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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23653
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HORIZON OFFSHORE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0487309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2500 CITYWEST BOULEVARD 77042
SUITE 2200 (Zip Code)
HOUSTON, TEXAS
(Address of principal executive
offices)
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark 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. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 13, 2001 was approximately $346 million.
The number of shares of the registrant's common stock, $1.00 par value per
share, outstanding as of March 13, 2001 was 22,722,801.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement prepared in
connection with the registrant's 2001 annual meeting of stockholders have been
incorporated by reference into Part III of this Form 10-K.
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HORIZON OFFSHORE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
Items 1. and 2. Business and Properties..................................... 1
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 4a. Executive Officers of the Registrant........................ 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7a. Quantitative and Qualitative Disclosure About Market Risk... 18
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 19
Item 11. Executive Compensation...................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 19
Item 13. Certain Relationships and Related Transactions.............. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 20
Financial Statements........................................ F-1
Signatures.................................................. S-1
Exhibit Index............................................... E-1
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
We provide marine construction services to the offshore oil and gas
industry. We operate primarily in the United States Gulf of Mexico, and have
recently expanded our operations to Mexico and Central and South America. Our
marine fleet consists of eleven vessels, ten of which are currently operational.
We have also established alliances and joint ventures with selected offshore
service and energy companies to broaden the range of services we offer our
customers, participate in the ultra-deepwater market and expand our operations
internationally. The primary services we provide include:
- installing pipelines in the Gulf of Mexico and selected international
markets;
- providing pipebury, hook-up and commissioning services; and
- installing production platforms and other structures and then
disassembling and salvaging them at the end of their life cycles.
We believe that our expanded fleet allows us to compete in the Gulf of
Mexico for substantially all pipeline installation projects in shallow water
depths of 200 feet and less and most other projects on the outer continental
shelf.
INDUSTRY CONDITIONS
Our operating results are directly tied to industry demand for our services,
most of which are performed on the continental shelf in the Gulf and recently
offshore Mexico, and, to a lesser degree, seasonal impact. Demand for our
services is primarily a function of the level of oil and gas activity in our
market areas. Due to the time required to drill a well and fabricate a
production platform, demand for our services usually lags exploratory drilling
by six to 18 months. The strong market conditions, including energy commodity
prices, rising rig count and construction permitting trends, indicate the
likelihood of demand increases. We believe our operating results are
significantly affected by improvements in market conditions, our enhanced fleet
capabilities and our management expertise.
Secondarily, the marine construction industry in the Gulf of Mexico
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 many projects are performed within a relatively short
period of time. We intend to partially offset the seasonality of our core
operations in the Gulf by pursuing select international expansion opportunities
in counter-seasonal markets, such as offshore Central and South America and West
Africa. The locations of these regions provide a counter-seasonal balance to our
domestic operations which will offset pressure on our first and fourth quarter
earnings. In addition, the similar operating environments and geographic
proximity of these regions, enable us to compete profitably in these markets.
SCOPE OF OPERATIONS
We are a leading provider of marine construction services in the Gulf of
Mexico. We expanded our operations to offshore Mexico in 2000 and also performed
a project offshore Ecuador. We laid 183 miles of pipe and buried 133 miles of
pipe of various diameters in various depths during 2000. We can install and bury
pipelines with an outside diameter (including concrete coating) of up to 48
inches. During 2000, we also installed or removed 40 offshore platforms. We can
install platforms of up to 1,000 tons using our derrick barges. In 2000, we
performed a total of 93 contracts.
Our highly specialized pipelay and pipebury vessels, the AMERICAN HORIZON,
CANYON HORIZON, CAJUN HORIZON, BRAZOS HORIZON, LONE STAR HORIZON and GULF
HORIZON install and bury pipelines of various diameters. Our pipelay vessels
employ conventional S-lay technology, which is appropriate for operating
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on the U.S. continental shelf and in many international areas. 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 tested 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
downward 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 on the
sea floor. During the pipelay process, divers regularly inspect the pipeline to
ensure that there are no obstructions on the sea floor, that the ramp is
providing proper support and that the pipeline is settling correctly. During
2000, we increased the tension capacity of the LONE STAR HORIZON, GULF HORIZON
and BRAZOS HORIZON, to provide our vessels with greater operating capabilities
and the ability to install larger diameter pipelines at greater water depths.
Pipelines installed on the 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 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 which is
pumped from the barge to create a trench into which the pipe is then laid. For
larger pipe burying projects, or where deeper trenching is required, we use the
CANYON HORIZON, our dedicated bury barge. During 2000, we increased its burial
capacity. It is one of only two dedicated pipebury barges operating in the Gulf
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 HORIZON for burying larger projects and
our towed jet sleds behind pipelay barges for burying smaller projects.
Our fleet also includes the PEARL HORIZON, a multi-purpose vessel. This
vessel performs diving support services such as connecting pipelines to
platforms and other pipelines (tie-ins), filling pipelines with water under
pressure to test for tensile strength (hydrostatic testing) and commencing
production from a platform (commissioning services). The PEARL HORIZON'S
capabilities were also modified to permit it to tow other vessels.
We install and remove or salvage offshore fixed platforms. We have
substantially expanded our operating capabilities in this market area. We
constructed a derrick barge, the PACIFIC HORIZON, which commenced operations in
March 1999, to complement the ATLANTIC HORIZON that we acquired in June 1998.
During 2000, we expanded the living quarters of the ATLANTIC HORIZON. The
PACIFIC HORIZON'S lift capacity was increased from 800 tons to 1,000 tons in
February 2000 to allow it to perform larger installation projects. This upgrade
allowed the PACIFIC HORIZON to install a production platform off the coast of
Ecuador. Derrick barges are equipped with cranes designed to lift and place
platforms, structures or equipment into position for installation. In addition,
they can be used to disassemble and remove platforms and prepare them for
salvage or refurbishment. We also have an alliance with Cal Dive
International, Inc. to provide Cal Dive with greater derrick barge and heavy
lift capacity to remove structures for salvage that exceed the capacity of their
equipment. We believe that the need to salvage platforms in the Gulf will
increase as older structures are decommissioned and are required to be removed
pursuant to regulatory requirements.
We recently expanded our alliance with Cal Dive International, Inc. to
include surface diving, which is done to inspect the pipeline as it is being
laid, monitor the pipebury activities, connect pipelines to production platforms
and assist derrick barges in the installation and removal of structures. We
believe that having Cal Dive perform our surface diving will allow us to
concentrate on our core activities and improve efficiencies.
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,
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and the location and duration of current and future projects. We have placed a
strong emphasis on the sequential structuring of scheduled work in adjacent
areas. Sequential scheduling reduces mobilization and de-mobilization 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 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, being completed in periods as
short as several days to periods of up to several months for projects involving
our larger pipelay vessels. We perform most of our projects on a fixed-price or
"lump sum" basis, although a few projects are performed on a cost-plus basis.
Under a fixed-price contract, the price stated in the contract is subject to
adjustment only for change orders placed 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-plus arrangements, we receive a specified
fee in excess of direct labor and material cost and are protected against cost
overruns, but do not benefit directly from improved performance.
MARINE EQUIPMENT
The following table describes our marine vessels.
MAXIMUM
MAXIMUM PIPELAY
LENGTH DERRICK LIFT DIAMETER DATE DATE
VESSEL VESSEL TYPE (FEET) (TONS) (INCHES) ACQUIRED DEPLOYED
------ ----------- -------- ------------ -------- ----------- -----------
American Horizon..... Pipelay/Pipebury 180 -- 18 Feb. 1996 Apr. 1996
Cajun Horizon........ Pipelay/Pipebury 140 -- 12 Jun. 1996 Jul. 1996
Lone Star Horizon.... Pipelay/Pipebury 320 -- 48 Nov. 1997 Jan. 1998
Gulf Horizon......... Pipelay/Pipebury 350 -- 42 Jul. 1997 Feb. 1998
Brazos Horizon....... Pipelay/Pipebury 210 -- 36 Apr. 1999 May 1999
Diving Support
Pearl Horizon........ Vessel 184 -- -- Oct. 1997 Apr. 1998
Diving Support
Stephaniturm......... Vessel 230 -- -- Apr. 1998 May 1998
Canyon Horizon....... Pipebury 330 -- -- Nov. 1997 Jun. 1998
Atlantic Horizon..... Derrick Barge 420 550 -- Jun. 1998 Jun. 1998
Pacific Horizon...... Derrick Barge 350 1,000 -- May 1998 Mar. 1999
Phoenix Horizon...... Derrick/Pipelay 300 250 24 Jul. 1997 (1)
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(1) Will not be deployed until needed for operations, currently bidding on
international contracts.
We own all of our marine vessels and have placed mortgages on them to secure
our term loan. See Note 4 of our notes to the 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.
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CAL DIVE JOINT VENTURE
On March 1, 2001, we signed a definitive agreement with Cal Dive forming a
joint venture, 50% owned by us, to perform deepwater reel pipelaying projects in
the U.S. Gulf of Mexico. We believe that a joint venture with an experienced
subsea development contractor like Cal Dive will expand our operating
capabilities and facilitate participating in the deepwater market segment. We
will jointly manage and staff the joint venture with Cal Dive. The joint venture
will charter the SEA SORCERESS, a 374 foot vessel with a 10,000 ton deck load
capacity that is being converted to a dynamically positioned multi-service
vessel, and other vessels from Cal Dive on an as-needed basis to perform
deepwater small diameter pipelaying projects. The joint venture will require an
estimated capital expenditure of approximately $15 million, of which we will pay
50%, to design, construct and install the reel pipelay equipment to be used to
perform pipelaying operations. Construction of a spooling facility to support
the joint venture and other reel pipelaying requirements at our marine base in
Port Arthur, Texas began in February 2001, at an estimated cost of $2.5 million
to us.
SAFETY AND QUALITY ASSURANCE
We are concerned with the safety and health of our employees and maintain a
stringent safety assurance program to reduce the possibility of costly
accidents. Our health, safety and environmental department establishes
guidelines to ensure compliance with all applicable state and federal safety
regulations. It also provides training and safety education through new employee
orientations, which include first aid and CPR training. In addition, prospective
employees must submit to alcohol and drug testing. After each accident or other
health or safety occurrence, we promptly collect data concerning the incident,
perform further investigations, and evaluate our safety procedures to help
prevent similar incidents. We believe that our safety program and commitment to
quality are vital to attracting and retaining customers and employees and
controlling costs.
CUSTOMERS
Our customers have primarily been the oil and gas companies operating on the
U.S. continental shelf. In 2000, we provided offshore marine construction
services to approximately 58 customers. We began two major projects for an
affiliate of Petroleos Mexicanos (Pemex) and completed a project offshore
Ecuador in 2000. Pemex accounted for 36.1% of our revenues for the year 2000.
Our management team concentrates on maintaining close relationships with
engineering firms that manage the award and provision of marine construction
services for many of the independent oil and gas producers.
We do not believe that our revenues depend on any one customer. The level of
construction services required by any particular customer depends on the size of
that customer's capital expenditure budget devoted to construction plans in a
particular year. Consequently, customers that account for a significant portion
of contract revenues in one fiscal year may represent an immaterial portion of
contract revenues in subsequent fiscal years. Our contracts are typically of
short duration, being completed in periods as short as several days to several
months.
BACKLOG
As of December 31, 2000, our backlog supported by written agreements totaled
$50.0 million, compared to our backlog at December 31, 1999 of $10.0 million. As
of March 1, 2001, backlog supported by written agreements amounted to
$47.0 million. Backlog is typically lower in the fourth and first quarters of
the year due to the seasonality and weather conditions in the Gulf during the
winter months. As we move into international market areas, where projects tend
to have longer lead times and result in earlier awards, our backlog may
increase. We do not consider backlog amounts to be a reliable indicator of
annual revenues, because most projects are awarded and performed within a
relatively short period of time.
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SEASONALITY, CYCLICALITY AND FACTORS AFFECTING DEMAND
The marine construction industry in the Gulf historically has been highly
seasonal with contracts being 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 intend to partially offset the seasonality of our operations in the
Gulf by continuing our international expansion.
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 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;
- the cost of exploring for, producing and delivering oil and gas;
- sale and expiration dates of offshore leases in the United States and
abroad;
- discovery rates of new oil and gas reserves in offshore areas; and
- local and international political and economic conditions.
INSURANCE
Our operations are subject to the inherent risks of offshore marine
activity, including accidents resulting in the loss of life or property,
environmental mishaps, mechanical failures and collisions. We insure against
these risks at levels we believe are consistent with industry standards. 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 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,
McDermott International, Inc., and from time to time other international
companies that may have vessels operating in the Gulf. We compete primarily with
Global Industries, McDermott 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
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specific areas or on a joint venture basis with one or more of the major
international construction companies.
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.
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.
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.
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 to Horizon. 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 we believe are comparable to policy
limits carried by others in the offshore construction industry.
EMPLOYEES
As of December 31, 2000, we had approximately 467 employees, including 280
operating personnel and 187 corporate, administrative and management personnel.
These employees are not unionized or employed pursuant to any collective
bargaining agreement or any similar agreement. We believe our relationship with
our employees is good.
Our ability to expand operations and meet 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
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of these occurs to the extent that such wage increases could not be passed on to
our customers, our growth and profitability could be impaired.
PROPERTIES
Our corporate headquarters is located in Houston, Texas, in approximately
67,900 square feet of leased space under a lease which expires in 2008.
We operate our marine support base and storage facility for marine
structures that may be salvaged by our marine fleet from 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.
CAUTIONARY STATEMENT
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; and
- projections involving anticipated capital expenditures or revenues,
earnings or other aspects of capital projects or operating results.
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:
- 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;
- risks of growth strategy, including the risks of rapid growth;
- operating hazards, including the unpredictable effect of natural
occurrences on operations and the significant possibility of accidents
resulting in personal injury and property damage;
- the highly competitive nature of the marine construction business;
- dependence on the continued strong working relationships with significant
customers operating in the Gulf;
- seasonality of the offshore construction industry in the Gulf;
- the need for additional financing;
- contract bidding risks;
- percentage-of-completion accounting;
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- 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 the expansion of our operations into international
offshore oil and gas producing areas; and
- risks involved in joint venture operations, including difficulty in
resolving disputes with present partners or reaching agreements with
future partners.
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:
INDUSTRY VOLATILITY MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
The demand for our services 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. 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. A prolonged low level of activity in offshore drilling and
exploration will adversely affect our revenues and profitability.
OUR RAPID GROWTH AND GROWTH STRATEGY INVOLVE RISKS
We have grown rapidly both through internal growth and acquisitions of
additional barges and vessels. Future acquisitions of other complementary
businesses and marine equipment are key elements of our growth strategy. If we
are unable to purchase additional equipment or other vessels on favorable
financial or other terms or to manage acquired businesses or vessels, this could
adversely affect our revenues and profitability. We cannot assure you that we
will be able to identify or acquire equipment or businesses. In addition, any
such future acquisitions may involve potential delays and increased costs. If we
acquire new vessels, we may need to upgrade or refurbish the vessels. If we
experience delays or cost increases in upgrading or refurbishing the vessels,
our operating results will be negatively affected.
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. 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.
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 growth because our expansion strategy depends on being awarded projects in
areas where we have not performed operations.
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Several of our competitors and potential competitors are larger and have
greater financial and other resources than us. 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. Additionally, as a result of the competitive
bidding process, our significant customers vary over time.
THE SEASONALITY OF THE MARINE CONSTRUCTION INDUSTRY MAY ADVERSELY AFFECT OUR
OPERATIONS
Historically, the greatest demand for marine construction services has been
during the period from May to September. This seasonality of the construction
industry in the Gulf 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 plan to offset Gulf seasonalities by pursuing
business opportunities in international areas, we cannot assure that such
expansion will offset the seasonality of our operations in the Gulf.
OUR ACQUISITION GROWTH STRATEGY MAY REQUIRE ADDITIONAL FINANCING
Our acquisition strategy may require significant amounts of additional
capital. We may have to incur substantial indebtedness to finance future
acquisitions and may issue additional equity securities in connection with such
acquisitions.
WE INCUR RISKS ASSOCIATED WITH CONTRACT BIDDING
Substantially all of our projects are performed on a fixed-price 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, during the summer construction
season, we typically bear the risk of delays caused by adverse weather
conditions.
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. To the extent that these adjustments result in a
reduction of previously reported profits, we would recognize a charge against
current earnings that may be significant depending on the size of the
adjustment.
OUR PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL
Elliott International, L.P. and Highwood Partners, L.P. are our two largest
stockholders. They each beneficially own approximately 15.7% of our outstanding
common stock. As a result, each exercises substantial influence on the outcome
of all matters requiring a stockholder vote, including the election of
directors.
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 internationally. The loss of the
services of any one of these persons could adversely impact our ability to
implement our expansion strategy.
9
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 which 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.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO SIGNIFICANT RISKS
A key element of our expansion 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; and
- other forms of government regulation which are beyond our control.
Our international operations have not yet been affected materially by such
conditions or events, but if our international operations expand, the exposure
to these 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 market 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.
THERE ARE RISKS ASSOCIATED WITH OUR JOINT VENTURE OPERATIONS
We believe that we will conduct many of our international operations through
joint ventures, jointly managed by us and the joint venture partner. Our joint
venture with Cal Dive and the operating vessels made available to us will
operate primarily in the Gulf of Mexico. Under its terms, though we will jointly
manage and staff the joint venture, we do not have the ability to fully control
the business and affairs of the joint venture. We anticipate entering into
additional joint ventures with other entities if we expand into other
international market areas. We cannot assure that we will undertake such joint
ventures or, if undertaken, that such joint ventures will be successful.
10
ITEM 3. LEGAL PROCEEDINGS
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, 2001.
NAME AGE POSITIONS WITH THE COMPANY
- ---- -------- --------------------------
Bill J. Lam......................... 34 President, Chief Executive Officer and Director
David W. Sharp...................... 47 Executive Vice President and Chief Financial Officer
R. Clay Etheridge................... 46 Executive Vice President and Chief Operating Officer
James K. Cole....................... 54 Senior Vice President
Executive officers are appointed by our board of directors, subject to
rights under employment agreements.
BILL J. LAM is 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. SHARP is our Executive Vice President and 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 McDermott, including world-wide project leader for the implementation of
accounting and financial systems. He was controller-Atlantic Division and
Director of Management Information of OPI International from November 1990 to
January 1995.
R. CLAY ETHERIDGE is our Executive Vice President and Chief Operating
Officer. Mr. Etheridge has served as our Executive Vice President and Chief
Operating Officer since September 1999. Prior to joining us, Mr. Etheridge
served as Vice President of International Operations for Global Industries from
March 1997 to September 1999. Mr. Etheridge has held executive management
positions with McDermott in southeast Asia, and OPI International, with
responsibility for Gulf of Mexico and West African operations, and served as
project manager for Heerema Marine Contractors.
JAMES K. COLE is our Senior Vice President and has held that position since
December 1997. From November 1996 to November 1997, Mr. Cole was Vice
President--Human Resources and Risk Management. He was manager of corporate
safety and health of McDermott from January 1995 to September 1996 and director
of corporate health, safety and environment for OPI International from
April 1991 to January 1995. On the advice of counsel, Mr. Cole filed a voluntary
petition for personal bankruptcy in July 1997.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, $1.00 par value, is traded on the Nasdaq National Market
under the symbol "HOFF". At March 13, 2001, we had approximately 28 holders of
record of the 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 each fiscal
quarter during the past two fiscal years.
LOW HIGH
-------- --------
2001:
First Quarter (through March 13, 2001).................. $16.50 $24.69
2000:
Fourth Quarter.......................................... $13.75 $19.75
Third Quarter........................................... $14.00 $19.13
Second Quarter.......................................... $ 6.32 $17.56
First Quarter........................................... $ 4.94 $ 9.94
1999:
Fourth Quarter.......................................... $ 4.63 $ 7.78
Third Quarter........................................... $ 7.00 $ 9.44
Second Quarter.......................................... $ 6.19 $ 8.31
First Quarter........................................... $ 4.50 $ 7.44
We intend to retain all of the cash our business generates to fund future
growth and meet our working capital requirements. 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.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the periods ended December 31, 2000, 1999,
1998, 1997 and 1996 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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Contract revenues............................ $160,532 $89,015 $119,802 $36,144 $14,088
Costs of contract revenues................... 136,146 72,181 91,961 30,104 21,616
-------- ------- -------- ------- -------
Gross profit (loss)........................ 24,386 16,834 27,841 6,040 (7,528)
Selling, general and administrative
expenses................................... 9,401 9,043 8,120 2,788 2,047
-------- ------- -------- ------- -------
Operating income (loss).................... 14,985 7,791 19,721 3,252 (9,575)
Other:
Interest expense........................... (7,730) (5,759) (3,000) (1,703) (1,662)
Interest income............................ 718 480 187 84 --
Gain on sale of assets..................... 6 10 20 614 --
Other income (expense)..................... (84) 158 17 29 40
-------- ------- -------- ------- -------
Net income (loss) before income taxes........ 7,895 2,680 16,945 2,276 (11,197)
Provision (benefit) for income taxes......... 2,902 1,001 4,485 -- (1,617)
-------- ------- -------- ------- -------
Net income (loss) before cumulative effect of
accounting change.......................... 4,993 1,679 12,460 2,276 (9,580)
Cumulative effect of accounting change, net
of taxes of $743........................... 1,381 -- -- -- --
-------- ------- -------- ------- -------
Net income (loss)............................ $ 6,374 $ 1,679 $ 12,460 $ 2,276 $(9,580)
======== ======= ======== ======= =======
Net income (loss) per share before cumulative
effect of accounting change--basic......... $ 0.27 $ 0.09 $ 0.69 $ 0.17 $ (0.70)
Cumulative effect of accounting change....... 0.07 -- -- -- --
-------- ------- -------- ------- -------
Net income (loss) per share--basic........... $ 0.34 $ 0.09 $ 0.69 $ 0.17 $ (0.70)
======== ======= ======== ======= =======
Net income (loss) per share before cumulative
effect of accounting change--diluted....... $ 0.26 $ 0.09 $ 0.69 $ 0.17 $ (0.70)
Cumulative effect of accounting change....... 0.07 -- -- -- --
-------- ------- -------- ------- -------
Net income (loss) per share--diluted......... $ 0.33 $ 0.09 $ 0.69 $ 0.17 $ (0.70)
======== ======= ======== ======= =======
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in) operating
activities................................. $ 10,688 $15,705 $ 10,481 $ 3,491 $(9,568)
Net cash used in investing activities........ (20,143) (26,475) (79,267) (28,306) (25,916)
Net cash provided by financing activities.... 10,581 9,238 75,589 25,011 38,134
OTHER NON-GAAP FINANCIAL DATA:
EBITDA(2).................................... $ 24,498 $15,533 $ 24,206 $ 4,897 $(8,820)
OTHER FINANCIAL DATA:
Depreciation and amortization................ $ 9,591 $ 7,574 $ 4,448 $ 1,002 $ 715
Capital expenditures......................... 19,281 24,396 95,725 38,267 29,999
DECEMBER 31,
-------------------
2000 1999
-------- --------
BALANCE SHEET DATA:
Working capital............................................. $ 9,952 $ 3,978
Property and equipment, net................................. 176,895 163,353
Total assets................................................ 239,425 202,401
Long-term debt, net of current maturities................... 78,415 68,986
Stockholders' equity........................................ 104,035 97,100
- ------------------------
(1) Results are from inception (December 20, 1995) through December 31, 1996.
13
(2) We calculate EBITDA as earnings before interest expense, interest income,
income taxes, depreciation and amortization. EBITDA is a supplemental
financial measurement we use to evaluate our business. We believe that
EBITDA provides supplemental information about our ability to meet future
requirements for debt service, capital expenditures and working capital. It
is not intended to depict funds available for reinvestment or other
discretionary uses. We believe factors that should be considered by
investors in evaluating EBITDA include, but are not limited to, trends in
EBITDA as compared to cash flow from operations, debt service requirements
and capital expenditures. Our measurement of EBITDA may not be comparable to
EBITDA as calculated by other companies. Further, you should not consider
EBITDA in isolation as an alternative to, or more meaningful than, net
income, cash flow provided by operations or any other measure of performance
determined in accordance with generally accepted accounting principles as an
indicator of our profitability or liquidity.
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 Statement."
GENERAL
We provide marine construction services to the oil and gas industry
primarily in the Gulf of Mexico and selected international locations. Our marine
fleet installs offshore pipelines to transport oil and gas from newly installed
production platforms and other subsea production systems, and installs and
salvages production platforms and other marine structures. Our present
management team assumed its current role in 1997 and has aggressively expanded
our operations. We now have a fleet of eleven vessels capable of providing a
full range of pipeline and derrick services in varying water depths. We
currently operate ten of these vessels, consisting of five pipelay/pipebury
barges, a dedicated pipebury barge, two derrick barges and two diving support
vessels.
The demand for offshore construction services in the Gulf 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. 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 Gulf 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.
14
RESULTS OF OPERATIONS
The discussion below describes our results of operations. Improvements in
the marine construction business are reflected in our results for the year ended
December 31, 2000. We believe our enhanced equipment capabilities have
strengthened our competitive position. Horizon has been awarded several large
projects during 2000 which demonstrates our reputation for superior execution
and the confidence that our customers have in our abilities. In 2000, we
mobilized our 500-ton derrick barge, the ATLANTIC HORIZON, and our pipelay
barge, the GULF HORIZON, to begin work on the construction of a major project
for Pemex. The project for the construction of six pipelines in the Cantarell
Field represented our entry into Mexico. We have completed a substantial portion
of this initial project and have begun construction on another Pemex project for
the installation, bury, hook-up and commissioning of seven pipelines in the
Cantarell Field. We believe that these projects are important milestones in the
execution of our international strategy and further enhance our reputation in
the international market. We will continue to pursue international construction
projects in Mexico, as well as Central and South America and West Africa. In
2000, we also completed a project offshore Ecuador and several other larger
projects in the U.S. Gulf of Mexico, including installation of 22 miles of
20-inch gas pipeline as part of the Hickory Pipeline Lateral Project and a
four-bundle pipelay project which required laying four pipelines simultaneously.
Our backlog of work was approximately $50 million as of December 31, 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
CONTRACT REVENUES.
Contract revenues were $160.5 million for 2000 compared with $89.0 million
for 1999. Our revenues for 2000 increased 80.3% compared with the same period
last year due to the projects in Mexico and higher utilization of our vessels in
the Gulf of Mexico. Our two projects in Mexico contributed approximately
$57.9 million in revenues during 2000.
GROSS PROFIT.
Gross profit was $24.4 million (15.2% of contract revenues) for 2000
compared with a gross profit of $16.8 million (18.9% of contract revenues) for
1999. The decrease in gross profit as a percentage of revenues is attributable
to lower margins previously bid on jobs due to competitive market conditions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses increased to $9.4 million (5.9%
of contract revenues) for 2000, compared with $9.0 million (10.2% of contract
revenues) for 1999. The percentage decrease was primarily due to the increase in
revenues without a corresponding significant increase in selling, general and
administrative expenses.
INTEREST EXPENSE.
Interest expense for 2000 was $7.7 million, net of $0.3 million interest
capitalized. Interest expense for 1999 was $5.8 million, net of $0.8 million
interest capitalized. Total outstanding debt was $90.9 million at December 31,
2000 compared with $79.3 million at December 31, 1999.
INTEREST INCOME.
Interest income includes interest from cash investments for the year ended
December 31, 2000 and 1999 of $718,000 and $480,000, respectively.
15
OTHER INCOME (EXPENSE).
Other income (expense) for the year ended December 31, 2000, consisted of
equity losses of $221,000 related to the DSND joint venture, $122,000 of revenue
earned from billings to the DSND joint venture for administrative services and
$15,000 of miscellaneous income. Other income (expense) for the year ended
December 31, 1999, consisted of $127,000 of insurance proceeds, $63,000 of
revenue earned from billings to the DSND joint venture for administrative
services, equity losses of $12,000 related to the DSND joint venture and $20,000
of miscellaneous expense.
INCOME TAXES.
We use the liability method of accounting for income taxes. Excluding
$743,000 of deferred tax provision attributable to the accounting change in
2000, we recorded a federal income tax expense of $2.9 million, at a net
effective rate of 36.8% on pre-tax income of $7.9 million. In 1999, we recorded
a federal income tax provision of $1.0 million, at a net effective rate of 37.4%
on pre-tax income of $2.7 million.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE.
We recorded a cumulative effect of $1.4 million, or $0.07 per share, net of
taxes of $0.7 million related to changing depreciation methods from
straight-line to the units-of-production method effective January 1, 2000. See
Note 1 of the notes to consolidated financial statements.
NET INCOME.
Net income was $6.4 million or $0.33 per share, diluted, for 2000, which
includes the effect of a cumulative adjustment of $1.4 million, or $0.07 per
share, related to a change in accounting principle. Net income for 1999 was
$1.7 million, or $0.09 per share, diluted.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
RESULTS OF OPERATIONS
CONTRACT REVENUES.
Contract revenues were $89.0 million for 1999 compared with $119.8 million
for 1998. Revenues for 1999 decreased due to reduced demand for offshore
construction services. We operated ten vessels in 1999, compared with eight
vessels operating in December 1998. We laid 190 miles and buried 155 miles of
pipe of various diameters and in various water depths in the Gulf during 1999,
compared with approximately 220 miles laid and 210 miles buried in 1998. We
recognized $3.2 million in revenues in 1999 and $4.9 million in 1998 for the
STEPHANITURM charter to DSND.
GROSS PROFIT.
Gross profit was $16.8 million (18.9% of contract revenues) for 1999 as
compared with a gross profit of $27.8 million (23.2% of contract revenues) for
1998. Lower gross profit for 1999 was primarily attributable to the lower level
of offshore construction and the intense price competition for pipeline
projects. We recognized gross profit of $2.0 million in 1999 and $4.1 million in
1998 from the STEPHANITURM charter to DSND.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses increased to $9.0 million
(10.2% of contract revenues) for 1999 from $8.1 million (6.8% of contract
revenues) for 1998, primarily due to expenses associated with our fleet
expansion. The percentage increase was primarily due to the decrease in revenues
while selling, general and administrative expenses increased.
16
INTEREST EXPENSE.
Interest expense was $5.8 million, net of $0.8 million interest capitalized
for 1999, compared with interest expense of $3.0 million, net of $1.3 million
interest capitalized for 1998. Total outstanding debt was $79.3 million at
December 31, 1999 compared with $69.9 million at year end 1998. The outstanding
debt increased during 1999 as a result of increasing debt to fund vessel
acquisitions and improvements.
INTEREST INCOME.
Interest income includes interest from cash investments for the year ended
December 31, 1999 and 1998 of $480,000 and $187,000, respectively.
OTHER INCOME (EXPENSE).
Other income (expense) for the year ended December 31, 1999 consisted of
$127,000 of insurance proceeds, $63,000 of revenue earned from billings to the
DSND joint venture for administrative services, equity losses of $12,000 related
to the DSND joint venture and $20,000 of miscellaneous expense. Other income
(expense) for the year ended December 31, 1998 consisted of $17,000 of
miscellaneous income.
INCOME TAXES.
We use the liability method of accounting for income taxes. We recorded a
deferred federal income tax expense of $1.0 million, at a net effective rate of
37.4% on pre-tax income of $2.7 million in 1999. This compares with a total
provision of $4.5 million for 1998 at a net effective rate of 26.5% on pre-tax
income of $16.9 million, due to operating loss carryforwards from previous
years.
NET INCOME.
Net income was $1.7 million or $0.09 per share, basic and diluted, for the
year ended December 31, 1999, compared to net income of $12.5 million, or $0.69
per share, basic and diluted, for the year ended December 31, 1998. The
reduction of net income is primarily the result of reduced demand for offshore
construction in the Gulf during 1999.
LIQUIDITY AND CAPITAL RESOURCES
In February 2001, we sold 3,800,000 shares of common stock in a secondary
offering. We received $66.3 million after deducting the underwriting discount
and expenses. We used $30.0 million to reduce indebtedness, $10.0 million to
support the joint venture with Cal Dive, and the remainder will be used for
general corporate purposes, including funding capital expenditures to expand our
operating capabilities and potential vessel acquisitions.
We had working capital of $10.0 million at December 31, 2000 compared with
working capital of $4.0 million at December 31, 1999. The increase in working
capital was primarily the result of an increase in contract receivables. We
intend to use a portion of the proceeds from the offering for general working
capital purposes. Cash provided by operations was $10.7 million for 2000,
$15.7 million for 1999 and $10.5 million for 1998. The decrease in cash provided
by operations during 2000 was the result of an increase in contract receivables
and costs in excess of billings. The improvement in cash provided by operations
during 1999 was the result of a decline in working capital attributable to
decreases in accounts receivable and costs in excess of billings. Reduced demand
for offshore construction in 1999 caused revenues to decrease from
$119.8 million in 1998 to $89.0 million in 1999, and caused a decline in working
capital.
In December 1998, we entered into a term loan agreement with The CIT
Group, Inc. providing for a $60.0 million term loan at a rate of LIBOR plus
2.65%. In December 1998, we borrowed $50.0 million. During 1999, our term loan
was amended to increase the amount that could be borrowed to $83.3 million, and
we borrowed an additional $33.3 million. During 2000, our term loan was
17
amended to increase the amount that could be borrowed to $91.4 million, and we
borrowed an additional $8.1 million. Outstanding borrowings under our term loan
at December 31, 2000 were $75.7 million. Our term loan is secured by mortgages
on all vessels. During March 2001, we paid $30 million to reduce the outstanding
principal balance under our term loan, which is subject to a penalty of up to 3%
of the pre-payment for the early extinguishment of debt. Outstanding borrowings
under our term loan at March 31, 2001 were $43.1 million. Our total borrowings
currently require a $411,000 monthly principal payment. The loan agreement with
The CIT Group, Inc. will mature at various dates between December 31, 2005 and
May 31, 2006.
At December 31, 2000, we had $9.2 million in cash and $13.4 million
outstanding under a $30.0 million revolving credit facility with Wells Fargo
Bank. Outstanding borrowings bore interest at LIBOR plus 2.0% and were secured
by accounts receivable from customers. There were no additional borrowings
available under the Wells Fargo borrowing base calculation at December 31, 2000.
In March 2001, we replaced the $30.0 million revolving credit facility with
Wells Fargo Bank by entering into a $25.0 million revolving line of credit with
a syndicate agented by Southwest Bank of Texas. The Southwest Bank facility
matures on April 3, 2003, and currently bears interest at LIBOR plus 2.0% and is
secured by accounts receivable from customers.
Our term loan and revolving credit facility require that certain conditions
be met in order for us to obtain advances. Our term loan is secured by mortgages
on all vessels. Our revolving credit facility is secured by accounts receivable.
Advances under our current credit facility may be obtained in accordance with a
borrowing base defined as a percentage of accounts receivable balances. Both the
term loan and revolving credit facility contain customary defaults and require
us to maintain certain financial ratios. The term loan and revolving credit
facility also contain certain covenants that limit our ability to incur
additional debt, pay dividends, create certain liens, sell assets and make
capital expenditures. We were in compliance with all loan covenants as of
December 31, 2000.
Capital expenditures during 2000 totaled $19.3 million compared with
$24.4 million for 1999. We made capital expenditures during 2000 primarily to
complete improvements to our existing fleet.
Current maturities of long-term debt were $12.5 million as of December 31,
2000. We believe that cash generated from operations and the offering, together
with available borrowings under our revolving credit facility, will be
sufficient to fund the planned capital projects and working capital requirements
into 2002. Planned capital expenditures for 2001 are estimated to total
approximately $24.0 million. Our strategy, however, is to make other
acquisitions, to expand our operating capabilities and expand into selected
international areas. To the extent we are successful in identifying acquisition
and expansion opportunities and have expanded our market share in those areas,
we may require additional equity or debt financing depending on the size of any
transaction.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk exposures primarily include interest rate and exchange rate
fluctuation on derivative and financial instruments as detailed below. Our
market risk sensitive instruments are classified as "other than trading". The
following sections address the significant market risks associated with our
financial activities during 2000. 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, 2000 the carrying value of our long-term variable rate
debt, including accrued interest, was approximately $75.7 million. The fair
value of this debt approximates the carrying value because the interest rates
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, 2000 would increase annual interest expense by
approximately $757,000.
18
In Mexico, we collect revenues and pay expenses in foreign currency. We
monitor the exchange rate of our foreign currencies and, when deemed
appropriate, enter into hedging transactions in order to mitigate the risk from
foreign currency fluctuations. We also manage foreign currency risk by
attempting to contract as much foreign revenue as possible in U.S. Dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data appear on pages
F-1 through F-19 in this report and are incorporated herein by reference. See
Index to consolidated financial statements on page 20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
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 2001 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.
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 2001 annual meeting of stockholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 2001 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 2001 annual meeting of stockholders and is incorporated
herein by reference.
19
PART IV
ITEM 14. 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
PAGE
--------
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
2. Financial Statement Schedules
Other 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 E-1. 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 2, 2000, we filed a report on Form 8-K, reporting under item 7,
earnings for the third quarter ended September 30, 2000.
20
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,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2000, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2000, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Houston, Texas
January 30, 2001
F-1
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,243 $ 8,117
Accounts receivable--
Contract receivables.................................... 20,436 16,675
Costs in excess of billings............................. 17,611 4,172
Affiliated parties...................................... 6,874 3,086
Inventory................................................. 1,947 1,700
Other current assets...................................... 2,537 1,909
-------- --------
Total current assets.................................. 58,648 35,659
PROPERTY AND EQUIPMENT, net................................. 176,895 163,353
OTHER ASSETS................................................ 3,882 3,389
-------- --------
$239,425 $202,401
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 8,192 $ 4,247
Accrued liabilities....................................... 4,953 2,926
Accrued job costs......................................... 22,484 13,332
Billings in excess of costs............................... 550 871
Current maturities of long-term debt...................... 12,517 10,305
-------- --------
Total current liabilities............................. 48,696 31,681
LONG-TERM DEBT, net of current maturities................... 78,415 68,986
DEFERRED INCOME TAXES....................................... 8,279 4,634
-------- --------
Total liabilities..................................... 135,390 105,301
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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,
19,869,098 and 19,826,480 shares issued, respectively... 9,162 9,119
Additional paid-in capital................................ 88,245 87,872
Retained earnings......................................... 13,209 6,835
Treasury stock, at cost, 1,003,400 and 1,025,500 shares,
respectively............................................ (6,581) (6,726)
-------- --------
Total stockholders' equity............................ 104,035 97,100
-------- --------
$239,425 $202,401
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
CONTRACT REVENUES........................................ $ 160,532 $ 89,015 $ 119,802
COSTS OF CONTRACT REVENUES............................... 136,146 72,181 91,961
---------- ---------- ----------
Gross profit........................................... 24,386 16,834 27,841
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............. 9,401 9,043 8,120
---------- ---------- ----------
Operating income....................................... 14,985 7,791 19,721
OTHER:
Interest expense....................................... (7,730) (5,759) (3,000)
Interest income........................................ 718 480 187
Gain on sale of assets................................. 6 10 20
Other income (expense)................................. (84) 158 17
---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES........................... 7,895 2,680 16,945
PROVISION FOR INCOME TAXES............................... 2,902 1,001 4,485
---------- ---------- ----------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE................................................. 4,993 1,679 12,460
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES OF
$743................................................... 1,381 -- --
---------- ---------- ----------
NET INCOME............................................... $ 6,374 $ 1,679 $ 12,460
========== ========== ==========
NET INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE--BASIC............................... $ 0.27 $ 0.09 $ 0.69
CUMULATIVE EFFECT OF ACCOUNTING CHANGE................... 0.07 -- --
---------- ---------- ----------
NET INCOME PER SHARE--BASIC.............................. $ 0.34 $ 0.09 $ 0.69
========== ========== ==========
NET INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE--DILUTED............................. $ 0.26 $ 0.09 $ 0.69
CUMULATIVE EFFECT OF ACCOUNTING CHANGE................... 0.07 -- --
---------- ---------- ----------
NET INCOME PER SHARE--DILUTED............................ $ 0.33 $ 0.09 $ 0.69
========== ========== ==========
WEIGHTED AVERAGE SHARES USED IN
COMPUTING NET INCOME PER SHARE--BASIC.................. 18,823,610 18,820,646 18,114,393
COMPUTING NET INCOME PER SHARE--DILUTED................ 19,455,470 18,820,646 18,114,393
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK COMMON ADDITIONAL RETAINED TREASURY STOCK TOTAL
------------------- STOCK PAID-IN EARNINGS ------------------- STOCKHOLDERS'
SHARES AMOUNT SUBSCRIPTION CAPITAL (DEFICIT) SHARES AMOUNT EQUITY
-------- -------- ------------ ---------- ---------- -------- -------- -------------
BALANCE, December 31, 1997 14,076 $3,369 $(950) $24,944 $(7,304) -- $ -- $ 20,059
Subscriptions received..... -- -- 950 -- -- -- -- 950
Initial public offering of
common stock, net of
offering costs........... 5,750 5,750 -- 62,823 -- -- -- 68,573
Purchase of treasury stock,
at cost.................. -- -- -- -- -- 1,155 (7,582) (7,582)
Net income................. -- -- -- -- 12,460 -- -- 12,460
------ ------ ----- ------- ------- ----- ------- --------
BALANCE, December 31, 1998... 19,826 9,119 -- 87,767 5,156 1,155 (7,582) 94,460
Purchase of treasury stock,
at cost.................. -- -- -- -- -- 3 (18) (18)
Issuance of treasury stock
to purchase assets....... -- -- -- 125 -- (133) 874 999
Stock registration costs... -- -- -- (20) -- -- -- (20)
Net income................. -- -- -- -- 1,679 -- -- 1,679
------ ------ ----- ------- ------- ----- ------- --------
BALANCE, December 31, 1999... 19,826 9,119 -- 87,872 6,835 1,025 (6,726) 97,100
401(k) contributions in
company stock............ -- -- -- 102 -- (22) 145 247
Stock options exercised.... 43 43 -- 271 -- -- -- 314
Cumulative effect of
accounting change, net of
taxes of $743............ -- -- -- -- 1,381 -- -- 1,381
Net income before
cumulative effect of
accounting change........ -- -- -- -- 4,993 -- -- 4,993
------ ------ ----- ------- ------- ----- ------- --------
BALANCE, December 31, 2000... 19,869 $9,162 $ -- $88,245 $13,209 1,003 $(6,581) $104,035
====== ====== ===== ======= ======= ===== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,374 $ 1,679 $ 12,460
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 9,591 7,574 4,448
Cumulative effect of accounting change.................. (2,124) -- --
Deferred income taxes................................... 3,645 1,001 3,770
Gain on sale of assets.................................. (6) (10) (20)
Amortization of deferred interest....................... -- 733 --
Expense recognized for issuance of treasury stock for
401(k) plan contributions............................. 247 -- --
Changes in operating assets and liabilities--
Accounts receivable................................... (7,549) 5,870 (15,889)
Income taxes receivable............................... -- 481 (481)
Costs in excess of billings........................... (13,439) 5,374 (6,588)
Billings in excess of costs........................... (321) (1,737) 2,460
Inventory............................................. (247) (1,700) --
Other assets.......................................... (607) (971) 179
Accounts payable...................................... 3,945 (3,407) 3,509
Accrued liabilities................................... 2,027 (2,180) 2,566
Accrued job costs..................................... 9,152 2,998 4,833
Accrued interest...................................... -- -- (681)
Income taxes payable.................................. -- -- (85)
-------- -------- ---------
Net cash provided by operating activities........... 10,688 15,705 10,481
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases and additions to equipment...................... (18,191) (23,397) (79,255)
Drydock costs............................................. (1,965) (3,078) (777)
Proceeds from sale of assets.............................. 13 -- 765
-------- -------- ---------
Net cash used in investing activities............... (20,143) (26,475) (79,267)
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under notes payable and long-term debt......... 21,488 33,300 123,865
Principal payments on long-term debt...................... (10,937) (23,883) (109,588)
Loan fees................................................. (284) (161) (629)
Issuance of common stock.................................. 314 -- 950
Initial public offering proceeds, net..................... -- -- 68,573
Purchase of treasury stock................................ -- (18) (7,582)
-------- -------- ---------
Net cash provided by financing activities........... 10,581 9,238 75,589
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,126 (1,532) 6,803
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 8,117 9,649 2,846
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 9,243 $ 8,117 $ 9,649
======== ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.................................... $ 6,753 $ 5,864 $ 4,789
Cash paid for income taxes................................ $ -- $ -- $ 1,218
Non-cash investing and financing activities:
Purchases and additions to equipment with the issuance
of notes payable...................................... $ 1,090 $ -- $ 16,470
Purchases and additions to equipment with the issuance
of treasury stock..................................... $ -- $ 999 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Horizon Offshore, Inc. (a Delaware corporation) and its subsidiaries
(Horizon), provide offshore construction services to the oil and gas industry.
These services generally consist of laying and burying marine pipelines for the
transportation of oil and gas. Work is performed primarily on a fixed-price or
day-rate basis or a combination thereof.
Horizon, which was incorporated on December 20, 1995, did not commence
operations until March 1996 and until December 1997 was wholly owned by Highwood
Partners, L.P. and Elliott International, L.P. (the Principal Stockholders). The
Principal Stockholders funded substantially all of Horizon's cash requirements
from inception through April 1998, including operating activities, working
capital requirements and capital expenditures for the acquisition and
improvement of assets and equipment. These advances were represented by
promissory notes bearing interest at the rate of 10% per annum.
In 1997, Horizon was recapitalized through a series of transactions. The
Principal Stockholders contributed $21.0 million of the principal indebtedness
and accrued interest to additional paid-in capital. We issued 10% Subordinated
Notes due December 31, 2005 (Subordinated Notes) to the Principal Stockholders
to evidence the remaining outstanding indebtedness and to provide for any future
advances in an aggregate amount not to exceed $24.0 million. In April 1998, we
completed an initial public offering (the Offering) of 5,750,000 shares of
common stock at $13.00 per share and received $68.6 million, net of
$6.2 million of underwriting commissions and discounts and expenses. We used the
net proceeds of the Offering to repay $23.8 million of outstanding Subordinated
Notes and to acquire the STEPHANITURM, a 230-foot diving support vessel, for
$18.3 million. The remaining Offering proceeds were used to expand our fleet.
In February 2001, we completed a secondary offering of 3,800,000 shares of
common stock at $18.50 per share and received $66.3 million, net of
$4.0 million of underwriting commissions and discounts and expenses. We used
$30.0 million to reduce debt, $10.0 million to support the Cal Dive joint
venture, and the remainder will be used for general corporate purposes,
including funding capital expenditures to expand our operating capabilities and
potential vessel acquisitions.
CAL DIVE JOINT VENTURE
On March 1, 2001, we signed a definitive agreement with Cal Dive
International, Inc. forming a joint venture, 50% owned by us, to perform
deepwater reel pipelaying projects in the U.S. Gulf of Mexico. We will jointly
manage and staff the joint venture with Cal Dive. The joint venture will charter
the SEA SORCERESS, a 374 foot vessel with a 10,000 ton deck load capacity that
is being converted to a dynamically positioned multi-service vessel, and other
vessels from Cal Dive on an as-needed basis to perform deepwater small diameter
pipelaying projects. The joint venture will require an estimated capital
expenditure of approximately $15.0 million, of which we will pay 50%, to design,
construct and install the reel pipelay equipment. Construction of a spooling
facility to support the joint venture and other reel pipelaying requirements at
our marine base in Port Arthur, Texas began in February 2001, at an estimated
cost of $2.5 million to us.
DSND TRANSACTION
In December 1997, Det Sondenfjelds-Norske Dampskibsselskab ASA (DSND)
acquired 4,125,000 shares of our common stock from the Principal Stockholders.
On August 13, 1999, DSND sold all of its shares of Horizon common stock in the
public market and is no longer a stockholder. Upon completion
F-6
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
of the Offering in April 1998, DSND sold the STEPHANITURM, a dynamically
positioned diving support vessel, to us. In addition, we obtained a 30% interest
in a joint venture (the DSND Horizon Joint Venture) formed to operate a reel
pipelaying vessel in the Gulf, offshore Mexico, Canada, and in the Caribbean.
Horizon and DSND are required to fund cash for operating activities in
proportion to their equity ownership. We recognized equity in losses of the DSND
Horizon Joint Venture of $221,000, $12,000 and $158,000 and made contributions
of $189,000, $39,000 and $138,000 during 2000, 1999 and 1998, respectively. We
earned $122,000, $63,000 and $127,000 during 2000, 1999 and 1998, respectively,
from administrative fees billed to the DSND Horizon Joint Venture. In February,
2001, the DSND joint venture was dissolved.
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
and profitability. We experienced a decline in demand for marine construction
services in the Gulf during 1999. As oil prices began to improve at mid-year
1999, drilling activity began to increase to a substantial level by mid-2000.
Our operating results are directly tied to industry demand for our services,
most of which are performed in the continental shelf in the Gulf.
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 Gulf 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Horizon and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
REVENUE RECOGNITION
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 contract. We consider the percentage-of-completion method to be
the best available measure of progress on these contracts. 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 revenues recognized in excess of amounts billed. The liability
"Billings in excess of costs" represents amounts billed in excess of revenues
recognized.
F-7
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In December 1999, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101,
as amended, was effective beginning in the fourth quarter of 2000. The adoption
of this pronouncement did not have any material effect on our consolidated
financial statements.
COST RECOGNITION
Costs of contract revenues include 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 has been purchased and is undergoing major modifications
prior to being placed into service. Interest is capitalized until the equipment
is placed into service using an effective rate based on related debt. Interest
expense is net of interest capitalized in the amount of $0.3 million in 2000,
$0.8 million in 1999 and $1.3 million in 1998.
CASH AND CASH EQUIVALENTS
We consider all cash in banks and highly liquid investments with original
maturity dates of three months or less to be cash equivalents.
INVENTORY
Inventory consists of structures obtained as a result of performing salvage
services that are held for resale. The inventory is reported at the lower of
cost or market value. We periodically assess the net realizable value of our
inventory items.
PROPERTY AND EQUIPMENT
We use the units-of-production method to calculate depreciation on our major
barges and vessels to accurately reflect the wear and tear of normal use. Major
additions and improvements to barges, boats 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 is provided
using the straight-line method based on the following estimated useful lives:
Buildings................................................... 15 years
Machinery and equipment..................................... 8 years
Office furniture and equipment.............................. 5 years
Leasehold improvements...................................... 3 years
On January 1, 2000, we changed depreciation methods from the straight-line
method to the units-of-production method on our major barges and vessels to more
accurately reflect the wear and tear of normal use. We believe that the
units-of-production method is best suited to reflect the actual deterioration of
our marine equipment. Depreciation expense calculated under the
units-of-production
F-8
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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. For the year ended
December 31, 2000, we recorded the cumulative effect of a $1.4 million
adjustment, or $0.07 per share, which is net of taxes of $0.7 million related to
changing depreciation methods from the straight-line method to the
units-of-production method. Had this change been applied retroactively,
pro-forma net income would have been increased by $1.7 million ($1.1 million
after tax, or $0.06 per share) in 1999. The impact on pro-forma net income for
1998 is not disclosed due to immateriality.
Effective July 1, 1999, we changed the estimated salvage value on certain of
our barges and vessels from zero to 10% to more accurately reflect our estimate
of the value of the assets at the end of their estimated useful lives. The
change was treated as an accounting estimate change. For the year ended
December 31, 1999, the change had the effect of reducing depreciation expense by
$0.4 million and increasing net income by $0.2 million or $0.01 per share--basic
and diluted.
We periodically assess the realizability of our long-term assets pursuant to
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Based on our analysis of
the undiscounted future cash flows for our long-term assets, no impairments have
been recognized under SFAS No. 121 for the years ended December 31, 2000, 1999
and 1998.
OTHER LONG-TERM ASSETS
Other assets consist principally of prepaid loan fees, deferred dry-dock
cost, deferred interest, deferred offering costs and deposits. Deferred interest
was imputed at 10% on aggregate non-interest bearing debt of $1.0 million,
$3.0 million and $5.1 million at December 31, 2000, 1999 and 1998, respectively,
and is amortized over the life of the debt agreements using the effective
interest rate method. Deposits consist of a security deposit on the corporate
office lease as of December 31, 2000. Loan fees paid in connection with the loan
facilities will be amortized over the term of the loans (See Note 4).
Dry-dock costs are third-party costs associated with scheduled maintenance
on the marine construction vessels. Costs incurred in connection with
dry-dockings are deferred and amortized over the period to the next scheduled
dry-docking. Other current assets include the portion of these deferred charges
expected to be amortized during the next twelve month period, with the residual
balance in other long-term assets.
Deferred offering costs are expenses related to the secondary offering
completed in February 2001 and will be netted against the proceeds from the
offering in additional paid-in capital.
F-9
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Other long-term assets consist of the following (in thousands):
DECEMBER 31
-------------------
2000 1999
-------- --------
Deposits.................................................... $ 114 $ 114
Deferred dry-dock costs..................................... 3,503 2,779
Deferred interest expense................................... -- 47
Prepaid loan fees........................................... 145 379
Deferred offering costs..................................... 120 --
Other....................................................... -- 70
------ ------
$3,882 $3,389
====== ======
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2000 the carrying value of our long-term variable rate
debt, including accrued interest, was approximately $75.7 million. The fair
value of this debt approximates the carrying value because the interest rates
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, 2000 would increase annual interest expense by
approximately $757,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 review all significant estimates on a recurring basis and record the
effect of any necessary adjustments prior to publication of the Company's
financial statements. Adjustments made with respect to the use of estimates
often relate to improved information not previously available. Uncertainties
with respect to such estimates are inherent in the preparation of financial
statements.
SEGMENT INFORMATION
We have domestic operations in one industry segment, the marine construction
service industry to offshore oil and gas companies. We had one major oil and gas
customer whose revenues accounted for 36.1% of consolidated revenues in 2000.
Our revenues generally do not depend on any one customer. The level of
construction services required by a customer depends on the size of their
capital expenditure budget for construction for the year. Consequently,
customers that account for a significant
F-10
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," Horizon does not have more than one reportable operating
segment.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with current
year presentation.
2. ACCOUNTS RECEIVABLE:
Contract receivables are generally billed upon the completion of small
contracts and are progress billed on larger contracts. Costs in excess of
billings solely represent costs incurred on jobs in process. Claims for extra
work and changes in scope of work are included in revenues when collection is
determined to be probable.
We have not experienced material losses from uncollected receivables. Our
principal customers are major and independent oil and gas 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. However,
management believes that the diversification of our portfolio of receivables
within the energy industry reduces any potential credit risk associated with any
particular customer.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Barges, boats and related equipment......................... $183,367 $165,266
Land and buildings.......................................... 7,908 7,586
Machinery and equipment..................................... 245 245
Office furniture and equipment.............................. 1,751 1,292
Leasehold improvements...................................... 1,787 1,409
-------- --------
195,058 175,798
Less--Accumulated depreciation.............................. (18,163) (12,445)
-------- --------
Property and equipment, net................................. $176,895 $163,353
======== ========
Depreciation expense is included in the following expense
accounts:
Costs of contract revenues.................................. $ 7,068 $ 6,366
Selling, general and administrative......................... 788 543
-------- --------
$ 7,856 $ 6,909
======== ========
F-11
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE:
Notes payable consist of the following (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Term loan payable to The CIT Group due in 84 monthly
installments, maturing June 1, 2006, secured by mortgages
on all vessels. Interest at LIBOR plus 2.65%, (9.27% and
8.09% at December 31, 2000 and 1999, respectively)........ $ 75,670 $ 76,279
Note payable to a foreign marine company including imputed
interest at 10%, due in three annual installments of
$1 million, matured August 3, 2000........................ -- 1,000
Note payable to a foreign marine company including imputed
interest at 10%, due in monthly installments beginning
January 1, 1998, maturing December 31, 2001............... 963 2,012
Capital lease for tension equipment on board the LONE STAR
HORIZON. Down payment of $50,000 with variable monthly
installments beginning in May 2000, maturing
March 2001................................................ 899 --
Revolving credit facility to Wells Fargo Bank due
December 31, 2001, secured by accounts receivables from
customers. Interest at Wells Fargo Bank's prime rate plus
1/2% or LIBOR plus 2.0%, (10.0% and 7.44% at December 31,
2000 and 1999, respectively).............................. 13,400 --
-------- --------
Total long-term debt........................................ 90,932 79,291
Less--Current maturities.................................... (12,517) (10,305)
-------- --------
Long-term debt, net of current maturities................... $ 78,415 $ 68,986
======== ========
LOAN FACILITIES
In December 1998, we entered into a term loan agreement with The CIT
Group, Inc. providing for a $60.0 million term loan at a rate of LIBOR plus
2.65%. In December 1998, we borrowed $50.0 million. During 1999, our term loan
was amended to increase the amount that could be borrowed to $83.3 million, and
we borrowed an additional $33.3 million. During 2000, our term loan was amended
to increase the amount that could be borrowed to $91.4 million, and we borrowed
an additional $8.1 million. Outstanding borrowings under our term loan at
December 31, 2000 were $75.7 million. Our term loan is secured by mortgages on
all vessels. During March 2001, we paid $30 million to reduce the outstanding
principal balance under our term loan, which is subject to a penalty of up to 3%
of the pre-payment for the early extinguishment of debt. Outstanding borrowings
under our term loan at March 31, 2001 were $43.1 million. Our total borrowings
currently require a $411,000 monthly principal payment. The loan agreement with
The CIT Group, Inc. will mature at various dates between December 31, 2005 and
May 31, 2006.
At December 31, 2000, we had $9.2 million in cash and $13.4 million
outstanding under a $30.0 million revolving credit facility with Wells Fargo
Bank. Outstanding borrowings bore interest at LIBOR plus 2.0% and were secured
by accounts receivable from customers. There were no additional borrowings
available under the Wells Fargo borrowing base calculation at December 31, 2000.
In March 2001, we replaced the $30.0 million revolving credit facility with
Wells Fargo Bank by entering into a $25.0 million revolving line of credit with
a syndicate agented by Southwest Bank of Texas. The Southwest Bank facility
matures on April 3, 2003, and currently bears interest at LIBOR plus 2.0% and is
secured by accounts receivable from customers.
F-12
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE: (CONTINUED)
Our term loan and revolving credit facility require that certain conditions
be met in order for us to obtain advances. Our term loan is secured by mortgages
on all vessels. Our revolving credit facility is secured by accounts receivable.
Advances under our current credit facility may be obtained in accordance with a
borrowing base defined as a percentage of accounts receivable balances. Both the
term loan and revolving credit facility contain customary defaults and require
us to maintain certain financial ratios. The term loan and revolving credit
facility also contain certain covenants that limit our ability to incur
additional debt, pay dividends, create certain liens, sell assets and make
capital expenditures. We were in compliance with all loan covenants as of
December 31, 2000.
Maturities of long-term debt for each of the years ending December 31 are as
follows (in thousands):
2001........................................................ $12,517
2002........................................................ 10,655
2003........................................................ 10,655
2004........................................................ 10,655
2005........................................................ 12,968
Thereafter.................................................. 33,482
-------
$90,932
=======
5. INCOME TAXES:
Our provision for income taxes in the 2000 statement of operations excludes
$743,000 of deferred tax provision that is presented in the cumulative effect of
a change in accounting principle. Total tax expense for the years ended
December 31, 2000, 1999 and 1998 consists of (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Federal
Current................................................... $ -- $ -- $ 715
Deferred.................................................. 3,645 1,001 3,770
------ ------ ------
$3,645 $1,001 $4,485
====== ====== ======
The income tax expense for the years ended December 31, 2000, 1999 and 1998
differs from the amount computed by applying the statutory federal income tax
rate of 34 percent to consolidated income before income taxes as follows
(dollars in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Expense computed at federal statutory
rate................................... $3,407 34.0% $ 911 34.0% $5,761 34.0%
Increase (decrease) in provision from:
Nondeductible expenses................... 238 2.8 90 3.4 48 .3
Decrease in valuation allowance for
deferred tax assets.................... -- -- -- -- (1,324) (7.8)
------ ---- ------ ---- ------ ----
$3,645 36.8% $1,001 37.4% $4,485 26.5%
====== ==== ====== ==== ====== ====
F-13
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES: (CONTINUED)
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,
-------------------
2000 1999
-------- --------
Assets--
Net operating loss carryforwards.......................... $19,199 $11,967
Gain on asset sales....................................... 965 965
Contributions carryover................................... 5 5
Fixed asset basis difference.............................. 198 585
Alternative minimum tax carryforwards..................... 917 917
------- -------
Total gross deferred tax assets......................... 21,284 14,439
Liabilities--
Book/tax depreciation difference.......................... 29,563 19,073
------- -------
Net deferred tax liabilities............................ $(8,279) $(4,634)
======= =======
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 $56.5 million at December 31,
2000 begin to expire in the year 2012. Our ability to utilize the net operating
loss carryforwards could be limited by a change in ownership as defined by
federal income tax regulations.
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
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 these
proceedings, individually and in the aggregate, if adversely determined, would
not have a material adverse effect on our financial position and results of
operations.
LEASES
We lease office space at various locations under operating leases that
expire through 2008. Rental expense was $1.0 million for 2000, $0.7 million for
1999 and $0.6 million for 1998. Future minimum non-cancelable lease commitments
under these agreements for the years ended December 31 are as follows (in
thousands):
2001........................................................ $ 1,039
2002........................................................ 1,646
2003........................................................ 1,646
2004........................................................ 1,676
2005........................................................ 1,697
Thereafter.................................................. 5,016
-------
$12,720
=======
F-14
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
INSURANCE
We participate in a retrospectively rated insurance agreement. In our
opinion, we have adequately accrued for all 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 four executive officers that
expire beginning in April 2001 through August 2002 and we have purchased
$5.0 million in "key-man" life insurance with respect to our Chief Executive
Officer, for which Horizon is the named beneficiary.
7. 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
$247,000 of common stock to the plan during 2000, $238,000 of cash during 1999
and $123,000 of cash during 1998. We intend to make future contributions with
Horizon common stock or cash.
8. STOCKHOLDERS' EQUITY:
PUBLIC OFFERINGS OF COMMON STOCK
In April 1998, we completed the Offering of 5,750,000 shares of common stock
and received $68.6 million, net of $6.2 million of underwriting commissions and
discounts and expenses. We used the net proceeds of the Offering to repay
$23.8 million of outstanding subordinated notes, to acquire the STEPHANITURM, a
230-foot diving support vessel, for $18.3 million, and used the remaining net
proceeds to expand our fleet.
In February 2001, we sold 3,800,000 shares of common stock in a secondary
offering. We received $66.3 million after deducting the underwriting discount
and expenses. We used $30.0 million to reduce indebtedness, $10.0 million to
support the Cal Dive joint venture, and the remainder will be used for general
corporate purposes, including funding capital expenditures to expand our
operating capabilities and potential vessel acquisitions.
STOCK SPLIT
In January 1998, we effected a 220 for one stock split. The effect of the
stock split has been retroactively reflected in the accompanying consolidated
financial statements as of the earliest period.
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 2.4 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 over three years and
unexercised options expire ten years from the date of issue. At December 31,
2000, we had options for 357,300 shares of common stock remaining to be issued
under the plan.
F-15
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
Horizon follows Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which permits one of two methods of
accounting for stock options. We have elected the method that only requires note
disclosure of stock based compensation. Because of this election, we are
required to account for our employee stock-based compensation plan under
Accounting Principles Board (APB) Opinion No. 25 and its related
interpretations. In accordance with APB No. 25, deferred compensation is
recorded for stock-based compensation grants based on the excess of the
estimated fair value of the common stock on the measurement date over the
exercise price. The deferred compensation is amortized over the vesting period
of each unit of stock-based compensation grant, which is generally three years.
If the exercise price of the stock-based compensation grants is equal to the
estimated fair value of Horizon's stock on the date of grant, no compensation
expense is recorded.
The following pro forma information is required by SFAS No. 123, and has
been determined as if Horizon had accounted for its employee stock options under
the fair-value method as defined by SFAS No. 123. The fair value of these
options was estimated at the date of grant using the Black-Scholes method
assuming an option life of 10 years and no dividends as well as the following
additional weighted average assumptions for 2000: volatility of 56.85%,
risk-free interest rate of 6.77%, 1999: volatility of 53.22%, risk-free interest
rate of 5.46%, and 1998: volatility of 39.94%, risk-free interest rate of 5.89%.
For purposes of pro forma disclosures, the estimated fair value of the
option is amortized to expense over the vesting period of the options using the
straight-line method. Horizon's pro forma information follows (in thousands
except per share amount):
2000 1999 1998
-------- -------- --------
Net Income:
As reported.............................................. $6,374 $1,679 $12,460
Pro Forma................................................ $2,995 (79) 11,392
Basic EPS:
As reported.............................................. $ 0.34 $ 0.09 $ 0.69
Pro Forma................................................ $ 0.16 $ 0.00 $ 0.63
Diluted EPS:
As reported.............................................. $ 0.33 $ 0.09 $ 0.69
Pro Forma................................................ $ 0.15 $ 0.00 $ 0.63
F-16
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes activity under the Plan for the years ended
December 31, 2000, 1999 and 1998:
WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
Granted..................................................... 694,000 $13.00
Forfeited and canceled...................................... (16,500) $13.00
---------
Outstanding at December 31, 1998............................ 677,500 $13.00
Granted..................................................... 1,328,000 $ 6.28
Forfeited and canceled...................................... (96,500) $ 5.69
---------
Outstanding at December 31, 1999............................ 1,909,000 $ 8.67
Granted..................................................... 218,500 $ 8.85
Forfeited and canceled...................................... (79,503) $ 9.30
Exercised................................................... (42,618) $ 8.48
---------
Outstanding at December 31, 2000 2,005,379 $ 8.67
=========
The following table summarizes information on stock options outstanding and
exercisable as of December 31, 2000, pursuant to the Plan:
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------------
RANGE OF SHARES REMAINING WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$12.00 to 15.88............ 686,541 7.38 $ 13.11 256,790 $12.98
$ 7.75 to 11.00............ 150,000 8.83 $ 8.23 45,000 $ 7.81
$ 5.50 to 7.50............ 1,168,838 8.61 $ 6.12 336,633 $ 6.13
--------- ---- ------------- ------- ------
$ 5.50 to 15.88............ 2,005,379 8.20 $ 8.67 638,423 $ 9.00
========= ==== ============= ======= ======
TREASURY STOCK
In July 1998, the board of directors approved the repurchase of up to
$10.0 million of outstanding common stock. Shares have been purchased from time
to time, subject to market conditions, in the open market or in privately
negotiated transactions. As of December 31, 1999, we had repurchased 1,158,800
shares of common stock for a total cost of $7.6 million, and we re-issued
133,300 shares of treasury stock in connection with the purchase of the BRAZOS
HORIZON. As of December 31, 2000, treasury stock consisted of 1,003,400 shares
at a cost of $6.6 million, following the issuance of 22,100 shares for the
Company's 401(k) contributions in 2000. Treasury stock is stated at the average
cost basis.
EARNINGS PER SHARE
Earnings per share data for all periods presented has been computed pursuant
to Statement of Financial Accounting Standards ("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
F-17
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
potential dilution that could occur if securities and other contracts to issue
common stock were exercised or converted into common stock.
The following table presents information necessary to calculate earnings per
share for the three years ended December 31, 2000:
2000 1999 1998
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income.................................... $ 6,374 $ 1,679 $ 12,460
Average common shares outstanding............. 18,823,610 18,820,646 18,114,393
----------- ----------- -----------
Basic earnings per share...................... $ 0.34 $ 0.09 $ 0.69
=========== =========== ===========
Average common and dilutive potential common
shares outstanding:
Average common shares outstanding............. 18,823,610 18,820,646 18,114,393
Assumed exercise of stock options............. 631,860 -- --
----------- ----------- -----------
19,455,470 18,820,646 18,114,393
----------- ----------- -----------
Diluted earnings per share.................... $ 0.33 $ 0.09 $ 0.69
=========== =========== ===========
9. RELATED PARTY TRANSACTIONS:
In August 1998, we entered into a master services agreement with Odyssea
Marine, Inc. (Odyssea), an entity wholly owned by the Principal Stockholders, to
charter certain marine vessels from Odyssea. As of December 31, 2000, we owed
Odyssea $0.3 million for charter services compared to $30,000 at December 31,
1999. During 2000, Odyssea billed Horizon $11.3 million and Horizon paid Odyssea
$11.0 million for services rendered under the agreement. In management's
opinion, the transactions were effected on terms similar to those which could
have been obtained from unaffiliated third parties.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The marine construction industry in the 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.
F-18
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): (CONTINUED)
The following table sets forth selected quarterly information for 2000 and
1999. We believe that all necessary adjustments have been included in the
amounts stated below to present fairly the results of such periods.
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000
- ----------------------------------------------
Contract revenues............................. $ 15,906 $ 36,588 $ 56,286 $ 51,752
Gross profit.................................. 1,125 6,543 10,264 6,454
Operating income (loss)....................... (885) 4,172 7,837 3,861
Net income (loss) before cumulative effect of
accounting change........................... (1,686) 1,569 3,705 1,405
Cumulative effect of accounting change, net of
taxes of $743............................... 1,381 -- -- --
Net income (loss)............................. (305) 1,569 3,705 1,405
Net income (loss) per share--basic and
diluted:
Net income (loss) per share before cumulative
effect of accounting change--basic.......... $ (0.09) $ 0.08 $ 0.20 $ 0.07
Cumulative effect of accounting change........ 0.07 -- -- --
---------- ---------- ---------- ----------
Net Income (loss) Per Share--Basic.......... $ (.02) $ 0.08 $ 0.20 $ 0.07
Net income (loss) per share before cumulative
effect of accounting change--diluted........ $ (0.09) $ 0.08 $ 0.19 $ 0.07
Cumulative effect of accounting change........ 0.07 -- -- --
---------- ---------- ---------- ----------
Net Income (loss) Per Share--Diluted........ $ (.02) $ 0.08 $ 0.19 $ 0.07
Weighted average shares
Basic....................................... 18,804,379 19,362,393 18,827,558 18,848,518
Diluted..................................... 18,804,379 19,362,393 19,758,322 19,755,032
1999
- ----------------------------------------------
Contract revenues............................. $ 12,357 $ 23,437 $ 36,286 $ 16,935
Gross profit (loss)........................... 2,266 6,834 8,113 (379)
Operating income (loss)....................... (76) 4,705 5,837 (2,675)
Net income (loss)............................. (605) 2,305 2,748 (2,769)
Net income (loss) per share................... $ (.03) $ 0.12 $ 0.15 $ (0.15)
Weighted average shares--basic and diluted.... 18,669,793 18,870,580 18,921,705 18,800,980
F-19
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 31, 2001.
HORIZON OFFSHORE, INC.
By: /s/ DAVID W. SHARP
-----------------------------------------
David W. Sharp
EXECUTIVE VICE PRESIDENT AND
CHIEF 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/ JAMES DEVINE
------------------------------------------- Chairman of the Board March 31, 2001
James Devine
/s/ BILL J. LAM President and Director
------------------------------------------- (Principal Executive March 31, 2001
Bill J. Lam Officer)
/s/ DAVID W. SHARP Chief Financial Officer
------------------------------------------- (Principal Financial and March 31, 2001
David W. Sharp Accounting Officer)
/s/ JONATHAN D. POLLOCK
------------------------------------------- Director March 31, 2001
Jonathan D. Pollock
/s/ EDWARD L. MOSES, JR.
------------------------------------------- Director March 31, 2001
Edward L. Moses, Jr.
/s/ MICHAEL R. LATINA
------------------------------------------- Director March 31, 2001
Michael R. Latina
/s/ DEREK LEACH
------------------------------------------- Director March 31, 2001
Derek Leach
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER
- ---------------------
3.1 -- Amended and Restated Certificate of Incorporation of the
Company(1)
3.2 -- Bylaws of the Company(1)
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Company's
Certificate of Incorporation and Bylaws defining the rights
of holders of Common Stock
4.2 -- Specimen Common Stock certificate(1)
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 -- Employment and Non-Competition Agreement dated as of
January 1, 1998 between the Company and Bill J. Lam(1)*
10.5 -- First Amendment effective April 1, 2000 to Employment and
Non-Competition Agreement dated as of January 1, 1998
between the Company and Bill J. Lam(5)*
10.6 -- Employment and Non-Competition Agreement dated as of
January 1, 1998 between the Company and David W. Sharp(1)*
10.7 -- Employment and Non-Competition Agreement dated as of
January 1, 1998 between the Company and James K. Cole(1)*
10.8 -- Registration Rights Agreement dated as of December 4, 1997
among the Company, Highwood Partners, L.P., and Westgate
International, L.P.(1)
10.9 -- Credit Agreement dated as of October 27, 1997 among Den
norske Bank ASA, Horizon Vessels, Inc. and Horizon Offshore
Contractors, Inc.(1)
10.10 -- Amendment No. 1 to Amended and Restated Credit Agreement
dated as of September 28, 1999 between Horizon
Vessels, Inc., Horizon Offshore Contractors, Inc. and Wells
Fargo Bank.(5)
10.11 -- Amendment No. 2 to Amended and Restated Credit Agreement
dated as of December 31, 1999 between Horizon
Vessels, Inc., Horizon Offshore Contractors, Inc. and Wells
Fargo Bank(5)
10.12 -- 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)
10.13 -- 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)
10.14 -- 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)
10.15 -- 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)
10.16 -- 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)
E-1
EXHIBIT
NUMBER
- ---------------------
10.17 -- Employment and Non-Competition Agreement dated as of
September 1, 1999 between the Company and Clay Etheridge(2)
10.18 -- Preferability Letter of Arthur Andersen LLP(2)
10.19 -- 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)
10.20 -- Employment Agreement dated October 11, 1999 between Horizon
Offshore Contractors, Ltd. and James Devine(4)
21.1 -- Subsidiaries of the Company(5)
23.1 -- Consent of Arthur Andersen LLP(7)
- ------------------------
(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) Filed herewith
* Management Contract or Compensatory Plan or Arrangement.
E-2