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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 333-69826
HORNBECK-LEEVAC MARINE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 72-1375844 4424
(State or other (I.R.S. Employer (Primary Standard
jurisdiction of Identification Number) Industrial
incorporation or Classification
organization) Code Number)
414 NORTH CAUSEWAY BOULEVARD
MANDEVILLE, LOUISIANA 70448
(985) 727-2000
(Address, including zip code, and telephone
number, including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
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 the 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. Yes [ ] No [ ] NOT APPLICABLE
The aggregate market value of common stock, par value $.01 per share, held
by non-affiliates of the Registrant is not ascertainable as such stock is
privately held and there is no public market for such stock. The total number of
shares of the Registrant's common stock, par value $.01 per share, outstanding
as of March 27, 2002 was 30,154,300.
DOCUMENTS INCORPORATED BY REFERENCE
None.
HORNBECK-LEEVAC MARINE SERVICES, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I.......................................................................1
Items 1 and 2. -- Business and Properties.................................1
Competitive Strengths...................................................1
Our Strategy............................................................3
Overview of Our Industry................................................4
Our Offshore Supply Vessel Business.....................................5
Offshore Supply Vessels.................................................7
Our Tug and Tank Barge Business.........................................8
Ocean-Going Tank Barges.................................................9
Ocean-Going Tugs.......................................................10
Customers and Charter Terms............................................10
Competition............................................................11
Environmental and Other Governmental Regulation........................12
Operating Hazards and Insurance........................................15
Employees..............................................................15
Properties.............................................................15
Seasonality of Business................................................15
Recent Developments....................................................16
Item 3 -- Legal Proceedings..............................................16
Item 4 -- Submission of Matters to a Vote of Security Holders............16
PART II.....................................................................17
Item 5 -- Market for the Registrant's Common Stock and Related
Stockholder Matters.........................................17
Item 6 -- Selected Financial Data........................................18
Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations,........................20
General................................................................20
Results of Operations..................................................21
Liquidity and Capital Resources........................................25
Contractual Obligations and Commercial Commitments.....................26
Inflation..............................................................27
Critical Accounting Policies...........................................27
Forward-Looking Statements.............................................28
Item 7a -- Quantitative and Qualitative Disclosures
About Market Risk...........................................28
Item 8 -- Financial Statements and Supplementary Data....................28
Item 9 -- Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures.....................28
PART III....................................................................29
Item 10 -- Directors and Executive Officers of the Registrant............29
Committees of the Board of Directors...................................30
Compensation Committee Interlocks and Insider Participation............31
Term and Compensation of Directors.....................................31
Item 11 -- Executive Compensation........................................32
Executive Compensation.................................................32
Summary Compensation Table.............................................32
Option Grants..........................................................33
Fiscal Year End Option Values..........................................34
Employment Agreements..................................................34
Incentive Compensation Plan............................................35
401(k) Retirement Plan.................................................35
Item 12 -- Security Ownership of Certain Beneficial Owners
and Management..............................................36
Item 13 -- Certain Relationships and Related Transactions................38
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TABLE OF CONTENTS
(CONTINUED)
PART IV.......................................................................39
Item 14 -- Exhibits, Financial Statement Schedules and
Reports on Form 8-K...........................................39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..............................F-1
SIGNATURES..............................................................S-1
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PART I
ITEMS 1 AND 2. -- BUSINESS AND PROPERTIES.
HORNBECK-LEEVAC Marine Services, Inc. was incorporated under the laws of
the State of Delaware in 1997 under the name "HV Marine Services, Inc." We are a
leading provider of marine transportation services in the markets we serve
through the operation of newly constructed deepwater offshore supply vessels in
the Gulf of Mexico and ocean-going tugs and tank barges in the northeastern
United States and in Puerto Rico. Currently, we own and operate a fleet of ten
deepwater offshore supply vessels and have another three deepwater vessels under
construction. We also own and operate a fleet of thirteen ocean-going tugs,
sixteen ocean-going tank barges and one coastwise tanker.
Our principal executive offices are located at 414 North Causeway
Boulevard, Mandeville, Louisiana 70448, and our telephone number is (985)
727-2000.
In this Form 10-K, "company," "we," "us" and "our" refers to
HORNBECK-LEEVAC Marine Services, Inc. and its subsidiaries, except as otherwise
indicated.
COMPETITIVE STRENGTHS
New Technologically Advanced Fleet of Deepwater Offshore Supply Vessels.
Our offshore supply vessels have significantly more capacity and operate more
efficiently than conventional offshore supply vessels. They also require
significantly lower capital expenditures for scheduled drydockings and
maintenance than older vessels. We believe that our larger, faster and more
cost-efficient vessels will remain in high demand as exploration, development
and production activity in the deepwater Gulf of Mexico continues to increase.
We believe that our operation of new technologically advanced offshore
supply vessels specifically designed to meet the needs of deepwater exploration,
development and production activity gives us a competitive advantage in
obtaining long-term contracts for our vessels and in attracting and retaining
crews. Since we accepted delivery of our first offshore supply vessel in
November 1998, our average utilization rate for our offshore supply vessels has
been approximately 95% compared to an industry average of approximately 75% over
the same time period, based on vessels available for service, according to One
Offshore, formerly Offshore Data Services.
We believe that we operate the youngest fleet of offshore supply vessels in
the Gulf of Mexico. Over 70% of the Gulf of Mexico offshore supply vessel fleet
is over 18 years old with many approaching 25 years old, reflecting the absence
of any significant construction activity between the early 1980s and mid-1990s.
The average age of our offshore supply vessel fleet is less than two years, and
we have three additional offshore supply vessels under construction. Moreover,
our offshore supply vessels incorporate sophisticated technologies that allow us
to operate more effectively and more safely in deepwater markets. These
technologies include dynamic positioning, roll reduction, controllable pitch
thrusters and our unique cargo handling systems permitting high volume transfer
rates of liquid mud and dry bulk. Our offshore supply vessels are also capable
of operating both on the continental shelf and in the deepwater regions of the
Gulf of Mexico, which we believe gives us a competitive advantage over operators
of conventional offshore supply vessels.
Because our vessels are designed specifically to handle the rougher seas in
the deepwater Gulf of Mexico, we are able to operate more safely than a
conventional offshore supply vessel designed for less challenging environments.
We believe that safety has become an increasingly important consideration for
oil and gas operators due to the environmental and regulatory sensitivity
associated with offshore drilling and production activity. In addition,
operators are especially concerned with a vessel's ability to avoid collisions
with multi-million dollar drilling rigs or production platforms during adverse
weather conditions, but are hesitant to stop operations in such conditions
because of the high daily cost of halting a deepwater operation. Our vessels
have been designed to mitigate the adverse impacts of bad weather conditions and
high seas, providing us with an important competitive advantage.
Leading Market Presence. We believe that we will be the second largest
operator of deepwater offshore supply vessels in the Gulf of Mexico following
delivery of our three offshore supply vessels currently under construction. We
operate the largest fleet of tank barges for the transportation of petroleum
products in Puerto Rico and, as a
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result of our acquisition in May 2001 of tugs and tank barges from the
Spentonbush/Red Star Group, affiliates of Amerada Hess Corporation, believe that
we are also the fourth largest tank barge transporter of clean and dirty
petroleum products in New York Harbor. Our offshore supply vessel and
ocean-going tug and tank barge fleets also benefit from the restrictions of
Section 27 of the Merchant Marine Act of 1920, commonly referred to as the Jones
Act, which requires that vessels engaged in coastwise U.S. trade, including
along the coast of Puerto Rico, be built in the United States, be U.S.-flagged
and be owned and managed by U.S. citizens.
Numerous Industry-Recognized Certifications. As part of our commitment to
quality and safety, we have pursued on a voluntary basis and have received
certifications and classifications, which are not generally held by other
companies in our industry. We maintain ISO 9000 and ISO 14001 certifications for
quality and environmental management, respectively, from the International
Standards Organization with respect to the nine tugs and nine tank barges
acquired from the Spentonbush/Red Star Group. Our other tugs and tank barges
participate in the Responsible Carrier Program, developed by the American
Waterways Operators to improve marine safety and environmental protection in the
tank barge industry. Our offshore supply vessels participate in the U.S. Coast
Guard's Streamlined Inspection Program in which we and the Coast Guard cooperate
to develop training, inspection and compliance processes, with our personnel
conducting periodic examinations of vessel systems and taking corrective actions
where necessary. Both of our principal office locations in Mandeville, Louisiana
and Brooklyn, New York, as well as the majority of our vessels, including all of
our offshore supply vessels and our tugs and tank barges acquired from the
Spentonbush/Red Star Group, are also certified under the International Safety
Management Code, developed by the International Maritime Organization to provide
internationally recognized standards for the safe management and operation of
ships and for pollution prevention. Our offshore supply vessels are classed by
the American Bureau of Shipping, which develops and verifies standards for the
design, construction and operational maintenance of vessels and facilities.
History of Successful Deepwater Offshore Supply Vessel Construction. We
employ senior management with significant naval architecture, marine engineering
and shipyard experience. We design our own offshore supply vessels and work
closely with our contracted shipyards in their construction. We typically source
and supply a large portion of the aggregate cost of a vessel with
owner-furnished equipment from vendors other than the shipyard. We delivered our
current fleet of ten deepwater offshore supply vessels substantially on time and
on budget. We believe that our history of delivering new vessels without
significant delays gives us a competitive advantage in obtaining contracts for
our vessels before their actual delivery. The shipyards responsible for our
three offshore supply vessels currently under construction have notified us that
delivery of these vessels will be delayed from their original delivery dates. We
do not believe that such delays in the delivery of these vessels will have a
material adverse affect on our financial condition, results of operations or
ability to charter such vessels prior to their delivery.
Favorable OPA 90 Fleet Status. Approximately 50% of the single hulled tank
barge capacity serving the northeastern United States affected by the Oil
Pollution Act of 1990, commonly referred to as OPA 90, is required to be retired
or substantially reconstructed by December 31, 2004. Eleven of our sixteen tank
barges are not required under OPA 90 to be retired or double hulled until 2015.
Of the remainder, three are required to be retired or modified by 2004 and two
by 2009. Our coastwise tanker, the M/V W.K. McWilliams, Jr., is not subject to
OPA 90 retirement dates. Because most of our barges are not required to be
double hulled until 2015, we believe we have a competitive advantage over
operators with barges that must be retired or modified to add double hulls
before that date.
Long-term Contracts and a Diversified Fleet Provide Stability of Revenue
and Cash Flow. We pursue long-term contracts to manage our growth and provide a
stable base of revenue and cash flow throughout the energy service industry
cycle. We regularly receive more inquiries regarding the charter of our vessels
than we have vessels to contract, allowing us to select our charterers
carefully. We continue to experience a high level of inquiries as potential
charterers have become aware of the capabilities and performance of our newly
constructed offshore supply vessels.
While seven of our ten current offshore supply vessels are under contracts
with expiration dates ranging from April 2003 through November 2006, we are
currently involved in a contract dispute with one of our customers with respect
to two of such vessels, which could result in only five of our offshore supply
vessels being under long-term contracts. These contracts generally provide for
full year-round utilization, are based on dayrates with a built-in escalation
clause and are exclusively dedicated to the charterer.
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In connection with the acquisition in May 2001 of tugs and tank barges and
related business from the Spentonbush/Red Star Group, we entered into a
long-term contract of affreightment with Amerada Hess to be its exclusive marine
logistics provider and coastwise transporter of petroleum products in the
northeastern United States. This long term contract with Amerada Hess, when
coupled with our operation of tank barges in both the northeastern United States
and Puerto Rico, provides revenue diversification to complement our offshore
supply vessel fleet. We operate four of our tank barges in the Caribbean under
renewable contracts that have been renewed in each of the last three years.
Experienced Management Team. Our senior management team has an average of
19 years of domestic and international marine transportation industry
experience. We believe that our team has successfully demonstrated its ability
to grow our fleet through new construction and strategic acquisitions and to
secure profitable contracts for our vessels in favorable and unfavorable market
conditions. Our in-house naval architecture team enables us to design and manage
our new construction of vessels, adapt our vessels for specialized purposes and
oversee and manage the drydocking process. We believe this will result in a
lower overall cost of ownership over the life of our vessels.
OUR STRATEGY
Maintain Focus on Deepwater Gulf of Mexico. We intend to maintain our focus
on operating high quality offshore supply vessels capable of working in the
deepwater regions of the Gulf of Mexico. Increasingly, oil and gas companies are
focusing capital expenditures on the exploration and development of reserves in
the deepwater Gulf of Mexico to replace slowing or declining production from
shallow water fields. We believe that there could be a shortage of offshore
supply vessels that can effectively serve the planned drilling programs in the
deepwater Gulf of Mexico market. Our offshore supply vessels are designed to
meet the specialized needs of these deepwater programs. In addition, all of our
offshore supply vessels are capable of operating in all of the major deepwater
oil and gas producing regions of the world.
Maintain Competitive Advantage By Using Sophisticated Technologies. We
designed our offshore supply vessels to meet the higher capacity and performance
needs of our clients' drilling and production programs. This has been
accomplished through the incorporation of sophisticated propulsion and cargo
handling systems and larger capacities. For example, the HOS Innovator, the BJ
Blue Ray and the HOS Dominator are the first U.S.-flagged offshore supply
vessels operating in the Gulf of Mexico to receive Dynamic Positioning Class II
certification from the American Bureau of Shipping and the BJ Blue Ray is the
first U.S.-flagged offshore supply vessel to be given a Well Stimulation class
notation certification by the ABS. Dynamic positioning technology allows a
vessel to maintain its position without the use of mooring operations. We
believe that the advanced features of our offshore supply vessels give us a
competitive advantage in obtaining contracts.
Continue Building New Vessels as Market Demand Dictates. Since we were
formed in 1997, we have designed and delivered ten deepwater offshore supply
vessels. Of these vessels, all were delivered without significant delays or cost
overruns and are currently operating under time charters. We have three other
vessels under construction with anticipated delivery dates from May 2002 to
August 2002. We will continue to monitor demand for deepwater vessels, including
demand in international markets, in determining the level and timing of
additional vessels under our newbuild program.
Complementary Acquisitions. To date we have completed four acquisitions
involving ocean-going tugs and tank barges. We will continue to evaluate
strategic acquisitions to expand our offshore supply vessel and tug and tank
barge fleets to increase market share and enhance long-term client
relationships.
Optimize Tug and Tank Barge Operations. We have consolidated the
operational management of our fleet in our new Brooklyn facility and continue to
optimize use of our tug and tank barge fleet by increasing services offered to
parties other than Amerada Hess. Before our acquisition of tugs and tank barges
from the Spentonbush/Red Star Group, these vessels were largely dedicated to the
use of Amerada Hess and its affiliates in New York Harbor. Centralized
operational management will allow us to move vessels from one region of
operations to another to take advantage of the changing mix of opportunities.
Pursue Long-term Contracts. The average initial term for our current
offshore supply vessel term contracts is approximately three years. Our contract
of affreightment with Amerada Hess for the services of tugs and tank barges in
the northeastern United States has an initial term of June 1, 2001 through March
31, 2006. All of our other tug
3
and tank barge contracts may be, and typically are, renewed annually. We intend
to maintain a significant percentage of our assets working under long-term
contracts, which results in high utilization rates and provides a stable cash
flow base to manage our debt obligations.
Leverage Existing Customer Relationships to Meet Diversified Marine
Transportation Demand. We continue to leverage our existing customer
relationships by expanding our services to certain customers with diversified
marine transportation needs. Many integrated oil companies require offshore
supply vessels to support their exploration and production activities and
ocean-going tug and tank barges to support their refining, trading and retail
distribution activities. In addition, many of our customers conduct operations
in international markets and have indicated an interest in chartering our
offshore supply vessels for use overseas. We are currently evaluating several
such opportunities.
OVERVIEW OF OUR INDUSTRY
Offshore Supply Vessel Industry. Oil prices were higher than historical
averages during 1999, 2000 and much of 2001. During the same periods natural gas
prices also generally increased. Increases in the prices of oil and natural gas
and a tightening of inventory levels during the same periods increased the
demand for working drilling rigs and related services, although fluctuations in
oil and natural gas prices over the past six months have resulted in less
offshore drilling activity in the shallow water areas of the Gulf of Mexico.
This has decreased demand for offshore supply vessel services on the continental
shelf in the Gulf of Mexico, and dayrates there have also declined. Demand and,
correspondingly, dayrates for offshore supply vessels capable of operating in
the deepwater Gulf of Mexico have not experienced a similar decline, but remain
stable. The higher cost of deepwater drilling makes it generally less feasible
to abandon a deepwater project upon a short-term decline in the price of oil and
natural gas.
The Gulf of Mexico, a bifurcated market of continental shelf and deepwater
regions, is a critical oil and gas supply basin for the United States,
accounting for 20% and 26%, respectively, of total U.S. oil and gas production
in 2001. Because natural gas production from wells on the continental shelf
declines at a rapid rate and the deepwater regions of the Gulf of Mexico hold
most of the unexplored areas of potential gas reserves, we believe that
deepwater drilling in the Gulf of Mexico will continue to be a primary source of
additions to domestic natural gas reserves. The Minerals Management Service has
adopted royalty relief incentives for natural gas produced from wells drilled in
at least 200 meters of water to encourage deepwater exploration. Moreover, the
deepwater Gulf of Mexico is expected to be the source of a significant
percentage of increased oil production in the United States. The Minerals
Management Service estimates that by 2005 oil production from the deepwater Gulf
of Mexico will represent approximately 65% of total offshore oil production in
the United States.
Despite recent fluctuations in the prices of oil and natural gas, the
active Gulf of Mexico offshore supply vessel fleet operating in the deepwater
region continues to operate at nearly 100% utilization, largely because of
continuing strong deepwater rig utilization as exploration, development and
production companies find larger reserves in the deepwater to meet increased
reserve loss through depletion. The total offshore supply vessel fleet in the
Gulf of Mexico numbered 343 at the end of February 2002, of which we believe
approximately 100 that operate on the continental shelf were unavailable for
immediate service because they are cold stacked. Vessels that are cold stacked
are available for service but are not under contract and are in drydock or need
of a crew. Approximately 40% of the 243 active vessels have been built or
"stretched" since 1996, and are designed to operate in the deepwater regions of
the Gulf of Mexico.
We anticipate that demand for deepwater offshore supply vessels in the Gulf
of Mexico will continue to increase in the near future. Although development of
deepwater fields has historically been limited by the substantially greater cost
of such development, new technologies, such as improved seismic surveying and
subsea production systems, have lowered deepwater finding and development costs.
Nevertheless, exploration and development activity in deepwater regions, once
begun, remains less sensitive to movements in oil and gas prices than shallow
water projects because the longer duration and higher costs still associated
with the exploration and development of deepwater regions create a long-term
commitment to deepwater projects regardless of short-term price fluctuations.
The number of deepwater fields under evaluation and development has grown
dramatically in recent years. From 1990 to 2001, production in the deepwater
Gulf of Mexico increased from 4% to 59% of total Gulf of Mexico oil production
and from 1% to 23% of total Gulf of Mexico natural gas production. The Minerals
Management Service estimates that production of oil and gas from deepwater Gulf
of Mexico wells increased 20% and 15%,
4
respectively, in 2000. Of the 72 deepwater Gulf of Mexico fields discovered to
date, 42 fields began production by the end of 2000, and an additional four
began production in 2001. Because offshore supply vessels with larger capacities
and longer ranges are required to work in deepwater regions, we believe that the
development of these fields and other potential discoveries will result in a
need for additional deepwater offshore supply vessels beyond the number of
currently available vessels and vessels being constructed under announced
construction plans. This demand is most likely to be met through new
construction.
Tug and Tank Barge Industry. Based upon our analysis of the industry, we
believe approximately 1.2 million barrels of clean and dirty petroleum products
are transported each day by tank barges operating in the coastwise trade in the
northeastern United States. The market is made up of a vast network of
refineries, terminals, tankers and pipelines delivering products to the harbors,
most of which is then transported to smaller distribution terminals by tank
barges.
The primary drivers of demand for tug and tank barge services in the
northeastern United States are population growth, the strength of the U.S.
economy and changes in weather patterns that affect consumption of heating oil
and gasoline. The tank barge market in general is marked by steady demand and we
believe that demand for refined petroleum products and crude oil will remain
steady or gradually increase in the foreseeable future. Specifically, we believe
that:
- demand for home heating oil will remain steady;
- gasoline shipments will continue to be supported by consistent demand
from existing automobile technology;
- diesel fuel consumption will grow slowly as economic activity requires
increased trucking miles and remain unaffected by any alternative fuel
technologies; and
- jet fuel consumption will increase as air travel and air freight
activity slowly increase.
The largest single market in the region is New York Harbor. Imported
petroleum products are primarily delivered to New York Harbor as it has the
capacity to receive products in cargo lots of 50,000 tons or more per tanker. By
contrast, draft limitations in most New England ports and drawbridge limitations
in Boston and Portland, Maine limit the average cargo carrying capacity of
direct imports into many of the largest New England ports to about 30,000 tons
per tanker. This means that ships importing directly into New England must
frequently discharge in multiple ports or terminals or transfer cargoes to tank
barges, involving more time and cost. As existing tankers are retired, they are
typically replaced by larger tankers. As larger petroleum tankers are being
built, we believe that direct delivery into New York Harbor with onward barging
to New England, the Hudson River and Long Island will increase.
We also believe that demand for barging services will be strengthened as
larger oil tankers are being built to replace oil tankers removed from service
due to mandates under OPA 90. These larger-sized tankers are being built to
facilitate the importation of crude oil and petroleum products into the United
States, which is expected to grow at compounded annual growth rates of 1.7% and
4.9%, respectively, through 2020, according to the Energy Information Agency.
These larger tankers will require lightering services provided by tugs and tank
barges.
In addition, OPA 90 has imposed significant limits on the service lives and
capacity of most existing tank barges. Approximately 50% of the U.S. flagged
tanker and tank barge fleet in the northeastern United States affected by OPA 90
must be retired or substantially reconstructed by December 31, 2004. Based on
the remaining lives of the majority of our tank barge fleet under OPA 90, we
believe we are well positioned to obtain additional customers in the
northeastern United States as currently available capacity is legally required
to be removed from service or substantially reconstructed.
OUR OFFSHORE SUPPLY VESSEL BUSINESS
We serve the oil and gas industry in the deepwater region of the Gulf of
Mexico through the operation and management of a fleet of ten newly constructed
deepwater offshore supply vessels by our subsidiary, Hornbeck Offshore Services,
LLC. We also have three additional deepwater offshore supply vessels under
construction. We believe that the increased size of our vessel fleet will enable
us to take further advantage of the strong demand for
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offshore supply vessels in the deepwater regions of the Gulf of Mexico, which
has resulted in high utilization levels and increased vessel dayrates,
notwithstanding recent fluctuations in the prices of oil and natural gas.
To design, maintain and expand the quality of our offshore supply vessel
fleet, we have gathered a core team of naval architects and other marine
professionals. Where appropriate, we work closely with potential charterers to
design vessels specifically to meet their anticipated needs in operating a
deepwater project that could have a duration of more than twenty years and
require expenditures exceeding $1 billion. In such circumstances, we generally
contract these specially designed vessels for three to five years, with renewal
options, before construction is completed. Moreover, because we have already
established a reputation for on-time delivery and reliability, charterers have
contacted us to construct vessels to meet their needs. Although we will design
vessels to meet the specific needs of a charterer, we ensure in our design that
customization does not preclude efficient operation of these vessels for other
customers, for other purposes or in other situations.
Our offshore supply vessels serve drilling and production facilities and
support offshore construction and maintenance work. Supply boats differ from
other types of marine vessels in their cargo carrying flexibility and capacity.
In addition to transporting deck cargo, such as pipe or drummed material and
equipment, supply boats transport liquid mud, potable and drilling water, diesel
fuel and dry bulk cement. Accordingly, larger supply boats, which have greater
liquid mud and dry bulk cement capacities, as well as larger areas of open deck
space, than smaller supply boats, are generally in higher demand for deepwater
service than vessels without those capabilities.
We designed our fleet of offshore supply vessels specifically to meet the
demands of the Gulf of Mexico's deepwater areas. Deepwater wells require
specialized equipment to meet the more difficult operating environment compared
to wells drilled on the continental shelf. They also require a substantially
higher volume of supplies to support the drilling operations. Conventional
offshore supply vessels do not have sufficient on-deck or below-deck cargo
capacity to support deepwater drilling operations economically. Our vessels have
two to three times the dry bulk capacity and deck space, three to ten times the
liquid mud capacity and two to four times the deck tonnage as conventional 180'
offshore supply vessels, which are used primarily in shallow water regions on
the continental shelf. Our advanced cargo handling systems allow for dry bulk
and liquid cargoes to be loaded and unloaded three times faster, while the solid
state controls of our engines typically result in a 20% greater fuel efficiency
than vessels powered by conventional engines.
In addition, drilling rigs and offshore supply vessels operating in
deepwater environments generally require dynamic positioning capability to
enable continued operation in such environments, even in adverse weather
conditions. Conventional offshore supply vessels generally do not have dynamic
positioning capability. Our advanced dynamic positioning systems allow our
vessels to maintain position within a minimal variance. Our unique hull design
and integrated rudder and thruster system provide a more manageable vessel. Our
vessels have been designed with state-of-the-art lifesaving, fire alarm,
monitoring, emergency power and fire suppression systems. Our vessels also have
double-bottomed and double-sided hulls that minimize the environmental impact of
hull penetrations, solid state control that minimizes visible soot and polluting
gases and zero discharge sewage and waste systems that minimize the impact on
regulated marine environments.
While offshore supply vessels service existing oil and gas production
platforms as well as exploration and development activities, incremental vessel
demand depends primarily upon the level of drilling activity, which can be
influenced by a number of factors, including oil and gas prices and drilling
budgets of exploration and production companies. As a result, utilization and
dayrates have historically correlated to oil and gas prices and drilling
activity, although the higher initial costs of deepwater production and the
typically long-term nature of deepwater offshore supply vessel contracts have
weakened the significance of that correlation in recent years. Our operations
are presently limited to the Gulf of Mexico, which is one of the largest natural
gas production areas in the United States. Natural gas currently accounts for
approximately 60% of all hydrocarbon production in the Gulf of Mexico, and as a
result, activity in this region is highly dependent upon natural gas prices.
Based on the growth in deepwater discoveries and announced development
plans, the current and anticipated need for additional drilling rigs to service
such growth, the number of vessels needed to service each rig and the
anticipated redeployment of vessels currently working in the Gulf of Mexico to
overseas locations, we believe that demand for offshore supply vessels capable
of operating efficiently and safely in deepwater areas will continue to increase
over the next two or three years. We expect a continued shortage of adequate
vessels serving the deepwater Gulf of Mexico even though several of our
competitors have announced plans to build new offshore supply vessels greater
than 200' in length, which are specially designed for the deepwater market.
Although vessels operating in
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overseas locations that continue to be in compliance with the Jones Act
requirements may be remobilized from overseas locations if dayrates increase
significantly, we believe it is unlikely that any such remobilization would have
a significant impact in the near future.
Our offshore supply vessels are also designed to support certain specialty
services, including well stimulation, remotely operated vehicles used in
oilfield subsea construction, underwater inspections, marine seismic operations
and certain non-energy applications such as fiber optics cable installation. We
have designed our offshore supply vessels to include such characteristics as
maneuverability, fuel efficiency and firefighting capacity, which strengthens
demand for their use in specialty situations. Two of our vessels, the HOS
Innovator and the HOS Dominator, are currently providing remotely operated
vehicle, subsea construction services under three-year contracts with a large
oilfield service company. The BJ Blue Ray is operating under a five-year
contract to support well stimulation services with a large oilfield service
company.
We have focused on providing high quality, responsive service while
maintaining a low cost structure. We believe the quality of our fleet and the
strength of our management team will allow us to develop and maintain long-term
customer relationships. Although we currently operate exclusively in the Gulf of
Mexico, our vessels are capable of operating in deepwater regions around the
world and all of our vessels are either fully SOLAS (Safety of Life at Sea)
certified or SOLAS ready. SOLAS is the international convention that regulates
the technical characteristics of vessels for purposes of ensuring international
standards of safety for vessels engaged in commerce between international ports.
The following table provides information, as of March 27, 2002, regarding
the offshore supply vessels owned by us as well as those under construction.
OFFSHORE SUPPLY VESSELS
CLASS CURRENT SERVICE DATE COMMENCED BRAKE
NAME LENGTH (FEET) FUNCTION(1) SERVICE HORSEPOWER
- ---------------- ------------- ---------------- -------------- ----------
HOS Crossfire... 200 Supply November 1998 4,000
HOS Super H..... 200 Supply January 1999 4,000
HOS Brigadoon... 200 Supply March 1999 4,000
HOS Thunderfoot. 200 Supply May 1999 4,000
HOS Dakota...... 200 Supply June 1999 4,000
HOS Deepwater... 240 Supply November 1999 4,500
HOS Cornerstone. 240 Supply March 2000 4,500
HOS Innovator... 240 ROV Support April 2001 4,500
BJ Blue Ray..... 265 Well Stimulation November 2001 6,700
HOS Dominator... 240 ROV Support February 2002 4,500
HOS Brimstone... 265 TBD May 2002(Est.) 6,700
HOS Sandstorm... 265 TBD June 2002(Est.) 6,700
HOS Stormridge.. 265 TBD August 2002(Est.) 6,700
(1) ROV: remotely operated vehicle
TBD: to be determined
7
The following table provides a comparison of certain specifications and
capabilities of our deepwater offshore supply vessels in comparison to
conventional 180' offshore supply vessels used primarily on the continental
shelf of the Gulf of Mexico.
CONVENTIONAL
180' HORNBECK 200' HORNBECK 240' HORNBECK 265'
OSV(1) CLASS CLASS CLASS
------------ ------------ ------------ ------------
SIZE
Class length overall (ft.) ..... 180 200 240 265
Breadth (ft.) .................. 40 54 54 60
Depth (ft.) .................... 14 18 18 22
Maximum draft (ft.) ............ 12 13 13 16
Deadweight (long tons) ......... 950 1,750 2,250 3,560
Clear deck area (sq ft.) ....... 3,450 6,580 8,836 9,212
CAPACITY
Fuel capacity (gallons) ........ 79,400 90,000 151,800 151,800
Fuel pumping rate
(gallons per minute) ......... 275 500 500 500
Drill water capacity (cu. ft.).. 141,000 240,000 240,000 332,500
Dry bulk capacity (cu. ft.)..... 4,000 7,000 8,400 10,800
Liquid mud capacity (barrels) .. 1,200 3,640 6,475 11,500
Liquid mud pumping
rate (gals per minute) ....... 250 550 600 600
Potable water capacity
(gallons)..................... 11,500 52,200 52,200 52,200
MACHINERY
Main engines (horsepower)....... 2,250 4,000 4,500 6,700
Auxiliaries (number) .......... 2 3 3 3
Total rating (kw) .............. 200 750 750 810
Bow thruster (horsepower)....... 325 800 1,600 2,400
Type .......................... Fixed Controllable Controllable Controllable
Pitch Pitch Pitch Pitch
Stern thruster (horsepower)..... N/A N/A 800 1,600
Type .......................... N/A N/A Controllable Controllable
Pitch Pitch
Fire fighting (gallons per
minute)....................... 1,000 1,250 2,700 2,700
Dynamic positioning(2) ......... N/A DP1 DP1/2 DP2/3
CREW REQUIREMENTS
Number of personnel(3) ......... 5 5 5 7
- ----------
(1) Statistics are for a typical 180' class vessel. Actual specifications and
capabilities may vary from vessel to vessel.
(2)Dynamic positioning permits a vessel to maintain position without the use of
anchors. The numbers "1," "2" and "3" refer to increasing levels of technical
sophistication and system redundancy features.
(3) Regulatory manning requirements; depending on the services provided,
operators may man vessels with more crew than required by regulations.
OUR TUG AND TANK BARGE BUSINESS
Through our subsidiary, LEEVAC Marine, LLC, we own and operate a fleet of
thirteen ocean-going tugs, sixteen ocean-going tank barges, one of which has
been bareboat chartered to a third party, and one coastwise tanker. Generally, a
tug and tank barge work together as a "tow" to transport refined or bunker grade
petroleum products along the coast of Puerto Rico and in the Caribbean and the
upper east coast of the United States. Our tank barges carry petroleum products
that are typically characterized as either "clean" or "dirty." Clean products
are
8
primarily gasoline, home heating oil, diesel fuel and jet fuel. Dirty products
are mainly crude oils, residual crudes and feed stocks, heavy fuel oils and
asphalts.
Our tugs and tank barges serve the northeastern U.S. coast, primarily New
York Harbor, by transporting both clean and dirty petroleum products to and from
refineries and distribution terminals. Our tugs and tank barges also transport
both clean and dirty petroleum products from refineries and distribution
terminals to the Puerto Rico Electric Power Authority and to utilities located
on other Caribbean islands. In addition, we provide ship lightering, bunkering
and docking services in these markets and are well positioned to provide such
services to the new tankers that are too large to make direct deliveries to
distribution terminals and refineries.
On May 31, 2001, we acquired nine ocean-going tugs and nine ocean-going
tank barges from the Spentonbush/Red Star Group, composed of certain affiliates
of Amerada Hess, as well as the business related to these tugs and barges,
greatly expanding our capacity in the northeastern United States and increasing
our market share of the coastwise trade on the U.S. upper east coast. As part of
the acquisition, Amerada Hess entered into a long-term contract of affreightment
with us pursuant to which Amerada Hess has committed to use us as its exclusive
marine logistics provider and transporter of liquid petroleum products in the
northeastern United States. Under this contract, Amerada Hess has committed to
ship a minimum of 45 million barrels annually for an initial period from June 1,
2001 through March 31, 2006 with options to renew for subsequent periods. Also
under the contract, we have the opportunity, on a reasonable commercial efforts
basis, to coordinate the marine logistics for Amerada Hess in the southeastern
United States, subject to Amerada Hess's right to cancel within 30 days after
December 31 of each year of the contract.
The contract of affreightment will provide us with a significant source of
revenues over the life of the contract. Our contract of affreightment allows
Amerada Hess to reduce its minimum annual cargo volume commitment subject to a
significant adjustment penalty. If Amerada Hess does not transport volumes as
contemplated under the contract, we believe that we would be able to replace
such volumes through other customers.
The following tables provide information, as of March 27, 2002, regarding
the tugs and tank barges we own.
OCEAN-GOING TANK BARGES
BARREL LENGTH YEAR OPA 90
NAME CAPACITY (FEET) BUILT DATE(1)
- --------------------------- -------- ------ ----- -------
Energy 11101 .............. 111,844 420 1979 2009
Energy 11102 .............. 111,844 420 1979 2009
Energy 9801 ............... 97,432 390 1967 2004
M/V W.K. McWilliams, Jr.(2) -- 402 1992 N/A
Energy 9501 ............... 94,442 346 1972 2004
Energy 8701 ............... 86,454 360 1976 2004
Energy 7002 ............... 72,693 351 1971 2015
Energy 7001 ............... 72,016 300 1977 2015
Energy 6504 ............... 66,333 305 1958 2015
Energy 6505 ............... 65,710 328 1978 2015
Energy 6503 ............... 65,145 327 1988 2015
Energy 6502 ............... 64,317 300 1980 2015
Energy 6501 ............... 63,875 300 1974 2015
Energy 5501 ............... 57,848 341 1969 2015
Energy 5502 ............... 55,761 309 1969 2015
Energy 2201 ............... 22,556 242 1973 2015
Energy 2202 ............... 22,457 242 1974 2015
- ----------
(1) For a discussion of OPA 90 see " -- Environmental and Other Governmental
Regulations" below.
(2)This coastwise tanker, acquired on November 15, 2001, is not currently
certificated to transport petroleum products and, therefore, barrel capacity is
not applicable to this vessel.
9
OCEAN-GOING TUGS
GROSS LENGTH YEAR BRAKE
NAME TONNAGE (FEET) (FEET) HORSEPOWER
- ----------------- ------- ------ ------ ----------
Ponce Service.... 190 107 1970 4,200
Caribe Service... 194 111 1970 4,200
Atlantic Service. 198 105 1978 4,000
Brooklyn Service. 198 105 1975 4,000
Gulf Service..... 198 126 1979 4,000
Tradewind Service 183 105 1975 3,000
Yabucoa Service.. 183 105 1975 3,000
Spartan Service.. 126 102 1978 3,000
Sea Service...... 173 109 1975 2,820
Port Service..... 198 95 1957 2,300
North Service.... 187 100 1978 2,200
Bay Ridge Service 194 100 1981 2,000
Stapleton Service 146 78 1966 1,530
CUSTOMERS AND CHARTER TERMS
Major integrated oil companies and large independent oil and gas
exploration, development and production companies constitute the majority of our
customers for our offshore supply vessel services, while refining, marketing and
trading companies constitute the majority of our customers for our tug and tank
barge services. The number and identity of our customers vary from year to year,
as does the percentage of revenues attributable to a specific customer. The
percentage of revenues attributable to a customer in any particular year depends
on the level of oil and gas exploration, development and production activities
undertaken or refined petroleum products or crude oil transported by a
particular customer, the availability and suitability of our vessels for the
customer's projects or products and other factors, many of which are beyond our
control. For the year ended December 31, 2001, Amerada Hess Corporation and
Mariner Energy, Inc. each accounted for more than 10% of our total revenues for
such period.
Currently, seven of our ten offshore supply vessels are under long-term
charter contracts, with initial terms ranging from two to five years. However,
we are currently involved in a contract dispute with one of our customers with
respect to two of such vessels, which could result in only five of our offshore
supply vessels being under long-term contracts. Certain of the contracts for our
offshore supply vessels contain early termination options in favor of the
customer, some with substantial early termination penalties designed to
discourage the customers from exercising such options. Similarly, thirteen of
our sixteen tank barges provide services under long-term contracts of one year
or longer. Our offshore supply vessels have performed services for approximately
34 different customers, and our tugs and tank barges have performed services for
approximately 84 different customers. Because of the variety and number of
customers historically using the services of our fleet, and the near equal
balance between supply and demand in both the offshore supply vessel and tug and
tank barge markets, we believe that the loss of any one customer would not have
a material adverse effect on our business.
We enter into a variety of contract arrangements with our customers,
including spot and time charters, contracts of affreightment and consecutive
voyage contracts. Our contracts are obtained through competitive bidding or,
with established customers, through negotiation.
Two of our offshore supply vessels had been under long-term charter to
Mariner Energy, Inc., which is 96%-owned by an indirect affiliate of Enron Corp.
Mariner had been using these two vessels to service an offshore drilling rig it
chartered for drilling operations in the Gulf of Mexico. On December 11, 2001,
Mariner notified us of its intent to furlough the drilling rig by December 15,
2001 and unilaterally sought to terminate its contract with respect to our two
vessels. Mariner, in fact, released one of our vessels on December 14, 2001 and
the other on December 16, 2001.
We do not believe that Mariner's actions will have a material adverse
affect on our financial condition or results of operations. Both vessels have
already been redeployed under spot market charters with major oil companies
earning substantially the same dayrates as under the Mariner contract with
almost no lapse in utilization. We continue to experience strong demand for
offshore supply vessels capable of operating in the deepwater Gulf of Mexico
based on the ongoing requests we receive from other customers for the services
of our vessels. In addition,
10
we are in discussions with several customers regarding term contract
opportunities for these vessels. Furthermore, we do not believe that Mariner was
entitled under the terms of the contract to terminate the charter of our
vessels, and we are continuing discussions with Mariner on this issue. Should
our discussions with Mariner not lead to a resolution of this issue, we believe
that we would have certain rights of recovery against Mariner, and we intend to
take all appropriate steps to protect our rights under the contract.
As of February 28, 2002, accounts receivable from Mariner for base charter
hire for the period prior to the release of our vessels, had been fully paid.
COMPETITION
We operate in a highly competitive industry. Competition in the offshore
supply vessel and ocean-going tug and tank barge segments of the marine
transportation industry primarily involves factors such as:
- availability and capability of the vessels,
- ability to meet the customer's schedule,
- price,
- safety record,
- reputation and
- experience.
Under the terms of the Merchant Marine Act of 1920, also known as the Jones
Act, competition in the coastwise trade in the United States and Puerto Rico is
restricted to vessels built in the United States that are U.S. flagged and owned
and managed by U.S. citizens.
We believe we operate the second largest fleet of offshore supply vessels
designed for service in the deepwater Gulf of Mexico. We operate the largest
tank barge fleet in Puerto Rico and we believe that we are the fourth largest
transporter by tank barge of petroleum products in New York Harbor.
We do not anticipate significant competition in the near term from
pipelines as an alternative method of petroleum product delivery in the
northeastern United States or Puerto Rico. No pipelines are currently under
construction that could provide significant competition to tank barges in the
northeastern United States or Puerto Rico, nor are any new pipelines likely to
be built in the near future due to cost constraints and logistical and
environmental requirements.
Although some of our principal competitors are larger and have greater
financial resources and international experience, we believe that our operating
capabilities and reputation enable us to compete effectively with other fleets
in the market areas in which we operate. In particular, we believe that the
relatively young age and advanced features of our offshore supply vessels
provide us with a competitive advantage in both the shelf and deepwater segments
of the Gulf of Mexico. The ages of our offshore supply vessels range from one
month to 41 months, while approximately 70% of the offshore supply vessels
operating in the Gulf of Mexico continental shelf areas are over 18 years old,
with many approaching 25 years old. We believe that many of these older vessels
will be retired in the next few years. In addition to the young age of our
fleet, the advanced capabilities of our fleet position us to take advantage of
the expanding deepwater segment of the Gulf of Mexico. Operators in the
deepwater segment of the Gulf of Mexico typically require larger offshore supply
vessels with greater capacities than conventional 180' class offshore supply
vessels. All of our existing supply vessels provide faster horsepower and
greater capacities for drill water, dry bulk, drilling mud and mud pumping than
conventional vessels. Upon completion of our three vessels currently under
construction, we believe that we will be in an even better position to provide
continuing service in the growing deepwater segment of the Gulf of Mexico. We
also believe we hold a competitive advantage with respect to our tank barges:
most of our barges will not be required to be removed from service under OPA 90
until January 1, 2015, while many of the tank barges in the fleets of our
competitors currently operating in the northeastern U.S. must be retired or
modified by 2005. We also believe we have a competitive advantage with
11
respect to our tank barge operations in Puerto Rico because labor restrictions
and tax laws in Puerto Rico and mobilization/demobilization costs make it
impractical for competitors to provide occasional transportation services
without entering the market on a long-term basis.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
Our operations are significantly affected by a variety of federal, state
and local laws and regulations governing worker health and safety and the
manning, construction and operation of vessels. Certain governmental agencies,
including the U.S. Coast Guard, the National Transportation Safety Board, the
U.S. Customs Service and the Maritime Administration of the U.S. Department of
Transportation, have jurisdiction over our operations. In addition, private
industry organizations such as the American Bureau of Shipping oversee aspects
of our business. The Coast Guard and the National Transportation Safety Board
establish safety criteria and are authorized to investigate vessel accidents and
recommend improved safety standards.
The U.S. Coast Guard regulates and enforces various aspects of marine
offshore vessel operations. Among these are classification, certification,
routes, dry-docking intervals, manning requirements, tonnage requirements and
restrictions, hull and shafting requirements and vessel documentation. Coast
Guard regulations require that each of our vessels be dry-docked for inspection
at least twice within a five-year period.
Under Section 27 of the Merchant Marine Act of 1920, also known as the
Jones Act, the privilege of transporting merchandise or passengers for hire in
the coastwise trade in U.S. domestic waters extends only to vessels that are
owned and managed by U.S. citizens and are built in and registered under the
laws of the United States. A corporation is not considered a U.S. citizen
unless, among other things:
- the corporation is organized under the laws of the United States or of
a state, territory or possession of the United States,
- at least 75% of the ownership of voting interest with respect to
its capital stock is held by U.S. citizens,
- the corporation's chief executive officer, president and chairman
of the board are U.S. citizens and
- no more than a minority of the number of directors necessary to
constitute a quorum for the transaction of business are
foreigners.
If we fail to comply with these requirements, our vessels lose their eligibility
to engage in coastwise trade within U.S. domestic waters. To facilitate
compliance, our certificate of incorporation:
- limits ownership by foreigners of any class of our capital stock
(including our common stock) to 4%, so that foreign ownership
will not exceed the 25% permitted;
- permits withholding of dividends and suspension of voting rights
with respect to any shares held by foreigners that exceed 4%;
- permits a stock certification system with two types of
certificates to aid tracking of ownership and
- permits our board of directors to make such determinations to
ascertain ownership and implement such measures as reasonably may
be necessary.
Our operations are also subject to a variety of federal, state, local and
international laws and regulations regarding the discharge of materials into the
environment or otherwise relating to environmental protection. The requirements
of these laws and regulations have become more complex and stringent in recent
years and may, in certain circumstances, impose strict liability, rendering a
company liable for environmental damages and remediation costs without regard to
negligence or fault on the part of such party. Aside from possible liability for
damages and costs associated with releases of hazardous materials including oil
into the environment, such laws and regulations may expose us to liability for
the conditions caused by others or even acts of ours that were in compliance
with all applicable laws and regulations at the time such acts were performed.
Failure to comply with
12
applicable laws and regulations may result in the imposition of administrative,
civil and criminal penalties, revocation of permits, and issuance of corrective
action orders. Moreover, it is possible that changes in the environmental laws,
regulations or enforcement policies or claims for damages to persons, property,
natural resources or the environment could result in substantial costs and
liabilities to us. We believe that we are in substantial compliance with
currently applicable environmental laws and regulations.
OPA 90 and regulations promulgated pursuant thereto impose a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills. A "responsible party" includes
the owner or operator of an onshore facility, pipeline or vessel or the lessee
or permittee of the area in which an offshore facility is located. OPA 90
assigns liability to each responsible party for oil removal costs and a variety
of public and private damages. Under OPA 90, "tank vessels" of over 3,000 gross
tons that carry oil or other hazardous materials in bulk as cargo, a term which
includes our tank barges, are subject to liability limits of the greater of
$1,200 per gross ton or $10 million. For any vessels, other than "tank vessels,"
that are subject to OPA 90, the liability limits are the greater of $0.5 million
or $600 per gross ton. A party cannot take advantage of liability limits if the
spill was caused by gross negligence or willful misconduct or resulted from
violation of a federal safety, construction or operating regulation. If the
party fails to report a spill or to cooperate fully in the cleanup, the
liability limits likewise do not apply.
OPA 90 also imposes ongoing requirements on a responsible party, including
preparedness and prevention of oil spills, preparation of an oil spill response
plan and proof of financial responsibility (to cover at least some costs in a
potential spill) for vessels in excess of 300 gross tons. We have engaged the
National Response Corporation to serve as our independent contractor for
purposes of providing stand-by oil spill response services in all geographical
areas of our fleet operations. In addition, our Oil Spill Response Plan has been
approved by the U.S. Coast Guard. Finally, we have provided satisfactory
evidence of financial responsibility to the U.S. Coast Guard for all of our
vessels over 300 tons.
OPA 90 requires that all newly-built tank vessels used in the transport of
petroleum products be built with double-hulls and provides for a phase-out
period for existing single-hull vessels. Modifying existing vessels to provide
for double-hulls will be required of all tank barges and tankers in the industry
by the year 2015. We are in a favorable position concerning this provision
because a significant number of vessels in our fleet of tank barges measure less
than 5,000 gross tons. Vessels of such tonnage may continue to operate without
double-hulls through the year 2015. Under existing legal requirements,
therefore, we will not be required to modify or replace most of our tank barges
before 2015. Although we are not aware of anything that would lead us to believe
this will change, a change in the law affecting the requirement for double-hulls
or other aspects of our operations may occur that would require us to modify or
replace our existing tank barge fleet earlier than currently anticipated.
The Clean Water Act imposes strict controls on the discharge of pollutants
into the navigable waters of the United States. The Clean Water Act also
provides for civil, criminal and administrative penalties for any unauthorized
discharge of oil or other hazardous substances in reportable quantities and
imposes substantial liability for the costs of removal and remediation of an
unauthorized discharge. Many states have laws that are analogous to the Clean
Water Act and also require remediation of accidental releases of petroleum in
reportable quantities. Our vessels routinely transport diesel fuel to offshore
rigs and platforms and also carry diesel fuel for their own use. Our supply
boats transport bulk chemical materials used in drilling activities and liquid
mud, which contains oil and oil by-products. We maintain vessel response plans
as required by the Clean Water Act to address potential oil spills.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, also known as "CERCLA" or "Superfund," and similar laws impose
liability for releases of hazardous substances into the environment. CERCLA
currently exempts crude oil from the definition of hazardous substances for
purposes of the statute, but our operations may involve the use or handling of
other materials that may be classified as hazardous substances. CERCLA assigns
strict liability to each responsible party for all response and remediation
costs, as well as natural resource damages and thus we could be held liable for
releases of hazardous substances that resulted from operations by third parties
not under our control or for releases associated with practices performed by us
or others that were standard in the industry at the time.
The Resource Conservation and Recovery Act regulates the generation,
transportation, storage, treatment and disposal of onshore hazardous and
non-hazardous wastes and requires states to develop programs to ensure the safe
disposal of wastes. We generate non-hazardous wastes and small quantities of
hazardous wastes in connection with
13
routine operations. We believe that all of the wastes that we generate are
handled in compliance with the Resource Conservation and Recovery Act and
analogous state statutes.
In or around early September 2000, LEEVAC Marine, a subsidiary of ours, was
one of approximately 130 companies that received a letter from the U.S.
Environmental Protection Agency, also known as the "EPA," directing LEEVAC
Marine to respond to a request for information on hazardous substances that may
have been sent by it to the Palmer Barge Line Site in Port Arthur, Texas. The
Palmer Barge Line Site was listed as a federal Superfund site in July 2000.
According to records furnished by EPA, LEEVAC Marine had two tank cleaning jobs
performed at this site in September-October 1988 at a cost of approximately
$12,000. We believe that the cleaning services performed by Palmer Barge Line
involved the removal of non-hazardous waste. In late September 2001, LEEVAC
Marine received a letter from the EPA notifying LEEVAC Marine that it is no
longer identified as a potentially responsible party in this matter and,
therefore, we do not believe that we will have any ultimate liability with
respect to this matter. LEEVAC Marine was notified in March 1996 regarding the
possibility of remediating on a voluntary basis certain waste pits at the SBA
Shipyards site in Jennings, Louisiana. This site is not identified as a
Superfund site. Subsequent to this initial notice, in December 2000, LEEVAC
Marine was one of approximately 14 companies that formed a limited liability
company referred to as "SSCI Remediation, LLC" to address this matter. LEEVAC
Marine accrued a $97,500 liability at the time of our formation to cover this
expense. LEEVAC Marine's current percentage of liability for cleanup efforts at
this site is estimated at approximately 1.7%, and, to date, it has contributed
approximately $34,000 towards this cleanup effort. This amount represents LEEVAC
Marine's share of a $2 million voluntary clean-up plan submitted to the limited
liability company's member group by an independent contractor whose contract is
to clean up the site in a manner that will meet both state and federal
standards. Remedial activities have begun at the SBA Shipyards site. Pursuant to
the agreement in June 1997, Cari Investment Company agreed to indemnify us for
certain matters, which would include those discussed in this paragraph. The
indemnity would be applicable to all liabilities, obligations, damages and
expenses related to the Superfund matter and to all liabilities, obligations,
damages and expenses in excess of $0.1 million. Christian G. Vaccari, who served
as our Chairman and Chief Executive Officer until February 2002, is a minority
shareholder and President of Cari Investment Company.
The Outer Continental Shelf Lands Act gives the federal government broad
discretion to regulate the release of offshore resources of oil and gas. Because
our operations rely primarily on offshore oil and gas exploration, development
and production, if the government were to exercise its authority under the Outer
Continental Shelf Lands Act to restrict the availability of offshore oil and gas
leases, such an action would have a material adverse effect on our financial
condition and results of operations.
In addition to laws and regulations affecting us directly, our operations
are also influenced by laws, regulations and policies which affect our
customers' drilling programs and the oil and gas industry as a whole.
We currently have in place pollution insurance coverage for oil spills in
navigable waters of the United States. Our ten offshore supply vessels have $5
million in primary insurance coverage for such offshore oil spills, with an
additional $100 million in excess umbrella coverage. In addition, fifteen of our
sixteen tank barges have $10 million in primary insurance coverage for such
offshore oil spills, with an excess umbrella coverage of $1 billion. Our
sixteenth tank barge is leased under a bareboat charter, and the operator of
that tank barge is responsible for insuring the tank barge for offshore oil
spills. Finally, our thirteen tugs have $5 million in primary insurance coverage
for these offshore oil spills, with an excess umbrella coverage of $1 billion.
Our tugs and tank barges acquired from the Spentonbush/Red Star Group have
obtained ISO 14001 certifications for environmental management from the
International Standards Organization. Both of our principal office locations in
Mandeville, Louisiana and Brooklyn, New York, as well as the majority of our
vessels, including all of our offshore supply vessels and our tugs and tank
barges acquired from the Spentonbush/Red Star Group, are also certified under
the International Safety Management Code, developed by the International
Maritime Organization to provide internationally recognized standards for the
safe management and operation of ships and for pollution prevention. Our other
tugs and tank barges participate in the Responsible Carrier Program developed by
the American Waterways Operators to improve marine safety and environmental
protection in the tank barge industry. Our offshore supply vessels participate
in the U.S. Coast Guard's Streamlined Inspection Program to maintain the overall
quality of our vessels and their operating systems. We believe that our
voluntary attainment and maintenance of these certifications and participation
in these programs provides evidence of our commitment to operate in a manner
that minimizes our impact on the environment.
14
In connection with the terrorist attacks in New York on September 11, 2001,
certain of our tugs operating in New York Harbor were requisitioned by the U.S.
Coast Guard for four days pursuant to federal law authorizing the requisition of
U.S. owned vessels in a national emergency. The loss of revenues associated with
such requisition by the Coast Guard did not have a material adverse impact on
our financial condition or results of operations.
OPERATING HAZARDS AND INSURANCE
The operation of our vessels is subject to various risks, such as
catastrophic marine disaster, adverse weather conditions, mechanical failure,
collision and navigation errors, all of which represent a threat to personnel
safety and to our vessels and cargo. We maintain insurance coverage that we
consider customary in the industry against certain of these risks, including, as
discussed above, $1 billion in pollution insurance for the tug and tank barge
fleet and $100 million of pollution coverage for the offshore supply vessels. We
believe that our current level of insurance is adequate for our business and
consistent with industry practice, and we have not experienced a loss in excess
of our policy limits. We may not be able to obtain insurance coverage in the
future to cover all risks inherent in our business, or insurance, if available,
may be at rates that we do not consider to be commercially reasonable. In
addition, as more single-hulled vessels are retired from active service,
insurers may be less willing to insure and customers less willing to hire
single-hulled vessels.
EMPLOYEES
At December 31, 2001, we had 393 employees in the United States and Puerto
Rico, including 337 operating personnel and 56 corporate, administrative and
management personnel. None of our employees are represented by a union or
employed pursuant to a collective bargaining agreement or similar arrangement.
In July 2001, the International Organization of Masters, Mates and Pilots, ILA,
AFL-CIO, initiated action to organize a union that would include 30 of our fleet
and technical employees in Puerto Rico. We contested the action with the
regional office of the National Labor Relations Board and engaged in a campaign
to educate our employees with regard to the issues related to the action. Our
Puerto Rican employees held an election on the matter in October 2001, the
results of which are currently sealed pending our appeal to the National Labor
Relations Board with regard to the appropriate make-up of the collective unit
presumed by the union. Regardless of the Board's decision on our appeal, we
anticipate a favorable result in this matter. We have not experienced any
strikes or work stoppages, and our management believes that we continue to enjoy
good relations with our employees.
PROPERTIES
Our headquarters are located in Mandeville, Louisiana in two leased
facilities consisting of approximately 6,500 and approximately 1,800 square
feet, respectively. These facilities house our principal executive and
administrative offices. The leases on these facilities are month to month. For
local support, we have an office in Puerto Rico consisting of approximately
1,900 square feet. To support our operations in the northeastern United States,
we lease office space and warehouse space in Brooklyn, New York, consisting of
approximately 66,760 square feet. We also lease dock space, consisting of
approximately 36,000 square feet, in Brooklyn, New York. We operate our tug and
tank barge fleet from these New York facilities. The lease on the dock space
expires in 2006. We believe that our facilities, including waterfront locations
used for vessel dockage and certain vessel repair work, provide an adequate base
of operations for the foreseeable future. Information regarding our fleet is set
forth above in "Items 1 and 2 -- Business and Properties -- Our Offshore Supply
Vessel Business" and " -- Our Tug and Tank Barge Business."
SEASONALITY OF BUSINESS
Demand for our offshore supply vessel services is directly affected by the
levels of offshore drilling activity. Budgets of many of our customers are based
upon a calendar year, and demand for our services has historically been stronger
in the third and fourth calendar quarters when allocated budgets are expended by
our customers and weather conditions are more favorable for offshore activities.
Many other factors, such as the expiration of drilling leases and the supply of
and demand for oil and gas, may affect this general trend in any particular
year. These factors have less impact on our offshore supply vessel business due
to the long-term full utilization nature of most of our contracts.
Tank barge services are significantly affected by demand for refined
petroleum products and crude oil. Such demand is seasonal and often dependent on
weather conditions. Unseasonably mild winters result in significantly
15
lower demand for heating oil in the northeastern United States, which is a
significant market for our tank barge services. Conversely, the summer driving
season can increase demand for automobile fuel and, accordingly, the demand for
our services. While the recent winter season was the warmest on record and,
therefore, adversely affected the volume of products we transported in the
northeastern United States in the fourth quarter of 2001 and the first quarter
of 2002, we do not believe that this trend will continue next winter.
RECENT DEVELOPMENTS
Changes in Senior Management. On February 27, 2002, Todd M. Hornbeck was
appointed Chief Executive Officer in addition to his positions as President and
Secretary, and Carl G. Annessa was appointed Chief Operating Officer in addition
to his position as Vice President. Also, Bernie W. Stewart was named Chairman of
the Board on February 27, 2002. Christian G. Vaccari, who formerly served as our
Chief Executive Officer and Chairman of the Board, continues to serve as one of
our directors.
Delivery of the HOS Dominator. On February 20, 2002, we took delivery of
the HOS Dominator, a 240-ft. class offshore supply vessel. The HOS Dominator was
immediately employed under a three-year contract with a large oilfield service
company to support remotely operated vehicle, subsea construction services.
Completion of Senior Notes Exchange Offer. On January 18, 2002, we
completed an exchange offer pursuant to an effective Registration Statement on
Form S-4, whereby $175 million of our privately placed 10 5/8% Series A notes
due 2008 were exchanged for a like principal amount of our 10 5/8% Series B
notes due 2008, which are identical in all material respects to the form and
terms of the Series A notes, except that the offering of the Series B notes was
registered under the Securities Act of 1933. References in this Form 10-K to our
"senior notes" refers to the outstanding Series B notes.
New Revolving Line of Credit. On December 31, 2001, two of our
subsidiaries, Hornbeck Offshore Services, LLC and LEEVAC Marine, LLC, entered
into a new three-year senior secured revolving line of credit (the "Revolver")
for $50.0 million. Pursuant to the terms of the Revolver, our borrowings under
this facility will initially be limited to $25.0 million unless we have obtained
the lender's concurrence to borrow in excess of $25.0 million and are in
compliance with the terms of the indenture governing our senior notes with
respect to the incurrence of additional indebtedness. Borrowings under the
Revolver accrue interest, at our option, at either (i) the prime rate announced
by Citibank, N.A. in New York, plus a margin of 0% to 1%, or (ii) the London
Interbank Offered Rate, plus a margin of 1.75% to 3.0%. We are also required to
pay a commitment fee on available but unused amounts ranging from 0.25% to
0.375%. The interest rate margin and commitment fee are based on our leverage
ratio, as defined in the agreement governing the Revolver. We can use the
amounts we draw under the Revolver for working capital purposes, acquisitions
and vessel construction. On February 25, 2002, the undrawn Revolver was
collateralized by four of our offshore supply vessels and four of our
ocean-going tugs with an aggregate orderly liquidation value of approximately
$75.0 million. We have guaranteed the obligations of Hornbeck Offshore Services,
LLC and LEEVAC Marine, LLC under the Revolver.
Changes in Subsidiaries. Effective December 17, 2001, two of our
subsidiaries, Hornbeck Offshore Services, Inc. and HORNBECK-LEEVAC Marine
Operators, Inc., both Delaware corporations, converted into Delaware limited
liability companies, as permitted by Delaware law, and are now known as Hornbeck
Offshore Services, LLC and HORNBECK-LEEVAC Marine Operators, LLC, respectively.
On December 17, 2001, we formed two new subsidiaries, LEEVAC Marine, LLC and
Energy Services Puerto Rico, LLC, both Delaware limited liability companies.
Effective December 31, 2001, we merged LEEVAC Marine, Inc., one of our existing
Louisiana corporate subsidiaries, into LEEVAC Marine, LLC, and Energy Services
Puerto Rico, Inc., our other existing Louisiana corporate subsidiary, into
Energy Services Puerto Rico, LLC.
ITEM 3 -- LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings, although we
may from time to time be subject to various legal proceedings and claims that
arise in the ordinary course of business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock is privately-held and not listed for quotation on any
exchange or over-the-counter market. At March 27, 2002, we had 70 holders of
record of our common stock.
In August and October 2001, we issued a total of 5,509,434 shares of our
common stock that were not registered under the Securities Act in reliance upon
Section 4(2) of the Act and Regulation D promulgated thereunder exempting
transactions by an issuer not involving a public offering. The shares were
issued to our existing stockholders and the amount of consideration we received
for the issuance of these shares was $14.6 million. We repurchased all of our
outstanding warrants with $14.5 million of the proceeds. The remaining funds
were available for payment of expenses incurred in the offering.
In September 2001, we issued 50,000 shares of our common stock that were
not registered under the Securities Act in reliance upon Section 4(2) of the Act
exempting transactions by an issuer not involving a public offering. The shares
were issued to one of our employees and the amount of consideration we received
for the issuance of these shares was $0.1 million. These proceeds were available
for general corporate purposes.
On July 24, 2001, we issued $175 million in principal amount of our 10 5/8%
Series A notes due 2008 to the initial purchasers of those notes who then resold
the Series A notes only to qualified institutional buyers pursuant to Rule 144A
of the Securities Act of 1933. We used a substantial portion of the proceeds we
received in connection with this private placement to repay the outstanding
indebtedness under our then existing credit facilities and such facilities have
been terminated. On January 18, 2002, all of the Series A notes were exchanged
for a like principal amount of our 10 5/8% Series B notes due 2008, which are
identical in all material respects to the form and terms of the Series A notes,
except that the offering of the Series B notes was registered under the
Securities Act. We did not receive any proceeds from the exchange offer.
We do not plan to pay cash dividends on our common stock. We intend to
retain all of the cash our business generates to meet our working capital
requirements and fund future growth. In addition, our debt agreements prohibit
us from paying dividends on our common stock.
17
ITEM 6 -- SELECTED FINANCIAL DATA
HORNBECK-LEEVAC MARINE SERVICES, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT RATIOS AND VESSEL DATA)
Our selected historical consolidated financial information as of and for
the fiscal years ended December 31, 1997, 1998, 1999, 2000 and 2001, was derived
from our audited historical consolidated financial statements. You should read
this information together with, and is qualified in its entirety by reference
to, "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and our historical consolidated financial statements and their notes
included elsewhere in this report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue ................................. $ 6,656 $ 12,822 $ 25,723 $ 36,102 $ 68,791
Operating expenses ...................... 5,906 10,701 17,275 20,410 32,371
General and administrative expenses ..... 762 1,699 2,467 3,355 8,473
Operating income (loss) ................. (12) 422 5,981 12,337 27,947
Interest income ......................... 47 130 170 305 1,455
Interest expense ........................ 324 1,155 5,262 8,216 10,665
Other income (expense)(1) ............... 29 544 (20) (138) --
Income (loss) before income taxes and
extraordinary item .................... (260) (59) 869 4,288 18,737
Extraordinary loss, net of tax benefit of
$1,065(2) ............................. -- -- -- -- 1,964
Income tax (expense) benefit ............ 80 156 (341) (1,550) (6,802)
Net income (loss) ....................... (180) 97 528(3) 2,738 9,971
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ............... $ 4,621 $ 3,183 $ 6,144 $ 32,988 $ 53,203
Working capital ......................... 4,206 2,129 1,857 29,524 48,516
Property, plant and equipment, net ...... 14,742 45,819 85,700 98,935 180,781
Total assets ............................ 25,461 58,216 103,486 147,148 258,817
Total debt .............................. 9,500 34,621 83,954 89,391 172,413(4)
Stockholders' equity(5) ................. 12,350 13,060 13,480 49,745 59,866
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating
activities(6) ......................... $ 950 $ 3,593 $ 1,559 $ 4,203 $ 25,677
OTHER FINANCIAL DATA AND RATIOS
(UNAUDITED):
EBITDA(7) ............................... $ 511 $ 1,890 $ 9,875 $ 17,806 $ 37,072
Cash interest ........................... 324 418 4,495 7,145 5,577
Capital expenditures .................... 6,403 33,492 42,293 16,224 88,328
Depreciation and amortization ........... 476 1,338 3,724 5,164 7,670
Ratio of EBITDA to cash interest(8) ..... 1.6x 4.5x 2.2x 2.5x 6.6x
OTHER OPERATING DATA (UNAUDITED):
Offshore Supply Vessels:
Average number ........................ N/A 0.1 4.1 6.8 7.8
Average utilization rate(9) ........... N/A 100% 93.1% 93.4% 99.1%
Average dayrate(10) ................... N/A $ 8,936 $ 6,724 $ 8,435 $ 11,872
18
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
Tugs and Tank Barges:
Average number of tank barges ......... 7.1 7.0 7.1 7.0 12.3
Average fleet capacity (barrels) ...... 406,462 358,108 434,861 451,655 847,780
Average barge size (barrels) .......... 56,770 51,158 61,464 64,522 68,109
Average utilization rate(9) ........... N/A 75.3% 73.9% 71.4% 84.4%
Average dayrate(11) ................... N/A $ 6,502 $ 8,482 $ 8,982 $ 9,306
- -----------
(1) Includes other operating income and expenses.
(2) A non-cash extraordinary loss of $1,964, net of taxes, was incurred during
2001 resulting from the early extinguishment of debt. This extraordinary
item relates to the write off of deferred financing costs upon the
refinancing of all our debt through the issuance of the Series A notes.
(3) Excludes a net write off of $108 related to a cumulative effect of change
in accounting principle for start-up costs.
(4) Excludes original issue discount associated with the Series A notes in the
amount of $3,024.
(5) On October 25, 2001, we completed a private placement of $14,600 of our
common stock. We repurchased all of our outstanding warrants with $14,500
of the proceeds.
(6) For more information regarding cash flows from operating activities and for
information regarding cash flows from investing activities and financing
activities, please refer to our Consolidated Statements of Cash Flows
beginning on page F-6.
(7) EBITDA is earnings before interest expense, other income (expense),
provision for income taxes, depreciation and amortization. EBITDA is
presented as it is commonly used by certain investors to analyze and
compare operating performance and to determine a company's ability to
service or incur debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flow or other income or cash flow data or
as a measure of a company's profitability or liquidity and is not a measure
calculated in accordance with generally accepted accounting principles.
EBITDA is not necessarily comparable with similarly titled measures
reported by other companies.
(8) Calculated as EBITDA divided by cash interest. For purposes of calculating
the ratio of EBITDA to cash interest, EBITDA consists of the components
discussed in footnote (9) above.
(9) Utilization rates are average rates based on a 365-day year. Vessels are
considered utilized when they are generating revenues.
(10) Average dayrates represent average revenue per day, which includes charter
hire and brokerage revenue, based on the number of days during the period
that the offshore supply vessels generated revenue.
(11) Average dayrates represent average revenue per day, including time
charters, revenues generated on a per-barrel-transported basis, demurrage,
shipdocking and fuel surcharge revenue, based on the number of days during
the period that the tank barges generated revenue.
19
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with our historical consolidated financial statements and their
notes included elsewhere in this Form 10-K.
GENERAL
We operate deepwater offshore supply vessels in the Gulf of Mexico and
ocean-going tugs and tank barges in the northeastern United States, primarily
New York Harbor, and in Puerto Rico. We charter our offshore supply vessels on a
dayrate basis, under which the customer pays us a specified dollar amount for
each day during the term of the contract, under either fixed time charters or
spot market charters. A fixed time charter is a contract in which the charterer
obtains the right for a specified period to direct the movements and utilization
of the vessel in exchange for payment of a specified daily rate, generally paid
monthly, but the vessel owner retains operational control over the vessel.
Typically, the owner fully equips the vessel and is responsible for normal
operating expenses, repairs, wages and insurance, while the charterer is
responsible for voyage expenses, such as fuel, port and stevedoring expenses.
Spot market charters in the offshore supply vessel industry are generally time
charter contracts with terms of less than one year. Generally, we absorb crew,
insurance and repair and maintenance costs in connection with operation of our
offshore supply vessels and our customers absorb other direct operating costs.
All of our offshore supply vessels are currently operating under time
charter contracts, including seven that are chartered with initial terms ranging
from two to five years. We are currently involved in a contract dispute with one
of our customers with respect to two of such vessels, which could result in only
five of our offshore supply vessels being under long-term contracts. Our
long-term contracts for our offshore supply vessels are consistent with those
used in the industry and are either fixed for a term of months or years or are
tied to the duration of a long-term contract for a drilling rig for which the
vessel provides services. These contracts generally contain, among others,
provisions governing insurance, reciprocal indemnifications, performance
requirements and, in certain instances, dayrate escalation terms and renewal
options.
While offshore supply vessels service existing oil and gas production
platforms as well as exploration and development activities, incremental vessel
demand depends primarily upon the level of drilling activity, which can be
influenced by a number of factors, including oil and gas prices and drilling
budgets of exploration and production companies. As a result, utilization and
dayrates have historically correlated to oil and gas prices and drilling
activity, although the greater investment of time and expense associated with
deepwater production and the consequent long-term nature of deepwater offshore
supply vessel contracts have weakened the significance of the correlation in
recent years.
Generally, we operate an ocean-going tug and tank barge together as a "tow"
to transport petroleum products between U.S. ports and along the coast of Puerto
Rico. We operate our tugs and tank barges under fixed time charters, spot market
charters, contracts of affreightment and consecutive voyage contracts. Spot
market charters in the tug and tank barge industry are generally single-voyage
contracts of affreightment or time charter contracts with terms of less than one
year. A consecutive voyage contract is a contract for the transportation of
cargo for a specified number of voyages between designated ports over a fixed
period of time under which we are paid based on the volume of products we
deliver per voyage. Under consecutive voyage contracts, in addition to earning
revenues for volumes delivered, we earn a standby hourly rate between charters.
One of our tank barges has been chartered to a third party under a bareboat
charter. A bareboat charter is a "net lease" in which the charterer takes full
operational control over the vessel for a specified period of time for a
specified daily rate that is generally paid monthly to the vessel owner. The
bareboat charterer is solely responsible for the operation and management of the
vessel and must provide its own crew and pay all operating and voyage expenses.
The primary drivers of demand for our tug and tank barge services are
population growth, the strength of the United States economy and changes in
weather patterns that affect consumption of heating oil and gasoline. The tug
and tank barge market, in general, is marked by steady demand over time. We
believe that demand for refined petroleum products and crude oil will remain
steady or gradually increase for the foreseeable future.
Our operating costs are primarily a function of fleet size and utilization
levels. The most significant direct operating costs are wages paid to vessel
crews, maintenance and repairs and marine insurance. Generally, fluctuations in
vessel utilization affect only that portion of our direct operating costs that
is incurred when our
20
vessels are active. Direct operating costs as a percentage of revenues may
therefore vary substantially due to changes in day rates and utilization.
In addition to the operating costs described above, we incur fixed charges
related to the depreciation of our fleet and costs for routine drydock
inspections and maintenance and repairs necessary to ensure compliance with
applicable regulations and to maintain certifications for our vessels with the
U.S. Coast Guard and various classification societies. The aggregate number of
drydockings and other repairs undertaken in a given period determines the level
of maintenance and repair expenses and marine inspection amortization charges.
We generally capitalize costs incurred for drydock inspection and regulatory
compliance and amortize such costs over the period between such drydockings,
typically 30 or 60 months.
Applicable maritime regulations require us to drydock our vessels twice in
a five-year period for inspection and routine maintenance and repair. If we
undertake a large number of drydockings in a particular fiscal period,
comparative results may be affected.
RESULTS OF OPERATIONS
The tables below set forth, by segment, the average dayrates and
utilization rates for our vessels and the average number of vessels owned during
the periods indicated. The average dayrates are based on the number of days the
vessel, for the offshore supply vessel segment, or tank barge, for the tug and
tank barge segment, generated revenue during the period. For the offshore supply
vessel segment, revenue includes charter hire and brokerage revenue. For the tug
and tank barge segment, revenue includes time charters, revenues generated on a
per-barrel-transported basis, demurrage, shipdocking and fuel surcharge revenue.
Utilization rates are average rates based on a 365-day year. Vessels are
considered utilized when they are generating revenues. These offshore supply
vessels and tug and tank barges generate substantially all of our revenues and
operating profit.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1999 2000 2001(1)
-------- -------- -------- --------
OFFSHORE SUPPLY VESSELS:
Average number of vessels ....... 0.1 4.1 6.8 7.8
Vessel days available ........... 44 1,517 2,490 2,857
Average utilization rate ........ 100.00% 93.1% 93.4% 99.1%
Average dayrate ................. $ 8,936 $ 6,724 $ 8,435 $ 11,872
TUGS AND TANK BARGES:
Average number of tank barges ... 7.0 7.1 7.0 12.3
Average fleet capacity (barrels) 358,108 434,861 451,655 847,780
Average barge size (barrels) .... 51,158 61,464 64,522 68,109
Average utilization rate ........ 75.3% 73.9% 71.4% 84.4%
Average dayrate ................. $ 6,502 $ 8,482 $ 8,982 $ 9,306
- ----------
(1) Includes only seven months of operations of the nine tugs and nine tank
barges acquired from the Spentonbush/Red Star Group effective May 31, 2001,
and only eight months of operations from the HOS Innovator, delivered April
28, 2001 and only 2 months of operations from the BJ Blue Ray delivered
November 6, 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues were $68.8 million for the year ended December 31, 2001,
as compared to $36.1 million in 2000, an increase of $32.7 million or 90.6%.
This increase was primarily attributable to our offshore supply vessel segment,
which continued to experience strong demand for our vessels, and the revenues
generated by the additional tugs and tank barges acquired on May 31, 2001.
Revenues from our offshore supply vessel segment increased to $33.6 million
in 2001 as compared to $19.6 million in 2000, an increase of $14.0 million or
71.4%. The primary reasons for the increase in revenue from this segment were a
41% increase in average dayrates, a 6% increase in utilization and the addition,
during 2001, of two newly constructed offshore supply vessels, one in late April
and the other in early November. Our utilization rate
21
for our offshore supply vessels was 99.1% for 2001 compared to 93.4% in 2000 as
a result of higher demand for deepwater drilling, construction and field
development activity in the Gulf of Mexico. Our offshore supply vessel average
dayrate was $11,872 for 2001 compared to $8,435 in 2000, an increase of $3,437
or 40.7%. The increase in average dayrates was due to a combination of higher
demand and the addition to our fleet of the larger, newly constructed 240' class
HOS Innovator on April 28, 2001 and the 265' class BJ Blue Ray on November 6,
2001, which operated at higher dayrates than our 200' class offshore supply
vessels.
Revenues from our tug and tank barge segment totaled $35.2 million for 2001
as compared to $16.5 million in 2000, an increase of $18.7 million or 113.3%.
This segment revenue increase is primarily due to increased utilization and the
acquisition of nine tugs and nine tank barges on May 31, 2001, which increased
fleet capacity from 451,655 barrels to 1,130,727 barrels. Our utilization rate
for our tugs and tank barges increased to 84.4% for 2001 compared to 71.4% in
2000. The increase in utilization was primarily the result of a change from
vessels operating under contracts of affreightment to time charters, as well as
the vessels being out of service for repairs fewer days in 2001 as compared to
2000. Our average dayrate increased to $9,306 in 2001 compared to $8,982 in
2000, an increase of $324 per day or 3.6%.
Operating Expense. Our operating expense, including depreciation and
amortization, increased to $32.4 million for 2001 as compared to $20.4 million
in 2000, an increase of $12.0 million or 58.8%. The increase in total operating
expense resulted primarily from the addition of vessels to the offshore supply
vessel and tank barge fleets during 2001. Daily operating expenses per vessel in
both the offshore supply vessel segment and the tug and tank barge segment
remained fairly constant.
Operating expense for our offshore supply vessel segment increased $5.9
million or 63.4% in 2001 to $15.2 million compared to $9.3 million in 2000. This
increase was primarily the result of the HOS Cornerstone being in service for
all of 2001, but only a portion of 2000 and the HOS Innovator and BJ Blue Ray
being in service for a portion of 2001 but not in service during 2000.
Operating expense for our tug and tank barge segment was $25.7 million for
2001 compared to $11.1 million in 2000, an increase of $14.6 million or 131.5%.
The operating expense increase resulted primarily from our acquisition of nine
tugs and nine tank barges on May 31, 2001.
General and Administrative Expense. Our general and administrative expense
was $8.5 million for 2001 as compared to $3.4 million of 2000, an increase of
$5.1 million. This increase primarily resulted from increased overhead relating
to the nine tugs and nine tank barges acquired on May 31, 2001, new costs
associated with compliance with our reporting obligations under the federal
securities laws and an increase in profit-based incentive bonus compensation
accruals as our profitability increased.
Interest Expense. Interest expense was $10.7 million in 2001 compared to
$8.2 million in 2000, an increase of $2.5 million or 30.5%. This increase in
interest expense resulted from the refinancing of all of our conventional
floating rate debt through the issuance of the Series A notes in July 2001 with
a higher fixed rate, and a higher average balance of debt outstanding in the
2001 period. This increase was offset by the capitalization of interest costs
relating to new construction which increased significantly in 2001 due to the
construction in progress of six offshore supply vessels compared to the
construction in 2000 of one vessel completed in March 2000.
Interest Income. Interest income was $1.5 million in 2001 compared to $0.3
million in 2000, an increase of $1.2 million or 400%. This increase in interest
income resulted from substantially higher cash balances invested during the 2001
period resulting from the excess proceeds of the Series A notes offering being
available for investment after the refinancing.
Income Tax Expense. Our effective tax rate for 2001 was 36.3% compared to
an effective tax rate of 36.0% for 2000.
Extraordinary Loss. A non-cash extraordinary loss of $2.0 million, net of
taxes, was incurred during 2001 resulting from the early extinguishment of debt.
This extraordinary item relates to the write-off of deferred financing costs
upon the refinancing of all our debt through the issuance of the Series A notes
in July 2001.
22
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues were $36.1 million in 2000 compared to $25.7 million in
1999, an increase of $10.4 million or 40%. Substantially all of this increase
was attributable to our offshore supply vessel segment, which added five vessels
to its fleet during 1999 and one during 2000.
Revenues from our offshore supply vessel segment totaled $19.6 million in
2000 compared to $9.5 million in 1999, an increase of $10.1 million or 106%. The
increase in our revenues in 2000 reflected the continued growth of our offshore
supply vessel fleet through new construction during 1999 and early 2000 as
follows:
VESSEL NAME IN SERVICE DATE
- ----------------------------- -----------------------
HOS Super H.................. January 14, 1999
HOS Brigadoon................ March 11, 1999
HOS Thunderfoot.............. May 12, 1999
HOS Dakota................... June 16, 1999
HOS Deepwater................ November 15, 1999
HOS Cornerstone.............. March 11, 2000
In addition to the impact of new vessel deliveries, average dayrates in
2000 were $8,435 as compared to $6,724 in 1999, an increase of $1,711 per day or
25%. This increase reflects the continuing increase in demand for offshore
supply vessels to support deepwater oil and gas exploration, drilling and
production in the Gulf of Mexico, combined with the higher dayrates attributable
to two 240' class vessels entering the fleet in late 1999 and early 2000. Our
average utilization rate was approximately 93% in each year.
Revenues from our tug and tank barge segment totaled $16.5 million in 2000
compared to $16.2 million in 1999, an increase of $0.3 million or 2%. Our
utilization rate decreased to 71.4% in 2000 from 73.9% in 1999, primarily due to
the removal of vessels from service for scheduled maintenance. Although vessel
utilization decreased, our average dayrate increased to $8,982 in 2000 from
$8,482 in 1999, an increase of $500 per day worked or 6%.
Operating Expense. Our operating expense, including depreciation and
amortization, increased from $17.3 million in 1999 to $20.4 million in 2000, an
increase of $3.1 million or 18%. Daily operating expenses per vessel in both the
offshore supply vessel segment and the tug and tank barge segment remained
fairly constant. Changes in operating expenses resulted primarily from changes
in the number of vessels operating in the fleet and fluctuations in direct costs
of sales that are either reimbursed by customers or absorbed as an operating
expense for the vessel.
Operating expense for our offshore supply vessel segment increased $4.0
million in 2000 to $9.3 million compared to $5.3 million in 1999. This increase
resulted from the inclusion in 2000 of vessels added to our fleet at various
times in 1999 and early 2000.
Operating expense for our tug and tank barge segment decreased $0.9 million
or 8% in 2000 to $11.1 million compared to $12.0 million in 1999. The operating
expense reduction was the result of changes from contracts of affreightment to
time charters for three tows. During 1999, we had seven tows operating under
contracts of affreightment as compared to six tows operating under a contract of
affreightment and one tow operating under a time charter in 2000. The result was
a daily operating cost of $4,340 per day in 2000 compared to $4,648 per day in
1999, a decrease of $308 per day or 7%.
General and Administrative Expense. Our general and administrative expense
was $2.5 million in 1999 compared to $3.4 million in 2000, an increase of $0.9
million or 36%. This increase primarily resulted from an increase in shore-based
personnel and associated compensation costs as offshore supply vessel fleet
operations expanded and increased accruals under our profit-based incentive
bonus compensation program as our profitability increased.
Interest Expense. Interest expense was $8.2 million in 2000 compared to
$5.3 million in 1999, an increase of $2.9 million or 55%. Interest expense
increased as vessels were delivered in 1998, 1999 and 2000 due to conversion
from construction interest, which was capitalized, to interest expense under
term financing. The financing of the HOS Deepwater and the HOS Cornerstone under
one of our former credit facilities increased our debt balances, leading to
increased interest expense.
23
Income Tax Expense. Our effective tax rate for 2000 was 36.0% compared to
an effective tax rate of 39% for 1999. The effective tax rate decreased due to
an increase in operating income and the amount of nondeductible expenses
remaining constant between the periods.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues were $25.7 million in 1999 compared to $12.8 million in
1998, an increase of $12.9 million or 101%. The increase in revenue was the
result of the delivery of newly constructed offshore supply vessels in late 1998
and during 1999 and the acquisition of tugs and tank barges with higher
capacities in March 1999.
Revenues from our offshore supply vessel segment totaled $9.5 million in
1999 compared to $0.3 million in 1998, an increase of $9.2 million. The revenue
increase in 1999 reflects the growth of our fleet through new construction from
one vessel, the HOS Crossfire, which commenced service November 6, 1998, to six
vessels at the end of 1999. Moreover, average dayrates decreased to $6,724 in
1999 compared to $8,936 in 1998. Average dayrates fluctuated as vessels entered
the fleet in the spot market before term charters were obtained for the vessels
in late 1998 and early 1999, then stabilized and began a rising trend in the
third quarter due to the increase in demand for offshore supply vessels to
support deepwater oil and gas exploration, development and production in the
Gulf of Mexico. Our utilization rate was 93.1% in 1999 compared to 100% in 1998.
Revenues from our tug and tank barge segment totaled $16.2 million in 1999
compared to $12.5 million in 1998, an increase of $3.7 million or 29%. The
majority of the increase resulted from the purchase in March 1999 of the Energy
6503 and Energy 7002 with capacities of 65,145 barrels and 72,693 barrels,
respectively, which was partially offset by the sale in March 1999 of the LMI
2000 with a capacity of 20,750 barrels, and by the sale in December 1999 of the
LMI 2503 with a capacity of 23,451 barrels, which had been cold stacked in
February. These transactions increased our marine transportation total fleet
capacity from 358,108 barrels to 451,655. Utilization remained relatively stable
with a utilization rate of 73.9% in 1999 compared to 75.3% in 1998. Average
dayrates increased to $8,482 in 1999 from $6,502 in 1998, an increase of $1,980
per day or 30%, due to increased capacity and time charter contracts at rates
higher than historical averages.
Operating Expense. Our operating expense, including depreciation and
amortization, increased from $10.7 million in 1998 to $17.3 million in 1999, an
increase of $6.6 million or 62%. Daily operating expenses per vessel in both the
offshore supply vessel segment and the tug and tank barge segment remained
fairly constant. Changes in operating expenses resulted primarily from changes
in the number and size of vessels operating in the fleet during the periods.
Operating expense for our offshore supply vessel segment increased $5.1
million in 1999 to $5.3 million compared to $0.2 million in 1998. This increase
primarily resulted from the addition of the newly constructed vessels placed in
service in late 1998 and during 1999.
Operating expense for our tug and tank barge segment increased $1.5 million
or 14% in 1999 to $12 million compared to $10.5 million in 1998. This increase
in operating expense resulted from the sale and purchase, previously described,
of certain tank barges and the constructive total loss incurred as the result of
the grounding of the M/V New Jersey in March 1998. The vessel was subsequently
repurchased from the insurance company for salvage value, repaired and returned
to service as the M/V Tradewind Service in March 1999. The barge sale and
purchase in March 1999 resulted in increases in depreciation, insurance and crew
costs. In addition, planned drydocking amortization cost increased as a result
of the cost of regularly scheduled drydock for repair, maintenance and
regulatory recertification. The resulting daily average operating cost increased
from $4,124 per day in 1998 to $4,648 per day in 1999, a change of $524 per day
or 13%.
General and Administrative Expense. Our general and administrative expense
was $1.7 million in 1998 compared to $2.5 million in 1999, an increase of $0.8
million or 47%. This increase primarily resulted from the addition of a
shore-based administrative facility in Puerto Rico to service our Caribbean tug
and tank barge operations, the cost of consolidating operations, accounting and
management offices into one location and an increase in profit-based incentive
bonus compensation accruals as our profitability increased.
Interest Expense. Interest expense was $5.3 million in 1999 compared to
$1.2 million in 1998, an increase of $4.1 million or 342%. This increase
reflects the incurrence of debt to construct offshore supply vessels that were
delivered in 1998 and 1999. Interest expense increased as vessels were delivered
in late 1998 and throughout 1999
24
due to the conversion from construction interest, which was capitalized, to
interest expense under term financing. During 1998, the proceeds of a debt
placement provided interest income which partially offset interest expense.
Moreover, the amortization of financing costs and the warrant valuation
adjustment that occurred in connection with the June 1998 debt placement were
reflected for all of 1999 compared to six months in 1998.
Income Tax Expense. The comparison of our effective tax rates for the years
ended December 31, 1998 and 1999 was not meaningful due to the Company's net
operating loss of $59 and other non-deductible expenses of $101 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our principal needs for capital are to fund ongoing operations, capital
expenditures for the construction of new vessels and acquisitions and debt
service. We have historically financed our capital needs with cash flow from
operations, issuances of equity and borrowings under our credit facilities.
Net cash provided by operating activities was $1.6 million in 1999, $4.2
million in 2000 and $25.7 million in 2001. Changes in cash flow from operating
activities are principally the result of higher income from operations after
considering increases in depreciation and amortization due to the significant
expansion of our vessel fleet, offset by changes in our net working capital.
Net cash used in investing activities was $42.3 million in 1999, $16.2
million in 2000 and $88.3 million in 2001. Net cash used in investing activities
was primarily the result of new vessel construction and acquisitions. Also
included in these invested cash amounts are drydocking expenditures,
predominately related to recertification of vessels not recently acquired, of
$1.0 million in 1999 and $1.7 million in both 2000 and 2001.
Net cash provided by financing activities was $43.7 million in 1999, $38.9
million in 2000 and $82.9 million in 2001. Net cash provided by financing
activities was primarily the result of issuances of equity and senior notes and
borrowings under our former credit facilities offset in part by the repayment in
full of such credit facilities.
On December 31, 2001, two of our subsidiaries, Hornbeck Offshore Services,
LLC and LEEVAC Marine, LLC, entered into a new three-year senior secured
revolving line of credit (the "Revolver") for $50.0 million. Pursuant to the
terms of the Revolver, our borrowings under this facility will initially be
limited to $25.0 million unless we have obtained the lender's concurrence to
borrow in excess of $25.0 million and are in compliance with the terms of the
indenture governing our senior notes with respect to the incurrence of
additional indebtedness. Borrowings under the Revolver accrue interest, at our
option, at either (i) the prime rate announced by Citibank, N.A. in New York,
plus a margin of 0% to 1%, or (ii) the London Interbank Offered Rate, plus a
margin of 1.75% to 3.0%. We are also required to pay a commitment fee on
available but unused amounts ranging from 0.25% to 0.375%. The interest rate
margin and commitment fee are based on our leverage ratio, as defined in the
agreement governing the Revolver. We can use the amounts we draw under the
Revolver for working capital purposes, acquisitions and vessel construction. On
February 25, 2002, the undrawn Revolver was collateralized by four of our
offshore supply vessels and four of our ocean-going tugs with an aggregate
orderly liquidation value of approximately $75.0 million. We have guaranteed the
obligations of Hornbeck Offshore Services, LLC and LEEVAC Marine, LLC under the
Revolver.
On July 24, 2001, we issued $175.0 million in principal of 10 5/8% Series A
notes due 2008. We realized net proceeds of $165.0 million, a substantial
portion of which was used to repay and extinguish our outstanding indebtedness
under our then existing credit facilities, which were terminated. On January 18,
2002, all of the Series A notes were exchanged for a like principal amount of
our 10 5/8% Series B notes due 2008, which are identical in all material
respects to the form and terms of the Series A notes, except that the offering
of the Series B notes was registered under the Securities Act. We did not
receive any proceeds from the exchange offer. At December 31, 2001, we had
outstanding debt of $172.0 million, net of original issue discount, under the
senior notes.
Interest on the senior notes is payable semi-annually each February 1 and
August 1. The senior notes do not require any payments of principal prior to
their stated maturity on August 1, 2008, but pursuant to the indenture
25
under which the senior notes are issued, we are required to make offers to
purchase the senior notes upon the occurrence of certain events, such as asset
sales or a change in control.
The senior notes are general unsecured obligations and rank equally in
right of payment with all our existing and future unsecured senior indebtedness
and senior to all our future subordinated indebtedness. Our payment obligations
under the senior notes are fully and unconditionally guaranteed on a senior
unsecured basis by all our present and future significant subsidiaries on a
joint and several basis.
The agreement governing the Revolver and the indenture under which the
senior notes were issued impose operating and financial restrictions on us. Such
restrictions affect, and in many cases limit or prohibit, among other things,
our ability to incur additional indebtedness, make capital expenditures, redeem
equity, create liens, sell assets and make dividends or other payments.
During 2001, we expended approximately $88.3 million for vessel
construction, the Spentonbush/Red Star Group acquisition (including drydocking
expenses incurred with respect to such vessels during 2001) and the acquisition
of the M/V W.K. McWilliams, Jr. As of December 31, 2001, we had cash of
approximately $53.2 million and working capital of approximately $48.5 million.
As of December 31, 2001, we were committed under vessel construction contracts
to complete construction of four offshore supply vessels. As of December 31,
2001, the amount expected to be expended to complete construction of these
vessels was approximately $27.1 million, which becomes due at various dates
through 2002. In addition, we expect to expend approximately $8.0 million during
2002 for drydocking expenses related to recertification of all vessels and other
maintenance capital expenditures.
We believe that cash on hand and cash generated from operations will
provide sufficient funds for our identified capital projects, debt service and
working capital requirements. Our strategy, however, includes expanding our
fleet through the construction or acquisition of additional offshore supply
vessels, tugs and tank barges as needed to take advantage of the strong demand
for such vessels. Depending on the market demand for offshore supply vessels,
tugs and tank barges and consolidation opportunities that may arise, we may
require additional debt or equity financing. Although we continue to evaluate
potential acquisitions and newbuild opportunities, we do not presently have any
agreements, understandings or arrangements with respect to any specific
acquisition target or newbuild opportunity.
As of December 31, 2001, we had federal net operating loss carryforwards of
approximately $8.8 million available through 2017 to offset future taxable
income. In addition, we expect our federal tax net operating losses to increase
due to our use of accelerated tax depreciation with respect to new vessels. Our
use of these net operating losses may be limited due to U.S. tax laws. Based on
the age and composition of our current fleet, however, we expect to pay a lower
than normal amount of federal income taxes over the next five years. See Note 8
to our Consolidated Financial Statements included in this Form 10-K.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth an aggregation of our contractual
obligations and commercial commitments as of December 31, 2001, in thousands of
dollars.
PAYMENTS DUE BY PERIOD
----------------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----- ------ ----------- --------- -------
Long-term Debt (1) $172,413 $ 437 $ -- $ -- $171,976
Operating Leases 1,632 847 483 302 --
Construction Commitments (2) 27,167 27,167 -- -- --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $201,212 $ 28,451 $ 483 $ 302 $171,976
======== ======== ======== ======== ========
26
(1) Net of original issue discount of $3,024.
(2) See Note 9 to our Consolidated Financial Statements for further discussion
of these commitments.
INFLATION
To date, general inflationary trends have not had a material effect on our
operating revenues or expenses.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our Consolidated Financial Statements included in this Form
10-K, which have been prepared in accordance with accounting principles
generally accepted in the United States. In many cases, the accounting treatment
of a particular transaction is specifically dictated by generally accepted
accounting principles. In other circumstances, the Company is required to make
estimates, judgments and assumptions that we believe are reasonable based upon
information available. We base our estimates and judgments on historical
experience and various other factors that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions and conditions. We believe that of our significant accounting
policies discussed in Note 2 to our Consolidated Financial Statements, the
following may involve a higher degree of judgment.
Purchase Accounting. Purchase accounting requires extensive use of
estimates and judgments to allocate the cost of an acquired enterprise to the
assets acquired and liabilities assumed. The cost of each acquired operation is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. These estimates are revised during an allocation period
as necessary when, and if, information becomes available to further define and
quantify the value of the assets acquired and liabilities assumed. For example,
costs related to the recertification of acquired vessels that are drydocked
within the first twelve months immediately following the acquisition of such
vessels are capitalized into the costs of such vessels and are depreciated over
the estimated useful lives of the vessels. The allocation period does not exceed
beyond one year from the date of the acquisition. To the extent additional
information to refine the original allocation becomes available during the
allocation period, the allocation of the purchase price is adjusted. Should
information become available after the allocation period, those items are
reflected in operating results.
Carrying Value of Vessels. We depreciate our tugs, tank barges, and
offshore supply vessels over estimated useful lives of 14 to 25 years, 3 to 18
years and 25 years, respectively. The useful lives used for tank barges is based
on their classification under the Oil Pollution Act of 1990 (OPA 90). In
assigning depreciable lives to these assets, we have considered the effects of
both physical deterioration largely caused by wear and tear due to operating use
and other economic and regulatory factors that could impact commercial
viability. To date, our experience confirms that these policies are reasonable,
although there may be events or changes in circumstances in the future that
indicate the recoverability of the carrying amount of a vessel might not be
possible. Examples of events or changes in circumstances that could indicate
that the recoverability of vessel's carrying amount should be assessed might
include a change in regulations such as OPA 90, a significant decrease in the
market value of a vessel and current period operating or cash flow losses
combined with a history of operating or cash flow losses or a projection or
forecast that demonstrates continuing losses associated with a vessel. If events
or changes in circumstances as set forth above indicate that a vessel's carrying
amount may not be recoverable, we would then be required to estimate the
undiscounted future cash flows expected to result from the use of the vessel and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the vessel, we would be required to recognize an
impairment loss.
Recertification Costs. Our tugs, tank barges and offshore supply vessels
are required by regulation to be recertified after certain periods of time.
These recertification costs are incurred while the vessel is in drydock where
other routine repairs and maintenance are performed and, at times, major
replacements and improvements are performed. Routine repairs and maintenance are
expensed as incurred. Recertification costs are generally deferred and amortized
over the length of time in which the recertification is expected to last, which
is generally 30 to 60 months. Major replacements and improvements which extend
the vessel's economic useful life or functional operating capability are
capitalized and depreciated over the vessel's remaining economic useful life.
Inherent in this process are estimates we make regarding the specific cost
incurred and the period that the incurred cost will benefit.
27
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Form 10-K, including certain
information set forth in the sections entitled "Business and Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We have based these forward-looking statements on our current views
and assumptions about future events and our future financial performance. You
can generally identify forward-looking statements by the appearance in such a
statement of words like "anticipate," "believe," "continue," "could,"
"estimate," "expect," "intend," "may," "plan," "potential," "predict,"
"project," "should" or "will" or the negative of these words or other comparable
words. When you consider our forward-looking statements, you should keep in mind
the cautionary statements we make in this Form 10-K.
Among the risks, uncertainties and assumptions to which these
forward-looking statements may be subject are:
- changes in international economic and political conditions, and in
particular in oil and gas prices;
- our ability to manage costs effectively;
- our ability to finance our operations and construct new vessels on
acceptable terms;
- our ability to complete vessels under construction without significant
delays or cost overruns;
- the effects of competition;
- our ability to integrate acquisitions successfully;
- our ability to charter our vessels on acceptable terms;
- our ability to access the debt and equity markets to fund our capital
requirements, which may depend on general market conditions and our
financial condition at the time; and
- our success at managing these risks.
Our forward-looking statements are only predictions based on expectations
that we believe are reasonable. Actual events or results may differ materially
from those described in any forward-looking statement. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. To the extent these
risks, uncertainties and assumptions give rise to events that vary from our
expectations, the forward-looking events discussed in this Form 10-K may not
occur.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any derivative financial instrument
transactions to manage or reduce market risk or for speculative purposes.
The Company is subject to interest rate risk on its long-term fixed
interest rate senior notes. In general, the fair market value of debt with a
fixed interest rate will increase as interest rates fall. Conversely, the fair
market value of debt will decrease as interest rates rise. The senior notes
accrue interest at the rate of 10 5/8% per annum and mature on August 1, 2008.
There are no scheduled principal payments under the notes prior to the maturity
date.
The Company's operations are conducted between U.S. ports, including along
the coast of Puerto Rico, and therefore the Company is not presently exposed to
foreign currency fluctuation.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and information required by this Item appear on
pages F-1 through F-17 of this report.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
28
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are as follows:
NAME AGE POSITION
- --------------------------------- ----------- -----------------------
Todd M. Hornbeck................. 33 President, Chief Executive Officer,
Secretary and Director
Carl G. Annessa.................. 45 Vice President and Chief Operating Officer
James O. Harp, Jr................ 41 Vice President and Chief Financial Officer
Paul M. Ordogne.................. 50 Treasurer and Controller
Richard W. Cryar................. 54 Director
Larry D. Hornbeck................ 63 Director
Bruce W. Hunt.................... 44 Director
Bernie W. Stewart................ 57 Director
Christian G. Vaccari............. 42 Director
Andrew L. Waite.................. 41 Director
Todd M. Hornbeck has served as our President and Secretary and as a
director since our formation in June 1997. Until February 2002, he also served
as Chief Operating Officer. In February 2002, he was appointed Chief Executive
Officer. Mr. Hornbeck worked for the original Hornbeck Offshore Services, Inc.,
a publicly held offshore service vessel company, from 1986 to 1996, serving in
various positions relating to business strategy and development. Following the
merger of Hornbeck Offshore Services, Inc. with Tidewater, Inc. (NYSE:TDW) in
March 1996, he accepted a position as Marketing Director -- Gulf of Mexico with
Tidewater, where his responsibilities included managing relationships and
overall business development in the Gulf of Mexico region. Mr. Hornbeck remained
with Tidewater until our formation. Mr. Hornbeck is the son of Larry D.
Hornbeck.
Carl G. Annessa has served as our Vice President of Operations since
September 1997. In February 2002, he was appointed Vice President and Chief
Operating Officer. Mr. Annessa's responsibilities include not only operational
oversight but, based on his education and prior experience as a naval architect,
design and implementation of our vessel construction program. Before joining us,
he was employed for seventeen years by Tidewater, Inc., in various technical and
operational management positions, including management of large fleets of
offshore supply vessels in the Arabian Gulf, Caribbean and West African markets.
Mr. Annessa was employed for two years by Avondale Shipyards, Inc. as a naval
architect before joining Tidewater.
James O. Harp, Jr. has served as our Vice President and Chief Financial
Officer since January 2001. Before joining us, Mr. Harp served as Vice President
in the Energy Group of RBC Dominion Securities Corporation, an investment
banking firm, from August 1999 to January 2001 and as Vice President in the
Energy Group of Jefferies & Company, Inc., an investment banking firm, from June
1997 to August 1999. From July 1982 to June 1997 he served in a variety of
capacities, most recently as Tax Principal, with Arthur Andersen LLP. Since
April 1992, he has also served as Treasurer and Director of SEISCO, Inc., a
seismic brokerage company.
Paul M. Ordogne has served as our Treasurer and Controller since our
formation in June 1997. From 1980 to June 1997, he worked for Cari Investment
Company, serving in various financial and accounting positions, including those
of controller and assistant treasurer. Mr. Ordogne is a certified public
accountant.
Richard W. Cryar has served as one of our directors since our formation in
June 1997. Since 1994, he has served as Managing Member of Cari Capital Company,
L.L.C., a merchant banking firm. Since October 1999, Mr. Cryar has served as a
general partner in the equity fund, Audubon Capital Fund I, L.P.
Larry D. Hornbeck joined our Board of Directors effective August 22, 2001.
An executive with over 30 years experience in the offshore vessel business
worldwide, Mr. Hornbeck was the founder of the original Hornbeck Offshore
Services, Inc., an offshore supply vessel company with over 100 vessels
operating worldwide. From its inception in 1981 until its merger with Tidewater,
Inc., Mr. Hornbeck served as the Chairman of the Board, President and Chief
Executive Officer of Hornbeck Offshore
29
Services. From 1969 to 1980, Mr. Hornbeck was Chairman, President and Chief
Executive Officer of Sealcraft Operators, Inc., a publicly held, specialty
service offshore supply vessel company operating worldwide. Following the
merger, Mr. Hornbeck served as a director of Tidewater from March 1996 until
October 2000. Since 1994, Mr. Hornbeck has served on the board of directors of
Coastal Towing, Inc., an inland tug and tank barge company. Mr. Hornbeck is the
father of Todd M. Hornbeck.
Bruce W. Hunt has served as one of our directors since August 1997. He has
been President of Petrol Marine Corporation since 1988 and President and
Director of Petro-Hunt, L.L.C. since 1997. Mr. Hunt served as a director of the
former Hornbeck Offshore Services, Inc., a public company, from November 1992 to
March 1996.
Bernie W. Stewart joined our Board of Directors effective November 21, 2001
and was appointed Chairman of the Board in February 2002. Mr. Stewart was Senior
Vice President, Operations of R&B Falcon Corporation and President of R&B Falcon
Drilling U.S., its domestic operating subsidiary, from May 1999 until R&B Falcon
Corporation (NYSE: FLC) merged with Transocean Sedco Forex Inc. (NYSE:RIG) in
January 2001. Between April 1996 and May 1999, he served as Chief Operating
Officer of R&B Falcon Holdings, Inc. and as President of such company from
January 1998. From 1993 until joining R&B Falcon Holdings, he was Senior Vice
President and Chief Operating Officer for the original Hornbeck Offshore
Services, Inc., where he was responsible for overall supervision of the
company's operations. From 1986 until 1993, he was President of Western
Oceanics, Inc., an offshore drilling contractor. Since leaving R&B Falcon
Corporation upon its merger with Transocean Sedco Forex, Mr. Stewart has been an
independent business consultant.
Christian G. Vaccari has served as one of our directors since our formation
in June 1997 and served as our Chairman of the Board and Chief Executive Officer
from June 1997 until February 2002. Since 1989, Mr. Vaccari has served as
President, Chief Executive Officer and Chairman of the Board of Cari Investment
Company, the former parent of LEEVAC Marine, Inc. From 1988 to 1994, he served
as Director of Corporate Development and Marketing for JAMO, Inc., a leading
building materials company in the southeastern United States. From 1984 to 1988,
Mr. Vaccari was an investment advisor with Thomson McKinnon, Inc., an investment
banking firm. Since July 1997, Mr. Vaccari has served as a director of
Riverbarge Excursion Lines, Inc. and since October 1999, he has served as a
general partner in the equity fund, Audubon Capital Fund I, L.P.
Andrew L. Waite has served as one of our directors since November 2000. He
was appointed to our board as the designee of SCF IV, L.P. Mr. Waite is a
Managing Director of L.E. Simmons & Associates, Incorporated and has been an
officer of that company since October 1995. He was previously Vice President of
Simmons & Company International, where he served from August 1993 to September
1995. From 1984 to 1991, Mr. Waite held a number of engineering and management
positions with the Royal Dutch/Shell Group, an integrated energy company. He
currently serves as a director of Oil States International, Inc. (NYSE:OIS), a
diversified oilfield and equipment service company and WorldOil.com Inc., an
online oilfield services portal.
Advisory Director. R. Clyde Parker, Jr. serves as an advisor to our Board
of Directors. He was appointed to such position by our Board of Directors and
serves with the title Advisory Director at the board's discretion. In his
capacity as an Advisory Director, Mr. Parker's presence at or absence from any
meeting of our Board of Directors is not counted for quorum purposes, and he is
not entitled to vote on any matters submitted to our Board of Directors for
approval. Mr. Parker served as one of our directors from our formation in June
1997 until August 2001. He has been a shareholder with the law firm of Winstead
Sechrest & Minick P.C. since May 1996. Mr. Parker was previously a partner with
the law firm of Keck, Mahin & Cate from February 1992 to May 1996. Mr. Parker
was also an attorney with Weil, Gotshal & Manges from June 1986 to February 1992
and with Vinson & Elkins from April 1983 to June 1986. He was a certified public
accountant and practiced in public accounting with A.M. Pullen & Company (now
McGladrey & Pullen) from June 1971 through July 1980.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has a compensation committee, which currently
consists of Messrs. Stewart, Hunt and Waite. The compensation committee:
- reviews and recommends to the board of directors the compensation and
benefits of our executive officers,
- establishes and reviews general policies relating to our compensation
and benefits and
- administers our stock incentive plan.
30
The board has also established an audit committee comprised Messrs. Cryar,
Larry Hornbeck, Hunt, Stewart and Waite. The audit committee recommends to the
board the independent public accountants to audit our annual financial
statements. The board selects the independent public accountants, subject to
shareholder approval. The audit committee also establishes the scope of, and
oversees, the annual audit.
Our board may establish other committees from time to time to facilitate
the management of the business and affairs of our company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of our board of directors.
TERM AND COMPENSATION OF DIRECTORS
The members of our board of directors are divided into three classes and
are elected for a term of three years, or until a successor is duly elected and
qualified. The terms of office of the Class I, Class II and Class III directors
expire at the annual meeting of stockholders to be held in 2004, 2002 and 2003,
respectively.
Directors who are also our employees receive no additional compensation for
serving as directors or committee members. Non-employee directors receive
compensation in the form of stock option grants for their service as directors.
All directors are reimbursed for their out-of-pocket expenses incurred in
connection with serving on our board.
As compensation for their service as directors or advisory directors, as
applicable, during 2001, in March 2002 each of Messrs. Cryar, Larry Hornbeck,
Hunt, Parker, and Waite were granted options to purchase 20,000 shares of our
common stock at an exercise price of $2.65 per share. In March 2002, Mr. Stewart
was also granted options to purchase 10,000 shares of our common stock at an
exercise price of $2.65 per share in connection with his service as director in
2001. One fourth of these options was exercisable as of the date of grant and
one-fourth will become exercisable on each of the three following anniversaries
of such dates. Also, during 2001, Messrs. Waite and Larry Hornbeck were each
granted options to purchase 10,000 shares of our common stock at an exercise
price of $2.65 per share in connection with the commencement of their service as
directors. One-fifth of these options granted to Messrs. Waite and Larry
Hornbeck was exercisable as of the date of the grant and one-fifth will become
exercisable on each of the four following anniversaries of such dates.
On February 27, 2002, we entered into an advisory agreement with Bernie W.
Stewart, our Chairman of the Board. Under the terms of this agreement, Mr.
Stewart advises and makes recommendations to our executive officers and board of
directors on matters relating to our business, including our operations,
finances, strategic planning and acquisitions. Mr. Stewart is providing these
services on a full-time basis through May 31, 2002 and will provide these
services on a part-time basis through February 27, 2003. He will receive $20,000
per month for his full-time advisory services and $8,335 per month for his
part-time services. In addition to the options granted to Mr. Stewart described
above, under the terms of his advisory agreement Mr. Stewart was granted options
to purchase 10,000 shares of our common stock at an exercise price of $2.65 per
share. Also under the terms of the advisory agreement, Mr. Stewart purchased
37,736 shares of our common stock at a purchase price of $2.65 per share, and,
upon such purchase, we granted Mr. Stewart an option to purchase an equal number
of shares of our common stock at a purchase price of $2.65 per share, which
option shall be exercised in accordance with, and subject to the terms of, the
terms and conditions of the HORNBECK-LEEVAC Marine Services, Inc. Incentive
Compensation Plan. If we terminate the agreement for any reason other than for
cause, or if Mr. Stewart terminates the agreement for cause, he will be entitled
to receive his advisory fees for the remainder of the original term of the
agreement. Mr. Stewart has agreed that during the term of his advisory agreement
he will not be employed by or associated with or own more than five percent (5%)
of the outstanding securities of any entity which competes with us. Mr. Stewart
has also agreed that during the term of the advisory agreement and for a period
of two years after he will not (i) solicit any of our employees, customers,
suppliers or sales agents to terminate their relationship with us or (iii)
employ or cause any of our competitors to employ any person who is or was
recently one of our employees, sales representatives, contractors, advisors or
agents.
31
ITEM 11 -- EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the chief
executive officer and certain of our other executive officers whose total annual
salary and bonus exceeded $100,000 for the years ended December 31, 2000 and
2001.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND POSITION(1) FISCAL YEAR SALARY BONUS(2) (3) OPTIONS(4) (5,6)
-------------------- ----------- ------ -------- ------------ ---------- ------------
Todd M. Hornbeck
President, Chief
Executive Officer 2000 $165,625 $ 70,000 -- 300,000 $ 1,206
and Secretary ............ 2001 $195,833 $400,000 -- -- 1,940
Carl G. Annessa
Vice President and 2000 $121,771 $ 39,000 -- 100,000 1,286
Chief Operating Officer .. 2001 $155,000 $240,000 -- -- 1,953
James O. Harp, Jr
Vice President and
Chief Financial 2000 -- -- -- -- --
Officer .................. 2001 $163,571 $255,000 -- 100,000 1,103
Paul M. Ordogne
Treasurer and 2000 $103,021 $ 30,804 -- 48,000 648
Controller ............... 2001 $115,000 $ 42,665 -- -- 1,541
Christian G. Vaccari
Former Chairman of
the Board and Chief 2000 $168,750 $ 70,000 -- 300,000 --
Executive Officer ........ 2001 $195,833 $400,000 -- -- 1,295
- ----------
(1) Mr. Harp joined us as our Vice President and Chief Financial Officer on
January 15, 2001. Effective February 27, 2002, Mr. Vaccari ceased serving
as our Chairman of the Board and Chief Executive Officer and continues to
serve as one of our directors. Also effective February 27, 2002, Mr.
Hornbeck was appointed to the additional position of Chief Executive
Officer and Mr. Annessa was appointed to the additional position of Chief
Operating Officer.
(2) Bonuses were paid in 2001 and 2002 as compensation for services provided in
2000 and 2001, respectively.
(3) None of the perquisites and other benefits paid to each named executive
officer exceeded the lesser of $50,000 or 10% of the total annual salary
and bonus received by each named executive officer.
(4) In connection with the adoption of an incentive compensation program for
executive officers, we granted options in 2001 in part as compensation for
services provided in 2000 for Messrs. Vaccari, Hornbeck, Annessa and
Ordogne. In addition, Mr. Harp was granted options upon commencement of his
employment in 2001,
32
vesting in equal amounts on the first, second and third anniversaries of
the grant, to purchase 100,000 shares of our common stock at an exercise
price of $2.65 per share.
(5) For 2000, these amounts represent (i) employer matching contributions made
under our 401(k) savings plan in the amount of $630, $796 and $360 for
Messrs. Hornbeck, Annessa and Ordogne, respectively, and (ii) premiums of
$576, $490 and $288 for Messrs. Hornbeck, Annessa and Ordogne,
respectively, associated with life insurance policies.
(6) For 2001, these amounts represent (i) employer matching contributions made
under our 401(k) savings plan in the amount of $1,517, $1,530, $680, $1,118
and $872 for Messrs. Hornbeck, Annessa, Harp, Ordogne and Vaccari,
respectively, and (ii) premiums of $423, $423, $423, $423 and $423 for
Messrs. Hornbeck, Annessa, Harp, Ordogne and Vaccari, respectively,
associated with life insurance policies.
OPTION GRANTS
The following table shows all grants of options to acquire shares of our
common stock granted during the year ended December 31, 2001 to the executive
officers named in the Summary Compensation Table above under the HORNBECK-LEEVAC
Marine Services, Inc. Incentive Compensation Plan.
POTENTIAL REALIZABLE
NUMBER OF VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL
UNDERLYING OPTIONS EXERCISE OR RATES OF STOCK
OPTIONS GRANTED IN BASE PRICE EXPIRATION APPRECIATION
NAME GRANTED FISCAL YEAR ($/SHARE)(1) DATE FOR OPTION TERM(2)
---- ------- ----------- ----------- ---------- ------------------
5% 10%
-------- ---------
Todd M. Hornbeck........ 300,000(4) 22% $ 2.65 March 9, 2011 501,000 1,266,000
Carl G. Annessa......... 100,000(4) 7% $ 2.65 March 9, 2011 167,000 422,000
James O. Harp, Jr....... 100,000(3) 7% $ 2.65 Jan. 15, 2011 167,000 422,000
Paul M. Ordogne......... 48,000(4) 3% $ 2.65 March 9, 2011 80,160 202,560
Christian G. Vaccari.... 300,000(4) 22% $ 2.65 March 9, 2011 501,000 1,266,000
- ----------
(1) The options were granted at or above the fair market value of our common
stock on the date of grant.
(2) In accordance with the rules of the Securities and Exchange Commission, the
gains or "option spreads" that would exist for the respective options
granted are shown. These gains are based on the assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. These assumed annual compound rates
of stock price appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent our estimate or projection of
future appreciation.
(3) One-third of these options become exercisable on each of the first, second
and third anniversaries of the date of grant.
(4) One-fifth of these options are exercisable as of the date of grant, and
one-fifth become exercisable on each of the first, second, third and fourth
anniversaries of the date of grant.
33
FISCAL YEAR END OPTION VALUES
The following table shows information with respect to unexercised options
held by the executive officers named in the Summary Compensation Table as of
December 31, 2001. None of our executive officers named in the Summary
Compensation Table have exercised any options to purchase our common stock.
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 2001 AT DECEMBER 31, 2001
--------------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- --------------- ---------------- --------------- ---------------
Todd M. Hornbeck................. 128,333 256,667 $ 48,333 $ 10,167
Carl G. Annessa.................. 60,000 90,000 28,200 6,100
James O. Harp, Jr................ -- 100,000 -- --
Paul M. Ordogne.................. 30,433 45,067 14,133 4,067
Christian G. Vaccari............. 128,333 256,667 48,333 10,167
EMPLOYMENT AGREEMENTS
Todd M. Hornbeck serves as our President, Chief Executive Officer and
Secretary, James O. Harp, Jr. serves as our Vice President and Chief Financial
Officer, Carl G. Annessa serves as our Vice President and Chief Operating
Officer and Paul M. Ordogne serves as our Treasurer and Controller, each under
an employment agreement with an initial term expiring December 31, 2003. Each
agreement may be renewed on an annual basis for up to three additional years
(two years in the case of Mr. Ordogne), unless terminated by the employee or us.
The employment agreements of Messrs. Hornbeck, Harp, Annessa and Ordogne
currently provide for annual base salaries of $200,000, $170,000, $170,000 and
$116,000, respectively. Our board has agreed to award a bonus or bonuses to each
of Messrs. Hornbeck, Harp and Annessa if our company meets certain EBITDA and
earnings per share targets with respect to any year during which their
respective employment agreement is in effect. Our board may, in its discretion,
award a smaller bonus if our company does not meet such targets or an additional
bonus if our company exceeds such targets. Mr. Ordogne is eligible for a bonus
each year at the discretion of the Board. Under each of their respective
employment agreements, the employee's salary will be reviewed from time to time
by our compensation committee for possible increases based on the employee's
performance.
If we terminate the employment of Mr. Hornbeck for any reason other than
for cause, he will be entitled to receive his salary until the actual
termination date of his agreement or two years after the date of termination,
whichever is later. If we terminate the employment of Messrs. Harp, Annessa or
Ordogne for any reason other than for cause, he will be entitled to receive his
salary until the actual termination date of his agreement or one year, as to
Messrs. Harp and Annessa, and six months, as to Mr. Ordogne, after the date of
termination, whichever is later. If we should undergo a change in control while
the agreements are in effect and Messrs. Hornbeck, Harp or Annessa is either
constructively or actually terminated under the conditions set forth in his
agreement, then he will be entitled to receive three times his salary for the
year in which the termination occurs and, in general, three times the bonus he
received for the previous year. If we should undergo a change in control while
Mr. Ordogne's agreement is in effect and he is either constructively or actually
terminated under the conditions set forth in his agreement, then he will be
entitled to receive one and one-half times his salary for the year in which the
termination occurs and, in general, one and one-half times the bonus he received
for the previous year.
Mr. Hornbeck has agreed that during the term of his agreement and Messrs.
Harp, Annessa and Ordogne have each agreed that during the term of their
respective agreements and for a period of one year (six months in the case of
Mr. Ordogne) after termination, they will not (i) be employed by or associated
with or own more than five percent (5%) of the outstanding securities of any
entity which competes with us in the locations in which we operate, (ii) solicit
any of our employees to terminate their employment or (iii) accept employment
with or payments from any of our clients or customers who did business with us
while employed by us. We may elect to extend Mr. Annessa's noncompetition period
for an additional year by paying his compensation and other benefits for an
additional year, and we may elect to extend Mr. Ordogne's noncompetition period
for an additional six months by paying his compensation and other benefits for
an additional six months.
34
Christian G. Vaccari served as our Chairman of the Board and Chief
Executive Officer under an employment agreement with terms substantially
identical to the terms of Mr. Hornbeck's employment agreement described above.
Effective February 27, 2002, Mr. Vaccari ceased serving as our Chairman of the
Board and Chief Executive Officer, and his employment under the terms of his
agreement terminated.
INCENTIVE COMPENSATION PLAN
Our board of directors and shareholders adopted an Incentive Compensation
Plan in 1997. The purpose of the HORNBECK-LEEVAC Marine Services, Inc. Incentive
Compensation Plan is to strengthen our company by providing an incentive to our
employees, officers, consultants, non-employee directors and advisors to devote
their abilities and energies to our success. The plan provides for the granting
or awarding of incentive and nonqualified stock options, stock appreciation and
dividend equivalent rights, restricted stock and performance shares. With the
approval of our shareholders, we have reserved 3.5 million shares of our common
stock for issuance pursuant to awards made under the plan.
The HORNBECK-LEEVAC Marine Services, Inc. Incentive Compensation Plan is
administered by the compensation committee. Subject to the express provisions of
the plan, the compensation committee has full authority, among other things:
- to select the persons to whom stock, options and other awards will be
granted,
- to determine the type, size and terms and conditions of stock options
and other awards and
- to establish the terms for treatment of stock options and other awards
upon a termination of employment.
Under the plan, awards other than stock options and stock appreciation
rights given to any of our executive officers whose compensation must be
disclosed in our annual proxy statement and who is subject to the limitations
imposed by Section 162(m) of the tax code must be based on the attainment of
certain performance goals established by the Board or the compensation
committee. The performance measures are limited to earnings per share, return on
assets, return on equity, return on capital, net profit after taxes, net profits
before taxes, operating profits, stock price and sales or expenses.
Additionally, the performance goals must include formulas for calculating the
amount of compensation payable if the goals are met; both the goals and the
formulas must be sufficiently objective so that a third party with knowledge of
the relevant performance results could assess that the goals were met and
calculate the amount to be paid.
Consistent with certain provisions of the tax code, there are other
restrictions providing for a maximum number of shares that may be granted in any
one year to a named executive officer and a maximum amount of compensation
payable as an award under the plan (other than stock options and stock
appreciation rights) to a named executive officer.
401(K) RETIREMENT PLAN
We have adopted a 401(k) plan for our employees. Employees are eligible to
participate in the plan following three months of employment with us if they are
at least 21 years of age. Under the plan, eligible employees are permitted,
subject to legal limitations, to contribute up to 20% of compensation. The plan
provides that we will match an amount equal to a percentage set by us of up to
6% of an employee's contribution before the end of each calendar year. We are
also permitted to make qualified non-elective and discretionary contributions in
proportion to each eligible employee's compensation as a ratio of the aggregate
compensation of all eligible employees. The amounts held under the plan are
invested in investment funds maintained under the plan in accordance with the
directions of each participant.
All employees' contributions are immediately 100% vested. Contributions by
us to the plan vest at a rate of 20% each year after the second year of service.
Upon attaining age 65, participants are automatically 100% vested, even with
respect to our contributions. Subject to certain limitations imposed under the
tax code, participants or their designated beneficiaries are entitled to payment
of vested benefits upon termination of employment. On attaining age 65,
participants are entitled to distribution of the full value of their benefits
even if they continue to be employed by us. Such employees also have the option
of deferring payment until April 1 following the year they attain the age of 70
1/2. In addition, hardship and other in-service distributions are available
under certain circumstances and
35
subject to certain conditions. The amount of benefits ultimately payable to a
participant under the plan depends on the level of the participant's salary
deferral contributions under the plan, the amount of our discretionary and
matching contributions made to the plan and the performance of the investment
funds maintained under the plan in which participants are invested.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our voting securities as of March 27, 2002 by:
- each person who is known to us to be the beneficial owner of more than
5% of our voting securities;
- each of our directors; and
- each of our named executive officers and all of our executive officers
and directors as a group.
Unless otherwise indicated, each person named below has an address c/o our
principal executive offices and has sole power to vote and dispose of the shares
of voting securities beneficially owned by them, subject to community property
laws where applicable.
DIRECT OWNERSHIP BENEFICIAL OWNERSHIP
------------------------------- ------------------------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
SHARES OUTSTANDING SHARES OUTSTANDING(1)
------ ----------- ------ --------------
SCF-IV, L.P...................... 9,864,912 32.7 9,864,912(2) 32.7
Cari Investment Company.......... 5,129,364 17.0 ) 5,753,982 18.8
Christian G. Vaccari............. 239,618 * )
William Herbert Hunt Trust ) 5,123,976(4)
Estate......................... 5,065,976 16.8 ) 17.0
Bruce W. Hunt.................... 25,000 * )
Todd M. Hornbeck................. 1,537,736 5.1 3,242,736(5) 10.7
Rock Creek Partners II, Ltd...... 2,660,904 8.8 2,660,904 8.8
Carl G. Annessa.................. 70,000 * 160,000(6) *
James O. Harp, Jr................ 35,088 * 68,421(7) *
Paul M. Ordogne.................. 99,300 * 146,000(8) *
Richard W. Cryar................. 43,143 * 76,143(9) *
Larry D. Hornbeck................ 159,120 * 166,120(10) *
Bernie W. Stewart................ 73,450 * 87,884(11) *
Andrew L. Waite.................. 2,210 * 9,377(12) *
All shares owned or controlled
by executive officers and
directors as a group
(10 persons)................... 2,320,379 7.7 14,834,639(13) 47.8
----------
* Less than 1%
(1) Percentages of outstanding common stock beneficially owned for each
beneficial owner and for the officers and directors as a group have been
calculated by dividing (1) the outstanding shares held by such owner or
such group plus additional shares such owner or such group, respectively,
is entitled to acquire pursuant to options or warrants exercisable within
sixty (60) days by (2) the total outstanding shares of our common stock
plus the additional shares only such owner or such group, respectively, is
entitled to acquire pursuant to such options or warrants.
36
(2) SCF-IV, L.P. is a limited partnership of which the ultimate general partner
is L.E. Simmons & Associates, Incorporated. The Chairman of the Board and
President of L.E. Simmons & Associates, Incorporated is Mr. L.E. Simmons.
As such Mr. Simmons may be deemed to have voting and dispositive power over
the shares owned by SCF-IV, L.P. The address of Mr. Simmons and SCF-IV,
L.P. is 6600 Chase Bank Tower, 600 Travis Street, Houston, Texas 77002.
Pursuant to a voting arrangement agreed to by SCF-IV, L.P. and the company
in connection with our private equity offering completed in October 2001,
SCF is restricted from voting 562,081 of those shares.
(3) Cari Investment Company is owned entirely by Christian G. Vaccari and other
members of his family. Mr. Vaccari also serves as its chief executive
officer and may be deemed to share voting and dispositive power with
respect to the 5,129,364 shares of common stock owned by Cari Investment
Company. Cari Investment Company's address is 1100 Poydras Street, Suite
2000, New Orleans, LA 70163. Beneficial ownership includes options to
purchase 385,000 shares of common stock that are currently exercisable by
Mr. Vaccari.
(4) Mr. Bruce W. Hunt is a representative of the William Herbert Hunt Trust
Estate and may be deemed to share voting and dispositive power with respect
to the 5,065,976 shares of common stock owned by the Trust Estate. Also
includes options to purchase 33,000 shares of common stock that are
currently exercisable by Mr. Hunt. The Trust Estate's address is 3900
Thanksgiving Tower, 1601 Elm Street, Dallas, TX 75201.
(5) Troy A. Hornbeck has granted a power of attorney to Todd M. Hornbeck
covering the voting interest in his 1,500,000 shares, and therefore Todd
Hornbeck has control of all voting decisions with respect to a total of
3,037,376 shares. Beneficial ownership includes options to purchase 205,000
shares of common stock that are currently exercisable by Todd Hornbeck.
(6) Beneficial ownership includes options to purchase 90,000 shares of common
stock that are currently exercisable.
(7) Beneficial ownership includes options to purchase 33,333 shares of common
stock that are currently exercisable.
(8) Beneficial ownership includes options to purchase 46,700 shares of common
stock that are currently exercisable.
(9) Beneficial ownership includes options to purchase 33,000 shares of common
stock that are currently exercisable.
(10) Beneficial ownership includes options to purchase 7,000 shares of common
stock that are currently exercisable.
(11) Beneficial ownership includes options to purchase 14,434 shares of common
stock that are currently exercisable.
(12) Mr. Waite serves as Managing Director of L.E. Simmons & Associates,
Incorporated, the ultimate general partner of SCF-IV, L.P. As such, Mr.
Waite may be deemed to have voting and dispositive power over the shares
owned by SCF-IV, L.P. Mr. Waite disclaims beneficial ownership of the
shares owned by SCF-IV, L.P. Beneficial ownership includes options to
purchase 7,167 shares of common stock that are currently exercisable.
(13) Beneficial ownership includes options to purchase 854,634 shares of common
stock that are currently exercisable.
Voting Agreements. Under the terms of a voting agreement among Todd M.
Hornbeck, Troy A. Hornbeck, Cari Investment Company and the company, the
Hornbecks and Cari Investment Company had agreed to vote their shares in such
manner as to maintain equal representation of Todd and Troy Hornbeck, on the one
hand, and Cari Investment Company, on the other hand, on our board and on any
committee designated by our board until the earlier of completion of an initial
public offering of our securities, the tenth anniversary of the agreement or
certain other events specified in the agreement. As a result of the closing of
the registered exchange offer of our senior notes, it is the position of Todd
and Troy Hornbeck and the company that this voting agreement has terminated.
Christian G. Vaccari, as representative of Cari Investment Company, has
indicated that Cari Investment Company does not agree. Under the terms of a
stockholders' agreement among SCF-IV, L.P., Todd
37
Hornbeck, Troy Hornbeck, Cari Investment Company and the company, Todd and Troy
Hornbeck and Cari Investment Company have agreed to vote their shares in favor
of SCF-IV, L.P.'s designee to our board, so long as it owns at least 5% of the
company's outstanding common stock or, prior to an initial public offering, it
owns at least 80% of the common stock it acquired in November 2000. SCF-IV, L.P.
also agrees to vote its shares in favor of the two designees of Todd and Troy
Hornbeck and the two designees of Cari Investment Company. Pursuant to a voting
arrangement entered into between SCF-IV, L.P. and the company in connection with
our private equity offering completed in October 2001, SCF is restricted from
voting 562,081 of its shares.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a discussion of transactions between our company and its
executive officers, directors and shareholders owning more than five percent of
our common stock. We believe that the terms of each of these transactions were
at least as favorable as could have been obtained in similar transactions with
unaffiliated third parties. Because of the existence of these transactions, the
parties to these transactions could have interests different from those of other
shareholders.
Christian G. Vaccari, who served as our Chairman of the Board and Chief
Executive Officer until February 2002 and who is one of our current directors,
is a member of LEEVAC Industries, LLC and Chairman of the Board of LEEVAC
Shipyards, Inc. Three of our recently constructed offshore supply vessels were
built by LEEVAC Shipyards, two were built by LEEVAC Industries and, as of
December 31, 2001, we had contracts with LEEVAC Industries for the construction
of two additional offshore supply vessels, one of which was delivered in
February 2002. Our current contracts with LEEVAC Industries, as well as our past
contracts with LEEVAC Industries and LEEVAC Shipyards, were entered into
following a competitive bidding process. In 2001, we made payments under such
shipyard contracts aggregating $24.9 million, and at December 31, 2001, after
giving effect to subsequent change orders, we had contracts calling for the
payment of an additional $7.6 million over the course of construction of the two
offshore supply vessels.
On June 5, 1998, Enron North America Corp. and Joint Energy Development
Investments II Limited Partnership entered into an agreement with us and
Hornbeck Offshore Services, Inc. and LEEVAC Marine Inc., which we refer to as
Facility C and pursuant to which Enron North America and Joint Energy
Development Investments agreed to lend these subsidiaries $20 million. In
connection with Facility C, our subsidiaries issued to each of Enron North
America and Joint Energy Development Investments a promissory note in the amount
of $10 million, which each bore interest at 7% annually. ENA CLO I Holding
Company I L.P., an affiliate of Enron North America, subsequently succeeded to
the interests, obligations, duties and rights of both Joint Energy Development
Investments and Enron North America as lenders under Facility C. These notes
were paid in full with proceeds from the private placement of the Series A notes
and this credit facility has been terminated.
In connection with Facility C, Enron North America and Joint Energy
Development Investments were each issued warrants to purchase shares of our
common stock. On October 25, 2001, we repurchased all of the warrants for an
aggregate purchase price of $14.5 million. In order to finance the repurchase of
the warrants, we completed a private placement of $14.6 million of our common
stock.
38
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following items are filed as part of this report:
1. Financial Statements. The financial statements and information
required by Item 8 appear on pages F-1 though F-17 of this report. The Index to
Consolidated Financial Statements appears on page F-1.
2. Financial Statement Schedules. All schedules are omitted because
they are not applicable or the required information is shown in the financial
statements or the notes thereto.
3. Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.1 -- Restated Certificate of Incorporation of HORNBECK-LEEVAC Marine Services, Inc.
filed with the Secretary of State of the State of Delaware on December 13, 1997
(incorporated by reference to Exhibit 3.1 to the Company's Registration Statement
on Form S-4 dated September 21, 2001, Registration No. 333-69826).
3.2 -- Certificate of Amendment of the Restated Certificate of Incorporation of
HORNBECK-LEEVAC Marine Services, Inc. filed with the Secretary of State of Delaware
on December 1, 1999 (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4 dated September 21, 2001, Registration No.
333-69826).
3.3 -- Certificate of Amendment of the Restated Certificate of Incorporation of
HORNBECK-LEEVAC Marine Services, Inc. filed with the Secretary of State of the
State of Delaware on October 23, 2000 (incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
3.4 -- Certificate of Correction to Certificate of Amendment of the Restated
Certificate of Incorporation of HORNBECK-LEEVAC Marine Services, Inc. filed with
the Secretary of State of the State of Delaware on November 14, 2000 (incorporated
by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-4
dated September 21, 2001, Registration No. 333-69826).
3.5 -- Second Restated Bylaws of HORNBECK-LEEVAC Marine Services, Inc., adopted
October 4, 2000 (incorporated by reference to Exhibit 3.5 to the Company's
Registration Statement on Form S-4 dated September 21, 2001, Registration No.
333-69826).
4.1 -- Indenture dated as of July 24, 2001, between Wells Fargo Bank Minnesota,
National Association (as Trustee) and the Company, including table of contents and
cross-reference sheet (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4 dated September 21, 2001, Registration No.
333-69826).
39
4.2 -- Supplemental Indenture dated as of December 17, 2001, between Wells Fargo Bank
Minnesota, National Association (as Trustee), the Company, Hornbeck Offshore
Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.), HORNBECK-LEEVAC Marine
Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC Marine, LLC
and Energy Services Puerto Rico, LLC, with Notation of Subsidiary Guarantee by
Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.),
HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators,
Inc.), LEEVAC Marine, LLC and Energy Services Puerto Rico, LLC attached
(incorporated by reference to Exhibit 4.1.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-4 dated December 19, 2001, Registration No.
333-69826).
4.3 -- Specimen 10 5/8% Series B Senior Note due 2008 (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).
10.1 -- Employment Agreement dated effective January 1, 2001 by and between Christian
G. Vaccari and the Company (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
10.2 -- Employment Agreement dated effective January 1, 2001 by and between Todd M.
Hornbeck and the Company (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
10.3 -- Employment Agreement dated effective January 1, 2001 by and between Carl
Annessa and the Company (incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4 dated September 21, 2001, Registration No.
333-69826).
10.4 -- Employment Agreement dated effective January 1, 2001 by and between Paul M.
Ordogne and the Company (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4 dated September 21, 2001, Registration No.
333-69826).
10.5 -- Employment Agreement dated effective January 1, 2001 by and between James O.
Harp, Jr. and the Company (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
*10.6 -- Advisory Agreement dated effective February 27, 2002 by and between Bernie W.
Stewart and the Company.
10.7 -- Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-4 dated September 21, 2001, Registration
No. 333-69826).
10.8 -- Amendment No. 1 to Incentive Compensation Plan (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-4 dated September
21, 2001, Registration No. 333-69826).
10.9 -- Asset Purchase Agreement dated as of May 31, 2001 among LEEVAC Marine, Inc.,
Hygrade Operators, Inc., Red Star Towing and Transportation Company, Inc., Sheridan
Towing Co., Inc., R.S. Bushey & Sons, Inc., and Amerada Hess Corporation
(incorporated by reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-4 dated September 21, 2001, Registration No. 333-69826).
40
10.10 -- Contract of Affreightment dated as of May 31, 2001 among LEEVAC Marine, Inc.
and Amerada Hess Corporation (certain portions omitted based on a grant of
confidential treatment filed separately with the Commission) (incorporated by
reference to Exhibit 10.9 to Amendment No. 2 to the Company's Registration
Statement on Form S-4 dated December 19, 2001, Registration No. 333-69826).
*10.11 -- Credit Agreement dated as of December 31, 2001 among Hornbeck Offshore
Services, LLC, LEEVAC Marine, LLC and Hibernia National Bank, as Agent and the
lenders named therein.
*10.12 -- First Amendment to Credit Agreement dated as of February 25, 2002 among
Hornbeck Offshore Services, LLC, LEEVAC Marine, LLC and Hibernia National Bank, as
Agent and the lenders named therein.
*21 -- Subsidiaries of HORNBECK-LEEVAC Marine Services, Inc.
* Filed herewith.
(b) Reports on Form 8-K.
None.
41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF HORNBECK-LEEVAC MARINE SERVICES, INC.:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and
2001.................................................................. F-3
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended December 31, 2001..................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for Each of the Four Years in the Period Ended December 31, 2001........ F-5
Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended December 31, 2001..................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
HORNBECK-LEEVAC Marine Services, Inc.
We have audited the accompanying consolidated balance sheets of HORNBECK-LEEVAC
Marine Services, Inc. and subsidiaries (formerly HV Marine Services, Inc.) as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. 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 HORNBECK-LEEVAC
Marine Services, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
January 28, 2002
F-2
HORNBECK-LEEVAC MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------------
2000 2001
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 32,988 $ 53,203
Accounts and claims receivable, net of allowance for doubtful
accounts of $55 and $133, respectively................................... 6,349 10,690
Prepaid insurance.......................................................... 668 1,047
Other current assets....................................................... 333 665
----------- -----------
Total current assets................................................... 40,338 65,605
Property, plant and equipment, net......................................... 98,935 180,781
Goodwill, net of accumulated amortization of $495 and $621, respectively... 2,755 2,628
Deferred charges, net...................................................... 5,120 9,803
----------- -----------
Total assets........................................................... $ 147,148 $ 258,817
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 2,183 $ 5,624
Current portion of long-term debt.......................................... 6,834 437
Accrued interest........................................................... 869 8,161
Other accrued liabilities.................................................. 928 2,867
----------- -----------
Total current liabilities.............................................. 10,814 17,089
Long-term debt, net of original issue discount of $0 and $3,024, 82,557 171,976
respectively.............................................................
Deferred tax liabilities, net.............................................. 3,875 9,570
Other liabilities.......................................................... 157 316
----------- -----------
Total liabilities...................................................... 97,403 198,951
STOCKHOLDERS' EQUITY:
Preferred stock; $0.01 par value; 5,000 shares authorized; no shares issued
and outstanding ......................................................... -- --
Common stock: $0.01 par value; 100,000 shares authorized; 24,575 shares
and 30,135 shares issued and outstanding at December 31, 2000 and 2001, .
respectively............................................................. 246 301
Additional paid-in capital................................................. 48,301 61,019
Retained earnings (deficit)................................................ 1,198 (1,454)
----------- -----------
Total stockholders' equity............................................. 49,745 59,866
----------- -----------
Total liabilities and stockholders' equity............................. $ 147,148 $ 258,817
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-3
HORNBECK-LEEVAC MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 2000 2001
----------- ----------- -----------
Revenue............................................................. $ 25,723 $ 36,102 $ 68,791
Costs and Expenses:
Operating expenses................................................ 17,275 20,410 32,371
General and administrative expenses............................... 2,467 3,355 8,473
----------- ----------- -----------
19,742 23,765 40,844
----------- ----------- -----------
Operating income.................................................. 5,981 12,337 27,947
Other Income (Expense):
Interest income................................................... 170 305 1,455
Interest expense.................................................. (5,262) (8,216) (10,665)
Other income (expense), net....................................... (20) (138) --
----------- ----------- -----------
(5,112) (8,049) (9,210)
----------- ----------- -----------
Income before income taxes, cumulative effect of change in
accounting principle and extraordinary item....................... 869 4,288 18,737
Income tax expense.................................................. (341) (1,550) (6,802)
----------- ----------- -----------
Income before cumulative effect of change in accounting principle and
extraordinary item.................................................. 528 2,738 11,935
Extraordinary loss, net of tax benefit of $1,065.................... -- -- (1,964)
Cumulative effect on prior years of change in accounting for start-up
costs, net of taxes of $55.......................................... (108) -- --
----------- ----------- -----------
Net Income.......................................................... $ 420 $ 2,738 $ 9,971
=========== =========== ===========
Pro forma information (Note 6):
Net Income, reported above........................................ $ 420 $ 2,738 $ 9,971
Pro forma additional interest expense............................. 2,262 7,262 2,952
----------- ----------- -----------
Pro forma net income................................................ $ (1,842) $ (4,524) $ 7,019
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
HORNBECK-LEEVAC MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CAPITAL STOCK
-------------
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------- --------- ------
Balance at December 31, 1998.............. 11,367 $ 114 $ 13,029 $ (83) $ 13,060
Amortization of put feature of warrants... -- -- 617 (617) --
Net income................................ -- -- -- 420 420
---------- --------- ---------- ---------- ----------
Balance at December 31, 1999.............. 11,367 114 13,646 (280) 13,480
Shares issued............................. 13,208 132 33,395 -- 33,527
Amortization of put feature of warrants... -- -- 1,260 (1,260) --
Net income................................ -- -- -- 2,738 2,738
---------- --------- ---------- ---------- ----------
Balance at December 31, 2000.............. 24,575 246 48,301 1,198 49,745
Shares issued............................. 5,560 55 14,595 -- 14,650
Amortization of put feature of warrants... -- -- 12,623 (12,623) --
Repurchase of warrants.................... -- -- (14,500) -- (14,500)
Net income................................ -- -- -- 9,971 9,971
---------- --------- ---------- ---------- ----------
Balance at December 31, 2001.............. 30,135 $ 301 $ 61,019 $ (1,454) $ 59,866
========== ========= ========== =========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-5
HORNBECK-LEEVAC MARINE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS)
1999 2000 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 420 $ 2,738 $ 9,971
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 3,724 5,164 7,670
Provision for bad debts....................................... 78 (77) 78
Deferred tax expense.......................................... 286 1,550 5,816
Gain on sale of assets........................................ -- (3) --
Amortization of financing costs and initial warrant valuation. 391 496 1,026
Changes in operating assets and liabilities:
Accounts and claims receivable.............................. (1,570) (3,051) (4,419)
Prepaid expenses............................................ (513) (50) (379)
Deferred charges and other assets........................... (1,718) (2,975) (6,917)
Accounts payable............................................ (191) (1,002) 3,441
Accrued liabilities, accrued interest and other liabilities. 652 1,413 9,390
--------- --------- ---------
Net cash provided by operating activities......................... 1,559 4,203 25,677
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................................. (42,293) (15,324) (60,298)
Acquisition of tugs and tank barges from Spentonbush/Red
Star Group...................................................... -- -- (28,030)
--------- --------- ---------
Net cash used in investing activities............................. (42,293) (15,324) (88,328)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior notes............................ -- -- 171,896
Proceeds from borrowings under debt agreements.................... 43,695 8,329 40,750
Payments on long-term debt........................................ -- (2,991) (129,930)
Repurchase of warrants............................................ -- -- (14,500)
Proceeds from shares issued....................................... -- 32,627 14,650
--------- --------- ---------
Net cash provided by financing activities......................... 43,695 37,965 82,866
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 2,961 26,844 20,215
Cash and cash equivalents at beginning of period.................. 3,183 6,144 32,988
--------- --------- ---------
Cash and cash equivalents at end of period........................ $ 6,144 $ 32,988 $ 53,203
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Interest paid..................................................... $ 4,495 $ 7,145 $ 5,577
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-6
HORNBECK-LEEVAC MARINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
(IN THOUSANDS)
1. ORGANIZATION:
Formation
HORNBECK-LEEVAC Marine Services, Inc. (formerly HV Marine Services, Inc.
and, herein, the Company) is incorporated in the state of Delaware. The Company
wholly owns LEEVAC Marine, LLC, Hornbeck Offshore Services, LLC, HORNBECK-LEEVAC
Marine Operators, LLC and Energy Services Puerto Rico, LLC. All of the
subsidiaries were converted from C Corporations to Limited Liability Companies
(LLC) in 2001. The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Nature of Operations
Hornbeck Offshore Services, LLC (HOS) operates nine offshore supply vessels
to furnish support to the offshore oil and gas exploration and production
industry, primarily in the United States Gulf of Mexico and to provide specialty
services. Prior to 2000, HOS operated six vessels with one additional vessel
being added in each of March 2000, April 2001 and November 2001. HOS has four
vessels under construction which are expected to be delivered in 2002. LEEVAC
Marine, LLC (LM) operates ocean-going tugs and tank barges which provide vessel
and barge charters for the transportation of petroleum products. In 2000, LM
operated an average of seven ocean-going tank barges and associated tugs. On May
31, 2001, the Company purchased a fleet of nine ocean-going tugs and nine
ocean-going tank barges and the related coastwise transportation businesses from
the Spentonbush/Red Star Group, affiliates of Amerada Hess Corporation, for
approximately $28,000 in cash. The result of this acquisition has been included
since the date of acquisition (see Note 14). HORNBECK-LEEVAC Marine Operators,
LLC (HLMO) is a service subsidiary that provides administrative and personnel
support to the other subsidiaries. Energy Services Puerto Rico, LLC (ESPR)
provides administrative and personnel support to employees residing in Puerto
Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
HOS contracts its offshore support vessels to clients under time charters
based on a daily rate of hire and recognizes revenue as earned on a daily basis
during the contract period of the specific vessel.
LM also contracts its vessels to clients under time charters based on a
daily rate of hire. Revenue is recognized on such contracts as earned on a daily
basis during the contract period of the specific vessel. Under other contracts,
primarily contracts of affreightment, revenue is recognized based on the
percentage of days incurred for the voyage to total estimated days applied to
total estimated revenues. Voyage related costs are expensed as incurred.
Substantially all voyages under these contracts are less than 10 days in length.
Cash and cash equivalents
Cash and cash equivalents consist of all highly liquid investments in money
market funds and investments available for current use with an initial maturity
of three months or less.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization of equipment and leasehold improvements are computed using the
straight-line method based on the estimated useful lives of the related assets.
Improvements and major repairs that extend the useful life of the related asset
are capitalized. Gains and losses from retirements or other dispositions are
recognized currently.
F-7
The estimated useful lives by classification are as follows:
Tugs........................................ 14-25 years
Tank Barges................................. 3-18 years
Offshore supply vessels..................... 25 years
Machinery and equipment..................... 5 years
All of the tank barges have estimated useful lives based on their
classification under the Oil Pollution Act of 1990.
Deferred Charges
The Company's tank barges, tugs and offshore supply vessels are required by
regulation to be recertified after certain periods of time. The Company defers
certain costs related to the recertification of the vessels. Deferred drydocking
costs are amortized over the length of time in which the improvement made during
the recertification is expected to last (generally thirty or sixty months).
Financing charges are amortized over the term of the related debt using the
interest method.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The Company's temporary differences primarily relate to depreciation and
deferred drydocking costs.
Deferred tax assets and liabilities are measured using currently enacted
tax rates. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The provision for income taxes includes provisions for both federal and state
income taxes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Accounts Receivable
Customers are primarily major and independent, domestic and international,
oil and oil service companies. The Company's customers are granted credit on a
short-term basis and related credit risks are considered minimal.
Goodwill
Goodwill reflects the excess of cost over the estimated fair value of the
net assets acquired. Goodwill is being amortized on a straight-line basis over
its estimated useful life of 25 years. Realization of goodwill is periodically
assessed by management based on the expected future profitability and
undiscounted future cash flows of acquired entities and their contribution to
the overall operations of the Company. Should the review indicate that the
carrying value is not recoverable, the excess of the carrying value over the
undiscounted cash flow would be recognized as an impairment loss. See Recent
Accounting Pronouncements below.
Recent Accounting Pronouncements
In early 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP is effective for fiscal years beginning after
December 15, 1998 and requires costs of start-up activities and organization
costs to be expensed as incurred. The unamortized costs were written off and
reflected as a cumulative effect of a change in accounting principle during
1999.
F-8
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. The adoption did not have a material
impact on its financial position as the Company has not entered into any
derivative instruments.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Statement No. 141, Business Combinations (SFAS
141) and Financial Accounting Standards Statement No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. The purchase method of
accounting is required to be used for all business combinations initiated after
June 30, 2001. SFAS 141 also requires separate recognition of intangible assets
that meet certain criteria.
Under SFAS 142, goodwill and indefinite-lived intangible assets are no
longer amortized but are reviewed for impairment annually, or more frequently if
circumstances indicate potential impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. For goodwill and indefinite-lived intangible assets acquired
prior to July 1, 2001, goodwill will continue to be amortized through the
remainder of 2001 at which time amortization will cease and a transitional
goodwill impairment test will be performed. Any impairment charges resulting
from the initial application of the new rules will be classified as a cumulative
change in accounting principle. The Company has not completed its initial
evaluation of goodwill impairment that is required with the adoption of the SFAS
No. 142. However, based on the preliminary evaluation procedures it has
performed, the Company does not believe that its existing goodwill balances will
be impaired under the new standards; however, no assurances can be given. The
initial transition evaluation is required to be and will be completed by June
30, 2002 which is within the six month transition period allowed by the new
standard upon adoption. Goodwill amortization for each of the years ended
December 31, 2000 and 2001 was $126.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), which requires recording the fair value of a
liability for an asset retirement obligation in the period incurred. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with earlier
application permitted. Upon adoption of SFAS 143, the Company will be required
to use a cumulative effect approach to recognize transition amounts for any
existing retirement obligation liabilities, asset retirement costs and
accumulated depreciation. The Company does not have any known asset retirement
obligations, therefore adoption of this statement will have no effect on the
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), which supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS 144 also supersedes certain aspects
of APB 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be reported in discontinued operations in
the period incurred rather than as of the measurement date as presently required
by APB 40. Additionally, certain dispositions may now qualify for discounted
operations treatment. The provisions of SFAS 144 are required to be applied for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. The adoption of this statement is not expected to have any effect
on the Company's financial statements.
3.DEFINED CONTRIBUTION PLAN:
HLMO is a participating employer in a defined contribution plan with a cash
or deferred arrangement pursuant to Section 401(k) of the Internal Revenue Code,
which was, until September 30, 2001, sponsored by an affiliate. Employees must
be at least twenty-one years of age and have completed one year of service to be
eligible for participation. Participants may elect to defer up to 20 percent of
their compensation, subject to certain statutorily established limits. The
Company may elect to make annual matching and/or profit sharing contributions to
the plan. During the years ended December 31, 1999, 2000 and 2001 the Company
made contributions of $6, $6 and $75, respectively.
F-9
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following :
DECEMBER 31,
2000 2001
--------- ---------
Tugs ......................... $ 9,467 $ 28,846
Tank barges .................. 14,614 26,504
Offshore supply vessels ...... 69,744 102,932
Construction in progress ..... 12,294 36,402
Machinery and equipment ...... 818 581
Less: Accumulated depreciation (8,002) (14,484)
--------- ---------
$ 98,935 $ 180,781
Interest expense of $365 and $3,075 was capitalized for the years ended
December 31, 2000 and 2001, respectively.
5. INVESTMENT IN UNCONSOLIDATED ENTITY:
In years prior to 2000 and for over ten months in 2000 the Company had
a 60 percent limited partner interest in a partnership. The remaining 40 percent
was owned by an entity in which the Company's Chairman of the Board and Chief
Executive Officer had a minority interest. The partnership's only asset was a
tank barge which was leased by the Company on a short-term basis. The Company
accounted for this investment using the cost-method of accounting because it did
not exert significant influence over the operations of the partnership. Monthly
lease payments were charged to expense, and partnership profit distributions
were netted against the lease expense. During the years ended December 31, 1999,
2000 and 2001 LM's lease expense, net of distributions, related to this
partnership was approximately $105, $106 and $0, respectively. As part of its
$35,000 private equity offering in November 2000, the Company issued
approximately 340 shares of common stock at a per share price of $2.65 for an
aggregate of $900 in exchange for the remaining 40 percent of the partnership.
The price represented 40 percent of the value of the tank barge based on an
independent appraisal. As a result the barge was recorded as an asset in the
Company's consolidated property, plant and equipment.
6. LONG-TERM DEBT:
On June 5, 1998, the Company entered into a $43,000 line of credit
agreement with two banks (Facility A) and $15,000 and $20,000 line of credit
agreements (Facility B and C, respectively) with two venture capital companies.
These "Credit Agreements" were used to refinance existing indebtedness and
partially finance the construction of offshore supply vessels (see Note 9).
Facilities A and B converted to term loans on the completion of the last
offshore supply vessel. In connection with Facility C, the Company issued
detachable warrants to purchase 11,905 shares of common stock. The warrants were
assigned an estimated market value of $500. The warrants for the purchase of
10,500 shares of common stock were exercisable with an exercise price of $1.68
per share. The remaining warrants became exercisable only on the occurrence of
an event of default under Facility C, the Company filing for bankruptcy or if
the indebtedness under Facility C was not discharged in full by June 5, 2003.
All of the warrants issued in connection with establishment of Facility C
provided the holders with a put option whereby the holders had the right, if the
Company's stock was not publicly traded by June 5, 2003 to require the Company
to repurchase the warrants at their fair market value.
According to EITF Issue 88-9, Accounting for Put Warrants, issued by
the Emerging Issues Task Force and supplemented by EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's own Stock, a company whose stock is not publicly traded may elect to
account for warrants that contain put options either as a liability or as
equity. As previously discussed, the Company assigned a market value of $500 to
the warrants at issuance based on the relative fair value of the Facility C debt
and the warrants. The $500 was allocated to equity and the Company has been
amortizing, through retained earnings, the fair market value of the warrants
through June 5, 2003, the first date on which the put could have been exercised.
The warrants were revalued each period-end with changes in value accounted for
prospectively. Had the Company elected to account for the warrants as a
liability rather than as equity, the warrants would have been adjusted to their
fair value at each
F-10
period-end with the fair value adjustment reported as a noncash adjustment to
interest expense. The additional interest expense that would be reported for the
years ended December 31, 1999, 2000 and 2001 would be $2,262, $7,262 and $2,952,
respectively. The Company has included this pro forma information in its
consolidated statements of operations. In the event of an initial public
offering of the Company's stock, the Company's operating results would be
required to reflect the additional interest expense in the amounts stated above
for each applicable period.
The Company repurchased and terminated all of the warrants for $14,500
in October 2001. The repurchase of the warrants was funded by a private
placement of the Company's common stock for gross proceeds of $14,600. The
remaining funds were used for payment of expenses incurred in the offering. As a
result of the repurchase of the warrants, the unamortized value of the warrants
was accelerated and charged to retained earnings in the fourth quarter of 2001.
Beginning in 2002, there will be no further pro forma effects relating to the
accounting for the put warrants due to the Company's repurchase as noted above.
On March 5, 1999, the Facility A credit agreement was amended by the
Company with the two banks by which it was then maintained. The commitment was
increased from $43,000 to $49,400 along with an extension of the outside date
for conversion of construction loans to term loans. The conversion date occurred
at the delivery of the last offshore supply vessel in March 2000.
In July and November 2000, the Company entered into two new credit
facilities (collectively, Facility D) totaling $41,400 with a new lender. Of the
proceeds, $15,000 was used to repay Facility B in full. The remaining amounts
were used to pay the construction costs of additional offshore supply vessels.
At December 31, 2000, Facility D was collateralized by two existing vessels and
four vessels under construction.
In November 2000, Facility A credit agreement was amended by the
Company. The Commitment was increased from $49,400 to $69,000. These additional
funds were used to build additional vessels.
On July 24, 2001, the Company issued $175,000 in principal amount of
Senior Notes. The Company realized net proceeds of approximately $165,000, a
substantial portion of which was used to repay and fully extinguish all of the
then existing credit facilities. The Senior Notes mature on August 1, 2008 and
require semi-annual interest payments at an annual rate of 10 5/8 percent on
February 1 and August 1 of each year until maturity, with the first payment due
on February 1, 2002. The effective interest rate on the Senior Notes is 11.18
percent. No principal payments are due until maturity. The Senior Notes are
unsecured senior obligations and rank equally in right of payment with other
existing and future senior indebtedness and senior in right of payment to any
subordinated indebtedness incurred by the Company in the future. The Senior
Notes are guaranteed by all of the Company's subsidiaries. The Company may, at
its option, redeem all or part of the Senior Notes from time to time at
specified redemption prices and subject to certain conditions required by the
Indenture. The Company is permitted under the terms of the Indenture to incur
additional indebtedness in the future, provided that certain financial
conditions set forth in the Indenture are satisfied by the Company. As of
December 31, 2001, the Company was permitted to incur a minimum of $25,000 of
additional indebtedness.
The Company completed an Exchange Offer on January 18, 2002, whereby
the 10 5/8% Series A Senior Notes, due 2008, were exchanged for 10 5/8% Series B
Senior Notes with the same terms, the offering of which was publicly registered.
Effective December 31, 2001, the Company entered into a new senior
secured revolving line of credit (the Revolver) for $50,000 with one of its
former lenders. Pursuant to the terms of the Revolver, the Company's borrowings
under this facility will initially be limited to $25,000 unless it has obtained
the lender's concurrence to borrow in excess of $25,000. Pursuant to the
indenture governing the Senior Notes, unless the Company meets a specified
consolidated interest coverage ratio test, the level of permitted borrowings
under this facility initially will be limited to $25,000 plus 15 percent of the
increase in the Company's consolidated net tangible assets over the consolidated
net tangible assets as of March 31, 2001 determined on a pro forma basis to
reflect the Spentonbush/Red Star Group acquisition. The Revolver is currently
unsecured and cannot be drawn upon by the Company until the Revolver is secured.
The Revolver will be collateralized by four offshore supply vessels and four
ocean going tugs. The collateral was not in place as of December 31, 2001 due to
the administrative changes necessary which resulted from the restructuring of
the Company's subsidiaries into limited liability entities as discussed in Note
1. Upon collateralization of the Revolver, which is expected to occur by
February 28, 2002, the Company will be allowed to draw upon the facility.
F-11
As of the dates indicated, the Company had the following outstanding
long-term debt:
2000 2001
--------- ---------
Non-revolving line of credit payable to two banks at 9.9%
(Facility A) due 2004, with interest paid at LIBOR tranche
renewals, but not greater than 90 days .......................... $ 44,869 $ --
Senior subordinated notes, payable to two venture capital companies
at 7% (Facility C) due 2005, with interest paid quarterly ....... 23,542 --
Term note, payable to a financing company at 10.3% (Facility D)
due 2013, with interest paid monthly ............................ 20,700 --
10 5/8% Series A Senior Notes due 2008, net of original issue
discount of $3,024 .............................................. -- 171,976
Insurance notes payable and other ................................. 506 437
--------- ---------
89,617
Less: Debt discount, 7% senior subordinated notes due 2005 ....... (226) --
--------- ---------
89,391 172,413
Less: Current maturities ......................................... 6,834 437
--------- ---------
$ 82,557 $ 171,976
========= =========
Annual maturities of long-term debt during each year ending December
31, are as follows:
2002 ..... $ 437
2003 ..... --
2004 ..... --
2005 ..... --
2006 ..... --
Thereafter 171,976
--------
$172,413
7. STOCK OPTION PLANS:
SFAS No. 123, "Accounting for Stock-Based Compensation," established
financial accounting and reporting standards for stock-based compensation plans.
The Company's plan includes all arrangements by which employees and directors
receive shares of stock or other equity instruments of the Company, or the
Company incurs liabilities to employees or directors in amounts based on the
price of the stock. SFAS No. 123 defines a fair-value-based method of accounting
for stock-based compensation. However, SFAS No. 123 also allows an entity to
continue to measure stock-based compensation cost using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to retain the accounting prescribed in APB No. 25 must make
pro forma disclosures of net income assuming dilution as if the fair-value-based
method of accounting defined in SFAS No. 123 had been applied. The Company
retained the provisions of APB No. 25 for expense recognition purposes. Under
APB No. 25, where the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense in recognized.
The Company established an incentive stock option plan which provides
that options for a maximum of 3,500 shares of common stock that may be granted
by the Company. The purchase price of the stock subject to each option is
determined by the Board of Directors of the Company and cannot be less than the
fair market value of the stock at the date of grant. No options have been
exercised to date. All options granted expire 5 - 10 years after date of grant,
have an exercise price equal to or greater than the estimated market price of
the Company's stock at the date of grant and vest over a 2 to 4 year period.
F-12
The following summarizes the option activity in the plans during 1999,
2000 and 2001:
1999 2000 2001
-------------------------- -------------------------- ---------------------------
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
OUTSTANDING PER SHARE OUTSTANDING PER SHARE OUTSTANDING PER SHARE
----------- --------- ----------- --------- ----------- ---------
Balance, beginning of
year .............. 53 $1.85 150 $1.85 386 $1.97
Granted ........... 97 1.85 236 2.04 1,420 2.65
Cancelled ......... -- -- -- -- (66) 2.36
------ ----- ------ ----- ------ -----
Balance, end of year 150 $1.85 386 $1.97 1,740 $2.51
====== ===== ====== ===== ====== =====
There were 76, 196 and 568 options exercisable at December 31, 1999,
2000 and 2001, respectively.
Had compensation cost for the Company's stock options been determined
based on the fair value at the grant date consistent with the method under SFAS
No. 123, the Company's income available to common stockholders for the years
ended December 31, 1999, 2000 and 2001 would have been as indicated below:
1999 2000 2001
--------------- --------------- ----------
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
As reported...................................... $ 420 $ 2,738 $ 9,971
Pro forma........................................ 405 2,697 9,801
The weighted average fair value at the date of grant for options
granted during the periods presented was $.38, $.52 and $.74 as of December 31,
1999, 2000 and 2001, respectively.
The fair value of the options granted under the Company's stock option
plan during each of the three years ended December 31, 2001, was estimated using
the Black-Scholes Pricing Model using the minimum value method whereby
volatility is not considered. The other assumptions used were: risk-free
interest rate of six percent, expected life of five to seven years and no
expected dividends.
8. INCOME TAXES:
The net long-term deferred tax liabilities (assets) in the accompanying
balance sheets include the following components:
2000 2001
-------- --------
DEFERRED TAX LIABILITIES:
Fixed assets ................................. $ 8,605 $ 11,819
Deferred charges ............................. 711 964
-------- --------
Total deferred tax liabilities ............. 9,316 12,783
ASSETS:
Net operating loss carryforward .............. (5,422) (3,201)
Allowance for doubtful accounts .............. (19) (39)
Other ........................................ (92) (65)
-------- --------
Total deferred tax assets .................. (5,533) (3,305)
Valuation allowance ............................ 92 92
-------- --------
Total deferred tax liabilities, net ........ $ 3,875 $ 9,570
======== ========
F-13
The components of the income tax expense follow:
1999 2000 2001
------ ------ ------
Current tax expense ........................... $ 55 $ -- $ --
Deferred tax expense .......................... 231 1,550 5,737
------ ------ ------
Total ......................................... 286 1,550 5,737
Tax benefit allocated to accounting change and 55 -- 1,065
------ ------ ------
extraordinary loss
Tax expense attributed to continuing operations $ 341 $1,550 $6,802
====== ====== ======
At December 31, 2001, the Company had federal net operating loss
carryforwards of approximately $8,832. The carryforward benefit from the federal
net operating loss carryforwards begin to expire in 2017. The Company had state
net operating loss carryforwards of approximately $1,515. These carryforwards
can only be utilized if the Company generates taxable income in the appropriate
tax jurisdiction. A valuation allowance has been established to fully offset the
deferred tax asset related to the state carryforward.
The following table reconciles the difference between the statutory
federal income tax rate for the Company to the effective income tax rate:
1999 2000 2001
---- ---- ----
Statutory Rate ....... 34.0% 34.0% 35.0%
State Taxes .......... 2.0% 1.0% 1.0%
Non-deductible expense 2.0% 1.0% 0.3%
Other ................ 1.0% --% --%
---- ---- ----
39.0% 36.0% 36.3%
==== ==== ====
9. COMMITMENTS:
Vessel Construction
At December 31, 2001, the Company was committed under a vessel
construction contract with a shipyard affiliated with the Company's Chairman of
the Board and Chief Executive Officer to construct two offshore supply vessels.
At that date, the remaining amount expected to be incurred to complete
construction with respect to such contract was approximately $7,622. At December
31, 2001, the Company was also committed under a vessel construction contract
with another shipyard to construct two additional offshore supply vessels. At
that date, the remaining amount expected to be expended to complete construction
with respect to such contract was approximately $19,545.
The Company is obligated under the terms of both contracts to remit
funds to the shipyards based on vessel construction milestones, which are
subject to change during vessel construction.
Operating Leases
The Company is obligated under certain operating leases for marine
vessels, office space and vehicles. The office space lease provides for a term
of five years with five one-year renewal options.
Future minimum payments under noncancelable leases for years subsequent
to 2001 follow:
YEAR ENDED DECEMBER 31,
-----------------------
2002 $ 847
2003 258
2004 225
2005 214
2006 88
In addition, the Company leases marine vessels used in its operations
under month-to-month operating lease agreements. See Note 5 for information
regarding a short-term vessel operating lease from an affiliate.
F-14
Total rent expense related to leases was $3,104, $1,758 and $771 during the
years ended December 31, 1999, 2000 and 2001, respectively.
See Note 14 for a description of the lease entered into in connection
with the Spentonbush/Red Star Group acquisition.
10. DEFERRED CHARGES:
Deferred charges include the following:
1999 2000 2001
------ ------ ------
Deferred loan costs, net of accumulated amortization of
$552, $889 and $424, respectively .......................... $2,034 $3,004 $6,972
Deferred drydockings costs, net of accumulated amortization of
$589, $1,372 and $2,414, respectively ...................... 1,383 2,086 2,789
Other ........................................................ -- 30 42
------ ------ ------
Total .................................................... $3,417 $5,120 $9,803
====== ====== ======
11. RELATED PARTY TRANSACTIONS:
A former member of the Company's Board of Directors, now serving as an
Advisory Director, is a partner in a law firm that has provided legal services
to the Company. The Company paid approximately $123, $475 and $1,529 to the law
firm during the years ended December 31, 1999, 2000 and 2001, respectively. The
Company paid approximately $351 to a venture capital company, certain members of
which are related parties of the Company, for services provided during the year
ended December 31, 1999. No services were provided during 2000 and 2001. As
discussed in Note 9, the Company was committed under a vessel construction
contract to construct two offshore supply vessels with a shipyard affiliated
with the Company's Chairman of the Board and Chief Executive Officer. The same
shipyard has constructed five of the nine offshore supply vessels in service as
of December 31, 2001. See Note 9 for additional information.
12. MAJOR CUSTOMERS:
In the years ended December 31, 1999, 2000 and 2001 revenues by
customer that individually exceeded ten percent of total revenue are as follows:
YEAR ENDED DECEMBER 31,
1999 2000 2001
----------- ----------- --------
Customer A.............. 19% -- --
Customer B.............. 10% -- --
Customer C.............. 12% 13% 12%
Customer D.............. -- 15% --
Customer E.............. -- -- 19%
13. SEGMENT INFORMATION:
The Company provides marine transportation services through two
business segments. The Company operates newly constructed deepwater offshore
supply vessels in the Gulf of Mexico through its offshore supply vessel segment.
The offshore supply vessels principally support offshore drilling and production
operations in the deepwater regions of the Gulf of Mexico by transporting cargo
to offshore drilling rigs and production facilities and provide support for
specialty services. The tug and tank barge segment operates ocean-going tugs and
tank barges in the northeastern United States and in Puerto Rico. The
ocean-going tugs and tank barges provide coastwise transportation of refined and
bunker grade petroleum products from one port to another. The following shows
reportable segment information for the years ended December 31, 1999, 2000 and
2001 reconciled to consolidated totals and prepared on the same basis as the
Company's consolidated financial statements.
F-15
1999 2000 2001
-------- -------- --------
OPERATING REVENUE:
Offshore supply vessels .... $ 9,492 $ 19,626 $ 33,610
Tugs and tank barges ....... 16,231 16,476 35,181
-------- -------- --------
Total .................... $ 25,723 $ 36,102 $ 68,791
======== ======== ========
OPERATING EXPENSES:
Offshore supply vessels .... $ 5,263 $ 9,291 $ 15,168
Tugs and tank barges ....... 12,012 11,119 25,676
-------- -------- --------
Total .................... $ 17,275 $ 20,410 $ 40,844
======== ======== ========
OPERATING INCOME:
Offshore supply vessels .... $ 3,498 $ 8,784 $ 18,442
Tugs and tank barges ....... 2,483 3,553 9,505
-------- -------- --------
Total .................... $ 5,981 $ 12,337 $ 27,947
======== ======== ========
CAPITAL EXPENDITURES:
Offshore supply vessels .... $ 35,136 $ 14,473 $ 53,317
Tugs and tank barges ....... 6,979 1,609 34,926
Corporate .................. 178 142 85
-------- -------- --------
Total .................... $ 42,293 $ 16,224 $ 88,328
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Offshore supply vessels .... $ 1,685 $ 2,823 $ 3,503
Tugs and tank barges ....... 2,039 2,341 4,167
-------- -------- --------
Total .................... $ 3,724 $ 5,164 $ 7,670
======== ======== ========
IDENTIFIABLE ASSETS:
Offshore supply vessels .... $ 74,407 $ 87,866 $140,580
Tugs and tank barges ....... 28,472 28,569 67,937
Corporate .................. 607 30,713 50,300
-------- -------- --------
Total .................... $103,486 $147,148 $258,817
-------- -------- --------
LONG-LIVED ASSETS:
Offshore supply vessels .... $ 66,380 $ 78,143 $128,188
-------- -------- --------
Tugs and tank barges ....... 19,040 20,449 52,272
-------- -------- --------
Corporate .................. 280 343 321
-------- -------- --------
Total .................... $ 85,700 $ 98,935 $180,781
-------- -------- --------
14. SPENTONBUSH/RED STAR GROUP ACQUISITION:
On May 31, 2001, the Company purchased a fleet of nine ocean-going tugs
and nine ocean-going tank barges and the related coastwise transportation
businesses from the Spentonbush/Red Star Group for approximately $28,000 in
cash. As part of the acquisition, the Company entered into a contract of
affreightment with Amerada Hess as its exclusive marine logistics provider and
coastwise transporter of petroleum products in the northeastern United States.
The contract became effective on June 1, 2001 and its initial term continues
through March 31, 2006. The Company also entered into a five-year lease for the
Brooklyn marine facility of Amerada Hess where the tug and tank barge operations
that were acquired are based and from which such operations are conducted. The
lease expires in March 2006. The Company incurred approximately $600 in
acquisition costs.
The purchase method was used to account for the acquisition of the tugs
and tank barges from the Spentonbush/Red Star Group. There was no goodwill
recorded as a result of the acquisition. Costs related to the recertification of
acquired vessels that are drydocked within the first twelve months immediately
following the acquisition of such vessels are capitalized into the costs of such
vessels and are depreciated over the estimated useful life of the vessels. The
purchase price was allocated to the acquired assets based on the estimated fair
value as of May 31, 2001 as follows (in thousands):
Property, Plant and Equipment $27,030
Other Assets ................ 1,000
=======
Purchase Price .............. $28,030
F-16
The following summarized unaudited pro-forma income statement data
reflects the impact the Spentonbush/Red Star Group acquisition would have had on
the Company's consolidated results of operations for each year, had the
acquisition taken place at the beginning of the fiscal year (in thousands):
UNAUDITED PRO-FORMA RESULTS FOR THE
--------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Revenue ........ $89,298 $78,198
Operating income 33,614 21,621
Net Income 13,141 7,546
15. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER ENDED
---------------------------------------------------------
(In thousands) MAR 31 JUN 30 SEP 30 DEC 31
-------- -------- -------- --------
FISCAL YEAR 2001
Revenues .................... $ 10,416 $ 15,278 $ 21,422 $ 21,675
Operating Income ............ 3,999 6,438 8,788 8,722
Extraordinary items ......... -- -- 1,877 87
Net Income .................. 1,758 3,122 1,667 3,424
Pro forma net income (Note 6) 1,758 3,122 1,667 472
FISCAL YEAR 2000
Revenues .................... $ 7,265 $ 9,054 $ 9,813 $ 9,970
Operating Income ............ 1,408 3,534 3,477 3,918
Extraordinary items ......... -- -- -- --
Net Income (loss) ........... (305) 769 863 1,411
Pro forma net income (Note 6) (305) 769 863 (5,851)
F-17
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
its behalf by the undersigned, thereunto duly authorized, in the City of
Mandeville, the State of Louisiana, on April 1, 2002.
HORNBECK-LEEVAC MARINE SERVICES, INC.
By: /s/ TODD M. HORNBECK
------------------------------------------
Todd M. Hornbeck
President and Chief Executive 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/ TODD M. HORNBECK President, Chief Executive April 1, 2002
- -------------------------------------------- Officer, Secretary and
(Todd M. Hornbeck) Director (Principal
Executive Officer)
/s/ JAMES O. HARP, JR. Vice President and Chief April 1, 2002
- -------------------------------------------- Financial Officer
(James O. Harp, Jr.) (Principal Financial and
Accounting Officer)
/s/ RICHARD W. CRYAR Director April 1, 2002
- --------------------------------------------
(Richard W. Cryar)
/s/ LARRY D. HORNBECK Director April 1, 2002
- --------------------------------------------
(Larry D. Hornbeck)
/s/ BRUCE W. HUNT Director April 1, 2002
- --------------------------------------------
(Bruce W. Hunt)
/s/ BERNIE W. STEWART Director and Chairman of April 1, 2002
- -------------------------------------------- the Board
(Bernie W. Stewart)
/s/ CHRISTIAN G. VACCARI Director April 1, 2002
- --------------------------------------------
(Christian G. Vaccari)
/s/ ANDREW L. WAITE Director April 1, 2002
- --------------------------------------------
(Andrew L. Waite)
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------------- --------------------------------------------------------------
3.1 -- Restated Certificate of Incorporation of HORNBECK-LEEVAC
Marine Services, Inc. filed with the Secretary of State of
the State of Delaware on December 13, 1997 (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
3.2 -- Certificate of Amendment of the Restated Certificate of
Incorporation of HORNBECK-LEEVAC Marine Services, Inc.
filed with the Secretary of State of Delaware on December
1, 1999 (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
3.3 -- Certificate of Amendment of the Restated Certificate of
Incorporation of HORNBECK-LEEVAC Marine Services, Inc.
filed with the Secretary of State of the State of Delaware
on October 23, 2000 (incorporated by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-4
dated September 21, 2001, Registration No. 333-69826).
3.4 -- Certificate of Correction to Certificate of Amendment of
the Restated Certificate of Incorporation of
HORNBECK-LEEVAC Marine Services, Inc. filed with the
Secretary of State of the State of Delaware on November 14,
2000 (incorporated by reference to Exhibit 3.4 to the
Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
3.5 -- Second Restated Bylaws of HORNBECK-LEEVAC Marine
Services, Inc., adopted October 4, 2000 (incorporated by
reference to Exhibit 3.5 to the Company's Registration
Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
4.1 -- Indenture dated as of July 24, 2001, between Wells Fargo
Bank Minnesota, National Association (as Trustee) and the
Company, including table of contents and cross-reference
sheet (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
4.2 -- Supplemental Indenture dated as of December 17, 2001,
between Wells Fargo Bank Minnesota, National Association
(as Trustee), the Company, Hornbeck Offshore Services, LLC,
(f.k.a. Hornbeck Offshore Services, Inc.), HORNBECK-LEEVAC
Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine
Operators, Inc.), LEEVAC Marine, LLC and Energy Services
Puerto Rico, LLC, with Notation of Subsidiary Guarantee by
Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck Offshore
Services, Inc.), HORNBECK-LEEVAC Marine Operators, LLC,
(f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC
Marine, LLC and Energy Services Puerto Rico, LLC attached
(incorporated by reference to Exhibit 4.1.1 to Amendment
No. 2 to the Company's Registration Statement on Form S-4
dated December 19, 2001, Registration No. 333-69826).
4.3 -- Specimen 10 5/8% Series B Senior Note due 2008
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).
10.1 -- Employment Agreement dated effective January 1, 2001 by
and between Christian G. Vaccari and the Company
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).
10.2 -- Employment Agreement dated effective January 1, 2001 by
and between Todd M. Hornbeck and the Company (incorporated
by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
10.3 -- Employment Agreement dated effective January 1, 2001 by
and between Carl Annessa and the Company (incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
10.4 -- Employment Agreement dated effective January 1, 2001 by
and between Paul M. Ordogne and the Company (incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
10.5 -- Employment Agreement dated effective January 1, 2001 by
and between James O. Harp, Jr. and the Company
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).
*10.6 -- Advisory Agreement dated effective February 27, 2002 by
and between Bernie W. Stewart and the Company.
10.7 -- Incentive Compensation Plan (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-4 dated September 21, 2001, Registration No.
333-69826).
10.8 -- Amendment No. 1 to Incentive Compensation Plan
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).
10.9 -- Asset Purchase Agreement dated as of May 31, 2001 among
LEEVAC Marine, Inc., Hygrade Operators, Inc., Red Star
Towing and Transportation Company, Inc., Sheridan Towing
Co., Inc., R.S. Bushey & Sons, Inc., and Amerada Hess
Corporation (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-4 dated
September 21, 2001, Registration No. 333-69826).
10.10 -- Contract of Affreightment dated as of May 31, 2001 among
LEEVAC Marine, Inc. and Amerada Hess Corporation (certain
portions omitted based on a grant of confidential treatment
filed separately with the Commission) (incorporated by
reference to Exhibit 10.9 to Amendment No. 2 to the
Company's Registration Statement on Form S-4 dated December
19, 2001, Registration No. 333-69826).
*10.11 -- Credit Agreement dated as of December 31, 2001 among
Hornbeck Offshore Services, LLC, LEEVAC Marine, LLC and
Hibernia National Bank, as Agent and the lenders named
therein.
*10.12 -- First Amendment to Credit Agreement dated as of February
25, 2002 among Hornbeck Offshore Services, LLC, LEEVAC
Marine, LLC and Hibernia National Bank, as Agent and the
lenders named therein.
*21 -- Subsidiaries of HORNBECK-LEEVAC Marine Services, Inc.
* Filed herewith.