================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23653
------------------------
HORIZON OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0487309
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)
2500 CITYWEST BOULEVARD, SUITE 2200
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 361-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
November 15, 1999 was 18,800,980.
================================================================================
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 3,341 $ 9,649
Accounts receivable --
Contract receivables....... 30,654 25,549
Costs in excess of
billings................ 8,588 9,546
Related parties............ 224 82
Income taxes receivable......... 481 481
Inventory....................... 324 --
Other current assets............ 554 642
-------------- -------------
Total current assets....... 44,166 45,949
PROPERTY AND EQUIPMENT, net.......... 159,527 145,680
OTHER ASSETS......................... 6,496 2,040
-------------- -------------
$210,189 $ 193,669
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 3,576 $ 7,654
Accrued liabilities............. 2,526 5,086
Accrued job costs............... 15,366 10,334
Billings in excess of costs..... 1,941 2,608
Current maturities of long-term
debt.......................... 9,694 7,606
-------------- -------------
Total current
liabilities............. 33,103 33,288
LONG-TERM DEBT, net of current
maturities......................... 71,204 62,268
DUE TO RELATED PARTIES............... 32 20
DEFERRED INCOME TAXES................ 5,980 3,633
-------------- -------------
Total liabilities.......... 110,319 99,209
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value,
5,000,000 shares authorized,
none issued and outstanding... -- --
Common stock, $1 par value,
35,000,000 shares authorized,
19,826,480 shares issued at
September 30, 1999 and
December 31, 1998............. 9,119 9,119
Additional paid-in capital...... 87,872 87,767
Retained earnings............... 9,605 5,156
Treasury stock, 1,025,500 shares
at September 30, 1999 and
1,155,000 shares at December
31, 1998...................... (6,726) (7,582)
-------------- -------------
Total stockholders'
equity.................. 99,870 94,460
-------------- -------------
$210,189 $ 193,669
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CONTRACT REVENUES.................... $ 36,286 $ 34,894 $ 72,079 $ 87,816
COST OF CONTRACT REVENUES............ 28,173 27,545 54,866 66,292
------------ ------------ ------------ ------------
Gross profit.................... 8,113 7,349 17,213 21,524
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,276 2,308 6,746 6,050
------------ ------------ ------------ ------------
Operating income................ 5,837 5,041 10,467 15,474
OTHER INCOME (EXPENSE):
Interest expense................ (1,697) (641) (4,164) (1,855)
Interest income and other....... 88 40 493 143
------------ ------------ ------------ ------------
NET INCOME BEFORE INCOME TAXES....... 4,228 4,440 6,796 13,762
PROVISION FOR INCOME TAXES........... 1,480 1,491 2,347 3,370
------------ ------------ ------------ ------------
NET INCOME........................... $ 2,748 $ 2,949 $ 4,449 $ 10,392
============ ============ ============ ============
NET INCOME PER SHARE -- BASIC AND
DILUTED............................ $ 0.15 $ 0.15 $ 0.24 $ 0.58
============ ============ ============ ============
SHARES USED IN COMPUTING NET INCOME
PER SHARE --
BASIC AND DILUTED.................. 18,921,705 19,740,572 18,810,196 17,880,863
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income......................... $ 4,449 $ 10,392
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation and amortization... 5,488 3,121
Deferred income taxes........... 2,347 2,408
Changes in operating assets and
liabilities --
Accounts receivable........... (5,247) (15,548)
Costs in excess of billings... 958 (12,189)
Billings in excess of costs... (667) 1,067
Inventory..................... (324) --
Other current assets.......... -- (52)
Accounts payable.............. (4,078) 5,313
Accrued liabilities........... (2,560) 2,807
Accrued job costs............. 5,032 9,498
Accrued interest.............. -- (671)
Due to related parties........ 12 --
Income taxes payable.......... -- 130
--------- ---------
Net cash provided by
operating activities.... 5,410 6,276
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases and additions to
equipment......................... (17,864) (61,619)
Drydock costs...................... (4,860) (619)
Purchase of other assets........... -- (368)
--------- ---------
Net cash used in investing
activities.............. (22,724) (62,606)
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under notes payable and
long-term debt.................... 18,800 13,747
Loan fees.......................... -- (767)
Principal payments on long-term
debt.............................. (7,776) (26,177)
Issuance of common stock........... -- 950
Initial public offering proceeds,
net............................... -- 68,721
Purchase of treasury stock......... (18) (1,538)
--------- ---------
Net cash provided by
financing activities.... 11,006 54,936
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (6,308) (1,394)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 9,649 2,846
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 3,341 $ 1,452
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest............. $ 4,363 $ 1,914
Cash paid for income taxes......... $ -- $ 265
Non-cash investing and financing
activities:
Purchase and additions to
equipment with the issuance of
notes payable................... $ -- $ 26,098
Purchase and additions to
equipment with the issuance of
treasury stock.................. $ 998 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated interim financial statements included herein have been
prepared by Horizon Offshore, Inc. (a Delaware corporation) and its subsidiaries
(Horizon or the Company), and are unaudited, except for the balance sheet at
December 31, 1998, which has been prepared from the audited financial
statements. In the opinion of management, the unaudited consolidated interim
financial statements include all adjustments necessary for a fair presentation
of the financial position as of September 30, 1999, the statements of operations
for each of the three and nine months period ended September 30, 1999 and 1998,
and the statements of cash flows for the nine months period ended September 30,
1999 and 1998. Although management believes the unaudited interim related
disclosures in these consolidated interim financial statements are adequate to
make the information presented not misleading, certain information and footnote
disclosures normally included in annual audited financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules of the Securities and Exchange Commission. The
results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1999. The consolidated interim financial statements included herein
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1998 Annual Report on Form 10-K.
ORGANIZATION
Horizon provides offshore construction services to the oil and gas
industry. These services generally consist of laying and burying marine
pipelines for the transportation of oil and gas, and installing and salvaging
production platforms and other marine structures. Work is performed primarily on
a fixed-price or day-rate basis or a combination of these.
In April 1998, the Company completed its initial public offering (the
Offering) of 5,750,000 shares of its common stock at $13.00 per share and
received $68.6 million in net proceeds. The Company used the net proceeds of the
Offering to repay $23.8 million of indebtedness and to acquire the Stephaniturm,
a 230-foot diving support vessel, for $18.3 million. The remaining Offering
proceeds were used to upgrade and expand the Company's fleet and operating
capabilities.
INTEREST CAPITALIZATION
Interest is capitalized on the average amount of accumulated expenditures
for equipment that is undergoing major modification and refurbishment prior to
being placed into service. Interest is capitalized using an effective rate based
on related debt until the equipment is placed into service. Interest expense for
the three and nine months ended September 30, 1999 is net of $90,000 and
$757,000 of capitalized interest, respectively. Interest expense for the three
and nine months ended September 30, 1998 was net of $443,000 and $736,000 of
capitalized interest, respectively.
INVENTORY
Inventory consists of structures held for resale from derrick salvage
services. The inventory is reported at the lower of cost or market value.
5
<PAGE>
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Barges, boats and related
equipment.......................... $ 159,909 $141,436
Land and buildings................... 7,412 7,084
Machinery and equipment.............. 245 245
Office furniture and equipment....... 1,238 1,121
Leasehold improvements............... 1,359 1,330
------------- ------------
170,163 151,216
Less -- Accumulated depreciation..... (10,636) (5,536)
------------- ------------
Property and equipment, net.......... $ 159,527 $145,680
============= ============
During the nine months ended September 30, 1999, the Company incurred $18.9
million for vessel acquisitions, improvements and refurbishments to its fleet
and for improvements to its marine base in Port Arthur, Texas. In April 1999,
the Company purchased the Brazos Horizon, a pipelay/pipebury barge for $5.8
million, which consisted of $4.8 million in cash and 133,300 shares of the
Company's common stock with a fair value of $1.0 million. Treasury stock was
reissued for this transaction.
Effective July 1, 1999, the Company changed its estimated salvage value on
certain of its barges and vessels from zero to 10%. The Company increased the
estimated salvage value from zero to 10% to more accurately reflect management's
estimate of the value of the assets at the end of their estimated useful lives.
For both the three and nine months ended September 30, 1999, the change had the
effect of reducing depreciation expense by $0.2 million and increasing net
income by $0.1 million or less than $.01 per share -- basic and diluted.
3. STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
Earnings per share data for all periods presented has been computed
pursuant to Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" that requires a presentation of basic earnings per share
(basic EPS) and diluted earnings per share (diluted EPS). Basic EPS excludes
dilution and is determined by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities and
other contracts to issue common stock were exercised or converted into common
stock. No options to purchase common stock were granted prior to April 1998. The
Company had outstanding options covering an aggregate of 1.3 million shares of
common stock and 0.1 million shares were exercisable as of September 30, 1999.
There are no material differences in basic EPS and diluted EPS for all periods
presented. Options to purchase 0.8 million shares for both the three and nine
months ended September 30, 1999 were excluded from the calculation of diluted
EPS as they were anti-dilutive.
TREASURY STOCK
In July 1998, the board of directors approved the repurchase of up to $10
million of the Company's outstanding common stock. Shares have been purchased
from time to time, subject to market conditions, in the open market or in
privately negotiated transactions. As of September 30, 1999, the Company had
repurchased 1,158,800 shares of common stock for a total cost of $7.6 million,
and the Company re-issued 133,300 shares of treasury stock in connection with
the purchase of the Brazos Horizon. As of
6
<PAGE>
HORIZON OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1999, the Company's treasury stock consisted of 1,025,500 shares
at a cost of $6.7 million. The Company records its inventory of treasury stock
under the average cost basis.
4. RELATED PARTY TRANSACTIONS
The Company has chartered the Stephaniturm to Det Sondenfjelds-Norske
Dampskibsselskab ASA (DSND) until December 31, 1999. The Company recognized $2.4
million in revenues and $1.5 million in gross profit during the nine months
ended September 30, 1999, related to this charter. The Company recognized $3.5
million in revenues and $2.9 million in gross profit related to this charter for
the nine months ended September 30, 1998. On August 13, 1999, DSND sold its 4.1
million shares of the company's common stock and is no longer a stockholder.
In August 1998, the Company entered into a master services agreement with
Odyssea Marine, Inc. (Odyssea), an entity wholly-owned by Elliott Associates,
L.P. and Westgate International, L.P., the Company's principal stockholders
(Principal Stockholders), to charter certain marine vessels from Odyssea. As of
September 30, 1999, the Company owed Odyssea $0.2 million as a result of
services performed under this agreement, compared to $1.1 million at December
31, 1998. During the nine months ended September 30, 1999, Odyssea billed
Horizon $2.8 million and Horizon paid Odyssea $3.7 million for services rendered
under the agreement.
In August 1998, the Company entered into an agreement with Prime Natural
Resources, Inc. (Prime), an entity that is majority-owned by one of the
Principal Stockholders, to perform marine construction work. Prime awards
contracts to Horizon on the basis of a competitive bid process. As of September
30, 1999, the outstanding receivable balance from Prime was $1.9 million,
compared to $1.3 million at December 31, 1998. The Company billed Prime $4.2
million for services rendered under the agreement during the first nine months
of 1999.
In the opinion of management of the Company, all of the transactions
described above were effected on terms at least as favorable to the Company as
those which could have been obtained from unaffiliated third parties.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND THE
DISCUSSION UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" INCLUDED IN THE COMPANY'S 1998 ANNUAL REPORT ON FORM
10-K. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE
SUBJECT TO RISKS AND UNCERTAINTIES. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, ACTUAL RESULTS MAY DIFFER FROM THOSE EXPRESSED OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS.
GENERAL
Horizon provides marine construction services to the oil and gas industry
primarily in the Gulf of Mexico. The Company's marine fleet is used to perform a
wide range of marine construction activities, including installation of marine
pipelines to transport oil and gas from newly installed production platforms and
other subsea production systems, and the installation and abandonment of
production platforms.
The Company's management team has aggressively expanded the Company's
operations. Horizon currently has a fleet of twelve vessels, eleven of which
were operational during the third quarter. These vessels are capable of
providing a full range of pipeline and derrick services in varying water depths,
and included five pipelay / pipebury barges, a dedicated pipebury barge, two
derrick barges, two diving support vessels, and one material barge. In April
1999, the Company purchased the Brazos Horizon, a pipelay / pipebury barge. The
Company's expanded fleet competes in the Gulf for substantially all pipeline
installation projects in shallow water depths of 200 feet and less and projects
in intermediate water depths between 200 and 800 feet. The Company also competes
for projects in selected international markets. Horizon has two derrick barges
with lift capacities up to 550 and 800 tons deployed. The Company is currently
upgrading the Pacific Horizon from an 800 ton lift capacity to 1000 tons which
is expected to be completed by the end of this year. The diving and towing
capabilities of the Pearl Horizon are also being upgraded.
The demand for offshore construction services in the Gulf is cyclical and
depends largely on the financial condition of the oil and gas companies active
there and, in particular, their levels of capital expenditures for developmental
construction. These expenditures are influenced by prevailing oil and gas
prices, expectations about future demand and prices, the cost of exploring for,
producing and developing oil and gas reserves, the discovery rates of new oil
and gas reserves, sale and expiration dates of offshore leases in the United
States and abroad, political and economic conditions, governmental regulations
and the availability and cost of capital. Historically, oil and gas prices and
the level of exploration and development activity have fluctuated substantially,
impacting the demand for pipeline and marine construction services.
Factors affecting the Company's profitability include competition,
equipment and labor productivity, contract estimating, weather conditions and
the other risks inherent in marine construction. The marine construction
industry in the Gulf is highly seasonal because the most favorable weather
conditions for the Company's services generally occur during the second and
third quarters of the calendar year. Full year results are not a direct multiple
of any quarter or combination of quarters because of this seasonality.
RESULTS OF OPERATIONS
The discussion below describes the Company's results of operations.
Revenues and profits declined in the first nine months of 1999 compared to 1998
as offshore construction activity in the Gulf decreased primarily in response to
lower oil and gas prices in late 1998 and early 1999. Although reduced demand
for construction and lower margins bid on jobs impacted results for the first
nine months of 1999, Horizon was able to increase revenues and maintain its
profitability during the third quarter of 1999. If the offshore construction
market improves next year as expected, management believes Horizon's expanded
fleet and operations capabilities should position the Company to take advantage
of any increased activity levels in the Gulf of Mexico as well as in certain
international areas.
The Company's vessel acquisitions have expanded its operating capabilities
and increased its operating cost structure. The aggregate amount of selling,
general and administrative expenses has increased to support this growth. During
the first nine months of 1999, the Company deployed two additional vessels,
8
<PAGE>
the Brazos Horizon, a pipelay/pipebury barge, and the Pacific Horizon, an
800-ton derrick barge. The Company's fleet expansion, together with reduced
offshore construction demand, resulted in a decrease in fleet utilization during
the first nine months of 1999 compared to last year. The lower utilization for
the pipelay vessels was partially offset by increased utilization of the
Company's derrick vessels. The Pacific Horizon and the Atlantic Horizon together
successfully completed several projects during the third quarter. This is a
major accomplishment in the Company's strategy to penetrate the salvage and
installation market. The Company also completed its largest contract to date.
This project consisted of laying and burying 80 miles of 20-inch diameter pipe
in water depths up to 365 feet utilizing four Horizon vessels.
Horizon has continued its expansion efforts into selected international
markets during the third quarter of 1999 by securing a contract to transport and
install a production platform offshore Ecuador. This project is scheduled to
begin in the first quarter of 2000 and represents the Company's commitment to
international expansion in Latin America. The Company is also continuing its
business development efforts in West Africa and Mexico by actively bidding on
selected projects. The Stephaniturm is on charter in the North Sea with DSND
until December 31, 1999, and the company expects this vessel to continue working
in the North Sea market next year.
A weakness in energy prices and a prolonged decline in offshore drilling
and exploration could adversely affect the Company's future revenues and
profitability. In late 1998 and the first nine months of 1999, the Company
experienced a decline in demand for its marine construction services in the Gulf
as oil and gas companies reduced their levels of capital expenditures. The
Company expects reduced demand for its services to impact its results of
operations for the remainder of 1999.
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1998
CONTRACT REVENUES. Contract revenues were $36.3 million for the quarter
ended September 30, 1999, compared to $34.9 million for the quarter ended
September 30, 1998. The completion of the Company's largest contract to date
together with the salvage and installation work performed this quarter
significantly contributed to the increase in revenues and gross profit.
GROSS PROFIT. Gross profit was $8.1 million (22.4% of contract revenues)
for the quarter ended September 30, 1999, compared to a gross profit of $7.3
million (21.1% of contract revenues) for the quarter ended September 30, 1998.
The largest contract completed to date significantly contributed to the increase
in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were consistent at $2.3 million (6.3% of contract
revenues) for the three months ended September 30, 1999 with $2.3 million (6.6%
of contract revenues) for the same period in 1998.
INTEREST EXPENSE. Interest expense was $1.7 million for the three months
ended September 30, 1999, net of $0.1 million interest capitalized, and $0.6
million for the same period last year, net of $0.4 million interest capitalized.
The Company's total outstanding debt was $80.9 million at September 30, 1999,
compared to $53.2 million at September 30, 1998. The outstanding debt increased
as a result of the vessel acquisitions and improvements made to expand the
capabilities of the Company's fleet.
OTHER INCOME. Included in other income is interest income on cash
investments for the three months ended September 30, 1999, and the three months
ended September 30, 1998 of $88,000 and $40,000 respectively.
INCOME TAXES. The Company uses the liability method of accounting for
income taxes. For the quarter ended September 30, 1999, the Company recorded a
federal income tax provision of $1.5 million, at a net effective rate of 35.0%
on pre-tax income of $4.2 million. For the quarter ended September 30, 1998,
Horizon recorded a federal income tax provision of $1.5 million, at a net
effective rate of 33.6% on pre-tax income of $4.4 million due to losses carried
forward from previous years.
NET INCOME. Net income was $2.7 million, or $0.15 per share (computed
based upon 18,921,705 weighted average shares), for the quarter ended September
30, 1999, compared to net income for the quarter ended September 30, 1998 of
$2.9 million, or $0.15 per share (computed based upon 19,740,572 weighted
average shares).
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
CONTRACT REVENUES. Contract revenues were $72.1 million for the nine
months ended September 30, 1999, compared to $87.8 million for the nine months
ended September 30, 1998. The Company's results of operations for the first nine
months of 1999 reflect the reduced demand for offshore construction in the Gulf
of Mexico earlier in 1999.
GROSS PROFIT. Gross profit was $17.2 million (23.9% of contract revenues)
for the first nine months of 1999, compared to a gross profit of $21.5 million
(24.5% of contract revenues) for the same period of 1998. Reduced demand for
marine construction in the Gulf and lower margins bid on jobs resulted in
decreased gross profit for the first nine months of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $6.7 million (9.4% of contract revenues)
for the nine months ended September 30, 1999 from $6.1 million (6.9% of contract
revenues) for the same period of 1998 primarily due to the addition of personnel
and other expenses associated with the growth of the Company.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1999 was $4.2 million net of $0.8 million of interest capitalized. Interest
expense was $1.9 million for the nine months ended September 30, 1998, net of
$0.7 million of interest capitalized. Interest expense increased during the
first nine months of 1999 due to the Company's debt borrowings for vessel
acquisitions and improvements made to expand the Company's fleet and
improvements to the marine base in Port Arthur, Texas.
OTHER INCOME. Included in other income is interest income on cash
investments for the nine months ended September 30, 1999 and the nine months
ended September 30, 1998 of $319,000 and $143,000 respectively.
INCOME TAXES. The Company uses the liability method of accounting for
income taxes. For the nine months ended September 30, 1999, the Company recorded
a federal income tax provision of $2.3 million, at a net effective rate of 34.5%
on pre-tax income of $6.8 million. For the same period last year, the Company
recorded a federal income tax provision of $3.4 million, at a net effective rate
of 24.5% on pre-tax income of $13.8 million. Prior to 1998, a valuation
allowance was established to offset the Company's net deferred tax assets,
including those related to loss carryforwards, to the extent they were not
realizable through the sale of appreciated assets. The Company decreased its
valuation allowance in fiscal 1998, which partially offset income taxes in the
first nine months of 1998.
NET INCOME. Net income was $4.4 million, or $0.24 per share (computed
based on 18,810,196 weighted average shares), for the nine months ended
September 30, 1999, compared to net income for the nine months ended September
30, 1998 of $10.4 million, or $0.58 per share (computed based on 17,880,863
weighted average shares). The decrease in net income is due to the decline in
revenues and gross profit and the increase in operating expenses primarily in
the first half of 1999.
LIQUIDITY AND CAPITAL RESOURCES
In December 1998, Horizon entered into a loan agreement with The CIT Group,
Inc. providing for a $60 million term loan (the Term Loan) at a rate of LIBOR
plus 2.65%. Initially, the Company borrowed $50 million in December 1998, and
borrowed an additional $5 million in March 1999 upon the completion of the
Pacific Horizon. In May 1999, the terms of this loan were amended to increase
the amount that may be borrowed to $73.8 million and the Company borrowed an
additional $13.8 million. The outstanding balance on the Term Loan at September
30, 1999 was $63.8 million. The first advance of $50 million under the Term Loan
is due in 84 monthly principal installments of $463,000, the second advance of
$5 million is due in 84 monthly principal installments of $46,000, and the third
advance of $13.8 million is due in 84 monthly principal installments of
$128,000. The remaining principal balance is due at the end of 84 months.
There were no borrowings outstanding under the Company's $30 million credit
facility (the Revolver) at September 30, 1999. Den Norske Bank assigned its
interest in the revolver to Wells Fargo Bank effective September 28, 1999. As
part of this assignment, the interest rate on amounts outstanding under the
revolver was reduced from LIBOR plus 2.5% to LIBOR plus 2%.
10
<PAGE>
In 1997, one of the Principal Stockholders issued letters of credit and
provided guarantees to secure Horizon's notes payable to two foreign marine
companies pursuant to a settlement agreement. During 1998, Den Norske Bank
issued two letters of credit on behalf of the Company to secure any obligation
paid by the Principal Stockholder under its letters of credit. These letters of
credit are deducted from the Company's borrowing base calculation under the
Revolver.
Both the Term Loan and the Revolver require that certain conditions be met
in order for the Company to obtain advances under the loans. These loans are
secured by substantially all assets of the Company, including mortgages on all
vessels owned by the Company, as well as accounts receivable. Both loan
facilities require the Company to maintain certain financial ratios and contain
certain covenants that limit the Company's ability to incur additional
indebtedness, pay dividends, create certain liens, sell assets and make capital
expenditures. Horizon was in compliance with all loan covenants as of September
30, 1999.
In July 1998, the board of directors approved the repurchase of up to $10
million of the Company's outstanding common stock. As of September 30, 1999, the
Company had repurchased 1,158,800 shares of common stock for a total cost of
$7.6 million through borrowings provided by a wholly owned subsidiary of one of
the Principal Stockholders. The $7.6 million was repaid from proceeds of the
Term Loan in December 1998. The Company purchased 3,800 shares of common stock
during the first quarter of 1999 with cash provided by operations. In April
1999, the Company re-issued 133,300 shares of treasury stock in connection with
the purchase of the Brazos Horizon. The Company records the inventory of
treasury stock under the average cost basis.
Horizon had working capital of $11.1 million at September 30, 1999,
compared to working capital of $12.7 million at December 31, 1998. The third
quarter decline in working capital was primarily due to an increase in the
current maturities of long-term debt.
Cash provided by operations was $5.4 million for the first nine months
ended September 30, 1999, compared to $6.3 million for the first nine months
ended September 30, 1998. The Company has used borrowings to fund capital
expenditures. Cash used for capital expenditures during the first nine months
ended September 30, 1999 totaled $17.9 million, compared to $61.6 million for
the first nine months ended September 30, 1998. Principal payments on long-term
debt were $7.8 million and $26.2 million during the first nine months of 1999
and 1998, respectively.
Planned capital expenditures for the remainder of 1999 are estimated to
total approximately $3.0 million, which include expenditures to upgrade the
Pacific Horizon from a 800 ton lift capacity to a 1,000 ton lift capacity, to
upgrade the Pearl Horizon, and to purchase new diving equipment. Management
believes that cash generated from operations, together with available borrowings
under its loan facilities, will be sufficient to fund the Company's currently
planned capital projects and working capital requirements into the year 2000.
The Company's strategy, however, is to make other acquisitions to expand its
operating capabilities and expand into selected international markets. To the
extent the Company is successful in identifying acquisition and expansion
opportunities, it most likely will require additional equity or debt financing
depending on the size of any transaction.
YEAR 2000
The Company has implemented a Year 2000 project plan to identify and assess
its risks associated with Year 2000 issues. Under the plan, the Company assessed
its major information and computing systems and has updated or replaced
applications that were not Year 2000 compliant. The Company has also contacted
its key vendors and customers to assess their efforts and progress with Year
2000 issues. The Company does not anticipate any material effects on its
business, operations or financial condition. Despite efforts to address Year
2000 issues in advance, there can be no assurance that the Company will not
experience unanticipated disruption, negative consequences or costs caused by
undetected errors in the technology used in its internal systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
The Company was not engaged in any transactions requiring disclosure at
September 30, 1999.
11
<PAGE>
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
In addition to historical information, Management's Discussion and Analysis
of Financial Condition and Results of Operations includes certain
forward-looking statements regarding events and financial trends that may affect
the Company's future operating results and financial position. Such
forward-looking statements are subject to uncertainties that could cause the
Company's actual results to differ materially from such statements. Such
uncertainties include but are not limited to: industry conditions and
volatility; prices of oil and gas; the Company's ability to obtain and the
timing of new projects; and changes in competitive factors, including the level
of capital expenditures by oil and gas companies due to fluctuations in the
price of oil and gas; risks of growth strategy, including the risks of rapid
growth; operating hazards, including the unpredictable effect of natural
occurrences on operations and the significant possibility of accidents resulting
in personal injury and property damage; seasonality of the offshore construction
industry in the Gulf; the Company's ability to attract and retain skilled
workers; the need for additional financing; contract bidding risks;
percentage-of-completion accounting; continued active participation of the
Company's executive management and key personnel; the effect on the Company's
performance of regulatory programs and environmental matters; risks involved in
the Company's operations expansion into international offshore oil and gas
producing areas; and risks involved in joint venture operations, including
difficulty in resolving disputes with present partners or reaching agreements
with future partners. These and other uncertainties related to the business are
described in detail under the heading "Risk Factors" in the Company's 1998
Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
27.1 Financial Data Schedule (2)
(b) Reports on Form 8-K:
The following current reports on Form 8-K were filed during the fiscal
quarter ended September 30, 1999:
October 5, 1999 -- Item 5. Other Events. The Company announced the
appointment of R. Clay Etheridge as Executive Vice President and Chief Operating
Officer on September 13, 1999.
October 20, 1999 -- Item 5. Other Events. The Company announced that James
Devine was elected as Chairman of the Board of Directors.
- ------------
1 Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration Statement No. 333-43965).
2 Filed herewith
12
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Date: November 15, 1999 HORIZON OFFSHORE, INC.
By: /s/ DAVID W. SHARP
DAVID W. SHARP
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED INTERIM FINANCIAL STATEMENTS OF HORIZON OFFSHORE, INC. AND
SUBSIDIARIES AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,341
<SECURITIES> 0
<RECEIVABLES> 30,654
<ALLOWANCES> 0
<INVENTORY> 324
<CURRENT-ASSETS> 44,166
<PP&E> 170,163
<DEPRECIATION> 10,636
<TOTAL-ASSETS> 210,189
<CURRENT-LIABILITIES> 33,103
<BONDS> 0
0
0
<COMMON> 9,119
<OTHER-SE> 87,872
<TOTAL-LIABILITY-AND-EQUITY> 210,189
<SALES> 72,079
<TOTAL-REVENUES> 72,079
<CGS> 54,866
<TOTAL-COSTS> 54,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,164
<INCOME-PRETAX> 6,796
<INCOME-TAX> 2,347
<INCOME-CONTINUING> 4,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,449
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
