UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DCD.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2003March 31, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period fromto

 

Commission file number 333-69826001-32108

 

Hornbeck Offshore Services, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 72-1375844

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification

Number)

 

103 NORTHPARK BOULEVARD, SUITE 300

COVINGTON, LA 70433

(Address of Principal Executive Offices) (Zip Code)

(985) 727-2000

(Registrant’s Telephone Number, Including Area Code)

414 NORTH CAUSEWAY BOULEVARD

MANDEVILLE, LA 70448

(Former Address)

 

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¨     Nox

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes¨     Nox

 

The total number of shares of common stock, par value $.01 per share, outstanding as of November 11, 2003May 6, 2004 was 36,319,536.20,774,214.

 



HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003MARCH 31, 2004

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

  1

Item 1

 

Financial Statements

  1

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1110
  

General

  1110
  

Critical Accounting Policies

  1312
  

Results of Operations

12

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

  14
  

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002Liquidity and Capital Resources

  16
  

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002Contractual Obligations

  18
  

Liquidity and Capital ResourcesForward Looking Statements

  19
Contractual Obligations and Commercial Commitments21
Inflation21
Forward Looking Statements21

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  2220

Item 4

 

Controls and Procedures

  2320

PART II—OTHER INFORMATION

  2422

Item 1

 

Legal Proceedings

  2422

Item 2

 

Changes inIn Securities and Use of Proceeds

  2422

Item 3

 

Defaults Upon Senior Securities

  2422

Item 4

 

Submission of Matters to a Vote of Security Holders

  2422

Item 5

 

Other Information

  2422
Item 6 

Recent Developments

22

Item 6

Exhibits and Reports on Form 8-K

  2523

SIGNATURESSIGNATURE

  2926

 

 

i


PART I—FINANCIAL INFORMATION

 

Item 1—Financial Statements

 

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

  September 30,
2003


  December 31,
2002


  March 31,
2004


  December 31,
2003


  (Unaudited)  (Unaudited)
ASSETS            

Current assets:

            

Cash and cash equivalents

  $12,462  $22,228  $42,677  $12,899

Accounts and claims receivable, net of allowance for doubtful accounts of $471 and $469, respectively

   19,696   14,616

Accounts and claims receivable, net of allowance for doubtful accounts of $294 and $454, respectively

   14,213   17,124

Prepaid insurance

   1,235   569   1,751   291

Property taxes receivable

   1,429   2,144

Other current assets

   1,638   1,877   1,598   1,081
  

  

  

  

Total current assets

   35,031   39,290   61,668   33,539
  

  

Property, plant, and equipment, net

   314,068   226,232

Property, plant and equipment, net

   321,557   316,715

Goodwill, net

   2,628   2,628   2,628   2,628

Deferred charges, net

   11,544   10,113   11,915   12,316

Other assets

   27   27   44   44
  

  

  

  

Total assets

  $363,298  $278,290  $397,812  $365,242
  

  

  

  

LIABILITIES AND STOCKHOLDERS’ EQUITY            

Current liabilities:

            

Accounts payable

  $4,504  $5,350  $6,856  $3,884

Accrued interest

   3,104   7,747   3,096   7,799

Accrued payroll and benefits

   2,999   3,740   1,804   3,911

Other accrued liabilities

   136   188      247
  

  

  

  

Total current liabilities

   10,743   17,025   11,756   15,841
  

  

Revolving credit facility

   46,900   —        40,000

Long-term debt, net of original issue discount of $2,420 and $2,694, respectively

   172,580   172,306

Long-term debt, net of original issue discount of $2,223 and $2,323, respectively

   172,777   172,677

Deferred tax liabilities, net

   22,300   16,709   24,941   23,567

Other liabilities

   448   374   921   762
  

  

  

  

Total liabilities

   252,971   206,414   210,395   252,847
  

  

Stockholders’ equity:

            

Preferred stock: $0.01 par value; 5,000 shares authorized, no shares issued and outstanding

   —     —     —     —  

Common stock: $0.01 par value; 100,000 shares authorized, 36,320 shares and 30,305 shares issued and outstanding, respectively

   363   303

Common stock: $0.01 par value; 100,000 shares authorized, 20,648 and 14,528 shares issued and outstanding, respectively

   206   145

Additional paid-in capital

   90,149   60,880   162,974   90,351

Retained earnings

   19,815   10,693   24,221   21,883

Accumulated other comprehensive income

   16   16
  

  

  

  

Total stockholders’ equity

   110,327   71,876   187,417   112,395
  

  

  

  

Total liabilities and stockholders’ equity

  $363,298  $278,290  $397,812  $365,242
  

  

  

  

 

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

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS AND SHARES IN THOUSANDS)THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

   Three Months Ended
September 30,


  Nine Months Ended
September 30,


 
   2003

  2002

  2003

  2002

 
   (Unaudited)  (Unaudited) 

Revenues

  $28,215  $22,322  $81,572  $66,381 

Costs and expenses:

                 

Operating expenses

   16,998   12,510   45,665   33,958 

General and administrative expenses

   2,941   2,603   8,654   7,657 
   


 


 


 


    19,939   15,113   54,319   41,615 
   


 


 


 


Operating income

   8,276   7,209   27,253   24,766 

Interest expense

   (4,804)  (4,021)  (13,378)  (11,817)

Interest income

   25   127   141   575 

Other income (expense), net

   (10)  —     697   —   
   


 


 


 


Income before income taxes

   3,487   3,315   14,713   13,524 

Income tax expense

   (1,328)  (1,272)  (5,591)  (5,152)
   


 


 


 


Net income

  $2,159  $2,043  $9,122  $8,372 
   


 


 


 


   Three Months Ended
March 31,


 
   2004

  2003

 
   (Unaudited) 

Revenues

  $31,347  $27,347 

Costs and expenses:

         

Operating expenses

   14,351   10,474 

Depreciation and amortization

   5,207   3,621 

General and administrative expenses

   2,960   2,894 
   


 


    22,518   16,989 
   


 


Operating income

   8,829   10,358 

Interest expense

   (5,145)  (4,217)

Interest income

   38   72 

Other income (expense), net

   (10)  706 
   


 


Income before income taxes

   3,712   6,919 

Income tax expense

   (1,374)  (2,629)
   


 


Net income

  $2,338  $4,290 
   


 


Basic net income per share of common stock

  $0.16  $0.35 
   


 


Diluted net income per share of common stock

  $0.15  $0.35 
   


 


Weighted average basic shares outstanding

   14,925   12,122 
   


 


Weighted average diluted shares outstanding

   15,306   12,340 
   


 


 

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

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

 

  Nine Months Ended
September 30,


   Three Months Ended
March 31,


 
  2003

  2002

   2004

 2003

 
  (Unaudited)   (Unaudited) 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

  $9,122  $8,372   $2,338  $4,290 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation

   10,261   7,355    4,157   3,044 

Amortization

   2,172   1,401    1,050   577 

Provision for bad debts

   69   348    (160)  (31)

Deferred tax expense

   5,591   5,152    1,374   2,670 

Gain on sale of assets

   —     (713)

Amortization of financing costs

   1,131   1,071    393   374 

Gain on sale of asset

   (713)  —   

Changes in operating assets and liabilities:

        

Accounts receivable

   (5,150)  (2,521)

Accounts and claims receivable

   3,071   621 

Prepaid insurance and other current assets

   (427)  539    (1,256)  (951)

Deferred charges and other assets

   (4,364)  (3,184)   (879)  (1,056)

Accounts payable

   (1,489)  (1,442)   2,716   1,561 

Accrued liabilities and other liabilities

   (1,900)  (2,163)

Accrued interest

   (4,643)  (5,014)   (4,703)  (4,619)

Accrued liabilities and other liabilities

   (732)  (142)
  


 


  


 


Net cash provided by operating activities

   10,828   11,935    6,201   3,604 
  


 


  


 


CASH FLOWS FROM INVESTING ACTIVITIES:

        

Construction of offshore supply vessels

   (30,667)  (38,841)

Acquisition of offshore supply vessels

   (48,000)  —   

Acquisition of tank barge

   (7,400)  —   

Proceeds from sale of vessel

   1,650   —   

Construction of new vessels

   (6,239)  (12,880)

Proceeds from the sale of vessel

   —     1,650 

Capital expenditures

   (6,965)  (4,682)   (2,793)  (9,209)
  


 


  


 


Net cash used in investing activities

   (91,382)  (43,523)   (9,032)  (20,439)
  


 


  


 


CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from borrowings under debt agreements

   1,657   46 

Payments on borrowings under debt agreements

   (1,001)  (434)

Net proceeds from borrowings under revolving credit facility

   46,900   —   

Repurchase of shares

   —     (50)

Net proceeds (payments) from borrowings under revolving credit facility

   (40,000)  7,400 

Deferred financing costs

   (95)  (153)   (65)  (5)

Net proceeds from shares issued

   23,327   413 

Gross proceeds from initial public offering

   78,000   —   

Payments for initial public offering costs

   (6,111)  —   

Net cash proceeds from common stock issued

   795   9 
  


 


  


 


Net cash provided by (used in) financing activities

   70,788   (178)

Net cash provided by financing activities

   32,619   7,404 
  


 


  


 


Net decrease in cash and cash equivalents

   (9,766)  (31,766)

Effects of exchange rate changes on cash

   (10)  —   
  


 


Net increase (decrease) in cash and cash equivalents

   29,778   (9,431)

Cash and cash equivalents at beginning of period

   22,228   53,203    12,899   22,228 
  


 


  


 


Cash and cash equivalents at end of period

  $12,462  $21,437   $42,677  $12,797 
  


 


  


 


SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:

        

Interest paid

  $19,260  $19,075   $10,258  $9,319 
  


 


  


 


Income taxes paid

  $—    $66 
  


 


NON-CASH FINANCING ACTIVITIES:

     

Issuance of shares to partially fund the acquisition of offshore supply vessels

  $6,000  $—   
  


 


 

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

 

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(DOLLARS AND SHARES IN THOUSANDS)THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

1.Basis of Presentation

 

The accompanying unaudited consolidated financial statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States. The interim financial statements and notes are presented as permitted by instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements have been included and consist only of normal recurring items. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 20022003 of Hornbeck Offshore Services, Inc. (together with its subsidiaries, the “Company”). The results of operations for the three month and nine month periodsperiod ended September 30, 2003March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.2004. Certain amounts reported in prior periods have been reclassified to conform to the 20032004 presentation.

 

2.Recent Accounting PronouncementsEarnings (Net Income) Per Share and Reverse Stock Split

 

In JanuaryBasic net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period. Diluted net income per share of common stock was calculated by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period plus the effect of dilutive stock options. Weighted average number of common shares outstanding was calculated by using the sum of the shares determined on a daily basis divided by the number of days in the period. At March 31, 2004 and 2003 the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46) “ConsolidationCompany had dilutive stock options of Variable Interest Entities,”381 and 218, respectively, which clarifieswere assumed exercised using the applicationtreasury stock method. In the first quarter of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating2004, stock options representing 360 shares were excluded from the computation of diluted net income per share of common stock because their exercise price was greater than the market price of the common stock at March 31, 2004.

On March 5, 2004, the Company effected a 1-for-2.5 reverse stock split of its common stock that caused the number of outstanding shares to consolidationdecrease from 36,320 to 14,528. For all periods, the share amounts and per share data reflected throughout these financial statements have been adjusted to give effect to the reverse stock split. Basic and diluted net income per common share are each calculated based on the weighted average number of variable interest entities (VIEs) in which equity investors do not haveshares outstanding during the characteristics of a controlling financial interest or do not have sufficient equity at riskperiods adjusted for the entity to finance its activities without additional subordinated financial support from other parties. The provisionseffect of FIN 46 became effective immediately for VIEs created after January 31, 2003. The provisions of FIN 46 for VIEs created on or before January 31, 2003 were delayed until December 31, 2003 by FASB Staff Position No. FIN 46-6, “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities,”issued in October 2003. The Company continues to assess the impact of FIN 46, yet believes that it will not be required to consolidate any existing VIEs. However, the Company’s final conclusions will be incorporated into its consolidated financial statements upon full adoption of FIN 46 on December 31, 2003.

In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” to clarify under what circumstances a contract with an initial net investment meets the characteristics of a derivative, to clarify when a derivative contains a financing component, to amend the definition of an “underlying” to conform it to language in FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and to amend certain other existing pronouncements. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and is to be applied prospectively. Implementation of SFAS 149 did not have a material effect on the Company’s consolidated financial statements as of and for the period ended September 30, 2003, as it did not have any derivative instruments or hedging arrangements.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 requires that certain financial instruments issued in the form of shares that are mandatorily redeemable, as well as certain other financial instruments, be classified as liabilities in the financial statements. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective beginning with the Company’s third quarter of 2003. The provisions of this statement did not have a material impact on the Company’s consolidated financial statements as of and for the period ended September 30, 2003.

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)reverse stock split.

 

3.Acquisitions of Offshore Supply VesselsInitial Public Offering

 

On June 26, 2003, theThe Company acquired five 220-foot new generation offshore supply vessels (“OSVs”) and their related business from Candy Marine Investment Corporation,completed an affiliateinitial public offering of Candy Fleet Corporation (collectively, “Candy Fleet”) for $45.0 million comprised6,000 shares of $39.0 million in cash and $6.0 million inits common stock at $13.00 per share, for the purposetotal gross proceeds of diversifying its OSV fleet and expanding its service offerings. Candy Fleet is a privately held marine vessel operator in the Gulf of Mexico. The Company funded the cash portion of the purchase price with a combination of borrowings under the Company’s revolving credit facility and with part of the cash proceeds generated by the private placement of common stock as discussed in Note 4. The new vessel names are theHOS Explorer,HOS Express,HOS Pioneer,HOS Trader andHOS Voyager.

On August 6, 2003, the Company completed the acquisition of an additional 220-foot new generation OSV from Candy Fleet. The closing of the transaction was effected after satisfying certain conditions precedent to closing including, among other things, receipt during July 2003 of $13.5$78 million in proceeds relating to the previously announced $30.0 million private placement of common stock and the satisfactory completion of a drydocking and survey of the vessel in early August 2003. The purchase price was $9.0 million.on March 31, 2004. The Company plans to continue operatinguse the acquired vessel, which was renamed the HOS Mariner, in the Gulf of Mexico.

The purchase method was used to account for the acquisition of the six OSVs from Candy Fleet. The purchase price allocation is currently being evaluated and is tentative pending receipt of an inventory valuation from vendors. The final allocation is expected to be completed by December 31, 2003. There were no intangible assets or goodwill recorded as a result of the acquisitions. As of September 30, 2003, the aggregate purchase price for the six OSVs was allocated to the acquired assets based on the estimated fair values as follows (in thousands):

Property, plant and equipment

  $53,817

Inventory

   183
   

Purchase price

  $54,000
   

4.Private Placement of Common Stock

In May 2003, the Company commenced a private placement of its common stock to accredited investors to raise gross proceeds of $30.0 million, including $6.0 million of common stock, or 1.2 million shares, issued to Candy Fleet as partial consideration for the June 26, 2003 acquisition of five OSVs. The Company had received payments or irrevocable, unconditional and binding stock subscriptions for 4.3 million shares resulting in $10.5 million of cash proceeds and subscriptions receivable of approximately $11.0 million by June 30, 2003. All stock subscriptions receivable recorded during June 2003 were collected in full during July 2003. The private placement was completed in July 2003 with $2.5 million of additional proceeds received from July 2003 subscriptions for 0.5 million shares. Costs incurred for the private placement of common stock were approximately $0.7 million and were recorded as a reduction in additional paid in capital.

5.Long-Term Debt

On July 24, 2001, the Company issued $175.0 million in principal amount of 10 5/8% senior notes (senior notes). The Company realized net proceeds of the offering of approximately $165.0$71.4 million to fund a substantialportion of the costs of the construction of ocean-going, double-hulled tank barges, the retrofit of certain existing vessels, possible future acquisitions or additional new vessel construction,

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

and for general corporate purposes. Pending such uses, on March 31, 2004, the Company used a portion of the proceeds to repay the outstanding balance under its revolving credit facility. The Company’s shares of common stock trade on the New York Stock Exchange under the symbol “HOS.”

4.Long-Term Debt

On July 24, 2001, the Company issued $175,000 in principal amount of 10 5/8% senior notes. The Company realized net proceeds of approximately $165,000, a substantial portion of which was used to repay and fully extinguish all of the then existing credit facilities. The senior notes mature on August 1, 2008 and require semi-annual interest payments at an annual rate of 10 5/8% 5/8% on February 1 and August 1 of each year until maturity, with the first payment due on February 1, 2002.maturity. The effective interest rate on the senior notes is 11.18%. No principal payments are due until maturity. The senior notes are unsecured senior obligations and rank equally in right of payment with other existing and future senior indebtedness and senior in right of payment to any subordinated indebtedness incurred by the Company in the future. The senior notes are guaranteed by all of the Company’s subsidiaries. The Company may, at its option, redeem all or part of the senior notes from time to time at specified redemption prices and subject to certain conditions required by the indenture. The Company is permitted under the terms of the indenture to incur additional indebtedness in the future, provided that certain financial conditions set forth in the indenture are satisfied by the Company. The Company completed an exchange offer on January 18, 2002, whereby the 10 5/8% Series A senior notes, due August 1, 2008, were exchanged for 10 5/8% Series B senior notes with the same terms, the offering of which was publicly registered.

 

Effective December 31, 2001,On February 13, 2004, the Company entered into a newamended and restated its senior secured revolving credit facility for $50.0 million (revolvingto extend its maturity and increase its nominal size to $100,000. The current borrowing base is $60,000. The expiration date of the facility is February 13, 2009. The maturity of this facility will automatically accelerate to March 31, 2008, if by that date the Company has not redeemed its senior notes or refinanced them with debt having a maturity later than July 31, 2009. As of March 31, 2004, the Company had no outstanding balance under the revolving credit facility) with three banks.facility. As of such date, seven OSVs and four ocean-going tugs and associated personalty collateralized the revolving credit facility. Borrowings under the revolving credit facility accrue interest, at our option, at either (1) the prime rate announced by Citibank, N.A. in New York, plus a margin of up to 1.0%, or (2) the London Interbank Offered Rate, plus a margin of 1.5% to 3.5%. As of March 31, 2004, the weighted average interest rate was 4.19% under such facility. Unused commitment fees are currently payable on a quarterly basis, at the annual rate of one-quarter to three-eighths of one percent on the revolving credit facility. The revolving credit facility expires on December 31, 2004; however, the Company believes it will be renewed prior to that date.

On June 26, 2003, concurrent with the acquisition of the five OSVs from Candy Fleet, the Company amended the $50.0 million revolving credit facility to increase its borrowing base from $25.0 million to $50.0 million. In connection with this amendment, the Company pledged two additional OSVs as collateral.

On September 30, 2003, the Company amended the revolving credit facility to increase the borrowing base from $50.0 million to $60.0 million, while adding a fourth bank, DVB Bank AG, to its lending group. The Company pledged one additional OSV as collateral in connection with this amendment. As of September 30, 2003, seven OSVs and four ocean-going tugs collateralize the revolving credit facility. As of September 30, 2003, the Company had a balance outstanding of $46.9 millionunused but available amounts under the revolving credit facility, which primarily fundedbased on the acquisition of a double-hulled tank barge and six OSVs, and had $13.1 million of additionalleverage ratio as defined in the credit immediately available under the revolving credit facility.facility agreement.

 

The revolving credit facility and indenture impose certain operating and financial restrictions on the Company. Such restrictions affect, and in many cases limit or prohibit, among other things, the Company’s ability to incur additional indebtedness, make capital expenditures, redeem equity, create liens, sell assets and make dividend or other restricted payments.

Interest expense excludes capitalized interest related to new construction of OSVs of $0.7 million in the third quarter of 2003 and $1.0 million in the third quarter of 2002, $2.3 million in the first nine months of 2003 and $3.2 million in the first nine months of 2002.

6.Stock Option Plans

SFAS No. 123 “Accounting for Stock-Based Compensation” established financial accounting and reporting standards for stock-based compensation plans. The Company’s plan includes all arrangements by which employees and directors receive shares of stock or other equity instruments of the Company, or the Company incurs liabilities to employees or directors in amounts based on the price of the stock. SFAS 123 defines a fair-value-based method of accounting for stock-based compensation. However, SFAS 123 also allows an entity to continue to measure stock-based

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Interest expense excludes capitalized interest related to new vessel construction of $0.4 million in the first quarter of 2004 and $0.9 million in the first quarter of 2003.

5.Incentive Compensation Plan

The Company established an incentive compensation plan that provides the Company with the ability to grant options for a maximum of 3,500 shares of common stock. The purchase price of the stock subject to each option is determined by the Board of Directors of the Company and cannot be less than the fair market value of the stock at the date of grant.

In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123”, was issued by the FASB and amends SFAS 123, “Accounting for Stock-Based Compensation.” This Statement provides alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation and amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. We have not adopted either of the alternative methods of transition and continue to apply Accounting Principles Board Opinion, APB, No. 25, “Accounting for Stock Issued to Employees.” Additionally, SFAS 148 amends APB No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information.

SFAS 123 also allows an entity to continue to measure stock-based compensation cost using the intrinsic value method of APB Opinion No. 25 “Accounting for Stock Issued to Employees.”25. Entities electing to retain the accounting prescribed in APB 25 must make pro forma disclosures of net income assuming dilution as if the fair-value-based method of accounting defined in SFAS 123 had been applied. The Company retained the provisions of APB 25 for expense recognition purposes. Under APB 25, where the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of SFAS 123.” This pronouncement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Under the fair value based method, compensation cost for stock options is measured when options are issued. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and frequent disclosures in financial statements for the effects of stock-based compensation.

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

 

The transition guidance and annual disclosure provisions of SFAS 148 were effective for fiscal years ending after December 15, 2002. As of December 31, 2002, the Company adopted SFAS 148 through continued application of the intrinsic value method of accounting under APB 25, and enhanced financial statement disclosures for the effect on net income had the fair value provisions of SFAS 148 been applied.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

HadIf compensation cost for the Company’s stock options had been determined based on the fair value at the grant date consistent with the method under SFAS 123, the Company’s income available to common stockholders for the ninethree months ended September 30,March 31, 2004 and 2003 and 2002 would have been as indicated below:

 

  2003

  2002

   2004

 2003

 

Income available to common stockholders:

        

As reported

  $9,122  $8,372   $2,338  $4,290 

Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect

   (284)  (242)   (292)  (257)
  


 


  


 


Pro forma

  $8,838  $8,130   $2,046  $4,033 
  


 


  


 


Basic net income per share of common stock::

   

As reported

  $0.16  $0.35 

Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect

   (0.02)  (0.02)
  


 


Pro forma

  $0.14  $0.33 
  


 


Diluted net income per share of common stock:

   

As reported

  $0.15  $0.35 

Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect

   (0.02)  (0.02)
  


 


Pro forma

  $0.13  $0.33 
  


 


 

7.6.Commitments and Contingencies

 

In April 2002, the Company’s Board of Directors approved the third newbuild program forVessel Construction

At March 31, 2004, the Company to build eight new generation OSVs. On May 1, 2002, followingwas committed under vessel construction contracts with a competitive bidding process, a definitive agreement was signed with LEEVAC Industries, LLC for the construction of the first four vessels of this program, each of which has been designed as a 240 ED class vessel. LEEVAC Industries, LLC isshipyard affiliated with one of the Company’s directors who is also the former Chairman of the Board and former Chief Executive Officer, who currently serves on the Board of the Company. The Company received a favorable fairness opinion fromDirectors, to construct one double-hulled tank barge and with an independent appraiser with respect to the terms of the contract. The contract providesunrelated third party shipyard for the deliveryconstruction of all four vessels during 2003. Aggregate construction costs forone additional double-hulled tank barge. At that date, the first four vessels, before allocation of construction period interest, areremaining amount expected to be approximately $53.0 million, including $18.4 million that was incurred during 2004 to complete construction with respect to such vessels during 2002. On September 17, 2003, the Company took delivery of the third of these vessels, theHOS Greystone. As of

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2003, the amount expected to be expended to complete construction of the remaining vesselcontracts was approximately $4.0 million, which becomes due at various dates during the fourth quarter of 2003.$28.3 million. The Company is obligated under the terms of the foregoing contractcontracts to remit funds to the shipyards based on vessel construction milestones, the timing of which are subject to change during vessel construction. Construction bids from shipyards for the last four vessels of this new build program are currently being evaluated. Demand for new generation OSVs in the Gulf of Mexico and foreign markets will be a key determinant of when the four additional OSVs will be constructed.

Contingencies

 

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

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8.7.Segment Information

 

The Company provides marine transportation services through two business segments. The Company operates new generation OSVsoffshore supply vessels in the U.SU.S. Gulf of Mexico Trinidad & Tobago and Mexicoselect international markets through its offshore supply vessel segment. The OSVsoffshore supply vessels principally support complex exploration and production projects by transporting cargo to offshore drilling rigs and production facilities and provide support for specialty services. The tug and tank barge segment primarily operates ocean-going tugs and tank barges in the northeastern United States and in Puerto Rico. The ocean-going tugs and tank barges provide coastwise transportation of refined and bunker grade petroleum products from one port to another. The following table shows reportable segment information prepared on the same basis as the Company’s unaudited consolidated financial statements.

 

  Three Months Ended
September 30,


  Nine Months Ended
September 30,


  2003

  2002

  2003

  2002

  Three Months Ended
March 31,


Operating revenues:

            
  2004

  2003

Operating revenue:

      

Offshore supply vessels

  $17,355  $11,932  $45,123  $32,025  $15,565  $13,172

Tugs and tank barges

   10,860   10,390   36,449   34,356   15,782   14,175
  

  

  

  

  

  

Total

  $28,215  $22,322  $81,572  $66,381  $31,347  $27,347
  

  

  

  

  

  

Operating expenses:

                  

Offshore supply vessels

  $6,803  $4,057

Tugs and tank barges

   7,548   6,417
  

  

Total

  $14,351  $10,474
  

  

Depreciation and amortization:

      

Offshore supply vessels

  $9,297  $5,281  $22,288  $13,511  $2,919  $1,861

Tugs and tank barges

   7,701   7,229   23,377   20,447   2,288   1,760
  

  

  

  

  

  

Total

  $16,998  $12,510  $45,665  $33,958  $5,207  $3,621
  

  

  

  

  

  

General and administrative expenses:

                  

Offshore supply vessels

  $1,514  $941  $4,044  $2,838  $1,049  $1,203

Tugs and tank barges

   1,427   1,662   4,610   4,819   1,911   1,691
  

  

  

  

  

  

Total

  $2,941  $2,603  $8,654  $7,657  $2,960  $2,894
  

  

  

  

  

  

Operating income:

                  

Offshore supply vessels

  $6,544  $5,710  $18,791  $15,676  $4,793  $6,050

Tugs and tank barges

   1,732   1,499   8,462   9,090   4,036   4,308
  

  

  

  

  

  

Total

  $8,276  $7,209  $27,253  $24,766  $8,829  $10,358
  

  

  

  

  

  

Capital expenditures:

                  

Offshore supply vessels

  $19,380  $11,564  $89,880  $40,131  $2,959  $14,175

Tugs and tank barges

   373   317   8,454   2,996   5,767   7,845

Corporate

   252   164   698   396   306   69
  

  

  

  

  

  

Total

  $20,005  $12,045  $99,032  $43,523  $9,032  $22,089
  

  

  

  

  

  

Depreciation and amortization:

            

Offshore supply vessels

  $2,620  $1,578  $6,546  $4,052

Tugs and tank barges

   2,196   1,826   5,887   4,704
  

  

  

  

Total

  $4,816  $3,404  $12,433  $8,756
  

  

  

  

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

  

As of

September
30, 2003


  As of
December
31, 2002


  As of
March 31,
2004


  As of
December 31,
2003


Identifiable assets:

            

Offshore supply vessels

  $277,843  $196,068  $279,195  $276,567

Tugs and tank barges

   66,400   74,036   73,780   68,589

Corporate

   19,055   8,186   44,837   20,086
  

  

  

  

Total

  $363,298  $278,290  $397,812  $365,242
  

  

  

  

Long-lived assets:

            

Offshore supply vessels

  $258,534  $174,676  $259,303  $258,076

Tugs and tank barges

   54,304   50,797   60,346   56,914

Corporate

   1,230   759   1,908   1,725
  

  

  

  

Total

  $314,068  $226,232  $321,557  $316,715
  

  

  

  

8.Subsequent Events

On April 28, 2004, the Company issued an additional 126 shares of its common stock pursuant to the exercise by the underwriters in the initial public offering of an option to purchase additional shares, which resulted in incremental gross proceeds to the Company of approximately $1.6 million.

On April 30, 2004, the Company exercised the first of its three fixed-price options with a shipyard for the construction of one additional double-hulled tank barge. This will be the third vessel to be constructed under the Company’s current tank barge newbuild program, which is based on a proprietary new tank barge design developed in-house by the Company.

Item 2—Management’s Discussion Andand Analysis Ofof Financial Condition Andand Results Ofof Operations

 

The following Management’s Discussion And Analysis Of Financial Condition And Results Of Operationsmanagement’s discussion and analysis of financial condition and results of operations should be read together with our unaudited consolidated financial statements and notes to unaudited consolidated financial statements and our Annual Report on Form 10-K for the year ended December 31, 2002.2003. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements. In this Form 10-Q, “company,” “we,” “us,”“us” and “our” refer to Hornbeck Offshore Services, Inc. and its subsidiaries, except as otherwise indicated. The term “new generation,” when referring to OSVs, mean deepwater-capable vessels subject to the regulations promulgated under the International Convention on Tonnage Measurement of Ships, 1969, which was adopted by the United States and made effective for all U.S. flaggedU.S.-flagged vessels in 1992.

 

General

 

We own and operate a fleet of 2223 technologically advanced, new generation OSVs. Currently, 1819 of our OSVs are operating in the U.S. Gulf of Mexico, three of our OSVs are operating offshore Trinidad & Tobago and one is working offshore Mexico. We also operate 12 ocean-going tugs and 16 ocean-going tank barges in the northeastern United States, primarily New York Harbor, in Puerto Rico and in Puerto Rico.

We charter our OSVs on a dayrate basis, under which the customer pays us a specified dollar amount for each day during the termU.S. Gulf of the contract, pursuant to either fixed time charters or spot market charters. A fixed time charter is a contract with a term of at least one year in which the charterer obtains the right to direct the movements and utilization of the vessel in exchange for payment of a specified dayrate, generally paid monthly, but the vessel owner retains operational control over the vessel. Typically, the owner fully equips the vessel and is responsible for normal operating expenses, repairs, wages and insurance, while the charterer is responsible for voyage expenses, such as fuel, port and stevedoring expenses. Spot market charters in the OSV industry are generally time charter contracts with either relatively short, indefinite terms or fixed terms of less than one year. Generally, the vessel owner absorbs crew, insurance and repair and maintenance costs in connection with the operation of OSVs pursuant to spot market charters, while customers absorb all other direct operating costs.

All of our OSVs operate under time charters, including seven that are chartered under contracts with expiration dates ranging from June 2004 through November 2007. The long-term contracts for our OSVs are consistent with those used in the industry and are either fixed for a term of months or years or are tied to the duration of a long-term contract for a drilling rig for which the vessel provides services. These contracts generally contain, among others, provisions governing insurance, reciprocal indemnifications, performance requirements and, in certain instances, dayrate escalation terms and renewal options.Mexico.

 

While OSVs service existing oil and gas production platforms as well as exploration and development activities, incremental OSV demand depends primarily upon the level of drilling activity, which can be influenced by a number of factors, including oil and natural gas prices and drilling budgets of exploration and production companies. As a result, utilization rates have historically been tied to oil and natural gas prices and drilling activity. However, the relatively large capital commitments, longer lead times and investment horizons associated with deepwater and deep well projects have diminished the significance of this relationship. Soft market conditions in the U.S. Gulf of Mexico have persisted throughout most of 2002 and for the first nine months of 2003. Despite the market weakness, we added six new generation OSVs to our fleet, three of which were cold-stacked when acquired, and were able to achieve a fleetwide OSV utilization of approximately 90% for the third quarter of 2003.

We have developed five different classes of proprietary, new generation OSVs to meet the diverse needs of our customers. The recent acquisition of six 220’ OSVs from Candy Fleet, a sixth class, changed the mix of equipment in our fleet, broadening our coverage with additional vessels well suited for “deep gas” exploration and other complex shelf drilling applications. Given that the recently acquired vessels were 220 class OSVs, our complement of OSVs smaller than our 240 class size increased from 33 percent to 50 percent, resulting in a decrease in our fleetwide average dayrates. However, we have also achieved a commensurate reduction in both our fleetwide average capital costs and daily operating expense per vessel.

Our third quarter average dayrate was positively impacted by a full quarter contribution from theHOS Gemstone, the second of our four new 240 ED class supply vessels. This vessel was delivered in mid-June and is currently operating under a one-year time charter, with a one-year renewal option, with a large independent oil and gas company supporting deepwater operations in the U.S. Gulf of Mexico. We expect our fourth quarter average dayrate to also be positively impacted by the delivery of a proprietary newbuild vessel, theHOS Greystone, which was delivered in mid-September, two weeks ahead of schedule. The delivery of theHOS Greystone marks the eighth consecutive quarter that we have placed a newly constructed OSV in service. The fourth vessel of this newbuild program, theHOS Silverstar, was on track for early delivery in mid-December; however, we plan to make various vessel enhancements to address emerging market trends. These vessel modifications have resulted in the delivery date of theHOS Silverstar being rescheduled from December 2003 to January 2004.these factors.

 

Although the current U.S. Gulf of Mexico OSV market conditions remain volatile,remains soft, we believe certain eventstrends could have a favorable impact on the long-term market outlook. Deepwater properties continue to change ownership, and several of the new exploration and productionthis segment. First, certain operators have publicly confirmed their intentions to work these properties over the next several quarters. Additionally, integrated oil companies have recently reaffirmed their commitments to continue developing large deepwater and other complex projects in the U.S. Gulf of Mexico for drilling in late-2004 and 2005. Second, there has been an increase in the U.S. Gulf of Mexico drilling permits issued from 59 in February 2004 to 98 in March 2004, a level not seen since April 2002. Third, additional floating production platform installations are expected to commence activity during 2004. Fourth, as we have anticipated, we are beginning to see an accelerated attrition rate of older, conventional 180 ft. supply boats working in the U.S. Gulf of Mexico. In responseMany such vessels are being written off by competitors and are expected to be removed from service. Fifth, in addition to the traditional sources of demand for modern U.S.-flagged vessels, including deep gas and other complex drilling applications, our new generation OSVs have increasingly been working on the shelf supporting conventional drilling projects. Finally, more new generation OSVs are leaving the U.S. Gulf of Mexico for foreign markets. A combination of all of these factors, could suggest improving market conditions we elected to expand our operations within the western hemisphere in mid-2002. We now have three vessels operating in Trinidad & Tobago and one in Mexico. We will continue to take advantage of our vessels’ capabilities to meet emerging market trends, both in the U.S. Gulf and in select international markets.

Generally, we operate an ocean-going tug and tank barge together as a “tow” to transport petroleum products between U.S. ports and along the coast of Puerto Rico. We operate our tugs and tank barges under fixed time charters, spot market charters, contracts of affreightment and consecutive voyage contracts. Spot market charters in the tug and tank barge industry are generally single-voyage contracts of affreightment or time charter contracts with terms of less than one year. A consecutive voyage contract is a contract for the transportation of cargo for a specified number of voyages between designated ports over a fixed period of time under which we are paid based on the volume of products we deliver per voyage. Under consecutive voyage contracts, in addition to earning revenues for volumes delivered, we earn a standby hourly rate between charters. One of our tank barges was chartered to a third party under a bareboat charter from January 2000 until it was sold to the third party on January 28, 2003. A bareboat charter is a “net lease” in which the charterer takes full operational control over the vessel for a specified period of time for a specified daily rate that is generally paid monthly to the vessel owner. The bareboat charterer is solely responsible for the operation and management of the vessel and must provide its own crew and pay all operating and voyage expenses.this segment.

 

The primary demand drivers for our tug and tank barge services are population growth, the strength of the U.S. economy, changes in weather, oil prices and competition from alternate energy sources. The tug and tank barge market, in general, is marked by steady

demand over time. Results for the third quarterfirst and fourth quarters of 2003 were fairly consistent with the second quarter of 2003a given year are typically higher due to normal seasonal weather patterns that typically result in a drop-off of activity during the second and third quarters. Our third quarter results were slightly lower than the second quarter due to more vessel days

out of service for drydocking activity in the third quarter of 2003, compared to the second quarter of 2003. We generally take advantage of this seasonality to prepare the tug and tank barge fleet for peak demand periods by performing our regulatory drydocking and maintenance programs during these off-peak periods.the second and third quarters. In addition, we continuously evaluate our customer’scustomers’ needs and often elect to accelerate scheduled drydockings to take advantage of certain positioningmarket opportunities.

As expected, activity during the first quarter of 2004 was seasonally higher than the fourth quarter of 2003 due to the peak demand caused by winter-related activity. Second quarter 2004 results for this segment should return to their normal, historical levels.

As the peak summer travel season approaches, higher gasoline prices are not expected to decrease demand. In fact, the Energy Information Administration has predicted that daily gasoline use in the United States could be up to 9.3 million barrels in 2004 compared to 9.1 million barrels in 2003. Usage in the summer of 2004 at these projected levels would be a new seasonal record high and reflects that gasoline demand continues to rise annually. In addition, the EIA stated that U.S. spring season gasoline stocks are currently at one of the lowest levels in the last 30 years. These factors support our reason for optimism in this segment.

 

As the next major Oil Pollution Act of 1990, or OPA 90, milestone approaches on January 1, 2005, we are beginning to see an increase in customer demand and a favorable trend toward premiumfor double-hulled equipment has led to increases in dayrates for double-hulledthis equipment, particularly for tank barges in black oil service. We are actively working to ensure that our fleet is well positioned to take advantage of these opportunities as they develop. In November 2003, we commenced a new double-hulled tank barge newbuild construction program to address our need to replace three single-hulled tank barges that are required under OPA 90 to be retired from service prior to January 1, 2005. Our current newbuild program is based on a proprietary new tank barge design that we have developed in-house to replace and expand our existing fleet of ocean-going tank barges. The design of these vessels is intended to maximize transit speed, improve cargo through-put rates and enhance crew safety features.

 

Our operating costs are primarily a function of fleet size and utilization levels. The most significant direct operating costs are wages paid to vessel crews, maintenance and repairs and marine insurance. Because most of these expenses remain payable regardless of vessel utilization, our direct operating costs as a percentage of revenues may fluctuate considerably with changes in dayrates and utilization.

 

In addition to the operating costs described above, we incur fixed charges related to the depreciation of our fleet and costs for routine drydock inspections and maintenance and repairs necessary to ensure compliance with applicable regulations and to maintain certifications for our vessels with the U.S. Coast Guard and various classification societies. The aggregate number of drydockings and other repairs undertaken in a given period determines the level of maintenance and repair expenses and marine inspection amortization charges. We generally capitalize costs incurred for drydock inspection and regulatory compliance and amortize such costs over the period between such drydockings, typically 30 or 60 months.

Applicable maritime regulations require us to drydock our vessels twice in a five-year period for inspection and routine maintenance and repair. If we undertake a large number of drydockings in a particular fiscal period, comparative results may be affected.

 

Critical Accounting Policies

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited consolidated financial statements included in this Form 10-Q. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles. In other circumstances, we are required to make estimates, judgments and assumptions that we believe are reasonable based upon information available. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are discussed in Notenote 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.2003. There were no significant changes to our critical accounting policies as reported in our Form 10-K during the ninethree months ended September 30, 2003.March 31, 2004.

 

On September 9, 2003, the Accounting Standards Executive Committee, or AcSEC, of the American Institute of Certified Public Accountants voted to approve a Statement of Position, or SOP, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. The SOP is expected to be presented for approval by the FASB in the fourth quarter of 2003. If approved, the SOP would require us to expense as incurred some or all of the recertification costs in connection with the drydocking of our vessels. The SOP was undertaken to clarify the diversity in practice that exists in accounting for these and other costs related to property, plant and equipment. We will continue to monitor the progress related to the potential new rules and their impact on our consolidated financial statements.

Results of Operations

 

The table below sets forth, by segment, the average dayrates and utilization rates for our vessels and the average number of vessels owned during the periods indicated. These offshore supply vessels and tugs and tank barges generate substantially all of our revenues and operating profit.

 

   Three Months Ended
September 30,


  Nine Months Ended
September 30,


 
   2003

  2002

  2003

  2002

 

Offshore Supply Vessels:

                 

Average number of vessels (1)

   19.9   11.6   15.8   10.4 

Average utilization rate (2)

   88.7%  91.0%  90.0%  94.1%

Average dayrate (3)

  $10,411  $12,344  $11,460  $11,994 

Tugs and Tank Barges:

                 

Average number of tank barges (4)

   16.0   16.0   15.9   16.0 

Average fleet capacity (barrels) (4)

   1,156,330   1,130,727   1,141,308   1,130,727 

Average barge capacity (barrels) (4)

   77,221   70,670   72,019   70,670 

Average utilization rate (2)

   67.7%  73.1%  72.8%  77.9%

Average dayrate (5)

  $10,788  $9,119  $11,125  $9,382 
   Three Months Ended
March 31,


 
   2004(4)

  2003(4)

 

Offshore Supply Vessels:

         

Average number of vessels

   22.3   13.2 

Average utilization rate (1)

   78.4%  89.7%

Average dayrate (2)

  $9,629  $12,397 

Tugs and Tank Barges:

         

Average number of tank barges

   16.0   15.5 

Average fleet capacity (barrels)

   1,156,330   1,111,264 

Average barge capacity (barrels)

   72,271   71,515 

Average utilization rate (1)

   91.2%  83.4%

Average dayrate (3)

  $11,503  $11,442 

(1)We owned 22 OSVs at September 30, 2003. Five OSVs were acquired on June 26, 2003 and one additional OSV on August 6, 2003. We took delivery of a newly constructed OSV on September 17, 2003 and expect the delivery of an additional newly constructed OSV in January 2004.
(2)Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenuesrevenues.
(3)(2)Average dayrates represent average revenue per day, which includes charter hire and brokerage revenue, based on the number of days during the period that the OSVs generated revenue.
(4)These averages give effect to our sale of theEnergy 5502 on January 28, 2003, and our acquisition of theEnergy 8001 on February 28, 2003. As of September 30, 2003, our tank barge fleet was comprised of 16 vessels.
(5)(3)Average dayrates represent average revenue per day, including time charters, brokerage revenue, revenues generated on a per-barrel-transported basis, demurrage, shipdocking and fuel surcharge revenue, based on the number of days during the period that the tank barges generated revenue. For purposes of brokerage arrangements, this calculation excludes that portion of revenue that is equal to the cost paid by customers of in-chartering third party equipment.
(4)On March 3, 2004, we placed theHOS Silverstar in service, the fourth new 240 ED class OSV added to our fleet and the last vessel to be constructed under our most recent OSV newbuild program. The March 31, 2003 averages give effect to our sale of theEnergy 5502 on January 28, 2003, and our acquisition of theEnergy 8001 on February 28, 2003.

 

In March 2003, the Securities and Exchange Commission, (SEC)or SEC, adopted rules regulating the use of non-GAAP financial measures, such as EBITDA, in filings with the SEC,

disclosures and press releases. These rules require non-GAAP financial measures to be presented with and reconciled to the most nearly comparable financial measure calculated and presented in accordance with GAAP.

 

EBITDA consists of earnings (net income) before interest expense, provision for income taxes, depreciation and amortization. This term, as we define it, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States, or GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

We Refer to our Annual Report on Form 10-K for the year ended December 31, 2003 for a description of how management uses, and why we believe investors use, EBITDA is useful to an investor in evaluating ourthe Company’s operating performance because:performance.

it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as interest expense, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and

it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest charges from our outstanding debt) and asset base (primarily depreciation and amortization of our vessels) from our operating results.

Our management uses EBITDA:

as a measure of operating performance because it assists us in comparing our performance on a consistent basis as it removes the impact of our capital structure and asset base from our operating results;

in presentations to our board of directors to enable them to have the same consistent measurement basis of operating performance used by management;

as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations;

as a basis for incentive cash bonuses paid to our executive officers and other shore-based employees;

to assess compliance with financial ratios and covenants included in our revolving credit facility and the indenture governing our senior notes; and

in communications with lenders, senior note holders, rating agencies and others, concerning our financial performance.

 

The following table reconciles EBITDA with our net income for each of our business segments and in the aggregate, for the three and nine months ended September 30,March 31, 2004 and 2003, and 2002, respectively (dollars in thousands).

 

  Three months ended
September 30,


  Nine months ended
September 30,


  Three months ended
March 31,


  2003

  2002

  2003

  2002

  2004

  2003

EBITDA:

                  

Offshore supply vessels:

                  

Net income

  $1,708  $1,588  $5,131  $4,176  $349  $1,664

Plus:

                  

Interest expense

   3,791   3,200   10,572   9,333   4,149   3,391

Income tax expense

   1,052   994   3,145   2,580   245   1,019

Depreciation and amortization

   2,620   1,578   6,546   4,052   2,919   1,860
  

  

  

  

  

  

EBITDA

  $9,171  $7,360  $25,394  $20,141  $7,662  $7,934
  

  

  

  

  

  

Tugs and tank barges:

                  

Net income

  $451  $455  $3,991  $4,196  $1,989  $2,626

Plus:

                  

Interest expense

   1,013   821   2,806   2,484   996   826

Income tax expense

   276   278   2,446   2,572   1,129   1,610

Depreciation and amortization

   2,196   1,826   5,887   4,704   2,288   1,761
  

  

  

  

  

  

EBITDA

  $3,936  $3,380  $15,130  $13,956  $6,402  $6,823
  

  

  

  

  

  

Total:

            

Consolidated Total:

      

Net income

  $2,159  $2,043  $9,122  $8,372  $2,338  $4,290

Plus:

                  

Interest expense

   4,804   4,021   13,378   11,817   5,145   4,217

Income tax expense

   1,328   1,272   5,591   5,152   1,374   2,629

Depreciation and amortization

   4,816   3,404   12,433   8,756   5,207   3,621
  

  

  

  

  

  

EBITDA

  $13,107  $10,740  $40,524  $34,097  $14,064  $14,757
  

  

  

  

  

  

Summarized financial information concerning our reportable segments is shown below in the following table (dollars in thousands):

 

  Three months ended
September 30,


  Nine months ended
September 30,


  Three months ended
March 31,


  2003

  2002

  2003

  2002

  2004

  2003

Revenues:

                  

Offshore supply vessels

  $17,355  $11,932  $45,123  $32,025  $15,565  $13,172

Tugs and tank barges

   10,860   10,390   36,449   34,356   15,782   14,175
  

  

  

  

  

  

  $28,215  $22,322  $81,572  $66,381  $31,347  $27,347
  

  

  

  

  

  

Operating expenses:

                  

Offshore supply vessels

  $9,297  $5,281  $22,288  $13,511  $6,803  $4,057

Tugs and tank barges

   7,701   7,229   23,377   20,447   7,548   6,417
  

  

  

  

  

  

  $16,998  $12,510  $45,665  $33,958  $14,351  $10,474
  

  

  

  

  

  

General and administrative expenses

  $2,941  $2,603  $8,654  $7,657

Depreciation and amortization:

      

Offshore supply vessels

  $2,919  $1,861

Tugs and tank barges

   2,288   1,760
  

  

  $5,207  $3,621
  

  

General and administrative expenses:

  $2,960  $2,894
  

  

  

  

  

  

Interest expense

  $4,804  $4,021  $13,378  $11,817  $5,145  $4,217
  

  

  

  

  

  

Interest income

  $25  $127  $141  $575  $38  $72
  

  

  

  

  

  

Income tax expense

  $1,328  $1,272  $5,591  $5,152  $1,374  $2,629
  

  

  

  

  

  

 

Three Months Ended September 30, 2003March 31, 2004 Compared to Three Months Ended September 30, 2002March 31, 2003

 

Revenues.Revenues. Revenues were $28.2$31.3 million for the three months ended September 30, 2003,March 31, 2004, compared to $22.3$27.3 million for the same period in 2002,2003, an increase of $5.9$4.0 million or 26.5%14.7%. TheThis net increase in revenues wasis primarily the result of the year-over-year growth of our OSVfleet. Our operating fleet by 12grew from an average of 41 vessels since June 2002 andduring the additionfirst quarter of one double-hulled tank barge in February 2003.2003 to an average of 50 vessels during the first quarter of 2004. The additional revenues generated by these thirteennine vessels accounted for a $6.0$4.5 million of the increase in revenues, which was offset byour revenues. We also experienced a $0.1$0.5 million decrease in revenue related torevenues from our vessels that were in service during each of the three monthsquarters ended September 30, 2003March 31, 2004 and 2002, including theEnergy 5502, which was not in service during the third quarter of 2003.

 

Revenues from our OSV segment increased to $17.4$15.6 million for the three months ended September 30, 2003,March 31, 2004, compared to $11.9$13.2 million for the same period in 2002,2003, an increase of $5.5$2.4 million or 46.2%18.2%. The net increase in segment revenuesrevenue is due to the addition of twelve10 new generation OSVs since June 2002.mid-March 2003. Our OSV utilization rate was 88.7%78.4% for the three months ended September 30, 2003,March 31, 2004, which was slightly lower than the 91.0%89.7% utilization rate we achieved in the same period of 2002.2003. The utilization rate was lower for the three months ended March 31, 2004 primarily due to having more OSVs working in the spot market under weak market conditions in the U.S Gulf of Mexico. To a lesser degree, OSV utilization was impacted by the drydocking of vessels, including discretionary modifications to prepare certain vessels for international service, for 65 days out of service compared to 23 days in the 2003 quarter. Spot market contracts are more susceptible to fluctuations in utilization and day rates, particularly in soft market conditions, which we are currently experiencing. Our OSV average dayrate decreased to $10,411 indayrates were $9,629 for the third quarter of 2003three months ended March 31, 2004 compared to $12,344

$12,397 for the same period of 2002,2003, a decrease of $1,933$2,768 or 15.7%22.3%. The addition of six 220 class OSVs from Candy Fleet resulted in a decrease in our fleetwide averageAverage dayrates due tofor the change in our fleet complement to a greater proportion of vessels smaller than our 240 class size. Prior to the first Candy Fleet acquisition on June 26th, 33 percent of our fleet was comprised of vessels under 240’ in length. After the second Candy Fleet acquisition on August 6th, OSVs smaller than 240’ in length comprised 50 percent of our fleet. This shift in our OSV vessel mix, coupled with continued downward pressure on spot market dayrates in the Gulf of Mexico, resulted inthree months ended March 31, 2004 were lower average dayrates this quarter compared to the prior year quarter. Continued volatilitysame period in average dayrates and utilization is expected as we will have numerous boats in the spot market during the remainder of this year. Spot market vessels heighten the susceptibility2003 due primarily to dayrate and utilization swings resulting fromcontinued weak market conditions in the U.S. Gulf of Mexico.Mexico and the change in the average vessel size of our fleet complement after the mid-2003 acquisition of six 220’ vessels.

 

Revenues from our tug and tank barge segment totaled $10.9$15.8 million for the three months ended September 30, 2003,March 31, 2004 compared to $10.4$14.2 million for the same period in 2002,2003, an increase of $0.5

$1.6 million or 4.8%11.3%. The revenues increase is primarily due to an increased average barge size and change in the contract mix. Revenues for the three months ended September 30, 2003 included $0.4 million that was equal to the cost of in-chartering third-party equipment paid by customers compared to $0.9 million in the prior year quarter. Our utilization rate decreased to 67.7% for the three months ended September 30, 2003 compared to 73.1% for the same period in 2002. The decrease in utilization was primarily the result of more drydocking and repair activities in the third quarter of 2003. Our average dayrate increased to $10,788 for the three months ended September 30, 2003, compared to $9,119 for the same period of 2002. The $1,669 or 18.3% increase in dayrates since the third quarter of 2002 was drivenrevenue resulted primarily byfrom the sale of theEnergy 5502 in January 2003 and the purchase of theEnergy 8001 in February 2003.2003 and weather related demurrage charges. TheEnergy 5502 was generating bareboat charter revenue during the thirdfirst quarter of 2002 that is2003, which was substantially below our fleet average dayrate. However,less than the time charter revenue generated by the double-hulledEnergy 8001, a larger capacity vessel, commanded higher average dayrates and was operating through a time charter arrangement.

Operating Expenses. Our operating expenses, including depreciation and amortization, increased to $17.0 million. Revenues for the quarterthree months ended September 30, 2003,March 31, 2004 included $1.4 million derived from in-chartering third-party equipment compared to $12.5$1.2 million for the same period in 2002,2003. Our utilization rate increased to 91.2% for the three months ended March 31, 2004, compared to 83.4% for the same period in 2003. The increase in utilization was primarily the result of colder than average weather patterns and having fewer vessels drydocked during the first quarter of 2004 compared to the first quarter of 2003. Our average dayrate of $11,503 for the three months ended March 31, 2004 was roughly flat compared to $11,442 for the same period of 2003, an increase of $4.5$61 or 0.5%. The slight increase in dayrates was primarily related to having two months less of bareboat charter revenue from theEnergy 5502, which we sold on January 28, 2003

Operating Expense. Our operating expense increased to $14.4 million for the three months ended March 31, 2004, compared to $10.5 million for the same period in 2003, an increase of $3.9 million or 36.0%37.1%. The increase in operating expensesexpense resulted primarily from the addition of 12 vessels to our OSVfleet of 10 new generation OSVs since mid-March 2003 and the addition of one double-hulled tank barge fleets since June 2002.in February 2003.

 

Operating expensesexpense for our OSV segment increased to $9.3$6.8 million infor the third quarter of 2003three months ended March 31, 2004, compared to $5.3$4.1 million for the same period of 2002,in 2003, an increase of $4.0$2.7 million or 75.5%65.9%. This increase was primarily the resultrelated to having an average of theHOS Brimstone,HOS Stormridge,HOS Sandstorm,HOS Bluewater, HOS Gemstone andHOS Greystonebeingnine additional new generation OSVs in service for substantially more days during the third quarter of 2003three months ended March 31, 2004 compared to the third quarter of 2002 and the acquisition of six OSVssame period in June and August 2003. Daily, Average daily operating costs per vessel for the third quarter of 2003three months ended March 31, 2004 decreased over the same period in 2003, commensurate with the change in our fleet complement with the addition of 2002 primarily due to operating a greater complement of 200 and 220 class vessels.six 220’ vessels in mid-2003.

 

Operating expensesexpense for our tug and tank barge segment was $7.7increased to $7.5 million for the three months ended September 30, 2003,March 31, 2004 compared to $7.2$6.4 million for the same period of 2002,in 2003, an increase of $0.5$1.1 million or 6.9%. The increase is primarily the result of the sale of theEnergy 5502 and the purchase of theEnergy 800117.2%. Operating expense for the third quarter ofthree months ended March 31, 2004 and 2003, respectively, included $0.1$0.5 million and $0.8 million, for the cost of in-chartering third-party equipment paid by customers compared to $0.6 million in the year-ago quarter. Dailyequipment. Average daily operating costs per vessel, excluding in-chartering expenses, for the third quarter of 2003 remained fairly consistent withthree months ended March 31, 2004 increased over the same period of 2002.2003 due primarily to the acquisition of the double-hulledEnergy 8001in February 2003.

Depreciation and Amortization. Our depreciation and amortization expenses of $5.2 million for the three months ended March 31, 2004 increased $1.6 million or 44.4% compared to the $3.6 million for the same period in 2003. Depreciation and amortization were higher in

2004 as a result of having an average of nine more vessels in our fleet and increased drydocking activity during 2003. These expenses are expected to increase with the delivery of newly constructed vessels and when these vessels undergo their initial 30 and 60 month recertifications.

 

General and Administrative Expense.Expense Third-quarter 2003. Our general and administrative expenses of $3.0 million for the three months ended March 31, 2004 remained fairly constant with $2.9 million were $0.3 million or 11.5% higher thanreported for the $2.6 million reportedsame period in the corresponding quarter of 2002.2003. We expect these costs to increase for the remainder of 20032004 to accommodate our continued growth and increased reporting obligations under federal securities laws.laws and the new corporate governance legislation and regulations.

 

Interest Expense.Expense. Interest expense was $4.8$5.1 million for the third quarter of 2003,three months ended March 31, 2004, compared to $4.0$4.2 million for the same period of 2002,in 2003, an increase of $0.8$0.9 million or 20.0%21.4%. Capitalization of interest costs relating to new vessel construction of OSVs was approximately $0.7$0.4 million for the three months ended September 30, 2003,March 31, 2004, compared to $1.0$0.9 million for the same period of 2002.in 2003. The net increase in interest expense is attributable toaverage balance outstanding under our revolving credit facility which had no drawings duringfor the third quarterfirst three months of 2002.2004 was $46.5 million compared to $5.4 million for the same period in 2003. The outstanding balance under this facility was fully paid on March 31, 2004.

 

Interest Income.Income. Interest income of $25,000 was less than the $0.1 million earned infor the three months ended March 31, 2004, and was fairly constant with the same period of 2002 primarily due to lowerin 2003. Average cash balances were $27.8 million and $17.5 million for the quarters ended March 31, 2004 and 2003, respectively, which contributed to a slight decrease in interest income during the third quarter of 2003.three months ended March 31, 2004.

 

Income Tax Expense.Expense. Our effective tax rate for the three months ended September 30, 2003 and 2002March 31, 2004 was 38 percent, respectively. Our income tax expense primarily consists of deferred taxes due37% compared to

our federal net operating loss carryforwards. Our income tax rate is higher than 38% during the federal statutory rate due primarily to expected state and foreign tax liabilities and items not deductible for federal income tax purposes.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Revenues. Revenues were $81.6 million for the ninethree months ended September 30, 2003, compared to $66.4 million for the same period in 2002, an increase of $15.2 million or 22.9%. This increase in revenues is primarily the result of the growth of our fleet since May 2002. Our operating fleet grew from 40 vessels at the end of the third quarter of 2002 to 50 vessels at the end of the third quarter ofMarch 31, 2003. The additional revenues generated by these 10 vessels accounted for a $10.9 million increase in revenues which was offset by a $4.3 million decrease in revenues from our 40 vessels that were in service during each of the nine months ended September 30, 2003 and 2002.

Revenues from our OSV segment increased to $45.1 million in the first nine months of 2003 compared to $32.0 million for the first nine months of 2002, an increase of $13.1 million or 40.9%. Our utilization rate was 90.0% for the first nine months of 2003, compared to 94.1% for the same period of 2002. The decrease in utilization was impacted by having fewer long-term contracts and more vessels operating in the spot market, which is more susceptible to market fluctuations. Our OSV average dayrate was $11,460 for the first nine months of 2003, compared to $11,994 for the same period in 2002, a decrease of $534 or 4.5%. The decrease in average dayrates primarily reflects the addition of six 220 class OSVs, which experience lower dayrates than our 240 or 265 class vessels.

Revenues from our tug and tank barge segment totaled $36.4 million in the first nine months of 2003 compared to $34.4 million for the same period of 2002, an increase of $2.0 million or 5.8%. The segment revenue increase is primarily due to the acquisition of one 80,000-barrel double-hulled tank barge on February 28, 2003. Our utilization rate decreased to 72.8% for the first nine months of 2003, compared to 77.9% for the same period of 2002 primarily due to more drydocking days occurring in the first nine months of 2003 and an increase in vessels operating under contracts of affreightment during the 2003 period. Our average dayrate increased $1,743, or 18.6%, to $11,125 for the first nine months of 2003 compared to $9,382 for the first nine months of 2002. The increased dayrates were primarily driven by higher average barge capacities and a bareboat charter contract replaced by a time charter contract, which commands a higher dayrate.

Operating Expenses. Our operating expenses, including depreciation and amortization, increased to $45.7 million for the first nine months of 2003, compared to $34.0 million for the same period of 2002, an increase of $11.7 million or 34.4%. The increase in operating expenses was the result of having more vessels in service during the first nine months of 2003 compared to the year ago nine-month period.

Operating expenses for our OSV segment increased $8.8 million or 65.2% for the first nine months of 2003 to $22.3 million compared to $13.5 million for the first nine months of 2002. This increase was primarily the result of five newly constructed, larger class OSVs being in service for substantially more days during the first nine months of 2003 compared to the first nine months of 2002 and the acquisition of six 220 class OSVs in mid-2003. Daily operating costs per vessel for the first nine months of 2003 decreased over the same period of 2002, primarily due to a change in the OSV fleet complement from June 2003 to September 2003.

Operating expenses for our tug and tank barge segment was $23.4 million for the first nine months of 2003, compared to $20.4 million for same period of 2002, an increase of $3.0 million or 14.7%. The operating expense increase is primarily the result of theEnergy 8001 acquisition in February 2003. Daily operating expenses per vessel in the tug and tank barge segment remained fairly constant.

General and Administrative Expense. Our general and administrative expense was $8.7 million for the first nine months of 2003, compared to $7.7 million for the same period of 2002, an increase of $1.0 million or 13.0%. This increase primarily resulted from increased overhead relating to the costs associated with reporting obligations under federal securities laws that were incurred during 2003 but not in the first nine months of 2002.

Interest Expense. Interest expense was $13.4 million in the first nine months of 2003, compared to $11.8 million in the first nine months of 2002, an increase of $1.6 million or 13.6%. The increase in interest expense resulted from lower capitalized interest in 2003 related to the construction in progress of four vessels compared to the construction of eight vessels in progress during the same 2002 period. This increase was offset in part by the capitalization of interest costs of $2.3 million and $3.2 million for the nine months ended September 30, 2003 and 2002, respectively.

Interest Income. Interest income was $0.1 million in the first nine months of 2003 compared to $0.6 million in the first nine months of 2002, a decrease of $0.5 million or 83.3%. Average cash balances were $17.3 million and $37.3 million for the nine months ended September 30, 2003 and 2002, respectively, which substantially contributed to the decrease in interest income during the nine months ended September 30, 2003.

Income Tax Expense: Our effective tax rate was 38.0 percent for the first nine months of 2003 and 2002. Our income tax expense primarily consists of deferred taxes due to our federal net operating loss carryforwards. Our income tax rate is higher than the federal statutory rate due primarily to expected state and foreign tax liabilities and items not deductible for federal income tax purposes.

 

Liquidity and Capital Resources

 

Our capital requirements have historically been financed with cash flow from operations, issuances of our common equity and debt securities, and borrowings under our credit facilities. We require capital to fund ongoing operations, the construction of new vessels, acquisitions, vessel recertifications, discretionary capital expenditures and debt service. We have historically financedThe nature of our capital requirements with cash flow from operations, issuancesand the types of equity and debt securities, and borrowings under our credit facilities.financing sources are not expected to significantly change during 2004.

 

Net cash provided by operating activities was $10.8 million for the nine months ended September 30, 2003, comparedPursuant to $11.9 million for the nine months ended September 30, 2002. Changes in cash flow from operating activities are principally the resultan amendment and restatement of higher income from operations after considering increases in depreciation and amortization due to the significant expansion of our vessel fleet, offset by changes in our net working capital.

Net cash used in investing activities was $91.4 million for the nine months ended September 30, 2003 compared to $43.5 million for the nine months ended September 30, 2002. Net cash used in investing activities for each period included the cost of new vessel construction and, for the period ended September 30, 2003, acquisition costs related to theEnergy 8001and six OSVs, offset by proceeds from the sale of theEnergy 5502.

Net cash provided by financing activities was $70.8 million for the nine months ended September 30, 2003 comprised primarily of $46.9 million from borrowings under our revolving credit facility and $23.3 million net proceeds from the issuance of common stock. For the nine months ended September 30, 2002, net cash used in financing activities was $0.2 million comprised of the net issuance of additional common equity offset by payments on borrowings under debt agreements.

WeFebruary 13, 2004, we have a three-yearfive-year $100 million senior secured revolving credit facility with four banks. Oura borrowing base of $60 million. As of December 31, 2003, we had $40 million outstanding and $20 million of available borrowing capacity under the then-existing facility. As of March 31, 2004, following the closing of our initial public offering, and pending other uses described in the related prospectus, our outstanding balance on the revolving credit facility was amended on September 30, 2003 to increase our borrowing base to $60.0 million. In connection with this amendment,paid and we pledged an additional OSV as collateral. Ashad $60 million of September 30, 2003, seven OSVs and four ocean-going tugs collateralize the revolving credit immediately available under such facility. BorrowingsWe have

under themade, and may make additional, short-term draws on our revolving credit facility accrue interest, atfrom time to time to satisfy scheduled capital expenditure requirements or for other corporate purposes. Any liquidity in excess of our option, at either (i)planned capital expenditures will be utilized to repay debt or finance the prime rate announced by Citibank, N.A. in New York, plus a marginimplementation of 0.0%our growth strategy, which includes expanding our fleet through the construction, retrofit of existing or acquisition of additional vessels, including OSVs and ocean-going tugs and tank barges, as needed to 1.0%, or (ii)take advantage of the London Interbank Offered Rate, plus a margin of 1.75% to 3.00%. As of September 30, 2003, our weighted average interest rate was 3.95%. Wedemand for such vessels. The three double-hulled tank barges currently being constructed will replace single-hulled vessels that are also required to pay a commitment fee on available but unused amounts ranging from 0.250%be retired under OPA 90 prior to 0.375%. The interest rate margin and unused commitment fee are based onJanuary 1, 2005.

We believe that our leverage ratio, as defined in the revolving credit facility. We can use the amounts we draw under such facility forcurrent working capital, purposes, acquisitionsprojected cash flow from operations and available capacity under certain circumstances, new vessel construction. Theour revolving credit facility, expires on December 31, 2004, but we believe it will be renewed priorsufficient to that time. Asmeet our cash requirements for the foreseeable future. Although we expect to continue generating positive working capital through our operations, events beyond our control, such as mild winter conditions, a reduction in domestic consumption of September 30, 2003, we had $46.9 million outstanding under this facility, which amount was used,refined petroleum products, or declines in part,expenditures for exploration, development and production activity may affect our financial condition or results of operations. The net proceeds generated by our initial public offering in March 2004 will allow us to fund the acquisition of an 80,000-barrel double-hulled tank barge and a portion of the acquisition cost of six OSVs. As of September 30, 2003, we had $13.1 million available under the facility.

As of September 30, 2003, we had outstanding debt of $172.6 million, net of original issue discount, underfurther implement our senior notes. Interestgrowth strategy. However, depending on the senior notes is payable semiannually each February 1market demand for OSVs, tugs and August 1. The senior notes do nottank barges and other growth opportunities that may arise, we may require scheduled payments of principal prior to their stated maturity on August 1, 2008. Pursuant to the indenture under which the senior notes are issued, however, we are required to make offers to purchase the senior notes upon the occurrence of specified events, such as certain asset salesadditional debt or a change in control.

The revolving credit facility and indenture impose certain operating and financial restrictions on us. Such restrictions affect, and in many cases limit or prohibit, among other things, our ability to incur additional indebtedness, make capital expenditures, redeem equity create liens, sell assets and make dividend or other restricted payments.financing.

 

As of September 30, 2003, we hadOperating Activities. We rely primarily on cash of approximately $12.5 million andflows from operations to provide working capital of approximately $24.3 million. During the nine months ended September 30, 2003, we expended $30.7for current and future operations. Cash flows from operating activities totaled $6.2 million for the constructionthree months ended March 31, 2004 compared to $3.6 million for the same period in 2003. The increase in operating cash flows during these periods was primarily due to the growth of new generation OSVs, before allocationour fleet. Our cash flow from operations for 2004 should reflect a full year of construction period interest. Asrevenue contribution from the nine vessels we added to our fleet in 2003 and nine months of September 30, 2003, we were committed under a vessel construction contract to complete construction ofactivity for one OSV which is part of our current eight-vessel newbuild program. We are currently evaluating construction bids from shipyards for the last four vessels of this program,that entered service in addition toMarch 2004. However, continued soft market demand for such vesselsconditions in the deepwaterU.S. Gulf of Mexico and foreign markets. Aggregate construction costscould temper cash flows from operations. Cash flows from operations were also impacted by cash outlays for the first four vessels, before allocation of construction period interest, are expected to be approximately $53.0 million, including $18.4 million that was incurred with respect to such vessels during 2002. We took delivery of theHOS Bluewater on March 17, 2003, the HOS Gemstone on June 17, 2003, and theHOS Greystone on September 17, 2003. As of September 30, 2003, the amount expected to be expended to complete construction of the remaining vessel was approximately $4.0 million, which becomes due at various datesdrydock recertification activity during the fourth quarter of 2003. During the ninethree months ended September 30, 2003,March 31, 2004. During calendar 2004, we expendedexpect to drydock a total of eight OSVs, six tugs, and eight tank barges for recertification and/or discretionary vessel enhancements at an estimated total cost of approximately $7.5 million for drydocking-related expenses for vessels, of which $4.5 million was accounted for as deferred charges and $3.0 million for other vessel capital improvements. Under our accounting policy, we generally capitalize drydocking expenditures related to vessel recertification to deferred charges and amortize the amount over 30 or 60 months.$12.8 million.

 

As of December 31, 2002,2003, we had federal tax net operating loss carryforwards of approximately $21.5$37.4 million available through 2018 to offset future taxable income. In addition, we expect to generate federalThese tax benefits due to our use ofnet operating losses were generated primarily through accelerated tax depreciation with respectapplied to newour vessels. Our use of these federal tax net operating losses and additional tax benefits may be limited due to U.S. tax laws. Based on the age and composition of our current fleet, however, we expect to pay a lower than normal amount ofcontinue generating federal income taxestax net operating losses over the near term.

 

InInvesting Activities. Net cash used in investing activities was $9.0 million for the fourth quarter of 2003, we commenced our fourth vessel newbuild program by signing definitive agreementsthree months ended March 31, 2004 compared to $20.4 million for the same period in 2003. Cash utilized in investing activities for both periods were primarily for the construction of twonew vessels and miscellaneous capital expenditures, and, for the three months ended March 31, 2003, the acquisition of a double-hulled tank barges. The first two double-hulledbarge, offset by $1.7 million in cash proceeds from the sale of a single-hulled tank barge during such period. For the remainder of 2004,

tank barges of this newbuild programinvesting activities are expectedanticipated to be delivered in December 2004 and will be constructed at two different shipyards. We are currently evaluating our plans with respectinclude costs for new vessel construction related to a third tank barge. We have also secured fixed-price options from one of the shipyards to construct up to three additional double-hulled tank barges, for delivery after 2004. Constructionthe purchase of two tugs and retrofit costs forcapital expenditures comprised of vessel modifications and miscellaneous corporate equipment purchases, as well as the first three vessels of the tank barge newbuild program are not expected to exceed $42.0 million, before allocation of construction period interest.

We believe that cash on hand and cash generated from operations will provide sufficient funds to complete construction of the one remaining new generation OSV currently under construction in our newbuild program and the first three double-hulled vessels in our tank barge new build program discussed above, and to satisfy debt service and working capital requirements. We have, however, made, and may make additional, short-term draws on our revolving credit facility from time to time during peak demands on our cash that occur as a result of scheduled capital expenditure commitments. Any excess liquidity will be available to finance our strategy, which includes expanding our fleet through thepotential construction or acquisition of additional orvessels.

Financing Activities. Net cash provided by financing activities was $32.6 million for the retrofitthree months ended March 31, 2004, primarily relating to net proceeds from our initial public offering of existing, OSVs, tugs and tank barges as needed to take advantagecommon stock that was completed on March 31, 2004 after payment of the demand for such vessels. Depending on the market demand for OSVs, tugs and tank barges and consolidation opportunities that may arise, we may require additional debt or equity financing, including to fund, at such time as we elect to proceed, the construction of the last four vessels in our current new generation OSV newbuild program and additional vesselsoutstanding borrowings under our revolving credit facility. For the three months ended March 31, 2003, net cash provided by financing activities was $7.4 million, which primarily resulted from the proceeds of borrowings under our revolving credit facility for the purchase of a double-hulled tank barge construction program.barge. On April 28, 2004, we received net proceeds of $1.5 million from the issuance of additional shares of common stock pursuant to the exercise of an option by the underwriters related to our initial public offering. For the remainder of 2004, we expect to generate cash from financing activities resulting from borrowings under our revolving credit facility as needed.

 

Contractual Obligations and Commercial Commitments

 

We have a $100 million revolving credit facility with a borrowing base of $60 million. As of March 31, 2004, the weighted average interest rate was 4.19% under such facility. As of March 31, 2004, we had no outstanding balance, as we used a portion of the net proceeds from our initial public offering to pay all borrowings thereunder, and thus we have $60.0 million of borrowing capacity immediately available under the facility.

As of March 31, 2004, we had outstanding debt of $172.8 million, net of original issue discount, under our unsecured senior notes. The following table sets forth an aggregationeffective interest rate on the senior notes is 11.18% and is payable semi-annually each February 1 and August 1. The senior notes do not require any payments of principal prior to their stated maturity on August 1, 2008, but pursuant to the indenture under which the senior notes are issued, we are required to make offers to purchase the senior notes upon the occurrence of specified events, such as certain asset sales or a change in control. For additional information with respect to our revolving credit facility and our senior notes, please refer to note 4 of our contractual obligations and commercial commitments as of September 30, 2003, in thousands of dollars.

   Total

  Less
Than 1
Year


  1 to 3
Years


  3 to 5
Years


  Thereafter

Long-term debt (1)

  $175,000  $—    $—    $175,000  $  —

Revolving credit facility

   46,900   —     46,900   —     

Operating leases (2)

   3,597   610   2,377   610   

Construction commitments (3)

   4,010   4,010   —     —     
   

  

  

  

  

Total

  $229,507  $4,620  $49,227  $175,610  $
   

  

  

  

  


(1)Includes original issue discount of $2,420.
(2)Included in operating leases are commitments for office space, vessel rentals, office equipment, and vehicles.
(3)The timing of the incurrence of these costs is subject to change among periods based on the achievement of shipyard milestones, but the amounts are not expected to change materially in the aggregate. During the fourth quarter of 2003, we signed definitive agreements with two shipyards for the construction of the first two double-hulled tank barges as part of our fourth newbuild program. Costs related to the first three vessels of the most recent newbuild program are not expected to exceed $42.0 million, before the allocation of construction period interest.

Inflationunaudited consolidated financial statements included herein.

 

ToAs of December 31, 2003, we were committed under vessel construction contracts to complete construction of one new generation OSV under our most recent OSV newbuild program, and two double-hulled tank barges under our current tank barge newbuild program. During the three months ended March 31, 2004, we expended $5.9 million for new vessel construction, before allocation of construction period interest, which was comprised of $1.5 million for the OSV and $4.4 million for the tank barge newbuild program. Aggregate construction costs before allocation of construction period interest for the four OSVs constructed under our most recent OSV newbuild program was $52.2 million or $0.8 million less than our original $53 million estimate for this program. We recently announced the exercise of an option with a shipyard for the construction of a third double-hulled tank barge under our current tank barge newbuild program. The three barges now under construction, along with two higher horsepower tugs that we expect to purchase this year as power sources

for these larger barges, are expected to cost approximately $64.0 million in the aggregate, of which about $7.9 million has already been incurred and paid during the fourth quarter of 2003 and the first quarter of 2004. We expect to incur the remaining balance of $56.1 million as follows: $49.2 million during the remainder of 2004 and $6.9 million in 2005. The timing of the incurrence of these costs is subject to change among periods based on the achievement of shipyard milestones and the actual acquisition date general inflationary trends haveof the tugs. However, the amounts are not had a material effect on our operating revenues or expenses.expected to change materially in the aggregate.

During the three months ended March 31, 2004, we expended approximately $3.3 million for drydocking-related expenses for vessels, of which $1.9 million was accounted for as deferred charges and $1.4 million for other vessel capital improvements. During the three months ended March 31, 2004, we also expended approximately $0.3 million for miscellaneous non-vessel related additions to property, plant and equipment.

 

Forward Looking Statements

 

We make forward-looking statements in this Form 10-Q, including certain information set forth in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have based these forward-looking statements on our current views and assumptions about future events and our future financial performance. You can generally identify forward-looking

statements by the appearance in such a statement of words like “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should” or “will” or other comparable words or the negative of these words. When you consider our forward-looking statements, you should keep in mind the risk factors we describe and other cautionary statements we make in this Form 10-Q.

 

Among the risks, uncertainties and assumptions to which these forward-looking statements may be subject are:

 

changesactivity levels in international economic and political conditions,the energy markets;

 

changes in oil and natural gas prices,

activity levels in the energy markets,prices;

 

increases in supply of new vessels;

the effects of competition;

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

our ability to integrate acquisitions successfully;

 

demand for refined petroleum products or in methods of delivery,delivery;

 

loss of existing customers and our ability to attract new customers;

 

changes in laws,laws;

changes in international economic and political conditions;

 

financial stability of our customers,customers;

 

retention of skilled employees,employees;

our ability to finance our operations on acceptable terms and access the debt and equity markets to fund our capital requirements, which depend on general market conditions and our financial condition at the time,

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

the effects of competition,

our ability to successfully integrate acquisitions,time;

 

our ability to charter our vessels on acceptable terms,terms; and

 

our success at managing these and other risks.
our success at managing these risks.

 

Our forward-looking statements are only predictions based on expectations that we believe are reasonable. Actual events or results may differ materially from those described in any forward-looking statement. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the extent these risks, uncertainties and assumptions give rise to events that vary from our expectations, the forward-looking events discussed in this Form 10-Q may not occur.

 

Item 3—Quantitative Andand Qualitative Disclosures About Market Risk

 

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

 

We are subject to interest rate risk on our long-term fixed interest rate senior notes. In general, the fair market value of debt with a fixed interest rate will increase as interest rates fall. Conversely, the fair market value of debt will decrease as interest rates rise. The senior notes accrue interest at the rate of 10 5/8% per annum and mature on August 1, 2008. There are no scheduled principal payments under the senior notes prior to the maturity date. Our revolving credit facility has a variable interest rate and, therefore, is not subject to interest rate risk.

As of March 31, 2004, we had no drawings under such facility.

Our operations are primarily conducted between U.S. ports, including along the coast of Puerto Rico, and historically we have not been exposed to significant foreign currency fluctuation. However, as we expand our operations toin international markets, we may become exposedour exposure to certain risks typically associated with foreign currency fluctuation. We currently have fixed time charters for three of our offshore supply vessels for service in Trinidad & Tobago. Although such contracts are denominated and will be paid in U.S. Dollars, value added tax (“VAT”) payments are paid in Trinidad dollars which creates an exchange risk relatedfluctuation is expected to currency fluctuations. In addition, we are currently operating under a fixed time charter with one of our other OSVs for service in Mexico. Although we are paid in U.S. Dollars, there is an exchange risk to foreign currency fluctuations related to the payment terms of such time charter.increase. To date, we have not hedged against any foreign currency rate fluctuations associated with foreign currency VAT payments or other foreign currency denominated transactions arising in the normal course of business. We continually monitor the currency exchange risks associated with conducting international operations. To date,As of March 31, 2004, there were no material changes in our market or interest rate risk or material gains or losses associated with suchcurrency fluctuations have not been material.since last reported on our Annual Report on Form 10-K for the period ended December 31, 2003.

 

Item 4—Controls Andand Procedures

 

Disclosure Controls Andand Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were

effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

Internal Control Over Financial Reporting

 

We also maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our policies and procedures are followed. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1—Legal Proceedings

 

We are not currently a party to any material legal proceedings, although we may from time to time be subject to various legal proceedings and claims that arise in the ordinary course of business.

 

Item 2—Changes Inin Securities Andand Use Ofof Proceeds

The Company completed a private placement of common stock on July 3, 2003 as reported in Item 2 of Form 10-Q, filed August 14, 2003.

 

In September 2003 we filed a Registration Statement on Form S-1 (Registration No. 333-108943) (as amended, the “Registration Statement”), in connection with our initial public offering of common stock. The SEC declared the Registration Statement effective on March 25, 2004. On March 31, 2004, we completed the initial public offering of 6,000,000 shares of common stock at $13.00 per share for gross proceeds of $78 million. The lead managing underwriters were Goldman, Sachs & Co. and Jefferies & Company, Inc. The net proceeds to us from the initial public offering, after deducting $6.6 million in underwriting commissions and discounts and our estimated offering expenses, were approximately $71.4 million. The Company plans to use the net proceeds of the offering to fund a portion of the costs of the construction of ocean-going, double-hulled tank barges, the retrofit of certain existing vessels, possible future acquisitions or additional new vessel construction, and for general corporate purposes. Pending such uses, we used a portion of the net proceeds of the offering to repay the outstanding balance under our revolving credit facility on March 31, 2004.

In March 2004, we issued 2,500120,000 shares of our common stock to certain Holdersholders of options granted under our Incentive Compensation Plan upon their exercise of such options. The total amount of consideration we received for the issuance of these shares was approximately $6,625.$795,000, net of taxes. The issuance of these shares of our common stock was exempt from registration under Rule 701 promulgated under the Securities Act of 1933.

 

Item 3—Defaults Upon Senior Securities

 

None.

 

Item 4—Submission Ofof Matters To Ato a Vote Ofof Security Holders

 

None.

 

Item 5—Other Information

 

Recent Developments

On November 6, 2003,April 28, 2004, the Company held a conference call to discussissued an additional 126,400 shares of its third quarter 2003 operating results. During such call, management discussed additional material non-public information with respectcommon stock to the Company’s resultsunderwriters pursuant to the exercise of operations and financial conditionan option to purchase additional shares, which resulted in incremental gross proceeds from its initial public offering of approximately $1.6 million.

On April 30, 2004, the Company exercised one of its three fixed-price options with a shipyard for the construction of one additional double-hulled tank barge. This will be the third quarter of 2003 that was not previously included in its Reportvessel to be constructed under the Company’s current tank barge newbuild program, which is based on Form 8-K furnished toa proprietary new tank barge design developed in-house by the SEC. The additional material non-public information has been included under Item 1—Financial Statements (and accompanying notes) and Item 2—Management’s Discussion And Analysis Of Financial Condition And Results Of Operations in this Report on Form 10-Q.Company.

Item 6—Exhibits Andand Reports Onon Form 8-K

 

(a)Exhibits:

 

Exhibit
Number


  

Description of Exhibit


*1.1

—Underwriting Agreement dated as of March 25, 2004 by and among the Company and the underwriters named therein.

3.1  

—Second Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on December 13, 1997March 5, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826)10-K for the period ended December 31, 2003).

3.2  Certificate of Amendment of the Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on December 1, 1999 (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).
3.3Certificate of Amendment of the Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on October 23, 2000 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).
3.4Certificate of Correction to Certificate of Amendment of the Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on November 14, 2000 (incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).
3.5Certificate of Amendment of the Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on May 29, 2002 (incorporated by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S-1 filed July 22, 2001, Registration No. 333-96833).
3.6

Certificate of Designation of Series A Junior Participating Preferred Stock filed with the Secretary of State of the State of Delaware on June 20, 2003 (incorporated by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S-1 dated September 19, 2003, Registration No. 333-108943).

3.73.3  Second

—Third Restated Bylaws of the Company adopted October 4, 2000February 17, 2004 (incorporated by reference to Exhibit 3.5 of the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).

3.8Amendment to Second Restated Bylaws of the Company adopted May 28, 2002 (incorporated by reference to Exhibit 3.83.3 to the Company’s Registration Statement on Form S-1 filed July 22, 2001, Registration No. 333-96833)10-K for the period ended December 31, 2003).
*3.9Second Amendment to Second Restated Bylaws adopted September 26, 2003.

4.1  

Indenture dated as of July 24, 2001 between Wells Fargo Bank Minnesota, National Association (as Trustee) and the Company, including table of contents and cross-reference sheet (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).

Exhibit
Number


Description


4.2  

Supplemental Indenture dated as of December 17, 2001, between Wells Fargo Bank Minnesota, National Association (as Trustee), the Company, Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.), HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC Marine, LLC and Energy Services Puerto Rico, LLC, with Notation of Subsidiary Guarantee by Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.), HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC Marine, LLC and Energy Services Puerto Rico, LLC attached (incorporated by reference to Exhibit 4.1.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-4 dated December 19, 2001, Registration No. 333-69826).

4.3  Specimen 10-5/8% Series B Note due 2008

—Second Supplemental Indenture and Amendment dated as of June 18, 2003, between Wells Fargo Bank Minnesota, National Association (as Trustee), the Company and HOS-IV, LLC, with Notation of Subsidiary Guarantee by HOS-IV, LLC (incorporated by reference to Exhibit 4.12 to the Company’s Registration Statement on Form S-1 dated September 19, 2003, Registration No. 333-108943).

4.4

—Third Supplemental Indenture and Amendment dated as of February 13, 2004, between Wells Fargo Bank Minnesota, National Association (as Trustee), the Company and Hornbeck Offshore Trinidad & Tobago, LLC, with Notation of Subsidiary Guarantee by Hornbeck Offshore Trinidad & Tobago, LLC (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826)10-K for the period ended December 31, 2003).

4.44.5  

—Stockholders’ Agreement dated as of October 27, 2000 between the Company, Todd M. Hornbeck, Troy A. Hornbeck, Cari Investment Company and SCF-IV, L.P. (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-1 filed September 19, 2003, Registration No. 333-108943).

Exhibit
Number


Description of Exhibit


4.6

Rights Agreement dated as of June 18, 20022003 between the Company and Mellon Investor Services LLC as Rights Agent, which includes as Exhibit A the Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the form of Right Certificate and as Exhibit C the form of Summary of Rights to Purchase Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 2, 2003).

4.54.7  

Stockholders’ Agreement dated as of June 5, 1997 between the Company, Todd M. Hornbeck, Troy A. Hornbeck and Cari Investment Company (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration No. 333-96833).

4.64.8  

Registration Rights Agreement dated as of October 27, 2000 between the Company and SCF-IV, L.P. (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration No. 333-96833).

4.74.9  

—Registration Rights Agreement dated as of June 24, 2003 between the Company and certain purchasers of securities (incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement on Form S-1 filed September 19, 2003, Registration No. 333-108943).

4.10

Agreement Concerning Registration Rights dated as of October 27, 2000 between the Company, SCF-IV, LP, Joint Energy Development Investments II, LP and Sundance Assets, LP (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration No. 333-96833).

4.84.11  Stockholders’ Agreement dated as of October 27, 2000 between the Company, Todd M. Hornbeck, Troy A. Hornbeck, Cari Investment Company and SCF-IV, L.P (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-1 dated September 19, 2003, Registration No. 333-108943).
4.9

Letter Agreement dated September 24, 2001 between the Company, Todd M. Hornbeck, Troy A. Hornbeck, Cari Investment Company and SCF-IV, L.PL.P. (incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-1 filed September 19, 2003, Registration No. 333-108943).

4.12

—Specimen 10 5/8% Series B Senior Note due 2008 (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).

4.13

—Specimen certificate for the Company’s common stock, $0.01 par value (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to Registration Statement on Form S-1 dated March 10, 2004, Registration No. 333-108943).

4.14

—Amendment to Rights Agreement dated as of March 5, 2004 between the Company and Mellon Investor Services LLC as Rights Agent. (Incorporated by reference to Exhibit 4.13 to the Company’s Form 10-K for the period ended December 31, 2003).

10.1

—Amended and Restated Credit Agreement dated as of February 13, 2004 among the Company and Hibernia National Bank, as agent, and Hibernia National Bank, Fortis Capital Corp., Southwest Bank of Texas, N.A., DVB Bank Aktiengesellscheft and Wells Fargo Bank, N.A., as lenders (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K for the period ended December 31, 2003).

*31.1

—Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2

—Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*32.1

—Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit
Number


Description of Exhibit


*32.2

—Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed herewith

(b) Reports on Form 8-K.

During the quarter for which this report is filed, the registrant filed one Current Report on Form 8-K, as follows:

On February 19, 2004, we furnished a report on Form 8-K announcing that we had issued a press release that reported fourth quarter 2003 results, the delivery of the 240 ED classHOS Silverstar and the amendment and restatement of our revolving credit facility.

Since the end of the quarter for which this report is filed, the registrant filed one Current Report on Form 8-K, as follows:

On May 6, 2004, we furnished a report on Form 8-K announcing that we had issued a press release that reported first quarter 2004 results, the completion of our initial public offering and the construction of an additional double-hulled tank barge.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.

Hornbeck Offshore Services, Inc.

Date: May 11, 2004

By:

/s/    JAMES O. HARP, JR.        


James O. Harp, Jr.

Vice President and Chief Financial Officer

Exhibits Index

Exhibit
Number


Description of Exhibit


*1.1

—Underwriting Agreement dated as of March 25, 2004 by and among the Company and the underwriters named therein.

3.1

—Second Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on March 5, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K for the period ended December 31, 2003)

3.2

—Certificate of Designation of Series A Junior Participating Preferred Stock filed with the Secretary of State of the State of Delaware on June 20, 2003 (incorporated by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S-1 dated September 19, 2003, Registration No. 333-108943).

4.103.3  Registration Rights Agreement dated as

—Third Restated Bylaws of June 24, 2003 between the Company and certain purchasers of securitiesadopted February 17, 2004 (incorporated by reference to Exhibit 4.113.3 to the Company’s Form 10-K for the period ended December 31, 2003) .

4.1

—Indenture dated as of July 24, 2001 between Wells Fargo Bank Minnesota, National Association (as Trustee) and the Company, including table of contents and cross-reference sheet (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1S-4 dated September 19, 2003,21, 2001, Registration No. 333-108943)333-69826).

Exhibit
Number


Description


4.114.2  

—Supplemental Indenture dated as of December 17, 2001, between Wells Fargo Bank Minnesota, National Association (as Trustee), the Company, Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.), HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC Marine, LLC and Energy Services Puerto Rico, LLC, with Notation of Subsidiary Guarantee by Hornbeck Offshore Services, LLC, (f.k.a. Hornbeck Offshore Services, Inc.), HORNBECK-LEEVAC Marine Operators, LLC, (f.k.a. HORNBECK-LEEVAC Marine Operators, Inc.), LEEVAC Marine, LLC and Energy Services Puerto Rico, LLC attached (incorporated by reference to Exhibit 4.1.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-4 dated December 19, 2001, Registration No. 333-69826).

4.3

Second Supplemental Indenture and Amendment dated as of June 18, 2003, between Wells Fargo Bank Minnesota, National Association (as Trustee), the Company and HOS-IV, LLC, with Notation of Subsidiary Guarantee by HOS-IV, LLC (incorporated by reference to Exhibit 4.12 to the Company’s Registration Statement on Form S-1 dated September 19, 2003, Registration No. 333-108943).

*10.14.4  Amended

—Third Supplemental Indenture and Restated Incentive Compensation PlanAmendment dated as of February 13, 2004, between Wells Fargo Bank Minnesota, National Association (as Trustee), the Company and Hornbeck Offshore Trinidad & Tobago, LLC, with Notation of Subsidiary Guarantee by Hornbeck Offshore Trinidad & Tobago, LLC (incorporated by reference to Exhibit 4.4 to the Company’s Form 10-K for the period ended December 31, 2003) .

10.24.5  Amendment to Senior Employment

—Stockholders’ Agreement dated effective February 17, 2003 by andas of October 27, 2000 between the Company, Todd M. Hornbeck, Troy A. Hornbeck, Cari Investment Company and the CompanySCF-IV, L.P. (incorporated by reference to Exhibit 10.154.6 to the Company’s Registration Statement on Form S-1 datedfiled September 19, 2003, Registration No. 333-108943).

Exhibit
Number


Description of Exhibit


10.3   4.6  Amendment to Employment

—Rights Agreement dated effective February 17,as of June 18, 2003 between the Company and Mellon Investor Services LLC as Rights Agent, which includes as Exhibit A the Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the form of Right Certificate and as Exhibit C the form of Summary of Rights to Purchase Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 2, 2003).

   4.7

—Stockholders’ Agreement dated as of June 5, 1997 between the Company, Todd M. Hornbeck, Troy A. Hornbeck and between Carl G. Annessa and theCari Investment Company (incorporated by reference to Exhibit 10.164.3 to the Company’s Registration Statement on Form S-1 dated September 19, 2003,filed July 22, 2002, Registration No. 333-108943)333-96833).

10.4   4.8  Amendment to Employment

—Registration Rights Agreement dated effective February 17, 2003 byas of October 27, 2000 between the Company and between James O. Harp, Jr. and the CompanySCF-IV, L.P. (incorporated by reference to Exhibit 10.174.4 to the Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration No. 333-96833).

   4.9

—Registration Rights Agreement dated as of June 24, 2003 between the Company and certain purchasers of securities (incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement on Form S-1 filed September 19, 2003, Registration No. 333-108943).

*10.5   4.10  Third

—Agreement Concerning Registration Rights dated as of October 27, 2000 between the Company, SCF-IV, LP, Joint Energy Development Investments II, LP and Sundance Assets, LP (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration No. 333-96833).

   4.11

—Letter Agreement dated September 24, 2001 between the Company, Todd M. Hornbeck, Troy A. Hornbeck, Cari Investment Company and SCF-IV, L.P. (incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-1 filed September 19, 2003, Registration No. 333-108943).

   4.12

—Specimen 10 5/8% Series B Senior Note due 2008 (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-4 dated September 21, 2001, Registration No. 333-69826).

   4.13

—Specimen certificate for the Company’s common stock, $0.01 par value (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to Registration Statement on Form S-1 dated March 10, 2004, Registration No. 333-108943).

   4.14

—Amendment to Rights Agreement dated as of March 5, 2004 between the Company and Mellon Investor Services LLC as Rights Agent. (Incorporated by reference to Exhibit 4.13 to the Company’s Form 10-K for the period ended December 31, 2003).

10.1

—Amended and Restated Credit Agreement dated as of September 30, 2003 by andFebruary 13, 2004 among Hornbeck Offshore Services, Inc.the Company and Hibernia National Bank, as agent, and Hibernia National Bank, Fortis Capital Corp., DVB Bank Aktiengesellscheft and Southwest Bank of Texas, N.A., DVB Bank Aktiengesellscheft and Wells Fargo Bank, N.A., as lenders

*10.6 (incorporated by reference to Exhibit 10.5 to the Company’s Form of First Amendment to Indemnification Agreement10-K for Directors, Officers and Key Employeesthe period ended December 31, 2003).

*31.1  

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2  

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit
Number


Description of Exhibit


*32.1  

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2  

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


  *Filed herewith.

* Filed herewith

(b) Reports on Form 8-K

During the quarter for which this report is filed, the registrant filed three Current Reports on Form 8-K, as follows:

On July 3, 2003, we furnished a report on Form 8-K announcing that we had issued a press release that reported our adoption of a stockholder rights plan.

On July 7, 2003, we furnished a report on Form 8-K announcing that we had issued a press release that reported our acquisition of five 220-foot deepwater offshore supply vessels, an amendment to our revolving credit agreement and the completion of a private offering of our common stock.

On August 7, 2003, we furnished a report on Form 8-K announcing that we had issued a press release that reported second quarter 2003 results, the delivery of the 240’ED classHOS Gemstone, expansion of our offshore supply vessel operations into Mexico and the acquisition of an additional 220-foot deepwater offshore supply vessel.

Since the end of the quarter for which this report is filed, the registrant filed one Current Report on Form 8-K, as follows:

On November 6, 2003, we furnished a report on Form 8-K announcing that we had issued a press release that reported the results of our operations for the three months ended September 30, 2003.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.

Hornbeck Offshore Services, Inc.

Date:    November 12, 2003

By:

/s/ JAMES O. HARP, JR.

James O. Harp, Jr.
Vice President and Chief Financial Office

 

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