UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 001-16857

Horizon Offshore, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(713) 361-2600

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value per share

Preferred Stock Purchase Rights

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

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

      The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2004), was approximately $21.7 million.

      The number of shares of the registrant’s common stock, $1.00 par value per share, outstanding as of March 28, 2005 was 32,252,658.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement prepared in connection with the registrant’s 2005 annual meeting of stockholders have been incorporated by reference into Part III of this Form 10-K.

HORIZON OFFSHORE, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2004

TABLE OF CONTENTS

PART I

General

      Horizon Offshore, Inc. (a Delaware corporation) was incorporated on December 20, 1995 and commenced operations in March 1996. Horizon Offshore, Inc. and its subsidiaries (references to Horizon, company, we or us are intended to refer to Horizon Offshore, Inc. and its subsidiaries) provide marine construction services for the offshore oil and gas and other energy related industries in the U.S. Gulf of Mexico, Latin America, Southeast Asia, West Africa and the Mediterranean.

      Our primary services include:

Developments

      During the past three years, we have experienced operating and net losses. Our liquidity has been negatively impacted by our inability to collect outstanding claims and receivables from Petróleos Mexicanos (Pemex) and Williams Oil Gathering LLC (Williams), and the delays in collecting the claims and receivables from Iroquois Gas Transmission LP (Iroquois) that were settled in March 2005. Also during 2004, our liquidity has been impacted by low utilization of vessels, a fire on the Gulf Horizon in May 2004 and our inability to secure performance bonds and letters of credit on large international contracts without utilizing cash collateral. We have closely managed cash due to our lack of liquidity and negotiated extended payment terms with our large trade payable creditors and subcontractors. In order to meet our liquidity needs during the past three years, we have incurred a substantial amount of debt. During 2004, we issued an aggregate of $113.7 million, including paid in-kind interest, face value of 16% subordinated secured notes (the 16% Subordinated Notes) and 18% subordinated secured notes (the 18% Subordinated Notes) in order to meet our immediate liquidity needs. At December 31, 2004, we had approximately $232.8 million face value of total outstanding debt, which was secured by all of our assets.

      In light of our substantial debt and inability to generate sufficient cash flows from operations to service it; since the second quarter of 2004, our management has explored a significant number of financing alternatives designed to refinance and restructure our debt maturing in 2005 and provide us with additional working capital to support our operations. While management was in the process of negotiating a financing proposal, we were required to repay all of our outstanding indebtedness under our revolving credit facilities with Southwest Bank of Texas, N.A. (Southwest Bank) that matured in February 2005, which further impacted our liquidity. In March 2005, our negotiations to obtain additional financing and to refinance our indebtedness maturing in 2005 failed. As a result, our only alternative to commencing bankruptcy proceedings was to proceed to implement our previously announced recapitalization plan with the holders of our 16% and 18% Subordinated Notes (collectively, the Subordinated Notes) in two steps. The first step consisted of closing two senior secured term loans (the Senior Credit Facilities) of $30 million and $40 million, respectively, with holders and affiliates of holders of our Subordinated Notes on March 31, 2005.

      We will use the proceeds of the Senior Credit Facilities to repay the $25.6 million outstanding under our revolving credit facility with The CIT Group/Equipment Financing, Inc. (CIT Group) maturing in May 2005, make a $2.0 million prepayment on our CIT Group term loan and pay an estimated $3.0 million of closing costs and fees. We will use the balance of the proceeds from this financing transaction to provide working capital to support our operations and for other general corporate purposes. The second step of our recapitalization plan consists of a debt for equity exchange. In order to implement this exchange, we entered into a letter agreement dated March 31, 2005 (the Recapitalization Agreement) with the holders of all of our Subordinated Notes that terminated the October 29, 2004 recapitalization letter agreement. The Recapitalization Agreement contemplates that we will use our best efforts to close a series of recapitalization transactions

pursuant to which the holders of our Subordinated Notes will exchange approximately $85 million of Subordinated Notes and 1,400 shares of our Series A Redeemable Participating Preferred Stock (Series A Preferred Stock) for one million shares of a new series of Series B Mandatorily Convertible Preferred Stock (Series B Preferred Stock) and 60 million shares of our common stock. The common stock and Series B Preferred Stock issued in the debt for equity exchange on an “as converted” basis will be equivalent to 95% of our aggregate outstanding common stock after giving effect to the recapitalization transactions. This equity will also be issued in consideration of the Subordinated Note holders consenting to the financing transaction and release of all of the collateral securing the Subordinated Notes, amending the terms of the $25 million of Subordinated Notes that are expected to remain outstanding following the closing of the recapitalization transactions to extend their maturity to March 2010 and reduce their interest rate to 8% per annum payable in-kind, and, if applicable, participating in the financing transaction as a lender.

      In order to be able to issue common stock and the Series B Preferred Stock as required by the Recapitalization Agreement without the lengthy delay associated with obtaining stockholder approval required under the Nasdaq Marketplace Rules, we decided to delist our shares of common stock from the Nasdaq National Market, effective as of the close of business on April 1, 2005. In connection with the financing transaction, we also amended our CIT Group term loan to, among other things, extend the $15 million payment due in December 2005 until March 2006 and accelerate the maturity date from June 2006 to March 2006. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for further details of this financing transaction and the Recapitalization Agreement.

Scope of Operations

      Our operating results are directly tied to industry demand for our services, and, to a lesser degree, seasonal impact. The demand for our services depends on the level of capital expenditures by oil and gas companies for developmental construction. Due to the time required to drill a well and fabricate a production platform, demand for our services usually lags exploratory drilling by nine to eighteen months and sometimes longer.

      Our fleet consists of thirteen vessels, including nine vessels which are currently operational and two pipelay/pipebury barges, one derrick barge and one diving support vessel that are not currently operational. The following table describes our marine vessels.

      Included in our fleet of nine operational vessels are four pipelay and pipebury vessels and one combination pipelay and derrick vessel that install and bury pipelines with an outside diameter (including concrete coating) of up to 39 inches. Our pipelay vessels employ conventional S-lay technology that is appropriate for operating on the U.S. continental shelf and the international areas where we currently operate. Conventional pipeline installation involves the sequential assembly of pieces of pipe through an assembly line of welding stations that run the length of the pipelay vessel. Welds are then inspected and coated on the deck of the pipelay barge. The pipe is then supported off the stern and into the water via a ramp that is referred to as a “pontoon” or “stinger.” The ramp supports the pipe to some distance under the water and prevents over-stressing as it curves into a horizontal position toward the sea floor. The barge is then moved forward by its anchor winches and the pipeline is laid on the sea floor. The suspended pipe forms an elongated “S” shape as it undergoes a second bend above the contact point. During the pipelay process, divers regularly inspect the pipeline to ensure that the ramp is providing proper support and that the pipeline is settling correctly.

      Pipelines installed on the U.S. continental shelf or located in water depths of 200 feet or less are required by the regulations of the United States Department of Interior’s Minerals Management Service to be buried at least three feet below the sea floor. Jet sleds towed behind pipelay/pipebury barges are used to bury pipelines on smaller pipe installation projects. Towed jet sleds are less likely to damage the pipeline being laid or any existing pipelines that the pipeline may cross. Towed jet sleds use a high-pressure stream of air and water that is pumped from the barge to create a trench into which the pipe settles. For larger pipe burying projects, or where deeper trenching is required, we use the Canyon Horizon, our dedicated bury barge. The Canyon Horizon is currently located in the Mediterranean. We match our burying approach to the requirements of each specific contract by using the Canyon Horizon for larger projects and our towed jet sleds behind pipelay barges for smaller projects.

      We also install and remove or salvage offshore fixed platforms. We currently operate two derrick barges equipped with cranes designed to lift and place platforms, structures or equipment into position for installation. In addition, they are used to disassemble and remove platforms and prepare them for salvage or refurbishment. The Pacific Horizon has a lift capacity of 1,000 tons, and the Atlantic Horizon has a 550-ton lift capacity. Our fleet also includes the Sea Horizon, which is our 360-foot long and 100-foot wide combination vessel that has both pipelay and derrick capabilities. The Sea Horizon is utilized to install and remove offshore fixed platforms and has a lift capacity of 1,200 tons. 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. There have been no significant sales of inventory since 2002.

      During 2004, we laid 230 miles of pipe of various diameters in various depths pursuant to a total of 31 pipeline construction contracts. Also in 2004, we installed or removed 48 offshore platforms. We are currently performing marine construction projects in the U.S. Gulf of Mexico and a project for the Israel Electric Corporation (IEC) in the Mediterranean. In addition, we were recently awarded a contract for the installation of the West Africa Gas Pipeline.

      Our customers award contracts by means of a highly competitive bidding process. In preparing a bid, we must consider a variety of factors, including estimated time necessary to complete the project, the recovery of equipment costs and the location and duration of current and future projects. We have placed a strong emphasis on attempting to sequentially structure scheduled work in adjacent areas. Sequential scheduling reduces mobilization and demobilization time and costs associated with each project and increases profitability. We employ core groups of experienced offshore personnel that work together on particular types of projects to increase our bidding accuracy. We often obtain the services of workers outside of our core employee groups by subcontracting with other parties. Our management examines the results of each bid submitted, reevaluates bids, and implements a system of controls to maintain and improve the accuracy of the bidding process. The accuracy of the various estimates in preparing a bid is critical to our profitability.

      Our contracts are typically of short duration in the U.S. Gulf of Mexico, being completed in periods as short as several days to periods of up to several months for projects involving our larger pipelay vessels. International construction projects typically have longer lead times and extended job durations. Substantially all of our projects are performed on a fixed-price or a combination of a fixed-price and day-rate basis in the

case of extra work to be performed under the contract. From time to time, we perform projects on a day-rate or cost-reimbursement basis. Under a fixed-price contract, the price stated in the contract is subject to adjustment only for change orders approved by the customer. As a result, we are responsible for all cost overruns. Furthermore, our profitability under a fixed-price contract is reduced when the contract takes longer to complete than estimated. Similarly, our profitability will be increased if we can perform the contract ahead of schedule. Under cost-reimbursement arrangements, we receive a specified fee in excess of direct labor and material cost and are protected against cost overruns, but unless cost savings incentives are provided, we generally do not benefit directly from improved performance.

Marine Equipment

      We own all of our marine vessels and have placed mortgages on them to collateralize our debt. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Under governmental regulations and our insurance policies, we are required to maintain the vessels in accordance with standards of seaworthiness, safety and health prescribed by governmental regulations and applicable vessel classification societies. We believe that we are in compliance with all governmental regulations and insurance policies regarding the operation and maintenance of our nine operational vessels.

      In the normal course of our operations, we also lease or charter other vessels, such as diving support vessels, tugboats, cargo barges, utility boats and support vessels.

Safety and Quality Assurance

      We believe that the safety and health of our employees, the protection of the environment and our assets, while consistently providing products and services to our customers’ satisfaction and within regulatory guidelines is a key component of our operations. We maintain stringent safety assurance programs to reduce the possibility of costly incidents and to attract and retain new employees and customers. Our Health, Safety, Environmental and Quality Department establishes and regularly updates these programs to ensure compliance with all applicable state, federal, foreign and customer safety regulations as well as the quality requirements for providing an end product that satisfies client and regulatory specifications.

      We believe that our response to the fire aboard the Gulf Horizon in May 2004 exemplified the quality and effectiveness of our safety assurance and employee training programs. The crew’s reaction allowed all of the personnel on board to be safely evacuated and the barge to be recovered afloat. A damage assessment and employee interviews were conducted promptly upon the barge’s arrival to port, and opportunities for improvement to our safety procedures have been implemented.

      In 2004, our worldwide Health, Safety and Environmental Management System maintained OH SAS-18001 certification with the Norwegian classification society Det Norske Veritas (DNV), which certifies that our health and safety processes meet or exceed international standards. Additionally in 2004, DNV granted our marine operations in North America ISO 9001:2000 accreditation, which is an internationally recognized accreditation. We achieved this accreditation by demonstrating that our Quality Management System consistently provides products and services that meet customer and applicable regulatory requirements. Our Houston support department and Southeast Asia operations have already achieved ISO 9001:2000 accreditation.

Seasonality, Cyclicality and Factors Affecting Demand

      The marine construction industry in the U.S. Gulf of Mexico and Latin America historically has been highly seasonal with contracts typically awarded in the spring and early summer and performed before the onset of adverse weather conditions in the winter. The scheduling of much of our work is affected by weather conditions and other factors, and many projects are performed within a relatively short period of time. We have attempted to offset the seasonality of our core operations in the U.S. Gulf of Mexico and offshore Mexico by performing marine construction projects in international areas offshore Southeast Asia, West Africa and the Mediterranean. We believe that these regions and the timing of customers’ awards will provide some measure of counter-seasonal balance to our operations in the U.S. Gulf of Mexico and offshore Mexico, but we cannot ensure that performing jobs in these areas will offset the seasonality of the work in the U.S. Gulf of

Mexico and offshore Mexico. Our contracts are typically of short duration in the U.S. Gulf of Mexico, being completed in periods as short as several days to periods of up to several months for projects involving our larger pipelay vessels. International construction projects typically have longer lead times and extended job durations.

      The demand for offshore construction services depends largely on the condition of the oil and gas industry and, in particular, the level of capital expenditures by oil and gas companies for developmental construction. These expenditures are influenced by:

Working Capital Requirements for Project Start-up Costs

      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. We may also be required to incur substantial costs to procure pipe and other materials prior to beginning construction. The timing of start-up costs incurred and progress billings on large contracts in accordance with contract terms and milestones and the collections of the related contract receivables may increase our working capital requirements. In addition, we may be required to use working capital to provide collateral to secure future performance bonds and letters of credit on large international contracts. These working capital requirements for project start-up costs may prohibit us from pursuing construction projects because we do not have enough working capital to support the project.

Customers and Geographic Information

      We have domestic and international operations in one industry, the marine construction service industry for offshore oil and gas companies and energy companies. During 2004, we provided marine construction services for domestic customers in the U.S. Gulf of Mexico and foreign customers in Latin America, Southeast Asia, West Africa and the Mediterranean. See Note 14 of our notes to consolidated financial statements for financial information on our geographic segments. The percentages of consolidated revenues from domestic and foreign customers for each of the last three years are as follows:

      In 2004, we provided offshore marine construction services to approximately 46 customers. Our customers consist of national oil companies, major and independent oil and gas companies, energy companies and their affiliates. Customers accounting for more than 10% of consolidated revenues for each of the last three years are as follows:

      The amount of revenue accounted for by a customer depends on the level of construction services required by the customer based on the size of its capital expenditure budget and our ability to bid for and obtain its work. Consequently, customers that account for a significant portion of contract revenues in one year may represent an immaterial portion of contract revenues in subsequent years.

Backlog

      As of March 28, 2005, our backlog supported by written agreements totaled approximately $170 million. We were awarded a contract for the installation of the West Africa Gas Pipeline during December 2004, which is included in our backlog. As of March 12, 2004, our backlog totaled approximately $203 million. Of the total backlog as of March 28, 2005, approximately $58 million is expected to be earned after 2005. As of December 31, 2004, our backlog supported by written agreements totaled approximately $166 million, compared to our backlog at December 31, 2003 of approximately $42 million. Our backlog has typically been lower in the fourth and first quarters of the year due to the seasonality and weather conditions in the U.S. Gulf of Mexico during the winter months. As we secure additional international projects, which tend to have longer lead times and result in earlier awards, our backlog may increase. Because of contract lead times, durations and seasonal issues, we do not consider backlog amounts to be a reliable indicator of annual revenues.

Insurance

      Our operations are subject to the inherent risks of offshore marine activity, including accidents resulting in injuries, the loss of life or property, damage to property, environmental mishaps, mechanical failures and collisions. We insure against these risks at levels we believe are consistent with industry standards. Our insurance premiums required to cover these risks significantly increased during the past three years due to losses in the insurance industry as a whole and specifically the energy and marine market, as well as our recent claims and loss experience. Insurance premiums may increase in the future.

      Builder’s Risk insurance is required to provide coverage for property while under construction. Builder’s Risk covers the contractor’s interest in materials at the job site before they are installed, materials in transit intended for the job and the value of the property being constructed until it is completed and accepted by the owner. Builder’s Risk deductibles and premiums have significantly increased during the past several years, and coverage is not available for all types of damage that may occur. In some cases, we may be responsible for part or all of the deductible. We may be required pursuant to contract terms to obtain and carry Builder’s Risk insurance, which will be factored into our contract bid pricing.

      Offshore employees, including marine crews, are covered by an insurance policy, which covers Jones Act exposures. Our self-insured retention on the Jones Act program for employees is currently $100,000 per claim.

      We purchase marine hull insurance to cover physical damage to our vessels, as well as carry protection and indemnity insurance for our employees. In August 2004, the underwriters on the policy of marine hull insurance purchased to cover physical damage to the Gulf Horizon during the tow to Israel to perform the IEC project filed an action for declaratory judgment in the English High Court seeking a declaration that the

policy is void due to a misrepresentation of the risk. See Item 3. “Legal Proceedings” for a discussion of this litigation.

      We believe that our insurance is adequate to cover the fair market value of our vessels and to cover the cost of repairs for damage to our vessels as a result of offshore risks. However, certain risks are either not insurable or insurance is available only at rates that are not economical. We cannot assure that any such insurance will be sufficient or effective under all circumstances or against all hazards to which we may be subject.

Competition

      The marine construction industry is highly competitive. Competition is influenced by such factors as price, availability and capability of equipment and personnel, and reputation and experience of management. Contracts for work in the U.S. Gulf of Mexico are typically awarded on a competitive bid basis one to three months prior to commencement of operations. Customers usually request bids from companies they believe are technically qualified to perform the project. Our marketing staff contacts offshore operators known to have projects scheduled to ensure an opportunity to bid for these projects. Although we believe customers consider, among other things, the availability and technical capabilities of equipment and personnel, the condition of equipment and the efficiency and safety record of the contractor, price is the primary factor in determining which qualified contractor is awarded the contract. Because of the lower degree of complexity and capital costs involved in shallow water marine construction activities, there are a number of companies with one or more pipelay barges capable of installing pipelines in shallow water.

      We currently compete in the Gulf in water depths of 200 feet or less primarily with Global Industries, Ltd., Torch Offshore, Inc. and Chet Morrison Contractors, Inc. Torch Offshore, Inc. filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 2005 and several of its vessels are now inoperative. In projects in water depths of 200 feet or more or where a higher degree of complexity is involved, competition generally is limited to Global Industries, Ltd. and from time to time other international companies that may have vessels operating in the U.S. Gulf of Mexico. We compete primarily with Offshore Specialty Fabricators, Inc., Manson Gulf L.L.C., Bisso Marine Co., Inc. and Diamond Services Corporation for the installation and removal of production platforms.

      Internationally, the marine construction industry is dominated by a small number of major international construction companies and government owned or controlled companies that operate in specific areas or on a joint venture basis with one or more of the major international construction companies. International contracts are typically awarded on a competitive bid basis and generally have longer lead times than those in the U.S. Gulf of Mexico. Our major competitors internationally are Global Industries, Ltd., J. Ray McDermott, S.A. and Hyundai Heavy Industries Company Ltd.

Regulation

      Many aspects of the offshore marine construction industry are subject to extensive governmental regulation. Our United States operations are subject to the jurisdiction of the United States Coast Guard, the National Transportation Safety Board and the Customs Service, as well as private industry organizations such as the American Bureau of Shipping. The Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards, and the Customs Service is authorized to inspect vessels at will.

      We are required by various governmental and quasi-governmental agencies to obtain permits, licenses and certificates in connection with our operations. We believe that we have obtained or will be able to obtain, when required, all permits, licenses and certificates necessary to conduct our business.

      In addition, we depend on the demand for our services from the oil and gas industry and, therefore, our business is affected by laws and regulations, as well as changing taxes and policies relating to the oil and gas industry. In particular, the exploration and development of oil and gas properties located on the continental shelf of the United States is regulated primarily by the Minerals Management Service. The Minerals

Management Service must approve and grant permits in connection with drilling and development plans submitted by oil and gas companies. Delays in the approval of plans and issuance of permits by the Minerals Management Service because of staffing, economic, environmental or other reasons could adversely affect our operations by limiting demand for services.

      Complying with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and changes to the NASDAQ rules, has required us to expend significant resources. As a result, we will continue to invest necessary resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses.

      Certain of our employees are covered by provisions of the Jones Act, the Death on the High Seas Act and general maritime law. These laws make liability limits under state workers’ compensation laws inapplicable and permit these employees to bring suit for job related injuries with generally no limits on our potential liability. See “Insurance” under this Item for a discussion of insurance coverage.

Environmental Regulation

      Our operations are affected by numerous federal, state and local laws and regulations relating to protection of the environment, including the Outer Continental Shelf Lands Act, the Federal Water Pollution Control Act of 1972 and the Oil Pollution Act of 1990. The technical requirements of these laws and regulations are becoming increasingly complex and stringent, and compliance is becoming increasingly difficult and expensive. Certain environmental laws provide for “strict liability” for remediation of spills and releases of hazardous substances and some provide liability for damages to natural resources or threats to public health and safety. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties, and criminal prosecution. It is possible that changes in the environmental laws and enforcement policies, or claims for damages to persons, property, natural resources or the environment could result in substantial costs and liabilities. Our insurance policies provide liability coverage for sudden and accidental occurrences of pollution and/or clean up and containment of the foregoing in amounts that are in accordance with customary industry practices.

Employees

      As of January 31, 2005, we had approximately 585 employees, including 465 operating personnel and 120 corporate, administrative and management personnel. Of our total employees, approximately 496 are employed domestically and approximately 89 are employed internationally. As of January 31, 2005, we had no employees that were unionized or employed subject to any collective bargaining or similar agreements. However, we may, in the future, employ union laborers if required by project specific labor agreements. We believe our relationship with our employees is good.

      Our ability to further expand our operations internationally and meet any increased demand for our services depends on our ability to increase our workforce. A significant increase in the wages paid by competing employers could result in a reduction in the skilled labor force and/or increases in the wage rates paid. If either of these circumstances takes place to the extent that such wage increases could not be passed on to our customers, our profitability could be impaired.

Company Information and Website

      Our principal executive offices are located at 2500 CityWest Boulevard, Suite 2200, Houston, Texas 77042. Our telephone number is (713) 361-2600. Our Internet address is www.horizonoffshore.com. Copies of the annual, quarterly and current reports that we file with the SEC, and any amendments to those reports, are available on our web site free of charge. The information posted on our web site is not incorporated into this Annual Report.

Properties

      Our corporate headquarters is located in Houston, Texas, in approximately 94,000 square feet of leased space under leases expiring from 2006 to 2008. In addition, we lease approximately 40,500 square feet of office space in various international locations under leases expiring from 2005 to 2008. These offices support our marine construction activities. We are seeking to consolidate the office space in our corporate headquarters in an effort to reduce our leased space by approximately 26,000 square feet.

      We own and operate a marine support base located on 26 acres of waterfront property in Sabine, Texas. This marine base includes 1,700 feet of bulkhead, 59,000 square feet of office and warehouse space, and two heliports. We also own a marine support and spool base and storage facility (for marine structures that may be salvaged by our marine fleet) on approximately 23 acres with approximately 6,000 feet of waterfront on a peninsula in Sabine Lake near Port Arthur, Texas with direct access to the Gulf. The facility has more than 3,000 feet of deepwater access for docking barges and vessels. We also lease approximately 19,250 square feet of land in Morgan City, Louisiana for inventory storage on a month-to-month basis.

Cautionary Statements

      Certain statements made in this Annual Report that are not historical facts are intended to be “forward-looking statements.” Such forward-looking statements may include statements that relate to:

      Also, you can generally identify forward-looking statements by such terminology as “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “estimate” or similar expressions. We caution you that such statements are only predictions and not guarantees of future performance or events. In evaluating these statements, you should consider various risk factors, including but not limited to the risks listed below. These risk factors may affect the accuracy of the forward-looking statements and the projections on which the statements are based.

      All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are beyond our control. Any one of such influences, or a combination, could materially affect the results of our operations and the accuracy of forward-looking statements made by us. Some important factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements include the following:

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

      A more detailed discussion of the foregoing factors follows:

      In light of our substantial debt and inability to generate sufficient cash flows from operations necessary to service it, we need to consummate the recapitalization transactions contemplated by the Recapitalization Agreement to exchange approximately $85 million of Subordinated Notes for equity. There can be no

assurance regarding our ability to complete these recapitalization transactions. If we are unable to complete these recapitalization transactions, we may have to consider alternatives to settle our existing liabilities with our limited resources, including seeking protection from creditors through bankruptcy proceedings.

      We currently have a significant amount of indebtedness. Subsequent to closing the financing transaction on March 31, 2004 and after repaying the CIT Group debt, we will have total indebtedness with a face value of approximately $246.3 million outstanding. In addition, we will continue to have a significant amount of indebtedness if we are able to close the recapitalization transactions.

      Our high level of debt could have important consequences, including the following:

      Our ability to service our existing debt, provide working capital and fund our capital expenditure requirements will depend on our ability to generate cash in the future. Our ability to generate cash in the future is subject to demand for construction services by the oil and gas industry as a result of increased levels of capital expenditures by oil and gas companies, the resolution of collection issues on various receivables, claims and the outcome of litigation, and to competitive, general economic, financial, and many other factors that may be beyond our control.

      It is of critical importance that we successfully perform our existing marine construction projects and continue to obtain additional projects that provide us with the cash flow necessary to support our operations. Depending on our success in obtaining and performing construction projects, we expect to continue to experience periodic cash demands that exceed our cash flow. We require substantial working capital to fund our business and meet debt service and other obligations. Adequate financing is of critical importance to provide us with the working capital required to support our operations. In the event we need to obtain any additional financing in the future, we will evaluate all available financing sources, including, but not limited to, the issuance of equity or debt securities, and in the case of international projects, corporate alliances and joint ventures. Funds raised through the issuance of additional equity may have negative effects on our stockholders, such as a dilution in percentage of ownership, and the rights, preferences or privileges of the new security holders may be senior to those of the common stockholders. If we need and are unable to obtain additional financing, management may be required to explore alternatives to reduce cash used by operating activities, including not pursuing construction projects that may otherwise appear to be promising to us due to the amount of working capital required to support the project. Failure to generate sufficient revenues, obtain additional financing or reduce cash used by operating activities would have a material adverse effect on our business, results of operations and financial condition.

      In the event that we do not meet our financial covenants, and we are unsuccessful in obtaining waivers of non-compliance, our lenders would have the right to accelerate our debt with them, and cross-default provisions could result in acceleration of other indebtedness. If this occurs, we will have to consider alternatives to settle our existing liabilities with our limited resources, including seeking protection from creditors through bankruptcy proceedings.

      Receiving an audit opinion with a “going concern” explanatory paragraph from our independent registered public accounting firm would adversely affect our operations, including our ability to obtain additional projects and generate sufficient cash flow from operations to meet our obligations. Concerns regarding our ability to continue operations as a result of receiving an audit opinion with an explanatory paragraph about our ability to continue as a going concern may cause our customers to decide not to conduct business with us or conduct business with us on terms that are less favorable than those customarily extended by them. In addition, our vendors, suppliers and subcontractors may determine to further reduce any trade credit they extend to us. Any of these factors could have a further material adverse affect on our business, financial condition, results of operations and cash flows. If we are unable to continue as a going concern, we will have to consider alternatives to settle our existing liabilities with our limited resources, including seeking protection from creditors through bankruptcy proceedings. As a result, investments in our securities may be highly speculative.

      A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. We must successfully perform our existing marine construction projects and continue to obtain additional projects that provide us with the cash flow necessary to meet our existing obligations. Our failure to generate positive cash flow from performing marine construction projects would materially and adversely affect our ability to continue as a going concern.

      We reported operating losses of $(25.1) million, $(69.7) million and $(1.3) million for the years ended December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004, we had an accumulated deficit of $(108.7) million. We expect to continue to incur net losses during 2005. We may not be profitable in the future. If we do achieve profitability in any period, we may not be able to sustain or increase such profitability on a quarterly or annual basis. We had cash flows provided by (used in) operations of $2.1 million for 2004, $(53.1) million in 2003 and $48.5 million in 2002. Insufficient cash flows may adversely affect our ability to fund capital expenditures and pay debt service and other contractual obligations. If revenue generated from our existing backlog or any new projects awarded is less than estimated, we experience difficulty in collecting contractual amounts, or operating expenses exceed our expectations, our business, results of operations and financial condition will be materially and adversely affected.

      During the second quarter of 2005, we intend to submit our remaining Pemex EPC 64 contract claim to arbitration in Mexico in accordance with the Rules of Arbitration of the International Chamber of Commerce. A failure to recover any amounts from Pemex in arbitration or our lawsuits against Williams and the

underwriters on the policy for marine hull insurance covering physical damage to the Gulf Horizon during the tow to Israel to perform the IEC project will place additional pressure on and adversely affect our liquidity. See the risk factor above under the caption “Our substantial indebtedness could adversely affect our financial health” for a discussion concerning liquidity and Item 3. “Legal Proceedings” for a discussion of these receivables and claims in litigation.

      In order to be able to issue common stock and the Series B Preferred Stock as required by the Recapitalization Agreement without the lengthy delay associated with obtaining stockholder approval required under the Nasdaq Marketplace Rules, we decided to delist our common stock from the NASDAQ National Market, effective as of the close of business on April 1, 2005. We expect that our common stock will begin trading on the NASD OTC Bulletin Board when the market opens on April 4, 2005. As a result, an investor may find it difficult to sell or obtain quotations as to the price of our common stock. Delisting could also adversely affect investors’ perception, which could lead to further declines in the market price of our common stock. Delisting will also make it more difficult and expensive for us to raise capital through sales of our common stock or securities convertible into our common stock.

      The demand for our services remained at low levels in the U.S. Gulf of Mexico during 2004 and depends on the level of capital expenditures by oil and gas companies for developmental construction on the U.S. continental shelf in the Gulf of Mexico. As a result, the cyclical nature of the oil and gas industry has a significant effect on our revenues and profitability. Historically, prices of oil and gas, as well as the level of exploration and developmental activity, have fluctuated substantially. Despite the increasing energy prices over the last several years, capital expenditures by oil and gas companies operating on the U.S. continental shelf in the Gulf of Mexico remained at reduced levels during 2004 due to the higher costs and economics of drilling new wells in a mature area. Oil and gas companies are looking to new prospects in international areas where the return on capital expenditures is potentially greater due to the larger, long-lived reservoirs and lower operating costs. The low levels of activity in drilling and exploration on the U.S. continental shelf in the Gulf of Mexico during 2004 caused our vessel utilization and profit margins to decrease and adversely affected our revenues and profitability. Any continued low level of activity in offshore drilling and exploration on the U.S. continental shelf in the Gulf of Mexico will further adversely affect our revenues and profitability. Any significant decline in the worldwide demand for oil and gas, or prolonged low oil or gas prices in the future, will likely depress development activity. We are unable to predict future oil and gas prices or the level of oil and gas industry activity.

      Substantially all of our projects are performed on a fixed-price basis or a combination of a fixed-price and day-rate basis in the case of extra work to be performed under the contract. From time to time, we also perform projects on a day-rate or cost-reimbursement basis. Changes in offshore job conditions and variations in labor and equipment productivity may affect the revenue and costs on a contract. These variations may affect our gross profits. In addition, typically during the summer construction season, and occasionally during the winter season, we bear the risk of interruptions, interferences and other delays caused by adverse weather conditions and other factors beyond our control. If the customer substantially increases the scope of our operations under the contract, we are subjected to greater risk of interruptions, interferences and other delays as was the case with the EPC 64 contract. When we perform extra work outside of the scope of the contract, we negotiate change orders and unapproved claims with our customers. In particular, unsuccessful negotiations of unapproved claims could result in decreases in estimated contract profit or additional contract losses and adversely affect our financial position, results of operations and our overall liquidity, as is the case with respect to our current claims against Pemex and Williams.

      We may be required to provide cash collateral to secure future performance bonds and letters of credit on large international contracts, as was the case with respect to the Pemex and IEC projects during 2004. If we are unable to secure performance bonds and letters of credit with cash collateral when and if they are required, we may not be able to bid on or obtain contracts requiring performance bonds or letters of credit, which could adversely affect our results of operations and financial condition.

      Our business is highly competitive because construction companies operating offshore compete vigorously for available projects, which are typically awarded on a competitive bid basis. Several of our competitors and potential competitors are larger and have greater financial and other resources than us that may provide them with an advantage in the bid award process in light of our current financial position. In addition, competitors with greater financial resources may be willing to sustain losses on certain projects to prevent further market entry by other competitors. Marine construction vessels have few alternative uses and high maintenance costs, whether they are operating or not. As a result, some companies may bid contracts at rates below our rates. These factors may adversely affect the number of contracts that are awarded to us and the profit margins on those contracts. Additionally, as a result of the competitive bidding process, our significant customers vary over time.

      Offshore construction involves a high degree of operational risk. Risks of vessels capsizing, sinking, grounding, colliding, burning and sustaining damage from severe weather conditions are inherent in offshore operations. These hazards may cause significant personal injury or property damage, environmental damage, and suspension of operations. In addition, we may be named as a defendant in lawsuits involving potentially large claims as a result of such occurrences. Our insurance premiums required to cover these risks have significantly increased during the past three years due to losses in the insurance industry and the recent increase in our loss experience. We believe that we maintain prudent insurance protection. However, there is no assurance that our insurance will be sufficient or effective under all circumstances. A successful claim for which we are not fully insured may have a material adverse effect on our revenues and profitability.

      The fire aboard the Gulf Horizon in May 2004 has negatively impacted revenues, profitability and liquidity. The underwriters on the insurance policy covering the Gulf Horizon while on tow have filed an action seeking to avoid coverage. The process of collecting any insurance proceeds has continued to impact our liquidity. Proceeds received from the insurance company will be used either to repair the vessel, or if the vessel ultimately is determined to be beyond repair, to repay debt collateralized by the vessel.

      Historically, the greatest demand for marine construction services in the U.S. Gulf of Mexico and offshore Mexico has been during the period from May to September. This seasonality of the construction industry in the U.S. Gulf of Mexico and offshore Mexico is caused both by weather conditions and by the historical timing of capital expenditures by oil and gas companies which accompanies this. As a result, revenues are typically higher in the summer months and lower in the winter months. Although we are pursuing business opportunities in international areas that we believe will offset the seasonality of our core operations in the U.S. Gulf of Mexico and offshore Mexico, there can be no assurance that obtaining projects in these areas will offset the seasonality of these operations. We have attempted to offset the seasonality of these operations by performing projects in international areas offshore Southeast Asia, West Africa and the Mediterranean.

      A key element of our strategy has been to expand our operations into selected international oil and gas producing areas, which we will continue to do. These international operations are subject to a number of risks inherent in any business operating in foreign countries including, but not limited to:

      As our international operations expand, the exposure to the above mentioned risks will increase. As a result, we could, at any one time, have a significant amount of our revenues generated by operating activity in a particular country. Therefore, our results of operations could be susceptible to adverse events beyond our control that could occur in the particular country in which we are conducting such operations.

      Additionally, our competitiveness in international areas may be adversely affected by regulations, including but not limited to regulations requiring:

      We cannot predict what types of the above events, if any, may occur.

      Our customers’ contract awards are subject to the size of their capital expenditure budget for construction for the year and a highly competitive bidding process. We believe that price is one of the primary factors in determining which qualified contractor is awarded the contract; therefore, we must maintain a strong working relationship with our customers. Our quality of customer service is dependent upon the availability and technical capabilities of our equipment and personnel, the condition of our equipment and our safety record. In addition, our project and marketing personnel maintain contact with customers to ensure customer satisfaction.

      Since our contract revenues are recognized on a percentage-of-completion basis, we periodically review contract revenue and cost estimates as the work progresses. Accordingly, adjustments are reflected in income in the period when such revisions are determined. These adjustments could result in a revision of previously reported profits, which may be significant.

      Our success depends on, among other things, the continued active participation of our executive officers and certain of our other key operating personnel. Our officers and personnel have extensive experience in the marine construction industry, both domestic and international. The loss of the services of any one of these persons could adversely impact our operations. During December 2004, our former President and Chief

Executive Officer terminated his employment pursuant to his employment agreement. Our principal executive officer is currently our Chief Restructuring Officer, and we are conducting an executive search for a Chief Executive Officer.

      Our operations are subject to various governmental regulations, violations of which may result in civil and criminal penalties, injunctions, and cease and desist orders. In addition, some environmental statutes may impose liability without regard to negligence or fault. Although our cost of compliance with these laws has to date been immaterial, the laws are changed frequently. Accordingly, it is impossible to predict the cost or impact of these laws on our future operations.

      We depend on demand for our services from the oil and gas industry, and this demand may be affected by changing tax laws and oil and gas regulations. As a result, the adoption of laws that curtail oil and gas production in our areas of operation may adversely affect us. We cannot determine to what extent our operations may be affected by any new regulations or changes in existing regulations.

      Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, has increased our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. In particular, we have incurred and expect to continue to incur additional general and administrative expense as we implement and report under Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our independent auditors to attest to, our internal controls. The compliance requirements of these new rules could also result in continued diversion of management’s time and attention, which could prove to be disruptive to normal business operations. Further, the impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business.

      We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

      Terrorist activities, anti-terrorist efforts and other armed conflict involving the U.S. may adversely affect the U.S. and global economies and could prevent us from meeting our debt service, financial and other contractual obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for marine construction services. Oil and gas related facilities and assets, including our marine equipment, could be direct targets for terrorists attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is damaged or destroyed. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all. Our efforts to expand internationally may increase these risks.

      In July 2003, we formally submitted total claims to Pemex of approximately $78 million that included unapproved claims for extra work related to interferences, interruptions and other delays, as well as claims for additional scope of work performed. Since that time, our negotiations with Pemex have resulted in us settling the non-weather claims for $9.1 million. We intend to submit the remaining claim related to interruptions due to adverse weather conditions to arbitration in Mexico in accordance with the Rules of Arbitration of the International Chamber of Commerce during the second quarter of 2005. As of December 31, 2004, the carrying value of this claim included in costs in excess of billings totaled $18.5 million, net of the $33.1 million allowance for doubtful costs in excess of billings. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Accounts Receivable.”

      On September 12, 2003, we filed a lawsuit in the 295th Judicial District of the District Court for Harris County, Texas against Williams for whom we provided marine construction services. The lawsuit asserts a claim for damages for breach of contract and wrongful withholding of amounts due to us for services provided under the contract and a claim related to Williams’ portion of the insurance deductible under the Builder’s Risk insurance policy for the contract totaling $12.3 million. The lawsuit seeks specific compensatory damages and fees and costs. Williams has filed a counter-claim against us for alleged breach of contract. We have not been able to resolve our dispute with Williams through mediation, and the court has reset the trial for October 2005.

      On May 18, 2004, our pipelay barge, the Gulf Horizon, caught fire while on tow from the U.S Gulf of Mexico to Israel to perform the IEC project. A damage assessment was performed, and based on such assessment, we expect that the repair costs will equal or exceed the $28.0 million insured value of the vessel and it may ultimately be declared a constructive total loss. However, in August 2004, the underwriters on the policy for hull insurance purchased to cover physical damage to the Gulf Horizon during the tow filed an action for declaratory judgment in the English High Court seeking a declaration that the policy is void from its inception due to a misrepresentation of the risk. We initially filed suit in Harris County, Texas seeking recovery of the full amount of the policy, $28.0 million, plus sue and labor expenses, and damages for wrongful denial of the claim. Since then, the English High Court has ruled that it has exclusive jurisdiction over the matter, and our action in Texas has been dismissed without prejudice. We have now filed a counter claim against the underwriters for $31.0 million, and we expect a trial to be set for a date in late 2005.

      In March 2005, we settled our lawsuit against Iroquois for breach of contract and withholding of amounts due to us for services performed under the contract for $21.5 million. In conjunction with this settlement, we also reached agreement with several of our large subcontractors on this project to reduce the amounts owed to them by $1.5 million. After providing for payments of $16.7 million to subcontractors, we collected $4.8 million.

      We are involved in various routine legal proceedings primarily involving claims for personal injury under the Jones Act and general maritime laws which we believe are incidental to the conduct of our business. We believe that none of these proceedings, if adversely determined, would have a material adverse effect on our business or financial condition.

      None.

PART II

      Our common stock will trade on the NASDAQ National Market under the symbol “HOFF” until the close of business on April 1, 2005. We have requested that our common stock be delisted from the NASDAQ National Market at that time. We expect that our common stock will begin trading on the NASD OTC Bulletin Board on April 4, 2005.

      The following table sets forth the high and low closing bid prices per share of our common stock, as reported by the NASDAQ National Market, for the periods indicated.

      At February 28, 2005, we had approximately 41 holders of record of our common stock.

      We intend to retain all of the cash our business generates to meet our working capital requirements, fund operations and reduce our substantial indebtedness. We do not plan to pay cash dividends on our common stock in the foreseeable future. In addition, our debt agreements prevent us from paying dividends or making other distributions to our stockholders.

      The following table provides information regarding common stock authorized for issuance under our equity compensation plans as of December 31, 2004:

      None.

      The selected financial data for the five-year period ended December 31, 2004 is derived from our audited financial statements. You should read the information below together with “Management’s Discussion and

Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included in this Annual Report.

      You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ from those expressed or implied by the forward-looking statements. See “Cautionary Statements.”

General

      We provide marine construction services for the offshore oil and gas and other energy related industries in the U.S. Gulf of Mexico, Latin America, Southeast Asia, West Africa and the Mediterranean.

      Our primary services include:

      The demand for offshore construction services depends largely on the condition of the oil and gas industry and, in particular, the level of capital expenditures by oil and gas companies for developmental construction. These expenditures are influenced by:

      Historically, oil and gas prices and the level of exploration and development activity have fluctuated substantially, impacting the demand for pipeline and marine construction services. Factors affecting our profitability include competition, equipment and labor productivity, contract estimating, weather conditions and other risks inherent in marine construction. The marine construction industry in the U.S. Gulf of Mexico and offshore Mexico is highly seasonal as a result of weather conditions with the greatest demand for these services occurring during the second and third calendar quarters of the year. International shallow water areas offshore Southeast Asia and the Mediterranean are less cyclical and are not impacted seasonally to the degree the U.S. Gulf of Mexico and offshore Mexico is impacted. The West Africa work season helps to offset the decreased demand during the winter months in the U.S. Gulf of Mexico and offshore Mexico.

Overview

      During the past three years, we have experienced operating and net losses. Our liquidity has been negatively impacted by our inability to collect outstanding receivables and claims from Pemex and Williams, and the delays in collecting the receivables and claims from Iroquois that were settled in March 2005. Also during 2004, our liquidity has been impacted by low utilization of vessels, a fire on the Gulf Horizon in May 2004 and our inability to secure performance bonds and letters of credit on large international contracts without utilizing cash collateral. We have closely managed cash due to our lack of liquidity and negotiated extended payment schedules with our large trade payable creditors and subcontractors. In order to meet our liquidity needs during the past three years, we have incurred a substantial amount of debt. During 2004, we issued an aggregate of $113.7 million, including paid in-kind interest, face value of Subordinated Notes in order to meet our immediate liquidity needs. At December 31, 2004, we had approximately $232.8 million face amount of total outstanding debt.

      In light of our inability to repay our substantial debt maturing in 2005 and immediate need for working capital financing necessary to continue our operations, our only alternative to commencing bankruptcy proceedings was to proceed to implement our previously announced recapitalization plan with the holders of our Subordinated Notes in two steps. The first step consisted of closing the Senior Credit Facilities, and the

second step consists of a debt for equity exchange. See “Liquidity and Capital Resources — Recent Events” under this item for detailed discussion of this financing transaction and the Recapitalization Agreement.

      At December 31, 2004, $42.2 million of our debt is classified as current because it matures within the next twelve months or because the asset securing the debt is classified as current. Included in current maturities of long-term debt is an aggregate of $29.9 million of outstanding indebtedness under our two revolving credit facilities with Southwest Bank, which matured and were repaid in February 2005, and under our revolving credit facility with CIT Group, which will be repaid with proceeds from the Senior Credit Facilities.

      We had an operating loss for 2004 of $(25.1) million. Gross profit was $27.8 million (10.9% on revenues of $254.2 million) for the year ended December 31, 2004. Gross profit improved for 2004 due to revenues and gross profits related to our IEC and Pemex contracts, which accounted for 36% and 23% of consolidated revenues for the year ended December 31, 2004, respectively. Offsetting the improvement in gross profit is a $6.4 million impairment loss on the carrying value of our inventory of production platforms and other structures, which is included in cost of contract revenues of our domestic operations for the fourth quarter of 2004. In addition, our domestic operations generated operating losses, as the level of contract activity and associated revenues were not sufficient to support our operating cost structure in this geographic area. The continuing low levels of vessel utilization due to competitive market conditions, a decrease in demand for our services and unusually adverse weather in the U.S. Gulf of Mexico during the second quarter of 2004 were contributing factors to the loss from our domestic operations. Approximately 60% of our work in the U.S. Gulf of Mexico during the fourth quarter of 2004 is attributable to repair work on pipelines and structures that were damaged by Hurricane Ivan in September 2004.

      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. Despite the increasing energy prices over the last several years, capital expenditures by oil and gas companies operating on the U.S. continental shelf in the Gulf of Mexico remained at reduced levels during 2004 due to the higher costs and economics of drilling new wells in a mature area. Oil and gas companies are looking to new prospects in international areas where the return on capital expenditures is potentially greater due to the larger, long-lived reservoirs and lower operating costs. The resulting competitive market conditions in response to lower levels of developmental construction have decreased our vessel utilization and profit margins in the U.S. Gulf of Mexico and offshore Mexico and adversely affected our revenues and profitability. In general, our profit margins for marine construction have declined over the past five years.

      The Sea Horizon and the Canyon Horizon mobilized to Israel and arrived at the end of July 2004 to begin work on the installation of a 30” diameter natural gas transmission pipeline for IEC. The project included the transportation, installation, burial and precommissioning of approximately 56 miles of 30” diameter pipeline with landfalls at three locations, along with a lateral 3 miles of 12” diameter pipeline. We recognized $91.2 million in revenues on the IEC project during 2004. This project was substantially completed in January 2005. We expect to complete the testing and commissioning phase of this project during the third quarter of 2005. The Sea Horizon will mobilize in March 2005 and is expected to begin work on the West Africa Gas Pipeline in August 2005.

      Our Latin American operations improved during 2004 related to work on a contract for the engineering and procurement of 24” diameter pipe and the construction and installation of several pipelines in the Bay of Campeche for Pemex. The Lone Star Horizon mobilized and began work in late July 2004 to lay and trench pipelines ranging in size from 10” diameter to 24” diameter and perform one shore approach. The Atlantic Horizon mobilized in mid August 2004 to complete minor trenching and perform tie-ins on the Pemex project. We recognized $58.2 million in contract revenues related to this project during 2004. The Lone Star Horizon and the Atlantic Horizon completed their work on the Pemex project and mobilized back to the U.S. Gulf of Mexico in October 2004. The remaining work, primarily hook-ups, was completed with a chartered dive support vessel during the fourth quarter of 2004.

      Construction activities related to the two-year pipeline and structural installation program offshore Nigeria were completed in the second quarter of 2004. Our customer in Nigeria did not exercise their option,

which expired in September 2004 pursuant to the contract, for a third year of work. During the third quarter of 2004, we completed a contract in West Africa for the repair of a 26” diameter export pipeline. Revenues from our West Africa operations of $17.4 million accounted for 6.8% of our consolidated revenues for 2004. In December 2004, we signed a contract with West Africa Gas Pipeline Company Limited (WAPCo) for the installation of the West Africa Gas Pipeline. WAPCo is a consortium of Chevron Texaco, Shell Overseas Holding, Ltd., Nigerian National Petroleum Corporation and Takoradi Power Company Limited of Ghana. The Sea Horizon will mobilize and is expected to begin work on this project in August 2005 to install approximately 360 miles of 20” diameter pipeline and 10 miles of 18” diameter pipeline. The Brazos Horizon is expected to begin work on this project in October 2005 to install four near shore sections of pipeline ranging from 8” diameter to 20” diameter and to complete approximately 22 miles of 8” diameter to 10” diameter lateral pipeline. The contract is expected to be substantially complete in October 2006.

      We recorded a $6.4 million impairment charge to cost of contract revenues related to our inventory of production platforms and other structures during the fourth quarter of 2004, which reduced our gross profit by 2.5% of contract revenues. There have been no significant sales of inventory since 2002. The carrying value of our inventory of production platforms and other structures was impaired as a result of the competitive market for the fabrication of new structures and the availability of salvaged structures combined with the continued lack of demand for production platforms and other structures in the U.S.

      In addition to the impairment loss on inventory, we recorded impairments and reserves totaling $22.3 million, which also increased the operating loss for 2004. During the fourth quarter of 2004, we recorded a $5.7 million reserve on the Iroquois receivable due to the settlement of our litigation with Iroquois for less than the carrying value of the claims and receivables. The $13.3 million impairment of property, equipment and intangibles includes a net impairment loss of $11.2 million on the Gulf Horizon due to a fire in May 2004 while on tow from the U.S. Gulf of Mexico to Israel, a $1.1 million impairment loss on the Cajun Horizon resulting from the removal of this vessel from service and a $1.0 million impairment of goodwill. During the third quarter of 2004, the underwriters on the policy of marine hull insurance purchased to cover physical damage to the Gulf Horizon during the tow filed a declaratory judgment action in England seeking a declaration that the policy was void from its inception. The underwriters claim that we did not adequately describe the work to be performed by the riding crew of the barge while on tow. As a result of the litigation of this claim, we have not recognized the recovery of losses under this policy, and we have recorded a net impairment loss of $11.2 million on the Gulf Horizon to reflect its current market value of $2.0 million as of December 31, 2004. Due to the low utilization of our vessels servicing the U.S. Gulf of Mexico, we removed the Cajun Horizon from service. During the fourth quarter, we determined that we will cease operations of one of our Mexican subsidiaries and recognized impairment of the remaining goodwill associated with that entity. We recorded a charge of $3.3 million as impairment loss on assets held for sale during 2004 to reduce the net carrying value of these assets to their fair value, less the estimated cost to sell the assets. During the second quarter of 2004, we implemented a plan to sell the Phoenix Horizon (a marine construction vessel), two dive support vessels and a cargo barge due to the sustained difficult economic environment and depressed market for the marine construction industry throughout 2003 and 2004. Based upon our marketing of these assets for sale, discussions with potential buyers have indicated a decline in market value of two of the assets held for sale. During the fourth quarter of 2004, we completed the sale of the cargo barge and received net proceeds of approximately $745,000 which was used to repay a portion of our CIT Group revolving credit facility and resulted in a $7,000 gain on the sale.

      The timing and collection of progress payments, our ability to negotiate payment terms with our trade payable creditors and large subcontractors, our ability to secure additional projects and our ability to stay on budget and meet our cash flows for our projects is of critical importance to provide sufficient liquidity for operations. As of March 28, 2005, our backlog totaled approximately $170 million compared to our backlog at March 12, 2004 of approximately $203 million. Of the total backlog as of March 28, 2005, approximately $58 million is not expected to be earned until after 2005.

Critical Accounting Policies And Estimates

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

      The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, assuming Horizon continues as a going concern, which contemplates the realization of the assets and the satisfaction of liabilities in the normal course of business.

      Our significant accounting policies are described in Note 1 of our notes to consolidated financial statements. We consider certain accounting policies to be critical policies due to the significant judgments, subjective and complex estimation processes and uncertainties involved for each in the preparation of our consolidated financial statements. We believe the following represent our critical accounting policies.

      We have discussed our critical accounting policies and estimates, together with any changes therein, with the audit committee of our board of directors.

      Contract revenues for construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to the total estimated costs at completion for each contract. This percentage is applied to the estimated revenue at completion to calculate revenues earned to date. We consider the percentage-of-completion method to be the best available measure of progress on these contracts. We follow the guidance of AICPA Statement of Position (SOP) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” relating to the use of the percentage-of-completion method, estimating costs and claim recognition for construction contracts. Estimating costs to complete each contract pursuant to SOP 81-1 is a significant variable in determining the amount of revenues earned to date. We continually analyze the costs to complete each contract and recognize the cumulative impact of revisions in total cost estimates in the period in which the changes become known. In determining total costs to complete each contract, we apply judgment in the estimating process. Contract revenue reflects the original contract price adjusted for agreed upon change orders and unapproved claims. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. We recognize unapproved claims only when the collection is deemed probable and if the amount can be reasonably estimated for purposes of calculating total profit or loss on long-term contracts. We record revenue and the unbilled receivable for claims to the extent of costs incurred and to the extent we believe related collection is probable and include no profit on claims recorded. Changes in job

performance, job conditions and estimated profitability, including those arising from claims and final contract settlements, may result in revisions to estimated costs and revenues and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset “Costs in excess of billings” represents the costs and estimated earnings recognized as revenue in excess of amounts billed as determined on an individual contract basis. The liability “Billings in excess of costs” represents amounts billed in excess of costs and estimated earnings recognized as revenue on an individual contract basis.

      For some service contracts related to the salvage of production platforms, revenues are recognized under SEC Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” and No. 104, “Revenue Recognition,” when all of the following criteria are met; persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price is fixed or determinable; and collectibility is reasonably assured. Revenues from salvage projects sometimes include non- cash values assigned to structures that are received from time to time as partial consideration for services performed. In assigning values to structures received, we apply judgment in estimating the fair value of salvage inventory.

      The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion methodologies affect the amounts reported in our consolidated financial statements. If our business conditions were different, or if we used different assumptions in the application of this accounting policy, it is likely that materially different amounts could be reported in our financial statements. If we used the completed contract method to account for our revenues, our results of operations would reflect greater variability in quarterly revenues and profits as no revenues or costs would be recognized on projects until the projects were substantially complete, which for larger contracts may involve deferrals for several quarters.

      We have significant investments in billed and unbilled receivables as of December 31, 2004. Billed receivables represent amounts billed upon the completion of small contracts and progress billings on large contracts in accordance with contract terms and milestones. Unbilled receivables on fixed-price contracts, which are included in costs in excess of billings, arise as revenues are recognized under the percentage-of-completion method. Unbilled amounts on cost-reimbursement contracts represent recoverable costs and accrued profits not yet billed. Allowances for doubtful accounts and estimated nonrecoverable costs primarily provide for losses that may be sustained on unapproved change orders and claims. In estimating the allowance for doubtful accounts, we evaluate our contract receivables and costs in excess of billings and thoroughly review historical collection experience, the financial condition of our customers, billing disputes and other factors. When we ultimately conclude that a receivable is uncollectible, the balance is charged against the allowance for doubtful accounts. As of December 31, 2004 and 2003, the allowance for doubtful contract receivables was $5.7 million and $0, respectively, and the allowance for doubtful costs in excess of billings was $33.1 million and $33.1 million, respectively. Reserve for claims and receivables for the years ended December 31, 2004, 2003 and 2002 was $5.7 million, $33.1 million and $0, respectively. There were no receivables charged against the allowances for doubtful accounts for the years ended December 31, 2004, 2003 or 2002.

      In July 2003, we formally submitted claims to Pemex of approximately $78 million with a carrying value of $60.7 million. During the fourth quarter of 2003, we reserved $33.1 million related to these outstanding claims. During 2004, we collected $9.1 million for a portion of the non-weather related claims. At December 31, 2004, the carrying value of the remaining claim, included in costs in excess of billings, totaled $18.5 million.

      In March 2005, we reached a settlement with Iroquois and collected $21.5 million. In connection with this settlement, we reserved $5.7 million at December 31, 2004 to reflect the amount of the claim we expected to collect.

      We negotiate change orders and unapproved claims with our customers. In particular, unsuccessful negotiations of unapproved claims could result in decreases in estimated contract profit or additional contract losses, while successful claims negotiations could result in increases in estimated contract profit or recovery of previously recorded contract losses. Any future significant losses on receivables would further adversely affect our financial position, results of operations and our overall liquidity.

      Other assets consist principally of capitalized dry-dock costs, prepaid loan fees, goodwill and deposits. Deposits consist of security deposits on office leases as of December 31, 2004 and 2003.

      Dry-dock costs are direct costs associated with scheduled major maintenance on our marine vessels and are capitalized and amortized over a five-year cycle. We incurred and capitalized dry-dock costs of $11.9 million in 2004, $4.9 million in 2003 and $5.8 million in 2002. The significant dry-dock costs capitalized for 2004 relate primarily to the vessels utilized to perform the work awarded under the IEC and Pemex contracts. Major dry-dock costs on the Canyon Horizon prior to its mobilization to Israel, as well as regulatory dry-dockings for the American Horizon and the Pecos Horizon required by the U.S. Coast Guard and the American Bureau of Shipping, were completed during 2004. As of December 31, 2004, capitalized dry-dock costs totaled $17.0 million.

      Loan fees paid in connection with new loan facilities are deferred and amortized over the term of the respective loans. The amortization of the deferred loan fees is recorded as interest expense in the accompanying consolidated statements of operations. In connection with the issuance of the 16% Subordinated Notes, we incurred and capitalized loan fees of $6.3 million. Additionally, we incurred and capitalized loan fees of $4.4 million in connection with the issuances of the 18% Subordinated Notes in May, September and November 2004. We wrote-off $800,000 of the unamortized portion of deferred loan fees for the 18% Subordinated Notes related to the prepayment of these notes with the proceeds of $4.5 million collected from Pemex, which is included as loss on debt extinguishment in the accompanying consolidated statements of operations for the year ended December 31, 2004.

      In August 2002, we acquired the remaining 51% equity interest in an entity in Mexico for $1.0 million cash. We previously had a 49% equity interest in this entity and included its accounts in our consolidated financial statements as we exercised effective control over the entity’s operations. This acquisition qualified us to bid on and perform projects reserved for national companies in Mexico without a locally domiciled partner. We recorded $1.0 million of goodwill in connection with acquiring the equity interest, which is nondeductible for tax purposes, and is included in other long-term assets at December 31, 2003. During the fourth quarter of 2004, we determined that we will cease operations of this entity, as we have established a new entity in Mexico to secure and perform current projects in Mexico. During the fourth quarter of 2004, we recognized a $1.0 million impairment charge for the remaining book value of goodwill related to this acquisition. The impairment charge is presented under impairment of property, equipment and intangibles on our consolidated statements of operations and is included in our Latin American operations.

      We use the units-of-production method to calculate depreciation on our major barges and vessels to approximate the wear and tear of normal use. The annual depreciation based on utilization of each vessel will not be less than 25% of annual straight-line depreciation, and the cumulative depreciation based on utilization of each vessel will not be less than 50% of cumulative straight-line depreciation. Accelerated depreciation methods are used for tax purposes. The useful lives of our major barges and vessels range from 15 years to 18 years. Upon sale or retirement, the cost of the equipment and accumulated depreciation are removed from the accounts and any gain or loss is recognized. If we alternatively applied only a straight-line depreciation method, less depreciation expense would be recorded in periods of high vessel utilization and more depreciation expense would be recorded in periods of low vessel utilization. We believe the method we use better matches costs with the physical use of the equipment.

      When events or changes in circumstances indicate that assets may be impaired, we review long-lived assets for impairment and evaluate whether the carrying value of the asset may not be recoverable according to Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Changes in our business plans, a significant decrease in the market value of a long-lived asset, a change in the physical condition of a long-lived asset or the extent or manner in which it is being used, or a severe or sustained downturn in the oil and gas industry, among other factors, are considered triggering events. The carrying value of each asset is compared to the estimated undiscounted future net cash flows for each asset or asset group. If the carrying value of any asset is more than the estimated undiscounted future net cash flows expected to result from the use of the asset, a write-down of the asset to estimated fair market value must be made. When quoted market prices are not available, fair value must be determined based upon other valuation techniques. This could include appraisals or present value calculations of estimated future cash flows. In the calculation of fair market value, including the discount rate used and the timing of the related cash flows, as well as undiscounted future net cash flows, we apply judgment in our estimates and projections, which could result in varying levels of impairment recognition.

      During 2004, we recorded a net impairment loss of $11.2 million on the Gulf Horizon and related assets as a result of a fire it sustained while on tow to Israel and because the insurance claim is in litigation, a $1.1 million impairment loss on the Cajun Horizon as a result of our decision to remove this vessel from service and a $3.3 million impairment loss on assets held for sale as discussions with potential buyers have indicated a decline in market value of these assets.

      At December 31, 2004, we had two stock-based compensation plans. Pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123”, we have elected to account for stock-based employee compensation under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. In January 2003, we granted options to three former directors to purchase 15,320 shares of common stock at an exercise price equal to the market price of the common stock on the date of grant. These options vested immediately, and $56,000 was recorded as compensation expense in the statements of operations during the first quarter of 2003. Also, we recorded an additional $156,000 as compensation expense in the statements of operations during the second quarter of 2003 related to the remeasurement of options in connection with the resignation of a key employee. Except for the compensation expense recorded above, no stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For stock-based compensation grants to non-employees, we recognize as compensation expense the fair market value of such grants as calculated pursuant to SFAS No. 123, amortized ratably over the lesser of the vesting period of the respective option or the individual’s expected service period. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)), which mandates expense recognition for stock options and other types of equity-based compensation based on the fair value of the options at the grant date. We will begin to recognize compensation expense for stock options in the third quarter of 2005, as discussed below under “Recent Accounting Pronouncements.”

      We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of income tax expense for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. The current provision for income tax is based upon the current tax laws and our interpretation of these laws, as well as the

probable outcomes of any foreign or domestic tax audits. The value of our net deferred tax asset is dependent upon our estimates of the amount and category of future taxable income and is reduced by the amount of any tax benefits that are not expected to be realized. In September 2004, we received a $784,000 refund of alternative minimum tax paid in prior years due to the enactment of the Job Creation and Worker Assistance Act of 2002, which changed the calculation of the alternative minimum tax net operating loss deduction and allowed us to use a portion of our alternative minimum tax net operating loss to be deducted from alternative minimum taxable income generated in prior years. We reduced our deferred tax asset related to alternative minimum tax and accordingly reduced the valuation allowance associated with the realization of this deferred tax asset. For the years ended December 31, 2004, 2003 and 2002, a valuation allowance of $19.3 million, $23.1 million and $0 was charged as income tax expense against the net deferred tax assets that are not expected to be realized due to the uncertainty of future taxable income, respectively. Our valuation allowance as of December 31, 2004 is approximately $42.4 million. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, thus materially impacting our financial position and results of operations. Certain past and anticipated future changes in ownership could limit our ability to realize portions of the loss carryforwards.

Recent Accounting Pronouncements

      In December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense to be recognized for all share-based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by SFAS No. 123. Generally, the approach to determining fair value under the original pronouncement has not changed. However, there are revisions to the accounting guidelines established, such as accounting for forfeitures that will change our accounting for stock-based awards in the future.

      SFAS No. 123(R) must be adopted in the first interim or annual period beginning after June 15, 2005. The statement allows companies to adopt its provisions using either of the following transition alternatives:

      We currently plan to adopt SFAS No. 123(R) on July 1, 2005 using the modified prospective method. This change in accounting is not expected to materially impact our financial position. However, because we currently account for share-based payments to our employees using the intrinsic value method, our results of operations have not included the recognition of compensation expense for the issuance of stock option awards. Had we applied the fair-value criteria established by SFAS No. 123(R) to previous stock option grants, the impact to our results of operations would have approximated the impact of applying SFAS No. 123, which was an increase to net loss of approximately $1.0 million in 2004, $2.4 million in 2003 and $3.1 million in 2002. The impact of applying SFAS No. 123 to previous stock option grants is further summarized in Note 1 of the notes to consolidated financial statements. We currently expect the recognition of compensation expense for stock options issued and outstanding at December 31, 2004 to reduce our 2005 net income by approximately $0.4 million.

      We will be required to recognize expense related to stock options and other types of equity-based compensation beginning in 2005 and such cost must be recognized over the period during which an employee is required to provide service in exchange for the award. The requisite service period is usually the vesting period. The standard also requires us to estimate the number of instruments that will ultimately be issued,

rather than accounting for forfeitures as they occur. Additionally, we may be required to change our method for determining the fair value of stock options.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” an amendment of APB No. 29. This amendment eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary exchanges occurring in fiscal periods beginning after the date of this statement is issued. Retroactive application is not permitted. We are analyzing the requirements of this new statement and believe that its adoption will not have a significant impact on our financial position, results of operations or cash flows.

      During December 2004, the FASB issued Staff Position FSP No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2), which provides guidance on accounting for the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. Based on our analysis to date, we are not yet in a position to decide on whether, or to what extent, we might repatriate foreign earnings under the Jobs Act.

Results of Operations

      Information relating to Horizon’s operations follows (in millions):

Year Ended December 31, 2004 Compared To The Year Ended December 31, 2003

      Contract revenues were $254.2 million for 2004, compared to $270.3 million for 2003. Revenues decreased 6.0% compared with last year. The decline in revenues is primarily attributable to a decrease in pricing of services for marine construction in the U.S. Gulf of Mexico due to a highly competitive market during 2004, the sustained difficult economic environment and the depressed market in the marine construction industry for the U.S. Gulf of Mexico. Our customer mix in 2004 changed significantly compared to the mix of customers in 2003. The decline in domestic — other revenues reflects our lack of work in the Northeastern U.S. during 2004 compared to 2003. For 2003, revenues generated in the Northeastern U.S. accounted for 40% of consolidated revenues. Our domestic — U.S. Gulf of Mexico revenues and gross profits were further reduced by unusually adverse weather conditions during the second quarter of 2004; however, the named storms and hurricanes in the U.S. Gulf of Mexico during the third quarter of 2004 did not significantly impact vessel utilization and profit margins because we were paid contract rates for weather and were subsequently able to complete our projects under construction. The award and execution of our first project in the Mediterranean for IEC during 2004 accounted for a significant portion of our consolidated revenues for 2004. Also, revenues from our Latin American operations increased significantly for 2004 compared to 2003. Revenues related to the IEC contract accounted for 36% and the Pemex contract accounted for 23% of consolidated revenues for 2004. Construction activities related to our project in Southeast Asia accounted for 5.7% of our consolidated revenues for 2004. The diversion of the Sea Horizon from its scheduled work in Southeast Asia to work on the IEC project due to the loss of the Gulf Horizon as a result of a fire adversely impacted revenues and gross profit. Construction activities related to the two-year pipeline and structural installation program in Nigeria were completed during the second quarter of 2004; however, we completed a contract for the repair of a 26” diameter export pipeline in Nigeria for the same customer during the third quarter of 2004. Revenues from our West Africa operations accounted for 6.8% of our consolidated revenues for 2004.

      Gross profit was $27.8 million (10.9% of contract revenues) for 2004 compared with a gross profit of $6.5 million (2.4% of contract revenues) for 2003. The improvement in gross profit for 2004 is attributable to our operations in the Mediterranean and Latin American areas. We recorded a $6.4 million impairment charge to cost of contract revenues of our domestic operations related to our inventory of production platforms and other structures during the fourth quarter of 2004, which reduced our gross profit by 2.5% of contract revenues. Our domestic operations generated losses, as we did not have a sufficient level of contract activity and associated revenues to support our operating cost structure. In addition, domestic gross profit was negative as a result of the continuing low levels of vessel utilization due to competitive market conditions in the U.S. Gulf of Mexico. Also, we were unable to stay on budget for two projects in the U.S. Gulf of Mexico during the first and second quarters of 2004 as we were not as productive in executing the projects as originally estimated when the work was bid, resulting in lower gross profit. The construction activities related to the two-year pipeline and structural installation program in Nigeria and the repair work on a 26” diameter pipeline resulted in a gross profit for this region for 2004. Our Southeast Asia operations generated a loss as the Sea Horizon was mobilized to work on the IEC contract offshore Israel in July 2004.

      Selling, general and administrative expenses were $30.7 million (12.1% of contract revenues) for 2004, compared with $21.7 million (8.0% of contract revenues) for 2003. Selling, general and administrative expenses increased for 2004 compared to 2003 primarily due to additional legal costs of $1.7 million associated with our ongoing contract disputes and related litigation, $2.0 million of costs incurred to recover the Gulf Horizon subsequent to a fire sustained while on tow to Israel and to obtain repair estimates, and $0.5 million of costs incurred as we implement Section 404 of the Sarbanes-Oxley Act. During 2004, we have also incurred $0.6 million in legal costs associated with restructuring our existing debt and $1.8 million related to professional advisor and consulting fees associated with the restructuring of our existing debt. We recorded net

severance and restructuring costs of $2.1 million primarily related to the severance benefit of our former president under his amended employment agreement and another senior employee termination during 2004. During 2003, we recorded charges of $680,000 related to severance and other costs in connection with the resignation of a key employee and additional costs related to a consulting firm in Mexico assisting us in the administration of our Pemex claims.

      During the fourth quarter of 2004, we recorded a reserve of $5.7 million related to the pending settlement of our litigation with Iroquois for less than the carrying value of the claims and receivables of $27.2 million. In March 2005, we reached a settlement with Iroquois and collected gross proceeds of $21.5 million. See Item 3. “Legal Proceedings” for a discussion of the Iroquois settlement.

      During the fourth quarter of 2003, we recorded a reserve of $33.1 million related to our outstanding EPC 64 contract claims against Pemex since we have been unsuccessful in resolving such claims. Since the ultimate amount and timing of payment of these claims is uncertain, we recorded this reserve for the outstanding receivable to reflect our best estimate of the amount that we believe we will collect. We did not record any additional reserves related to this Pemex receivable during 2004.

      During 2004, we recorded a net impairment loss of $11.2 million on the Gulf Horizon and related assets as a result of a fire it sustained while on tow to Israel, a $1.1 million impairment charge resulting from the removal from service of the Cajun Horizon and a $1.0 million impairment charge for the remaining book value of goodwill related to one of our inactive Mexican subsidiaries. In 2003, we recognized a $21.3 million impairment loss on the value of the Phoenix Horizon, two diving support vessels, one small construction vessel, a cargo barge and related marine equipment due to lower expected utilization levels. The sustained difficult economic environment and depressed market for the marine construction industry throughout 2003 and 2004 has resulted in a decline in the utilization of our vessels, triggering the impairment of the vessels, the cargo barge and related marine equipment.

      The impairment losses on several of our marine construction vessels were recognized under SFAS No. 144 during 2004 and 2003. The impairment losses were based upon the cost of the vessels in excess of their estimated fair value based upon expected sales prices as determined by broker quotations or orderly liquidation value appraisals from third parties. The sustained difficult economic environment, depressed market for the marine construction industry and increased competition for construction projects throughout 2003 and 2004 has resulted in a decline in the utilization of our vessels, triggering the impairment of the vessels.

      During the second quarter of 2004, we implemented a plan to sell the Phoenix Horizon (a marine construction vessel), two dive support vessels and a cargo barge, and we recorded a charge of $3.3 million as an impairment loss on these assets held for sale during 2004 to reduce the net carrying value of these assets to the fair value, less the estimated cost to sell the assets. There were no assets held for sale or impairment losses on assets held for sale during 2003.

      Interest expense for 2004 was $26.0 million, with no interest capitalized for the year. Interest expense for 2003 was $9.5 million, net of $0.1 million of capitalized interest. The face value of our total outstanding debt was $232.8 million excluding debt discount of $20.2 million at December 31, 2004, compared to $171.5 million at December 31, 2003. Interest expense increased due to higher average outstanding debt balances, higher interest rates and other financing costs. Interest expense also increased due to the amortization of the debt discount associated with the Subordinated Notes, amortization of deferred loan fees over the term of the respective debt and paid in-kind interest on the Subordinated Notes. Cash paid for interest was $8.0 million,

interest paid in-kind was $11.2 million and amortization of debt discounts and deferred loan fees was $8.4 million for 2004, less a $1.6 million decrease in the fair value of the liability related to the Series A Preferred Stock.

      Interest income includes interest from cash investments for the years ended December 31, 2004 and 2003 of $286,000 and $67,000, respectively. Cash investments consist of interest bearing demand deposits. Interest income for 2004 primarily relates to interest earned on our escrow accounts securing performance bonds and letters of credit recorded as restricted cash.

      Loss on extinguishment of debt includes the write-off of deferred loan fees of $800,000 and debt discount of $754,000 related to the $4.5 million collected from Pemex used to prepay a portion of the 18% Subordinated Notes during the third quarter of 2004. Also included in the loss on debt extinguishment is the write-off of deferred loan fees of $165,000 for the early payment of our $15.0 million term loan with Elliott Associates, L.P. during the first quarter of 2004 in connection with the issuance of the 16% Subordinated Notes. In March 2004, we issued $65.4 million of 16% Subordinated Notes and used a portion of the proceeds to repay our outstanding loan with Elliott Associates, L.P.

      Loss on debt extinguishment relates to a prepayment penalty of $569,000 and the write-off of deferred loan fees of $299,000 for the early retirement of debt during the second quarter of 2003. In June 2003, we refinanced the Sea Horizon with another lender and used a portion of the proceeds to repay and extinguish our previous lender’s debt resulting in the loss on debt extinguishment. This refinancing secured in 2003 provided additional liquidity and working capital to fund operations due to our inability to collect our Pemex receivables and claims.

      Other income (expense) for 2004 primarily consisted of $85,000 of net foreign currency gain due to activity in Mexico denominated in Mexican pesos and an increase in the U.S. dollar compared to the Mexican peso and $31,000 of net gain on sale of assets. Included in other income (expense) for 2003 is a $115,000 of net foreign currency loss due to activity in Mexico denominated in Mexican pesos and a weakening of the Mexican peso compared to the U.S. dollar.

      We use the liability method of accounting for income taxes. We recorded a federal income tax provision of $2.1 million on a pre-tax loss of $(52.4) million for 2004. We recorded a federal income tax benefit of $(7.6) million, at a net effective rate of 9.5% on a pre-tax loss of $(80.1) million for 2003. The provision for 2004 relates to foreign taxes on income generated from international operations, which was reduced by the refund we received of $784,000 for the deduction of alternative minimum tax net operating losses from prior years against alternative minimum taxable income generated in prior years allowed by the Job Creation and Worker Assistance Act of 2002. For 2003, the difference in the effective tax rate and the statutory tax rate is primarily due to the tax benefit recognized in 2003 attributable to a research and development credit of $(3.4) million. There was no tax benefit recorded on pre-tax losses due to the recording of additional valuation allowance of $19.3 million for the year ended December 31, 2004 to fully offset our net deferred tax assets that are not expected to be realized due to the uncertainty of future taxable income. The utilization of any net operating loss carryforwards is dependent on the future profitability of the company. Accordingly, no assurance can be given regarding the ultimate realization of such loss carryforwards.

      Net loss was $(54.5) million, or $(2.00) per share-diluted, for 2004, compared to a net loss for 2003 of $(72.5) million, or $(2.74) per share-diluted.

Year Ended December 31, 2003 Compared To The Year Ended December 31, 2002

      Contract revenues were $270.3 million for 2003, compared to $283.4 million for 2002. Revenues decreased 4.6% compared with 2002. The decline in revenues is attributable to a decrease in pricing of services for marine construction in the U.S. Gulf of Mexico due to a highly competitive market during 2003. Our customer mix in 2003 changed significantly compared to the mix of customers in 2002. The significant decline in revenues from Pemex from 52% of our total revenues in 2001 to 31% in 2002 to 1% in 2003 have impacted our total revenues, gross profit and the change in customer mix. In 2003, we completed the remainder of a contract for Pemex and recognized $3.9 million of revenues. This reduction in revenues in 2003 for Latin America was offset by our expansion into other international areas. We completed two large projects in Southeast Asia, offshore Brunei and Malaysia, as well as began work on a major project in West Africa, offshore Nigeria. We also completed two large projects in the Northeastern U.S. during 2003, further offsetting the decrease in revenue in Latin America. Work performed in the Northeastern U.S. is included in our Domestic operations.

      Gross profit was $6.5 million (2.4% of contract revenues) for 2003 compared with a gross profit of $30.4 million (10.7% of contract revenues) for 2002. In general, our gross profits for marine construction have declined over the past five years. Lower gross profits on projects in the Northeastern U.S., reduced vessel utilization and unusually adverse weather conditions during 2003, and resulting downtime and revenues recorded for such events, lowered gross profit. Our various projects in the Northeastern U.S., which in total accounted for approximately 40% of revenues, were primarily performed by subcontracted vessels rather than our own vessels, and as such, lower gross profits were recorded. The gross profits on the Pemex projects, which accounted for a greater percentage of revenues in 2002, were higher than gross profits on other contracts in 2003.

      Selling, general and administrative expenses were $21.7 million (8.0% of contract revenues) for 2003, compared with $21.8 million (7.7% of contract revenues) for 2002. The slight decrease primarily relates to the reversal of accrued costs associated with our Pemex claims, offset by increases in costs associated with international operations, additional depreciation expense for corporate fixed assets placed into service during the second half of 2002 and first quarter of 2003, and severance and other charges due to the resignation of a key employee in 2003.

      During the fourth quarter of 2003, we recorded a reserve of $33.1 million related to our outstanding EPC 64 contract claims against Pemex since we have been unsuccessful in resolving such claims. Since the ultimate amount and timing of payment of these claims is uncertain, we recorded this reserve for the outstanding receivable to reflect our best estimate of the amount that we believe we will collect. We did not record any reserve for claims and receivables during 2002.

      A $21.3 million impairment loss was recognized under SFAS No. 144 during 2003 on several of our marine construction vessels. Due to lower expected utilization levels, the value of the Phoenix Horizon, two diving support vessels, one small construction vessel, a cargo barge and related marine equipment has been impaired. We previously recognized a $9.9 million impairment loss related to the Phoenix Horizon for the year ended December 31, 2002. The impairment of the Phoenix Horizon in 2003 is a result of a further decline in its fair market value and management’s determination not to make capital improvements required to place the vessel into service due to the availability of other operational assets. The sustained difficult economic environment, depressed market for the marine construction industry and increased competition for construc-

tion projects throughout 2003 has resulted in a decline in the utilization of our vessels, triggering the impairment of the other vessels and the cargo barge. The impairment losses were based upon the cost of the vessels in excess of their estimated fair value based upon expected sales prices as determined by broker quotations or orderly liquidation value appraisals from third parties.

      Interest expense for 2003 was $9.5 million, net of $0.1 million of capitalized interest. Interest expense for 2002 was $4.6 million, net of $1.6 million of capitalized interest. Total outstanding debt was $171.5 million at December 31, 2003 compared with $98.3 million at December 31, 2002. Interest expense increased due to higher average outstanding debt balances, higher interest rates and other costs associated with the additional financing secured during the second quarter of 2003.

      Interest income includes interest from cash investments for the years ended December 31, 2003 and 2002 of $67,000 and $91,000, respectively. Interest income declined as we have closely managed our cash position during 2003, and we were required to borrow funds to meet working capital requirements.

      Loss on debt extinguishment relates to a prepayment penalty of $569,000 and the write-off of deferred loan fees of $299,000 for the early retirement of debt during the second quarter of 2003. In June 2003, we refinanced the Sea Horizon with another lender and used a portion of the proceeds to repay and extinguish our previous lender’s debt resulting in the loss on debt extinguishment. This refinancing secured in 2003 provided additional liquidity and working capital to fund operations due to our inability to collect our Pemex receivables and claims. There were no losses on debt extinguishment during 2002.

      Other income (expense) for 2003 primarily consisted of $115,000 of net foreign currency loss due to activity in Mexico denominated in Mexican pesos and a weakening of the Mexican peso compared to the U.S. dollar.

      Included in other income (expense) for 2002 is a $2.0 million loss related to a fire on the Lone Star Horizon, and $0.8 million of foreign currency loss due to activity denominated in Mexican pesos and a weakening of the Mexican peso compared to the U.S. dollar.

      We use the liability method of accounting for income taxes. We recorded a federal income tax benefit of $(7.6) million, at a net effective rate of 9.5% on a pre-tax loss of $(80.1) million for 2003. We recorded a federal income tax benefit of $(3.1) million, at a net effective rate of 35.7% on a pre-tax loss of $(8.6) million for 2002. The difference in the effective tax rate and the statutory tax rate for 2003 is primarily due to the valuation allowance of $23.1 million recorded during the fourth quarter of 2003 to fully offset the net deferred tax asset. The utilization of any net operating loss carryforwards is dependent on the future profitability of the company. Accordingly, no assurance can be given regarding the ultimate realization of such loss carryforwards. The difference from the statutory tax rate for 2002 is due to the application of the extraterritorial income exclusion for income earned primarily in Mexico from January 1, 2002 to December 31, 2002. The exclusion allows us to exclude a portion of income earned outside the United States for tax purposes. The impact of this exclusion on future periods will vary depending upon the amount of income earned outside the United States. Changes in our ownership levels, future, current and past, may result in limitations on our annual and aggregate ability to utilize net operating losses.

      Net loss was $(72.5) million, or $(2.74) per share-diluted, for 2003, compared to a net loss for 2002 of $(5.5) million, or $(0.22) per share-diluted.

Liquidity and Capital Resources

      During the past three years, we have experienced operating and net losses. Our liquidity has been negatively impacted by our inability to collect outstanding receivables and claims from Pemex and Williams and the delays in collecting the claims and receivables from Iroquois that were settled in March 2005. Also during 2004, our liquidity has been impacted by low utilization of vessels, a fire on the Gulf Horizon in May 2004 and our inability to secure performance bonds and letters of credit on large international contracts without utilizing cash collateral. We have closely managed cash as a result of our lack of liquidity and negotiated extended payment schedules with our large trade payable creditors and subcontractors. In order to meet our liquidity needs during the past three years, we have incurred a substantial amount of debt. During 2004, we issued an aggregate of $113.7 million, including paid in-kind interest, face value of Subordinated Notes in order to meet our liquidity needs. We had substantial debt obligations of approximately $232.8 million face value outstanding at December 31, 2004, including the Subordinated Notes, an aggregate of $27.3 million of outstanding indebtedness under our two revolving credit facilities with Southwest Bank, which matured and were repaid in February 2005, and $25.6 million of outstanding indebtedness under our revolving credit facility with CIT Group, which will be repaid with the proceeds from the Senior Credit Facilities.

      In light of our substantial debt and inability to generate sufficient cash flows from operations to service it; since the second quarter of 2004, our management has explored a significant number of financing alternatives designed to refinance and restructure our debt maturing in 2005 and provide us with additional working capital to support our operations. While management was in the process of negotiating a financing proposal, we were required to repay all of our outstanding indebtedness under our revolving credit facilities with Southwest Bank that matured in February 2005, which further impacted our liquidity. In March 2005, our negotiations to obtain additional financing and to refinance our indebtedness maturing in 2005 failed. As a result, our only alternative to commencing bankruptcy proceedings was to proceed to implement our previously announced recapitalization plan with the holders of our Subordinated Notes in two steps. The first step consisted of closing the Senior Credit Facilities of $30 million and $40 million, respectively, with holders and affiliates of holders of our Subordinated Notes on March 31, 2005. In addition to being a lender, Manchester Securities Corp., an affiliate of Elliott Associates, L.P. and an entity under common management with Elliott International, L.P., each of which are holders of our Subordinated Notes and shares of our Series A Preferred Stock, serves as agent for the other lenders under the Senior Credit Facilities.

      The $30 million senior secured term loan bears interest at 15% per annum, payable monthly 10% in cash and 5% paid in-kind, requires a monthly principal payment of $500,000 beginning July 2005 and matures on March 31, 2007. The $40 million senior secured term loan bears interest at 10% per annum, payable monthly 8% in cash and 2% paid in-kind, and matures on March 31, 2007. Upon an event of default under the Senior Credit Facilities, the interest rate on each loan increases 2%, payable in cash on demand. In addition to interest, a loan servicing fee of 0.5% based upon the aggregate unpaid principal balance of the Senior Credit Facilities is payable quarterly in cash. The Senior Credit Facilities are collateralized by the cash collateral used to secure the letter of credit under the IEC contract, the outstanding claims and receivables from Pemex and Williams, accounts receivable, and first or second liens on all of our vessels and existing and future assets. The Senior Credit Facilities have covenants that restrict us from creating additional liens, incurring additional indebtedness, entering into certain affiliate transactions, disposing of assets other than in the ordinary course of business, and prohibit us from making certain payments. The Senior Credit Facilities also have the same financial covenants as our existing credit facilities, which were amended in connection with the financing

transaction. In addition, any events of default as specified in the documents governing the Senior Credit Facilities could result in acceleration of our indebtedness.

      The second step of our recapitalization plan consists of a debt for equity exchange. In order to implement this exchange, we entered into the Recapitalization Agreement with the holders of all of our Subordinated Notes that terminated the October 29, 2004 recapitalization letter agreement. The Recapitalization Agreement contemplates that we will use our best efforts to close a series of recapitalization transactions pursuant to which the holders of our Subordinated Notes will exchange approximately $85 million of Subordinated Notes and 1,400 shares of our Series A Preferred Stock for one million shares of Series B Preferred Stock and 60 million shares of our common stock. The common stock and Series B Preferred Stock issued in the debt for equity exchange on an “as converted” basis will be equivalent to 95% of our aggregate outstanding common stock after giving effect to the recapitalization transactions. This equity will also be issued in consideration of the Subordinated Note holders consenting to the financing transaction and release of all of the collateral securing the Subordinated Notes, amending the terms of the $25 million of Subordinated Notes that are expected to remain outstanding following the closing of the recapitalization transactions and, if applicable, participating in the financing transaction as a lender. In addition, in order to be able to issue common stock and the Series B Preferred Stock as required by the Recapitalization Agreement without the lengthy delay associated with obtaining stockholder approval required under the Nasdaq Marketplace Rules, we decided to delist our shares of common stock from the Nasdaq National Market, effective as of the close of business on April 1, 2005.

      The $25 million of Subordinated Notes that we expect to remain outstanding after the recapitalization transactions will accrue interest annually at 8% payable in-kind and mature on March 31, 2010. In addition, the documents governing the Subordinated Notes will be amended to delete certain covenants and events of default.

      The Series B Preferred Stock will automatically convert into common stock upon an amendment to our certificate of incorporation to increase our authorized number of shares of common stock. In the Recapitalization Agreement, we have agreed to call a stockholders’ meeting for this purpose not earlier than September 15, 2005 nor later than October 31, 2005. Prior to such mandatory conversion, the Series B Preferred Stock will have a liquidation preference equal to the greater of $40 million or the value of the shares of our common stock into which the preferred stock is convertible immediately prior to liquidation. In addition, if the Series B Preferred Stock is not automatically converted into common stock by March 31, 2011, we will be required to redeem the preferred stock for cash equal to $40 million increased at a rate of 10% per year, compounded quarterly, commencing June 30, 2005.

      We will use the proceeds of the Senior Credit Facilities to repay $25.6 million outstanding under our revolving credit facility with CIT Group maturing in May 2005, make a $2.0 million prepayment on our CIT Group term loan and pay an estimated $3.0 million for closing costs and fees. We will use the balance of the proceeds from the financing transaction to provide working capital to support operations and for other general corporate purposes. In connection with obtaining this financing, we restructured our term loan with CIT Group due June 2006 to extend the $15 million payment due in December 2005 until March 2006 and accelerate the maturity date from June 2006 to March 2006. In addition, we restructured the collateral securing the CIT Group term loan, increased its interest rate to LIBOR plus 6%, and are required to make monthly principal payments of $500,000 beginning in April 2005 with the remaining principal balance due on March 31, 2006 and pay a closing fee equal to 1.5% of the outstanding principal term loan balance. The restructured collateral on the CIT Group term loan includes all existing security, second or third liens on all assets collateralizing the Senior Credit Facilities and all proceeds received from any loss or insurance recovery on the Gulf Horizon. This term loan requires us to maintain a ratio of collateral to the principal balance of at least 1.25 to 1.

      We received consents from our existing lenders to enter into this financing transaction and amended our financial covenants in these existing credit facilities. As a result of consummating the financing transaction, based on management’s protections, we expect to be in compliance with our amended debt covenants until at least December 31, 2005.

      Cash provided by operations was $2.1 million for 2004 compared to cash used in operations of $(53.1) million for 2003 and cash provided by operations of $48.5 million for 2002. Cash provided by operations is primarily attributable to the billing and subsequent collection on the IEC and current Pemex projects and the requirement that we pay interest on the Subordinated Notes in-kind with additional Subordinated Notes. For 2003, funds used in operating activities is primarily attributable to the pretax loss of $(80.1) million and an increase in contract receivables associated with 2003 revenues and delays in collections of these revenues. Cash provided by operations of $48.5 for 2002 was primarily attributable to the billing and subsequent collection of projects in Latin America and the Northeastern U.S. as well as the increases in accounts payable related to the extension of the timing of vendor payments by us.

      Cash used in investing activities was $(4.8) million for 2004 compared to cash used in investing activities of $(14.7) million for 2003 and $(59.8) million for 2002. The decrease in cash used in investing activities is attributable to a reduction in our capital expenditures during 2004 as compared to the substantial completion of major upgrades on the Sea Horizon during 2003. During 2002, we made significant upgrades to the Sea Horizon, our largest vessel, and other vessels in our fleet to prepare them for major projects in Southeast Asia, West Africa and the Northeastern U.S.

      Cash provided by financing activities was $30.5 million for 2004 compared to $71.8 million for 2003 and $9.5 million for 2002. Funds provided by financing activities for 2004 included $71.8 million proceeds from the issuance of our Subordinated Notes and associated warrants, offset by net $23.3 million used to reduce our indebtedness under our three revolving credit facilities. The increase in funds provided by financing activities for 2003 is primarily attributable to the additional $55.0 million in secured asset based financing obtained during the second quarter. Also, in 2003, we borrowed additional funds under our revolving credit facilities to meet our short-term operating needs. For the year ended December 31, 2002, we recorded $30.8 million from our public stock offering which was offset by the funds used to reduce indebtedness under our revolving credit facilities.

      As of December 31, 2004, we had working capital of $29.0 million compared to $26.1 million of working capital at December 31, 2003. The increase in working capital was primarily attributable to a decrease in accrued job costs offset by an increase in the current maturities of our long-term debt. We have closely managed cash due to our lack of liquidity and negotiated extended payment schedules with our large trade payable creditors and subcontractors. In addition, we repaid our revolving credit facilities with Southwest Bank that matured in February 2005. On March 31, 2005, we refinanced our debt maturing in 2005 to provide additional financing necessary to meet our working capital needs. As a result of the refinancing of the debt maturing in 2005, we have classified $23.0 million of our three revolving credit facilities as long-term debt at December 31, 2004. We have classified all of our Subordinated Notes as long-term debt at December 31, 2004 as the Subordinated Note holder have released all of the collateral securing the Subordinated Note in favor of the Senior Credit Facilities.

      At December 31, 2004, we had approximately $232.8 million face value of total outstanding debt excluding debt discount of $20.2 million. Of the $212.6 million of outstanding net debt reflected in the accompanying consolidated balance sheet at December 31, 2004, $52.9 million represents borrowings on our three revolving credit facilities with Southwest Bank and CIT Group, $70.7 million represents outstanding balances on seven term-debt facilities and $89.0 million represents the outstanding balance on our Subordinated Notes, net of $20.2 million debt discount. The total face value of outstanding debt at December 31, 2004 represents an approximate increase of $61.3 million from December 31, 2003. This increase in debt is primarily due to the issuance of the 16% Subordinated Notes in March 2004 and 18% Subordinated Notes in May, September and November 2004 to meet our working capital needs. Interest rates vary from the one-month commercial paper rate plus 2.45% to 18% including amortization of the debt discount on our

Subordinated Notes, was 14.7%. Our term-debt borrowings currently require approximately $800,000 in total monthly principal payments. At December 31, 2004, we had no available borrowing capacity under our revolving credit facilities with Southwest Bank and CIT Group. All of our assets are pledged to secure our debt obligations and our recent operating results will not support any additional indebtedness.

      At December 31, 2004, $42.2 million of our debt is classified as current because it matures within the next twelve months or the asset securing the indebtedness is classified as current. Included in current maturities of long-term debt is an aggregate of $29.9 million of outstanding indebtedness under our two revolving credit facilities with Southwest Bank, which matured and were repaid in February 2005, and under our revolving credit facility with CIT Group, which will be repaid with proceeds from the Senior Credit Facilities. See “Recent Events”.

      The face value of our total obligation under our Subordinated Notes at December 31, 2004 was $109.2 million, including $11.2 million interest paid in-kind, excluding debt discount, net of amortization, of $20.2 million and after prepayment of $4.5 million of the $102.5 million aggregate amount issued during 2004. We issued 1,400 shares of the Series A Preferred Stock, $1.00 par value per share, for $1.00 per share to the purchasers of the additional $9.625 million of 18% Subordinated Notes on November 4, 2004. The Series A Preferred Stock shall be redeemed by us six years from the date of its issuance, or at the option of the Preferred Stockholders upon merger, sale of all or substantially all of our assets, our change of control or our liquidation, for cash in an amount equal to the amount by which the current market price of 14% of the outstanding shares of our common stock on a fully diluted basis (which amount will accrete at a rate of 25% per year commencing six months after issuance, compounded quarterly) exceeds the Warrant (as defined below) exercise price. However, upon stockholder approval, we shall redeem the Series A Preferred Stock with five year warrants (the Warrants) having an aggregate exercise price of $1.925 million to purchase a number of shares of our common stock equal to 14% of the outstanding common stock on a fully diluted basis (after giving effect to the issuance of the Warrants but excluding any out-of-the-money employee options). If the Series A Preferred Stock is redeemed for Warrants, the issuance of the Warrants will result in significant dilution to our stockholders. If not redeemed for Warrants, the holders of the Series A Preferred Stock will have a liquidation preference senior to our stockholders equal to the cash value of the Series A Preferred Stock described above. Pursuant to SFAS No. 150, we are required to classify financial instruments that are within its scope as a liability. Due to the mandatory redemption feature of the Series A Preferred Stock, we recorded the initial measurement of $2.0 million fair value for these shares as a liability. The Series A Preferred Stock was issued and recorded as original issue discount to the 18% Subordinated Notes and was reflected as a debt discount in the accompanying consolidated balance sheet as of December 31, 2004. The discount is amortized as a non-cash charge to interest expense over the term of the 18% Subordinated Notes using the effective interest rate method. Because the amount to be paid upon redemption varies, is based on specified conditions and is not known, the Series A Preferred Stock is subsequently measured at the amount of cash that would be paid under the conditions specified in the contract as if settlement occurred at each reporting date. The resulting change in the amount from the previous reporting date will be recognized as interest cost. As of December 31, 2004, we recognized a $1.6 million decrease in the fair value of this liability, which reduced interest expense, to reflect the current fair value of the Series A Preferred Stock of $0.4 million. The current redemption value of $0.4 million is reflected as a long-term liability in our consolidated balance sheet as of December 31, 2004. The 1,400 shares of Series A Preferred Stock will be canceled and retired if we consummate the recapitalization transactions contemplated by the Recapitalization Agreement.

      All of our assets are pledged as collateral on our indebtedness. Our loans are collateralized by mortgages on all of our vessels and property and by accounts receivable and claims. Our loans contain customary default and cross-default provisions and require us to maintain financial ratios at quarterly determination dates. The loan agreements also contain covenants that limit our ability to incur additional debt, pay dividends, create liens, sell assets and make capital expenditures. The Subordinated Notes also have covenants that restrict our ability to enter into any other agreements which would prohibit us from prepaying the Subordinated Notes from the proceeds of an equity offering, entering into certain affiliate transactions, incurring additional indebtedness other than refinancing our existing term and revolving debt, and disposing of assets other than in the ordinary course of business, and would also prohibit our subsidiaries from making certain payments. If we consummate the recapitalization transactions contemplated by the Recapitalization Agreement, the Subordinated Notes will no longer have these covenants. Our financial covenants are described in Note 5 of our notes to consolidated financial statements. At December 31, 2004, we were in compliance with all the financial covenants, as amended, required by our credit facilities. Based upon management’s current projections, as a result of consummating the financing transaction, we expect to be in compliance with our amended debt covenants at least through December 31, 2005.

      During the fourth quarter of 2004, we recorded a reserve of $5.7 million related to the settlement terms of our litigation with Iroquois for less than the carrying value of the claims and receivables. In March 2005, we reached a settlement with Iroquois and collected $21.5 million. In conjunction with this settlement, we also reached agreement with several of our large subcontractors on this project to reduce the amounts owed to them by $1.5 million. After providing for payments of $16.7 million to subcontractors, we collected $4.8 million.

      We intend to submit the Pemex claims related to interruptions due to adverse weather conditions to arbitration in Mexico in accordance with the Rules of Arbitration of the International Chamber of Commerce during the second quarter of 2005.

      We have filed suit against Williams in the 295th Judicial District of the District Court for Harris County, Texas for breach of contract and wrongful withholding of amounts due to us for services provided under the contract and a claim related to Williams’ portion of the insurance deductible under the Builder’s Risk insurance policy for the contract. We have not been able to resolve our dispute with Williams through mediation, and the court has reset the trial for October 2005.

      In August 2004, the underwriters on the policy for hull insurance purchased to cover physical damage to the Gulf Horizon during the tow to Israel filed an action for declaratory judgment in the English High Court seeking a declaration that the policy is void due to a misrepresentation of the risk. We initially filed suit in Harris County, Texas seeking recovery of the full amount of the policy, $28.0 million, plus sue and labor expenses, and damages for wrongful denial of the claim. Since then, the English High Court has ruled that it has exclusive jurisdiction over the matter, and our action in Texas has been dismissed without prejudice. We have now filed a counter claim against the underwriters for $31 million, and we expect a trial to be set for a date in late 2005.

      See Item 3. “Legal Proceedings” of Part II. herein.

      We do not have any significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

      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 the one-month commercial paper rate plus 2.45% to 18%, and our average interest rate at December 31, 2004, including amortization of the debt discount on our Subordinated Notes, was 14.7%. The following table summarizes our long-term material contractual cash obligations (in thousands):

      Planned capital expenditures for 2005 are estimated to range from approximately $10 million to $13 million and primarily related to vessel improvements and scheduled dry-docks. These expenditures will depend upon available funds, work awarded and future operating activity.

      Our market risk exposures primarily include interest rate, exchange rate and equity price fluctuation on financial instruments as detailed below. Our market risk sensitive instruments are classified as “other than trading.” The following sections address the significant market risks associated with our financial activities for the year ended December 31, 2004. 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 interest rates, foreign currency exchange rates or changes in our common stock price.

      As of December 31, 2004, the carrying value of our debt, including $0.2 million of accrued interest, was approximately $212.8 million. The fair value of this debt approximates the carrying value because the interest rates on a portion of our debt are based on floating rates identified by reference to market rates. We have $77.6 million of Subordinated Notes at a fixed 16% interest rate and $31.6 million of Subordinated Notes at a fixed 18% interest rate, excluding debt discount. A hypothetical 1% increase in the applicable interest rates as of December 31, 2004 would increase annual interest expense by approximately $1.2 million.

      We collect 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. Approximately 90% of revenues from foreign contracts are denominated in U.S. dollars. We monitor the exchange rate of our foreign currencies in order to mitigate the risk from foreign currency fluctuations. We receive payment in foreign currency equivalent to the U.S. dollars billed, which is converted to U.S. dollars that day or the following day. We recognized an $85,000 net foreign currency gain due to activity in foreign areas denominated in local currency and an increase of the U.S. dollar compared to these local currencies for the year ended December 31, 2004. Additional exposure could occur if we perform more contracts internationally.

      On November 4, 2004, we issued 1,400 shares of Series A Preferred Stock that are mandatorily redeemable by us in six years from the date of issuance. The Series A Preferred Stock is redeemable in cash for an amount by which the current market price of 14% of the outstanding shares of our common stock on a fully diluted basis exceeds $1.925 million. As of December 31, 2004, we recognized a $1.6 million decrease in the redemption value. The redemption value at December 31, 2004 was $0.4 million. The 1,400 shares of Series A Preferred Stock will be canceled and retired if we consummate the recapitalization transactions contemplated by the Recapitalization Agreement.

      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.

      Our consolidated financial statements appear on pages 45 through 85 in this report and are incorporated herein by reference. See Index to consolidated financial statements on page 45.

      On June 11, 2004, PricewaterhouseCoopers LLP (PWC) resigned as our independent registered public accounting firm. There were no disagreements between Horizon and PWC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. On July 11, 2004, upon the recommendation of the audit committee of our board of directors, we selected Grant Thornton LLP (Grant Thornton) to serve as our independent registered public accounting firm for 2004. During the fiscal year ended December 31, 2003 and the subsequent interim period preceding this selection, neither we nor anyone on our behalf consulted Grant Thornton regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, nor did Grant Thornton provide to us a written report or oral advice regarding such principles or audit opinion; or (2) any matter that was either the subject of a disagreement or a reportable event.

Disclosure Controls and Procedures

      As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

      The information required to be furnished under this heading is set forth under the captions “Management’s Report on Internal Control over Financial Reporting” on page 46 and “Report of Independent Registered Public Accounting Firm” on page 47.

Changes in Internal Control over Financial Reporting

      As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and principal financial officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth quarter.

      None.

PART III

      Information concerning our directors and executive officers called for by this item will be included in our definitive Proxy Statement prepared in connection with the 2005 annual meeting of stockholders and is incorporated herein by reference.

      We have adopted a code of ethics and business conduct that applies to all our directors, officers, employees and representatives. This code is publicly available on our website at http://www.horizonoffshore.com/invest/.irhome.asp. Amendments to the code of ethics and business conduct and any grant of a waiver from a provision of the code requiring disclosure under applicable SEC rules will be disclosed on our website. These materials may also be requested in print, without charge, by writing to our Investor Relations department at Horizon Offshore, Inc., 2500 CityWest Blvd, Suite 2200, Houston, Texas, 77042.

      Information concerning the compensation of the executive officers called for by this item will be included in our definitive Proxy Statement prepared in connection with the 2005 annual meeting of stockholders and is incorporated herein by reference.

      Information concerning security ownership of certain beneficial owners and management called for by this item will be included in our definitive Proxy Statement prepared in connection with the 2005 annual meeting of stockholders and is incorporated herein by reference.

      Information concerning certain relationships and related transactions called for by this item will be included in our definitive Proxy Statement prepared in connection with the 2005 annual meeting of stockholders and is incorporated herein by reference.

      Information concerning principal accountant fees and services called for by this item will be included in our definitive Proxy Statement prepared in connection with the 2005 annual meeting of stockholders and is incorporated herein by reference.

PART IV

      (a) The following documents are filed as a part of this report:

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Management of the Company, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Our internal controls are designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition.

      We conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Through this evaluation, we did not identify any material weaknesses in our internal controls. There are inherent limitations in the effectiveness of any system of internal controls over financial reporting; however, based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2004.

      Grant Thornton LLP, an independent registered public accounting firm, has issued an attestation report on management’s assessment of internal control over financial reporting, which is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Horizon Offshore, Inc.:

      We have audited the accompanying consolidated balance sheet of Horizon Offshore, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2004, and the related consolidated statement of operations, stockholders’ equity and cash flows for the year ended December 31, 2004. 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 audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horizon Offshore, Inc. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2005 expressed an unqualified opinion thereon.

      The Company completed a $70 million senior secured credit facility on March 31, 2005. See Note 16 for a discussion of this subsequent event and the Company’s financing and liquidity position.

/s/ Grant Thornton LLP

Houston, Texas

March 31, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Horizon Offshore, Inc.:

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Horizon Offshore, Inc. and its subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Horizon Offshore, Inc. and its subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Horizon Offshore, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Horizon Offshore, Inc. as of December 31, 2004, and the related consolidated statement of operations, stockholders’ equity and cash flows for the period ended December 31, 2004 and our report dated March 31, 2005 expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Houston, Texas

March 31, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of Horizon Offshore, Inc.:

      In our opinion, the accompanying consolidated balance sheet as of December 31, 2003 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2003 and 2002 present fairly, in all material respects, the financial position of Horizon Offshore, Inc. (a Delaware corporation), and subsidiaries at December 31, 2003 and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      The Company received approximately $45 million in net proceeds from the issuance of Subordinated Notes on March 11, 2004. See Note 15 to the consolidated financial statements as originally presented and included in the Company’s 2003 Form 10-K for a discussion of this subsequent event and the Company’s financing and liquidity position.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

March 12, 2004

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

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

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

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

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)