HORNBECK OFFSHORE SERVICES INC /LA - 10-K Annual Report

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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, 2002

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 OFFSHORE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

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.

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

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 26, 2003 was 30,305,286.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

ii

PART I

ITEMS 1 AND 2. -- BUSINESS AND PROPERTIES.

Hornbeck Offshore Services, Inc. (f/k/a HORNBECK-LEEVAC Marine Services,
Inc.) was incorporated under the laws of the State of Delaware in 1997 under the
name "HV Marine Services, Inc." In this Form 10-K, "company," "we," "us" and
"our" refers to Hornbeck Offshore Services, Inc. and its subsidiaries, except as
otherwise indicated.

GENERAL

We are a leading owner and operator of deepwater-capable offshore supply
vessels serving the offshore oil and gas industry. In 1997, we commenced a
growth-oriented newbuild program using our proprietary deepwater-OSV designs. We
currently operate a fleet of 14 deepwater OSVs in the Gulf of Mexico with an
average age of approximately 2.5 years. We have seven additional deepwater OSVs
planned or under construction.

Demand for our OSV services is primarily driven by deepwater drilling and
production activity. In the late-1990s, we identified a significant opportunity
in and developed a plan to exploit the emerging interest in deepwater
exploration and production in the Gulf of Mexico. Since then, the deepwater Gulf
of Mexico has become an increasingly active oil and natural gas producing
region. According to the Minerals Management Service, in 2001, the deepwater
accounted for approximately 59 percent of total Gulf of Mexico oil production
and 23 percent of total Gulf of Mexico natural gas production. Successful
exploration and development in deepwater areas requires a new generation of
expensive drilling rigs and production platforms and other advanced drilling and
production technology. We believe that these expensive projects are served most
effectively by a new generation of deepwater OSVs capable of supporting
day-to-day operations in a manner that minimizes costly downtime in terms of
both drilling rig dayrates and lost oil and natural gas production.

We believe that the existing fleet of conventional, 180' OSVs working in
shallow water areas, such as the continental shelf of the Gulf of Mexico, is not
capable of operating effectively in the deepwater market due to insufficient
cargo capacity and lack of dynamic positioning capability. Dynamic positioning
allows a vessel to maintain position without the use of anchors through a
sophisticated, computerized system. Since 1997, we have assembled a core team of
naval architects and other marine professionals to design and operate a new
class of OSVs that specifically address the challenges of deepwater operations.
All of our deepwater OSVs have been built based on the proprietary designs and
to the specifications of our in-house design team. As a result, all of our
deepwater OSVs have enhanced capabilities that allow them to be used effectively
in all stages of a deepwater project and for specialty services. Although we
currently operate primarily in the Gulf of Mexico, all of our OSVs are capable
of operating in all deepwater regions around the world. We have two OSVs
currently operating in Trinidad and Tobago and are actively pursuing contracts
in additional foreign markets in response to increased customer requests for our
offshore supply vessels. We will continue to analyze opportunities to deploy
more of our deepwater OSVs into foreign markets, including Trinidad, Mexico and
Brazil, under appropriate circumstances.

We are also a leading provider of marine transportation services to the
energy industry in the northeastern United States and Puerto Rico. We currently
own and operate a fleet of 12 ocean-going tugs, 16 ocean-going tank barges and
one coastwise tanker. We believe our tug and tank barge business complements our
OSV business, provides additional revenue and

1

geographic diversification and allows us to offer another line of services to
integrated oil and gas companies. Demand for our tug and tank barge services is
driven primarily by the consumption of refined petroleum products.

Our principal executive offices are located at 414 North Causeway
Boulevard, Mandeville, Louisiana 70448, and our telephone number is
(985) 727-2000. Our company's website address is www.hornbeckoffshore.com.

OFFSHORE SUPPLY VESSELS

THE OSV INDUSTRY

Offshore supply vessels serve exploratory and developmental drilling rigs
and production facilities and support offshore construction and subsea
maintenance activities. OSVs 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, OSVs transport liquid mud,
potable and drilling water, diesel fuel and dry bulk cement.

In general, demand for OSVs is primarily related to the level of drilling
activity, which can be influenced by a number of factors, including oil and
natural gas prices and drilling budgets of exploration and production companies.
As a result, utilization and dayrates are directly related to oil and natural
gas prices and drilling activity. However, dayrates and utilization in deepwater
regions are generally less sensitive to short-term commodity price fluctuations
due to the long-term nature of deepwater projects in general.

The Gulf of Mexico is a critical oil and natural gas supply basin for the
United States, accounting for 20 percent and 26 percent, respectively, of total
U.S. oil and natural gas production in 2001. Offshore oil and natural gas
activity in the Gulf of Mexico is bifurcated between the shallow water, or
continental shelf, and deepwater regions. Each region has distinct
characteristics both in terms of oil and natural gas exploration, development
and production activities and OSV requirements.

The continental shelf of the Gulf of Mexico is a mature producing region
with hydrocarbon reserves that demonstrate increasingly rapid production decline
rates. While significant infrastructure exists in this region and oil and
natural gas exploration, development and production activities are less costly
than in the deepwater, drilling activity is more sensitive to fluctuations in
commodity prices, particularly the price of natural gas. Decreases in oil and
natural gas prices generally result in reduced offshore drilling activity and
lower demand for OSV services in the shallow water areas of the Gulf of Mexico
as low commodity prices undermine the economic viability of these projects. This
causes a corresponding decline in dayrates for and utilization of OSVs that
operate in this region.

By contrast, the deepwater region of the Gulf of Mexico, which is generally
defined as water depths between 1,000 and 5,000 feet, is an emerging market with
many unexplored areas of potential oil and natural gas reserves and is an
increasingly important source of oil and natural gas production. From 1990 to
2001, production in the deepwater Gulf of Mexico increased from 4 percent to
59 percent of total Gulf of Mexico oil production and from 1 percent to
23 percent of total Gulf of Mexico natural gas production. The relatively large
capital commitments, long lead times and investment horizons associated with
deepwater exploration, development and production activities make it less likely
that an oil and gas company will abandon a deepwater project upon a short-term
decline in oil or natural gas prices. This is particularly true in the
ultra-deepwater, which is generally defined as water depths in excess of
5,000 feet. As a result,

2

despite recent fluctuations in commodity prices, the active Gulf of Mexico OSV
fleet operating in the deepwater and ultra-deepwater regions continues to
maintain high utilization compared to the continental shelf, at dayrates that
have remained relatively stable, although softer than a year ago.

According to Offshore Marine Services Association, the U.S.-flagged OSV
fleet totaled 354 vessels as of December 1, 2002, substantially all of which
were located in the Gulf of Mexico. Of this total, approximately 248, or
70 percent, are conventional, 180' OSVs that were operating primarily on the
continental shelf. Approximately 106 are deepwater capable and were operating
primarily in the deepwater Gulf of Mexico. Of the conventional OSV fleet, 109
were cold-stacked. Vessels that are cold-stacked have generally been removed
from active service by the operator due to lack of demand. In contrast, no
deepwater OSVs were cold-stacked at that time.

THE MARKET FOR DEEPWATER OSVS

Deepwater drilling, exploration and production activities require
specialized equipment and higher volumes of supplies to meet the more difficult
operating environment that characterizes the deepwater region. To accommodate
operations in this environment and meet customer demands, deepwater OSVs,
including our entire OSV fleet, are designed with larger capacities, including
greater liquid mud and dry bulk cement capacities, as well as larger areas of
open deck space, and longer voyage capabilities than conventional OSVs. In
addition, drilling rigs and OSVs operating in deepwater environments generally
require dynamic positioning, or anchorless station-keeping, capability to enable
continued operation in adverse weather conditions. For safety reasons, customers
do not allow OSVs to tie up to deepwater installations. We believe that vessels
in the existing fleet of conventional OSVs, substantially all of which lack
dynamic positioning capability and sufficient on-deck or below-deck cargo
capacity, are not capable of operating effectively or economically in the
deepwater market.

Recent discoveries of deepwater fields in the Gulf of Mexico have resulted
in increased developmental and exploratory drilling activities. Of the
86 deepwater Gulf of Mexico fields discovered to date, 56 fields had begun
production by the end of June 2002. Moreover, utilization rates for deepwater
OSVs in the Gulf of Mexico have averaged nearly 100 percent over the last two
years compared to an average utilization rate for the conventional OSV fleet of
approximately 75 percent over the same period. Given the recent and expected
deepwater activity, we believe that the supply of OSVs, including vessels
currently available and vessels being constructed under announced construction
plans, is more than sufficient to meet the current and near term demand for such
vessels, but long-term projections of deepwater activity indicate a potential
shortage. Furthermore, although U.S.-flagged vessels operating in overseas
locations may be remobilized to the Gulf of Mexico, we believe it is unlikely
that any such remobilization would have a significant impact on the supply of
deepwater OSVs in the near future. With the existing deepwater fleet operating
near full capacity, this demand is most likely to be met through new
construction of deepwater OSVs.

OUR OSV BUSINESS

We currently own and operate a fleet of 14 deepwater OSVs and have seven
deepwater OSVs planned or under construction. Our in-house engineering team
designed our fleet of OSVs specifically to meet the demands of deepwater
regions. Where appropriate, we work closely with potential charterers to design
vessels specifically to meet their anticipated needs, particularly when the
charterer will operate a deepwater project that could have a duration of more
than 20 years and require expenditures exceeding $1 billion. Our vessels have
two to

3

three times the dry bulk capacity and deck space, three to 10 times the liquid
mud capacity and two to four times the deck tonnage compared to conventional,
180' OSVs, which are used primarily 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 percent greater fuel efficiency than vessels powered by
conventional engines. In addition, we believe that the superior capabilities of
our deepwater OSVs allow them to earn higher average dayrates and utilization
rates than those generated by our peers.

All of our OSVs are equipped with advanced dynamic positioning systems that
allow our vessels to maintain position within a minimal variance. The unique
hull design and integrated rudder and thruster system of our OSVs provide for a
more manageable vessel. Our OSVs have been designed with state-of-the-art
lifesaving monitoring, emergency power, fire alarm and fire suppression systems
and systems monitoring equipment. These 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 marine
environments. Although we operate primarily in the Gulf of Mexico, two of our
OSVs are currently operating offshore Trinidad and Tobago and all of 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.

We design our OSVs to support certain specialty services, including well
stimulation, remotely operated vehicles, or ROVs, used in oilfield subsea
construction and maintenance, underwater inspections, marine seismic operations,
and certain non-energy applications such as fiber optics cable installation. We
design our OSVs to include such characteristics as maneuverability, fuel
efficiency and firefighting capacity, which strengthen demand for their use in
specialty situations. Two of our vessels, the HOS Innovator and the HOS
Dominator, currently provide ROV subsea construction and maintenance support for
a large oilfield service company under contracts with three-year initial terms.
The BJ Blue Ray provides well stimulation support services for another large
oilfield service company under a contract with a five-year initial term.

4

The following table provides information, as of March 26, 2003, regarding
our existing fleet of deepwater OSVs, as well as those we currently have under
construction.

OFFSHORE SUPPLY VESSELS

- ----------

(1) ROV: remotely operated vehicle

TBD: to be determined

The table above does not contain any information with respect to the four
additional OSVs for which we have evaluated construction bids from shipyards in
connection with our current newbuild program. Demand for deepwater offshore
supply vessels in the Gulf of Mexico and foreign markets will be a key
determinant of when the four additional OSVs will be constructed.

We have designed five distinct classes of OSVs to meet the diverse needs of
the offshore oil and gas industry. The following table provides a comparison of
certain specifications and capabilities of our deepwater and ultra-deepwater
OSVs to conventional, 180' OSVs used primarily in shallow water.

5

- ----------

(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 "0," "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.

TUGS AND TANK BARGES

THE TUG AND TANK BARGE INDUSTRY

Petroleum products are transported in the northeastern United States
through a vast network of refineries, terminals, tankers and pipelines. We
believe, based upon our analysis of the industry, that approximately 1.2 million
barrels of petroleum products are transported each day by tank barges operating
in the coastwise trade in this region. Tugs and tank barges are also used to
transport petroleum products in Puerto Rico and other Caribbean islands.

Demand for tug and tank barge services in the northeastern United States is
primarily driven by population growth, the strength of the U.S. economy and
changes in weather and transportation patterns that affect consumption of
heating oil, gasoline, diesel and jet fuel. The

6

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 in the
foreseeable future.

The largest single market in the northeastern United States 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. As a result, 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 increase as larger
oil tankers are built to replace oil tankers removed from service due to
mandates under the Oil Pollution Act of 1990, or 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 compound annual
growth rates of 1.7 percent and 4.9 percent, 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. Based upon our analysis of the industry,
we believe that at the time OPA 90 was passed, approximately 50 percent of the
U.S. flagged tanker and tank barge fleet in the northeastern United States
affected by OPA 90 was required to be retired or substantially reconstructed by
December 31, 2004.

OUR TUG AND TANK BARGE BUSINESS

We own and operate a fleet of 12 ocean-going tugs, 16 ocean-going tank
barges and one coastwise tanker. One of our tank barges is a double-hulled tank
barge and is not subject to OPA 90 retirement dates. Ten of our 15 single-hulled
tank barges are not required under OPA 90 to be retired or double-hulled until
2015. Of our remaining single-hulled tank barges, three are required to be
retired or modified before 2005, and two in 2009. Our coastwise tanker is not
subject to OPA 90 retirement dates. 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 required to be removed from service or substantially
reconstructed.

Generally, a tug and tank barge work together as a "tow" to transport
refined or bunker grade petroleum products. Our tank barges carry petroleum
products that are typically characterized as either "clean" or "dirty" along the
upper east coast of the United States, the coast of Puerto Rico and in the
Caribbean. Clean products are primarily gasoline, home heating oil, diesel fuel
and jet fuel. Dirty products are mainly crude oils, residual crudes and
feedstocks, 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

7

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 tank 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
transport by tank barge 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 26, 2003, regarding
the tugs, tank barges and the coastwise tanker we own.

OCEAN-GOING TUGS

8

OCEAN-GOING TANK BARGES AND COASTWISE TANKER

- ----------

(1) For a discussion of OPA 90 see "-- Environmental and Other Governmental
Regulations" below.

(2) This vessel, formerly known as the T/B Kilchis, is a double-hulled tank
barge that was acquired on February 28, 2003. Upon closing, we renamed this
vessel the Energy 8001.

(3) This coastwise tanker, formerly known as the M/V W.K. McWilliams, Jr., was
acquired on November 15, 2001, and is not currently certificated to
transport petroleum products. Therefore, barrel capacity is not applicable
to this vessel.

OUR COMPETITIVE STRENGTHS

Technologically Advanced Fleet of Deepwater OSVs. Our OSVs were designed
with the operating specifications necessary for operations in deepwater regions
and have significantly more capacity and operate more efficiently than
conventional OSVs. In addition, we believe that safety is an increasingly
important consideration for oil and gas operators due to the environmental and
regulatory sensitivity associated with offshore drilling and production
activity. While 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, they are hesitant to stop operations in such
conditions because of the high daily cost of halting a deepwater operation. Our
vessels incorporate sophisticated technologies and are designed specifically to
operate safely in the rougher seas in deepwater environments. These technologies
include dynamic positioning, roll reduction, controllable pitch thrusters and
our unique cargo handling systems, which permit high volume transfer rates of
liquid mud and dry bulk. We believe that we earn higher average dayrates and
utilization rates than those of our peers for the following reasons: the
superior capabilities of our deepwater OSVs and

9

the collaborative efforts of our in-house design team in providing marine
engineering solutions to our customers.

Young OSV Fleet. We believe that we operate the youngest fleet of OSVs in
the Gulf of Mexico. While over 70 percent of the Gulf of Mexico OSV fleet is
over 18 years old, the average age of our OSV fleet is approximately 2.5 years,
and we have seven additional deepwater OSVs currently planned or under
construction. Newer vessels experience less downtime and require significantly
less capital expenditures for scheduled drydockings and maintenance compared to
older vessels. The average intermediate drydocking for recertification for one
of our OSVs generally lasts five to 10 days in the shipyard and costs
approximately $0.3 million. In contrast, the typical drydocking for
recertification of a conventional, 180-foot OSVs may last up to 60 days in the
shipyard and can cost as much as $1.5 million. We believe that our operation of
new technologically advanced, deepwater OSVs 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 OSV in November 1998, the average
utilization rate for our OSVs has been approximately 95 percent. According to
One Offshore, formerly Offshore Data Services, the Gulf of Mexico industry
average was approximately 75 percent over the same time period, based on vessels
available for service. We expect that our newer, larger, faster and more
cost-efficient vessels will remain in high demand as deepwater exploration,
development and production activity continues to increase globally.

Leading Market Presence in Core Target Markets. We are the second largest
operator of deepwater OSVs in the Gulf of Mexico. We have a larger presence in
the deepwater Gulf of Mexico than any of our publicly traded competitors, with
12 of our 14 OSVs operating there. We will strengthen this position and our
ability to serve other markets following delivery of the seven deepwater OSVs we
currently have planned or under construction. We operate one of the largest
fleets of tugs and tank barges for the transportation of petroleum products in
Puerto Rico and believe that we are also the fourth largest tank barge
transporter of 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. This law effectively prohibits
vessels that are either foreign-flagged or foreign-built, whether owned and
operated by foreign or domestic companies, from operating in our market areas.

Successful Track Record of Deepwater OSV Construction. Our management
possesses significant naval architecture, marine engineering and shipyard
experience. We believe we are unique in the manner in which we design our own
OSVs and work closely with our contracted shipyards in their construction. In
addition, we typically source and supply much of the manufactured components
(owner-furnished equipment) from vendors other than the shipyard, comprising a
large portion of the aggregate cost of a vessel. This approach results in
substantial cost savings by avoiding the shipyard's mark-up on such equipment
and enabling us to qualify for volume discounts with our non-shipyard vendors.
This approach also fosters direct relationships with the vendors of our major
equipment systems, which enhances the level of service we receive from such
vendors during the warranty period. We delivered our current fleet of 14
deepwater OSVs substantially on time and on budget. As previously reported, two
of our recently delivered vessels experienced shipyard delays; however, we
settled arbitration proceedings with the shipyard in question and were awarded
liquidated damages with respect to such delays. We believe that our history of
delivering new vessels without significant delays provides us with a competitive
advantage in obtaining contracts for our vessels prior to their actual delivery.

10

Favorable OPA 90 Fleet Status. Based upon our analysis of the industry, we
believe that at the time OPA 90 was passed, approximately 50 percent of the
single hulled tank barge capacity serving the northeastern United States was
required to be retired or substantially reconstructed before 2005. Because most
of our barges are not required to be double-hulled until 2015, we believe we
have a competitive advantage over operators with significant numbers of tank
barges that must be retired or modified to add double hulls before that date.

Long-Term Contracts and a Diversified Fleet. Currently, five of our 14 OSVs
operate under long-term contracts with expiration dates ranging from April 2003
to November 2006. These contracts generally provide for full year-round
utilization, are, in some instances, based on dayrates with a built-in
escalation clause and are exclusively dedicated to the charterer. We often
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 high levels of inquiries as potential charterers have become aware of
the capabilities and performance of our newly constructed OSVs. A majority of
our tug and tank barge capacity is operating under a long-term contract of
affreightment through at least November 2006. In addition, our long-term
contract with Amerada Hess, when coupled with our operation of tugs and tank
barges in both the northeastern United States and Puerto Rico, provides revenue
diversification to complement our OSV fleet. We also operate two of our tank
barges in the Caribbean under contracts that have been renewed in each of the
last three years. We believe that by having many of our vessels operating under
long-term contracts, we have a competitive advantage because it provides us a
stable base of revenue and cash flow throughout the energy service industry
cycle, and enhances our ability to manage our long-term growth.

Experienced Management Team with Proven Track Record. Our executive
management team has an average of 21 years of domestic and international marine
transportation industry-related 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. Moreover, our in-house engineering
team enables us to design and manage our new vessel construction program, adapt
our vessels for specialized purposes, oversee and manage the drydocking process
and provide custom marine engineering solutions to our customers. We believe
this will continue to result in a lower overall cost of ownership over the life
of our vessels compared to our competitors, as well as a competitive advantage
in securing contracts for our OSVs as the benefits of our proprietary designs
and in-house engineering capabilities are recognized by our customers.

Numerous Industry-Recognized Safety and Quality Certifications. As part of
our commitment to quality and safety, we have pursued on a voluntary basis and
have received certifications and classifications that are not generally held by
other companies in our industry. We maintain ISO 9002 and ISO 14001
certifications for quality and environmental management, respectively, from the
International Standards Organization with respect to the eight tugs and nine
tank barges acquired from the Spentonbush/Red Star Group. We are one of the few
OSV companies operating in the Gulf of Mexico that is approved under 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 OSVs 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

11

recognized standards for the safe management and operation of ships and for
pollution prevention. Our OSVs are classed by the American Bureau of Shipping,
which develops and verifies standards for the design, construction and
operational maintenance of vessels and facilities. We believe that our numerous
industry certifications are a competitive advantage given that safety is an
increasingly important consideration for oil and gas operators due to the
environmental and regulatory sensitivity associated with offshore drilling and
production activity.

OUR STRATEGY

We have adopted the following mission statement, which we believe
summarizes our strategy: "Our mission is to be recognized as the energy
industry's marine transportation and service company of choice for our
customers, employees and investors through innovative, high quality, value-added
business solutions delivered with enthusiasm, integrity and professionalism with
the utmost regard for the safety of individuals and the protection of the
environment." To implement our mission, we have developed a strategy including
the following elements:

Maintain Technologically Advanced Fleet. We designed our OSVs to meet the
higher capacity and performance needs of our clients' drilling and production
programs. We have accomplished this by building our deepwater OSVs with
sophisticated propulsion and cargo handling systems, dynamic positioning
capabilities and larger capacities. We are committed to applying existing or
developing new technologies in each new vessel construction program in order to
continue to improve our service offerings and meet the evolving needs of our
customers.

Maintain Strong Focus In Deepwater Regions. We intend to maintain our focus
on operating high quality OSVs in deepwater regions. Oil and natural gas
exploration and development activity in these regions have increased recently as
a result of several factors including world-class exploration potential,
improvements in exploration and production technologies for deepwater projects,
and slowing or declining production from onshore and shallow water fields. We
believe that the deepwater regions worldwide will continue to be active areas
for exploration and development in the foreseeable future, and that demand for
our OSVs, which are uniquely equipped to serve the current and planned drilling
programs in these markets, will continue to be strong.

Expand Fleet Through Newbuilds And Selective Acquisitions. We plan to
expand our fleet through construction of new vessels, including our current
eight-vessel newbuild program and strategic acquisitions. Market demand for
vessels, including demand in international markets, will be the main determinant
of the level and timing of construction of additional vessels. We believe that
acquisition opportunities are likely to arise as consolidation in our industry
continues. We intend to use our expertise and experience to evaluate strategic
acquisitions where the opportunity exists to increase market share and create or
enhance long-term client relationships. To date, we have completed four
acquisitions involving ocean-going tugs and tank barges and one acquisition of a
coastwise tanker.

Pursue Optimal Mix of Long-Term and Short-Term Contracts. We seek to
balance our portfolio of charters with both long-term and short-term charters.
Long-term contracts provide more predictable cash flow, and short-term charters
may provide the opportunity to benefit from increasing dayrates. 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 debt obligations. The average initial term for our current
OSV 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

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through March 31, 2006. Our other tug and tank barge contracts typically have
been renewed annually over the last several years.

Continue To Leverage Existing Customer Relationships. We intend to build
upon existing customer relationships by expanding our services to those
customers with diversified marine transportation needs. Many integrated oil and
gas companies require OSVs to support their exploration and production
activities and ocean-going tugs 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 chartered two of our OSVs
for use overseas. Our OSVs are capable of operating in all of the major
deepwater oil and natural gas producing regions of the world. Our management
team has significant international experience and is currently evaluating
several additional such opportunities.

Optimize Tug And Tank Barge Operations. Prior to our acquisition of tugs
and tank barges from the Spentonbush/Red Star Group, those vessels were largely
dedicated to the use of Amerada Hess and its affiliates in New York Harbor.
Since that acquisition, we have consolidated the operational management of our
entire tug and tank barge fleet, including our Puerto Rican fleet, in our
Brooklyn facility. This enables us to market our services to customers other
than Amerada Hess in the northeastern United States, while we continue our
efforts to reduce costs and otherwise optimize utilization.

CUSTOMERS AND CHARTER TERMS

Major oil companies, large independent oil and gas exploration, development
and production companies and large oil service companies constitute the majority
of our customers for our OSV services, while refining, marketing and trading
companies constitute the majority of our customers for our tug and tank barge
services. The percentage of revenues attributable to a customer in any
particular year depends on the level of oil and natural 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,
2002, Amerada Hess Corporation and BHP Billiton each accounted for more than
10 percent of our total revenues for such period.

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.

Currently, five of our 14 OSVs operate under long-term charters. Most of
the contracts for our OSVs contain early termination options in favor of the
customer; however some have substantial early termination penalties designed to
discourage the customers from exercising such options. Similarly, 11 of our
16 tank barges provide services under long-term contracts with initial terms of
one year or longer. Since we commenced operations, our OSVs have performed
services for approximately 46 different customers, and our tugs and tank barges
have performed services for approximately 199 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 OSV 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.

Because we have established a reputation for on-time delivery and
reliability, charterers have contacted us in certain circumstances to construct
vessels to meet their needs. In such circumstances, we have generally contracted
these specially designed vessels for three to five

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years, with renewal options, before construction is completed. 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.

COMPETITION

We operate in a highly competitive industry. Competition in the deepwater
OSV and ocean-going tug and tank barge segments of the marine transportation
industry primarily involves factors such as:

o capability of the vessels;

o ability to meet the customer's schedule;

o safety record;

o reputation;

o price; and

o experience.

The terms of the Jones Act restrict the ability of vessels that are not
built in the United States and owned and managed by U.S. citizens to compete in
the coastwise trade in the U.S. and Puerto Rico.

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.

We believe that approximately 82 percent of the OSVs currently operating in
the deepwater Gulf of Mexico are owned by privately-held companies. We believe
we operate the second largest fleet of deepwater OSVs in the Gulf of Mexico.
Currently, none of our publicly traded competitors have a significant
concentration of purpose-built, deepwater OSVs in the Gulf of Mexico. In
contrast, approximately 82 percent of the OSVs operating on the continental
shelf of the Gulf of Mexico are owned by publicly-traded companies. We operate
one of the largest tank barge fleets in Puerto Rico and we believe that we are
the fourth largest transporter by tank barge of petroleum products in New York
Harbor. Virtually all of our competitors in the tug and tank barge industry are
privately held.

Although some of our principal competitors are larger and have greater
financial resources and extensive international operations, 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 OSVs provide us with
a competitive advantage in both shallow and deepwater regions worldwide. The
ages of our OSVs range from less than one month to 53 months, while
approximately 70 percent of the OSVs operating in the continental shelf area of
the Gulf of Mexico are over 18 years old, with

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many approaching 25 years old. We believe that many of these older vessels will
be retired in the next few years.

ENVIRONMENTAL AND OTHER GOVERNMENT REGULATION

Our operations are significantly affected by a variety of federal, state,
local and international laws and regulations governing worker health and safety
and the manning, construction and operation of vessels. Certain U.S.
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, drydocking intervals, manning requirements, tonnage requirements and
restrictions, hull and shafting requirements and vessel documentation. Coast
Guard regulations require that each of our vessels be drydocked 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:

o the corporation is organized under the laws of the United States or of a
state, territory or possession of the United States;

o at least 75% of the ownership of voting interest with respect to its
capital stock is held by U.S. citizens;

o the corporation's chief executive officer, president and chairman of the
board are U.S. citizens; and

o no more than a minority of the number of directors necessary to
constitute a quorum for the transaction of business are foreigners.

We meet all of the foregoing requirements. 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:

o limits ownership by foreigners of any class of our capital stock
(including our common stock) to 20%, so that foreign ownership will not
exceed the 25% permitted;

o permits withholding of dividends and suspension of voting rights with
respect to any shares held by foreigners that exceed 20%;

o permits a stock certification system with two types of certificates to
aid tracking of ownership;

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o permits our board of directors to redeem any shares held by foreigners
that exceed 20%; and

o 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 including natural resource damages 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
applicable laws and regulations may result in the imposition of administrative,
civil and criminal penalties, revocation of permits, issuance of corrective
action orders and suspension or termination of our operations. 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.

On February 14, 2003, one of our tank barges ran aground off of Long Island
Sound. The barge was loaded with approximately 52,000 barrels of heating oil. We
quickly activated our emergency spill response plan and worked closely with the
Coast Guard to contain the spill. Fortunately, we sustained no loss of life or
third party property damage and we believe there was no lasting environmental
impact related to the incident. This incident resulted in the

16

discharge of approximately 50 barrels of product, which quickly dissipated. We
safely lightered all remaining product from the barge, which is now in a repair
facility.

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 be required to modify or replace only five of our tank barges
before 2015. Although we are not aware of anything that would lead us to believe
this current schedule will change, it remains possible that 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 routine operations. We believe that all of
the wastes that we generate are handled in all material respects in compliance
with the Resource Conservation and Recovery Act and analogous state statutes.

LEEVAC Marine, Inc., a predecessor entity to Hornbeck Offshore
Transportation, LLC, one of our current subsidiaries, 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, SSCI Remediation, LLC, to address this matter. LEEVAC Marine accrued a
$97,500 liability at the time of our formation to cover this expense. Our
subsidiary's current percentage

17

of liability for cleanup efforts at this site is estimated at approximately 2.64
percent, and, to date, it has contributed approximately $34,000 towards this
cleanup effort, thereby reducing the accrued liability to $63,500. This $34,000
contribution represents our subsidiary's current share of a $2.0 million
voluntary cleanup plan submitted to the limited liability company's members by
an independent contractor who has agreed 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. In June 1997, Cari Investment Company agreed to
indemnify us for certain matters, including 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 other liabilities,
obligations, damages and expenses in excess of $100,000. Christian G. Vaccari,
who served as our Chairman and Chief Executive Officer until February 2002 and
is serving as one of our directors, is a minority shareholder and President,
Chief Executive Officer and Chairman of the Board of Cari Investment Company. In
July 2002, Hornbeck Offshore Transportation entered into a contractual agreement
whereby it paid an additional $17,000 to SSCI Remediation, LLC in order to limit
its exposure to certain future costs incurred by the independent contractor at
the site. This limitation on payment of future monies relates primarily to
certain legal and administrative costs of SSCI Remediation, LLC and does not bar
future payment of monies for Superfund cleanup costs or for costs associated
with any suits brought by third parties. Payment of the $17,450 has decreased
Hornbeck Offshore Transportation's accrual for environmental liability to
$46,050 with respect to this matter.

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 natural gas industry as a whole.

The Outer Continental Shelf Lands Act gives the federal government broad
discretion to regulate the release of offshore resources of oil and natural gas.
Because our operations rely primarily on offshore oil and natural 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 natural gas leases, such an action would have a
material adverse effect on our financial condition and results of operations.

We currently have in place protection and indemnity insurance coverage that
includes coverage for oil spills in navigable waters of the United States. Our
OSVs have $5.0 million in primary insurance coverage for such offshore oil
spills, with an additional $100.0 million in excess umbrella coverage. In
addition, our tugs and tank barges have insurance coverage for oil spills with a
coverage limit of $1.0 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 OSVs 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 OSVs 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.

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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, $1.0 billion in pollution insurance for the tug and tank barge
fleet and $100.0 million of pollution coverage for the OSVs. 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

On December 31, 2002, we had 446 employees in the United States and Puerto
Rico, including 380 operating personnel and 66 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 an action to organize a union that would have included 30 of
our fleet and technical employees in Puerto Rico. Our Puerto Rican employees
held an election on the matter in October 2001. The results of the election were
announced on July 11, 2002, with our Puerto Rican employees voting not to
unionize. On August 7, 2002, the National Labor Relations Board certified as
final the results of the election. 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 corporate headquarters are located in Mandeville, Louisiana in two
leased facilities that house our principal executive and administrative offices.
One facility consists of approximately 6,500 square feet and is held under a
short term lease, and the other consists of approximately 3,600 square feet and
is held under a month-to-month lease. In March 2003, we signed a non-binding
letter of intent to enter into a five-year lease, with two five-year renewal
options, with respect to a new location in nearby Covington, Louisiana in order
to consolidate our corporate headquarters into a single location. We plan to
relocate to that facility during the third quarter of 2003. We also hold a
one-year lease on a 4,500 square foot warehouse near our corporate headquarters
to maintain spare parts inventory. For local support in Puerto Rico, we lease an
office 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 our Brooklyn facilities 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
"-- Offshore Supply Vessels -- Our OSV Business" and "-- Tugs and Tank Barges --
Our Tug and Tank Barge Business."

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SEASONALITY OF BUSINESS

Demand for our OSV 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 natural gas, may affect this general trend in any
particular year. These factors have less impact on our OSV business due to our
high level of contracted cash flow, which has resulted in high utilization.

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 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.

RECENT DEVELOPMENTS

Delivery of the HOS Bluewater. On March 17, 2003, we took delivery of the
HOS Bluewater, our first 240ED class offshore supply vessel, and the first
vessel to be delivered under our current eight-vessel newbuild program. The HOS
Bluewater immediately commenced service under a spot time charter with a large
independent oil and gas company to support its deepwater operations in the Gulf
of Mexico.

Purchase of Double-Hulled Tank Barge. On February 28, 2003, we purchased
the T/B Kilchis, an 80,000 barrel double-hulled tank barge, from an unrelated
third party for $7.4 million. This vessel, which we renamed, the Energy 8001,
will partially address our need to replace three single-hulled barges by the end
of 2004 due to OPA 90 requirements. We placed this vessel in service on March
10, 2003 under a contract of affreightment.

Sale of Tank Barge and Tug. On January 28, 2003, we sold the tank barge,
Energy 5502, to an unrelated third party for $1.65 million. On December 15,
2002, we sold the single-screw tug, the M/V Port Service, to an unrelated third
party for $315,000.

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. We recently settled arbitration
proceedings with a shipyard regarding liquidated damages for vessel construction
delays and change orders that resulted in payments to us from the shipyard in
the amount of $1.1 million. These payments reduced the cost basis of the
vessels.

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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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. On March 26, 2003, we had 88 holders of
record of our common stock.

On October 11, 2002, we withdrew our Registration Statement on Form S-1
relating to a proposed initial public offering of our common stock. The
Registration Statement was filed with the Securities and Exchange Commission on
July 22, 2002.

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.

During the year ended December 31, 2002, we have issued the following
shares of our common stock which were not registered under the Securities Act of
1933:

(a) In December 2002, we issued 4,250 shares of our common stock to a
holder of options granted under our Incentive Compensation Plan upon their
exercise of such options. The total amount of consideration we received for the
issuance of these shares was approximately $8,670. The issuance of these shares
of our common stock was exempt from registration under Rule 701 promulgated
under the Securities Act of 1933.

(b) In May 2002, we issued 109,000 shares of our common stock to certain
holders of options granted under our Incentive Compensation Plan upon their
exercise of such options. The total amount of consideration we received for the
issuance of these shares was approximately $212,900. The issuance of these
shares of our common stock was exempt from registration under Rule 701
promulgated under the Securities Act of 1933.

(c) In March 2002, we issued 75,472 shares of our common stock to Bernie W.
Stewart, our Chairman of the Board, under the terms of his Advisory Agreement.
The amount of consideration we received for the issuance of these shares was
approximately $200,000. The issuance of these shares of our common stock was
exempt from registration under Rule 701 promulgated under the Securities Act of
1933.

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ITEM 6 -- SELECTED FINANCIAL DATA

HORNBECK OFFSHORE 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, 2002, 2001, 2000, 1999 and 1998, was derived
from our audited historical Consolidated Financial Statements. You should read
this information together with, and it is qualified in its entirety by reference
to, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical Consolidated Financial Statements and their notes
included elsewhere in this report.

- ----------

(1) Represents non-cash adjustment to interest expense resulting from warrants
that provide for put options. In connection with the filing of a Form S-1
with the Securities and Exchange Commission in July 2002, the Company
changed its method of accounting for put warrants. As a result, warrants
that contain put options are required to be reported at fair market value
and to report the changes as additional interest expense. See the Index to
our Consolidated Financial Statements at page F-1 for further information.

(2) Represents other operating income and expenses, including gains or (losses)
on disposition of assets and, for 2002, equity in income from investments
of $27.

(3) 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 our 10 5/8% Senior
Notes in July 2001.

(4) Includes goodwill amortization of $0, $126, $126, $126, and $135 for the
years ended December 31, 2002, 2001, 2000, 1999, and 1998, respectively.
SFAS No. 142 "Goodwill and Other Intangible Assets" requires that goodwill
and indefinite-lived intangible assets are no longer amortized but are
reviewed for impairment annually, or more frequently if circumstances
indicate potential impairment. Net income (loss) would have been $11,647,
$7,145, $(4,398), $(1,608) , and $(1,292) for the years ended December 31,
2002, 2001, 2000, 1999, and 1998, respectively, had SFAS 142 been in effect
on January 1, 1998.

(5) Excludes a net write-off of $108 related to a cumulative effect of change
in accounting principle for start-up costs.

(6) Excludes original issue discount associated with the Senior Notes in the
amount of $2,694 and $3,024 as of December 31, 2002 and 2001, respectively.

(7) Earnings before interest expense, provision for income taxes, depreciation
and amortization ("EBITDA") is an important financial performance measure
that is used by ratings agencies, our lenders and most of our investors,
particularly those who invest in our Senior Notes, as well as investment
banks that issue high yield debt research on our company. In addition,
EBITDA is used in the financial ratios and covenants included in the credit
agreement governing our revolving line of credit and the indenture
governing our Senior Notes. This table reflects the calculation of EBITDA.
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 accounting principles generally accepted in
the United States. EBITDA is not necessarily comparable with similarly
titled measures reported by other companies. In determining our EBITDA,
other income or (expense) is excluded, except for equity in income from
investments.

(8) Calculated as EBITDA, as defined in footnote (7) above, divided by cash
interest paid.

(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, brokerage revenue, 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.
For purposes of brokerage arrangements, this calculation excludes that
portion of revenue that is equal to the cost of in-chartering third party
equipment paid by customers.

23

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 own and operate deepwater offshore supply vessels ("OSVs") primarily in
the Gulf of Mexico, although two of our OSVs are currently operating offshore
Trinidad and Tobago. We also operate ocean-going tugs and tank barges in the
northeastern United States, primarily New York Harbor, and in Puerto Rico. We
charter our OSVs on a dayrate basis, under which the customer pays us a
specified dollar amount for each day during the term of the contract, pursuant
to either fixed time charters or spot market charters. A fixed time charter is a
contract with a term of at least one year in which the charterer obtains the
right to direct the movements and utilization of the vessel in exchange for
payment of a specified dayrate, 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 OSV industry are
generally time charter contracts with either relatively short, indefinite terms
or fixed terms of less than one year. Generally, the vessel owner absorbs crew,
insurance and repair and maintenance costs in connection with operation of OSVs
pursuant to spot market charters and customers absorb other direct operating
costs.

All of our OSVs are currently operating under time charters, including five
that are chartered under long-term contracts with expiration dates ranging from
April 2003 through August 2006. Our long-term contracts for our OSVs 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 OSVs service existing oil and gas production platforms as well as
exploration and development activities, incremental OSV demand depends primarily
upon the level of drilling activity, which can be influenced by a number of
factors, including oil and natural gas prices and drilling budgets of
exploration and production companies. As a result, utilization and dayrates have
historically been tied to oil and natural 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 OSV contracts have
diminished the significance of this relationship.

Although oil and natural gas prices were very high throughout the fourth
quarter of 2002, most oil and gas producers reduced their drilling activity due
to several concerns, including the possibility of an armed conflict in Iraq, the
sustainability of high commodity prices after the winter heating season and the
unstable United States economy. Although our deepwater niche performed well
during this period compared to other drilling sectors, it too experienced a
decrease in activity. The average deepwater drilling rig count in the Gulf of
Mexico in the fourth quarter of 2002 was 34 rigs compared to 41 a year ago. In
the past 60 days, four deepwater

24

drilling rigs went off contract with no apparent backlog, and currently, the
deepwater drilling rig count stands at 30. However, we expect that eight new
floating production-storage units will be installed in the Gulf of Mexico this
year, each requiring the service of multiple deepwater supply vessels.

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 had been chartered to a third party under a bareboat
charter from January 2000 until it was sold to such third party on January 28,
2003. 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. While
the operating results for our tug and tank barge segment improved during the
latter part of the fourth quarter of 2002, we do not believe that this is a
sustainable trend in the near-term. The recent extreme cold weather -- normal
for this time of year in the northeastern United States -- temporarily increased
demand for heating oil and, therefore, our tug and tank barge services above
early 2002 levels. After the winter season is over, the increased dayrates and
utilization rates that resulted from the increased winter-related activity, will
likely be negatively impacted by the unstable United States economy, the war
with Iraq and the disruptive Venezuelan oil strike. However, we believe that
such negative factors will be counteracted, in part, by the fact that
post-winter heating oil and gasoline inventories, which are running low, will
need to be replenished. Therefore, once the spike in demand caused by the winter
season is over and the uncertainty surrounding domestic economic conditions and
world events subsides, we believe that demand for refined petroleum products and
crude oil will return to normal levels and will thereafter remain steady or
gradually increase over the long-term.

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. Because most of these
expenses remain payable regardless of vessel utilization, our direct operating
costs as a percentage of revenues may fluctuate considerably with changes in
dayrates 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

25

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.

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 allocation period immediately following the acquisition of such
vessels adjust the value of the vessels acquired and the liabilities assumed
related to the drydocking. The adjusted basis of the vessel is 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. For
example, if an acquired vessel is subsequently disposed of within the allocation
period, the sales price of the vessel is used to adjust the original assigned
value to the vessel at the date of acquisition such that no gain or loss would
be recognized upon disposition during the allocation period. 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

26

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 can be accounted for in one of three
ways 1) capitalize and amortize, 2) accrue in advance, or 3) expense as
incurred. We defer and amortize recertification costs 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.

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. These offshore supply vessels and tug and tank barges
generate substantially all of our revenues and operating profit.

- ----------

(1) Includes only 10 months of operations from the HOS Dominator, delivered
February 28, 2002; only 6.5 months of operations from the HOS Brimstone,
delivered June 13, 2002; only 4.5 months of operations from the HOS
Stormridge, delivered August 11, 2002; and only 2.5 months of operations
from the HOS Sandstorm delivered October 20, 2002.

(2) 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;
only eight months of operations from the HOS Innovator, delivered April 28,
2001; and only two months of operations from the BJ Blue Ray delivered
November 6, 2001.

(3) Utilization rates are average rates based on a 365-day year. Vessels are
considered utilized when they are generating revenues.

27

(4) 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.

(5) Average dayrates represent average revenue per day, including time
charters, brokerage revenue, 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.
For purposes of brokerage arrangements, this calculation excludes that
portion of revenue that is equal to the cost of in-chartering third party
equipment paid by customers.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Revenues. Revenues were $92.6 million for the year ended December 31, 2002,
compared to $68.8 million in 2001, an increase of $23.8 million or 34.6 percent.
The increase in revenue is primarily the result of the increase in the size of
our fleet since February 2002. Our operating fleet grew from an average of 29.3
vessels during 2001 to an average of 40.0 during 2002.

Revenues from our offshore supply vessel segment increased to $46.4 million
in 2002 compared to $33.6 million for 2001, an increase of $12.8 million or 38.1
percent. Our average OSV fleet size grew by 3.2 vessels operating during 2002
compared to 2001. Our utilization rate was 94.9 percent for 2002 compared to
99.1 percent for 2001. The 4.2 percent decrease in utilization for 2002 resulted
from having fewer long-term contracts and more vessels operating in the spot
market, which is more susceptible to market fluctuations. The spot OSV market
was softer in 2002, a trend we expect to continue in 2003. In addition, we
experienced more drydocking days for 2002 compared to 2001. Our offshore supply
vessel average dayrate was $12,176 for 2002 compared to $11,872 for 2001, an
increase of $304 or 2.6 percent. The increase in average dayrates primarily
reflects the addition of larger, newly constructed 240' and 265' class vessels,
which experience higher dayrates than our 200' class vessels.

Revenues from our tug and tank barge segment totaled $46.2 million for 2002
compared to $35.2 million in 2001, an increase of $11.0 million or 31.3 percent.
The segment revenue increase is primarily due to the acquisition of nine tugs
and nine tank barges on May 31, 2001, which increased average fleet capacity in
barrels from 451,655 to 1,130,727. Revenues for 2002 included $2.9 million that
was equal to the cost of in-chartering third party equipment paid by customers
compared to $1.4 million for 2001. Our utilization rate decreased 6.3 percent to
78.1 percent for 2002 compared to 84.4 percent for 2001 primarily due to a
significant increase in vessels operating under contracts of affreightment
during 2002, and the adverse impact of the warm winter season and weak economic
conditions experienced in the northeastern United States since the third quarter
of 2001. More barrels moved under contracts of affreightment also contributed to
our average dayrate increasing by $555 to $9,499 for 2002 compared to $8,944 for
2001.

Operating Expense. Our operating expense, including depreciation and
amortization, increased to $48.0 million for 2002 compared to $32.4 million in
2001, an increase of $15.6 million or 48.1 percent. The increase in operating
expense is the result of an average of 10.7 more vessels in service during 2002
compared to 2001.

Operating expense for our offshore supply vessel segment increased $8.7
million, or 76.3 percent, in 2002 to $20.1 million compared to $11.4 million in
2001. This increase was primarily the result of an average of 3.2 more new
deepwater OSVs being in service during 2002 compared to 2001. Daily operating
costs per vessel for 2002 increased slightly over 2001,

28

primarily due to the higher costs of operating larger vessels, including
increased manning requirements.

Operating expense for our tug and tank barge segment was $28.0 million for
2002 compared to $20.9 million in 2001, an increase of $7.1 million or 34.0
percent. The operating expense increase is primarily the result of the addition
of nine tugs and nine tank barges on May 31, 2001. Daily operating expenses per
vessel in the tug and tank barge segment remained fairly constant.

As discussed in Note 2 to the audited Consolidated Financial Statements
contained herein, we adopted SFAS 142 effective January 1, 2002 and,
accordingly, we have ceased amortizing goodwill. Operating expenses for 2001
included goodwill amortization of $0.1 million.

General and Administrative Expense. Our general and administrative expense
was $10.3 million for 2002 compared to $8.5 million in 2001, an increase of $1.8
million or 21.2 percent. This increase primarily resulted from increased
overhead relating to the nine tugs and nine tank barges acquired on May 31, 2001
and increased costs associated with reporting obligations under federal
securities laws that we were subject to during all of 2002 but during only a
portion of 2001.

Interest Expense. Interest expense from debt obligations was $16.2 million
in 2002 compared to $10.7 million in 2001, an increase of $5.5 million or 51.4
percent. The increase in interest expense from debt obligations resulted from
the refinancing of our conventional floating rate debt through the issuance of
our $175.0 million of 10 5/8% Senior Notes ("Senior Notes") in July 2001 with a
higher fixed rate and average balance of debt outstanding for 2002. This
increase was offset in part by the capitalization of interest costs of $3.9
million and $3.1 million for 2002 and 2001, respectively. Higher capitalized
interest in 2002 was related to the construction in progress of seven offshore
supply vessels compared to the construction of six vessels in progress during
2001.

Non-cash adjustments to interest expense reflect fair value adjustments to
warrants having put options. There was no such adjustment for 2002 compared to
an adjustment for 2001 of $3.0 million.

Interest Income. Interest income was $0.7 million in 2002 compared to $1.5
million in 2001, a decrease of $0.8 million or 53.3 percent. The decrease in
interest income resulted from substantially lower interest rates earned on lower
average cash balances invested during 2002 compared to 2001.

Income Tax Expense. Our effective income tax provision for 2002 compared to
2001 was higher primarily due to foreign and state income taxes and the impact
of non-deductible interest expense resulting from fair value adjustments for
warrants with put options, which was $3.0 million lower in 2002 than in 2001.
Our income tax expense primarily consists of deferred taxes due to our federal
net operating loss carryforwards, which were approximately $21.5 million as of
December 31, 2002, and are available through 2018 to offset future taxable
income. Our income tax rate is higher than the federal statutory rate due
primarily to expected state tax liabilities, foreign taxes and items not
deductible for federal income tax purposes.

Extraordinary Loss. A non-cash extraordinary loss of approximately $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 our debt through the issuance
of our Senior Notes.

29

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,
compared to $36.1 million in 2000, an increase of $32.7 million or 90.6 percent.
This increase was primarily attributable to our OSV 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 OSV segment increased to $33.6 million in 2001 compared
to $19.6 million in 2000, an increase of $14.0 million or 71.4 percent. The
primary reasons for the increase in revenue from this segment were a 40.7
percent increase in average dayrates, a 5.7 percent increase in utilization and
the addition, during 2001, of two newly constructed OSVs, one in late April and
the other in early November. Our utilization rate for our OSVs was 99.1 percent
for 2001 compared to 93.4 percent in 2000 as a result of higher demand for
deepwater drilling, construction and field development activity in the Gulf of
Mexico. Our OSV average dayrate was $11,872 for 2001 compared to $8,435 in 2000,
an increase of $3,437 or 40.7 percent. 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. Each of these two new vessels operated at
higher dayrates than our 200 Class OSVs.

Revenues from our tug and tank barge segment totaled $35.2 million for 2001
compared to $16.5 million in 2000, an increase of $18.7 million or 113.3
percent. This segment revenue increase was 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 percent for
2001 compared to 71.4 percent in 2000. The increase in utilization was primarily
the result of a change from vessels operating under contracts of affreightment
to time charters, combined with the vessels being out of service for repairs
fewer days in 2001 compared to 2000. Our average dayrate remained fairly
constant at $8,944 in 2001 compared to $8,982 in 2000.

Operating Expense. Our operating expense, including depreciation and
amortization, increased to $32.4 million for 2001 compared to $20.4 million in
2000, an increase of $12.0 million or 58.8 percent. The increase in total
operating expense resulted primarily from the addition of vessels to the OSV and
tank barge fleets during 2001. Daily operating expenses per vessel in both the
OSV segment and the tug and tank barge segment remained fairly constant.

Operating expense for our OSV segment increased $2.1 million or 22.6
percent in 2001 to $11.4 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 $21.0 million for
2001 compared to $11.1 million in 2000, an increase of $9.9 million or 89.2
percent. 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 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.

30

Interest Expense. Interest expense from debt obligations was $10.7 million
in 2001 compared to $8.2 million in 2000, an increase of $2.5 million or
30.5 percent. This increase in interest expense from debt obligations resulted
from the refinancing of all of our conventional floating rate debt through the
issuance of our Senior Notes in July 2001 with a higher fixed rate and average
debt outstanding in the 2001 period. This increase was offset by capitalized
interest in 2001 of $3.1 million due to the construction in progress of six OSVs
compared to $0.4 million related to one vessel under construction in 2000.

Non-cash adjustments to interest expense reflect fair value adjustments to
warrants having put options. The adjustment for 2001 was $3.0 million compared
to $7.3 million in 2000, a decrease of $4.3 million or 59.4 percent.

Interest Income. Interest income was $1.5 million in 2001 compared to
$0.3 million in 2000, an increase of $1.2 million or 400.0 percent. This
increase in interest income resulted from substantially higher cash balances
invested during the 2001 period resulting from the excess proceeds of the Senior
Notes offering being available for investment after the refinancing.

Income Tax Expense. Our effective income tax provision for 2001 compared to
2000 was lower primarily due to the impact of non-deductible interest expense
resulting from fair value adjustments for warrants with put options, which was
$4.3 million lower in 2001 than in 2000.

Extraordinary Loss. A non-cash extraordinary loss of approximately
$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 our Senior Notes in July 2001. For more information, please read
"Recent Accounting Pronouncements" below.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Revenues. Revenues were $36.1 million in the year ended December 31, 2000
compared to $25.7 million in the year ended December 31, 1999, an increase of
$10.4 million or 40.5 percent. Substantially all of this increase was
attributable to our OSV fleet that increased in size and operated at
substantially higher dayrates in 2000 than in 1999.

Revenues from our OSV segment totaled $19.6 million in 2000 compared to
$9.5 million in 1999, an increase of $10.1 million or 106.3 percent. The
increase in our revenues in 2000 reflected the continued growth of our OSV fleet
through the construction of six new OSVs, five of which were delivered at
various points during 1999 and one of which was delivered in early 2000.

In addition to the impact of new vessel deliveries, average dayrates in
2000 were $8,435 compared to $6,724 in 1999, an increase of $1,711 per day or
25.4 percent. This increase reflected the continuing increase in demand for OSVs
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 93.0 percent 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 1.9 percent.
Our utilization rate decreased to 71.4 percent in 2000 from 73.9 percent 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 5.9 percent.

31

Operating Expense. Our operating expense, including depreciation and
amortization, increased from $16.9 million in 1999 to $20.4 million in 2000, an
increase of $3.5 million or 20.7 percent. Daily operating expenses per vessel in
both the OSV 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 OSV segment increased $4.1 million in 2000 to
$9.3 million compared to $5.2 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 $0.8 million
or 7.2 percent in 2000 to $11.1 million compared to $11.9 million in 1999. The
operating expense reduction was the result of changing certain contracts from
contracts of affreightment to time charters for three tows and having fewer
overall contracts of affreightment and more time charters. 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 6.6 percent.

General and Administrative Expense. Our general and administrative expense
was $3.4 million in 2000 compared to $2.9 million in 1999, an increase of
$0.5 million or 17.2 percent. This increase primarily resulted from an increase
in shore-based personnel and associated compensation costs as OSV fleet
operations expanded and increased accruals under our profit-based incentive
bonus compensation program as our profitability increased.

Interest Expense. Interest expense from debt obligations was $8.2 million
in 2000 compared to $5.3 million in 1999, an increase of $2.9 million or
54.7 percent. Interest expense from debt obligations 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.

Non-cash adjustments to interest expense resulting from fair value
adjustments to warrants was $7.3 million in 2000 compared to $2.3 million in
1999 representing a $5.0 million increase or 221.0 percent.

Income Tax Expense. Our effective income tax provision for 2000 compared to
1999 was higher primarily due to the impact of non-deductible interest expense
resulting from fair value adjustments to warrants with put options, which was
$5,000 higher in 2000 than 1999.

LIQUIDITY AND CAPITAL RESOURCES

We require capital to fund ongoing operations, the construction of new
vessels, acquisitions and debt service. We have historically financed our
capital requirements with cash flow from operations, issuances of equity and
debt securities, and borrowings under our credit facilities.

Net cash provided by operating activities was $25.0 million in 2002,
$33.3 million in 2001, and $5.7 million in 2000. Changes in cash flow from
operating activities are principally the result of the timing of our
construction draws paid for new vessel construction and interest paid on our
Senior Notes.

32

Net cash used in investing activities was $55.8 million in 2002, $88.3
million in 2001, and $15.3 million in 2000. Net cash used in investing
activities for each year included the cost of new vessel construction and, for
2001, also included the cost of the acquisition of tugs and tank barges from the
Spentonbush/Redstar Group, affiliates of Amerada Hess Corporation.

Net cash (used in) provided by financing activities was ($0.2 million) in
2002, $75.2 million in 2001, and $36.4 million in 2000. Financing activities
were comprised of the issuance of additional common equity, payments on
borrowings under debt agreements in 2002, the issuance of our Senior Notes in
2001, and payments and borrowings on long term debt and proceeds from the
issuance of stock in 2000.

We have a three-year senior secured revolving line of credit (the
"Revolver") with three banks 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 percent
to 1 percent, or (ii) the London Interbank Offered Rate, plus a margin of 1.75
percent to 3.0 percent. We are also required to pay a commitment fee on
available but unused amounts ranging from 0.25 percent to 0.375 percent. 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 and, in certain instances, for
acquisitions and vessel construction. The Revolver is 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. Amounts drawn under
the Revolver are payable upon demand. The Revolver is scheduled to expire on
December 31, 2004; however, we believe that it will be renewed at that time. As
of December 31, 2002, we had made no drawings under the Revolver; however on
February 28, 2003, we drew $7.4 million to fund our acquisition of an
80,000-barrel double-hulled tank barge.

As of December 31, 2002, we had outstanding debt of $172.3 million, net of
original issue discount, under our 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 under which the Senior Notes are issued, we
are required to make offers to purchase the Senior Notes upon the occurrence of
specified events, such as certain asset sales or a change in control.

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.

As of December 31, 2002, we had cash of approximately $22.2 million and
working capital of approximately $22.4 million. During 2002, we expended $47.4
million for new vessel construction, before allocation of construction period
interest. As of December 31, 2002, we were committed under vessel construction
contracts to complete construction of four offshore supply vessels of our
current eight-vessel newbuild program. We are currently evaluating construction
bids from shipyards for the last four vessels of this program, as well as market
demand for such vessels in the deepwater Gulf of Mexico and foreign markets.
Aggregate construction costs for the first four vessels, before allocation of
construction period interest, are expected to be approximately $53.0 million,
including $18.4 million that was incurred with respect to such vessels during
2002. As of December 31, 2002, the amount expected to be expended to complete
construction of the four vessels was approximately $34.6 million, which

33

becomes due at various dates during 2003. During 2002, we expended approximately
$6.5 million for drydocking-related expenses for vessels (of which $2.4 million
related to previously owned vessels and $2.5 million resulted from drydocking
obligations acquired from Spentonbush/Red Star Group) and $1.6 million for other
vessel capital improvements. Under our accounting policy, we capitalize
drydocking expenditures related to vessel recertification to deferred charges
and amortize the amount over 30 or 60 months. During 2002, we also expended
approximately $0.6 million for miscellaneous other additions to property, plant
and equipment.

As of December 31, 2002, we had federal net operating loss carryforwards of
approximately $21.5 million available through 2018 to offset future taxable
income. In addition, we expect to generate federal tax benefits due to our use
of accelerated tax depreciation with respect to new vessels. Our use of these
net operating losses and additional tax benefits 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.

We believe that cash on hand and cash generated from operations will
provide sufficient funds to complete construction of the three offshore supply
vessels currently under construction of our newbuild program discussed above,
and to satisfy debt service and working capital requirements. However, we may
make additional draws on our Revolver during peak demands on our cash that occur
as a result of scheduled capital expenditure commitments. Any excess liquidity
will be available to finance our strategy, which includes expanding our fleet
through the construction or acquisition of additional, or the retrofit of
existing, offshore supply vessels, tugs and tank barges as needed to take
advantage of the 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, including
with respect to the last four vessels of our newbuild program and any further
international expansion.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table sets forth an aggregation of our contractual
obligations and commercial commitments as of December 31, 2002 (in thousands).

- -----------

(1) Net of original issue discount of $2,694.

(2) Excluded from this table is the office lease we reported on our
Quarterly Report on Form 10-Q for the period ended September 30, 2002, of
approximately 16,000 square feet for a new corporate headquarters to be
located in Mandeville, Louisiana with an initial term of two years, and
four two-year renewal options, that was expected to commence during the
first quarter of 2003. In December 2002, we determined that the Lessor did
not intend to fulfill its contractual commitments with respect to the lease
and that, consequently, we would

34

not be able to occupy the new facility. As a result of the foregoing, we
began a search for alternative space and, in March 2003, we signed a
non-binding letter of intent to enter into a five-year lease, with two
five-year renewal options, with respect to another location for our new
corporate headquarters in nearby Covington, Louisiana. We plan to relocate
to that facility during the third quarter of 2003. The cost of this new
facility is also not included in this table.

(3) The timing of the incurrence of these costs is subject to change among
periods based on the achievement of shipyard milestones, but the amounts
are not expected to change materially in the aggregate.

INFLATION

To date, general inflationary trends have not had a material effect on our
operating revenues or expenses.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2001, we 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 an impact on our
financial position as we have not entered into any derivative instruments.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Statement (SFAS) No. 141, "Business Combinations"
SFAS 141 eliminated 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.

In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets." 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 continued to be amortized through 2001 at which
time amortization ceased and a transitional goodwill impairment test was
performed. Any impairment charges resulting from the initial application of the
new rules were classified as a cumulative change in accounting principle. We
completed our initial transition evaluation by June 30, 2002, which is within
the six-month transition period allowed by the new standard. We determined that
our goodwill balances would not be impaired. Goodwill amortization for each of
the years ended December 31, 2002, 2001 and 2000 was $0, $126 and $126,
respectively. The following table presents our net income as reported in our
Consolidated Financial Statements compared to what would have been reported had
SFAS 142 been in effect as of January 1, 2000 (in thousands).

35

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 requires that gains or losses recorded from the
extinguishment of debt that do not meet the criteria of Accounting Principles
Board (APB) Opinion No. 30 should not be presented as extraordinary items. This
statement is effective for fiscal years beginning after May 15, 2002 as it
relates to the reissued FASB Statement No. 4, with earlier application
permitted. Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
APB 30 for classification as an extraordinary item should be reclassified. We
have elected not to adopt this statement early. A non-cash extraordinary loss of
approximately $2.0 million, net of taxes, was incurred during the third quarter
of 2001 resulting from the early extinguishment of debt. This extraordinary item
relates to the write-off of deferred financing costs upon the refinancing of our
debt through the issuance of $175 million of Senior notes in July 2001. Income
before income tax expense and income tax expense for the year ended December 31,
2001 will be $15,708 and $5,737, respectively, when we adopted SFAS 145 on
January 1, 2003.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. SFAS 146
has no impact on our financial statements for the year ended December 31, 2002.

In November 2002, the FASB issued FASB Interpretation ("FIN") 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applied prospectively to guarantees issued
or modified after December 31, 2002. The adoption of these recognition
provisions will result in recording liabilities associated with certain
guarantees we provide. The disclosure requirements of this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. We do not expect that FIN 45 will have a material impact to
our Consolidated Financial Statements.

In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure -- An Amendment of FASB Statement No. 123," was issued
by the FASB and amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation." This Statement provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation and amends the disclosure provisions of SFAS
123 to require prominent disclosure about the effects on reported net income of
an entity's accounting policy decisions with respect to stock-based employee
compensation. Additionally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. The transition method provisions of this Statement are
effective for fiscal years ending after December 15, 2002. The interim financial
reporting requirements of this Statement are effective

36

for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002.

In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities," which clarifies the application of Accounting Research Bulletin
("ARB") 51, Consolidated Financial Statements, to certain entities (called
variable interest entities) in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The disclosure requirements
of this Interpretation are effective for all financial statements issued after
January 31, 2003. The consolidation requirements apply to all variable interest
entities created after January 31, 2003. In addition, public companies must
apply the consolidation requirements to variable interest entities that existed
prior to February 1, 2003 and remain in existence as of the beginning of annual
or interim periods beginning after June 15, 2003. We are currently assessing the
impact of FIN 46, and do not expect that it will have a material impact to the
Consolidated Financial Statements.

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:

o changes in international economic and political conditions, and in
particular in oil and gas prices;

o our ability to manage costs effectively;

o our ability to finance our operations and construct new vessels on
acceptable terms;

o our ability to complete vessels under construction without significant
delays or cost overruns;

o the effects of competition;

o our ability to integrate acquisitions successfully;

o our ability to charter our vessels on acceptable terms;

37

o 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

o 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

We have not entered into any derivative financial instrument transactions
to manage or reduce market risk or for speculative purposes.

We are subject to interest rate risk on our 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 Senior Notes prior to the maturity date.

Our operations are primarily conducted between U.S. ports, including along
the coast of Puerto Rico, and we have not historically been exposed to foreign
currency fluctuation. However, as we expand our operations to international
markets, we may become exposed to certain risks typically associated with
foreign currency fluctuation. We currently have fixed time charters for two of
our offshore supply vessels for service in Trinidad and Tobago. Although such
contracts are denominated and will be paid in U.S. Dollars, value added tax
("VAT") payments are paid in Trinidad dollars which creates an exchange risk
related to currency fluctuations. We do not hedge against any foreign currency
rate fluctuations associated with foreign currency VAT payments arising in the
normal course of business. We continually monitor the currency exchange risks
associated with conducting international operations. Gains or losses associated
with such fluctuations have not been material.

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and information required by this Item appear on
pages F-1 through F-20 of this report.

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Effective June 24, 2002, we dismissed Arthur Andersen LLP as our
independent public accountants and auditors and engaged Ernst & Young LLP as our
new independent public accountants and auditors. The decision to change our
independent public accountants and auditors was approved by our board of
directors upon the recommendation of our audit committee. For more information,
please refer to our Report on Form 8-K filed on June 24, 2002.

38

PART III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

OUR EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors are currently as follows:

- ----------

(1) Class I, II and III directors have terms expiring in 2004, 2003 and 2005,
respectively.

(2) Messrs. Cryar and Vaccari have tendered, and the company has accepted,
their resignations as directors, effective upon the closing of an initial
public offering of our common stock provided such offering occurs by the
earlier of April 30, 2003 or our 2003 annual stockholders' meeting. If no
such offering occurs by the earlier of those two dates, then the
resignation of Messrs. Cryar and Vaccari will not become effective.

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 traded offshore service vessel company, from 1991 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. He remained with
Tidewater until our formation. Todd Hornbeck is the son of Larry D. Hornbeck.
Todd Hornbeck serves as a board designee for himself and his brother, Troy A.
Hornbeck.

39

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 is responsible for operational oversight and
design and implementation of our vessel construction program. Prior to joining
us, he was employed for 17 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,
and was responsible for the design of several of Tidewater's vessels. Mr.
Annessa was employed for two years by Avondale Shipyards, Inc. as a naval
architect before joining Tidewater. Mr. Annessa received a degree in naval
architecture and mechanical engineering from the University of Michigan in 1979.

James O. Harp, Jr. has served as our Vice President and Chief Financial
Officer since January 2001. Prior to 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. During his investment banking career, Mr. Harp
worked extensively with marine-related oil service companies, including as our
investment banker in connection with our private equity offering in November
2000. From July 1982 to June 1997 he served in a variety of capacities, most
recently as Tax Principal, with Arthur Andersen LLP, and had a significant
concentration of international clients in the oil service and maritime
industries. Since April 1992, he has also served as Treasurer and Director of
SEISCO, Inc., a seismic brokerage company.

Timothy P. McCarthy has served as our Controller since May 2002. Prior to
joining us, Mr. McCarthy served in a variety of capacities, most recently as an
Experienced Manager, in the assurance practice section of the New Orleans office
of Arthur Andersen LLP from July 1994 to May 2002. Mr. McCarthy is a certified
public accountant.

Paul M. Ordogne has served as our Treasurer since our formation in June
1997. Until May 2002, he also served as our Controller. From 1980 to June 1997,
he worked for Cari Investment Company, a privately owned holding company for
energy-related investments, 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. Mr. Cryar
serves as a board designee of Cari Investment Company.

Larry D. Hornbeck has served as one of our directors since August 2001. An
executive with over 30 years experience in the offshore supply vessel business
worldwide, Mr. Hornbeck was the founder of the original Hornbeck Offshore
Services, Inc., a publicly traded offshore service 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 the original Hornbeck Offshore Services, Inc.
Following the merger, Mr. Hornbeck served as a director of Tidewater from March
1996 until October 2000. 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. Larry
Hornbeck is the father of Todd M. Hornbeck. Larry Hornbeck serves as the board
designee of Todd M. Hornbeck and Troy A. Hornbeck.

40

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, each of which is an energy-related
company. Mr. Hunt served as a director of the original Hornbeck Offshore
Services, Inc., a publicly traded offshore service vessel company, from November
1992 to March 1996.

Patricia B. Melcher joined our board of directors effective October 10,
2002. Ms. Melcher has served as the President of Allegro Capital Management,
Inc., a privately owned investment company focused on private equity investments
in energy-related companies, since 1997. From 1989 to 1994, she worked for SCF
Partners, L.P., an investment fund sponsor specializing in private equity
investments in oilfield service companies, and from 1995 to 1997, she served as
a board member and advisory board member of its general partner, L. E. Simmons &
Associates, Incorporated. From 1986 to 1989, Ms. Melcher worked for Simmons &
Company International, an investment banking firm serving the energy industry.

Bernie W. Stewart has served as one of our directors since November 2001
and was appointed Chairman of the Board in February 2002. Mr. Stewart was Senior
Vice President, Operations of R&B Falcon Corporation, a contract drilling
company, 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 its President 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., a publicly traded offshore service vessel
company, 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. From February 27, 2002 to February 27, 2003, Mr. Stewart acted as an
advisor to the company under an advisory services agreement discussed below.

David A. Trice joined our board of directors effective October 10, 2002.
Mr. Trice has served as the President of Newfield Exploration Company
(NYSE:NFX), an independent oil and gas company engaged in the exploration,
development and acquisition of crude oil and natural gas properties since May
1999. At Newfield, he has also served as the Chief Executive Officer since
February 2000, and as a director since 2000. From May 1999 to February 2000, he
served as its Chief Operating Officer and from July 1997 to May 1999, he served
as its Vice President--Finance and International. Mr. Trice served as the
President, Chief Executive Officer and Director of the Huffco Group, an offshore
drilling contractor, from 1991 to July 1997.

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, a privately owned holding company for energy-related investments. 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. Mr. Vaccari serves as a board designee of Cari Investment Company.

41

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, an investment banking firm serving the energy
industry, 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 oil and gas company. He currently serves as a
director of Oil States International, Inc. (NYSE:OIS), a diversified oilfield
equipment and service company.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has a compensation committee, which currently
consists of Messrs. Stewart, Hunt, Trice and Waite. The compensation committee:

o reviews and recommends to the board of directors the compensation and
benefits of our executive officers;

o establishes and reviews general policies relating to our compensation
and benefits; and

o administers our stock incentive plan.

The board has also established an audit committee comprised of Messrs.
Cryar, Larry Hornbeck, Hunt, Stewart and Waite and Ms. Melcher. 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.

The board has also established an ad hoc committee comprised of Messrs.
Larry Hornbeck, Todd Hornbeck, Hunt, Stewart and Waite. The purpose of this
committee is to address any issues related to the separation of Christian G.
Vaccari (who ceased serving as our Chief Executive Officer and Chairman of the
Board in February 2002 and who has tendered his resignation as a director
effective upon the closing of an initial public offering of our common stock
provided such offering occurs by either April 30, 2003 or our 2003 annual
stockholders' meeting, whichever occurs first) from the Company, including our
ongoing relationship with Mr. Vaccari, his family, Cari Investment Company
(which is the holder of more than 5 percent of our common stock and for which
Mr. Vaccari serves as President, Chief Executive Officer and Chairman of the
Board) and certain shipyards affiliated with Mr. Vaccari and with which we have
contracts for the construction of certain of our offshore supply vessels.

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 that 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

42

Class I, Class II and Class III directors expire at the annual meeting of
stockholders to be held in 2004, 2003 and 2005, respectively.

Directors who are also our employees receive no additional compensation for
serving as directors or committee members. Non-employee directors historically
have received 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.

Effective July 18, 2002, the board of directors approved a compensation
plan applicable to our non-employee directors. Under the terms of this plan,
each non-employee director receives a total annual retainer of $20,000, paid
quarterly. Each non-employee director will also receive $1,200 for each board
meeting attended in person and $800 for each board meeting attended by
telephonic communications. Board committee members will be entitled to receive
$600 for each committee meeting attended, with the committee chairman receiving
$800 for each committee meeting attended. Committee members must attend meetings
in person or by telephonic communications to receive the applicable
compensation. Under the terms of this plan, non-employee directors are entitled
to receive a minimum annual grant of 5,000 options to purchase common stock
which amount may be reviewed annually and increased at the discretion of the
compensation committee. After three years of service as a non-employee director,
a non-employee director and his immediate family may elect to participate in the
same insurance benefit programs sponsored by the company on the same monetary
terms as the executive officers.

The non-employee director compensation plan also provides for longevity
service awards to non-employee directors. Upon completion of three years of
service following adoption of the compensation plan, a director will be granted
options to purchase the number of shares of common stock equaling 25 percent of
the options granted to such director over the previous three years. Upon
completion of five years of service as a non-employee director, a director will
be granted options to purchase the number of shares of common stock equaling 50
percent of the options granted to such director over the previous five years
less the number of shares covered by the options awarded to such director after
three years of service. Thereafter, upon completion of each successive period of
five years of service, a non-employee director will be granted options to
purchase the number of shares of common stock equaling 50 percent of the options
granted to such director over the previous five years. Under the terms of this
compensation plan, neither Mr. Cryar nor Mr. Vaccari is qualified to participate
in the plan.

In addition to the cash compensation received for their service as
directors during 2002 under the terms of the plan described above, in March 2003
each of Messrs. Larry Hornbeck, Hunt, Stewart, Trice and Waite and Ms. Melcher
were granted options to purchase shares of our common stock. Notwithstanding the
provision of the plan calling for the grant of a minimum of 5,000 options to
purchase common stock, with their acquiescence, each of them were granted
options to purchase 4,250 shares of our common stock at an exercise price of
$4.48 per share. One third of these options will become exercisable on each of
the three following anniversaries of such date.

On February 27, 2002, we entered into an advisory agreement with an initial
term of one year with Bernie W. Stewart, our Chairman of the Board. Under the
terms of this agreement, Mr. Stewart advised and made 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 provided these services on a full-time basis through May 31, 2002 and on
a part-time basis through February 27, 2003. He received $20,000 per month for
his full-time advisory services and $8,335 per month for his part-time services.
Under the terms of his advisory agreement Mr. Stewart was granted options to
purchase 10,000 shares of

43

our common stock at an exercise price of $2.65 per share. The compensation
expense recorded during 2002 related to the granted options was $7,400 using the
Black-Scholes option pricing value methodology given that Mr. Stewart was not an
employee of the Company at the grant date. Also under the terms of the advisory
agreement, Mr. Stewart purchased 75,472 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 37,736 shares of our common stock at a purchase price of
$2.65 per share, which option shall be exercisable in accordance with the terms
and conditions of our Incentive Compensation Plan. Mr. Stewart agreed that
during the term of his advisory agreement he would not be employed by or
associated with or own more than five percent (5%) of the outstanding securities
of any of our competitors. Mr. Stewart also agreed that during the term of the
advisory agreement and for a period of two years thereafter he will not (i)
solicit any of our employees, customers, suppliers or sales agents to terminate
their relationship with us or (ii) 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.

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ITEM 11 -- EXECUTIVE COMPENSATION

The following table sets forth compensation information for the chief
executive officer and our other executive officers whose total annual salary and
bonus exceeded $100,000 for the years ended December 31, 2002, 2001, and 2000.

SUMMARY COMPENSATION TABLE

- ----------

(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, and is still being compensated under the
termination provisions of his employment agreement. Also effective February
27, 2002, Mr. Hornbeck, who had been serving as our President and Chief
Operating Officer, was appointed to the additional position of Chief
Executive Officer and Mr. Annessa was appointed to the additional position
of Chief Operating Officer. Mr. McCarthy joined us as our Controller on May
27, 2002. Mr. Ordogne had also served as our Controller until May 2002.

(2) For 2001, the salary amount for Mr. Harp is prorated to reflect his date of
hire of January 15, 2001. For 2002, the salary amount for Mr. McCarthy is
prorated to reflect his date of hire of May 27, 2002 and the amount for Mr.
Vaccari is prorated to reflect the amount of salary earned as our Chief
Executive Officer through his severance date of February 27, 2002.

45

(3) Bonuses were paid in 2003, 2002 and 2001 as compensation for services
provided in 2002, 2001 and 2000, respectively. For 2002, the amount for Mr.
Vaccari is prorated to reflect the amount of bonus earned as Chief
Executive Officer through his severance date of February 27, 2002.

(4) 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.

(5) In connection with the adoption of an incentive compensation program for
executive officers, we granted options in 2001, in part for services
rendered in 2000, for Messrs. Hornbeck, Annessa, Ordogne and Vaccari to
purchase shares of our common stock at an exercise price of $2.65 per
share. In addition, Mr. Harp was granted options upon commencement of his
employment in January 2001 to purchase 100,000 shares of our common stock
at an exercise price of $2.65 per share.

(6) In connection with our incentive compensation program for executive
officers, we granted options in 2003, in part for services rendered in
2002, for Messrs. Hornbeck, Annessa, and Harp to purchase shares of our
common stock at an exercise price of $4.48 per share. The amount of
options, if any, to be granted to Messrs. McCarthy and Ordogne pursuant to
our incentive compensation program for such period has not been determined
as of the filing date of this Form 10-K. In addition, Mr. McCarthy was
granted options upon commencement of his employment in May 2002 to purchase
20,000 shares of our common stock at an exercise price of $2.65 per share.

(7) 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.

(8) 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.

(9) For 2002, these amounts represent (i) employer matching contributions made
under our 401(k) savings plan in the amount of $2,200, $1,956, $701, $277,
$1,335 and $1,090 for Messrs. Hornbeck, Annessa, Harp, McCarthy, Ordogne
and Vaccari, respectively, and (ii) premiums of $673, $431, $431, $82, $431
and $981 for Messrs. Hornbeck, Annessa, Harp, McCarthy, Ordogne and
Vaccari, respectively, associated with life insurance policies and (iii) in
the case of Mr. Vaccari, the payments made under the termination provisions
of his employment agreement relating to the period during 2002 after his
severance.

OPTION GRANTS

During the year ended December 31, 2002, other than to Mr. McCarthy as
described below, we did not grant any options to acquire shares of our common
stock to the executive officers named in the Summary Compensation Table above.

- ----------

(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.

46

(3) One-fourth of these options become exercisable on each of the first,
second, third and fourth anniversaries of the date of grant.

FISCAL YEAR END OPTION VALUES

The following table shows information with respect to the exercise of
options to purchase our common stock and all unexercised options held by the
executive officers named in the Summary Compensation Table as of December 31,
2002. Except for Mr. Vaccari, none of the executive officers named in the
Summary Compensation Table have exercised any options to purchase our common
stock.

As provided for under Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," we account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." For
all periods presented, we have used the intrinsic value method whereby
compensation cost for stock options, if any, is measured as the excess of the
estimated fair value market price of our common stock at the date of grant over
the amount an employee must pay to acquire the stock.

EMPLOYMENT AGREEMENTS

Todd M. Hornbeck serves as our President, Chief Executive Officer and
Secretary, Carl G. Annessa serves as our Vice President and Chief Operating
Officer, James O. Harp, Jr. serves as our Vice President and Chief Financial
Officer, and Paul M. Ordogne serves as our Treasurer, each under an employment
agreement with an initial term expiring December 31, 2003. On January 1, 2004,
and on every third January 1 (or second January 1 in the case of Mr. Ordogne)
thereafter, each agreement will automatically renew for up to three additional
years (two years in the case of Mr. Ordogne), unless terminated before any such
renewal date by the employee or us.

The employment agreements of Messrs. Hornbeck, Annessa, Harp and Ordogne
provide for annual base salaries of $200,000, $170,000, $170,000 and $116,000,
respectively. However, 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. Effective
January 1, 2003, the board has approved an increase in the annual base salaries
of Messrs. Hornbeck, Annessa and Harp to $240,000, $200,000 and $185,000,
respectively. Our board has agreed to award a bonus or bonuses to each of
Messrs. Hornbeck, Annessa and Harp 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.

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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. Annessa, Harp 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. Annessa and Harp, 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, Annessa or Harp 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.
Annessa, Harp 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.

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, his employment under the terms of his
agreement terminated and he will continue to receive payments in accordance with
the termination provisions of his agreement until February 27, 2004.

INCENTIVE COMPENSATION PLAN

Our board of directors and shareholders adopted an Incentive Compensation
Plan in 1997. The purpose of the 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 stockholders,
we have reserved 3.5 million shares of our common stock for issuance pursuant to
awards made under the plan, of which 1,569,014 shares were available for future
grants as of December 31, 2002.

The 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:

o to select the persons to whom stock, options and other awards will be
granted,

48

o to determine the type, size and terms and conditions of stock options
and other awards, and

o 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
six percent (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. This plan does not permit
investments in our common stock.

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 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.

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ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our voting securities as of March 26, 2003 by:

o each person who is known to us to be the beneficial owner of more than
5% of our voting securities;

o each of our directors; and

o 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

- ----------

* 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

50

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.

(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 300,000 shares of common stock that are currently exercisable by
Mr. Vaccari and a total of 7,540 shares of common stock held in trusts for
the benefit of Mr. Vaccari's children.

(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 40,000 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 265,000
shares of common stock that are currently exercisable by Todd Hornbeck.

(6) Rock Creek Capital Group, Inc. is the ultimate general partner of both
Rock Creek Partners II, Ltd. and Rock Creek II Co. Investments, Ltd. As
such, it may be deemed to have voting and dispositive power with respect to
the shares owned by Rock Creek Partners II, Ltd. and Rock Creek II Co.
Investments, Ltd. The address of all of these entities is 1200 River Place
Drive, Suite 902, Jacksonville, Florida 32207.

(7) Beneficial ownership includes options to purchase 110,000 shares of
common stock that are currently exercisable.

(8) Beneficial ownership includes options to purchase 66,666 shares of
common stock that are currently exercisable.

(9) Beneficial ownership includes options to purchase 56,300 shares of
common stock that are currently exercisable.

(10) Beneficial ownership includes options to purchase 38,302 shares of
common stock that are currently exercisable.

(11) Beneficial ownership includes options to purchase 40,000 shares of
common stock that are currently exercisable.

(12) Beneficial ownership includes options to purchase 14,000 shares of
common stock that are currently exercisable.

(13) 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 14,167 shares of common stock that are currently exercisable.

(14) Beneficial ownership includes options to purchase 944,435 shares of
common stock that are currently exercisable.

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Voting Agreements. Under the terms of a stockholders' agreement among
SCF-IV, L.P., Todd M. Hornbeck, Troy A. 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. Under this agreement, 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.

Registration Rights. Under the terms of a stockholders' agreement among us,
Todd M. Hornbeck, Troy A. Hornbeck and Cari Investment Company, Todd and Troy
Hornbeck and Cari Investment Company are entitled to require us to file a
registration statement under the Securities Act of 1933 to sell some or all of
the shares of our common stock held by them. We are only required to make one
such stand-alone registration for each of Todd and Troy Hornbeck and one for
Cari Investment Company. In addition, holders of a majority of the shares of our
common stock issued to the Hornbecks and Cari Investment Company on June 5, 1997
and shares issued with equivalent registration rights to other persons or
entities may require us to register some or all of such shares if they have not
already been registered and may not then be sold under Rule 144(k) of the
Securities Act of 1933. Todd and Troy Hornbeck and Cari Investment Company also
have the right to include some or all of their shares of common stock in any
other registration statement that we file involving our common stock.

Under the terms of a registration rights agreement among us and SCF IV,
L.P., SCF IV, L.P. and other stockholders that purchased shares of our common
stock in the private placement of our common stock completed in November 2000
have the right to include some or all of such shares, and any shares issued in
respect of such shares, in any registration statement that we file involving our
common stock. Also under such agreement, the holders of 50.1% of the shares of
our common stock issued in the November 2000 private placement, which, at this
time, is only SCF IV, L.P., are entitled to require us to file a registration
statement under the Securities Act of 1933 to sell some or all of the common
stock held by them. We are only required to make one such registration for SCF
IV, L.P.

Contractual Restrictions on Transfer by Certain Stockholders. Todd M.
Hornbeck, Troy A. Hornbeck, Cari Investment Company have agreed, after we are a
reporting company under the Securities Exchange Act of 1934, to give us notice
of and an opportunity to make a competing offer regarding a decision by any of
them to sell or consider accepting an offer to sell to a single person or entity
shares of common stock representing 5% or more of our common stock, other than
in compliance with Rule 144 or to an affiliate or family member of the holder.
SCF-IV, L.P. has also agreed to give us notice of and an opportunity to make a
competing offer regarding a decision by it to sell or consider accepting an
offer to sell to a single person or entity shares of common stock representing
5% or more of our common stock. SCF-IV, L.P. is further prohibited from
transferring any of its shares of our common stock to any person or entity that
is a competitor of ours.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information as of December 31, 2002
about our Incentive Compensation Plan, which was approved by our stockholders.
All equity compensation paid by the company is made under and pursuant to the
terms and conditions of the Incentive Compensation Plan. All outstanding awards
relate to our common stock. Further

52

information regarding our incentive Compensation Plan can be found in Note 7 of
our Consolidated Financial Statements included herein.

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.

Effective May 29, 2002, we changed our name to Hornbeck Offshore Services,
Inc. from HORNBECK-LEEVAC Marine Services, Inc., and one of our subsidiaries
changed its name to Hornbeck Offshore Transportation, LLC from LEEVAC Marine,
LLC. In connection with these name changes, we terminated a cross-license with
Cari Investment Company covering the use of the name "LEEVAC" and certain logos
associated with such name, and assigned all of our interests therein to Cari
Investment Company. In consideration, Cari Investment Company agreed not to use
the name "LEEVAC" or its related logos in any activity that would compete with
our business. Cari Investment Company is a holder of more than 5% of our common
stock and Christian G. Vaccari, who served as our Chairman of the Board and
Chief Executive Officer until February 2002 and who currently serves as one of
our directors, is the President, Chief Executive Officer and Chairman of the
Board of Cari Investment Company.

Mr. Vaccari is also a member of LEEVAC Industries, LLC. Two of our recently
constructed offshore supply vessels delivered during 2002 were built by LEEVAC
Industries. As of December 31, 2002, we had contracts with LEEVAC Industries for
the construction of four additional offshore supply vessels, which are the first
four vessels to be constructed under our current eight-vessel newbuild program.
Since January 1, 2002, we have made payments under our various shipyard
contracts with LEEVAC Industries aggregating $21.1 million, and at December 31,
2002 our contracts with LEEVAC Industries call for the payment of an additional
$24.9 million over the course of construction of the four offshore supply
vessels. Our current and past contracts with LEEVAC Industries were entered into
following a competitive bidding process. In connection with our contract with
LEEVAC Industries relating to the construction of the first four vessels under
our current newbuild program, we received a favorable fairness opinion from an
independent appraiser with respect to the terms of the transaction.

In connection with Richard Cryar's resignation from our board of directors
tendered July 2002, the board approved an amendment to his stock options that
were outstanding at such time. The amendment provides for full vesting of any
unvested portions of such options upon

53

the effective date of a registration statement filed by the company in
connection with an initial public offering of our common stock.

ITEM 14 -- CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that our disclosure
controls and procedures, as defined at Exchange Act Rules 13a-14 and 15d-14, are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management, including our CEO and CFO, as
appropriate, to allow timely decisions regarding required disclosure.

We also maintain a system of internal accounting controls that are
designed to provide reasonable assurance that our books and records accurately
reflect our transactions and that our policies and procedures are followed.
There have been no significant changes in our internal controls or in other
factors that could significantly affect such controls since our most recent
evaluation of these controls, including any corrective actions with regard to
significant deficiencies or material weaknesses in our internal controls.

54

PART IV

ITEM 15 -- 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-20 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 -- Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware (incorporated by reference to Exhibit
3.5 to the Company's Registration Statement on Form S-1 dated
July 22, 2002, Registration No. 333-96833).

3.6 -- 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).

55

3.7 -- Amendment to Second Restated Bylaws of the Company adopted May
28, 2002 (incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-1 dated July 22, 2002,
Registration No. 333-96833).

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).

56

10.6 -- Advisory Agreement dated effective February 27, 2002 by and
between Bernie W. Stewart and the Company (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on May 15, 2002).

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 -- Form of Indemnification Agreement for directors, officers and key
employees (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 dated July 22, 2002,
Registration No. 333-96833).

*10.10 -- Director and Advisory Director Compensation Plan

10.11 -- 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).

10.12 -- 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).

10.13 -- 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 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form
10-K filed with the Commission on April 1, 2002).

10.14 -- 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
(incorporated by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K filed with the Commission on April 1,
2002).

21 -- Subsidiaries of Hornbeck Offshore Services, Inc. (incorporated by
reference to Exhibit 21.1 to the Company's Registration Statement
on Form S-1 dated July 22, 2002 (Registration No. 333-96833))

*99.1 -- Certification of the Chief Executive Officer Pursuant to Section
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

57

*99.2 -- Certification of the Chief Financial Officer Pursuant to Section
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

* Filed herewith.

(b) Reports on Form 8-K.

On October 15, 2002, we filed a report on Form 8-K announcing that we
had appointed two new directors to our board of directors and had filed to
withdraw our Registration Statement on From S-1 relating to a proposed initial
public offering of our common stock.

58

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The Consolidated Financial Statements included in this Form 10-K
include the put warrant accounting methodology that was adopted in the
Registration Statement on Form S-1 that the Company filed with the Securities
and Exchange Commission in July 2002 and withdrew in October 2002. Upon the
filing of the Form S-1, the Company was required to change its method of
accounting for its outstanding put warrants. Prior to the filing of the Form
S-1, the Company reported the put warrant, consistent with private company
accounting rules, as an equity item, and therefore all changes in the fair
market value of the put warrants were accounted for within Stockholders' Equity.
As a result of filing the Form S-1, the Company was required to report the put
warrants, consistent with public company accounting rules, as a liability, and
therefore the historical changes in the fair market value for the warrants were
accounted for as adjustments to interest expense for the applicable periods. The
Company previously presented the additional interest expense associated with the
change in value of the warrants as a pro forma adjustment to net income in its
December 31, 2001 Form 10-K and each of its Form 10-Q's for the calendar year
2002. These warrants were repurchased in October 2001 and therefore did not
affect the operating results for 2002. Therefore, net income for the years ended
December 31, 2001 and 2000 included in these Consolidated Financial Statements
includes the interest expense previously reported as the pro forma interest
charges for such years in the Company's Form 10-K for the year ended December
31, 2001.

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Hornbeck Offshore Services, Inc.

We have audited the accompanying consolidated balance sheets of Hornbeck
Offshore Services, Inc. and subsidiaries (formerly known as HORNBECK-LEEVAC
Marine Services, Inc. and subsidiaries) as of December 31, 2002 and 2001, 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, 2002. 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 Offshore
Services, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 2 to the financial statements, effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."

ERNST & YOUNG LLP

New Orleans, Louisiana
January 31, 2003

F-2

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these
consolidated statements.

F-3

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated statements.

F-4

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated statements.

F-5

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated statements.

F-6

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS)

1. ORGANIZATION:

Formation

Hornbeck Offshore Services, Inc. (formerly HORNBECK-LEEVAC Marine Services,
Inc. and, hereinafter, the Company) was incorporated under the laws of the State
of Delaware in 1997 under the name HV Marine Services, Inc. The Company is
incorporated in the state of Delaware. The Company wholly owns Hornbeck Offshore
Services, LLC, Hornbeck Offshore Transportation, LLC, Hornbeck Offshore
Operators, LLC and Energy Services Puerto Rico, LLC. Prior to May 29, 2002,
Hornbeck Offshore Transportation, LLC and Hornbeck Offshore Operators, LLC were
named LEEVAC Marine, LLC and HORNBECK-LEEVAC Marine Operators, LLC,
respectively. All of the subsidiaries were converted from C Corporations to
Limited Liability Companies (LLC) in December 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 offshore supply vessels to
provide support and specialty services to the offshore oil and gas exploration
and production industry, primarily in the Gulf of Mexico. Hornbeck Offshore
Transportation, LLC (HOT) operates ocean-going tugs and tank barges that provide
transportation of petroleum products. In 2000, HOT 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. HOT services the northeastern seaboard of the United States and Puerto
Rico. The results of this acquisition have been included since the date of
acquisition (see Note 14). Hornbeck Offshore Operators, LLC (HOO) 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 vessels operating in Puerto Rico.

During 2002, the Company obtained a 49.0 percent interest in Hornbeck
Offshore Trinidad and Tobago Limited (HOTT). HOTT is a vessel crewing and
management services company established to support the Company's Trinidad based
operations. The 49 percent interest owned by the Company is being recorded using
the equity method.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Revenue Recognition

HOS contracts its offshore supply 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.

F-7

HOT contracts its vessels to clients primarily under contracts of
affreightment, under which 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. HOT also
contracts its vessels 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.

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 as incurred.

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 improvements made
during the recertification are 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 federal, state and
foreign income taxes.

F-8

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. 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. The Company
usually does not require collateral.

Goodwill

Goodwill reflects the excess of cost over the estimated fair value of the
net assets acquired. Prior to January 1, 2002, realization of goodwill was
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 was not recoverable, the excess of the carrying value over the
undiscounted cash flow will be recognized as an impairment loss. Effective
January 1, 2002, the Company has performed goodwill impairment reviews by
reporting unit based on a fair value concept as required by Statement of
Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets." See Recent Accounting Pronouncements.

Stock-Based Compensation

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As provided for under SFAS No. 123, the Company accounts for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." For all periods presented, the Company has used the intrinsic value
method whereby compensation cost for stock options, if any, is measured as the
excess of the estimated fair value market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.

Impairment of Long-Lived Assets and Intangible Assets

When events or circumstances indicate that the carrying amount of
long-lived assets to be held and used or intangible assets might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amounts. Fair value
is determined based on discounted cash flow or appraised values, as appropriate.
Long-lived assets that are held for disposal are reported at the lower of the
assets' carrying amount or fair value less costs related to the assets'
disposition.

Recent Accounting Pronouncements

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities,"

F-9

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 an impact on the Company's
financial position as it has not entered into any derivative instruments.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Statement (SFAS) No. 141, "Business Combinations"
SFAS 141 eliminated 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.

In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets." 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 continued to be amortized through 2001 at which
time amortization ceased and a transitional goodwill impairment test was
performed. Any impairment charges resulting from the initial application of the
new rules were classified as a cumulative change in accounting principle. The
initial transition evaluation was completed by June 30, 2002, which is within
the six-month transition period allowed by the new standard. The Company's
goodwill balances were determined not to be impaired. Goodwill amortization for
each of the years ended December 31, 2002, 2001 and 2000 was $0, $126, and 126,
respectively. The following table presents the Company's net income as reported
in the Company's consolidated financial statements compared to what would have
been reported had the SFAS 142 been in effect as of January 1, 2000.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 requires that gains or losses recorded from the
extinguishment of debt that do not meet the criteria of Accounting Principles
Board (APB) Opinion No. 30 should not be presented as extraordinary items. This
statement is effective for fiscal years beginning after May 15, 2002 as it
relates to the reissued FASB Statement No. 4, with earlier application
permitted. Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
APB 30 for classification as an extraordinary item should be reclassified. The
Company has elected not to adopt this statement early. A non-cash extraordinary
loss of approximately $2,000, net of taxes, was incurred during the third
quarter of 2001 resulting from the early extinguishment of debt. This
extraordinary item relates to the write-off of deferred financing costs upon the
refinancing of the Company's debt through the issuance of $175,000 of Senior
notes in July 2001. Income before income tax expense and income tax expense for
the year ended December 31, 2001 will be $15,708 and $5,737, respectively, when
the Company adopts SFAS 145 on January 1, 2003.

F-10

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. SFAS 146
has no impact on the financial statements for the year ended December 31, 2002.

In November 2002, the FASB issued FASB Interpretation ("FIN") 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applied prospectively to guarantees issued
or modified after December 31, 2002. The adoption of these recognition
provisions will result in recording liabilities associated with certain
guarantees provided by the Company. The disclosure requirements of this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. Management does not expect this
Interpretation to have a material impact to the Consolidated Financial
Statements.

In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure -- An Amendment of FASB Statement No. 123," was issued
by the FASB and amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation." This Statement provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation and amends the disclosure provisions of SFAS
123 to require prominent disclosure about the effects on reported net income of
an entity's accounting policy decisions with respect to stock-based employee
compensation. Additionally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. The transition method provisions of this Statement are
effective for fiscal years ending after December 15, 2002. The interim financial
reporting requirements of this Statement are effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002.

In January 2003, the FASB issued FIN 46 "Consolidation of Variable
Interest Entities," which clarifies the application of Accounting Research
Bulletin ("ARB") 51, Consolidated Financial Statements, to certain entities
(called variable interest entities) in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The disclosure requirements
of this Interpretation are effective for all financial statements issued after
January 31, 2003. The consolidation requirements apply to all variable interest
entities created after January 31, 2003. In addition, public companies must
apply the consolidation requirements to variable interest entities that existed
prior to February 1, 2003 and remain in existence as of the beginning of annual
or interim periods beginning after June 15, 2003. Management is currently
assessing the impact of FIN 46, and does not expect this Interpretation to have
a material impact to the Consolidated Financial Statements.

F-11

Reclassifications

Certain reclassifications of amounts reported in prior years have been made
to conform to the current year presentation.

3. DEFINED CONTRIBUTION PLAN:

The Company was a participating employer in the Cari Investment Company
401(k) Plan, a defined contribution plan with a cash or deferred compensation
arrangement pursuant to Section 401(k) of the Internal Revenue Code. The Company
established a simple employer plan on March 1, 2001. Employees must be at least
twenty-one years of age and have completed three months 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, 2002, 2001 and 2000 the Company
made contributions of $125, $75 and $6, respectively.

4. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consisted of the following :

Interest expense of $3,867, $3,075, and $365 was capitalized for the years
ended December 31, 2002, 2001 and 1999, respectively.

5. INVESTMENT IN UNCONSOLIDATED ENTITIES:

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 then Chairman of the Board and Chief
Executive Officer had a minority interest. The partnership's only asset was a
tank barge that 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 year ended December 31, 2000,
HOT's lease expense, net of distributions, related to this partnership was
approximately $106. As part of its $35,000 private equity offering in November
2000, the Company issued approximately 340 shares of common stock at a price per
share 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.

F-12

6. LONG-TERM DEBT:

On June 5, 1998, the Company entered into a $20,000 line of credit
agreement (Credit Facility) with a venture capital company to refinance existing
indebtedness and partially finance the construction of offshore supply vessels
(see Note 9). The Company issued detachable warrants to purchase 11,905 shares
of common stock in connection with the Credit Facility. The warrants were
assigned an estimated market value of $500. 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 the Credit Facility, the Company filing for bankruptcy or
if the indebtedness under the Credit Facility was not discharged in full by June
5, 2003. All of the warrants issued in connection with establishment of the
Credit Facility 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 publicly traded is required to
account for warrants that contain put options as a liability. Upon the Company's
filing of a Registration Statement on Form S-1 in July 2002, which was
subsequently withdrawn in October 2002, the accounting for put warrants as a
liability became effective. 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 debt
with all subsequent changes to the fair market value of the warrants for each
period presented being recorded as a noncash adjustment to interest expense.

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 $14,650. The remaining funds
were used for payment of expenses incurred in the offering.

On July 24, 2001, the Company issued $175,000 in principal amount of 10
5/8% Senior Notes (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% 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, 2002, the Company was permitted to incur a minimum of $25,000 of
additional indebtedness.

In connection with the issuance of the Senior Notes, the Company wrote-off
deferred financing costs related to previous credit facilities. The write-off in
the amount of $1,964 (net of tax of $1,065) has been presented as an
extraordinary item in the accompanying statements of operations (see Note 2).

F-13

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 we have 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. Unused commitment fees are payable
quarterly at the annual rate of three-eighths of one percent on the revolving
line of credit. The terms of the Revolver call for it to expire on December 31,
2004; however, the Company believes that it will be renewed at that time. As of
December 31, 2002, the Company had made no drawings under the Revolver.

As of the dates indicated, the Company had the following outstanding
long-term debt:

Annual maturities of long-term debt during each year ending December 31,
are as follows:

2003............................ $ --
2004............................ --
2005............................ --
2006............................ --
2007............................ --
Thereafter...................... 172,306
----------
$ 172,306
==========

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

F-14

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. During 2002, 113 options were
exercised. All options granted expire 5 to 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.

The following summarizes the option activity in the plans during 2002, 2001
and 2000:

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, 2002, 2001 and 2000 would have been as indicated below:

The fair value of the options granted under the Company's stock option plan
during each of the three years ended December 31, 2002, 2001, and 1999 were
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 3.83 percent, 4.88 percent, and 6.20 percent, respectively, and
an expected life of five to seven years with no expected dividends for each
year.

F-15

8. INCOME TAXES:

The net long-term deferred tax liabilities (assets) in the accompanying
balance sheets include the following components:

The components of the income tax expense follow:

At December 31, 2001, the Company had federal net operating loss
carryforwards of approximately $21,549. The carryforward benefit from the
federal net operating loss carryforwards begin to expire in 2018. The Company
had state net operating loss carryforwards of approximately $1,515 related to
one state tax jurisdiction. 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 related to this one state tax jurisdiction.

The following table reconciles the difference between the Company's income
tax provision calculated at the federal statutory rate and the actual income tax
provision.

F-16

9. COMMITMENTS:

Vessel Construction

At December 31, 2002, the Company was committed under a vessel construction
contract with a shipyard affiliated with the Company's former Chairman of the
Board and Chief Executive Officer to construct four offshore supply vessels. At
that date, the remaining amount expected to be incurred to complete construction
with respect to such contract was approximately $24,926. The Company is
obligated under the terms of the contract to remit funds to the shipyard 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 Brooklyn facility lease provides for a term of
five years with five one-year renewal options.

Future minimum payments under noncancelable leases for years subsequent to
2002 follow:

The Company is obligated under capital leases for certain vehicles. The
lease payments, which bear no interest expense, will be $21, $21, and $4 for the
years ended December 31, 2003, 2004 and 2005, respectively.

In addition, the Company leases marine vessels used in its operations under
month-to-month operating lease agreements. Total rent expense related to leases
was $1,559, $771 and $1,758 during the years ended December 31, 2002, 2001 and
2000, respectively.

See Note 14 for a description of the lease entered into in connection with
the Spentonbush/Red Star Group acquisition.

In the normal course of its business, the Company becomes involved in
various claims and legal proceedings in which monetary damages are sought. It is
management's opinion that the Company's liability, if any, under such claims or
proceedings would not materially affect its financial position or results of
operations.

F-17

10. DEFERRED CHARGES:

Deferred charges include the following:

11. RELATED PARTY TRANSACTIONS:

A former member of the Company's Board of Directors, who served on the
Board from June 1997 until August 2001 and is 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 $1,529 and $475 to the law firm during
the years ended December 31, 2001 and 2000, respectively, the years during which
he served as a director. As discussed in Note 9, the Company was committed under
a vessel construction contract to construct four offshore supply vessels with a
shipyard affiliated with the Company's former Chairman of the Board and Chief
Executive Officer. The same shipyard has constructed seven of the thirteen
offshore supply vessels in service as of December 31, 2002. See Note 9 for
additional information.

12. MAJOR CUSTOMERS:

Revenues by customer that individually exceeded ten percent of total
revenue are as follows:

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 and Trinidad 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 and
Trinidad 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, 2002, 2001 and 2000 reconciled to consolidated totals
and prepared on the same basis as the Company's consolidated financial
statements.

F-18

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.

F-19

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. The Company completed its final purchase price
allocation and increased the liabilities related to assumed drydocking
liabilities to $4,995. The following reflects the final allocation of the
purchase price and recertification costs incurred during the allocation period
following the acquisition date (in thousands):

Property, plant and equipment...................... $ 32,025
Other assets....................................... 1,000
Accrued liabilities................................ (4,995)
---------
Purchase price..................................... $ 28,030
=========

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):

15. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

F-20

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 March 31, 2003.

HORNBECK OFFSHORE 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.

S-1

S-2

CERTIFICATIONS

I, Todd M. Hornbeck, certify that:

1. I have reviewed this annual report on Form 10-K of Hornbeck Offshore
Services, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003 By: /s/ TODD M. HORNBECK.
------------------------------------
Todd M. Hornbeck,
President and Chief Executive
Officer
(Principal Executive Officer)

C-1

I, James O. Harp, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Hornbeck Offshore
Services, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003 By: /s/ JAMES O. HARP, JR.
-------------------------------------
James O. Harp, Jr.,
Vice President and Chief Financial
Officer
(Principal Financial Officer)

C-2

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 -- Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed with the Secretary of State
of the State of Delaware (incorporated by reference to Exhibit
3.5 to the Company's Registration Statement on Form S-1 dated
July 22, 2002, Registration No. 333-96833).

3.6 -- 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).

3.7 -- Amendment to Second Restated Bylaws of the Company adopted May
28, 2002 (incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-1 dated July 22, 2002,
Registration No. 333-96833).

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 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed with the Commission on May 15, 2002).

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 -- Form of Indemnification Agreement for directors, officers and key
employees (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 dated July 22, 2002,
Registration No. 333-96833).

*10.10 -- Director and Advisory Director Compensation Plan

10.11 -- 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).

10.12 -- 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).

10.13 -- 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 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form
10-K filed with the Commission on April 1, 2002).

10.14 -- 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
(incorporated by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K filed with the Commission on April 1,
2002).

21 -- Subsidiaries of Hornbeck Offshore Services, Inc. (incorporated by
reference to Exhibit 21.1 to the Company's Registration Statement
on Form S-1 dated July 22, 2002 (Registration No. 333-96833))

*99.1 -- Certification of the Chief Executive Officer Pursuant to Section
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

*99.2 -- Certification of the Chief Financial Officer Pursuant to Section
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

* Filed herewith.