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UNITED STATES

Form 10-Q

Commission file number 0-23653

Horizon Offshore, Inc.

2500 CityWest Boulevard, Suite 2200

(713) 361-2600

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes þ          No o

      The number of shares of the registrant’s common stock, $1.00 par value per share, outstanding as of August 11, 2003 was 26,444,257.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

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

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HORIZON OFFSHORE, INC. AND SUBSIDIARIES

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

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HORIZON OFFSHORE, INC. AND SUBSIDIARIES

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

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HORIZON OFFSHORE, INC. AND SUBSIDIARIES

      The consolidated interim financial statements included herein have been prepared by Horizon Offshore, Inc. (a Delaware corporation) and its subsidiaries (references to Horizon, we or us are intended to refer to Horizon Offshore, Inc. and its subsidiaries), and are unaudited, except for the balance sheet at December 31, 2002, which has been prepared from the audited consolidated financial statements. In the opinion of management, the unaudited consolidated interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position as of June 30, 2003, the statements of operations for the three and six months ended June 30, 2003 and 2002, and the statements of cash flows for the six months ended June 30, 2003 and 2002. Although management believes the unaudited interim related disclosures in these consolidated interim financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules of the Securities and Exchange Commission. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2003. The consolidated interim financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2002 Annual Report on Form 10-K.

      Horizon provides marine construction services for the offshore oil and gas industry. These services generally consist of laying, burying or repairing marine pipelines for the transportation of oil and gas; installing and salvaging production platforms and other marine structures; and performing pipe spooling services. Work is performed primarily on a fixed-price or day-rate basis or a combination thereof.

      We have domestic and international operations in one industry segment, the marine construction service industry for offshore oil and gas companies. Customers accounting for more than 10% of consolidated revenues for the three and six months ended June 30, 2003 and 2002 are as follows:

In addition to the list in the table above, Petróleos Mexicanos (Pemex) accounted for 0.1% and 2.9% of revenues for the three and six months ended June 30, 2003 compared to 38.9% and 39.1% for the three and six months ended June 30, 2002, respectively. There were no other customers accounting for more than 10% of consolidated revenues for the three and six months ended June 30, 2003 and 2002.

      The level of construction services required by a customer depends on the size of their capital expenditure budget for construction for the year. Consequently, customers that account for a significant portion of contract revenues in one year may represent an immaterial portion of contract revenues in subsequent years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management must apply significant judgments in this process. Among the factors, but not fully inclusive of all factors, that may be considered by management in these processes are: the range of accounting policies permitted by accounting principles generally accepted in the United States; management’s understanding of our business; expected rates of business and operational change; sensitivity and volatility associated with the assumptions used in developing estimates; and whether historical trends are expected to be representative of future trends. Among the most subjective judgments employed in the preparation of these financial statements are estimates of expected costs to complete construction projects, the collectibility of contract receivables and claims, the fair value of salvage inventory, the depreciable lives of and future cash flows to be provided by our equipment, the period and extent of maintenance and repairs of dry-docking activity and certain judgments regarding the nature of income and expenditures for tax purposes. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date.

      Construction contract revenues are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to the total estimated costs for each construction contract. We consider the percentage-of-completion method to be the best available measure of progress on these contracts. We follow the guidance of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” for our accounting policy relating to the use of the percentage-of-completion method, estimated costs and claim recognition for construction contracts. Contract revenue reflects the original contract price adjusted for agreed upon change orders and unapproved claims. We recognize unapproved claims only when the collection is deemed probable and if the amount can be reasonably estimated for purposes of calculating total profit or loss on long-term contracts. We record revenue and the unbilled receivable for claims to the extent of costs incurred and include no profit on claims recorded. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset “Costs in excess of billings” represents revenues recognized in excess of amounts billed as determined on an individual contract basis. The liability “Billings in excess of costs” represents amounts billed in excess of revenues recognized on an individual contract basis.

      For service contracts, revenues are recognized under SEC Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” when all of the following criteria are met; persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price is fixed or determinable; and collectability is reasonably assured.

      Cost of contract revenues includes all direct material and labor costs and certain indirect costs, which are allocated to contracts based on utilization, such as supplies, tools, repairs and depreciation. Selling, general and administrative costs are charged to expense as incurred.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Interest is capitalized on the average amount of accumulated expenditures for equipment that is undergoing major modifications and refurbishment prior to being placed into service. Interest is capitalized using an effective rate based on related debt until the equipment is placed into service. Interest expense for the three and six months ended June 30, 2003 was net of $13,000 and $123,000 of capitalized interest, respectively. Interest expense for the three and six months ended June 30, 2002 was net of $490,000 and $1,013,000 of capitalized interest, respectively.

      We have significant investments in billed and unbilled receivables as of June 30, 2003. At June 30, 2003, we had $2.3 million in contract receivables and $61.6 million in costs in excess of billings from Pemex, including $53.0 million in claims related to weather and other delays, totaling $63.9 million. We believe our receivables are realizable; however, any changes will be recognized in the period in which they are determined. We have historically not experienced any significant losses on receivables, but significant losses would adversely affect our financial position and results of operations and perhaps our overall liquidity.

     Inventory

      Inventory consists of production platforms and other marine structures received from time to time as partial consideration from salvage projects performed in the U.S. Gulf of Mexico. No significant non-cash consideration was received during the six months ended June 30, 2003 and 2002. These structures are held for resale. The inventory is valued at amounts not in excess of the fair value of services provided. Horizon assesses the net realizable value of its inventory items at each balance sheet date. Inventory is classified as long-term due to the uncertain timing of its sale.

      Dry-dock costs are direct costs associated with scheduled major maintenance on the marine construction vessels. Costs incurred in connection with dry-dockings are deferred and amortized over the five-year cycle to the next scheduled dry-docking. On June 29, 2001, AICPA issued an exposure draft of a proposed SOP, “Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment.” If adopted, we would be required to expense regulatory maintenance cost on our vessels as incurred. We incurred and capitalized dry-dock costs of $1.4 million and $3.8 million for the six months ended June 30, 2003 and 2002, respectively. As of June 30, 2003, deferred dry-dock costs totaled $12.4 million. Expensing dry-dock costs would likely result in greater variability of our quarterly operating results as a substantial portion of our dry-dock activities take place during the first and fourth quarters.

      At June 30, 2003, we had two stock-based compensation plans. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” we have elected to account for stock-based employee compensation under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Additionally, for stock-based compensation grants to non-employees, we recognize as compensation expense the fair market value of such grants as calculated pursuant to SFAS No. 123, amortized ratably over the lesser of the vesting period of the respective option or the individual’s expected

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

service period. The following table illustrates the effect on net income (loss) and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data).

      To determine pro forma information as if we had accounted for the employee stock options under the fair-value method as defined by SFAS No. 123, we used the Black-Scholes method and assumed no dividends, as well as the following additional weighted average assumptions included in the following table:

      In January 2003, we granted options to three former directors to purchase 15,320 shares of common stock at an exercise price equal to the market price of the common stock on the date of grant. These options vested immediately, and $56,000 was recorded as compensation expense in the statements of operations during the first quarter of 2003. Also, we recorded an additional $156,000 as compensation expense in the statements of operations during the second quarter of 2003 related to the remeasurement of options in connection with the resignation of a key employee.

      Certain prior period amounts have been reclassified to conform to the presentation shown in the consolidated interim financial statements as of June 30, 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Property and equipment consists of the following (in thousands):

      During the six months ended June 30, 2003, we incurred $12.5 million of capital expenditures, including capitalized interest, primarily related to the upgrades of the Sea Horizon’s lift capacity to 1,200 tons, the Pacific Horizon’s main hoist equalizer and the design and fabrication of a 110-ton plow used for the pipeline installation and burial project in the Northeastern U.S.

      We use the units-of-production method to calculate depreciation on our major barges, vessels and related equipment to accurately reflect the wear and tear of normal use. The useful lives of our major barges and vessels range from 15 years to 18 years. Depreciation expense calculated under the units-of-production method may be different than depreciation expense calculated under the straight-line method in any period. The annual depreciation based on utilization of each vessel will not be less than 25% of annual straight-line depreciation, and the cumulative depreciation based on utilization of each vessel will not be less than 50% of cumulative straight-line depreciation.

      In April 2002, we sold 3,000,000 shares of common stock in a public offering. We received $30.8 million after deducting the underwriting discount and expenses. We used $20.0 million to reduce indebtedness under our revolving credit facilities and the remainder was used for general corporate purposes.

      Earnings per share data for all periods presented has been computed pursuant to SFAS No. 128, “Earnings Per Share” that requires a presentation of basic earnings per share (basic EPS) and diluted earnings per share (diluted EPS). Basic EPS excludes dilution and is determined by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock. As of June 30, 2003, we had outstanding options covering an aggregate of 3,495,718 shares of common stock, of which 2,271,392 shares were exercisable. Excluded from the computation of diluted EPS are options to purchase 3,495,718 shares of common stock as of June 30, 2003 at a weighted average price of $7.35 per share and 760,145 shares of common stock as of June 30, 2002 at a weighted average price of $14.11 per share, as they would be anti-dilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      During the six months ended June 30, 2003, we contributed 55,273 shares of treasury stock to our 401(k) Plan. As of June 30, 2003, our treasury stock consisted of 856,934 shares at a cost of $5.6 million.

      In August 1998, we entered into a master services agreement with Odyssea Marine, Inc. (Odyssea), an entity wholly-owned by Elliott Associates, L.P. (Elliott Associates) and Elliott International, L.P. (Elliott International), collectively our largest stockholder owning 15.8% of our outstanding common stock, to charter certain marine vessels from Odyssea. As of June 30, 2003, we owed Odyssea $0.8 million for charter services compared to $2.6 million at June 30, 2002. Odyssea billed Horizon and Horizon paid Odyssea for services rendered under the agreement as follows (in millions):

      In June 2003, we secured a $15.0 million loan due June 30, 2004 from Elliott Associates. See Note 5.

      In October 2000, we loaned $142,000 to our Chief Operating Officer. Forgiveness of that debt in connection with his resignation resulted in a write-off of his loan to selling, general and administrative expenses in the accompanying consolidated statement of operations as of June 30, 2003. See Note 7.

      As of June 30, 2003, we had approximately $153.1 million of total outstanding debt. This represents an approximate net increase of $54.8 million from December 31, 2002. Of the $153.1 million of outstanding debt, $57.9 million represents borrowings on our three revolving credit facilities and $95.2 million represents borrowings on eight term-debt facilities.

      During the second quarter of 2003, we secured a $35.0 million loan from Boeing Capital Corporation, of which $30.0 million was advanced in June 2003 and the remaining $5.0 million was advanced in July 2003. The loan has a seven year term, due June 30, 2010 and bears interest at Libor plus 4.8%. A portion of the proceeds from the loan was used to retire our GMAC Business Credit, LLC debt of $14.1 million. In connection with the retirement of this debt, we recognized additional interest expense of $0.3 million during the second quarter of 2003 related to the write-off of deferred loan fees and incurred a prepayment penalty of $0.6 million which is reflected in other expense in the accompanying consolidated statement of operations as of June 30, 2003. Additionally, we amended our existing revolving credit facility with CIT Group/ Equipment Financing, Inc. increasing borrowing capacity by $5.0 million. The additional $5.0 million advance was received in July 2003 and is due October 31, 2003. We also obtained a $15.0 million loan with a one-year term from Elliott Associates during the second quarter of 2003, bearing interest at 12%. Pursuant to the loan agreement, the interest rate increases to 18% on August 15, 2003. In addition, the loan agreement provides that if the loan is not repaid at the maturity date, Elliott Associates has the option to convert up to $5.0 million of the loan into our common stock at a conversion price which is the greater of the weighted average price of our common stock for the preceding 30 trading days or $3.50 per share. Any outstanding loan balance at the maturity date will be due in September 2004.

      At June 30, 2003, we classified $31.6 million as current maturities for our revolving credit facilities to Southwest Bank of Texas, N.A. based on their maturity of April 2004. We had $10.2 million available under our three revolving credit facilities at June 30, 2003. Our weighted average interest rate on all indebtedness

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

was 5.4% at June 30, 2003, and our term-debt borrowings currently require $796,000 in monthly principal payments.

      Our loans require that certain conditions be met in order for us to obtain advances. Our loans are collateralized by mortgages on our vessels and property and by accounts receivable. Advances under our revolving credit facilities may be obtained in accordance with a borrowing base defined as a percentage of accounts receivable balances and costs in excess of billings. The loans contain customary default and cross-default provisions and some require us to maintain certain financial ratios. The loan agreements also contain certain covenants that limit our ability to incur additional debt, pay dividends, create certain liens, sell assets and make capital expenditures.

      For the quarter ended June 30, 2003, we were not in compliance with two debt covenants related to a $6.7 million term loan and two debt covenants related to our three revolving credit facilities. Compliance with these covenants is determined quarterly based on the trailing four quarters ending on each determination date. We have obtained a waiver of compliance on the term loan as of the June 30, 2003 determination date and for the determination dates on or before March 31, 2004. We have also obtained waivers of compliance from the lenders on our three revolving credit facilities as of the June 30, 2003 determination date. In August 2003, we amended the loan agreement for our revolving credit facility with CIT Group/ Equipment Financing, Inc. to provide for less restrictive financial covenant ratios, which had an outstanding balance of $26.3 million at June 30, 2003. We expect to meet these covenants, as amended, at future determination dates. Based on current and forecasted demand for our services, we do not expect to meet the financial covenant ratios at future determination dates for our two revolving credit facilities with Southwest Bank of Texas, N.A., which had an outstanding balance of $31.6 million at June 30, 2003. We anticipate that we will need to further amend these debt covenants or receive waivers of compliance for these facilities in subsequent quarters of 2003. In connection with the waivers obtained from Southwest Bank of Texas, N.A., our two revolving credit facilities will be reduced from an aggregate of $50 million to $20 million upon collection of the Pemex receivable. The Southwest Bank of Texas, N.A. facilities are classified as current in the accompanying balance sheet at June 30, 2003 based on their maturity of April 2004. Our other facilities have been classified as long-term due to their stated maturity date, the future expected status of compliance with covenants, as amended, and our expectations regarding future payoffs, refinancing, or waivers to be obtained from Southwest Bank of Texas, N.A. In the event that the Southwest Bank of Texas, N.A. covenants are not met in the future, and we are unsuccessful in obtaining waivers of compliance, cross-default provisions could result in acceleration of substantially all of our indebtedness.

      During 2003, we have closely managed our cash position and borrowed funds to meet working capital requirements due to the delayed timing of the collection of our Pemex receivables and claims. The additional $55 million of asset based financing secured during the second quarter of 2003 will provide additional working capital to support our receivable position with Pemex. We expect that the volume of our contract revenues will largely influence our working capital and cash requirements. Our cash requirements are greatest at the start-up of a new project since we are required to incur mobilization expenses and complete all or a substantial portion of the majority of our projects before receiving payment from the customer. Although there can be no assurance, we believe that funds from operations will be sufficient in order to maintain necessary levels of operating liquidity.

      On September 20, 2002, the pipelay barge, Lone Star Horizon, sustained electrical damage due to a fire while at anchor off Ciudad Del Carmen, Mexico. We have incurred costs totaling $5.5 million to repair the Lone Star Horizon. We maintain hull and machinery insurance to cover physical damage to our vessels. This insurance coverage provides for both a $0.5 million occurrence deductible and a $1.5 million annual aggregate deductible. During the third quarter of 2002, we recorded this $2.0 million loss as other expense. To date, we

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

have collected reimbursement of $3.0 million and included the $0.5 million remaining insurance claim in current assets as of June 30, 2003.

      During the second quarter of 2003, we incurred approximately $680,000 in charges related to severance and other costs in connection with the resignation of a key employee, which is recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations as of June 30, 2003. We recorded liabilities of $382,000 for severance and other benefits to be paid pursuant to the employee’s separation agreement through August 31, 2004. This amount will be paid ratably each month through the term of the agreement. In addition, we incurred a non-cash charge of approximately $156,000 related to the remeasurement of the employee’s options and a non-cash charge of approximately $142,000 related to the forgiveness of the employee’s loan pursuant to conditions in his separation agreement. All charges are reflected in our Domestic geographic segment.

      We use the liability method of accounting for income taxes. We recorded a federal income tax benefit of $(6.2) million, at a net effective rate of 60.6% on pre-tax net loss of $(10.3) million for the quarter ended June 30, 2003 and a federal income tax benefit of $(7.7) million, at a net effective rate of 52.5% on pre-tax net loss of $(14.7) million for the six months ended June 30, 2003. The difference in the effective tax rates and the statutory tax rates for 2003 is primarily due to the tax benefit recognized in the second quarter of 2003 attributable to a research and development credit of $(3.0) million. We recorded a federal income tax provision of $1.2 million, at a net effective rate of 31.0% on pre-tax net income of $3.8 million for the quarter ended June 30, 2002 and a federal income tax provision of $1.3 million, at a net effective rate of 31.0% on pre-tax net income of $4.3 million for the six months ended June 30, 2002. The difference from the statutory tax rate is due to the application of the extraterritorial income exclusion for income earned primarily in Mexico from January 1, 2002 to June 30, 2002. The exclusion allows us to exclude a portion of income earned outside the United States for tax purposes.

      Horizon operates in the marine construction services industry. Geographic information relating to Horizon’s operations follows (in millions):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1)	Unallocated costs include support costs and operational overhead costs included in cost of contract revenues.
(2)	Long-lived assets include vessels, property and related marine equipment. Amounts reflect the location of the assets at June 30, 2003 and December 31, 2002. Equipment location changes as necessary to meet working requirements. Other identifiable assets include inventory and other long-term assets, and are primarily located in the Domestic geographic segment. Goodwill is included in the Latin America geographic segment.

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      You should read the following discussion and analysis together with our consolidated financial statements and notes thereto and the discussion “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2002 Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ from those expressed or implied by the forward-looking statements.

General

      We provide marine construction services for the offshore oil and gas industry in the U.S. Gulf of Mexico, Northeastern U.S., Latin America, Southeast Asia and West Africa. We have twelve vessels in our marine fleet that are currently operational.

      The primary services we provide include:

	•	installing pipelines;
	•	providing pipebury, hook-up and commissioning services;
	•	installing production platforms and other structures;
	•	disassembling and salvaging production platforms and other structures; and
	•	performing pipe spooling services.

      The demand for offshore construction services depends largely on the condition of the oil and gas industry and, in particular, the level of capital expenditures by oil and gas companies for developmental construction. Historically, oil and gas prices and the level of exploration and development activity have fluctuated substantially, impacting the demand for pipeline and marine construction services. Factors affecting our profitability include competition, equipment and labor productivity, contract estimating, weather conditions and other risks inherent in marine construction. The marine construction industry in the U.S. Gulf of Mexico is highly seasonal as a result of weather conditions with the greatest demand for these services occurring during the second and third calendar quarters of the year.

Critical Accounting Policies

      Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management must apply significant judgments in this process. Among the factors, but not fully inclusive of all factors, that may be considered by management in these processes are: the range of accounting policies permitted by accounting principles generally accepted in the United States; management’s understanding of our business; expected rates of business and operational change; sensitivity and volatility associated with the assumptions used in developing estimates; and whether historical trends are expected to be representative of future trends. Among the most subjective judgments employed in the preparation of these financial statements are estimates of expected costs to complete construction projects, the collectibility of contract receivables and claims, the fair value of salvage inventory, the depreciable lives of and future cash flows to be provided by our equipment, the period and extent of maintenance and repairs for dry-docking activity and certain judgments regarding the nature of income and expenditures for tax purposes. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date.

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      We consider certain accounting policies to be critical policies due to the significant judgments, estimation processes and uncertainties involved for each in the preparation of our consolidated financial statements. We believe the following represent our critical accounting policies.

      Contract revenues for construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to the total estimated costs at completion for each contract. This percentage is applied to the estimated revenue at completion to calculate revenues earned to date. We consider the percentage-of-completion method to be the best available measure of progress on these contracts. Changes in job performance, job conditions and estimated profitability, including those arising from claims and final contract settlements, may result in revisions to estimated costs and revenues and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Revenue also includes amounts earned upon the completion of salvage services. Revenues from salvage projects sometimes include non-cash values assigned to structures that are received from time to time as partial consideration.

      We follow the guidance of AICPA Statement of Position (SOP) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” relating to the use of the percentage-of-completion method, estimating costs and claim recognition for construction contracts. Contract revenue reflects the original contract price adjusted for agreed upon change orders and unapproved claims. We recognize unapproved claims only when the collection is deemed probable and if the amount can be reasonably estimated for purposes of calculating total profit or loss on long-term contracts. We record revenue for claims to the extent of costs incurred and include no profit on claims recorded.

      Cost of contract revenues includes all direct material and labor costs and certain indirect costs, such as supplies, tools, repairs and depreciation, which are allocated to contracts based on asset utilization. Selling, general and administrative costs are charged to expense as incurred.

      We have significant investments in billed and unbilled receivables as of June 30, 2003. At June 30, 2003, we had $2.3 million in contract receivables and $61.6 million in costs in excess of billings from Pemex, including $53.0 million in claims related to weather and other delays, totaling $63.9 million. We believe our receivables are realizable; however, any changes will be recognized in the period in which they are determined. We have historically not experienced any significant losses on receivables, but significant losses would adversely affect our financial position and results of operations and perhaps our overall liquidity.

      Inventory consists of production platforms and other marine structures received from time to time as partial consideration from salvage projects performed in the U.S. Gulf of Mexico. These structures are held for resale. The inventory is valued at amounts not in excess of the fair value of services provided. Horizon assesses the net realizable value of its inventory items at each balance sheet date. Inventory is classified as long-term due to the uncertain timing of the sale of inventory.

      We use the units-of-production method to calculate depreciation on our major barges and vessels to accurately reflect the wear and tear of normal use. The annual depreciation based on utilization of each vessel will not be less than 25% of annual straight-line depreciation, and the cumulative depreciation based on utilization of each vessel will not be less than 50% of cumulative straight-line depreciation. The useful lives of our major barges and vessels range from 15 years to 18 years. Major additions and improvements to barges, boats and related equipment are capitalized and depreciated over the useful life of the vessel. Maintenance

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      We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. Based on our analysis of the estimated future cash flows for our long-term assets, we recognized a $9.9 million impairment loss related to the Phoenix Horizon under SFAS No. 144 for the year ended December 31, 2002. Our planned use of the Phoenix Horizon changed during the fourth quarter of 2002 based on capital requirements and the projected utilization of our operating fleet to meet current market demands, which continued through the first half of 2003. During the fourth quarter of 2002, management determined not to invest in the improvements required to place the Phoenix Horizon into service due to the availability of other operational assets to address current market demands. No impairments were recognized for the six months ended June 30, 2003 and 2002.

      Dry-dock costs are direct costs associated with scheduled major maintenance on the marine construction vessels. Costs incurred in connection with dry-dockings are deferred and amortized over the five-year cycle to the next scheduled dry-docking. On June 29, 2001, AICPA issued an exposure draft of a proposed SOP, “Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment.” If adopted, we would be required to expense regulatory maintenance cost on our vessels as incurred. We incurred and capitalized dry-dock costs of $1.4 million and $3.8 million for the six months ended June 30, 2003 and 2002, respectively. As of June 30, 2003, deferred dry-dock costs totaled $12.4 million. Expensing dry-dock costs would likely result in greater variability of our quarterly operating results as a substantial portion of our dry-dock activities take place during the first and fourth quarters.

      Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” we have elected the method that requires disclosure of stock-based compensation. Because of this election, we account for stock-based employee compensation under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Additionally, for stock-based compensation grants to non-employees, we recognize as compensation expense the fair market value of such grants as calculated pursuant to SFAS No. 123, amortized ratably over the lesser of the vesting period of the respective option or the individual’s expected service period.

      In January 2003, we granted options to three former directors to purchase 15,320 shares of common stock at an exercise price equal to the market price of the common stock on the date of grant. These options vested immediately, and $56,000 was recorded as compensation expense in the statements of operations during the first quarter of 2003. Also, we recorded an additional $156,000 as compensation expense in the statements of operations during the second quarter of 2003 related to the remeasurement of options in connection with the resignation of a key employee.

      It is expected in the future that the FASB will require expensing of stock options issued based upon their fair values. Should this rule be implemented, we may be subject to significant stock compensation expense each quarter.

Recent Accounting Pronouncements

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of

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      On June 29, 2001, the AICPA issued an exposure draft of a proposed SOP, “Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment.” This proposed SOP would change, among other things, the method by which companies would account for normal, recurring or periodic repairs and maintenance costs related to “in service” fixed assets. It would require that these types of expenses be recognized when incurred rather than recognizing expense for these costs while the asset is productive. We are assessing the impact of the change should this SOP be adopted. If adopted, we would be required to expense regulatory maintenance cost on our vessels as incurred. We currently capitalize a significant portion of these costs and amortize them over the future periods they are expected to benefit. We incurred and capitalized dry-dock costs of $1.4 million and $3.8 million for the six months ended June 30, 2003 and 2002, respectively. As of June 30, 2003, deferred dry-dock costs totaled $12.4 million. Expensing dry-dock costs would likely result in greater variability of our quarterly operating results as a substantial portion of our dry-dock activities take place during the first and fourth quarters.

      In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 has not effected our results of operations or financial position.

      In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and should be applied prospectively. The provisions of SFAS No. 149 that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of SFAS No. 149 is not expected to have a material effect on our results of operations or financial position.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. The statement requires that an issuer classify financial instruments that are within its scope as a liability and requires disclosure regarding the terms of those instruments and settlement alternatives. Previously, many of these instruments were classified as equity or as mezzanine instruments (between the liabilities and the equity section). SFAS No. 150 is effective immediately for qualifying financial instruments issued after May 31, 2003 and is effective for existing issuances in the third quarter of 2003. We are adopting SFAS No. 150 as it becomes effective but do not expect it to have a material effect on our results of operations or financial position.

Results of Operations

      The discussion below describes our results of operations. During the first six months of 2003, revenues related to the pipeline installation and burial project in the Northeastern U.S. accounted for 44.5% of our consolidated revenues. We mobilized the Gulf Horizon to begin construction of this pipeline in May 2002.

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      Lower profit margins on the pipeline project in the Northeastern U.S., a significant decrease in vessel utilization due to competitive market conditions in the U.S. Gulf of Mexico and schedule slippage in several major projects in West Africa and the U.S. Gulf of Mexico contributed to a decrease in gross profit for the first six months of 2003. We also experienced lower margins on vessels operating in the northern U.S. Gulf of Mexico because of downtime due to adverse weather conditions. We believe our expansion into Southeast Asia and West Africa will provide some measure of counter-seasonal balance to the effect of adverse winter weather conditions in the U.S. Gulf of Mexico and Latin America. We will continue to pursue international construction projects in Mexico, Latin America, Southeast Asia and West Africa.

      The Brazos Horizon began work on a major portion of a pipeline and structural installation project in Nigeria in January 2003. In late March 2003, our customer temporarily suspended operations in Nigeria, including construction on this project, due to ethnic unrest in the Niger Delta. We anticipate that our work will resume in the fourth quarter of 2003. The suspension of operations in Nigeria negatively impacted revenues and gross profit during the second quarter of 2003.

      Pemex accounted for 2.9% of consolidated revenues for the first six months of 2003, compared with 39.1% for the first six months of 2002. As of June 30, 2003, we had $63.9 million of Pemex receivables, consisting of contract receivables of $2.3 million and costs in excess of billings of $61.6 million. Our receivables from Pemex continue to impact our liquidity; however, the additional $55 million of asset based financing secured during the second quarter of 2003 will provide additional working capital to support our receivable position with Pemex.

      Cumulative revenues recognized from 2000 through June 2003 on all Pemex projects in Mexico total $290.4 million, including $57.0 million of claims for extra work related to interferences, interruptions and other delays, primarily related to our second major project for Pemex, EPC 64, which was completed during the fourth quarter of 2002.

      A summary of our Pemex claims included in revenue are as follows (in millions):

      There were no claims related to Pemex included in revenues for the six months ended June 30, 2003.

      During November 2002, we engaged a consulting firm in Mexico to assist us in the administration of our Pemex claims. After complying with Pemex’s requirements, we formally submitted these claims in July 2003, with collections expected by September or October 2003. The unapproved claims that we have included as revenue through December 31, 2002 are substantially less than the actual claims presented to Pemex, and we believe we are entitled to collect more than the claim amounts recorded. However, there is a risk that the unapproved claims we have recognized as revenue may not be collected in full. Should these unapproved claims become uncollectible based upon subsequent events, we will recognize a loss in our financial statements at that time. There may be factors other than the submission, review and approval of our claims which are outside our control that may impact the ultimate collectibility of these amounts. We have considered these factors, including changes that have occurred related to Pemex employees involved in the project, the operating structure of Pemex, and the political and economic conditions in Mexico, in assessing the collectibility of these amounts.

      During the second quarter of 2003, we secured $55 million in secured asset based financing from three lenders, of which $45 million was funded during the second quarter of 2003 and $10 million was funded in July 2003. The proceeds were used to repay our $14.1 million loan with GMAC Business Credit, LLC and the remaining proceeds will be used to provide working capital to support operations.

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      We obtained a $35.0 million loan with a seven-year term from Boeing Capital Corporation, of which $30.0 million was advanced in June 2003 and the remaining $5.0 million was advanced in July 2003. We also obtained a $15.0 million loan during the second quarter of 2003 with a one-year term from Elliott Associates, L.P., which together with Elliott International, L.P., owns 15.8% of our outstanding common stock. Additionally, we increased our existing revolving credit facility with CIT Group/ Equipment Financing, Inc. by $5.0 million. The additional $5.0 million advance was received in July 2003 and is due October 31, 2003.

      Our credit facilities contain customary default and cross-default provisions and some require us to maintain certain financial ratios. For the quarter ended June 30, 2003, we were not in compliance with two debt covenants related to a $6.7 million term loan and two debt covenants related to our three revolving credit facilities. Compliance with these covenants is determined quarterly based on the trailing four quarters ending on each determination date. We have obtained a waiver of compliance on the term loan as of the June 30, 2003 determination date and for the determination dates on or before March 31, 2004. We have also obtained waivers of compliance from the lenders on our three revolving credit facilities as of the June 30, 2003 determination date. In August 2003, we amended the loan agreement for our revolving credit facility with CIT Group/ Equipment Financing, Inc. to provide for less restrictive financial covenant ratios, which had an outstanding balance of $26.3 million at June 30, 2003. We expect to meet these covenants, as amended, at future determination dates. Based on current and forecasted demand for our services, we do not expect to meet the financial covenant ratios at future determination dates for our two revolving credit facilities with Southwest Bank of Texas, N.A. which had an outstanding balance of $31.6 million at June 30, 2003. We anticipate that we will need to further amend these debt covenants or receive waivers of compliance for these facilities in subsequent quarters of 2003. In connection with the waivers obtained from Southwest Bank of Texas, N.A., our two revolving credit facilities will be reduced from an aggregate of $50 million to $20 million upon collection of the Pemex receivable. The Southwest Bank of Texas, N.A. facilities are classified as current in the accompanying balance sheet at June 30, 2003 based on their maturity of April 2004. Our other facilities have been classified as long-term due to their stated maturity date, the future expected status of compliance with covenants, as amended, and our expectations regarding future payoffs, refinancing, or waivers to be obtained from Southwest Bank of Texas, N.A. In the event that the Southwest Bank of Texas, N.A. covenants are not met in the future, and we are unsuccessful in obtaining waivers of compliance, cross-default provisions could result in acceleration of substantially all of our indebtedness.

      As of August 1, 2003, our backlog totaled approximately $87.8 million compared to our backlog at December 31, 2002 of approximately $123.6 million. This change is attributable to our execution of contract activity during that period.

      Early in 2003 we began certain initiatives in response to the challenging business environment and competitive conditions in the marine construction industry. The objective of these initiatives is to enhance profitability through productivity, efficiency and a reduction in expense levels. In January 2003, we formed a business improvement team composed of managers from different areas within Horizon to identify and implement significant cost-saving initiatives. As a result of those efforts, we have implemented cost-saving plans in the areas of travel, marketing, information systems, and other employee related expenses, and we reduced our workforce in January and February 2003. In addition, we reorganized our current operations oriented management structure to place more emphasis on project management and reduced our workforce in July 2003. We believe that these continuing cost-saving initiatives and project focused management will result in improved profitability.

      Contract Revenues. Contract revenues were $57.9 million for the quarter ended June 30, 2003, compared to $64.3 million for the quarter ended June 30, 2002. The decline in revenues is primarily due to reduced demand for offshore construction services in the U.S. Gulf of Mexico and schedule slippage in several major projects in West Africa and the U.S. Gulf of Mexico. Additionally, the decline in revenues is due to change in our customer mix in 2003 compared to 2002. The decrease in revenue from projects in Mexico was partially offset by revenues from the pipeline installation and burial project in the Northeastern U.S.

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      Gross Profit. Gross profit was a $(0.8) million loss for the quarter ended June 30, 2003, compared to gross profit of $9.5 million (14.8% of contract revenues) for 2002. Gross profit for the second quarter of 2003 decreased significantly as vessel utilization declined due to competitive market conditions in the U.S. Gulf of Mexico, which was compounded by schedule slippage in several major projects in West Africa and the U.S. Gulf of Mexico. Inclement weather in the U.S. Gulf of Mexico during the second quarter further eroded job margins. Profit margins on the pipeline installation and burial project in the Northeastern U.S. and other contracts in 2003 were lower than the profit margins on the Pemex projects, which accounted for a greater percentage of revenues in 2002.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.5 million (11.2% of contract revenues) for the three months ended June 30, 2003, compared with $4.4 million (6.8% of contract revenues) for the three months ended June 30, 2002. We recognized $680,000 in the second quarter of 2003 for severance and other charges due to the resignation of a key employee. The remainder of the increase primarily relates to costs associated with international operations of $1.5 million for 2003 compared to $0.6 million for 2002, and additional depreciation expense for corporate fixed assets placed into service during the second half of 2002 and first quarter of 2003.

      Interest Expense. Interest expense was $2.4 million for the three months ended June 30, 2003, net of $13,000 interest capitalized, and $1.0 million for the same period last year, net of $0.5 million interest capitalized. Our total outstanding debt was $153.1 million at June 30, 2003, compared to $92.4 million at June 30, 2002. Interest expense increased due to higher average outstanding debt balances, higher interest rates, the write-off of deferred loan fees related to early retirement of debt and other fees associated with the additional financing secured during the second quarter of 2003.

      Interest Income. Interest income on cash investments for the three months ended June 30, 2003 was $10,000 compared to $28,000 for the three months ended June 30, 2002.

      Other Income (Expense), Net. Other income (expense) for the three months ended June 30, 2003, primarily consisted of $569,000 in prepayment penalties for the early retirement of debt and $89,000 of net foreign currency loss due to activity in Mexico denominated in Mexican pesos and a decline of the U.S. dollar compared to the Mexican peso. Other income (expense) for the quarter ended June 30, 2002 primarily consisted of approximately $414,000 of foreign currency loss due to activity in Mexico denominated in Mexican pesos and a decline of the U.S. dollar compared to the Mexican peso. Also, included in other expense for the quarter ended June 30, 2002 is approximately $14,000 related to our Cal Dive joint venture.

      Income Taxes. We use the liability method of accounting for income taxes. For the quarter ended June 30, 2003, we recorded a federal income tax benefit of $(6.2) million, at a net effective rate of 60.6% on pre-tax net loss of $(10.3) million. The difference in the effective tax rate and the statutory tax rate is primarily due to the tax benefit recognized for the quarter ended June 30, 2003 attributable to a research and development credit of $(3.0) million. For the quarter ended June 30, 2002, we recorded a federal income tax provision of $1.2 million, at a net effective rate of 31.0% on pre-tax net income of $3.8 million. The difference from the statutory rate is due to the application of the extraterritorial income exclusion for income earned primarily in Mexico during the second quarter of 2002. The exclusion allows us to exclude a qualifying portion of income earned outside the United States for tax purposes.

      Net Income (Loss). Net loss for the quarter ended June 30, 2003 was $(4.1) million, or $(0.15) per share-diluted. This compares with net income of $2.6 million, or $0.10 per share-diluted for the quarter ended June 30, 2002.

      Contract Revenues. Contract revenues were $125.0 million for the six months ended June 30, 2003, compared to $130.4 million for the six months ended June 30, 2002. Revenues decreased due to reduced demand for offshore construction services in the U.S. Gulf of Mexico and schedule slippage in several major projects in West Africa and the U.S. Gulf of Mexico. The decline in revenues from projects in Mexico in 2002

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      Gross Profit. Gross profit was $1.8 million (1.4% of contract revenues) for the six months ended June 30, 2003, compared to gross profit of $14.6 million (11.2% of contract revenues) for the same period of 2002. Lower profit margins on the pipeline installation and burial project in the Northeastern U.S., reduced vessel utilization and unusually adverse weather conditions during 2003, and resulting downtime and revenues recorded for such events, lowered the overall profit margins. The profit margins on the Pemex projects, which accounted for a greater percentage of revenues in 2002, were higher than profit margins on other contracts in 2003.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.9 million (9.5% of contract revenues) for the six months ended June 30, 2003, compared to $7.9 million (6.1% of contract revenues) for the same period of 2002. The increase primarily relates to costs associated with international operations, additional depreciation expense for corporate fixed assets placed into service during the second half of 2002 and first quarter of 2003, and severance and other charges due to the resignation of a key employee in 2003.

      Interest Expense. Interest expense for the six months ended June 30, 2003 was $3.9 million, net of $123,000 of interest capitalized. Interest expense was $2.0 million for the six months ended June 30, 2002, net of $1.0 million of interest capitalized. Our total outstanding debt was $153.1 million at June 30, 2003, compared to $92.4 million at June 30, 2002. Interest expense increased due to higher average outstanding debt balances, higher interest rates, the write-off of deferred loan fees related to early retirement of debt and other fees associated with the additional financing secured during the second quarter.

      Interest Income. Interest income on cash investments for the six months ended June 30, 2003 and 2002 was $21,000 and $53,000, respectively. The decrease was primarily due to lower interest rates and lower average cash balances for 2003.

      Other Income (Expense), Net. Other income (expense) for the six months ended June 30, 2003, primarily consisted of $569,000 in prepayment penalties for the early retirement of debt and $136,000 of net foreign currency loss due to activity in Mexico denominated in Mexican pesos and a decline of the U.S. dollar compared to the Mexican peso, and approximately $5,000 of miscellaneous income. Included in other income (expense) for the six months ended June 30, 2002 is $411,000 of foreign currency loss due to activity in Mexico denominated in Mexican pesos and a decline of the U.S. dollar compared to the Mexican peso. Also included in other expense is approximately $46,000 related to our Cal Dive joint venture and $27,000 other income related to administrative fees related to our Cal Dive joint venture.

      Income Taxes. We use the liability method of accounting for income taxes. For the six months ended June 30, 2003, we recorded a federal income tax benefit of $(7.7) million, at a net effective rate of 52.5% on pre-tax net loss of $(14.7) million. The difference in the effective tax rate and the statutory tax rate is primarily due to the tax benefit recognized for the six months ended June 30, 2003 attributable to a research and development credit of $(3.0) million. For the six months ended June 30, 2002, we recorded a federal income tax provision of $1.3 million, at a net effective rate of 31.0% on pre-tax net income of $4.3 million. The difference from the statutory tax rate is due to the application of the extraterritorial income exclusion for income earned primarily in Mexico from January 1, 2002 to June 30, 2002. The exclusion allows us to exclude a portion of income earned outside the United States for tax purposes.

      Net Income (Loss). Net loss was $(7.0) million, or $(0.27) per share-diluted, for the six months ended June 30, 2003, compared to net income for the six months ended June 30, 2002 of $3.0 million, or $0.12 per share-diluted.

Liquidity and Capital Resources

      Our primary liquidity needs are to provide working capital to support our projects and other operations and to fund acquisitions and improvements to the fleet necessary to expand operations. We had $16.0 million of working capital at June 30, 2003 compared to $30.4 million of working capital at December 31, 2002. The

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      Our receivables from Pemex continue to impact our liquidity. As of June 30, 2003, we had contract receivables of $2.3 million and costs in excess of billings of $61.6 million from Pemex totaling $63.9 million. The significant delays between the completion of the work and when it is billed and collected are caused by Pemex’s rigid requirements on the submission, review and approval of invoices and documentation prior to their payment of contract claims and change orders. As of June 30, 2003, there were $57.0 million of claims for extra work related to interferences, interruptions and other delays, primarily related the EPC 64 contract in the Cantarell field. Pemex extended the EPC 64 contract, which had an original value of $41.0 million, and substantially increased the scope of our operations in the Cantarell field. As a result, this project was subject to greater interruptions due to weather conditions and standby time as other contractors completed their work. From 2000 through June 30, 2003, cumulative revenues recognized related to the EPC 64 contract totaled $194.4 million. The EPC 64 claim was formally submitted in July 2003.

      Cash used in operations was $33.0 million for the first six months of 2003 compared to cash provided by operations of $13.8 million for the first six months of 2002. The increase in funds used in operating activities is primarily attributable to the decrease in accrued job costs and accrued liabilities as projects were completed, delays in collections of revenues and the net loss before income tax benefit of $(14.7) million for the six months ended June 30, 2003.

      Cash used in investing activities was $8.4 million for the first six months of 2003 compared to cash used in investing activities of $22.7 million for the first six months of 2002. The decrease in funds used in investing activities is primarily attributable to the significant upgrades to the Sea Horizon, our largest vessel, and other vessels in our fleet during the first six months of 2002 compared to the first six months of 2003.

      Cash provided by financing activities was $53.6 million for the first six months of 2003 compared to cash provided by financing activities of $4.3 million for the first six months of 2002. The increase in funds provided by financing activities is primarily attributable to the additional $55 million in secured asset based financing, of which $45 million was funded during the second quarter of 2003. For the first six months ended June 30, 2002, the $30.8 million we received in our public stock offering was offset by the funds used to reduce indebtedness under our revolving credit facilities.

      At June 30, 2003, we had approximately $153.1 million of total outstanding debt. This represents an approximate net increase of $54.8 million from December 31, 2002 primarily due to additional borrowings to meet working capital needs during the first six months of 2003. Of the $153.1 million of outstanding debt, $57.9 million represents borrowings on our three revolving credit facilities and $95.2 million represents borrowings on our eight term-debt facilities. At June 30, 2003, we had $10.2 million available under our three revolving credit facilities and $18.3 million of cash and cash equivalents. Our weighted average interest rate on all indebtedness was 5.4% at June 30, 2003, and our term-debt borrowings currently require $796,000 in monthly principal payments. Current maturities of long-term debt were $56.2 million as of June 30, 2003.

      Our loans require that certain conditions be met in order for us to obtain advances. Our loans are collateralized by mortgages on our vessels and property and by accounts receivable. Advances under our revolving credit facilities may be obtained in accordance with a borrowing base defined as a percentage of accounts receivable balances and costs in excess of billings. The loans contain customary default and cross-default provisions and some require us to maintain certain financial ratios. The loan agreements also contain certain covenants that limit our ability to incur additional debt, pay dividends, create certain liens, sell assets and make capital expenditures.

      For the quarter ended June 30, 2003, we were not in compliance with two debt covenants related to a $6.7 million term loan and two debt covenants related to our three revolving credit facilities. Compliance with

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      During 2003, we have closely managed our cash position and borrowed funds to meet working capital requirements due to the delayed timing of the collection of our Pemex receivables and claims. The additional $55 million of asset based financing secured during the second quarter of 2003 will provide additional working capital to support our receivable position with Pemex. We expect that the volume of our contract revenues will largely influence our working capital and cash requirements. Our cash requirements are greatest at the start-up of a new project since we are required to incur mobilization expenses and complete all or a substantial portion of the majority of our projects before receiving payment from the customer. Although there can be no assurance, we believe that funds from operations will be sufficient in order to maintain necessary levels of operating liquidity.

      We have fixed debt service and lease payment obligations under notes payable and operating leases for which we have material contractual cash obligations. Interest rates on our debt vary from commercial paper plus 2.45% to 12.0%. The following table summarizes our long-term material contractual cash obligations (in millions):

      We completed the construction of a spooling facility at our marine base in Port Arthur, Texas in the first quarter of 2002. The facility can be used to provide pipe spooling services to other contractors and to our joint venture with Cal Dive. The joint venture, which has not commenced operations, was formed to charter from Cal Dive the Intrepid, a 374-foot dynamically positioned multi-service vessel, with reel pipelaying equipment. If both Cal Dive and Horizon decide to commence joint venture operations, the joint venture would be jointly managed and staffed, and we would be required to contribute approximately $8 million for the design, construction and installation of reel pipelaying equipment on the Intrepid that was completed in 2002. Based on current market conditions, we do not know when, or if, the joint venture will become operational.

      Planned capital expenditures for the remainder of 2003 are estimated to range from approximately $7 million to $9 million largely related to vessel improvements. These expenditures will depend upon available

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Forward-Looking Statements

      In addition to historical information, Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain forward-looking statements regarding events and financial trends that may affect our future operating results and financial position. Some important factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements include the following:

	•	Pemex’s approval of claims and the outcome of these claims, and our ability to manage our liquidity needs pending the timing of collection of our receivables and claims from Pemex;
	•	expected loan covenant noncompliance and the need for additional financing;
	•	industry volatility, including the level of capital expenditures by oil and gas companies due to fluctuations in the price and perceptions of the future price of oil and gas;
	•	risks of growth strategy, including the risks of rapid growth;
	•	operating hazards, including the unpredictable effect of natural occurrences on operations and the significant possibility of accidents resulting in personal injury and property damage;
	•	the highly competitive nature of the marine construction business;
	•	dependence on the continued strong working relationships with significant customers operating in the U.S. Gulf of Mexico;
	•	seasonality of the offshore construction industry in the U.S. Gulf of Mexico;
	•	ability to realize carrying values of salvaged structures;
	•	contract bidding risks;
	•	percentage-of-completion accounting;
	•	successful negotiation and collection of contract claims;
	•	continued active participation of our executive officers and key operating personnel;
	•	the effect on our performance of regulatory programs and environmental matters;
	•	risks involved in the expansion of our operations into international offshore oil and gas producing areas;
	•	risks involved in joint venture operations, including difficulty in resolving disputes with present partners or reaching agreements with future partners; and
	•	a terrorist attack and future wars.

      Many of these factors are beyond our ability to control or predict. We caution investors not to place undue reliance on forward-looking statements. We disclaim any intent or obligation to update the forward-looking statements contained in this report, whether as a result of receiving new information, the occurrence of future events or otherwise.

      These and other uncertainties related to the business are described in detail under the heading “Cautionary Statements” in our 2002 Annual Report on Form 10-K.

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      Our market risk exposures primarily include interest rate and exchange rate fluctuation on financial instruments as detailed below. Our market risk sensitive instruments are classified as “other than trading.” The following sections address the significant market risks associated with our financial activities during the six months ended June 30, 2003. Our exposure to market risk as discussed below includes “forward-looking statements” and represents estimates of possible changes in fair values, future earnings or cash flows that would occur assuming hypothetical future movements in foreign currency exchange rates or interest rates.

      As of June 30, 2003, the carrying value of our debt, including $0.3 million of accrued interest, was approximately $153.4 million. The fair value of this debt approximates the carrying value because the interest rates are based on floating rates identified by reference to market rates. A hypothetical 1% increase in the applicable interest rates as of June 30, 2003 would increase annual interest expense by approximately $1.5 million.

      We collect a portion of international contract revenues and pay local expenses in foreign currency. We manage foreign currency risk by attempting to contract as much foreign revenue as possible in U.S. dollars. We monitor the exchange rate of our foreign currencies in order to mitigate the risk from foreign currency fluctuations. Additional exposure could occur as we expand internationally. Approximately 80% of our current contracts with Pemex is denominated in U.S. dollars. We receive payment in Mexican pesos equivalent to the U.S. dollars billed, which is converted to U.S. dollars that day or the following day. Our contracts in Mexico also typically provide some protection from declining exchange rates on the portion of the contract revenues denominated in foreign currency. We recognized a $136,000 foreign currency loss due to activity in Mexico denominated in Mexican pesos and a decline of the U.S. dollar compared to the Mexican peso for the six months ended June 30, 2003.

      The level of construction services required by a customer depends on the size of its capital expenditure budget for construction for the year. Consequently, customers that account for a significant portion of contract revenues in one year may represent an immaterial portion of contract revenues in subsequent years.

      As of the end of the period ended June 30, 2003, we carried out an evaluation, under the supervision and with the participation and assurances of management, including the President and Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President and Chief Executive Officer along with the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be included in our periodic SEC filings.

      There have been no material changes in Horizon’s internal controls over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect these internal controls over financial reporting subsequent to the date of our recent valuation.

PART II — OTHER INFORMATION

      (a) Our annual meeting of stockholders was held on May 6, 2003. At such meeting, each of the following persons listed below was re-elected as a director of the company.

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      In addition to the directors re-elected at the annual meeting, the terms of Bill J. Lam, J. Louis Frank, John T. Mills, Michael R. Latina and Ken R. LeSuer continued after the annual meeting.

      (b) The stockholders also approved the Amended and Restated Horizon Offshore, Inc. 2002 Stock Incentive Plan.

      (a) Exhibits