Item 1. and 2. Business and Properties.................................. 1 Item 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings primarily involving claims for personal injury under the Jones Act and general maritime laws which the Company believes are incidental to the conduct of its business. The Company believes that none of these proceedings, if adversely determined, would have a material adverse effect on the Company's business or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the names, ages, and offices held by each of the Executive Officers of the Company as of March 12, 1999:
Executive Officers are appointed by, and serve at the pleasure of, the Company's Board of Directors, subject to rights under Employment Agreements.
BILL J. LAM is the President, Chief Executive Officer and a Director of the Company. Mr. Lam has been Chief Executive Officer and a Director since December 1997. From July 1997 to November 1997 he was Vice President -- Operations of the Company. Prior to being employed by the Company, Mr. Lam has held various supervisory positions for the following providers of marine construction services to the offshore oil and gas industry: Lowe Offshore, Inc. (from January 1997 to July 1997), McDermott (from January 1995 to January 1997) and OPI International, Inc. ("OPI") (from August 1990 to January 1995). Mr. Lam graduated from Texas A&M University in 1990 with a B.A. degree in economics.
DAVID W. SHARP is the Executive Vice President and the Chief Financial Officer of the Company and has held those positions since December 1997. From October 1996 to November 1997, Mr. Sharp was Vice President -- Finance of the Company. He held various positions with McDermott, including world-wide project leader for the implementation of accounting and financial systems, from January 1995 to October 1996. Prior thereto, he held various positions with OPI, including controller-atlantic division and director of management information from November 1990 to January 1995. Mr. Sharp is a certified public accountant and graduated from the University of Texas in 1975 with a B.B.A. degree in business management.
JAMES K. COLE is a Senior Vice President of the Company and has held that position since December 1997. From November 1996 to November 1997, Mr. Cole was Vice President -- Human Resources and Risk Management of the Company. He was manager of corporate safety and health of McDermott from January 1995 to September 1996 and director of corporate health, safety and environment for OPI from April 1991 to January 1995. Mr. Cole graduated from Louisiana State University (New Orleans) in 1973 with a B.A. degree in english. He served in the United States Army from 1967 to 1969. On the advice of counsel, Mr. Cole filed a voluntary petition for personal bankruptcy in July 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $1.00 par value (the "Common Stock"), is traded on the Nasdaq National Market under the symbol "HOFF." At March 15, 1999 the Company had approximately 29 holders of record of its Common Stock.
The following table sets forth the high and low closing bid prices per share of the Common Stock, as reported by the Nasdaq National Market, for each fiscal quarter since trading began on April 2, 1998.
The Company intends to retain earnings, if any, to meet its working capital requirements and to finance the future growth of its business and, therefore, does not plan to declare or pay cash dividends to holders of its Common Stock in the foreseeable future. In addition, the Company is prohibited from making distributions to its stockholders under the terms of its existing indebtedness. See Note 6 to financial statements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the periods ended December 31, 1998, 1997 and 1996 should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere in this Annual Report.
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(1) Results are from inception (December 20, 1995) through December 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations."
(2) EBITDA (earnings before interest expense, income taxes, depreciation and amortization) is a supplemental financial measurement used by the Company and investors in the marine construction industry in the evaluation of its business. Management believes that EBITDA provides supplemental information about the Company's ability to meet its future requirements for debt service, capital expenditures and working capital and is not intended to depict funds available for reinvestment or other discretionary uses. Management of the Company believes factors that should be considered by investors in evaluating EBITDA include, but are not limited to, trends in EBITDA as compared to cash flow from operations, debt service requirements and capital expenditures. The Company's measurement of EBITDA may not be comparable to similarly titled measures reported by other companies. Further, EBITDA should not be considered in isolation or as an alternative to, or more meaningful than, net income, cash flow provided by operations or any other measure of performance determined in accordance with generally accepted accounting principles as an indicator of the Company's profitability or liquidity.
(3) Number of days vessels are offshore performing services, in transit or waiting on inclement weather, while under contract.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere 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
Horizon provides marine construction services to the oil and gas industry primarily in the Gulf of Mexico. The Company's marine fleet installs marine pipelines to transport oil and gas from newly installed production platforms and other subsea production systems, and installs and salvages production platforms and other marine structures. Over the past several years, improvements in seismic and drilling technology and production techniques, which have increased drilling success rates and efficiencies, have resulted in increased exploration and development in the Gulf and have improved the economics of developing smaller oil and gas fields, especially in shallow water. According to Offshore Data Services reports, the number of offshore rigs operating in the Gulf was 60 in May 1992, compared to approximately 170 in December 1997 and 133 in December 1998.
The Company's present management team, which assumed its current role in July 1997, has aggressively expanded Horizon's operations. This management team has assembled a fleet of ten vessels capable of providing a full range of pipeline and derrick services in varying water depths. Horizon currently operates nine of these vessels, consisting of four pipelay/pipebury barges, a dedicated pipebury barge, two derrick barges and two diving support vessels. The Company's expanded fleet allows it to compete in the Gulf for substantially all pipeline installation projects in shallow water depths of 200 feet and less, as well as a significant number of projects in intermediate water depths between 200 and 800 feet. Horizon has two derrick barges deployed, and a derrick/pipelay barge undergoing refurbishment. These derrick barges have lift capacities ranging from 250 to 800 tons. The growth in the size and operating capabilities of the fleet is reflected in the Company's revenues and operating results. The following table describes Horizon's marine vessels and the date each vessel was deployed.
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* ANTICIPATED DEPLOYMENT.
The Stephaniturm, a 230-foot dynamically positioned diving support vessel, was acquired in April 1998 with Offering proceeds and was chartered to DSND during 1998. DSND extended the charter term to December 31, 1999 with a cancellation provision at September 30, 1999 upon payment by DSND of a $250,000 cancellation fee. The Company recognized $4.9 million in revenues and $4.1 million in gross profit during 1998 related to this charter. The Stephaniturm offers saturation diving services in water depths up to 1,000 feet, riser installation, tie-ins and commissioning services that will allow the Company to perform more complex projects and operate in deeper water and under adverse weather conditions.
In May 1998, the Company acquired the BB-316, a 350-foot pipebury barge, subsequently renamed the Pacific Horizon, which was reconfigured as a derrick barge by removing the pipebury equipment and
installing an 800-ton, revolving crane. The Pacific Horizon was available for operations in March 1999. The Phoenix Horizon, a derrick/pipelay barge, is expected to become operational in late 1999. Adverse weather conditions in the Gulf of Mexico during the third quarter of 1998 caused delays in the refurbishment of the Phoenix Horizon and in the delivery of equipment needed to complete the construction of the Pacific Horizon.
The Company entered into a capital lease in 1998 to acquire the Atlantic Horizon, a 550-ton derrick barge, pursuant to which the Company intends to acquire title to the vessel upon expiration of the lease term in November 1999.
Horizon formed a deepwater joint venture with DSND, its strategic alliance partner, in the second quarter of 1998 to conduct deepwater pipelaying operations in the Gulf. The Company will offer added capabilities to its customers and expand its presence into the deepwater market through the joint venture's operations.
The demand for offshore construction services in the Gulf depends largely on the condition of the oil and gas industry and, in particular, the level of capital expenditures by oil and gas companies for developmental construction. These expenditures are influenced by prevailing oil and gas prices, expectations about future demand and prices, the cost of exploring for, producing and developing oil and gas reserves, the discovery rates of new oil and gas reserves, sale and expiration dates of offshore leases in the United States and abroad, political and economic conditions, governmental regulations and the availability and cost of capital. Historically, oil and gas prices and the level of exploration and development activity have fluctuated substantially, impacting the demand for pipeline and marine construction services.
Factors affecting the Company's profitability include competition, equipment and labor productivity, contract estimating, weather conditions and the other risks inherent in marine construction. The marine construction industry in the Gulf is highly seasonal as a result of weather conditions with the greatest demand for these services occurring during the second and third calendar quarters of the year. Full year results are not a direct multiple of any quarter because of this seasonality.
RESULTS OF OPERATIONS
The discussion below describes the Company's results of operations. Three factors in particular make the results of the following periods difficult to compare. First, the 1998 operating results are not comparable to 1997 results due to substantial growth in the size and operating capabilities of the Company's fleet. The Company's recent vessel acquisitions have expanded its operating capabilities and increased its operating cost structure. The Company's ability to integrate these vessels into its operations will directly impact future results of operations. The aggregate amount of selling, general and administrative expenses has also increased to support this growth. Second, when the Company's new management team assumed its current role in July 1997, it implemented operational systems and procedures that include improved bidding and profitability analyses for projects, project supervision and review procedures. The management team has increased equipment utilization achieved through vessel and project scheduling and through an expansion in Horizon's client base. The benefits of these systems and procedures were not realized until late in 1997 and during 1998. Third, in the fourth quarter of 1996, the Company experienced difficulties in the Middle East primarily related to the acquisition of a barge and related pipelay project which resulted in significant financial losses described in the results of operations for the period from inception to December 31, 1996.
A prolonged weakness in energy prices or a prolonged period of lower levels of offshore drilling and exploration could adversely affect the Company's future revenues and profitability. The Company has experienced a decline in demand for its marine construction services in the Gulf as oil and gas companies have reduced their levels of capital expenditures. The Company expects reduced demand for its services may impact its results of operations for 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
CONTRACT REVENUES. Contract revenues were $119.8 million for the year ended December 31, 1998 compared to $36.1 million for the year ended December 31, 1997. Revenues increased dramatically in 1998
as the Company expanded its fleet to offer an extensive range of pipeline and derrick services. The Company operated two vessels, the American Horizon and the Cajun Horizon, for the entire year in 1997 compared to eight vessels in operation by June 1998. All eight vessels were operational for the last six months of 1998. Severe weather conditions in the Gulf in the third quarter of 1998 impacted both equipment productivity and profit margins, causing construction and scheduling delays. The Company laid 220 miles and buried 210 miles of pipe of various diameters and in various water depths in the Gulf during 1998 compared to approximately 125 miles of pipe laid and buried in 1997. The Company recognized $4.9 million in revenues in 1998 for the Stephaniturm charter to DSND. The Company's results of operations for 1998 reflect the extensive capabilities of the Company's expanded fleet and current management's ability to competitively bid, win and successfully manage projects.
GROSS PROFIT. Gross profit was $27.8 million (23.2% of contract revenues) for the year ended December 31, 1998 as compared to a gross profit of $6.0 million (16.7% of contract revenues) for 1997. Higher revenues and gross profit for 1998 were primarily attributable to the increased number of vessels that were deployed during this period. The Company recognized $4.1 million in gross profit from the Stephaniturm charter to DSND in 1998. In addition, the Company has continued to improve its gross profit margin beginning in the last half of 1997 through more efficient execution of projects, greater equipment utilization and an increase in the number of contracts awarded.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $8.1 million (6.8% of contract revenues) for 1998 from $2.8 million (7.7% of contract revenues) for 1997 primarily due to the addition of personnel and other expenses associated with the growth of the Company and its fleet expansion. The percentage decrease was primarily due to the significant increase in revenues without a commensurate increase in selling, general and administrative expenses.
INTEREST EXPENSE. Interest expense was $2.8 million, net of $1.3 million interest capitalized for 1998 and $1.6 million, net of $.3 million interest capitalized for 1997. The Company's total outstanding debt was $69.9 million at December 31, 1998 compared to $39.8 million at year end 1997. The outstanding debt increased significantly during the fourth quarter of 1997 and throughout 1998 as a result of the vessel acquisitions and improvements made to expand the Company's fleet and the acquisition of the marine base in Port Arthur, Texas. The increase in indebtedness was partially offset by the repayment of $23.8 million of outstanding Subordinated Notes from Offering proceeds.
OTHER INCOME. In December 1998, the Company sold its marine base in Houma, Louisiana to an unaffiliated third party for $.8 million cash resulting in a $20,000 gain. In February 1997, the Company sold one of its vessels to an unaffiliated third party for $3.3 million cash resulting in a $.6 million gain.
INCOME TAXES. The Company uses the liability method of accounting for income taxes. Horizon utilized net operating loss carryforwards that offset income taxes in 1997 and at least partially offset income taxes in 1998. The Company provided federal income tax expense of $4.5 million, at a net effective rate of 26% on pre-tax income of $16.9 million in 1998. The Company did not have a valuation allowance at December 31, 1998 due to the Company's history of profitable operations. For 1997, both pre-tax and net income were $2.3 million, as no income tax expense was recorded due to net operating loss carryforwards. A valuation allowance was established to offset the Company's net deferred tax assets, including those related to carryforwards, to the extent they were not realizable through the sale of appreciated assets at December 31, 1997. As of December 31, 1998, the Company had net operating loss carryforwards of approximately $5.3 million which expires in 2012. See Note 7 of the notes to the Company's consolidated financial statements.
NET INCOME. Net income was $12.5 million or $0.69 per share for the year ended December 31, 1998 compared to a net income for 1997 of $2.3 million or $0.17 per share. The increase in net income is primarily the result of the significant increase in revenues and gross profit generated by Horizon's expanded fleet.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM INCEPTION (DECEMBER 20, 1995) THROUGH DECEMBER 31, 1996
CONTRACT REVENUES. Contract revenues were $36.1 million for the year ended December 31, 1997 compared to $14.1 million for the period from inception (December 20, 1995) through December 31, 1996 (Fiscal 1996). The American Horizon and the Cajun Horizon, which were placed into service in April and July 1996, respectively, were operational for the entire year in 1997. There was a significant increase in the number of construction contracts awarded to the Company in 1997 as compared to 1996. The Company installed approximately 125 miles of pipe ranging from three to ten inches in diameter during 1997 compared to approximately 65 miles for Fiscal 1996. The Company's results of operations for 1997 reflect the level of offshore activity in the Gulf and current management's ability to competitively bid, win and successfully manage projects.
GROSS PROFIT (LOSS). Gross profit was $6.0 million (16.7% of contract revenues) for the year ended December 31, 1997 as compared to a gross loss of $7.5 million for Fiscal 1996. Under the guidance of present management, the Company has improved its gross profit margin in the last half of 1997 through more efficient execution of projects, greater equipment utilization, an increase in the number of contracts awarded and increased contract revenue.
The gross loss for Fiscal 1996 was primarily attributable to $7.4 million in charges relating to actions undertaken by the Company, under former management, in attempting to expand operations into the Middle East. At the time, the Company agreed to acquire and refurbish a barge for the purpose of providing construction services in the Middle East. In connection with the acquisition, the Company undertook certain actions to perform construction services for a customer of the seller. The Company encountered title disputes over the barge, higher than anticipated refurbishment costs and the subsequent rejection of the barge by the customer. Present management of the Company has resolved title, contractual and other legal disputes pertaining to the barge and related project. The Company acquired the barge for $4.8 million with $3.0 million being payable over a three year period and agreed to pay $4.9 million with $4.4 million payable in monthly installments commencing January 1, 1998 until December 31, 2001 to the customer to settle the claims. The Company is in the process of upgrading and refurbishing the barge, since renamed the Phoenix Horizon, to serve as a combination derrick/pipelay barge in the Gulf.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $2.8 million (7.7% of contract revenues) for 1997 from $2.0 million (14.5% of contract revenues) for Fiscal 1996 primarily due to the addition of personnel and other expenses associated with the growth of the Company. The Company incurred $.5 million (3.5% of contract revenues) of travel and other costs in Fiscal 1996 related to the Company's unsuccessful expansion into the Middle East.
INTEREST EXPENSE. Interest expense was $1.6 million, net of interest capitalized of $.3 million for 1997 and $1.7 million for Fiscal 1996. No interest was capitalized in Fiscal 1996. The Company's total outstanding debt increased during the last quarter of 1996 due to additional borrowings to fund acquisitions, capital improvements and working capital requirements. In April 1997, in connection with a recapitalization of the Company, the Principal Stockholders contributed $21.0 million of debt to additional paid-in capital. The Company applied $12.0 million of the proceeds from the sale of assets in 1997, as described below, to reduce debt to the Principal Stockholders. The Company's outstanding debt increased significantly during the fourth quarter of 1997 as a result of the vessel acquisitions and improvements made to expand the Company's fleet and the acquisition of marine bases in Houma, Louisiana and Port Arthur, Texas.
OTHER INCOME. The Company sold one of its vessels to an unaffiliated third party in February 1997 for $3.3 million cash resulting in the recognition of a $.6 million gain.
INCOME TAXES. The Company uses the liability method of accounting for income taxes. As of December 31, 1997, the Company had net operating loss carryforwards of approximately $2.1 million, and were utilized to reduce future income taxes in 1998. For financial reporting purposes, a valuation allowance has been established as of December 31, 1997 and 1996 to offset the Company's net deferred tax assets,
including those related to carryforwards, to the extent they were not realizable through the sale of appreciated assets. See Note 7 of the notes to the Company's consolidated financial statements.
A tax benefit of $1.6 million was recorded in Fiscal 1996 based upon the Company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. The deferred tax asset relates to the $4.8 million gain from the sale of assets which was included in taxable income for 1997. The Company accounted for the $3.2 million gain on the sale, net of taxes of approximately $1.6 million, as a capital contribution.
NET INCOME (LOSS). Net income was $2.3 million for the year ended December 31, 1997 as compared to a net loss for Fiscal 1996 of $9.6 million. The net loss for Fiscal 1996 was primarily the result of the $7.4 million in charges relating to the unsuccessful expansion into the Middle East.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company completed the Offering of 5,750,000 shares of its common stock and received net proceeds of approximately $68.6 million, after $6.2 million of underwriting commissions and discounts, and other expenses. Of the net proceeds, the Company used $23.8 million to repay its indebtedness to the Principal Stockholders, acquired the Stephaniturm for $18.3 million and used the remaining proceeds of the Offering to expand its fleet. Pending application of the proceeds to expand its fleet, the Company repaid $13.0 million on the term loan and $5.3 million on the revolving note payable to Den norske Bank (DNB). The balance of the proceeds was invested in short-term securities.
In May 1998, Horizon amended its credit facility with DNB (the " Credit Facility") to provide for up to $50 million of borrowings at LIBOR plus 3%. The amended Credit Facility provided for a $30 million reducing revolver to be reduced in monthly increments of $.6 million beginning September 30, 1999 and a $20 million revolving note due September 30, 2000. In December 1998, the Company replaced the $30 million reducing revolving note payable due to Den norske Bank by entering into a loan agreement with The CIT Group. This loan provides for a $60 million term loan (" CIT Term Loan") at a more favorable interest rate of LIBOR plus 2.65% to be repaid in 84 monthly installments of $.5 million, maturing January 30, 2006. The current amount borrowed at December 31, 1998 was $50 million, however, the CIT Term Loan provides for additional borrowings of $5 million upon completion of the Pacific Horizon and another $5 million upon completion of the Phoenix Horizon. The Company used the $50 million to repay the reducing revolver note to DNB, pay down the revolving note payable to DNB, pay indebtedness to a Principal Stockholder and invested the remaining proceeds for future capital expenditures. The $20 million revolving note payable to DNB was amended in December 1998 to provide for $30 million of borrowings ("DNB Revolver") at a lower interest rate of LIBOR plus 2.5%. The DNB Revolver matures December 31, 2001.
Both the CIT Term Loan and the DNB Revolver require that certain conditions be met in order for the Company to obtain advances under the loans. The CIT Loan is secured by mortgages on all vessels owned by the Company, except the Atlantic Horizon. The DNB Revolver is secured by accounts receivable. Other significant terms and covenants under these loans are described in note 6 to the financial statements. At December 31, 1998, the Company had $15.7 million available, pursuant to the borrowing base calculation under the DNB Revolver. Horizon was in compliance with all loan covenants at December 31, 1998.
In July 1998, Horizon announced that its board of directors approved the repurchase of up to $10 million of the Company's outstanding common stock. The shares may be purchased from time to time, subject to market conditions, in the open market or in privately negotiated transactions, and such repurchases are funded by borrowings provided by a wholly-owned subsidiary of one of the Principal Stockholders. The Company borrowed $7.6 million during 1998 under a promissory note payable to this subsidiary of the Principal Stockholder. The $7.6 million outstanding balance was repaid from proceeds of the CIT Term Loan in December 1998. The Company may borrow an additional $2.4 million from the wholly-owned subsidiary of the Principal Stockholder. The note matures on March 31, 2003 and bears interest rate to be equal to that charged on the DNB Revolver.
The Company entered into a capital lease in 1998 to acquire the Atlantic Horizon, a 550-ton derrick barge, for $16.4 million, pursuant to which the Company intends to acquire title to the vessel upon expiration of the lease term in November 1999. The lease term requires monthly lease payments of $.2 million for 18 months with the final payment of $13.2 million to be paid in November 1999. In the event the Company elects not to purchase the Atlantic Horizon at that time, the Company is required to pay $5 million as liquidated damages. This payment obligation is secured by a corporate surety bond in the amount of $5 million.
Horizon had working capital of $12.7 million at December 31, 1998 compared to a working capital deficit of $2.1 million at December 31, 1997. Prior to the completion of the Offering and the amendment to the Credit Facility in May 1998, the Company financed its vessel and property acquisitions and improvements through operating cash flow and short-term borrowings. The significant growth in the number of construction contracts and related contract revenues has resulted in an increase in contract receivables.
Cash provided by operations was $10.5 million for the year ended December 31, 1998 and $3.5 million for the year ended December 31, 1997, compared to cash used by operations of $9.6 million for Fiscal 1996. The Company has used borrowings and proceeds from the sale of assets to fund the cash used in operations and capital expenditures. The Company anticipates borrowing the additional $10 million under the CIT Term Loan and amounts available under the DNB Revolver to fund future equipment acquisitions and meet its working capital requirements.
Cash used for capital expenditures during 1998 totaled $79.3 million compared to $31.9 million for 1997. The Company also made improvements to its marine base in Port Arthur, Texas in 1998.
Planned capital expenditures for 1999 are estimated to total approximately $15 million to complete improvements to the Company's existing fleet. Management believes that cash generated from operations, together with available borrowings under its loan facilities, will be sufficient to fund the Company's currently planned capital projects and working capital requirements for 1999. The Company's strategy, however, is to make other acquisitions to expand its operating capabilities and expand into selected international areas. To the extent the Company is successful in identifying acquisition opportunities, it most likely will require additional debt or equity financing depending on the size of any transaction.
YEAR 2000
With respect to its internal systems, the Company is taking steps to prepare its systems for the Year 2000 date change. Total amounts spent to date on Year 2000 efforts are less than $100,000 and future efforts are also expected to cost less than $100,000. The Company believes that its estimated costs related to the Year 2000 issue will not be material to the Company's business, operations, or financial condition. The Company makes use of computers in its reporting of accounting, financial, administrative, and management information. Additionally, the Company uses computers as a communication tool for its employees to communicate among themselves and with other persons outside the organization. Finally, certain equipment of the Company makes use of embedded computer technology.
The Company has implemented a Year 2000 project plan to identify and assess its risks associated with Year 2000 issues. Under the plan, the Company assessed its major information and computing systems and has updated or replaced applications that were not Year 2000 compliant. The Company has also contacted its key vendors and customers to assess their efforts and progress with Year 2000 issues. The Company does not anticipate any material affects on its business, operations or financial condition. Despite efforts to address Year 2000 issues in advance, there can be no assurance that the Company will not experience unanticipated disruption, negative consequences or costs caused by undetected errors in the technology used in its internal systems.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In this Annual Report, the consolidated financial statements and supplementary data of the Company appear on pages through and are incorporated herein by reference. See Index to Consolidated Financial Statements on page 23.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive officers called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 1999 annual meeting of stockholders and is incorporated herein by reference. For additional information regarding executive officers of the Company, see "Executive Officers of the Registrant" of this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the compensation of the Company's executive officers called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 1999 annual meeting of stockholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 1999 annual meeting of stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions called for by this item will be included in the Company's definitive Proxy Statement prepared in connection with the 1999 annual meeting of stockholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are filed as a part of this report:
1. Financial Statements
PAGE ---- Report of Independent Public Accountants........................... Consolidated Balance Sheets as of December 31, 1998 and 1997............ Consolidated Statements of Operations for the Periods Ended December 31, 1998, 1997, and 1996.................. Consolidated Statements of Stockholders' Equity for the Periods Ended December 31, 1998, 1997, and 1996.............. Consolidated Statements of Cash Flows for the Periods Ended December 31, 1998, 1997, and 1996.................. Notes to Consolidated Financial Statements............................
2. Financial Statement Schedules
Other schedules have not been included because they are not applicable, immaterial or the information required has been included in the financial statements or notes thereto.
3. Exhibits
See Index to Exhibits on page E-1. The Company will furnish to any eligible stockholder, upon written request, a copy of any exhibit listed upon payment of a reasonable fee equal to the Company's expenses in furnishing such exhibit.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Horizon Offshore, Inc.:
We have audited the accompanying consolidated balance sheets of Horizon Offshore, Inc. (a Delaware corporation), and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1998 and 1997 and for the period from inception (December 20, 1995) through December 31, 1996. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of Horizon Offshore, Inc., and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997 and for the period from inception (December 20, 1995) through December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas February 26, 1999
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 (DEFICIT) (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
HORIZON OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Horizon Offshore, Inc. (a Delaware corporation) and its subsidiaries (Horizon or the Company), provide offshore construction services to the oil and gas industry. These services generally consist of laying and burying marine pipelines and installing and salvaging production platforms and other marine structures for the transportation of oil and gas. Work is performed primarily on a fixed-price or day-rate basis or a combination thereof.
Horizon, which was incorporated on December 20, 1995, did not commence operations until March 1996 and until December 1997 was wholly owned by Elliott Associates, L.P. and Westgate International, L.P. (the Principal Stockholders). Accordingly, the results of operations for the year ended December 31, 1996 are the same as those presented in the accompanying financial statements. The Principal Stockholders funded substantially all of the Company's cash requirements from inception through April 1998, to fund its operating activities, working capital requirements and capital expenditures for the acquisition and improvement of assets and equipment. These advances were represented by promissory notes bearing interest at the rate of 10% per annum.
In 1997, the Company was recapitalized through a series of transactions. The Principal Stockholders converted $21 million of the principal indebtedness and accrued interest to additional paid-in capital. The Company issued 10% Subordinated Notes due December 31, 2005 (Subordinated Notes) to the Principal Stockholders to evidence the remaining outstanding indebtedness and provide for any future advances in an aggregate amount not to exceed $20 million. Additionally, the Company issued a warrant to a Principal Stockholder to purchase 2,750,000 shares at $.004 per share, which approximated fair value at the date of the transaction. The warrant was exercised in December 1997. In 1997, the Company sold three boats, a tugboat and certain equipment to affiliated entities of the Principal Stockholders for a purchase price of $12.7 million and $12.0 million of the proceeds were used to reduce the indebtedness under the Subordinated Notes. The Company accounted for the $3.2 million gain on the sale, net of taxes of approximately $1.6 million, as a capital contribution. As of December 31, 1997 the balances outstanding on the Subordinated Notes totaled $16.1 million (See Note 6).
In April 1998, the Company completed its initial public offering (the Offering) of 5,750,000 shares of its common stock at $13.00 per share and received $68.6 million, net of $6.2 million of underwriting commissions and discounts, and other expenses. The Company used the net proceeds of the Offering to repay $23.8 million of outstanding Subordinated Notes and to acquire the Stephaniturm, a 230-foot diving support vessel, for $18.3 million. The remaining Offering proceeds were used to expand the Company's fleet.
DSND ALLIANCE
In December 1997, the Company entered into an agreement with Det Sondenfjelds-Norske Dampskibsselskab ASA (DSND) to form a strategic alliance. DSND is a Norwegian-based, full service contractor in the subsea construction business. DSND acquired 4,125,000 shares of the Company's common stock from the Principal Stockholders. Upon completion of the Offering in April 1998, DSND sold the DSND Stephaniturm, a dynamically positioned diving support vessel, to the Company. In addition, the Company obtained a 30% interest in a joint venture (the "DSND Horizon Joint Venture") formed to operate a reel pipelaying vessel in the Gulf, offshore Mexico and Canada, and in the Caribbean. The Company and DSND are required to fund, in proportion to their equity ownership, the funds required to operate the DSND Horizon Joint Venture to the extent not provided from operations. The Company recognized equity in losses of the DSND Horizon Joint Venture of $(158,000) and made contributions of $138,000 during 1998. The Company also earned $127,000 from administrative fees billed to the DSND Horizon Joint Venture. The
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company is unable at this time to predict future working capital requirements of the DSND Horizon Joint Venture. The DSND Horizon Joint Venture will also have access to DSND's other deep water pipelaying vessels on terms to be agreed upon for any deep water pipelaying projects that may be obtained by the DSND Horizon Joint Venture.
BUSINESS RISKS
The Company's level of activity depends largely on the condition of the oil and gas industry and, in particular, the level of capital expenditures by oil and gas companies for developmental construction. These expenditures are influenced by prevailing oil and gas prices, expectations about future demand and prices, the cost of exploring for, producing and developing oil and gas reserves, the discovery rates of new oil and gas reserves, sale and expiration dates of offshore leases in the United States and abroad, political and economic conditions, governmental regulations and the availability and cost of capital. Historically, oil and gas prices and the level of exploration and development activity have fluctuated substantially, impacting the demand for pipeline and marine construction services.
A prolonged weakness in energy prices or a prolonged period of lower levels of offshore drilling and exploration could adversely affect the Company's future revenues and profitability. The Company has experienced a decline in demand for its marine construction services in the Gulf as oil and gas companies have reduced their levels of capital expenditures. The Company expects reduced demand for its services may impact its results of operations for 1999.
Factors affecting the Company's profitability include competition, equipment and labor productivity, contract estimating, weather conditions and the other risks inherent in marine construction. The marine construction industry in the Gulf is highly seasonal as a result of weather conditions with the greatest demand for these services occurring during the second and third quarters of the year. Full year results are not a direct multiple of any quarter because of this seasonality.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
Contract revenues are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to the total estimated costs for each contract. This method is used because management considers costs incurred to be the best available measure of progress on these contracts. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset "Costs in excess of billings" represents revenues recognized in excess of amounts billed. The liability "Billings in excess of costs" represents amounts billed in excess of revenues recognized.
COST RECOGNITION
Costs of contract revenues include all direct material and labor costs and certain indirect costs which are allocated to contracts based on utilization, such as supplies, tools, repairs and depreciation. Selling, general and administrative costs are charged to expense as incurred.
INTEREST CAPITALIZATION
Interest is capitalized on the average amount of accumulated expenditures for equipment that has been purchased and is undergoing major modifications prior to being placed into service. Interest is capitalized
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
until the equipment is placed into service using an effective rate based on related debt. Interest expense for the years ended December 31, 1998 and 1997, is net of interest capitalized in the amount of $1.3 million and $.3 million, respectively.
EARNINGS PER SHARE
Earnings per share data for all periods presented has been computed pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" that requires a presentation of basic earnings per share (basic EPS) and diluted earnings per share (diluted EPS). Basic EPS excludes dilution and is determined by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock. There are no differences in basic EPS and diluted EPS for all periods presented.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin No. 98, nominal issuances of common and common equivalent shares by the Company during the 12 months immediately preceding the initial filing of the Registration Statement relating to the Offering have been included in the calculation of the shares used in computing earnings (loss) per share (for the periods prior to the completion of the Offering) as if these shares were outstanding for such periods. The Company's nominal issuances relate to the warrant issued in conjunction with the Company's recapitalization in 1997.
CASH AND CASH EQUIVALENTS
The Company considers all cash in banks and highly liquid investments with original maturity dates of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Equipment is carried at cost. Depreciation is provided using the straight-line method based on the following estimated useful lives:
Barges, boats and related equipment............................ 15 to 18 years Buildings............................ 15 years Machinery and equipment.............. 8 years Office furniture and equipment....... 5 years Leasehold improvements............... 3 years
Major additions and improvements to barges, boats and related equipment are capitalized over the useful life of the vessel. Maintenance and repairs including major overhauls are expensed as incurred. When equipment is sold or otherwise disposed of, the cost of the equipment and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income.
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes the recognition and measurement standards related to the impairment of long-lived assets. The Company periodically assesses the realizability of its long-term assets pursuant to the provisions of SFAS No. 121. Based on the Company's analysis of the undiscounted future cash flows for its long-term assets, no impairments have been recognized under SFAS No. 121.
OTHER ASSETS
Other assets consist principally of prepaid loan fees, deferred drydock cost, deferred interest and deposits. Deferred interest was imputed at 10% on aggregate non-interest bearing debt of $5.1 million and $7.4 million at December 31, 1998 and 1997, respectively, and will be amortized over the life of the debt agreements using the effective interest rate method. Deposits consist of a security deposit on the corporate
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
office lease and included a deposit for the purchase of marine equipment at December 31, 1997. Loan fees paid in connection with the loan facilities (See Note 6) will be amortized over the term of the loans.
Dry-dock costs are costs associated with scheduled maintenance on the Company's marine construction vessels. Costs incurred in connection with dry dockings are deferred and amortized over the period to the next scheduled dry docking. The Company includes in other current assets the portion of these deferred charges expected to be amortized during the next twelve month period, with the residual balance in other assets.
Other assets consist of the following (in thousands):
FEDERAL INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. The Company reviews all significant estimates on a recurring basis and records the effect of any necessary adjustments prior to their publication. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates are inherent in the preparation of financial statements.
SEGMENT INFORMATION
In 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued and requires companies to report financial and descriptive information about their reportable operating segments. The Company has operations in one industry segment, the marine construction service industry to offshore oil and gas companies, and the Company had no major customers whose revenues were 10% or more of consolidated revenues. Based upon the Company's interpretation of these requirements, it does not have any other reportable operating segments.
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTS RECEIVABLE:
Contract receivables are generally billed upon the completion of small contracts and are progress billed on larger contracts. Costs in excess of billings solely represent costs incurred on jobs in process. Claims for extra work and changes in scope of work are included in revenues when collection is determined by management to be probable.
The Company has not experienced material losses from uncollected receivables. The principal customers of the Company are the major and independent oil and gas companies and their affiliates. The concentration of customers in the energy industry may impact the Company's overall credit exposure, either positively or negatively, since these customers may be similarly affected by changes in economic or other conditions. However, management believes that the diversification of the Company's portfolio of receivables within the energy industry reduces any potential credit risk associated with any particular customer.
Included in accounts receivable from related parties at December 31, 1997 is $.3 million due from an affiliated entity owned by the Principal Stockholders for costs incurred by the Company related to the boats sold to this affiliated entity (See Note 1). During 1997, the affiliated entity repaid $1.2 million to the Company for such costs related to the boats, and the Company then paid $1.2 million on the Subordinated Notes in 1997.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
4. ACQUISITION OF ASSETS:
Prior to December 31, 1996, members of the Company's former management team undertook certain actions in an attempt to expand the Company's operations into the Middle East. Under prior management, the Company agreed to acquire and refurbish a barge for purposes of providing construction services in the Middle East. The Company acquired the barge for $4.8 million, of which $3.0 million was financed with a note payable to the seller. The Company incurred improvement costs to refurbish the barge of $.2 million in 1998, $6.7 million in 1997 and $3.3 million in 1996. In connection with the purchase, the Company undertook certain actions to perform construction services for a customer of the seller. The Company encountered title disputes over the barge, higher than anticipated barge refurbishing costs and the subsequent rejection of the barge by the customer. In August 1997, present management of the Company
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resolved the title, contractual and other legal disputes pertaining to the barge and the related project. Included in costs of contract revenues for 1996 is $7.4 million in charges related to the Company's attempt to expand operations into the Middle East. The Company paid $2.4 million in 1998 and $.5 million to the customer in the third quarter of 1997.
The Company acquired two pipelay/pipebury barges, one pipebury barge and one diving support vessel during the last half of 1997. Acquisition and improvement costs relating to these vessels totaled $25.5 million during the last half of 1997 and $23.8 million during 1998. In July 1997, the Company acquired land and buildings in Louisiana for $.8 million to use as a marine base to support offshore operations which were sold in 1998. This marine base was no longer able to support the Company's expanded operations. The Company acquired a facility near Port Arthur, Texas in December 1997 as its primary marine base and storage facility for marine structures for a total of $7.1 million, including improvements of $3.9 million made in 1998.
The Stephaniturm, a 230-foot dynamically positioned diving support vessel, was acquired for $18.3 million in April 1998 with Offering proceeds and is chartered to DSND. DSND extended the charter term until December 31, 1999 with a cancellation provision at September 30, 1999 upon payment by DSND of a $250,000 cancellation fee. The Company recognized $4.9 million in revenues and $4.1 million in gross profit during 1998 related to this charter.
In May 1998, the Company acquired the BB-316, a 350-foot pipebury barge, subsequently renamed the Pacific Horizon, which was reconfigured as a derrick barge for a total cost of $20.2 million at December 31, 1998. The Pacific Horizon was placed into service in March 1999.
The Company entered into a capital lease in 1998 to acquire the Atlantic Horizon, a 550-ton derrick barge, for $16.4 million, pursuant to which the Company intends to acquire title to the vessel upon expiration of the lease term in November 1999. The lease term requires monthly lease payments of $.2 million for 18 months with the final payment of $13.2 million to be paid in November 1999. In the event the Company elects not to purchase the Atlantic Horizon at that time, the Company is required to pay $5 million as liquidated damages. This payment obligation is secured by a corporate surety bond in the amount of $5 million.
5. DISPOSITION OF ASSETS:
The Company sold its marine base in Louisiana in December 1998 for $.8 million in cash and recognized a $20,000 gain on the sale.
The Company sold one of its boats to an unaffiliated third party in February 1997 for $3.3 million in cash. A $.6 million gain was recognized on the sale.
As discussed in Note 1, three boats and certain equipment were sold to affiliated entities owned by the Principal Stockholders for $12.7 million in 1997. The Company used the $12.0 million of sales proceeds to repay a portion of the debt to the Principal Stockholders. The Company accounted for the $3.2 million gain on the sale, net of taxes of approximately $1.6 million, as a capital contribution.
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE (IN THOUSANDS):
LOAN FACILITIES
On October 27, 1997, the Company entered into a credit facility, which was amended in December 1997, with Den norske Bank ("DNB") providing for $20 million of borrowings. In May 1998, Horizon amended its credit facility with DNB (the "Credit Facility") which provided for up to $50 million of borrowings at LIBOR plus 3%. The amended Credit Facility provided for a $30 million reducing revolver to be reduced in monthly increments of $.6 million beginning September 30, 1999 and a $20 million revolving note due September 30, 2000. In December 1998, the Company replaced the $30 million reducing revolving note payable due to Den norske Bank by entering into a loan agreement with The CIT Group. This loan
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provides for a $60 million term loan at LIBOR plus 2.65% ("CIT Term Loan") to be repaid in 84 monthly installments of $.5 million beginning January 30, 1999, maturing January 30, 2006. The current amount borrowed at December 31, 1998 was $50 million, however, the CIT Term Loan provides for additional borrowings of $5 million upon completion of the Pacific Horizon and another $5 million upon completion of the Phoenix Horizon. The Company used the proceeds from the CIT Term Loan to pay off all outstanding debt to DNB and the outstanding debt to a wholly-owned subsidiary of a principal stockholder. In December 1998, the Company amended the $20 million revolving note to provide for $30 million of borrowings ("DNB Revolver"). The DNB Revolver matures on December 31, 2001, bears interest at LIBOR plus 2.5% and is secured by accounts receivable from customers.
The CIT Term Loan and DNB Revolver loan covenants require that certain conditions be met in order for the Company to obtain advances. The CIT Term Loan is secured by mortgages on all vessels owned by the Company, except the Atlantic Horizon. The DNB Revolver is secured by accounts receivable. Advances under the DNB Revolver may be obtained in accordance with a borrowing base defined as a percentage of accounts receivable balances. Both the CIT and DNB loan facilities require the Company to maintain certain financial ratios and contain certain covenants that limit the Company's ability to incur additional indebtedness, pay dividends, create certain liens, sell assets and make capital expenditures.
The Company acquired the Atlantic Horizon, a derrick barge, under a lease purchase arrangement. The Company intends to refinance the vessel with proceeds from the CIT Term Loan upon the expiration of the lease term. In the event the Company elects not to purchase the Atlantic Horizon at that time, the Company is required to pay $5 million as liquidated damages. This payment obligation is secured by a corporate surety bond in the amount of $5 million.
Maturities of long-term debt for each of the years ending December 31 are as follows (in thousands):
1999................................. $ 7,606 2000................................. 7,606 2001................................. 21,330 2002................................. 5,556 2003................................. 5,556 Thereafter........................... 22,220 --------- $ 69,874 =========
INDEBTEDNESS TO RELATED PARTIES
The Principal Stockholders made advances to the Company, including accrued interest at 10% per annum, to fund operating activities, working capital requirements and capital expenditures for the acquisition and improvement of assets and equipment. These advances were represented by two promissory notes bearing interest at the rate of 10% per annum. In 1997, the Company was recapitalized through a series of transactions. The Principal Stockholders converted $21 million of the principal indebtedness and accrued interest to additional paid-in capital. The Company issued 10% Subordinated Notes due December 31, 2005 (Subordinated Notes) to the Principal Stockholders to evidence the remaining outstanding indebtedness and provide for any future advances in an aggregate amount not to exceed $24 million, as amended. In 1997, the Company sold three boats, a tugboat and certain equipment to affiliated entities of the Principal Stockholders for a purchase price of $12.7 million and $12.0 million of the proceeds were used to reduce the indebtedness under the Subordinated Notes. In April 1998, the Company repaid its $23.8 million indebtedness under its Subordinated Notes with Offering proceeds.
In July 1998, Horizon announced that its board of directors approved the repurchase of up to $10 million of the Company's outstanding common stock. The shares may be purchased from time to time,
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subject to market conditions, in the open market or in privately negotiated transactions, and such repurchases are funded by borrowings provided by a wholly-owned subsidiary of one of the Principal Stockholders. The Company borrowed $7.6 million during 1998 under a promissory note payable to this subsidiary of the Principal Stockholder. The $7.6 million outstanding balance was repaid from proceeds of the CIT Term Loan in December 1998. The Company may borrow an additional $2.4 million from the wholly-owned subsidiary of the Principal Stockholder to purchase shares up to $10 million. The note matures on March 31, 2003 and bears an interest rate to be equal to that charged on the DNB Revolver.
7. INCOME TAXES:
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of (in thousands):
The income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 differs from the amount computed by applying the statutory federal income tax rate of 34 percent to consolidated income before income taxes as follows (dollars in thousands):
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the temporary differences that give rise to the significant portions of the deferred tax assets and liabilities are presented below (in thousands):
At December 31, 1997, a valuation allowance was provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The Company established a valuation allowance for certain deferred tax assets due to realization uncertainties inherent regarding future operating results. The realization of a significant portion of net deferred tax assets is based in part on the Company's estimates of the timing of reversals of certain temporary differences and on the generation of taxable income before such reversals. The Company recognized a net deferred tax asset at December 31, 1996 for the benefit of utilizing the net operating loss carryforward from the sale of appreciated assets to a related party in March 1997. The $1.6 million tax effect of the resulting gain was netted with the gain and treated as a capital contribution in the accompanying financial statements. The net operating loss carryforward of approximately $5.3 million at December 31, 1998 expires in the year 2012. The Company's ability to utilize the net operating loss carryforward could be limited by a change in ownership as defined by federal income tax regulations.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various routine legal proceedings primarily involving claims for personal injury under the Jones Act and general maritime laws which the Company believes are incidental to the conduct of its business. The Company believes that none of these proceedings in the aggregate, if adversely determined, would have a material adverse effect on the Company's business.
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases office space at various locations under non-cancelable operating leases that expire through November 2001. Rental expense under these leases was $.6 million, $.3 million, and $.1 million for the year ended December 31, 1998, 1997, and 1996 respectively. Future minimum lease commitments under these agreements for the years ended December 31 are as follows (in thousands):
1999.................................... $ 675 2000.................................... 675 2001.................................... 620 --------- $ 1,970 =========
INSURANCE
In the opinion of management the Company has adequately accrued for all liabilities arising from these agreements based upon the total incremental amount that would be paid based upon the with-and-without calculation assuming experience to date and assuming termination.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three of its executive officers that expire April 1, 2001 and has purchased $5 million in "key-man" life insurance with respect to its chief executive officer, for which the Company is the named beneficiary.
9. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) Plan for all eligible employees and, at the discretion of management makes annual contributions to the plan. The Company made contributions of $.5 million to the plan during 1998. The Company did not make any contributions to the plan prior to 1998. The Company intends to make future contributions with stock.
10. STOCKHOLDERS' EQUITY:
PUBLIC OFFERING OF COMMON STOCK
In April 1998, the Company completed its initial public offering (the Offering) of 5,750,000 shares of its common stock at $13.00 per share and received $68.6 million, net of $6.2 million of underwriting commissions and discounts, and other expenses. The Company used the net proceeds of the Offering to repay $23.8 million of outstanding subordinated notes, to acquire the Stephaniturm, a 230-foot diving support vessel, for $18.3 million, and used the remaining net proceeds to expand the Company's fleet.
STOCK SALES
In December 1997, the Company issued to a company controlled by a director of the Company, pursuant to a subscription agreement, 326,480 shares of the Company's common stock at $2.91 per share, the same per share price paid by DSND. The receivable was fully paid in January 1998. In addition, the Principal Stockholders sold 858,440 shares of the Company's common stock at $2.91 per share, the same per share price paid by DSND, to officers and key employees of the Company.
STOCK SPLIT
In January 1998, the Company effected a 220 for one stock split. The effect of the stock split has been retroactively reflected in the accompanying financial statements as of the earliest period.
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
In January 1998, the Board of Directors and the stockholders of the Company approved the Stock Incentive Plan (the "Plan"). The Plan provides for the granting of stock options ("Options") to directors, executive officers, other employees and certain non-employee consultants of the Company. The Company accounts for grants to employees and directors under APB Opinion No. 25, and no compensation expense has been recognized in the basic financial statements. The Company has adopted the disclosure provisions of SFAS No. 123 "Accounting for Stock-Based Compensation."
The Plan has 1.9 million shares available for issuance as optioned shares and terminates in April 2009. In general, the terms of the option awards (including vesting schedules) will be established by the Compensation Committee of the Company's Board of Directors. The Company granted options to purchase 694,000 shares of common stock at $13.00, the IPO price, on April 1, 1998. One half of these options vest over a three year period, and the other one half are fully vested at the end of a five year period which could be excellerated upon certain events. As of December 31, 1998, the Company has outstanding options covering an aggregate of 677,500 shares of Common Stock. At December 31, 1998, no options were exercisable. Unexercised options expire ten years from the date of issue.
The following table summarizes activity under the Plan for the year ended December 31, 1998:
Had compensation cost for this plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing module with the following weighted-average assumptions used for grants in 1998: risk-free interest rate of 5.89%; no expected annual dividend yield; expected life of 10 years; and expected volatility of 39.94%. Since no options were granted prior to 1998 pro forma results have not been presented for such periods.
On January 1, 1999, the Company granted options to purchase 211,000 shares of Common Stock at $5.50 per share which vest equally over a three year period.
LITIGATION SETTLEMENT
A subsidiary of the Company, a Principal Stockholder and other persons were defendants in a lawsuit filed by a former member and employee of the Company's subsidiary. The actions were settled in February 1998 with the Principal Stockholder paying $150,000 and each party releasing the other from any further
HORIZON OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability. As the Company benefited from this settlement, the Company has recorded the $150,000 as an expense and a capital contribution in the accompanying consolidated financial statements.
TREASURY STOCK
On July 31, 1998, Horizon announced that its board of directors approved the repurchase of up to $10 million of the Company's outstanding common stock. The shares may be purchased from time to time, subject to market conditions, in the open market or in privately negotiated transactions. As of December 31, 1998, the Company had repurchased 1,155,000 shares of common stock for a total cost of $7,582,000 through debt borrowings. See Note 6.
11. RELATED PARTY TRANSACTIONS:
Effective as of September 30, 1997, the Company entered into a services agreement with an affiliated entity owned by the Principal Stockholders to provide administrative and support services, including certain administrative, accounting, financial, tax and other services. The service agreement terminated on September 30, 1998. Included in accounts receivable from related parties at December 31, 1998 is $12,000 receivable for direct and general and administrative costs.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The marine construction industry in the Gulf of Mexico is seasonal, with contracts being awarded in the spring and early summer and the work being performed before the onset of adverse winter weather conditions. Seasonality and adverse weather conditions historically have resulted in lower revenues in the fourth and first quarters. Full year results are not a direct multiple of any quarter because of this seasonality.
The following table sets forth selected quarterly information for 1998 and 1997. The Company believes that all necessary adjustments have been indicated in the amount stated below to present fairly the results of such periods.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 15, 1999.
HORIZON OFFSHORE, INC.
By: /s/ DAVID W. SHARP DAVID W. SHARP EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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EXHIBIT INDEX
EXHIBIT NUMBER - ------------------------ 3.1 -- Amended and Restated Certificate of Incorporation of the Company(1) 3.2 -- Bylaws of the Company(1) 4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Company's Certificate of Incorporation and Bylaws defining the rights of holders of Common Stock 4.2 -- Specimen Common Stock certificate(1) 10.1 -- Form of Indemnity Agreement by and between the Company and each of its directors(1) 10.2 -- Reimbursement and Indemnity Agreement dated as of June 10, 1997 between the Company and Elliott Associates, L.P.(1) 10.3 -- The Company's Stock Incentive Plan(1)* 10.4 -- Form of Stock Option Agreement under the Company's Stock Incentive Plan(1)* 10.5 -- Employment and Non-Competition Agreement dated as of January 1, 1998 between the Company and Bill J. Lam(1)* 10.6 -- Employment and Non-Competition Agreement dated as of January 1, 1998 between the Company and David W. Sharp(1)* 10.7 -- Employment and Non-Competition Agreement dated as of January 1, 1998 between the Company and James K. Cole(1)* 10.8 -- Credit Agreement dated as of October 27, 1997 among Den norske Bank ASA, Horizon Vessels, Inc. and Horizon Offshore Contractors, Inc.(1) 10.9 -- Amendment No. 1 to Credit Agreement dated as of December 30, 1997 among Den norske Bank ASA, Horizon Vessels, Inc. and Horizon Offshore Contractors, Inc.(1) 10.10 -- Alliance Agreement dated as of December 4, 1997 among Det Sondenfjelds-Norske Dampskibsselskab ASA, the Company, Highwood Partners, L.P., and Westgate International, L.P.(1) 10.11 -- Stockholder's Agreement dated as of December 4, 1997 among Det Sondenfjelds- Norske Dampskibsselskab ASA, the Company, Highwood Partners, L.P., and Westgate International, L.P.(1) 10.12 -- Memorandum of Agreement dated as of December 4, 1997 among DSND Shipping AS and Horizon Vessels, Inc. and "Barecon 89" Standard Bareboat Charter(1) 10.13 -- Option Agreement dated as of December 4, 1997 between the Company and DSND Oceantech, Ltd.(1) 10.14 -- Registration Rights Agreement dated as of December 4, 1997 among the Company, Highwood Partners, L.P., and Westgate International, L.P.(1) 10.15 -- 10% Subordinated Note due March 31, 2003 payable to the order of Westgate International, L.P.(1) 10.16 -- 10% Subordinated Note due March 31, 2003 payable to the order of Highwood Partners, L.P.(1) 10.17 -- Form of Purchase Agreement(1) 10.18 -- Services Agreement dated as of September 30, 1997 between the Company and Horizon Barge & Towing, Inc.(1) 10.19 -- Agreement for Purchase and Sale of Vessels dated as of May 30, 1997 between HLS Offshore, L.L.C. and CGI Marine Corporation(1) 10.20 -- Vessel Purchase Agreement dated as of December 2, 1997 between Horizon Barge & Towing, Inc. and Horizon Vessels, Inc.(1) 10.21 -- Vessel Purchase Option Agreement dated and effective as of May 15, 1998 between Big Hook, L.L.C. and Horizon Vessels, Inc.(2) 10.22 -- Bareboat Charter dated as of May 15, 1998 between Big Hook, L.L.C. and Horizon Vessels, Inc.(2) 10.23 -- Vessel Purchase Agreement dated as of May 27, 1998 between OPI Vessels, Inc. and Horizon Vessels, Inc.(2)
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10.24 -- Settlement Agreement dated as of June 10, 1997 between HLS Offshore L.L.C., Mannai Marine Co. Limited and RANA S.r.l.(1) 10.25 -- Consulting Agreement dated January 1, 1998 between the Company and Edward L. Moses, Jr.(1)* 10.26 -- Letter Agreement dated December 5, 1997 between the Company and Crossbay and Ventures, Ltd.(1) 10.27 -- Letter Agreement dated December 5, 1997 between the Company and Crossbay and Ventures, Ltd.(1) 10.28 -- Loan Agreement dated December 30, 1998 among Horizon Vessels, Inc., Horizon Offshore Contractors, Inc., The CIT Group/Equipment Financing, Inc., as agent, and the other lenders specified therein.(3) 10.29 -- Amended and Restated Credit Agreement dated as of December 30, 1998 among Horizon Vessels, Inc., Horizon Offshore Contractors, Inc., Den norske Bank ASA, as agent, and the other lenders specified therein.(3) 10.30 -- Promissory Note due June 30, 2003 dated August 5, 1998 by the Company payable to Highwood Associates, L.P.(3) 11.1 -- Statements Regarding Computation of Net Income (Loss) Per Share(3) 21.1 -- Subsidiaries of the Company(3) 23.1 -- Consent of Arthur Andersen LLP.(3) 27.1 -- Financial Data Schedule(3)
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(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration Statement No. 333-43965).
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated May 27, 1998 and filed with the Commission on June 11, 1998.
(3) Filed herewith.
* Management Contract or Compensatory Plan or Arrangement.
(B) REPORTS ON FORM 8-K
No Report 8-K has been filed during the last quarter of 1998.
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