 4.1% compared with last year. Our projects in
Mexico contributed approximately $86.7 million in revenues during 2002,
compared with $142.2 million during 2001. The decline in revenues from the
projects in Mexico was offset by revenues of $55.9 million from the Iroquois
pipeline installation and burial project and by revenues from other
international projects. Revenues recognized in 2002 and 2001 included $43.4
million and $23.3 million, respectively, from salvage and installation projects
in the U.S. Gulf of Mexico. Of the $43.4 million in revenues recognized in
2002, approximately $6.8 million represents values assigned to structures
received as partial consideration for salvage projects performed. No
significant non-cash consideration was received in 2001. Gross Profit. Gross profit was $30.4 million (10.7% of contract revenues) for 2002
compared with a gross profit of $35.0 million (12.9% of contract revenues) for
2001. Excluding the effect of the claims on the Pemex projects for which
revenues were recognized to the extent of actual costs incurred, gross profit
as a percentage of revenues was 11.3% for 2002 compared with 15.3% for 2001.
The decline was due to lower gross profit bid on jobs as a result of
competitive market conditions. In addition, unusually adverse weather
conditions during the fourth quarter of 2002, and resulting downtime and
revenues recorded for such events, lowered overall gross profit. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $21.8 million (7.7% of
contract revenues) for 2002, compared with $13.8 million (5.1% of contract
revenues) for 2001. The increase was primarily due to our international
expansion and costs associated with our Pemex claims. Impairment of Property and Equipment. We recognized a $9.9 million impairment loss related to the Phoenix
Horizonunder SFAS No. 144 for the year ended December 31, 2002. During the
fourth quarter of 2002, we determined that we would not invest in the
improvements required to place the barge into service under the current market
conditions. The impairment loss was based upon the cost of the Phoenix Horizon
in excess of its estimated fair value based upon estimated discounted future
cash flows. No impairments were recognized for the year ended December 31,
2001. 27




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Interest Expense. Interest expense for 2002 was $4.6 million, net of $1.6 million of
capitalized interest. Interest expense for 2001 was $5.4 million, net of $1.3
million of capitalized interest. Total outstanding debt was $98.3 million at
December 31, 2002 compared with $119.1 million at December 31, 2001. The
decrease in interest expense was due to lower average interest rates, lower
average outstanding debt balances as a result of the April 2002 equity offering
and an increase in interest capitalization in 2002 related to our increased
capital spending. Interest Income. Interest income includes interest from cash investments for the years
ended December 31, 2002 and 2001 of $0.1 million and $0.4 million,
respectively. The decrease was primarily due to lower interest rates and lower
average cash balances for 2002. Loss On Debt Extinguishment. There were no losses on debt extinguishment during 2002. During 2001, we
used a portion of the proceeds we received from a secondary offering in
February 2001 to reduce outstanding principal amounts under a term loan to
decrease our overall indebtedness. This prepayment was subject to a penalty of
$874,000. For the year ended December 31, 2001, we reclassified the
extraordinary loss of $874,000 due to the early extinguishment of debt from
extraordinary items pursuant to the adoption of SFAS No. 145 in 2003. Other Income (Expense). Included in other income (expense) for 2002 is a $2.0 million loss related
to a fire on the Lone Star Horizon, and $0.8 million of foreign currency loss
due to activity denominated in Mexican pesos and a weakening of the Mexican
peso compared to the U.S. dollar. Included in other income (expense) for the year ended December 31, 2001 is
$(164,000) of other net expenses associated with foreign currency and $(10,000)
of net expenses related to our Cal Dive joint venture. We recognized $(39,000)
of equity losses related to the DSND joint venture and $29,000 of revenue
earned from billings to the DSND joint venture for administrative services in
2001. The DSND joint venture was dissolved in February 2001. Income Taxes (Benefit). We use the liability method of accounting for income taxes. We recorded a
federal income tax benefit of $(3.1) million, at a net effective rate of 35.7%
on a pre-tax loss of $(8.6) million for 2002. We recorded a federal income tax
provision of $4.5 million, at a net effective rate of 29.7% on a pre-tax income
of $15.2 million for 2001. The difference from the statutory rate is due to
the application of the extraterritorial income exclusion for income earned
primarily in Mexico and parts of Southeast Asia. The exclusion allows us to
exclude a qualifying portion of income earned outside the United States for tax
purposes. The impact of this exclusion on future periods will vary depending
upon the amount of qualifying income earned outside the United States and
changes in tax rules. Net Income. Net loss was $(5.5) million, or $(0.22) per share-diluted, for 2002,
compared to net income for 2001 of $10.7 million, or $0.46 per share-diluted. Liquidity And Capital Resources Over
the past two years we have experienced operating and net losses, resulting in noncompliance
with our debt covenants. Subsequent to December
31, 2003 and in connection with our Subordinated Note issuance in
March 2004, we amended our existing debt covenants and expect to be
in compliance
with the amended terms during 2004. During
2003, we took actions to improve our competitiveness, operating results and
cash flow by reorganizing our operations and incorporating a project management
oriented approach in an effort to more efficiently and effectively execute our
marine construction projects. We reduced headcount in 2003 in light of the
sustained depressed market in the U.S. Gulf of Mexico. We believe
that these measures taken in 2003, combined with the additional
financing obtained in March 2004, will improve our 2004 operating
results. Our cash flows from operations and along with available
borrowing capacity under our bank revolving
credit facilities as a result of the Subordinated Note issuance should
be sufficient to finance our working capital and other capital requirements
until at least December 31, 2004. Management, however, believes that we will
need to complete the refinancing of our revolving credit facilities
maturing in January 2005 and depending on market conditions,
consummate an equity offering to refinance all or a portion of our Subordinated Notes.
Management further believes that should the market in the U.S. Gulf of Mexico remain depressed additional actions can be
taken to reduce operating expenses. Cash used in operations was $(53.1) million for the year ended 2003
compared to cash provided by operations of $48.5 million for
2002 and cash used in operations of $44.0 billion for 2001. The increase
in funds used in operations is primarily attributable to our pretax loss of
$(80.1) million for the year ended December 31, 2003, and an increase in contract
receivables associated with 2003 revenues and delays in collections of these
revenues. Cash provided by operations of $48.5 million in 2002 was
primarily attributable to the billing and subsequent collection of
projects in Latin America and the Northeastern U.S. as well as the
increases in current liabilities related to the extension of the
timing of payments by us. Cash used in operations of $44.0 million in
2001 was primarily attributable to the increase in costs in excess of
billings related to our EPC 64 contract with Pemex. Cash used in investing activities was $17.8 million for the year ended
2003 compared to cash used in investing activities of
$59.8 million and $53.2 million for 2002 and 2001, respectively.
The decrease in funds used in investing activities is attributable to a decline
in our capital expenditures during 2003 due to lower levels of vessel
utilization and competitive market conditions in the U.S. Gulf of Mexico.
During 2002, we made significant upgrades to the Sea Horizon, our largest
vessel, and other vessels in our fleet to prepare them for major projects in
Southeast Asia, West Africa and the Northeastern U.S. During 2001, we
used significant funds for the initial purchase of two of our larger
marine construction vessels. Cash provided by financing activities was $71.8 million for the year ended
2003 compared to cash provided by financing activities of $9.5 million for
2002 and $95.8 million for 2001. The increase in funds provided by financing activities is primarily
attributable to the additional $55.0 million in secured asset based financing
obtained during the second quarter of 2003. Also, in 2003, we borrowed
additional funds under our revolving credit facilities to meet our short-term
operating needs. For the year ended December 31, 2002, we received $30.8
million from our public stock offering which was offset by the funds used to
reduce indebtedness under our revolving credit facilities. The
significant cash provided by financing activities in 2001 primarily
relate to the $66.0 million we received from our public offering in
February 2001 as well as borrowings under our revolving credit
facilities. During the second quarter of 2003, we secured $55.0 million in secured
asset based financing from three lenders, of which $45.0 million was funded
during the second quarter of 2003 and $10.0 million was funded in July 2003.
The proceeds were used to repay our $14.1 million loan with GMAC Business
Credit, LLC, and the remaining proceeds were used to provide working capital to
support operations. We obtained a $35.0 million loan with a seven-year term
from Boeing Capital Corporation, of which $30.0 million was advanced in June
2003 and the remaining $5.0 million was advanced in July 2003. Additionally,
we increased our borrowing capacity by $5.0 million with CIT Group/Equipment
Finance, Inc. The additional $5.0 million was received in July 2003 and has
been repaid. We also obtained a $15.0 28




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million loan during the second quarter of 2003 with a one-year term from
Elliott Associates. The Elliott
Associates loan originally had a conversion feature, at Elliott Associates
option, to convert $5.0 million to common stock at maturity on June 30, 2004.
The entire outstanding amount of principal and interest due to Elliott
Associates under this loan has been repaid with the proceeds from the Subordinated Note offering. In January 2004, we amended our loan agreements with Southwest Bank of
Texas N.A. (Southwest Bank) to remove a condition that would have reduced the
borrowing capacity under the revolving credit facilities from an aggregate of
$50 million to $20 million on January 31, 2004. In March 2004, we extended the
maturity of these facilities to January 2005. Based on the maturity of these
facilities, this debt is classified non-current as of December 31, 2003. We
reduced our indebtedness under these facilities from the net proceeds that
we received from our Subordinated Note offering and believe
we will be able to refinance these facilities with other long-term debt. 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. We issued the Subordinated Notes in order to meet our
immediate working capital needs. We received net proceeds of approximately $45 million
from the offering of the Subordinated Notes, after considering offering costs and proceeds used to repay
all amounts of principal and interest under the $15 million term loan from
Elliott Associates. We also substantially reduced our indebtedness under our
revolving credit facilities with Southwest Bank. In order to meet our working
capital needs, however, we will be required to re-borrow funds under these
revolving credit facilities. Elliott Associates purchased $15 million aggregate
principal amount of the Subordinated Notes. Interest at 16% on the Subordinated Notes is payable 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. Upon an event of default under the
Subordinated Notes or if we fail to take certain actions following the issuance
of the Subordinated Notes, including actions with respect to the collateral and
the registration rights granted to the holders, each as described below, the
interest on the Subordinated Notes increases. 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. 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 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 to require:  
    
    a ratio of current assets to current liabilities of 0.90
to 1 for the period ending 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 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; and
    
    if 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 tax expense 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 less than negative $2.5 million for the three-month
period ending March 31, 2004, negative $4.5 million for the six-month period
ending June 30, 2004, $8 million for the nine-month period ending September 30,
2004, and $20 million for the twelve-month period ending December 31, 2004. For more information on our new financial covenants, see Exhibits 10.45
through 10.50 that are filed herewith. 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 and breach of the Subordinated Note covenants and our other debt
covenants, including the new financial covenants described above. Certain
holders of the Subordinated Notes for as long as they are holders of such notes
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 any such
board or committee meetings. 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 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
did not receive any warrants in the offering. Holders of the warrants received registration rights. If we propose to file a
registration statement with the SEC to register shares of our common stock, we are required to notify the
holders of such anticipated filing and include them in such registration. In
addition, if holders of shares of our common stock issued upon exercise of the
warrants holding at least 25% of such shares request that we register such
shares, we are required to file a registration statement with respect to such
shares and use our best efforts to effect such registration. We are required to
pay all of the expenses in connection with any such registrations. At December 31, 2003, we had approximately $171.5 million of total
outstanding debt. This represents an approximate net increase of $73.2 million
from December 31, 2002 primarily due to additional borrowings to meet working
capital needs during 2003. Of the $171.5 million of outstanding debt, $76.2
million represents borrowings on our three revolving credit facilities and
$95.3 million represents borrowings on our eight term-debt facilities. At
December 31, 2003, we had no additional available borrowings under our three
revolving credit facilities, and we had $10.1 million of cash and cash
equivalents. Our weighted average interest rate on all indebtedness was 5.87%
at December 31, 2003, and our term-debt borrowings currently require $796,000
in monthly principal payments. Current maturities of long-term debt were $24.7
million as of December 31, 2003. Subsequent to the issuance of the Subordinated Notes, our total
indebtedness was approximately $204.6 million. We will need to use a large
portion of our cash flow from operations to pay principal and interest on our
outstanding debt. 29




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Our primary liquidity needs are to meet debt service and provide working capital to support our
projects and other operations. We had $26.1 million of working capital at
December 31, 2003 compared to $30.4 million of working capital at December 31,
2002. The decrease in working capital was primarily attributable to our pretax
losses for the year ended December 31, 2003, the reserve recorded for our
unapproved claims against Pemex and the current classification of the $15
million Elliott Associates term loan. This decrease in working capital was
partially offset by the increase in contract receivables related to contract
revenues for 2003. Our loans require that certain conditions be met in order for us to obtain
advances. 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. For the quarter ended December 31, 2003, we did not meet certain covenants
for all of our credit facilities that contain financial covenants. In March
2004, we received waivers of compliance for the December 31, 2003 determination
date from all of our lenders that require us to meet these covenants. In conjunction with the issuance of the Subordinated Notes, we also
successfully revised our financial covenants contained in these
credit facilities with all of our lenders through the maturity of these various
loan agreements. Our new financial covenants are described above. Based on managements current projections, we expect to be in
compliance with our revised debt covenants until at least
December 31, 2004. In the event that we do not meet our financial covenants in the
future, and we are unsuccessful in obtaining waivers of compliance, 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. Our inability to collect our receivables from Pemex continues to impact
our liquidity. We have been unsuccessful in resolving our EPC 64 contract
claims that we submitted to Pemex of approximately $78 million. 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. 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. The carrying
value of our claims consisted of approximately $57.0 million of unapproved
claims and approximately $8.5 million of additional scope of work performed.
We have collected approximately $4.8 million the $57.0 million of claims as of December 31,
2003 related to our delays. Subsequent to December 31, 2003, we collected
approximately $2.1 million related to additional scope of work performed.
Pemex substantially increased the scope of our operations under this contract
during 2000 to 2002, which subjected the project to greater interruptions due
to adverse weather conditions and standby time as other contractors completed
their work. We continue to negotiate with and use our best efforts to resolve
our EPC 64 contract claims against Pemex. We previously anticipated that these
claims would be resolved by the end of the fourth quarter of 2003. During the
fourth quarter of 2003, however, since there was no final resolution of these
claims and the ultimate amount and timing of payment of these claims was
uncertain, we have recorded a $33.1 million reserve for unapproved claims. The
carrying value of our claims as of December 31, 2003 is $25.5 million and
consists of $19.1 million of unapproved claims and $6.4 million remaining of
additional scope of work. If we are unsuccessful in resolving these claims, 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. However, due to the size of the dispute and inherent uncertainties
with respect to arbitration, 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. An adverse outcome from negotiations or possible
arbitration could result in a further loss of up to the carrying value of $25.5 million.
Collection of amounts related to these claims would be remitted
directly as prepayment of our
Subordinated Notes issued in March 2004. Our liquidity also has been impacted by delay in collecting approximately $27.2 million of
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. Any adverse outcome of these lawsuits could result in a loss up to
the respective carrying value of our claims. See Item 3.
Legal Proceedings for a detailed discussion of this
litigation. 30




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Our ability to service our existing debt, provide working capital and fund
our capital expenditure requirements has been adversely affected by the
inability to collect our Pemex receivables and claims and our Iroquois and
Williams receivables. During 2003, we have closely managed our cash position
and borrowed funds, including the $55.0 million of asset based financing to
meet working capital requirements, due to the delayed timing of the collection
of our Pemex receivables and claims and the significant delays in collection of
our receivables from Iroquois and Williams. Also, the net proceeds of
approximately $45 million received from the issuance of the Subordinated Notes in March 2004 will allow
us to meet our immediate working capital needs, start-up new projects and make
improvements to our fleet as necessary to support our operations. The
timing of the collection of progress payments and our ability to stay
on budget for our projects significantly impacts our cash flow and
liquidity. We expect
that the volume of our future contract revenues will largely influence our
working capital and cash requirements. Our cash requirements are greatest at
the start-up of a new project since we are required to incur mobilization
expenses and complete all or a substantial portion of the majority of our
projects before receiving payment from the customer. Although there can be no
assurance, we believe that this additional financing and funds from operations
will be sufficient in order to maintain necessary levels of operating
liquidity until at least December 31, 2004. However, we believe we will need
to consummate an equity offering to refinance all or a portion of our indebtedness on our
revolving credit facilities maturing in January 2005 and the
Subordinated Notes. 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 18%. The following table summarizes our long-term material
contractual cash obligations as of December 31, 2003 (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterPrincipal and interest payments on debt
    
    $
    33,222
    
    
    $
    104,186
    
    
    $
    17,402
    
    
    $
    5,662
    
    
    $
    5,493
    
    
    $
    24,533Operating leases
    
    
    2,510
    
    
    
    2,504
    
    
    
    2,341
    
    
    
    2,347
    
    
    
    2,168
    
    
    
    320$
    35,732
    
    
    $
    106,690
    
    
    $
    19,743
    
    
    $
    8,009
    
    
    $
    7,661
    
    
    $
    24,853
 As
a result of the issuance of the Subordinated Notes in March 2004, our
long-term material contractual cash obligations for 2007 have increased by
approximately $101.5 million. In the event we receive payment on
the outstanding Pemex and Williams claims and receivables, we must
immediately remit the amounts collected as a prepayment of the
outstanding Subordinated Notes. We
do not have any off-balance
sheet arrangements. Planned capital expenditures for 2004 are estimated to range from
approximately $13 million to $15 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. 31




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Item 7A.Quantitative And Qualitative Disclosures About Market Risk 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 for the year ended December 31, 2003. 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 December 31, 2003, the carrying value of our debt, including $0.5
million of accrued interest, was approximately $172.0 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 $15.0
million term loan with Elliott Associates, which was repaid in full
in March 2004, was fixed at an 18% interest rate. A
hypothetical 1% increase in the applicable interest rates as of December 31,
2003 would increase annual interest expense by approximately $1.6 million. We collect a portion of international contract 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. We monitor the
exchange rate of our foreign currencies in order to mitigate the risk from
foreign currency fluctuations. Additional exposure could occur as we expand
internationally. 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 8.Financial Statements And Supplementary Data Our consolidated financial statements and supplementary data appear on
pages 36 through 60 in this report and are incorporated herein by reference.
See Index to consolidated financial statements on page 35. 
 Item 9.Changes In And Disagreements With Accountants On Accounting And Financial Disclosure On June 14, 2002, upon the recommendation of the audit committee of our
board of directors, the board of directors dismissed Arthur Andersen LLP
(Andersen) as our independent public accountants. We selected
PricewaterhouseCoopers LLP (PwC) as our new independent accountants. The
decision to select PwC was recommended by the audit committee and approved by
the board of directors. During the fiscal year ended December 31, 2001 and the
subsequent interim period preceding such selection, neither we nor anyone on
our behalf consulted PwC regarding either (1) the application of accounting
principles to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on our financial statements, nor
did PwC provide to us a written report or oral advice regarding such principles
or audit opinion; or (2) any matter that was either the subject of a
disagreement or a reportable event. Andersens report on our consolidated financial statements for the fiscal
year ended December 31, 2001 did not contain an adverse opinion or disclaimer
of opinion, nor was any such report qualified or modified as to uncertainty,
audit scope or accounting principles. During the 2001 fiscal year and through the date of this report there
were: (i) no disagreements with Andersen on any matter of accounting principle
practice, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to Andersens satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on our consolidated financial statements for such years; and (ii) no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. 32




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Item 9A.Controls and Procedures As of December 31, 2003, 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. There have been no significant changes
in our internal controls over financial reporting or in other factors
during our most recent fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably
likely to materially affect these internal controls over financial
reporting. Management,
including our
Chief Executive Officer and Chief Financial Officer, do not expect
that our disclosure controls or internal controls 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 III 
 Item 10.Directors And Executive Officers Of The Registrant Information concerning our directors and executive officers called for by
this item will be included in our definitive Proxy Statement prepared in
connection with the 2004 annual meeting of stockholders and is incorporated
herein by reference. For additional information regarding executive officers,
see Executive Officers of the Registrant of this Annual Report. We have adopted a code of ethics and business conduct that applies to all
our directors, officers, employees and representatives. This code is publicly
available on our website at http://www.horizonoffshore.com/invest/. Amendments
to the code of ethics and business conduct and any grant of a waiver from a
provision of the code requiring disclosure under applicable SEC rules will be
disclosed on our website. These materials may also be requested in print,
without charge, by writing to our Investor Relations department at Horizon
Offshore, Inc., 2500 CityWest Blvd, Suite 2200, Houston, Texas, 77042. 
 Item 11.Executive Compensation Information concerning the compensation of the executive officers called
for by this item will be included in our definitive Proxy Statement prepared in
connection with the 2004 annual meeting of stockholders and is incorporated
herein by reference. 
 Item 12.Security Ownership Of Certain Beneficial Owners And Management and Related Stockholder Matters Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in our definitive Proxy
Statement prepared in connection with the 2004 annual meeting of stockholders
and is incorporated herein by reference. 
 Item 13.Certain Relationships And Related Transactions Information concerning certain relationships and related transactions
called for by this item will be included in our definitive Proxy Statement
prepared in connection with the 2004 annual meeting of stockholders and is
incorporated herein by reference. 
 Item 14.Principal Accountant Fees and Services Information concerning principal accountant fees and services called for
by this item will be included in our definitive Proxy Statement prepared in
connection with the 2004 annual meeting of stockholders and is incorporated
herein by reference. 33




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PART IV 
 Item 15.Exhibits, Financial Statement Schedules And Reports On Form 8-K  (a)
    
    The following financial statements are filed as a part of this
report: 1.      Financial Statements Report of Independent AuditorsReport of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements 2.      Financial Statement Schedules  None Schedules have not been included because they are not applicable,
immaterial or the information required has been included in the financial
statements or notes thereto. 3.      Exhibits  (a)
    
    Exhibits See Index to Exhibits on page 62. The Company will furnish to any eligible
stockholder, upon written request, a copy of any exhibit listed upon payment of
a reasonable fee equal to our expenses in furnishing such exhibit.  (b)
    
    Reports on Form 8-K: On November 13, 2003, we filed a report on Form 8-K, reporting results for
the third quarter ended September 30, 2003 under item 7. On December 4, 2003, we filed a report on Form 8-K, announcing changes to
the Board of Directors under Item 7. On December 19, 2003, we filed a report on Form 8-K, providing a financial
update under Item 7. 34




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##### Table of Contents



Report of Independent Auditors To the Stockholders of Horizon Offshore, Inc.: In our opinion, the accompanying consolidated balance sheets as of December 31,
2003 and 2002 and the related consolidated statements of operations,
stockholders equity, and cash flows present fairly, in all material respects,
the financial position of Horizon Offshore, Inc. (a Delaware Corporation), and
subsidiaries at December 31, 2003 and 2002 and the results of their operations
and their cash flows for each of the years then ended in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. The financial statements of Horizon
Offshore, Inc. for the year ended December 31, 2001, were audited by other
independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated February 28, 2002. The Company received
approximately $45 million in net proceeds from the issuance of
Subordinated Notes on March 11, 2004. See Note 15 for a discussion of this
subsequent event and the Companys financing and liquidity position. As discussed above, the financial statements of Horizon Offshore, Inc. for the
year ended December 31, 2001, were audited by other independent accountants who
have ceased operations. As described in Note 2, these financial statements
have been revised. We audited the adjustments described in Note 2 that were
applied to revise the 2001 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 financial statements taken as a whole. /s/ PricewaterhouseCoopers LLP Houston, Texas
March 12, 2004 35




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The following audit opinion is a copy of the opinion issued by Arthur Andersen
LLP on February 28, 2002. This opinion has not been reissued by Arthur
Andersen LLP and Arthur Andersen LLP did not consent to the incorporation by
reference of this report (as included in this Form 10K) into any of the
Companys registration statements. Note that only the consolidated statements
of operations, stockholders equity and cash flows for the year ended December
31, 2001 covered by this report below are included in this set of consolidated
financial statements. Additionally, as discussed in Note 2, the Company has revised its financial
statements for the year ended December 31, 2001 to conform to the requirements
set forth in Statement of Financial Accounting Standard No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. The Andersen report does not extend to these changes.
The revisions to the 2001 financial statements that relate to the adoption of
Statement of Financial Accounting Standard No. 145 were reported on by
PricewaterhouseCoopers LLP, as stated in their report appearing herein. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of
Horizon Offshore, Inc., We have audited the accompanying consolidated balance sheets of Horizon
Offshore, Inc. (a Delaware corporation), and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders equity and cash flows for the years ended December 31, 2001, 2000
and 1999. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Horizon
Offshore, Inc., and subsidiaries as of December 31, 2001 and 2000, and
consolidated results of their operations and their cash flows for the years
ended December 31, 2001, 2000 and 1999, in conformity with accounting
principles generally accepted in the United States. Arthur Andersen LLP Houston, Texas
February 28, 2002 36




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) December 31,2003
    
    2002ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    10,115
    
    
    $
    6,073Accounts receivable-
Contract receivables
    
    
    101,153
    
    
    
    52,362Costs in excess of billings, net
    
    
    34,697
    
    
    
    78,494Affiliated parties
    
    
    170
    
    
    
    170Income tax refund receivable
    
    
    200
    
    
    
    Other current assets
    
    
    2,616
    
    
    
    3,010Total current assets
    
    
    148,951
    
    
    
    140,109PROPERTY AND EQUIPMENT, net
    
    
    239,411
    
    
    
    257,847INVENTORY
    
    
    8,250
    
    
    
    7,816OTHER ASSETS
    
    
    12,929
    
    
    
    14,761$
    409,541
    
    
    $
    420,533LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    31,271
    
    
    $
    34,930Accrued liabilities
    
    
    3,321
    
    
    
    10,641Accrued job costs
    
    
    56,346
    
    
    
    54,866Billings in excess of costs
    
    
    5,834
    
    
    
    602Current maturities of long-term debt
    
    
    9,651
    
    
    
    8,262Related party debt
    
    
    15,000
    
    
    
    Current taxes payable
    
    
    1,421
    
    
    
    423Total current liabilities
    
    
    122,844
    
    
    
    109,724LONG-TERM DEBT, net of current maturities
    
    
    146,886
    
    
    
    90,062DEFERRED INCOME TAXES
    
    
    
    
    
    
    9,072Total liabilities
    
    
    269,730
    
    
    
    208,858COMMITMENTS 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, 27,290,582
shares issued
    
    
    16,583
    
    
    
    16,583Additional paid-in capital
    
    
    182,687
    
    
    
    182,722Retained earnings (accumulated deficit)
    
    
    (54,151
    )
    
    
    18,353Treasury stock, 809,269 and 912,207 shares, respectively
    
    
    (5,308
    )
    
    
    (5,983
    )Total stockholders equity
    
    
    139,811
    
    
    
    211,675$
    409,541
    
    
    $
    420,533
 The accompanying notes are an integral part of these consolidated financial statements. 37




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data) Year Ended December 31,2003
    
    2002
    
    2001CONTRACT REVENUES
    
    $
    270,313
    
    
    $
    283,410
    
    
    $
    272,208COST OF CONTRACT REVENUES
    
    
    263,812
    
    
    
    253,016
    
    
    
    237,175Gross profit
    
    
    6,501
    
    
    
    30,394
    
    
    
    35,033SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    21,749
    
    
    
    21,845
    
    
    
    13,771PEMEX EPC 64
RESERVE
    
    
    33,092
    
    
    
    
    
    
    
    IMPAIRMENT OF PROPERTY AND EQUIPMENT
    
    
    21,332
    
    
    
    9,852
    
    
    
    Operating income (loss)
    
    
    (69,672
    )
    
    
    (1,303
    )
    
    
    21,262OTHER:Interest expense, net of amount
capitalized
    
    
    (9,542
    )
    
    
    (4,585
    )
    
    
    (5,381
    )Interest income
    
    
    67
    
    
    
    91
    
    
    
    403Loss on debt extinguishment
    
    
    (868
    )
    
    
    
    
    
    
    (874
    )Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    (22
    )Other income (expense), net
    
    
    (88
    )
    
    
    (2,831
    )
    
    
    (184
    )NET INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (80,103
    )
    
    
    (8,628
    )
    
    
    15,204INCOME TAX PROVISION (BENEFIT)
    
    
    (7,599
    )
    
    
    (3,079
    )
    
    
    4,511NET INCOME (LOSS)
    
    $
    (72,504
    )
    
    $
    (5,549
    )
    
    $
    10,693EARNINGS PER SHARE  BASIC AND DILUTED:Net income (loss)  BASIC
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.48Net income (loss)  DILUTED
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.46WEIGHTED AVERAGE SHARES USED IN COMPUTINGEARNINGS PER SHARE:BASIC
    
    
    26,429,014
    
    
    
    25,573,326
    
    
    
    22,430,894DILUTED
    
    
    26,429,014
    
    
    
    25,573,326
    
    
    
    23,085,975
 The accompanying notes are an integral part of these consolidated financial statements. 38




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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands) Common Stock
    
    AdditionalPaid-In
    
    Retained Earnings(Accumulated
    
    Treasury Stock
    
    TotalStockholders'Shares
    
    Amount
    
    Capital
    
    Deficit)
    
    Shares
    
    Amount
    
    EquityBALANCE,December 31, 2000
    
    
    19,869
    
    
    $
    9,162
    
    
    $
    88,245
    
    
    $
    13,209
    
    
    
    1,003
    
    
    $
    (6,581
    )
    
    $
    104,035Issuance of common
stock, net of offering
costs
    
    
    3,800
    
    
    
    3,800
    
    
    
    62,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,019Issuance of common
stock to purchase
assets
    
    
    250
    
    
    
    250
    
    
    
    1,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,605Stock options
exercised
    
    
    325
    
    
    
    325
    
    
    
    2,682
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,007401(k) contributions
in company stock
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    (29
    )
    
    
    196
    
    
    
    331Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,693
    
    
    
    
    
    
    
    
    
    
    
    10,693BALANCE,December 31, 2001
    
    
    24,244
    
    
    
    13,537
    
    
    
    154,636
    
    
    
    23,902
    
    
    
    974
    
    
    
    (6,385
    )
    
    
    185,690Issuance of common
stock, net of offering
costs
    
    
    3,000
    
    
    
    3,000
    
    
    
    27,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,844Stock options
exercised
    
    
    46
    
    
    
    46
    
    
    
    238
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284401(k) contributions
in company stock
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (62
    )
    
    
    402
    
    
    
    406Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,549
    )
    
    
    
    
    
    
    
    
    
    
    (5,549
    )BALANCE,December 31, 2002
    
    
    27,290
    
    
    
    16,583
    
    
    
    182,722
    
    
    
    18,353
    
    
    
    912
    
    
    
    (5,983
    )
    
    
    211,675401(k) contributions
in company stock
    
    
    
    
    
    
    
    
    
    
    (247
    )
    
    
    
    
    
    
    (103
    )
    
    
    675
    
    
    
    428Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,504
    )
    
    
    
    
    
    
    
    
    
    
    (72,504
    )BALANCE,December 31, 2003
    
    
    27,290
    
    
    $
    16,583
    
    
    $
    182,687
    
    
    $
    (54,151
    )
    
    
    809
    
    
    $
    (5,308
    )
    
    $
    139,811
 The accompanying notes are an integral part of these consolidated financial statements. 39




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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31,2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (72,504
    )
    
    $
    (5,549
    )
    
    $
    10,693Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities Depreciation and amortization
    
    
    19,718
    
    
    
    15,959
    
    
    
    12,935Impairment of property and
equipment
    
    
    21,332
    
    
    
    9,852
    
    
    
    Reserve for
Pemex
    
    
    33,092
    
    
    
    
    
    
    
    Deferred income tax expense
(benefit)
    
    
    (9,072
    )
    
    
    (3,718
    )
    
    
    4,511Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    22Expense recognized for issuance of treasury stock for 401(k) plan
contributions
    
    
    428
    
    
    
    406
    
    
    
    331Stock compensation
expense
    
    
    212
    
    
    
    
    
    
    
    Loan prepayment
penalty
    
    
    569
    
    
    
    
    
    
    
    Changes in operating assets and liabilities Accounts receivable
    
    
    (51,905
    )
    
    
    (7
    )
    
    
    (25,215
    )Costs in excess of billings
    
    
    10,705
    
    
    
    17,939
    
    
    
    (78,822
    )Billings in excess of costs
    
    
    5,232
    
    
    
    (1,258
    )
    
    
    1,310Income tax refund
receivable
    
    
    (200
    )
    
    
    
    
    
    
    Inventory
    
    
    (434
    )
    
    
    (6,111
    )
    
    
    242Other assets
    
    
    (4,721
    )
    
    
    (6,766
    )
    
    
    (8,521
    )Accounts payable
    
    
    (3,659
    )
    
    
    23,432
    
    
    
    3,306Accrued liabilities
    
    
    (4,336
    )
    
    
    (1,182
    )
    
    
    7,899Accrued job costs
    
    
    1,480
    
    
    
    5,067
    
    
    
    27,315Current taxes payable
    
    
    998
    
    
    
    423
    
    
    
    Net cash (used in) provided by operating
activities
    
    
    (53,065
    )
    
    
    48,487
    
    
    
    (43,994
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and additions to property, equipment and
intangibles
    
    
    (17,797
    )
    
    
    (59,752
    )
    
    
    (53,223
    )Proceeds
from casualty insurance claim
    
    
    3,114
    
    
    
    
    
    
    
    Net cash used in investing
activities
    
    
    (14,683
    )
    
    
    (59,752
    )
    
    
    (53,223
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under term debt
    
    
    21,362
    
    
    
    4,045
    
    
    
    32,596Principal payments on term debt
    
    
    (8,967
    )
    
    
    (8,040
    )
    
    
    (38,733
    )Borrowings on revolving credit facilities
    
    
    142,516
    
    
    
    131,424
    
    
    
    86,800Payments on revolving credit
facilities
    
    
    (97,267
    )
    
    
    (148,200
    )
    
    
    (52,500
    )Borrowings under related party
debt
    
    
    15,000
    
    
    
    
    
    
    
    Loan fees
    
    
    (854
    )
    
    
    (883
    )
    
    
    (1,351
    )Proceeds from issuance of common stock,
net
    
    
    
    
    
    
    30,844
    
    
    
    66,019Stock option transactions and other
    
    
    
    
    
    
    284
    
    
    
    3,007Net cash provided by financing activities
    
    
    71,790
    
    
    
    9,474
    
    
    
    95,838NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    4,042
    
    
    
    (1,791
    )
    
    
    (1,379
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    6,073
    
    
    
    7,864
    
    
    
    9,243CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    10,115
    
    
    $
    6,073
    
    
    $
    7,864SUPPLEMENTAL DISCLOSURES:Cash paid for interest
    
    $
    7,948
    
    
    $
    5,449
    
    
    $
    6,788Cash paid for income taxes
    
    $
    675
    
    
    $
    216
    
    
    $
    NON-CASH INVESTING AND FINANCING ACTIVITIES:Repayment of debt with proceeds of additional term debt
    
    $
    14,069
    
    
    $
    
    
    
    $
    Purchases and additions to equipment included in accrued liabilities
    
    $
    778
    
    
    $
    3,762
    
    
    $
    Purchases and additions to equipment with the issuance of common stock
    
    $
    
    
    
    $
    
    
    
    $
    1,605
 The accompanying notes are an integral part of these consolidated financial statements. 40




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization Horizon provides marine construction services for the oil and gas
industry domestically in the U.S. Gulf of Mexico and Northeastern U.S. and
internationally in Latin America, Southeast Asia and West Africa. We have
recently expanded our operations to the Middle East. These services generally
consist of laying, burying or repairing marine pipelines for the transportation
of oil and gas; installing and salvaging production platforms and other marine
structures; and performing pipe spooling services. 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. Business Risks Our level of activity 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
prevailing oil and gas prices, expectations about future demand and prices, the
cost of exploring for, producing and developing oil and gas reserves, the
discovery rates of new oil and gas reserves, sale and expiration dates of
offshore leases in the United States and abroad, 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. A prolonged weakness in energy prices or a prolonged period of lower
levels of offshore drilling and exploration could adversely affect our future
revenues, profitability and liquidity. Our 2002 and 2003 results reflect the
competitive nature and low demand for marine construction services in the U.S.
Gulf of Mexico. Profit margins in the U.S. Gulf of Mexico have decreased during
2002 and 2003 due to the reduced level of capital expenditures by oil and gas
companies for developmental construction, the competitiveness of this industry
and the general slow down of the U.S. and other economies in the region. Factors affecting our profitability include competition, equipment and
labor productivity, contract estimating, weather conditions and the other risks
inherent in marine construction. The marine construction industry in the U.S.
Gulf of Mexico is highly seasonal as a result of weather conditions, with the
greatest demand for these services occurring during the second and third
quarters of the year. Full year results are not a direct multiple of any
quarter or combination of quarters because of this seasonality. Segment Information and Significant Customers We have domestic and international operations in one industry segment, the
marine construction service industry for offshore oil and gas
companies and energy companies.
Customers accounting for more than 10% of consolidated revenues for the years
ended December 31, 2003, 2002 and 2001 are as follows: Year Ended December 31,Customer
    
    2003
    
    2002
    
    2001Iroquois Gas Transmission LP
    
    
    25
    %
    
    
    20
    %
    
    
    Algonquin Gas Transmission Company
    
    
    15
    %
    
    
    
    
    
    
    Brunei Shell Petroleum Company
    
    
    10
    %
    
    
    
    
    
    
    Petróleos Mexicanos (Pemex)
    
    
    1
    %
    
    
    31
    %
    
    
    52
    %
 At December 31, 2003, we reserved $33.1 million related to our previously
recorded outstanding unapproved claims against Pemex of approximately $52.2
million as the ultimate amount and timing of payment of these claims are
uncertain. The total claims 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 claims submitted to Pemex. The carrying value of our claims with Pemex, reflected in costs in
excess of billings, at December 31, 2003 is $25.5 million and includes $19.1
million of unapproved claims and $6.4 million of additional scope of work. If
we are 41




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unsuccessful in resolving these claims, we intend to submit some or all of
our EPC 64 contract claims against Pemex to arbitration in Mexico in accordance
with the Rules of Arbitration of the International Chamber of Commerce.
However, due to the size of the dispute and inherent uncertainties with respect
to possible arbitration, 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. A failure to recover any amounts from Pemex in this
dispute or future arbitration, if any, could result in a further loss of up to
the carrying value of $25.5 million. It is possible that these claims 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. Our unreserved net claim receivable remaining from
December 31, 2003 of approximately $25.5 million is our best estimate of the
amount we believe we will collect. See Note 7 for a detailed discussion of
this dispute and Note 15 regarding the disposition of any future
collections of this claim. As of December 31, 2003, we had contract receivables of $25.9 million and
costs in excess of billings of $1.3 million from Iroquois Gas Transmission LP
(Iroquois) totaling $27.2 million. We have billed the amounts
included in costs in excess of billings to December 31, 2003. 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. 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. If all our claims are denied, we could incur a loss of up to the carrying value of $27.2 million. See Note 7 for a
detailed discussion of this litigation. 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 for construction for the year 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 service industry for oil and
gas companies. Geographic information has been provided in Note 13 of these
consolidated financial statements. 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, judgments regarding the number and magnitude of self-insurance
reserves needed for potential medical claims and Jones Act obligations 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 42




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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. 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. Interest
expense for 2003 was net of $0.1 million of capitalized interest compared with
$1.6 million in 2002 and $1.3 million in 2001. Net interest expense was $9.5
million, $4.6 million and $5.4 million for 2003, 2002 and 2001, respectively. Accounts Receivable We have significant investments in billed and unbilled receivables as of
December 31, 2003. 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 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. Prior to the fourth
quarter of 2003, we had not experienced any significant losses on receivables.
During the fourth quarter of 2003, we recorded a $33.1 million reserve for
unapproved claims against Pemex. See Note 3. 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. 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. For the year ended December 31, 2003, as
well as December 31, 2001, there was no significant revenue recognized
representing the non-cash values assigned to the structures received as partial
consideration for performing salvage projects. During 2002, revenue of $6.8
million was recognized representing the non-cash values assigned to the
structures received as partial consideration for performing salvage services.
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
sales of inventory during 2003. In 2002 and 43




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2001, we sold inventory structures for $0.7 million and $0.9 million with
related cost of sales of $0.7 million and $0.6 million, respectively. Property and Equipment We use the units-of-production method to calculate depreciation on our
major barges, vessels and related equipment to approximate the wear and tear of
normal use. The useful lives of our major barges and vessels range from 15
years to 18 years. Major additions and improvements to barges, vessels and
related equipment are capitalized and depreciated over the useful life of the
vessel. Maintenance and repairs are expensed as incurred. When equipment is
sold or otherwise disposed of, the cost of the equipment and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
income. Depreciation on our other fixed assets is provided using the straight-line
method based on the following estimated useful lives: Buildings
    
    15 yearsMachinery and equipment
    
    8-15 yearsOffice furniture and equipment
    
    5 yearsLeasehold improvements
    
    3-10 years
 Depreciation
expense is included in the following expense accounts (in thousands): December 31,2003
    
    2002
    
    2001Cost of
contract revenues
    
    $
    12,839
    
    
    $
    10,851
    
    
    $
    9,127Selling,
general and administrative expenses
    
    
    1,380
    
    
    
    619
    
    
    
    1,128$
    14,219
    
    
    $
    11,470
    
    
    $
    10,255
 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 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 review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such asset may not be
recoverable. Based on our analysis of the estimated undiscounted future net
cash flows for our long-term assets during the fourth quarter of 2003, we
determined five of our marine vessels and related equipment were
impaired under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets and recognized a loss of $21.3 million to reflect the fair
market value of these impaired assets. Fair value was determined for two
vessels based on current quoted market prices. Fair value was determined for
three remaining vessels based on a third party appraisal of orderly liquidation
value obtained in 2003, as no quoted market price was available. The
impairment loss included the write-off of $2.3 million of
capitalized dry-dock
costs associated with these impaired vessels. Due to lower expected utilization
levels, the value of the Phoenix Horizon, two diving support
vessels, one small construction vessel, a
cargo barge and related marine equipment has been impaired. We previously
recognized a $9.9 million impairment loss related to the Phoenix Horizonfor
the year ended December 31, 2002. The impairment of the
Phoenix Horizon in 2003 is a
result of a further decline in its fair market value and managements decision
not to make capital improvements that are required to place the vessel into
service due to the availability of other operational assets. The sustained
difficult economic environment and depressed market for the marine construction
industry throughout 2003 has resulted in a decline in the utilization of our
vessels, triggering the impairment of the other vessels, the cargo barge and
related marine equipment. Other Assets Other assets consist principally of capitalized dry-dock costs, goodwill,
prepaid loan fees and deposits. Deposits consist of security deposits on office
leases as of December 31, 2003 and 2002. Loan fees paid in connection with the
loan facilities are amortized over the term of the respective loans. Dry-dock costs are direct costs associated with scheduled major
maintenance on our marine construction vessels. Costs incurred in connection
with dry-dockings are capitalized and amortized over the five-year cycle to the
next scheduled dry-docking. We wrote-off $2.3 million of capitalized dry-dock
costs during the fourth quarter of 2003 related to the impairment of three
marine vessels under SFAS No. 144. On June 29, 2001, the AICPA
issued an exposure draft of a proposed SOP, Accounting for Certain Costs and
Activities Related to Property, Plant and Equipment. If adopted, we would be
required to expense dry-docking costs on our vessels as incurred. We incurred
and capitalized dry-dock costs of $4.9 million, $5.8 million and $7.1 million
for the years ended December 31, 2003, 2002 and 2001, 44




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respectively. As of December 31, 2003, capitalized dry-dock costs totaled $11.4
million. Expensing dry-dock costs would likely result in greater variability
of our operating results as a substantial portion of our dry-dock activities
take place during the first and fourth quarters. In August 2002, we acquired the remaining 51% equity interest in an entity
in Mexico for $1.0 million cash. We previously had a 49% equity interest in
this entity and included its accounts in our consolidated financial statements
as we exercised effective control over the entitys operations. As a result of
this acquisition, we will be qualified to bid on and perform projects reserved
for national companies in Mexico without a locally domiciled partner. We
recorded $1.0 million of goodwill in connection with acquiring the equity
interest, which is nondeductible for tax purposes. The related goodwill is
included in other long-term assets. Federal Income Taxes We use the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period enacted. Deferred income tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred income tax assets will not be
realized. As of December 31, 2003 a valuation allowance in the amount of $23.1 million was charged as income tax
expense against deferred tax assets that are not expected to be realized due to the
uncertainty of future taxable income. Stock-Based Compensation At December 31, 2003, 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. Also, we recorded an additional $156,000 as compensation expense in
the statements of operations during the second quarter of 2003 related to the
remeasurement of options in connection with the resignation of a key employee.
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). Year Ended December 31,2003
    
    2002
    
    2001Net income (loss), as
reported
    
    $
    (72,504
    )
    
    $
    (5,549
    )
    
    $
    10,693Add: Total stock-based compensation
cost, net of related tax effects,
included in net loss
    
    
    212
    
    
    
    
    
    
    
    Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    (2,648
    )
    
    
    (3,128
    )
    
    
    (3,594
    )Pro forma net income
(loss)
    
    $
    (74,940
    )
    
    $
    (8,677
    )
    
    $
    7,099
 45




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Year Ended December 31,2003
    
    2002
    
    2001Earnings per share:Basic  as
reported
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.48Basic  pro
forma
    
    $
    (2.84
    )
    
    $
    (0.34
    )
    
    $
    0.32Diluted  as reported
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.46Diluted  pro forma
    
    $
    (2.84
    )
    
    $
    (0.34
    )
    
    $
    0.31
 To determine pro forma information as if we had accounted for the 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: 2003
    
    2002
    
    2001Expected option life (in
years)
    
    
    7
    
    
    
    7
    
    
    
    10Expected
volatility
    
    
    76.1
    %
    
    
    77.8
    %
    
    
    79.07
    %Risk-free interest
rate
    
    
    3.51
    %
    
    
    4.77
    %
    
    
    5.11
    %
 Fair Value of Financial Instruments The carrying values of cash, receivables, accounts payable and accrued
liabilities approximate fair value due to the short-term maturity of those
instruments. As of December 31, 2003 the carrying value of our debt, including $0.5
million accrued interest, was approximately $172.0 million. The fair value of
this debt approximates the carrying value because the interest rates, excluding
our $15.0 million term loan with Elliott Associates, are based on floating
rates identified by reference to market rates. Fair value was determined as
noted above. A hypothetical 1% increase in the applicable interest rates as of
December 31, 2003 would have increased annual interest expense by approximately
$1.6 million. 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. Other Comprehensive Loss We have no items representing other comprehensive losses under SFAS No.
130, Reporting Comprehensive Income. Reclassifications Certain prior period amounts have been reclassified to conform to the
presentation shown in the consolidated financial statements as of December 31,
2003. Reclassifications were made in the 2001 financial statements for the
loss on debt extinguishment as described in Note 2. Recent Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which revises current guidance with respect to gains and losses
on early extinguishment of debt. Under SFAS No. 145, gains and losses on early
extinguishment of debt will no longer be 46




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treated as extraordinary items unless they meet the criteria for
extraordinary treatment in APB Opinion No. 30.
We were required to adopt SFAS No. 145 effective January 1, 2003. Upon
adoption, we reclassified the extraordinary loss on early extinguishment of
debt of $874,000 from extraordinary items to other expense for the year ended
December 31, 2001, as this amount no longer qualified for extraordinary
treatment under SFAS No. 145. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
In December 2003, the FASB issued a revised version of this interpretation,
FIN 46(R). FIN 46(R) addresses the requirements for business enterprises to
consolidate certain variable interest entities who are the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 and FIN 46(R) are
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. The revised provisions of the interpretation
will become applicable for the first reporting period ending after March 15,
2004 for variable interest entities created before February 1, 2003. The
adoption of FIN 46 and FIN 46(R) is not anticipated to have a material effect
on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes how an issuer classifies and measures certain
financial instruments that have characteristics of both liabilities and
equity. The statement requires that an issuer classify financial instruments
that are within its scope as a liability and requires disclosure regarding the
terms of those instruments and settlement alternatives. Previously, many of
these instruments were classified as equity or as mezzanine instruments
(between the liabilities and the equity section). SFAS No. 150 is effective
immediately for qualifying financial instruments issued after May 31, 2003 and
was effective for existing issuances as of the third quarter ended September
30, 2003. Adoption of SFAS No. 150 did not have a material effect on our
results of operations or financial position. 2. LOSS ON EXTINGUISHMENT OF DEBT: In March 2001, we paid $30.0 million to reduce the outstanding principal
balance under our term loan, which was subject to a penalty of $0.9 million,
for the early extinguishment of debt. The penalty was originally recorded as
an extraordinary loss in 2001. Upon adoption of SFAS No. 145 in 2003, we
reclassified these amounts from extraordinary loss to other expense and tax
expense for the year ended December 31, 2001. 3. CONTRACT RECEIVABLES: Contract receivables are generally billed upon the completion of small
contracts and are progress billed on larger contracts in accordance with
contract terms and milestones. Costs in excess of billings solely represent
costs incurred and estimated earnings on jobs in progress. Contract receivables billed consist of the following (in thousands):
    
    DECEMBER 31,2003
    
    2002Completed contracts
    
    $
    3,406
    
    
    $
    15,808Contracts in progress
    
    
    85,825
    
    
    
    35,966Retained
    
    
    11,922
    
    
    
    588$
    101,153
    
    
    $
    52,362
 Contracts in progress are as follows (in thousands):
    
    DECEMBER 31,2003
    
    2002Costs incurred to date
    
    $
    437,891
    
    
    $
    285,545Estimated earnings to date
    
    
    54,193
    
    
    
    41,403492,084
    
    
    
    326,948Less: Billings to date
    
    
    (463,221
    )
    
    
    (249,056
    )$
    28,863
    
    
    $
    77,892Included in accompanying balance sheets under the following captions:Costs in excess of billings
    
    $
    34,697
    
    
    $
    78,494Billings in excess of costs
    
    
    (5,834
    )
    
    
    (602
    )$
    28,863
    
    
    $
    77,892
 47




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Our principal customers are national oil companies, major and
independent oil and gas companies, energy companies and their affiliates. The concentration of
customers in the energy industry may impact our overall credit exposure, either
positively or negatively, since these customers may be similarly affected by
changes in economic or other conditions. See Note 1. During the fourth quarter of 2003, we recorded a $33.1 million reserve for
unapproved claims from Pemex due to our inability to
collect any of the outstanding unapproved claims and as the ultimate amount and
timing of payment of these claims are uncertain. Cumulative revenues
recognized from 2000 through 2003 on all Pemex projects in Mexico totaled $291
million, including $57.0 million of claims made under three Pemex contracts for
extra work related to interferences, interruptions and other delays. Of the
$57.0 million of claims, $54.2 million related to our second major project for
Pemex, EPC 64, of which we have collected $2.0 million. The
remaining $2.8 million of claims related to two more recent
projects for Pemex and have been collected in full. These two more
recent projects were performed subsequent to the EPC 64 contract
under the current senior management at Pemex. Unapproved claims related to the Pemex projects arise
primarily from client delays and changes in the initial scope of work. A summary of the balance of claims remaining in costs in excess of
billings related to the Pemex projects are as follows (in millions): Claims included in 2001 revenue
    
    $
    42.8Claims included in 2002 revenue
    
    
    14.2Total claims
    
    
    57.0Claims billed to Pemex in 2002
    
    
    (4.0
    )Claims included in costs in excess
of billings as of December 31, 2002
    
    $
    53.0Claims billed to Pemex in 2003
    
    
    (0.8
    )Reserve for claims in 2003
    
    
    (33.1
    )Claims included in costs in excess
of billings as of December 31, 2003
    
    $
    19.1
 There were no claims related to Pemex included in revenues for the year
ended December 31, 2003. If we are unsuccessful in resolving these claims, we intend to submit some
or all of the EPC 64 contract claims against Pemex to arbitration in Mexico in
accordance with the Rules of Arbitration of the International Chamber of
Commerce. The carrying value of our uncollected receivables remaining from
December 31, 2003 of approximately $25.5 million, which includes $19.1 million
of unapproved claims and $6.4 million of additional scope of work, is the
amount we believe we will collect. An adverse outcome from this possible
arbitration could result in a further loss of up to the carrying value of $25.5 million. See Note 15 regarding the disposition of any
amounts collected from these claims. As of December 31, 2003, we had contract receivables of $25.9 million and
costs in excess of billings of $1.3 million from Iroquois totaling $27.2
million. We have subsequently billed the amounts included in costs in excess
of billings as of December 31, 2003. 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. 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 currently believe we will collect the full carrying value of
this asset. If all our claims are denied, we could incur a loss of
up to the carrying value of $27.2 million. As of December 31, 2003, we had
total claims of $7.6 million against Williams Oil Gathering LLC
(Williams) and had recognized revenue to the extent of cost
representing $5.5 million in unreserved contract receivables. 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. 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 currently believe we will collect the full carrying
value of this asset. If all our claims are denied, we could incur a
loss of up to the carrying value of $5.5 million. See Note 15 regarding the disposition of any
amounts collected from these claims. See Note 7 for a detailed discussion of these disputed claims and litigation. 48




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4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: Property and equipment consists of the following (in thousands): DECEMBER 31,2003
    
    2002Barges, vessels and related equipment
    
    $
    256,653
    
    
    $
    268,770Land and buildings
    
    
    19,732
    
    
    
    19,726Machinery and equipment
    
    
    245
    
    
    
    245Office furniture and equipment
    
    
    6,116
    
    
    
    5,554Leasehold improvements
    
    
    4,191
    
    
    
    3,440286,937
    
    
    
    297,735Less-Accumulated depreciation
    
    
    (47,526
    )
    
    
    (39,888
    )Property and equipment, net
    
    $
    239,411
    
    
    $
    257,847
 Other long-term assets consist of the following (in thousands): DECEMBER 31,2003
    
    2002Capitalized dry-dock costs
    
    $
    11,378
    
    
    $
    12,861Goodwill
    
    
    1,000
    
    
    
    1,000Prepaid loan fees
    
    
    144
    
    
    
    562Deposits
    
    
    287
    
    
    
    293Other
    
    
    120
    
    
    
    45$
    12,929
    
    
    $
    14,761
 Accrued liabilities consist of the following (in thousands): DECEMBER 31,2003
    
    2002Foreign value added tax payable
    
    $
    
    
    
    $
    3,771Accrued capital expenditures
    
    
    778
    
    
    
    3,762Other
    
    
    2,543
    
    
    
    3,108$
    3,321
    
    
    $
    10,641
 5. NOTES PAYABLE: Notes payable consist of the following (in thousands): DECEMBER 31,2003
    
    2002Revolving credit facility to Southwest Bank of Texas due January 21, 2005,
collateralized by accounts receivable. Interest at Southwest Banks prime rate plus
3/4% (4.75%) at December 31, 2003 and prime rate minus 1/4% (4.00%) at December
31, 2002
    
    $
    30,000
    
    
    $
    19,200Revolving credit facility to Southwest Bank of Texas due January 21, 2005,
collateralized by accounts receivable. Interest at Southwest Banks prime rate plus
1% (5.00%) at December 31, 2003 and prime rate (4.25%) at December 31,
2002
    
    
    20,000
    
    
    
    2,500Term loan payable to Elliott Associates, originally due June 30, 2004 and repaid with
proceeds from the issuance of 16% Subordinated Notes in March 2004. Interest at 18%
at December 31, 2003
    
    
    15,000
    
    
    
    
 49




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Revolving credit facility to The CIT Group due May 10, 2005, collateralized by
mortgages on certain vessels. Interest at Libor plus 3.25% (4.42%) at December 31,
2003 and Libor plus 2.90% (4.34%) at December 31,
2002
    
    
    26,173
    
    
    
    9,224Term loan payable to Boeing Capital Corporation, due in 84 monthly principal
installments of $238, plus interest, maturing June 30, 2010, collateralized by a
mortgage on the Sea Horizon. Interest at Libor plus 4.80% (5.95%) at December 31,
2003
    
    
    33,571
    
    
    
    Term loan payable to The CIT Group due in 84 monthly principal installments of $411,
plus interest, maturing June 30, 2006, collateralized by mortgages on certain
vessels. Interest at Libor plus 2.65% (3.77% and 4.03% at December 31, 2003 and 2002,
respectively)
    
    
    29,536
    
    
    
    34,469Term loan payable to GE Capital Corporation due in 120 monthly installments of $115,
including interest, maturing January 1, 2012, collateralized by a mortgage on the
Pecos Horizon. Interest at the one-month commercial paper rate plus 2.45% (3.47% and
4.17% at December 31, 2003 and 2002, respectively)
    
    
    9,268
    
    
    
    10,288Term loan payable to South Trust Bank due in 60 monthly installments of $72,
including interest, maturing August 31, 2006, collateralized by our Port Arthur
marine base. Interest at South Trust Banks prime rate plus 1/2% (4.50% and 4.75%
at December 31, 2003 and 2002, respectively)
    
    
    6,454
    
    
    
    7,004Term loan payable to Southwest Bank of Texas due in 60 monthly principal installments
of $15, plus interest, maturing November 1, 2006, collateralized by property located
in Port Arthur. Interest at Southwest Banks prime rate (4.00% and 4.25% at December
31, 2003 and 2002,
respectively)
    
    
    1,463
    
    
    
    1,643Term loan payable to ABN Amro Bank due in 60 monthly installments of $1, plus
interest, maturing September 19, 2006. Interest at 4.93%
    
    
    44
    
    
    
    59Term loan payable to ABN Amro Bank due in 60 monthly installments of $1, plus
interest, maturing December 20, 2006. Interest at 4.93%
    
    
    28
    
    
    
    38Term loan payable to GMAC Business Credit and repaid in June 2003. Interest at Libor
plus 2.5% (3.89%) at December 31, 2002
    
    
    
    
    
    
    13,899Total debt
    
    
    171,537
    
    
    
    98,324Less  Current maturities
    
    
    (24,651
    )
    
    
    (8,262
    )Long-term debt, net of current maturities
    
    $
    146,886
    
    
    $
    90,062
 Loan Facilities At December 31, 2003, we had approximately $171.5 million in total
outstanding debt. This represents an approximate increase of $73.2 million from
December 31, 2002. This increase in debt is primarily due to additional
borrowings secured to meet working capital needs for 2003. Of the $171.5
million of outstanding debt, $76.2 million represents borrowings on our three
revolving credit facilities and $95.3 million represents borrowing on eight
term-debt facilities. At December 31, 2003, we had no additional available
borrowings under our three revolving facilities. Interest rates vary from the
one-month commercial paper rate plus 2.45% to 18%. Our average interest rate
at December 31, 2003 was 5.87%, and our term-debt borrowings currently require
approximately $796,000 in total monthly principal payments. During the second quarter of 2003, we secured $55.0 million in secured
asset based financing from three lenders, of which $45.0 million was funded
during the second quarter of 2003 and $10.0 million was funded in July 2003.
The proceeds were used to repay our existing $14.1 million loan with GMAC
Business Credit, LLC, and the remaining proceeds were used to provide working
capital to support operations. We obtained a $35.0 million loan with a
seven-year term from Boeing Capital Corporation, of which $30.0 million was
advanced in June 2003 and the remaining $5.0 million was advanced in July 2003.
Additionally, we increased our borrowing capacity by $5.0 million with CIT
Group/Equipment Finance, Inc. The additional $5.0 million was received in July
2003 and has been repaid. We also obtained a $15.0 million loan during the
second quarter of 2003 with a one-year term from Elliott Associates, L.P.
(Elliott Associates), which together with Elliott International, L.P. owns
15.8% of our outstanding common stock. The Elliott 50




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Associates loan originally had a conversion feature, at Elliott Associates
option, to convert $5.0 million to common stock at maturity on
June 30, 2004 at a conversion price which is the greater of the
weighted average price of our common stock for the preceding
30 trading days or $3.50 per share. The entire outstanding amount of principal and interest under the $15.0 million
term loan was repaid with a portion of the proceeds from the issuance of the
Subordinated Notes in March 2004 as discussed in Note 15. In January 2004, we amended our loan agreements with Southwest Bank of
Texas N.A. (Southwest Bank) to remove a condition that would have reduced the
borrowing capacity under the revolving credit facilities with them from an
aggregate of $50 million to $20 million on January 31, 2004. In March 2004, we
extended the maturity of these facilities to January 2005. Based on the
maturity of these facilities, this debt is classified as non-current as of
December 31, 2003. We reduced our indebtedness under these
facilities from the net proceeds that we received from our
Subordinated Note issuance as discussed in Note 15 and believe
we will be able to refinance these facilities with other long-term debt. Our loans require that certain conditions be met in order for us to obtain
advances. 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. For the quarter ended December 31, 2003, we did not meet certain covenants
for all of our credit facilities that contain financial covenants. In March
2004, we received waivers of compliance for the December 31, 2003 determination
date from all of our lenders that require us to meet these covenants. Also in
March 2004, we successfully amended and revised our financial covenants
contained in these credit facilities through the maturity of the various loan
agreements. Based on managements current projections, we expect to be in
compliance with our amended and revised debt covenants until at
least December 31, 2004. However, in the event that we do not meet our financial covenants in
the future, and we are unsuccessful in obtaining waivers of
compliance, 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. In addition, material adverse changes in our business specified
in certain credit facilities could result in acceleration of our indebtedness. Maturities of long-term debt for each of the years ending December 31 are
as follows (in thousands): 2004
    
    $
    24,6512005
    
    
    100,6042006
    
    
    15,3422007
    
    
    4,0472008
    
    
    4,087Thereafter
    
    
    22,806$
    171,537
 6. INCOME TAXES: Total tax expense (benefit) for the years ended December 31, 2003, 2002
and 2001 consists of (in thousands): Year Ended December 31,2003
    
    2002
    
    2001CurrentState
    
    
    165
    
    
    
    98
    
    
    
    Foreign
    
    
    1,308
    
    
    
    541
    
    
    
    Total current
    
    
    1,473
    
    
    
    639
    
    
    
    DeferredU.S. Federal
    
    
    (9,072
    )
    
    
    (3,718
    )
    
    
    4,511Total deferred
    
    
    (9,072
    )
    
    
    (3,718
    )
    
    
    4,511$
    (7,599
    )
    
    $
    (3,079
    )
    
    $
    4,511
 51




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The source of income (loss) before income tax expense (benefit) is as
follows (in thousands): Year Ended December 31,2003
    
    
    
    2002
    
    
    
    2001United
States
    
    $
    (83,770
    )
    
    $
    (7,848
    )
    
    $
    14,896Foreign
    
    
    3,667
    
    
    
    (780
    )
    
    
    308$
    (80,103
    )
    
    $
    (8,628
    )
    
    $
    15,204
 The income tax expense (benefit) for the years ended December 31, 2003,
2002 and 2001 differs from the amount computed by applying the U.S. statutory
federal income tax rate of 34 percent to consolidated income before income
taxes as follows (dollars in thousands): Year Ended December 31,2003
    
    2002
    
    2001Expense (benefit) computed at federal statutory rate
    
    $
    (27,235
    )
    
    
    (34.0
    )%
    
    $
    (2,934
    )
    
    
    (34.0
    )%
    
    $
    5,161
    
    
    
    34.0
    %Increase (decrease) in provision from:State income tax net of federal
benefit
    
    
    109
    
    
    
    0.1
    
    
    
    65
    
    
    
    0.7
    
    
    
    
    
    
    
    Foreign taxes
    
    
    (275
    )
    
    
    (0.3
    )
    
    
    275
    
    
    
    3.2
    
    
    
    
    
    
    
    Foreign income exclusion
    
    
    (40
    )
    
    
    (0.0
    )
    
    
    (646
    )
    
    
    (7.5
    )
    
    
    (843
    )
    
    
    (5.5
    )Nondeductible expenses
    
    
    114
    
    
    
    0.1
    
    
    
    161
    
    
    
    1.9
    
    
    
    193
    
    
    
    1.2Research and development credit
    
    
    (3,421
    )
    
    
    (4.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred tax asset valuation allowance
    
    
    23,149
    
    
    
    28.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7,599
    )
    
    
    (9.5
    )%
    
    $
    (3,079
    )
    
    
    (35.7
    )%
    
    $
    4,511
    
    
    
    29.7
    %
 The difference in the effective tax rate and the statutory tax rate for
2003 is primarily due to the valuation allowance of $23.1 million recorded to
fully offset the net deferred tax asset during the fourth quarter of 2003.
Deferred income tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. Management came to the
conclusion in the fourth quarter of 2003, after reviewing historical results
and completion of the 2004 budget, that given the trend and magnitude of
historical losses, realization of our net deferred tax assets is not assured at
December 31, 2003. The difference from the statutory tax rate for 2002 is due
to the application of the extraterritorial income exclusion for income earned
primarily in Mexico from January 1, 2002 to December 31, 2002. The exclusion
allows us to exclude a portion of income earned outside the United States for
tax purposes. The impact of this exclusion on future periods will vary
depending upon the amount of income earned outside the United States. The tax effects of the temporary differences that give rise to the
significant portions of the deferred tax assets and liabilities are presented
below (in thousands): December 31,2003
    
    2002Assets Net operating loss carryforwards
    
    $
    49,284
    
    
    $
    29,416Gain on asset sales
    
    
    967
    
    
    
    967Accrued expense not currently
deductible
    
    
    88
    
    
    
    500Contributions carryover
    
    
    59
    
    
    
    44Fixed asset basis
difference
    
    
    9,690
    
    
    
    3,245Research and development credit
    
    
    3,421
    
    
    
    Allowance for bad
debts
    
    
    11,251
    
    
    
    Alternative minimum tax carryforwards
    
    
    917
    
    
    
    917Total gross deferred tax assets
    
    
    75,677
    
    
    
    35,089Liabilities Book/tax depreciation difference
    
    
    52,528
    
    
    
    44,161Net deferred tax assets (liabilities)
    
    
    23,149
    
    
    
    (9,072
    )Valuation allowance
    
    
    (23,149
    )
    
    
    $
    
    
    
    $
    (9,072
    )
 52




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The realization of a significant portion of deferred tax assets is based
in part on our estimates of the timing of reversals of certain temporary
differences and on the generation of taxable income before such reversals. The
net operating loss carryforwards of approximately $145.0 million at December
31, 2003 begin to expire in the year 2012 through 2023. The utilization of any
net operating loss carryforwards is dependent on the future profitability of
the company. Accordingly, no assurance can be given regarding the ultimate
realization of such loss carryforwards as the utilization of these deferred tax
assets is uncertain. Certain past and future changes in ownership could limit our ability to
realize portions of the loss carryforwards. 7. COMMITMENTS AND CONTINGENCIES: Contractual Disputes and
Litigation We continue to negotiate with and use our best efforts to resolve our EPC
64 contract claims against Pemex. The Pemex personnel responsible for
the EPC 64 contract at the time it was ongoing are no longer
participating in the
settlement negotiations of these claims, which has hindered our
ability to resolve them. From November 2002 through March 2004, we engaged a consulting
firm in Mexico to assist us in the administration of our Pemex claims. After complying
with Pemex's requirements, we formally submitted these claims in July 2003. Upon the
formal submission of such claims, we expected to resolve them by the end of the fourth quarter of
2003. However, during the fourth quarter of 2003, it became apparent
that the current management at Pemex was resistant to accepting responsibility
for resolving these claims due to the changes in personnel
negotiating these claims on behalf of Pemex and to the operating
structure of Pemex. Prior to that time, Pemex personnel had given us
assurances that our properly supported claims would be paid, and our
consulting firm from Mexico indicated they believed we would be able
to collect the carrying value of our claims. At December 31,
2003, since there was no final resolution of these claims and the
ultimate amount and timing of payment of these claims was uncertain, we
reserved $33.1 million related to our previously recorded outstanding
unapproved claims against 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 December 31, 2003, prior to the reserve recorded, consisted of $52.2 million of
unapproved claims and $8.5 million of additional scope of work. 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.
As of December 31, 2003, we had remaining unreserved contract receivables of $2.1 million and costs in excess
of billings of $25.5 million from Pemex, totaling $27.6 million. We subsequently collected the $2.1 million
of contract receivables that were outstanding as of December 31, 2003 related to work performed as additional scope of
work.
Our unreserved net claim receivable remaining from December 31, 2003 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.
We based our best current estimate of
ultimate collectibility on the limited indications from Pemex
during the fourth quarter of 2003 of suggested settlements on the portion of the claims not related to interferences and interruptions.
Pemex officials involved in the negotiation of the claims have failed
to indicate to us the amounts of which they might settle
the claims related to interferences and interruptions. Settlement of
this amount and final resolution could reasonably be expected to vary
from $25.5 million.
Had we not estimated a portion of the interferences and interruptions
claims that would be collected, the loss would be greater. 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
our Subordinated Notes issued in March 2004. On January 20, 2004, we filed a lawsuit in the Supreme Court in the State
of New York, New York County, against Iroquois for whom we provided marine
construction services. The lawsuit asserts a claim for damages for breach of
contract and wrongful withholding of amounts due to us totaling $40 million for
services performed under our contract with Iroquois. The lawsuit seeks
specific compensatory damages and fees and costs. The
$40.0 million of claims includes $27.2 million of
receivables as of December 31, 2003 and amounts relating to cost
of capital, compensatory damages, fees, and other costs. If all our
claims are denied, we could incur a loss of up to the carrying value of our claim of
$27.2 million. In February 2004, we were
presented a letter from Iroquois declaring its intent to file a counter-claim
for alleged damage to its pipeline, extra costs to complete the work due to
alleged breach of contract, indemnity for certain damage to third parties and
alleged failure to perform efficiently. We believe this action has no merit
and intend to vigorously defend against any formal claim. However, if
these counter-claims are filed and 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,
which would have a material adverse impact on our results of
operations and financial position. Given the early
stages of this litigation, 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. On September 12, 2003, we filed a lawsuit in the 295th Judicial District
of the District Court for Harris County, Texas against Williams for whom we
provided marine construction services. The lawsuit asserts a claim for damages
for breach of contract and wrongful withholding of amounts due to us totaling
$7.6 million for services performed under our contract with Williams. The
lawsuit seeks specific compensatory damages and fees and costs. The court has
ordered the parties to this lawsuit to engage in an alternative dispute
resolution with a mediator by September 14, 2004, and trial is set for November
15, 2004. If all our claims are denied, we could incur a loss of up to the carrying value of our claim of
$5.5 million. In addition, Williams has advised it intends to file a
counter-claim of approximately $4.0 million against us for alleged breach of
contract. We believe that this counter-claim has no merit and intend to
vigorously defend against it. However, if
these counter-claims are filed and 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 Williams,
which would have a material adverse impact on our results of
operations and financial position. Given the early stages of this lawsuit, 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 are involved in various routine legal proceedings primarily involving
claims for personal injury under the Jones Act and general maritime laws which
we believe are incidental to the conduct of our business. We believe that none
of these proceedings, if adversely determined, would have a material adverse
effect on our business or financial condition. Leases We lease office space at various locations under operating leases that
expire through 2008. Our operating leases for our corporate office are subject
to increases for variable operating expenses. Rental expense was $3.1 million
for 2003, $2.4 million for 2002 and $1.5 million for 2001. Future minimum
non-cancelable lease commitments under these agreements for the years ending
December 31 are as follows (in thousands): 53




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2004
    
    $
    2,5102005
    
    
    2,5042006
    
    
    2,3412007
    
    
    2,3472008
    
    
    2,168Thereafter
    
    
    320$
    12,190
 Insurance We participate in a retrospectively rated insurance agreement. In our
opinion, we have adequately accrued for all material liabilities arising from
these agreements based upon the total incremental amount that would be paid
based upon the with-and-without calculation assuming experience to date and
assuming termination. Employment Agreements We have entered into employment agreements with three executive officers
that expire from 2004 to 2006. In addition, we have entered into an employment
agreement with our Chairman of the Board that expires in 2004. We currently do
not have any key-man life insurance with respect to our executive officers. Cal Dive Joint Venture In March 2001, we formed a joint venture, 50% owned by us, with Cal Dive
to perform small diameter, deepwater reel pipelaying projects in the U.S. Gulf
of Mexico with the Intrepid, a vessel owned by Cal Dive. In January 2004, in
accordance with the terms of the joint venture, we provided notice of our
intent to withdraw from the joint venture. To date, no operations were
commenced under the joint venture. The carrying value of our investment in
this dormant joint venture was $45,000 at December 31, 2003. Upon dissolution, 50% of the net assets of the joint venture will be
distributed to us. 8. 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 accompanying 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 third and fourth quarter of 2003, we paid $76,000 and $75,000,
respectively, of the recorded liability resulting in a $231,000 remaining
liability at December 31, 2003. All charges are reflected in our Domestic
region. 9. EMPLOYEE BENEFIT PLAN: We have a 401(k) Plan for all eligible employees and we make annual
contributions to the plan, at the discretion of management. We contributed
$428,000, $406,000 and $331,000 of common stock to the plan during 2003, 2002
and 2001, respectively. We intend to continue to make future contributions with
Horizon common stock. 10. STOCKHOLDERS EQUITY: Public Offerings of Common Stock In April 2002, we sold 3,000,000 shares of common stock in a public
offering. We received $30.8 million after deducting the underwriting discount
and expenses. We used $20.0 million to reduce indebtedness under our revolving
credit facilities, and the remainder was used to meet operational liquidity
requirements. 54




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##### Table of Contents



Stockholders Rights Plan On January 11, 2001, our board of directors adopted a stockholders rights
plan. In connection with the plan, the
board of directors approved the authorization of 100,000 shares of $1.00 par
value per share, designated the Series A Participating Cumulative Preferred
Stock. Under the plan, preferred stock purchase rights were distributed as a
dividend at a rate of one right for each share of our common stock held as of
record as of the close of business on January 11, 2001. Additional rights will
be issued in respect of all shares of common stock issued while the rights plan
is in effect. Each right entitles stockholders of common stock to buy a
fraction of a share of the new series of preferred stock at an exercise price
of $50. The rights will become exercisable and detach from the common stock,
only if a person or group acquires 20% or more of the outstanding common stock,
or announces a tender or exchange offer that, if consummated, would result in a
person or group beneficially owning 20% or more of the outstanding common
stock. Once exercisable, each right will entitle the holder (other than the
acquiring person) to acquire common stock with a value of twice the exercise
price of the rights. We will generally be able to redeem the rights at $.001
per right at any time until the close of business on the tenth day after the
rights become exercisable. The rights will expire on January 11, 2011, unless
redeemed or exchanged at an earlier date. Stock Options In January 1998, the board of directors and the stockholders approved the
Stock Incentive Plan (the Plan). The Plan provides for the granting of stock
options to directors, executive officers, other employees and certain
non-employee consultants. The amended Plan has 3.15 million shares available
for issuance as optioned shares and terminates in April 2009. The terms of the
option awards (including vesting schedules) are established by the compensation
committee of the board of directors, but generally vest ratably over three
years and unexercised options expire ten years from the date of issue. In May
2002, the board of directors and the stockholders approved the 2002 Stock
Incentive Plan (the 2002 Plan). The 2002 Plan has 2.3 million shares available
for issuance as optioned shares and shall remain in effect until all awards
granted under the 2002 Plan have been satisfied. This plan has the same
characteristics as the Plan approved in 1998. At December 31, 2003, we had
options for 1.6 million shares of common stock remaining to be issued in
aggregate under both plans. The following table summarizes activity under the Plan for the years ended
December 31, 2003, 2002 and 2001: WeightedShares
    
    Average PriceOutstanding at December 31, 2000
    
    
    2,005,379
    
    
    $
    8.67Granted
    
    
    910,000
    
    
    $
    17.07Forfeited and canceled
    
    
    (715,043
    )
    
    $
    17.42Exercised
    
    
    (324,166
    )
    
    $
    9.10Outstanding at December 31, 2001
    
    
    1,876,170
    
    
    $
    9.34Granted
    
    
    916,000
    
    
    $
    6.90Forfeited and canceled
    
    
    (27,966
    )
    
    $
    7.52Exercised
    
    
    (45,984
    )
    
    $
    6.17Outstanding at December 31, 2002
    
    
    2,718,220
    
    
    $
    8.59Granted
    
    
    885,668
    
    
    $
    3.58Forfeited and canceled
    
    
    (181,204
    )
    
    $
    7.77Exercised
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    3,422,684
    
    
    $
    7.34
 55




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##### Table of Contents



The following table summarizes information on stock options outstanding and
exercisable as of December 31, 2003, pursuant to the Plan: Options Outstanding Weighted Average
    
    
    
    Options ExercisableRange Of Exercise
    
    Shares
    
    Remaining
    
    Weighted Average
    
    Shares
    
    Weighted AveragePrices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$16.67 to 23.28
    
    
    119,100
    
    
    
    7.23
    
    
    $
    20.06
    
    
    
    87,716
    
    
    $
    20.16$10.07 to 16.67
    
    
    544,854
    
    
    
    4.72
    
    
    $
    13.12
    
    
    
    538,176
    
    
    $
    13.14$3.46 to 10.07
    
    
    2,758,730
    
    
    
    7.54
    
    
    $
    5.64
    
    
    
    1,719,655
    
    
    $
    6.35$3.46 to 23.28
    
    
    3,422,684
    
    
    
    7.08
    
    
    $
    7.34
    
    
    
    2,345,547
    
    
    $
    8.42
 Treasury Stock As of December 31, 2003, treasury stock consisted of 809,269 shares at a
cost of $5.3 million, following the issuance of 102,938 and 61,298, shares for
the Companys 401(k) contributions in 2003 and 2002, respectively. Treasury
stock is stated at the average cost basis. The following table presents information necessary to calculate earnings
per share for the three years ended December 31, 2003 (in thousands, except per
share amounts): 2003
    
    2002
    
    2001Net income (loss)
    
    $
    (72,504
    )
    
    $
    (5,549
    )
    
    $
    10,693Average common shares outstanding
    
    
    26,429
    
    
    
    25,573
    
    
    
    22,431Basic earnings per share
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.48Average common and dilutive potential common shares outstanding:Average common shares outstanding
    
    
    26,429
    
    
    
    25,573
    
    
    
    22,431Assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    65526,429
    
    
    
    25,573
    
    
    
    23,086Diluted earnings per share
    
    $
    (2.74
    )
    
    $
    (0.22
    )
    
    $
    0.46
 As of December 31, 2003, we had outstanding options covering an aggregate
of 3,422,684 shares of common stock, of which 2,345,547 shares were
exercisable. Excluded from the computation of diluted earnings per share are
options to purchase 3,422,684 shares of common stock as of December 31, 2003 at
a weighted average price of $7.34 per share, 2,718,220 shares of common stock
as of December 31, 2002 at a weighted average price of $8.59 per share and
166,800 shares of common stock as of December 31, 2001, at a weighted average
price of $19.06 per share as these options would have an antidilutive effect. 11. 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, L.P. and
Elliott International, L.P., collectively our largest stockholder, to charter
certain marine vessels from Odyssea. As of December 31, 2003, we owed Odyssea
$1.1 million for charter services compared to $4.2 million at December 31,
2002. Odyssea billed Horizon and Horizon paid Odyssea for services rendered
under the agreement as follows (in millions). 2003
    
    2002
    
    2001Amount billed to Horizon
    
    $
    17.1
    
    
    $
    18.3
    
    
    $
    16.1Amount paid to Odyssea
    
    $
    20.2
    
    
    $
    14.7
    
    
    $
    15.8
 In June 2003, we secured a $15.0 million loan due June 30, 2004 from
Elliott Associates. All amounts of principal and interest under the $15.0
million term loan from Elliott Associates 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. See Notes 5 and
15. 56




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##### Table of Contents



In October 2000, we loaned $142,000 to our former Chief Operating Officer.
Forgiveness of that debt in connection with his resignation resulted in a
write-off of his loan to selling, general and administrative expenses in the
accompanying consolidated statement of operations in the second quarter of
2003. See Note 8. 12. CASUALTY LOSS: On September 20, 2002, our pipelay barge, the Lone Star Horizon, sustained
electrical damage due to a fire while at anchor off Ciudad Del Carmen, Mexico.
We incurred costs totaling approximately $5.5 million to repair the Lone Star
Horizon. We maintain hull and machinery insurance to cover physical damage to
our vessels. This insurance coverage provides for both a $0.5 million
occurrence deductible and a $1.5 million annual aggregate deductible. During
the third quarter of 2002, we included a $2.0 million loss as other expense.
To date, we have collected reimbursement of approximately $3.1 million, and
based on discussion with our insurance underwriters, we expect to collect
approximately $0.2 million of remaining reimbursement. During the fourth
quarter of 2003, we recorded $0.2 million of support costs that will not be
reimbursed as operating expenses. 13. GEOGRAPHIC INFORMATION: Horizon operates in a single industry segment, the marine construction
services industry. We changed our organizational structure and management
reporting information in 2002, resulting in geographical information
becoming available and being used by management. Comparable information is not
available for 2001, other than the level of revenues generated by geography,
which included 52% of revenues in Latin America with the remainder being
generated domestically. Geographic information relating to Horizons
operations follows (in millions): Year Ended December 31,2003
    
    2002Revenues:Domestic
    
    $
    201.7
    
    
    $
    156.6Latin America
    
    
    3.9
    
    
    
    106.3West Africa
    
    
    16.2
    
    
    
    1.4Southeast Asia
    
    
    48.1
    
    
    
    17.3Other
    
    
    0.4
    
    
    
    1.8Total
    
    $
    270.3
    
    
    $
    283.4Gross Profit:Domestic
    
    $
    0.8
    
    
    $
    12.4Latin America
    
    
    (0.7
    )
    
    
    18.4West Africa
    
    
    (1.4
    )
    
    
    (2.8
    )Southeast Asia
    
    
    8.1
    
    
    
    1.6Other
    
    
    (0.3
    )
    
    
    0.8Total
    
    $
    6.5
    
    
    $
    30.4
 As of December 31,2003
    
    2002Long-lived assets (1):Domestic
    
    $
    171.7
    
    
    $
    168.4Latin America
    
    
    0.2
    
    
    
    21.5West Africa
    
    
    19.7
    
    
    
    19.6Southeast Asia
    
    
    40.1
    
    
    
    34.3Other
    
    
    7.7
    
    
    
    14.0Total
    
    $
    239.4
    
    
    $
    257.8
   (1)
    
    Long-lived assets include vessels, property and related marine equipment.
Amounts reflect the location of the assets at December 31, 2003 and 2002.
Equipment location changes as necessary to meet working requirements. Other 57




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##### Table of Contents



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. 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The marine construction industry in the U.S. Gulf of Mexico is seasonal,
with contracts being awarded in the spring and early summer and the work being
performed before the onset of adverse winter weather conditions. Seasonality
and adverse weather conditions historically have resulted in lower revenues in
the fourth and first quarters. Full year results are not a direct multiple of
any quarter or combination of quarters because of this seasonality. The following table sets forth selected quarterly information for 2003 and
2002 (in thousands, except per share data). We believe that all necessary
adjustments have been included in the amounts stated below to present fairly
the results of such periods. Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 312003Contract revenues
    
    $
    67,061
    
    
    $
    57,928
    
    
    $
    79,770
    
    
    $
    65,554Gross profit (loss)
    
    
    2,534
    
    
    
    (750
    )
    
    
    7,469
    
    
    
    (2,752
    )Operating income (loss) (1) (2)
    
    
    (2,884
    )
    
    
    (7,231
    )
    
    
    2,071
    
    
    
    (61,628
    )Net loss (1) (2) (3)
    
    
    (2,948
    )
    
    
    (4,057
    )
    
    
    (289
    )
    
    
    (65,210
    )EARNINGS PER SHARE:Net loss per share  BASIC
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    (0.01
    )
    
    $
    (2.46
    )Net loss per share  DILUTED
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    (0.01
    )
    
    $
    (2.46
    )Shares used in computing net loss:Basic
    
    
    26,388
    
    
    
    26,417
    
    
    
    26,443
    
    
    
    26,467Diluted
    
    
    26,388
    
    
    
    26,417
    
    
    
    26,443
    
    
    
    26,4672002Contract revenues
    
    $
    66,103
    
    
    $
    64,291
    
    
    $
    64,977
    
    
    $
    88,039Gross profit
    
    
    5,047
    
    
    
    9,540
    
    
    
    11,642
    
    
    
    4,165Operating income (loss) (4)
    
    
    1,546
    
    
    
    5,149
    
    
    
    5,790
    
    
    
    (13,788
    )Net income (loss) (4)
    
    
    377
    
    
    
    2,614
    
    
    
    1,831
    
    
    
    (10,371
    )EARNINGS PER SHARE:Net income (loss) per share  BASIC
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.07
    
    
    $
    (0.39
    )Net income (loss) per share  DILUTED
    
    $
    0.02
    
    
    $
    0.10
    
    
    $
    0.07
    
    
    $
    (0.39
    )Shares used in computing net income (loss):Basic
    
    
    23,279
    
    
    
    26,260
    
    
    
    26,346
    
    
    
    26,366Diluted
    
    
    23,582
    
    
    
    26,926
    
    
    
    26,348
    
    
    
    26,366
   (1)
    
    Includes a $21.3 million impairment pretax loss related to several marine
vessels and related marine equipment recorded during the
fourth quarter of 2003.(2)
    
    Includes a $33.1 million reserve for unapproved claims against Pemex
recorded during the fourth quarter of 2003.(3)
    
    Includes a $23.1 million valuation allowance to fully offset the net
deferred tax asset recorded during the fourth quarter of 2003.(4)
    
    Includes a $9.9 million impairment pretax loss related to the Phoenix
Horizonfor the quarter ending December 31, 2002. 15. SUBSEQUENT EVENTS: 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. We issued the Subordinated Notes in order to meet our
immediate working capital needs. We received net proceeds of approximately $45 million
from the offering of the Subordinated Notes, after considering offering costs and proceeds used to repay
all amounts of principal and interest under the $15 million term loan from
Elliott Associates. We also substantially reduced our indebtedness under our
revolving credit facilities with Southwest Bank. In order to meet our working
capital needs, however, we will be required to re-borrow funds under these
revolving credit facilities. Elliott Associates purchased $15 million aggregate
principal amount of the Subordinated Notes. Interest at 16% on the Subordinated Notes is payable 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. Upon an event of default under the
Subordinated Notes or if we fail to take certain actions following the issuance
of the Subordinated Notes, including actions with respect to the collateral and
the registration rights granted to the holders, each as described below, the
interest on the Subordinated Notes increases. 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. 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. 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 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 to require:  
    
    a ratio of current assets to current liabilities of 0.90
to 1 for the period ending 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 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; and
    
    if 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 tax expense 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 less than negative $2.5 million for the three-month
period ending March 31, 2004, negative $4.5 million for the six-month period
ending June 30, 2004, $8 million for the nine-month period ending September 30,
2004, and $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 and breach of the Subordinated Note covenants and our other debt
covenants, including the new financial covenants described above. Certain
holders of the Subordinated Notes for as long as they are holders of such notes
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 any such
board or committee meetings. 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. Elliott Associates
did not receive any warrants in the offering. Holders of the warrants received registration rights. If we propose to file a
registration statement with the SEC to register shares of our common stock, we are required to notify the
holders of such anticipated filing and include them in such registration. In
addition, if holders of shares of our common stock issued upon exercise of the
warrants holding at least 25% of such shares request that we register such
shares, we are required to file a registration statement with respect to such
shares and use our best efforts to effect such registration. We are required to
pay all of the expenses in connection with any such registrations. 58




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##### Table of Contents



The Subordinated Notes will be
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 weighted average
assumptions included in the following table: Warrant life
    
    5 yearsExpected volatility
    
    
    76.6
    %Risk-free interest rate
    
    
    2.66
    %
 The discount, plus the discount related to offering costs, will be
amortized as a non-cash charge to interest expense over the term of the
Subordinated Notes using the effective interest rate method. Southwest Bank, as agent, provides two revolving credit facilities totaling
$50.0 million and agreed to extend its previously scheduled maturity date from
April 2004 to January 2005. We must secure an alternate credit facility to
replace Southwest Bank credit facilities prior to 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.
While management believes this replacement credit agreement sufficient to meet
our future needs will be secured in the second quarter of 2004, there can be no
assurance that we will be successful in this regard. We have been awarded a contract for approximately $100 million with the Israel Electric
Corporation and have been awarded a contract for approximately
$50 million with Pemex, under its current senior management. Management believes these
contracts will enhance our operating results and liquidity in 2004. Management
will continue our efforts in future periods to
enhance collections of our receivables and claims, manage timing of
our payments of trade and capital expenditure obligations and the level of
collateralization necessary to secure project performance requirements, all
with a view toward closely managing our future liquidity situation. 59




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on our behalf by the undersigned, thereunto duly authorized on March 12, 2004. HORIZON OFFSHORE, INC.By:

/s/
David W. SharpExecutive Vice President andChief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. SIGNATURE
    
    TITLE
    
    DATE/s/ J. Louis Frank
    
    Chairman of the Board
    
    March 12, 2004/s/ Bill J. Lam
    
    President and Director
(Principal Executive
Officer)
    
    March 12, 2004/s/ David W. Sharp
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 12, 2004/s/ Michael R. Latina
    
    Director
    
    March 12, 2004/s/ Ken R. LeSuer
    
    Director
    
    March 12, 2004/s/ John T. Mills
    
    Director
    
    March 12, 2004/s/
Edward L. Moses, Jr.
    
    Director
    
    March 12, 2004/s/
Charles O. Buckner
    
    Director
    
    March 12, 2004
 60




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##### Table of Contents



EXHIBIT INDEX EXHIBITNUMBER3.1
    
    
    
    
    
    Amended and Restated Certificate of Incorporation of the Company(1)3.2
    
    
    
    
    
    Bylaws of the Company(1)4.1
    
    
    
    
    
    Specimen Common Stock certificate (1)4.2
    
    
    
    
    
    Rights Agreement, dated as of January 11, 2002, between Horizon Offshore, Inc. and Mellon
Investor Services LLC, as Rights Agent, including (i) as Exhibit A-the Form of Certificate
of Designations, (ii) as Exhibit B-the Forms of Rights Certificate, Assignment and Election
to Purchase, and (iii) as Exhibit C-the Summary Description of the Stockholder Rights Plan
(7)4.3
    
    
    
    
    
    Form of Warrant (18)10.1
    
    
    
    
    
    Form of Indemnity Agreement by and between the Company and each of its directors (1)10.2
    
    
    
    
    
    The Companys Stock Incentive Plan (1)*10.3
    
    
    
    
    
    Form of Stock Option Agreement under the Companys Stock Incentive Plan (1)*10.4
    
    
    
    
    
    Registration Rights Agreement dated as of December 4, 1997 among the Company, Highwood
Partners, L.P., and Westgate International, L.P. (1)10.5
    
    
    
    
    
    Loan Agreement dated December 30, 1998 among Horizon Vessels, Inc., Horizon Offshore
Contractors, Inc., The CIT Group/Equipment Financing, Inc., as agent, and the other lenders
specified therein (6)10.6
    
    
    
    
    
    Amendment No. 1 to Loan Agreement dated as of January 30, 1999 among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., The CIT Group/Equipment Financing, Inc., as agent, and
the other lenders specified therein (5)10.7
    
    
    
    
    
    Amendment No. 2 to Loan Agreement dated as of May 25, 1999 among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., The CIT Group/Equipment Financing, Inc., as agent, and
the other lenders specified therein (5)10.8
    
    
    
    
    
    Amendment No. 3 to Loan Agreement dated as of November 30, 1999 among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., The CIT Group/Equipment Financing, Inc., as agent, and
the other lenders specified therein (5)10.9
    
    
    
    
    
    Amendment No. 4 to Loan Agreement dated as of January 31, 2000 among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., The CIT Group/Equipment Financing, Inc., as agent, and
the other lenders specified therein (5)10.10
    
    
    
    
    
    Employment and Non-Competition Agreement dated as of September 1, 1999 between the Company
and Clay Etheridge (2)*10.11
    
    
    
    
    
    Amendment No. 5 to the Loan Agreement dated as of June 30, 2000 among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., The CIT Group/Equipment Financing Inc., as agent, and
the other lenders specified therein (3)10.12
    
    
    
    
    
    Employment Agreement dated October 11, 1999 between Horizon Offshore Contractors, Ltd. and
James Devine (4)*10.13
    
    
    
    
    
    Loan Agreement, dated March 26, 2001 between Horizon Offshore Contractors, Inc., Horizon
Subsea Services, Inc., Horizon Offshore Vessels, Inc. and Southwest Bank of Texas, N.A.(8)10.14
    
    
    
    
    
    Loan Agreement dated June 29, 2001, between Horizon Vessels, Inc. and General Electric
Capital Corporation (9)10.15
    
    
    
    
    
    Employment and Non-Competition Agreement dated as of April 1, 2001 between the Company and
David W. Sharp (11)*10.16
    
    
    
    
    
    Credit Agreement dated May 10, 2001, among Horizon Vessels, Inc., Horizon Offshore
Contractors, Inc., Horizon Offshore, Inc. and The CIT Group/Equipment Financing, Inc. (9)10.17
    
    
    
    
    
    Employment Agreement and Non-Competition Agreement dated June 1, 2001 between the Company
and Bill Lam (11)*10.18
    
    
    
    
    
    Loan Agreement dated June 29, 2001, among Horizon Vessels, Inc., Horizon Offshore, Inc.,
Horizon Offshore Contractors, Inc. and SouthTrust Bank (11)10.19
    
    
    
    
    
    Loan Agreement dated August 31, 2001, between Horizon Vessels International Ltd. and GMAC
Business Credit, LLC (10)10.20
    
    
    
    
    
    Loan Agreement dated August 15, 2001, among Horizon Offshore Contractors, Inc., Horizon
Subsea Services, Inc., Horizon Vessels, Inc., HorizEn, L.L.C. and Southwest Bank of Texas,
N.A.(10)
 61




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##### Table of Contents



10.21
    
    
    
    
    
    First Amendment to Employment Agreement dated July 28, 2001 between Horizon Offshore
Contractors, Ltd. and James Devine (11)*10.22
    
    
    
    
    
    First Amendment to Loan Agreement dated as of April 17, 2002 among Horizon Offshore
Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc. and Southwest Bank
of Texas, N.A., as Agent (12)10.23
    
    
    
    
    
    First Amendment to EXIM Guaranteed Loan Agreement dated as of April 17, 2002 among Horizon
Offshore Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc., HorizEn,
L.L.C. and Southwest Bank of Texas, N.A., as Agent (12)10.24
    
    
    
    
    
    Horizon Offshore, Inc. 2002 Stock Incentive Plan (13)*10.25
    
    
    
    
    
    Fourth Amendment to Loan Agreement dated as of September 30, 2002, among Horizon Offshore
Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc. and Southwest Bank
of Texas, N.A. (14)10.26
    
    
    
    
    
    Third Amendment to EXIM Guaranteed Loan Agreement dated as of September 30, 2002, among
Horizon Offshore Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc.,
HorizEn, L.L.C., and Southwest Bank of Texas, N.A. (14)10.27
    
    
    
    
    
    Fifth Amendment to Loan Agreement dated as of March 6, 2003, among Horizon Offshore
Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc. and Southwest Bank
of Texas, N.A. (15)10.28
    
    
    
    
    
    Fourth Amendment to EXIM Guaranteed Loan Agreement dated as of March 6, 2003, among Horizon
Offshore Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc., HorizEn,
L.L.C., and Southwest Bank of Texas, N.A. (15)10.29
    
    
    
    
    
    Employment and Non-Competition Agreement dated May 31, 2002 between the Company and J. Louis
Frank (15)*10.30
    
    
    
    
    
    Amended and Restated Employment Agreement dated January 1, 2003 between the Company and
James Devine (15)*10.31
    
    
    
    
    
    Loan Agreement date October 2, 2000 between Horizon Offshore, Inc. and R. Clay Etheridge (15)10.32
    
    
    
    
    
    Amendment No. 8 to Loan Agreement dated as of May 13, 2003, among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., Horizon Offshore, Inc., The CIT Group/Equipment
Financing Inc., as agent, and the other lenders specified therein (16)10.33
    
    
    
    
    
    Loan Agreement dated June 4, 2003, between Horizon Vessels, Inc., as borrower and Elliott
Associates, L.P., as lender (17)10.34
    
    
    
    
    
    Amendment No. 1 dated as of June 30, 2003 to Loan Agreement dated June 4, 2003, between
Horizon Vessels, Inc, as borrower and Elliott Associates, L.P., as lender (17)10.35
    
    
    
    
    
    Loan Agreement dated June 30, 2003, between Horizon Vessels International, Inc., as borrower
and Boeing Capital Corporation, as lender (17)10.36
    
    
    
    
    
    Amendment No. 2 dated as of June 30, 2003 to Credit Agreement dated May 10, 2001, among
Horizon Vessels, Inc., as borrower, Horizon Offshore Contractors, Inc. and Horizon Offshore,
Inc., as guarantors and The CIT Group/Equipment Financing, Inc., as lender (17)10.37
    
    
    
    
    
    Employment and Non-Competition Agreement dated July 1, 2003 between the Company and David W.
Sharp (17)*10.38
    
    
    
    
    
    Employment and Non-Competition Agreement dated July 1, 2003 between the Company and William
B. Gibbens (17)*10.39
    
    
    
    
    
    Consulting Agreement dated December 4, 2003 between the Company and Edward L. Moses (18) *10.40
    
    
    
    
    
    Purchase Agreement dated as of
March 11, 2004 among Horizon Offshore, Inc., as issuer,
Horizon Vessels, Inc., Horizon Offshore Contractors, Inc., Horizon Subsea Services, Inc.,
Horizon Vessels International, Ltd., HorizEn L.L.C., ECH Offshore, S. de R.L. de C.V., and
HOC Offshore, S. de R.L. de C.V., as guarantors, and the initial purchasers named therein
(18)10.41
    
    
    
    
    
    Amendment No. 1 dated March 11, 2004 to the Registration Rights Agreement dated as of
December 4, 1997 among Horizon Offshore, Inc., Highwood Partners, L.P. and Westgate
International, L.P. (18)10.42
    
    
    
    
    
    Registration Rights Agreement dated as of March 11, 2004 among Horizon Offshore, Inc., as
issuer, Horizon Vessels, Inc., Horizon Offshore Contractors, Inc., Horizon Subsea Services,
Inc., Horizon Vessels International, Ltd., HorizEn L.L.C., ECH Offshore, S. de R.L. de C.V.,
and HOC Offshore, S. de R.L. de C.V., as guarantors, and the initial purchasers named
therein (18)10.43
    
    

    
    
    
    Sixth Amendment to Loan Agreement dated as of January 30, 2004, among Horizon Offshore
Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc., and Southwest Bank
of Texas, N.A., as agent (18)10.44
    
    

    
    
    
    Fifth Amendment to EXIM Guaranteed Loan Agreement dated as of January 30, 2004, among
Horizon Offshore Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc.,
HorizEn, L.L.C. and Southwest Bank of Texas, N.A., as agent (18)
 62




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##### Table of Contents



10.45
    
    
    
    
    
    Seventh Amendment to Loan Agreement
dated as of March 11, 2004, among Horizon Offshore
Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc., and Southwest Bank
of Texas, N.A., as agent (18)10.46
    
    
    
    
    
    Sixth Amendment to EXIM Guaranteed Loan Agreement dated as of March 11, 2004, among Horizon
Offshore Contractors, Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc., HorizEn,
L.L.C., and Southwest Bank of Texas, N.A., as agent (18)10.47
    
    
    
    
    
    First Amendment to Loan
Agreement dated as of March 10, 2004, among Horizon Vessels
International, Ltd. and Boeing Capital Corporation (18)10.48
    
    
    
    
    
    Amendment No. 9 to Loan Agreement dated as of March 11, 2004, among Horizon Vessels, Inc.,
Horizon Offshore Contractors, Inc., Horizon Offshore, Inc., The CIT Group/Equipment
Financing Inc., as agent, and the other lenders specified therein (18)10.49
    
    
    
    
    
    Loan Agreement dated June 29,
2001, as amended and restated as of March 11, 2004, among Horizon Vessels,
Inc., Horizon Offshore, Inc., Horizon Offshore Contractors, Inc. and SouthTrust Bank (18)10.50
    
    
    
    
    
    Amendment No. 3 dated as of March 11, 2004 to Credit Agreement dated as of May 10, 2001,
as amended, among Horizon Vessels, Inc. Horizon Offshore Contractors, Inc., Horizon Offshore, Inc., and The CIT Group/Equipment
Financing, Inc., as the lender(18)14.1
    
    
    
    
    
    Code of Ethics and Business Conduct (18)21.1
    
    
    
    
    
    Subsidiaries of the Company (18)23.1
    
    
    
    
    
    Consent of PricewaterhouseCoopers LLP (18)31.1
    
    
    
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18)31.2
    
    
    
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18)32.1
    
    
    
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18)32.2
    
    
    
    
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18)
   (1)
    
    Incorporated by reference to the Companys Registration Statement on Form
S-1 (Registration Statement No. 333-43965).(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.(3)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.(4)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.(5)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1999.(6)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1998.(7)
    
    Incorporated herein by reference to Exhibits 1, 2, 3 and 4 to the
Companys Registration Statement on Form 8-A12B, filed with the Commission
on January 18, 2002.(8)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.(9)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.(10)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.(11)
    
    Incorporated by reference to the Companys Annual Report on Form 10K-405
for the year ended December 31, 2001.(12)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002.(13)
    
    Incorporated by reference to Exhibit A to our Definitive Schedule 14A
filed on April 8, 2002.(14)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002. 63




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##### Table of Contents



(15)
    
    Incorporated by reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 2002.(16)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003.(17)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003.(18)
    
    Filed herewith.*
    
    Management Contract or Compensatory Plan or Arrangement. 64