Hornbeck Offshore Services Inc. Annual Report 2004

FY2004 Annual Report · Hornbeck Offshore Services Inc.
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It’s not about luck. It’s about experience.

Hornbeck Offshore Services, Inc.
2004 Annual Report

On our cover

On the left is Larr y D.
Hornbeck, one of our
directors who founded
the original Hornbeck
Offshore Services, Inc.
(NASDAQ:HOSS) in 1980,
which grew to over 100
vessels operating world-
wide before merging with
its largest competitor in
1996. Larr y Hornbeck is
holding a photograph of

On the right is Todd M. Hornbeck, President and
Chief Executive Ofﬁcer of Hornbeck Offshore Services,
Inc. (NYSE:HOS), which he co-founded in 1997. The
new generation OSV shown on Todd’s laptop is the
265’ x 60’ x 22’ HOS Stormridge, built by HOS in 2002
based on a proprietary design to meet the increasingly
complex needs of the deep-shelf, deepwater and ultra-
deepwater offshore drilling industry. State-of-the-art by
today’s standards, the new generation class of OSVs,
which carr y three to ten times the cargo capacity of
their forerunners, should set the industry standard for
at least the next twenty years.

the HOS Centurion, one of his original 180’ x 40’ x 14’
vessels. State-of-the-art when it was newly built by
HOSS in 1981, the conventional 180’ vessel class
was the standard of the OSV industry for servicing
shallow-shelf drilling for the past twenty years.

Company overview
Headquartered in Covington, Louisiana, Hornbeck
Offshore Services, Inc. (NYSE:HOS) is a leading
provider of technologically advanced, new generation
offshore supply vessels primarily in the U.S. Gulf of
Mexico and in select international markets, and is a
leading transporter of petroleum products through its
ﬂeet of ocean-going tugs and tank barges primarily in
the northeastern U.S. and in Puerto Rico. Hornbeck
currently owns and operates a ﬂeet of over 50 vessels,
with four additional vessels under construction.

Mission Statement
Our mission is to be recognized as the energy
industry's marine transportation and service
company of choice for our customers, employees,
and investors through innovative, high quality, value-
added business solutions delivered with enthusiasm,
integrity and professionalism and with the utmost
regard for the safety of individuals and the protection
of the environment.

Cautionary Statement regarding Forward-Looking Statements

This 2004 Annual Repor t contains for ward-looking statements in which we discuss factors we believe may affect our per formance in the

future. For ward-looking statements are all statements other than historical facts, such as statements regarding assumptions, expectations,

and projections about future events. Accuracy of the assumptions, expectations and projections depend on events that change over time

and thus susceptible to periodic change based on actual experience and new developments. Although the Company believes that the

assumptions, expectations and projections reﬂected in these for ward-looking statements are reasonable based on the information known

to the Company today, the Company can give no assurance that the assumptions, expectations and projections will prove to be correct.

The Company cautions readers that it under takes no obligation to update or publicly release any revisions to the for ward-looking statements

in this annual repor t hereafter to reﬂect the occurrence of any events or circumstances or any changes in our assumptions, expectations

and projections, except to the extent required by applicable law. Additionally, impor tant factors that might cause future results to differ

from these assumptions, expectations and projections include industr y risks, oil and natural gas prices, economic and political risks,

weather related risks, regulator y risks, and other factors described in our most recent Annual Repor t on Form 10-K ﬁled with the

Securities and Exchange Commission, a copy of which is enclosed herewith, and in other ﬁlings.

2004 Annual Report

Summary Financial Data

(In thousands, except per share data)

For years ended December 31
Revenues
Operating income
Net income (loss) (1)
Diluted net income (loss) per share(1)
Weighted-average diluted shares outstanding
Total assets
Total long term debt
Total stockholders’ equity
Net cash provided by operations
EBITDA(2)

2004
132,261
35,847
(2,483)
(0.13)
19,330
460,571
225,000
182,904
21,405
59,473

$
$
$
$

$
$
$
$
$

2003
110,813
35,687
11,190
0.82
13,604
365,242
212,677
112,395
25,499
54,161

$
$
$
$

$
$
$
$
$

Summary Operating Data (3)

For years ended December 31
Average number of OSVs
Average OSV utilization rate
Average OSV dayrate
Average number of barges
Average barge ﬂeet capacity (barrels)
Average barge size (barrels)
Average barge utilization rate
Average barge dayrate

2004
22.8
87.5%
10,154
16.0
1,156,330
72,271
82.2%
11,620

$

$

2003
17.3
88.6%
10,940
15.9
1,145,064
72,082
73.6%
10,971

$

$

$
$
$
$

2002
92,585
34,271
11,647
0.94
12,428
$ 278,290
$ 172,306
71,876
$
24,955
$
47,289
$

2002
11.0
94.9%
12,176
16.0
1,130,727
70,670
78.1%
9,499

$

$

Revenues (in millions)

EBITDA(2)

(in millions)

Vessels & Equipment (in millions)

6 Year C A G R 4 8 %

$140

$120

$100

$80

$60

$40

$20

0

6 Year C A G R 7 1 %

$80

$60

$40

$20

0

6 Year C A G R 4 1 %

$400

$300

$200

$100

0

98  99  00  01  02  03  04

98  99  00  01  02  03  04

98  99  00  01  02  03  04

Barge

 OSV

(1) Results for 2004 include a $22.4 million ($0.75 per diluted share) loss on early extinguishment of debt related to our November 2004 bond reﬁnancing.

(2) See our discussion of EBITDA as a non-GAAP ﬁnancial measure, which includes a reconciliation to the most comparable ﬁnancial measure

calculated and presented in accordance with GAAP, on page 10 of this 2004 Annual Repor t.

(3) See footnotes relating to Summar y Operating Data on page 28 of our enclosed 2004 Annual Repor t on Form 10-K.

1

TheHOS Citation, a 
conventional 180’ OSV,
was built by the original
HOSS in 1982.

2004 Annual Report

Dear fellow stockholders

2004 was a pivotal year for Hornbeck Offshore. At the start of the
year, we were a private company, which recognized that positive market 
fundamentals were occurring in both of our marine segments. Therefore, 
we knew that we needed to improve our ﬁnancial ﬂexibility to fully realize
our corporate growth opportunities. Through our knowledge of the market
place, strategic planning and some fortuitous timing, we achieved solid
results and ended the year positioned ahead of our own high expectations. 

Dramatically higher average oil and gas commodity prices stimulated
demand for our services and allowed us to demonstrate the strength
of our business model. It was a year in which both the public debt and 
equity markets were very attractive for energy issuers, so we seized 
the opportunity to completely re-engineer our capital structure.  

All facets of the Company’s balance sheet went through signiﬁcant
changes. In February, we extended the maturity of our revolving credit
facility and increased its nominal size to $100 million. In March 2004, we
completed our IPO, with gross proceeds of $80 million, and now have more
efﬁcient access to equity capital for future growth. In November 2004, we
commenced a tender offer for $175 million of 10.625% senior notes due
2008 to be funded by the issuance of $225 million in 6.125% senior notes
due 2014. This bond reﬁnancing decreased our annualized interest expense
by over $5 million even though our long-term debt increased by $50 million.
As a result of these three ﬁnancings, we substantially lowered our net
leverage ratio and overall cost-of-capital, while substantially increasing our
available liquidity. We are now well positioned to act on strategic growth
opportunities, beyond our newbuild tank barge program already underway.

We have a solid growth track record and we expect that trend to continue.
Between 1998 and 2004, Hornbeck has achieved compound annual growth
rates in total ﬂeet investment and EBITDA(1) of 41% and 71%, respectively.
Moreover, our near-term outlook is bullish, as we expect favorable OSV 
market conditions to continue through at least 2006. Accordingly, based
on the mid-point of our recently reported guidance ranges, we currently
project average annual growth in our EBITDA(1) for 2005 and 2006 of about
22% and 24%, respectively. We believe that 
our business model will allow us to
continue to post industry-leading
growth rates, margins and returns,
as we have for the past several years.

In our Offshore Supply Vessel
(OSV) segment, we have assembled a 

2

T h e H O S   S t o r m r i d g e ,   a   2 6 5 ’   O S V
b u i l t   i n   2 0 0 2   a n d   H O S   H o t s h o t ,
a   1 6 5 ’   f a s t   s u p p ly   ve s s e l   t h a t  
wa s   a c q u i r e d   i n   2 0 0 4 .

2004 Annual Report

multi-class ﬂeet of 24 new generation vessels through acquisitions and new
construction. We have one of the youngest, technologically advanced ﬂeets
in the Gulf of Mexico (GoM) with an average age of four years. During
2004, we added two additional vessels to our OSV division and, in January
2005, we acquired our ﬁrst foreign-ﬂagged vessel. This new generation
240’ class, 8,000 brake horsepower, anchor-handling towing supply vessel 
was immediately deployed under a new three-year time charter with one 
of our OSV customers in Trinidad. 

We are committed to being the provider of choice in the OSV market by
maintaining a superior ﬂeet that better meets the needs of the increasingly
complex drilling programs of our customers. Since 1998, the average 
utilization rate for our OSV ﬂeet has been approximately 94% compared to
the U.S. Gulf of Mexico industry average for conventional 180’ OSVs of
approximately 50% over the same time period. Our larger, faster and more
cost-efﬁcient vessels should remain in high demand as deepwater
and other complex and challenging exploration, development and
production activity continues to increase globally. But demand
trend lines are not always linear. We experienced some volatility 
in demand during 2004. Our average OSV utilization rate improved 
to 94% in the fourth quarter, up from an April 2004 through in the
low-70’s. During the same time frame, our average OSV dayrates 
rose from a low of $9,600 in April to over $10,900 for the fourth 
quarter, and continued upward to about $11,400 in February 2005.
Sensing the pending upswing, we kept about two-thirds of our ﬂeet in
the spot market to beneﬁt from the higher demand and did not lock-in 
to long-term contracts at those lower ﬁrst quarter 2004 dayrates. 
Based on our current outlook, we expect average ﬂeet utilization to
remain in the low to mid-90% range with average OSV dayrates above
$11,000 through at least 2006. 

In our Tug & Tank Barge segment, the Oil Pollution Act of 1990 
(OPA 90) mandates that all single-hulled tank vessels operating in U.S. 
navigable waters be removed from service based upon a predetermined
schedule. As a result, we were required to remove three of our 15 single-
hulled barges from service at the end of December 2004. To replace our
lost capacity, as well as to expand our ﬂeet-wide capacity by 28%, we have
contracted with shipyards for the construction of ﬁve new double-hulled
tank barges. The ﬁrst new barge was placed into service in March 2005,
with the second barge expected to be delivered in June of this year. Based
on current shipyard schedules, we expect to take delivery of the remaining
three tank barges near the end of 2005, as originally planned. Four of the
ﬁve barges were already committed to long-term contracts with major oil
companies while still under construction. With the inclusion of these ﬁve
vessels, 46% of our ﬂeet will be comprised of higher-margin double-hulled
capacity, up from 7% at December 31, 2004. 

3

  a   3 , 9 0 0  
  w a s   a c q u i r e d  

i c   S e r v i c e ,
t u g ,

l a n t
T h e A t
h o r s e p o w e r  
i n   2 0 0 1 .

TheHOS Dover, a 
conventional 180’ OSV, 
was built in 1978 and 
acquired by the original 
HOSS in 1990.

In addition, in June
2004, we acquired two 6,140
horsepower ocean-going tugs and
retroﬁtted them to bolster our tug ﬂeet’s 
ability to handle the larger tank barges in the 
newbuild program. 

While average dayrates for our tank barges have steadily risen from about
$8,500 in 1999 to over $12,600 for the fourth quarter 2004, there are 
reasons to believe long-term dayrates could continue to move higher still,
as upward pressure is exerted from declining supply, stable to modestly
increasing demand and the premium necessary to attract new capital to
build incremental double-hulled capacity. 

Diversiﬁcation strategy
Since the Company’s formation, Hornbeck has pursued a balanced portfolio
approach towards operating and growing our two marine businesses. From
1997 to 2001, while in the early phases of the construction period for our
new generation OSV ﬂeet, the Tug & Tank Barge segment contributed the
majority of our revenues and EBITDA(1). Since 2002, the OSV segment has
emerged as the primary contributor to our total EBITDA(1).

In 2004, our OSV segment contributed approximately 67% of consolidated
EBITDA(1). Our EBITDA(1) mix is expected to ﬂuctuate a little over the next 
two years due the transitional effect of the retirement of three barges in
December 2004 offset by the incremental capacity of the ﬁve newbuild
barges being delivered throughout 2005. Accordingly, the relative 
contribution from our OSV segment is expected to increase to 75% 
in 2005, before re-balancing to approximately 60% in 2006.

T h e H O S   C ro s s ﬁ re ,   a   2 0 0 ’
O S V,   wa s   t h e   ﬁ r s t   n e w  
ge n e r a t i o n   O S V   b u i l t  
by   H O S   a n d   d e l ive r e d  
i n   N ove m b e r   1 9 9 8 .

Our Tug & Tank Barge segment provides a stable base of cash ﬂow, which
we view as a competitive advantage particularly during soft OSV market
cycles. After delivery of ﬁve new tank barges in 2005, our Tug & Tank
Barge segment is expected to cover 100% of all company-wide ﬁxed
charges, including debt service and maintenance capex.

EBITDA and EPS results
Revenues for 2004 increased 19.4% to $132.3 million, primarily as a 
result of an increase in the average size of our OSV ﬂeet by 5.5 vessels.
Operating income was $35.8 million, or 27.1% of revenues, while EBITDA(1)
for 2004 grew to $59.5 million, an increase of 9.8%. The net loss for 2004
was $2.5 million, or $0.13 loss per share, which included the $22.4 million
($14.7 million after-tax) charge for the early extinguishment of debt.
Excluding this $0.75 per share charge, net income for 2004 was $12.2 
million, or $0.62 earnings per diluted share. In February 2005, we reported
that we expect our EBITDA(1) to be in the range of $70 million to $75 

4

2004 Annual Report

million for 2005, and expect our EBITDA(1) to be in the range of $85 million
to $95 million for 2006.

Conclusion
The equity market has rewarded our efforts during our ﬁrst year as a 
NYSE-listed company with a 93% increase in our stock price from $13.00
per share at the IPO, to our 52-week high of $25.10 per share set today,
March 18, 2005. Over the same period, our stockholder value, as measured
by the excess of our market cap above the cumulative cash invested by our
stockholders since inception of about $191 million, has increased by over
$250 million. In addition, our November 2004 bond reﬁnancing was well
received. We believe that our bond pricing represents the lowest coupon
(6.125%) and lowest Treasury spread (T+198) in the history of oil service
“high yield” transactions. Moody’s and S&P also upgraded our senior 
unsecured credit ratings from “B1/B+” to “Ba3/BB-,” respectively, 
during 2004. A good year by almost any measure. 

We are very enthusiastic about our future, both near-term and long-term.
Although we started the “new and improved” Hornbeck Offshore only eight
years ago in 1997, our senior management team, on average, has over 
20 years of experience in the marine service industry. Additionally, most
of our mariners and managers have spent their entire lives in the industry.
Collectively, we have all learned from the market cycles and the 
technological evolutions of the past. We know that those factors will 
continue to impact our future and understand what it takes 
to ride the waves of change. We will always 
treasure what we have learned from the previous
generation, while looking forward to the challenge
of setting the standard for the next generation.

Very truly yours,

Todd M. Hornbeck
President and Chief Executive Ofﬁcer
Hornbeck Offshore Services, Inc.

March 18, 2005

(1) See our discussion of EBITDA as a non-GAAP ﬁnancial measure, which includes
a reconciliation to the most comparable ﬁnancial measure calculated and 
presented in accordance with GAAP, on page 10 of this 2004 Annual Repor t

5

  t h e   ﬁ r s t   p r o p r i e t a r y  
l t   b y   H O S ,

T h e E n e r g y   1 3 5 0 1 ,
d o u b l e - h u l
o n   s e a   t r i a l s  

l e d   t a n k   b a r g e   b u i
i n   M a r c h   2 0 0 5 .

 
Deﬁning the next generation

It’s not just about the boats - it’s also about the people.

At Hornbeck Offshore, the term “new generation” 
doesn’t just refer to the Company’s ﬂeet of newly 
constructed vessels, but also describes its mariners
and managers. However, like any entrepreneurial
success story, it began with the vision of its leader 
and founders and, in this case, was built upon the
strong foundation and heritage of a “ﬁrst generation”
that preceded it.

Past as prologue
In 1980, after managing a publicly traded, multinational
offshore marine services vessel company for 11 years,
Larr y Hornbeck launched his own vision of success by
founding the original Hornbeck Offshore Services, Inc.

in Galveston, Texas. One
year later, he took the 
company public on the 
NASDAQ and traded under
the symbol “HOSS.” Larr y’s
son Todd, at the time only 
12 years old, took an early
interest in learning the boat
business at his father’s side.
Summer jobs on the vessels, 
in the shipyards and around 
the ofﬁce laid a foundation for
his future in the industry. 

Over the next 16 years, HOSS 
grew through new construction 
and seven acquisitions into 
the second largest offshore
services vessel ﬂeet in the U.S.
Gulf of Mexico with over 100
vessels operating worldwide.
HOSS was merged into Tidewater
in 1996, however, Larr y wisely
retained the rights to the company
name and logo to pass on to the
next generation.

6

Todd and Larry Hornbeck on sea 
trials for HOS’s ﬁrst proprietary 
new generation OSV, the HOS 
Crossﬁre, in September 1998.

When HOSS started, there were about 67 boat 
companies in the Gulf of Mexico (GoM). But due 
to a long down-cycle in the 1980’s, most of HOSS’s 
competitors didn’t make it to the 1990’s. By 1991,
there were only about 16 OSV companies left in the
GoM. HOSS not only survived, it prospered and strong
relationships were built. With the support and 
conﬁdence of its customers, employees, vendors,
bankers and investors, HOSS emerged to become 
one of the most successful marine service providers
of the 1990’s.

The legacy of leadership continues…
Along the way, Todd Hornbeck was learning his own 
lessons. In 1991, Todd joined his dad full-time at 
HOSS and eventually became involved with every
aspect of the commercial side of the business. Todd
closely monitored all of the acquisitions that HOSS 
completed during the 1990’s, as well as its international
expansion. Working from the bottom up, from deckhand
to marketing executive, Todd learned the fundamentals
of the boat business and what was required to lead a
successful company.  

Like his father, Todd’s entrepreneurial spirit called him
to leave Tidewater after the merger. Recognizing that 
a customer need wasn’t fully being met, he left to 
form a new company that would construct a “new 
generation” of OSVs designed to service the then-
emerging deepwater trend in the GoM. The new
Hornbeck Offshore Services, Inc. was co-founded by 
Todd in New Orleans, Louisiana in 1997. A year ago, 
it was listed on the NYSE where it trades under the
symbol “HOS.”

Like HOSS, the new company was started “from
scratch.” But, unlike HOSS, it inherited the advantage
of the Hornbeck legacy. The Hornbeck name and 
reputation, both in the “oil patch” and on “Wall Street,”
was instrumental in opening doors for the new company.

But to make sure it could step through those doors 
and be able to live up to that legacy, Todd began
assembling a ﬁrst-class team to lead HOS into the 
next generation.

The new Hornbeck Offshore management team was
developed, one key person at a time; each of them
marked by a common passion for the boat business,
tempered by a lifetime of experience and ﬁrst-hand
knowledge of how to manage and market the volatile
cycles of the oilﬁeld industry. They believed they could
build a “better mouse-trap,” a new generation of vessel
capable of servicing the offshore energy industry well
into the 21st century. 

The guiding principles, business philosophies and 
marketing strategies learned during the HOSS years
were brought to bear, as the new team began to 
develop the foundation upon which it would operate. In
addition, out of a strong sense of mutual respect, many
of the long-standing relationships that Larr y and Todd
had forged with customers, employees, vendors,
bankers and investors over the years, stepped up to
support HOS in its infancy and are still very much
involved with the Company today.  

The “new generation” deﬁnition expanded
The biggest difference between the two companies 
may be the diversiﬁcation strategy that HOS has 
pursued since its inception. While HOSS was more 
of a “pure-play” on the consolidation of conventional
OSVs, HOS has complemented its new generation OSV
strategy with a second marine segment that adds a 
stable base of cashﬂow to counter-balance the effects
of soft OSV market cycles. HOS has always viewed its
tug and tank barge business as an important part of its
business model due to the high barriers to entry and
excellent macro-fundamentals in that market. With the
re-tooling of the barge ﬂeet being driven by OPA 90,
HOS is excited about the prospects of leading the 
“next generation” of vessel class in that industry 
segment, as well.

Reﬂections by our CEO on lessons learned
“We are engaged in a very volatile and cyclical industry
that is constantly affected by a myriad of market forces.

7

Todd and Larry Hornbeck celebrate the ceremonial ﬁrst trade 
of HOS stock on the ﬂoor of the NYSE in March 2004.

Disciplined decision-
making based on objective criteria is
imperative. The ability to anticipate the future, stay
ﬂexible and ‘turn on a dime’ is critical to our long-term
success. These attributes have allowed us to proﬁtably
grow in ever changing market cycles, while remaining
true to the core values that are embodied in our 
mission statement.

“ We also know that this is a service business, so we
must stay focused on satisfying our customers’ current
needs while preparing to meet their future needs. If we
don’t, someone else will. That is why we focus on 
staying on the leading edge of new vessel construction
in each of our marine segments, while searching for
acquisition opportunities of new generation equipment
at a favorable price. More importantly, that is why we
have focused on assembling the right team to manage
and operate our ﬂeet. Because, you can have the best
boats in the world, but at the end of the day, it’s all
about people.

“These are some of the lessons learned from the ‘ﬁrst
generation’ of our Company’s heritage. We hope to
build upon them as we rise to the challenge of setting
the standard for the next generation.” TMH.

Computer-based vessel
management system to
better monitor engine
room equipment and
cargo operations

Dynamic Positioning
Class 2 for better
station-keeping
redundancy

State-of-the-art
navigation and
communication
suite

Controllable-pitch
propellers for better
fuel economy

Proprietary low resistance
hull form for fuel efficiency
and better DP capabilities

Positive-displacement
cargo pumps for predictable
and repeatable
product delivery

High deadweight and
large clear deck for
larger load capacity

Diesel-electric
technology for better
power management

Of our 24 new generation OSVs, 17 were built in recent
years based on the proprietary designs of our in-house
engineers to service deepwater, deep-shelf, complex
drilling and speciality projects. They range in size
from 200 to 265 feet in length and all of them have
approximately two to three times the dry bulk capacity
and deck space, two to ten times the liquid mud
capacity and two to four times the deck tonnage
compared to conventional 180’ OSVs. Their advanced
cargo handling systems allow cargo to be loaded and
unloaded three times faster. Hornbeck’s new generation
OSVs aren’t just bigger, faster and more efﬁcient.
They have state-of-the-art systems that allow them
to operate where conventional 180’ OSVs can’t. For
instance, Hornbeck OSVs operating in deepwater
have dynamic positioning systems to enable our vessels
to offer continued operation in adverse weather and
meet the customer’s operational safety requirements.

Such safety requirements often preclude conventional
OSVs from tying up to deepwater installations. These
features are major competitive advantages. But,
increasingly, our new generation OSVs are being
utilized by customers regardless of the complexity of
their drilling program. They have learned to appreciate
the beneﬁts of a new state-of-the-art vessel versus one
that is close to the end of its useful life. We believe
that our superior vessels will command much higher
dayrates than 180’s while commodity prices remain
strong and will continue to be preferred by our
customers even if commodity prices soften.

New Generation OSVs

DRAWN BY:

HOS 265W Class

CH’KD BY:

SCALE:

DRAWING #:

8

Hydrafoil skegs and
proprietary high
deadweight, low
resistance hull form for
faster transit speeds

Yokohama fenders for
ship lightering work

Powerful bow thruster
for docking
assistance and
reduced outside
tug costs

All-electrical power and
pumping plant for lower
maintenance and
operating cost, better
fuel management and
operational efficiency

OUTBOARD PROFILE

Remotely-controlled
ballast system for
increased operational
flexibility

Cargo piping installed
below deck for cleaner,
safer working areas

Positive-displacement
cargo pumps ensure
predictable product
delivery rates

MAIN DECK ARRANGEMENT

All electric deck machinery.
No hydraulic piping on deck.
Environmentally friendly

We operate a ﬂeet of 14 ocean-going tugs and 14
active ocean-going tank barges to transport petroleum
products within the northeastern U.S., primarily New
York Harbor, and Puerto Rico. We have four additional
barges currently under construction. These vessels
transport clean and dirty petroleum products to and
from reﬁneries and distribution terminals and provide
ship lightering, bunkering and docking services.

Due to the Oil Pollution Act of 1990 and its mandated
vessel retirement schedule, an estimated 33% of the
U.S. single-hulled tank barge supply has recently been
removed from service, with an additional 17% to be
removed by 2010. While industry newbuild and retroﬁt
programs are underway, it doesn’t appear that lost
capacity will be fully replaced. We expect upward
pressure on dayrates to coincide with declining
supply and stable to modestly increasing demand.

Presently, we have four double-hulled tank barges under
construction and scheduled to be delivered throughout
2005. The construction of these barges is based on
proprietary designs developed by our in-house engineers.
The design features outlined above maximize transit
speed, improve cargo throughput rates, enhance crew
safety and are environmentally friendly.

We believe that these superior vessels will achieve
higher dayrates and operating margins, lower insurance
and operating costs and provide exceptional customer
satisfaction and employee retention.

Tugs & Tank Barges

DRAWN BY:

HOT 135 Class

CH’KD BY:

SCALE:

DRAWING #:

9

Regulation G EBITDA Reconciliation

This 2004 Annual Report contains references to the non-GAAP
ﬁnancial measure of EBITDA. EBITDA consists of earnings 
(net income) before interest expense, income tax expense, 
depreciation, amortization and loss on early extinguishment of
debt. 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.

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;

We believe EBITDA is useful to an investor in evaluating our 
operating performance because:

• as a basis for incentive cash bonuses paid to our executive 

ofﬁcers and other shore-based employees;

• 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

• 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.

• 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.

In March 2003, the Securities and Exchange Commission, or
Commission, adopted rules regulating the use of non-GAAP 
ﬁnancial measures, such as EBITDA, in ﬁlings with the Commission,
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. The following table reconciles EBITDA
with our net income (loss), as reported, for the following periods:

Reconciliation of EBITDA to Net Income (Loss) ($mm)

Year Ended December 31,
Net income (loss), as reported
Adjustment for loss on early 
extinguishment of debt, net 
of taxes (1)
Net income (loss), as adjusted
Interest expense:
Debt obligations
Put warrants

Income tax expense (beneﬁt)
Depreciation and amortization
EBITDA

1998
($1.4)

1999
($1.7)

2000
($4.5)

2001
$7.0 

2002
$11.6 

2003
$11.2 

2004
($2.5)

2005E(2)
$19.6 

2006E(2),(3)
$28.4 

—
($1.4)

—
($1.7)

—
($4.5)

1.2
1.5
(0.2)
1.3 
$2.4 

5.3 
2.3 
0.3 
3.1 
$9.3 

8.2 
7.3 
1.6 
5.2 
$17.7 

2.0
$9.0 

10.7 
3.0 
6.7 
7.7 
$37.1 

—
$11.6 

16.2 
—
7.1 
12.3 
$47.3 

—
$11.2 

18.5 
—
6.9 
17.6 
$54.2 

14.7
$12.2

17.7
—
6.4
23.1
$59.5

1.1
$20.7 

12.1 
—
12.5 
27.2 
$72.5 

—
$28.4 

14.5 
—
17.1 
30.0 
$90.0 

(1) Results for 2001 were impacted by a $2.0 million after-tax ($0.19 per diluted share) charge on early extinguishment of debt relating to the July 2001 bond offering. 
Results for 2004 were impacted by a $14.7 million after-tax ($0.75 per diluted share) charge on early extinguishment of debt relating to the November 2004 bond 
reﬁnancing. The Company also expects to report a $1.1 million after-tax ($0.05 per diluted share) charge on early extinguishment of debt in the ﬁrst quarter of 2005.

(2) Reﬂects mid-point of reported Company guidance and estimates for each income statement metric.

(3) Reported Company guidance for 2006E assumes a full-year contribution from all ﬁve new barges delivered or expected to be delivered at various dates during 2005, 
which is expected to result in EBITDA from the Tug and Tank Barge segment of approximately 37% to 40% of the mid-point of the reported Company-wide 2006E 
guidance range of $85 million to $95 million. 

10

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 

FORM 10-K 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 

For the Fiscal Year Ended December 31, 2004 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 

For the Transition Period from                      to                      

Commission File Number 333-69826 

HORNBECK OFFSHORE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter) 

Delaware
(State or other jurisdiction of incorporation
or organization)

72-1375844
(I.R.S. Employer
Identification Number)

4424
(Primary Standard Industrial Classification
Code Number)

103 Northpark Boulevard, Suite 300 
Covington, Louisiana 70433 
(985) 727-2000
(Address, including zip code, and telephone number, including area code, of registrant' s principal executive offices)

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

Title of each class
Common Stock, $0.01 par value

Name of exchange, on which registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: 
None.

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  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and  will  not  be  contained,  to  the  best  of  the  Registrant s  knowledge,  in  definitive  proxy  or  information  statements 
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes     No x 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes      No x 

The aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the
Common  Stock  was  last  sold  as  of  the  last  day  of  registrantt's  most  recently  completed  second  fiscal  quarter  is
$158,294,678.

The number of outstanding shares of Common Stock as of March 1, 2005 is 20,823,428 shares. 

DOCUMENTS INCORPORATED BY REFERENCE

Portions  of  the  Registrant s  definitive  2005  proxy  statement,  anticipated  to  be  filed  with  the  Securities  and  Exchange
Commission within 120 days after the close of the Registrant' s fiscal year, are incorporated by reference into Part III of this
Form 10-K.

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

PART I

1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Items 1 and 2.—Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Offshore Supply Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and Tank Barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Our Competitive Strengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Our Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Customers and Charter Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Environmental and Other Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Operating Hazards and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Seasonality of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Availability of Reports, Certain Committee Charters and Other Information . . . . . . . 25
Item 3—Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4—Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 25
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Item 5—Market for the Registrant’s Common Stock and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6—Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 7—Management’s Discussion and Analysis of Financial Condition and Results

of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Item 7A—Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . 47
Item 8—Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . 48
Item 9—Changes in and Disagreements with Accountants on Accounting and

PART III

Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Item 9A—Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Item 9B—Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Item 10—Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 50
Item 11—Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Item 12—Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

i

50
Item 13—Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . .
50
Item 14—Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15—Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . .
51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . F-1
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1

ii

Items 1 and 2.—Business and Properties

PART I

Hornbeck Offshore Services, Inc. was incorporated under the laws of the State of
Delaware in 1997. In this annual report on Form 10-K, “company,” “we,” “us” and “our” refers
to Hornbeck Offshore Services, Inc. and its subsidiaries, except as otherwise indicated.
References in this annual report on Form 10-K to “OSVs” mean offshore supply vessels; to
“deepwater” mean offshore areas, generally 1,000' to 5,000' in depth, and ultra-deepwater
areas, generally more than 5,000' in depth; to “deep well” mean a well drilled to a true vertical
depth of 15,000' or greater; and to “new generation,” when referring to OSVs, mean modern,
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.-flagged vessels in 1992 and foreign-flagged equivalent
OSVs.

General

BUSINESS

We are a leading provider of technologically advanced, new generation OSVs serving the

offshore oil and gas industry, primarily in the U.S. Gulf of Mexico and in select international
markets. The focus of our OSV business is on complex exploration and production activities,
which include deepwater, deep well and other logistically demanding projects. We are also a
leading transporter of petroleum products through our tug and tank barge segment serving
the energy industry, primarily in the northeastern United States and Puerto Rico.

In the mid-1990s, oil and gas producers began seeking large hydrocarbon reserves at
deeper well depths using new, specialized drilling and production equipment. We recognized
that the existing fleet of conventional 180' OSVs operating in the U.S. Gulf of Mexico was not
designed to support these more complex projects or to operate in the challenging
environments in which they were conducted. Therefore, in 1997, we began a program to
construct new generation OSVs based upon our proprietary designs. Since that time, we have
constructed 17 new generation OSVs using these proprietary designs, and expanded our fleet
with the acquisitions of a total of six additional new generation OSVs, one fast supply vessel
and one anchor-handling towing supply vessel, or AHTS. Our OSV fleet is among the
youngest in the industry with an average age of approximately four years. We are the only
publicly traded company with a significant fleet of U.S.-flagged, new generation OSVs.

Our OSVs were purposefully designed with the flexibility to meet the diverse needs of our

clients in all stages of their exploration and production activities. As a result, all of our OSVs
have enhanced capabilities that allow them to more effectively support premium drilling
equipment required for deep drilling and related specialty services. In contrast to conventional
180' OSVs, our vessels have dynamic positioning capability, as well as greater storage and
off-loading capacity. We are capable of providing OSV services to our customers anywhere in
the world and we are actively pursuing additional contracts in select international markets.

Historically, demand for our OSV services has been primarily driven by the drilling of
deep wells, whether in the deepwater or on the U.S. Continental Shelf, and other complex

1

exploration and production projects that require specialized drilling and production equipment.
In addition, our new generation OSVs are increasingly in demand by our customers for
conventional drilling projects. Our customers are willing to pay more than the prevailing
dayrates for conventional 180' OSVs for such projects because of the ability of our OSVs to
reduce overall offshore logistics costs through the vessels’ greater capacities and operating
efficiencies.

According to the Minerals Management Service, or MMS, in 2003 the deepwater region

accounted for 62% of total U.S. Gulf of Mexico oil production and 43% of total U.S. Gulf of
Mexico natural gas production, up substantially from 4% and 1%, respectively, in 1990. In
addition, the MMS estimates that deep reservoirs on the Continental Shelf may hold up to 55
tcf of undiscovered natural gas. This potential reserve base compares favorably to the current
total of approximately 26 tcf of proven natural gas reserves in the entire U.S. Gulf of Mexico.
Our new generation OSVs are also well suited for drilling in logistically demanding projects
and frontier areas, where support infrastructure is severely limited.

Our tug and tank barge fleet consists of 14 ocean-going tugs and 13 active ocean-going
tank barges. As of March 1, 2005, we had five double-hulled tank barges under construction,
which will add new barrel-carrying capacity and replace barrel-carrying capacity lost when we
retired three of our 15 single-hulled tank barges from service at the end of 2004 as mandated
by the Oil Pollution Act of 1990, or OPA 90. We believe our tug and tank barge business
complements our OSV business by providing additional revenue and geographic
diversification, while allowing us to offer another line of services to integrated oil and gas
companies. Demand for our tug and tank barge services is primarily driven by the level of
refined petroleum product consumption in the northeastern United States and Puerto Rico,
our core operating markets. The Energy Information Administration, or EIA, projects that
refined petroleum product consumption in the East Coast region of the United States will
increase by an average of 1.7% per year from 2002 to 2010. Demand for refined petroleum
products is primarily driven by population growth, the strength of the U.S. economy, seasonal
weather patterns, oil prices and competition from alternate energy sources.

Offshore Supply Vessels

The OSV Industry

OSVs primarily serve exploratory and developmental drilling rigs and production facilities
and support offshore construction and subsea maintenance activities. OSVs differ from other
types of marine vessels in their cargo carrying flexibility and capacity. In addition to
transporting deck cargo, such as pipe or drummed material and equipment, OSVs also
transport liquid mud, potable and drilling water, diesel fuel, dry bulk cement and personnel
between shore bases and offshore rigs and facilities. In general, demand for OSVs, as
evidenced by dayrates and utilization rates, is primarily related to offshore oil and natural gas
exploration, development and production activity, which in turn is influenced by a number of
factors, including oil and natural gas prices and the drilling budgets of offshore exploration
and production companies.

OSVs operate worldwide, but are generally concentrated in relatively few offshore
regions with high levels of exploration and development activity such as the Gulf of Mexico,
the North Sea, Southeast Asia, West Africa, Latin America and the Middle East. While there

2

is some vessel migration between regions, key factors such as mobilization costs, vessel
suitability and government statutes prohibiting foreign-flagged vessels from operating in
certain waters generally limit such migration.

According to the MMS the U.S. Gulf of Mexico is a critical oil and natural gas supply
basin for the United States, and it predicts that new incentives offered to energy companies to
explore and develop hard-to-reach areas of the U.S. Gulf of Mexico may boost peak oil and
natural gas production by 43% and 13%, respectively, over the next decade. Offshore oil and
natural gas drilling and production in the U.S. Gulf of Mexico occurs on the Continental Shelf
and in the deepwater. Drilling activity on the Continental Shelf has historically been limited to
shallow wells, or wells with true vertical depths of less than 15,000'. However, with the advent
of improved technology and higher oil and gas prices, operators have begun to increasingly
focus exploratory efforts on deep wells and natural gas reserves located below 15,000'.
These deep prospects are largely undeveloped, but are believed to contain significant
reserves.

While the shallow waters of the Continental Shelf have been actively explored for

decades, relatively few deep wells have been drilled historically due to the high cost
associated with these wells. The dry hole cost of a typical Continental Shelf well drilled from
8,000' to 12,000' generally ranges from $4 million to $8 million, while the dry hole cost for a
deep well drilled in a similar location but to 15,000' or more can range from $10 million to $75
million. The higher costs associated with the drilling of deep wells can be attributed to, among
other things, the need for specialized, high-end drilling rigs and related equipment, greater
volumes of downhole materials such as liquid mud, tubular products and cement, and longer
drilling times.

Despite the higher costs associated with deep well Continental Shelf drilling, operators,

especially those in search of natural gas, have continued to demonstrate interest. This
interest is driven by, among other things, the potential for the discovery of significant natural
gas reserves. The MMS estimates that there may be up to 55 tcf of undiscovered,
conventionally recoverable, deep well natural gas on the Continental Shelf. Moreover, the
abundance of existing platforms, production facilities and pipelines on the Continental Shelf
allow new deep gas to flow quickly to market. In addition, MMS data indicates that higher
natural gas production rates can be expected from wells drilled on the Continental Shelf
below 16,000'. Furthermore, the MMS royalty relief programs enacted in 2001, and expanded
in August 2003 and again in January 2004, have stimulated interest by reducing the
development costs of these deep wells. The combination of these factors partly compensates
for the higher drilling costs of deep wells on the Continental Shelf and can allow operators to
commercially produce discovered reserves in this market. While overall drilling on the
Continental Shelf has declined from 2001 levels, gas production data from 2000 to 2003
provided by IHS Energy, an energy research company, suggests an increasing focus on deep
wells in shallow waters. From 2000 to 2003, gas production from deep wells as a percentage
of total wells on the Continental Shelf increased from 22% to 30%.

Recent discoveries of large hydrocarbon reserves in deepwater fields in the Gulf of

Mexico and at deeper well depths on the Continental Shelf have resulted in increased
developmental and exploratory drilling activities in these areas. The deepwater region of the
U.S. Gulf of Mexico is an increasingly important source of oil and natural gas production with

3

many unexplored areas of potential oil and natural gas reserves. According to the 2004
Deepwater and Ultra Deepwater Report of Infield Systems Limited, an international energy
research firm, the U.S. Gulf of Mexico had 58 deepwater projects developed between 1999
and 2003, and an additional 79 deepwater projects have been identified for development
between 2004 and 2008.

Because oil and natural gas exploration, development and production costs in the
shallow well Continental Shelf market are generally lower than those in the deepwater or
deep well environments, shallow well drilling activity on the Continental Shelf is typically more
sensitive to fluctuations in commodity prices, particularly the price of natural gas. Accordingly,
actual or anticipated decreases in oil and natural gas prices generally result in reduced
offshore drilling activity and correspondingly lower demand for the conventional 180' OSVs
serving the shallow well Continental Shelf market. This causes a corresponding decline in
OSV dayrates and utilization rates in that market. In contrast, the relatively larger capital
commitments and longer lead times and investment horizons associated with deepwater,
particularly ultra-deepwater, and deep well developments make it less likely that an operator
will abandon such projects in response to a short-term decline in oil or natural gas prices.
Dayrates and utilization rates for new generation OSVs that serve the deepwater and deep
well markets are, therefore, generally less sensitive to short-term commodity price fluctuations
and tend to be more stable than dayrates and utilization rates for OSVs serving the shallow
well Continental Shelf market.

According to our analysis of the industry and data compiled from various industry
sources, including the U.S. Coast Guard, we estimate that the U.S.-flagged OSV fleet
currently totals 386 vessels, substantially all of which are located in the Gulf of Mexico. Of this
total, 249, or 65% are conventional 180' OSVs that primarily operate on the Continental Shelf.
The remaining 137 vessels are U.S. flagged, new generation OSVs, with 115 currently
operating in the U.S. Gulf of Mexico. However, during soft markets conditions in the
deepwater, these modern vessels have increasingly migrated at premium dayrates to
conventional drilling environments, such as the U.S. Continental Shelf, Mexico and Trinidad &
Tobago. Of the conventional OSV fleet, a significant number are currently cold-stacked.
Vessels that are cold-stacked have generally been removed from active service by the
operator due to lack of demand. In contrast, we believe there are currently no new generation
OSVs cold-stacked.

The Market for New Generation OSVs

Complex exploration and production projects require specialized equipment and higher

volumes of supplies to meet the more difficult operating environment associated with such
offshore developments. In order to better serve these projects and meet customer demands,
new generation OSVs, including our entire OSV fleet, are designed with larger capacities,
including greater liquid mud and dry bulk cement capacities, as well as larger areas of open
deck space than conventional 180' OSVs. These features are essential to the effective
servicing of deepwater drilling projects, which are often distant from shore-based support
infrastructure, because they allow a vessel to make fewer trips to supply the liquid mud,
drilling water, dry bulk cement and other needs of the customer. In addition, OSVs operating
in deepwater environments generally require dynamic positioning, or anchorless station-
keeping capability, primarily because customers’ safety procedures preclude OSVs from tying

4

up to deepwater installations, and to enable continued operation in adverse weather
conditions. We believe that conventional 180' OSVs, substantially all of which lack dynamic
positioning capability and sufficient on-deck or below-deck cargo capacity, are not capable of
operating effectively or economically in the deepwater market. In addition, certain ports have
draft or other logistical impediments, which limit the pool of new generation vessels capable of
servicing such ports. Our proprietary vessels were designed to work under these shallow draft
and logistically demanding conditions.

As a result of recent deepwater and deep well drilling activity, utilization rates for new
generation OSVs in the U.S. Gulf of Mexico have averaged approximately 86% over the last
two years while the average utilization rate for the conventional 180' OSV fleet over the same
period has been approximately 72%, not taking into account cold-stacked conventional 180'
OSVs. Taking such cold-stacked vessels into account, we believe that the average utilization
rate for U.S. flagged conventional 180' OSVs is less than 50%. Additional utilization for new
generation OSVs has come from increasing demand for these vessels in support of
conventional shelf drilling projects. Moreover, during the same two-year period, average
dayrates for new generation OSVs were generally more than double the average dayrates of
conventional 180' OSVs. We believe that demand is beginning to outpace the supply of new
generation OSVs in the U.S. Gulf of Mexico. We base our belief on the recent and expected
drilling activity in all sectors of the U.S. Gulf of Mexico and the departure of certain new
generation OSVs to foreign markets, after taking into account vessels currently available and
vessels being constructed under announced construction plans. Furthermore, although U.S.-
flagged vessels operating in overseas locations may be remobilized to the U.S. Gulf of
Mexico, historically such re-mobilization has been limited.

Our OSV Business

We currently own and operate a fleet of 24 new generation OSVs, which includes one

AHTS vessel that is primarily operating as a supply vessel and towing jack-up rigs. We also
own and operate one fast supply vessel. We engineered and supervised the construction of
17 of our OSVs expressly to meet the demands of deepwater regions and other complex
drilling projects, based on our proprietary designs. Drawing from the vessel operating
experience of our in-house engineers, we work closely with potential charterers to design
vessels specifically to meet their anticipated needs. This is particularly the case when the
charterer will operate a project that could have a duration of more than 20 years and require
expenditures exceeding $1 billion. Our 17 proprietary OSVs have up to three times the dry
bulk capacity and deck space, two to ten times the liquid mud capacity and two to four times
the deck tonnage compared to conventional 180' OSVs. The advanced cargo handling
systems of our proprietary OSVs allow for dry bulk and liquid cargos to be loaded and
unloaded three times faster than conventional 180' OSVs, while the solid state controls of
their engines typically result in a 20% greater fuel efficiency than vessels powered by
conventional engines. In addition, our larger classes of proprietary OSV designs, designated
by us as our 240 ED and 265 classes, were designed, in part, to supply the substantially
greater liquid mud volume and other cargo capacity required for ultra-deepwater drilling. We
believe that our customers’ recognition of the superior capabilities of our proprietary OSVs
has contributed to our ability to achieve higher dayrates and utilization rates and increased
overall operating cost efficiencies than our competitors.

5

All of our new generation OSVs are equipped with dynamic positioning systems and

controllable pitch thrusters, which allow our vessels to maintain position with minimal
variance, and state-of-the-art safety, emergency power, fire alarm and fire suppression
systems and systems monitoring equipment. The unique hull design and integrated rudder
and thruster system of our 17 proprietary OSVs provide for a more maneuverable vessel.
These proprietary vessels also have double-bottomed and double-sided hulls that minimize
environmental impact in the event of vessel collisions or groundings, solid state controls that
minimize visible soot and polluting gases and zero discharge sewage and waste systems that
minimize the impact on marine environments. In addition, these 17 vessels are either fully
SOLAS (Safety of Life at Sea) certified or SOLAS ready. SOLAS is the international
convention that regulates the technical characteristics of vessels for purposes of ensuring
international standards of safety for vessels engaged in commerce between international
ports. These features allow us to market our proprietary OSVs for service in international
waters.

Our technologically advanced, new generation OSVs are also capable of providing
specialty services in support of certain of our customers, including well stimulation, remotely
operated vehicles, or ROVs, used in oilfield subsea construction and maintenance,
underwater inspections, marine seismic operations, and certain non-energy applications such
as fiber optics cable installation, military work and containerized cargo transportation.
Compared to conventional 180' OSVs, our OSVs have more dead weight capacity, deck
space, and berthing accommodations, improved maneuverability and greater fuel efficiency.
We believe these characteristics strengthen demand for our OSVs in specialty situations. Two
of our vessels, the HOS Innovator and the HOS Dominator, currently provide ROV subsea
construction and maintenance support for a large oilfield service company under contracts
that each have an initial term of three years. The BJ Blue Ray provides deepwater well
stimulation support services for another large oilfield service company under a contract with a
five-year initial term. This vessel was the first U.S.-flagged well stimulation vessel to receive
the American Bureau of Shipping WS and DPS2 class notations. We believe the BJ Blue Ray
is one of the most technologically sophisticated well stimulation vessels in the world.

On June 26, 2003, we acquired five 220' new generation OSVs from Candy Marine
Investment Corporation, an affiliate of Candy Fleet Corporation, or Candy Fleet. Following the
completion in July 2003 of a private placement of our common stock and satisfaction of
certain other conditions, on August 6, 2003 we acquired an additional 220' new generation
OSV from Candy Fleet. These six vessels complement our existing OSV fleet and have
allowed us to expand our service offerings to clients, particularly those drilling wells on the
Continental Shelf.

In January 2005, we acquired a new generation AHTS vessel from a private owner. This

vessel, which will be renamed the HOS Saylor, is our first foreign-flagged vessel. Upon
acquisition, we immediately deployed the HOS Saylor on a time charter with one of our OSV
customers in Trinidad & Tobago. This strategic vessel acquisition complements our growing
market presence in international waters. While this vessel has anchor-handling capabilities,
we are currently using it primarily as a supply vessel and for towing jack-up rigs.

6

The following table provides information, as of, March 1, 2005, regarding our fleet of vessels

that serve our OSV customers.

Name

Class

Offshore Supply Vessels:
BJ Blue Ray . . . . . . . . . . . . 265
HOS Brimstone . . . . . . . . . . 265
HOS Stormridge . . . . . . . . . 265
HOS Sandstorm . . . . . . . . . 265
HOS Bluewater . . . . . . . . . . 240 ED
HOS Gemstone . . . . . . . . . 240 ED
HOS Greystone . . . . . . . . . 240 ED
. . . . . . . . . . 240 ED
HOS Silverstar
. . . . . . . . . . 240 E
HOS Innovator
HOS Dominator
. . . . . . . . . 240 E
HOS Deepwater . . . . . . . . . 240
HOS Cornerstone . . . . . . . . 240
HOS Explorer . . . . . . . . . . . 220
HOS Express . . . . . . . . . . . 220
HOS Pioneer . . . . . . . . . . . . 220
HOS Trader . . . . . . . . . . . . . 220
HOS Voyager . . . . . . . . . . . 220
HOS Mariner . . . . . . . . . . . . 220
HOS Crossfire . . . . . . . . . . . 200
HOS Super H . . . . . . . . . . . 200
HOS Brigadoon . . . . . . . . . . 200
HOS Thunderfoot . . . . . . . . 200
HOS Dakota . . . . . . . . . . . . 200

Anchor-Handling Towing Supply Vessel:
HOS Saylor (2) . . . . . . . . . . 240

Fast Supply Vessel:
HOS Hotshot . . . . . . . . . . . . 165

Offshore Supply Vessels

Current
Service
Function

Well Stimulation
Supply
Supply
Supply
Supply
Supply
Supply
Supply
ROV Support(1)
ROV Support(1)
Supply
Supply
Supply
Supply
Supply
Supply
Supply
Supply
Supply
Supply
Supply
Supply
Supply

Built (Acquired)

Deadweight
(long tons)

Brake
Horsepower

November 2001
June 2002
August 2002
October 2002
March 2003
June 2003
September 2003
January 2004
April 2001
February 2002
November 1999
March 2000
February 1999 (June 2003)
September 1998 (June 2003)
June 2000 (June 2003)
November 1997 (June 2003)
May 1998 (June 2003)
September 1999 (August 2003)
November 1998
January 1999
March 1999
May 1999
June 1999

3,756
3,756
3,756
3,756
2,850
2,850
2,850
2,850
2,380
2,380
2,250
2,250
1,607
1,607
1,607
1,607
1,607
1,607
1,750
1,750
1,750
1,750
1,750

6,700
6,700
6,700
6,700
4,000
4,000
4,000
4,000
4,500
4,500
4,500
4,500
3,900
3,900
4,200
3,900
3,900
3,900
4,000
4,000
4,000
4,000
4,000

Towing/Supply

October 1999 (January 2005)

3,321

8,000

Fast Supply

April 2003 (May 2004)

260

6,200

(1) The term “ROV” means remotely operated vehicle.
(2) We acquired the HOS Saylor, a foreign-flagged vessel, in January 2005 from a private owner. We are currently using the HOS Saylor primarily for its

OSV capabilities and for towing jack-up rigs.

7

We have designed and constructed five distinct classes of proprietary OSVs and added a
sixth class, through the acquisitions of six OSVs from Candy Fleet, to meet the diverse needs
of the offshore oil and gas industry. The following table provides a comparison of certain
specifications and capabilities of our new generation OSVs to conventional 180' OSVs.

Conventional
180' OSV(1)

Our Proprietary Design OSV Classes

Acquired
OSVs

200

240

240 E

240 ED

265

220(2)

Size

Class length overall (ft.) . . . . . .
Breadth (ft.) . . . . . . . . . . . . . . . .
Depth (ft.) . . . . . . . . . . . . . . . . . .
Maximum draft (ft.) . . . . . . . . . .
Deadweight (long tons)
. . . . . .
Clear deck area (sq. ft.) . . . . . .

180
40
14
12
950
3,450

200
54
18
13
1,750
6,580

240
54
18
13
2,250
8,836

240
54
18
13
2,380
8,100

240
54
20
14.5
2,850
8,100

265
60
22
16
3,756
9,212

220
46
17
13.7
1,607
5,472

Capacity

Fuel capacity (gallons) . . . . . . .
Fuel pumping rate (gallons per
minute) . . . . . . . . . . . . . . . . . .
Drill water capacity (gallons) . .
Dry bulk capacity (cu. ft.) . . . . .
Liquid mud capacity

79,400

90,000

151,800

135,100

104,210

151,800 114,490

275
120,000
4,000

550
240,000
7,000

550
240,000
8,400

550
240,000
8,400

550
311,000
6,000

500
413,000
10,800

380
99,000
8,040

(barrels) . . . . . . . . . . . . . . . . .

1,200

3,640

6,475

6,475

8,300

10,500

2,955

Liquid mud pumping rate

(gallons per minute) . . . . . . .

250

500

1,000

1,000

1,000

1,000

1,200

Potable water capacity

(gallons) . . . . . . . . . . . . . . . . .

11,500

52,200

52,200

52,200

30,400

20,430

26,800

Machinery

Main engines (horsepower) . . .
Auxiliaries (number) . . . . . . . . .
Total rating (kw)
. . . . . . . . . . . .
Bow thruster (horsepower) . . . .
Type of Pitch . . . . . . . . . . . . . . .
Stern thruster (horsepower) . . .
Type of Pitch . . . . . . . . . . . . . . .
Fire fighting (gallons per

minute) . . . . . . . . . . . . . . . . . .
Dynamic positioning(3) . . . . . . .

Crew Requirements

2,250
2
200
325
Fixed
None

4,000
3
750
800

6,700
3
860
2,400
Controllable Controllable Controllable Controllable Controllable
1,600
— Controllable Controllable Controllable Controllable Controllable

4,000
3
750
1,600

4,000
3
750
1,600

4,000
3
750
1,600

300

800

300

800

3,900
2
250
530
Fixed
300
Fixed

None
None

1,250
DP0,1

2,700
DP1

2,700
DP2

2,700
DP2

2,700
DP2,3

2,600
DP0,1

Number of personnel(4) . . . . . .

5

6

6

7

7

8

6

(1) Statistics are for a typical 180' class vessel. Actual specifications and capabilities may vary from vessel to vessel.
(2) Excludes the HOS Saylor, which is a foreign-flagged AHTS vessel.
(3) Dynamic positioning permits a vessel to maintain position without the use of anchors. The numbers “0,” “1,” “2” and “3” refer to increasing

levels of technical sophistication and system redundancy features.

(4) Regulatory manning requirements; depending on the services provided, operators may man vessels with more crew than required by

regulations.

Additional information with respect to our OSV segment can be found in Note 14 of our

consolidated financial statements.

Tugs and Tank Barges

The Tug and Tank Barge Industry

Introduction. The domestic tank barge industry provides marine transportation of crude
oil, petroleum products and petrochemicals by tug and tank barge, and is a critical link in the
U.S. petroleum distribution chain. Petroleum products are transported in the northeastern
United States through a vast network of terminals, tankers and pipelines. We believe, based

8

upon our analysis of the industry, that in the northeastern United States approximately 430
million barrels of petroleum products are transported annually by tank barges. Additionally,
the EIA estimates that in Puerto Rico, our other core area of operation, approximately 70
million barrels of petroleum products are transported annually.

Demand for tug and tank barge services in the northeastern United States is primarily
driven by population growth, the strength of the U.S. economy, seasonal weather patterns, oil
prices and competition from alternate energy sources. According to the EIA, demand for
petroleum products in the northeastern United States is expected to increase approximately
1.7% annually through 2010, which we believe will generate steadily increasing demand for
the tank barge industry.

The largest tank barge market in the northeastern United States is New York Harbor.

Imported petroleum products are primarily delivered to New York Harbor as it has the
capacity to receive products in cargo lots of 50,000 tons or more per tanker. By contrast, draft
limitations in most New England ports and drawbridge limitations in Boston and Portland,
Maine limit the average cargo carrying capacity of direct imports into many of the largest New
England ports to about 30,000 tons per tanker. As a result, ships importing directly into New
England must frequently discharge in multiple ports or terminals or transfer cargos to tank
barges. As existing single-hulled tankers are retired due to age or as mandated under OPA
90, they are typically replaced by larger tankers. These larger-sized tankers are being built to
facilitate the importation of crude oil and petroleum products into the United States. The
volume of imported crude oil and petroleum products is expected to grow at a compound
annual rate of 2.4% through 2025, according to the EIA. As larger petroleum tankers are
being built, we believe that direct delivery into New York Harbor will generate increased tank
barge demand for lightering services and further shipment to New England, the Hudson River
and Long Island.

9

Oil Pollution Act of 1990. OPA 90 mandates that all single-hulled tank vessels operating
in U.S. waters be removed from service according to a set time schedule. Data provided by a
U.S. Coast Guard report dated September 2001 indicates that 5.5 million barrels of single-
hulled tank barge capacity would be retired by 2005 and an additional 3.5 million barrels by
2010, as mandated by OPA 90. According to the report, this represented on a cumulative
basis as of each such retirement date, 22% and 36%, respectively, of the total 24.9 million
barrel single- and double-hulled tank barge capacity that existed in 2001. The following chart
illustrates the capacity of tank vessels that must be removed from service from 2000 through
2014. We believe that, absent a substantial increase in the number of double-hulled vessels
constructed in the industry, this reduction in capacity, assuming steady demand, may
favorably impact dayrates and utilization of the remaining tank barges, including our own.

Based on data contained in the United States Coast Guard Report to Congress on the
Progress to Replace Single Hull Tank Vessels with Double Hull Tank Vessels, dated
September 2001.

Additionally, OPA 90 requires that owners or operators of tankers operating in U.S.
waters submit vessel spill response plans to the U.S. Coast Guard for approval and operate
according to the plans upon approval. Our vessel response plans have been approved by the
U.S. Coast Guard, and all of our crew members have been trained to comply with these
guidelines. For further discussion of OPA 90 see “—Environmental and Other Governmental
Regulation” below.

Our Tug and Tank Barge Business

We provide marine transportation, distribution and logistics services primarily in the
northeastern United States and Puerto Rico with our fleet of 14 ocean-going tugs and 13
active ocean-going tank barges. As of March 1, 2005, we had five double-hulled tank barges
under construction, which will add new barrel-carrying capacity and replace barrel-carrying
capacity lost when we retired three of our 15 single-hulled tank barges from service at the end
of 2004, as mandated by OPA 90. We provide our services to major oil companies, refineries

10

and oil traders. Generally, a tug and tank barge work together as a “tow” to transport refined
or bunker grade petroleum products. Our tank barges carry petroleum products that are
typically characterized as either “clean” or “dirty”. Clean products are primarily gasoline, home
heating oil, diesel fuel and jet fuel. Dirty products are mainly crude oils, residual crudes and
feedstocks, heavy fuel oils and asphalts.

Our tugs and tank barges serve the northeastern U.S. coast, primarily New York Harbor,
by transporting both clean and dirty petroleum products to and from refineries and distribution
terminals. Our tugs and tank barges also transport both clean and dirty petroleum products
from refineries and distribution terminals in Puerto Rico to the Puerto Rico Electric Power
Authority and to utilities located on other Caribbean islands. In addition, we provide ship
lightering, bunkering and docking services in these markets and are well positioned to provide
such services to the increasing number of new tankers that are too large to make direct
deliveries to distribution terminals and refineries.

On May 31, 2001, we acquired nine ocean-going tugs and nine ocean-going tank barges

from the Spentonbush/Red Star Group, composed of certain affiliates of Amerada Hess, as
well as the business related to these tugs and tank barges, greatly expanding our capacity in
the northeastern United States and increasing our market share of the coastwise trade on the
U.S. upper east coast. As part of the acquisition, Amerada Hess entered into a long-term
contract of affreightment with us pursuant to which Amerada Hess has committed to use us
as its exclusive marine logistics provider and transporter of liquid petroleum products by tank
barge in the northeastern United States. Under this contract, Amerada Hess has committed to
ship a minimum of 45 million barrels annually for an initial period from June 1, 2001 through
March 31, 2006, which can be extended for subsequent periods by mutual agreement. Also
under the contract, we have the opportunity, on a reasonable commercial efforts basis, to
coordinate the marine logistics for Amerada Hess in the southeastern United States, subject
to Amerada Hess’s right to cancel within 30 days after December 31 of each year of the
contract. The contract of affreightment will provide us with a significant source of revenues
over the life of the contract. Our contract of affreightment allows Amerada Hess to reduce its
minimum annual cargo volume commitment subject to significant adjustment penalties.
Because the tank barge market in the northeastern United States is currently operating at or
near capacity, we believe that we would be able to replace through other customers any
volumes that Amerada Hess does not transport as contemplated by the contract.

One of our tank barges is double-hulled and is not subject to OPA 90 retirement dates.

Ten of our 12 active single-hulled tank barges are not required under OPA 90 to be retired or
double-hulled until 2015. The two other single-hulled tank barges are required to be retired
from service in 2009. As required under OPA 90, we have previously retired from service
three single-hulled tank barges at the end of 2004. In anticipation of their retirement, we
commenced construction of five double-hulled, ocean-going tank barges, two of which are
expected to be delivered by the end of the second quarter of 2005 and the other three in the
fourth quarter of 2005. Our coastwise tanker is not subject to OPA 90 retirement dates. Based
on the remaining lives of the majority of our tank barge fleet under OPA 90 and our recent
construction program, we believe we are well positioned to obtain additional customers in the
northeastern United States, as a large portion of currently available capacity in that market
was required to be removed from service or be substantially reconstructed by 2005.

11

The following tables provide information, as of March 1, 2005, regarding the tugs, tank
barges and coastwise tanker that we own, as well as the five double-hulled tank barges under
construction at that date.

Name

Ocean-Going Tugs

Gross
Tonnage

Length
(feet)

Freedom Service(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty Service(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ponce Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Caribe Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlantic Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brooklyn Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradewind Service . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yabucoa Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spartan Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sea Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bayridge Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stapleton Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .

180
180
190
194
198
198
198
183
183
126
173
187
194
146

126
126
107
111
105
105
126
105
105
102
109
100
100
78

Year
Built

1982
1982
1970
1970
1978
1975
1979
1975
1975
1978
1975
1978
1981
1966

Brake
Horsepower

6,140
6,140
3,900
3,900
3,900
3,900
3,900
3,200
3,000
3,000
2,820
2,200
2,000
1,530

(1) These vessels have been substantially retrofitted since their purchase in June 2004 to provide power for the new double-hulled tank barges

under construction.

Ocean-Going Tank Barges and Coastwise Tanker

Name

Active:
Ocean-Going Tank Barges:

Energy 13501 . . . . . . . . . . . . . . . . . . . . . .
Energy 13502 . . . . . . . . . . . . . . . . . . . . . .
Energy 11101 . . . . . . . . . . . . . . . . . . . . . .
Energy 11102 . . . . . . . . . . . . . . . . . . . . . .
Energy 11103 . . . . . . . . . . . . . . . . . . . . . .
Energy 11104 . . . . . . . . . . . . . . . . . . . . . .
Energy 11105 . . . . . . . . . . . . . . . . . . . . . .
Energy 8001 . . . . . . . . . . . . . . . . . . . . . . .
Energy 7002 . . . . . . . . . . . . . . . . . . . . . . .
Energy 7001 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6504 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6505 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6503 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6502 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6501 . . . . . . . . . . . . . . . . . . . . . . .
Energy 5501 . . . . . . . . . . . . . . . . . . . . . . .
Energy 2201 . . . . . . . . . . . . . . . . . . . . . . .
Energy 2202 . . . . . . . . . . . . . . . . . . . . . . .

Inactive:
Ocean-Going Tank Barges:

Energy 9801 . . . . . . . . . . . . . . . . . . . . . . .
Energy 9501 . . . . . . . . . . . . . . . . . . . . . . .
Energy 8701 . . . . . . . . . . . . . . . . . . . . . . .

Coastwise Tanker:

Barrel
Capacity

Length
(feet)

Year Built

OPA 90
Date(1)

135,000 est.
135,000 est.
111,844
111,844
110,000 est.
110,000 est.
110,000 est.

81,364
72,693
72,016
66,333
65,710
65,145
64,317
63,875
57,848
22,556
22,457

97,432
94,442
86,454

450
450
420
420
390
390
390
350
351
300
305
328
327
300
300
341
242
242

390
346
360

TBD(2)
TBD(2)
1979
1979
TBD(2)
TBD(2)
TBD(2)
1996
1971
1977
1958
1978
1988
1980
1974
1969
1973
1974

1967
1972
1976

DH
DH
2009
2009
DH
DH
DH
DH
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015

(3)
(3)
(3)

Energy Service 9001(4) . . . . . . . . . . . . . .

—

402

1992

N/A

12

TBD: To be determined.
DH: OPA 90 limitations are not applicable to these double-hulled vessels.
(1)

Prior to January 1 of the year indicated (except for the Energy 11101 for which the date is June 1), according to OPA 90, the vessel must be
refurbished as a double hull or be retired from service in U.S. waters. For a discussion of OPA 90 see “—Environmental and Other
Governmental Regulation” below.
The Energy 13501 and Energy 11103 are under construction with delivery anticipated by the end of the second quarter of 2005. The Energy
13502, Energy 11104 and Energy 11105 are also under construction with delivery anticipated in the fourth quarter of 2005.
The Energy 9801, Energy 9501 and Energy 8701 were removed from service for the transport of petroleum products in navigable waters of
the United States prior to January 1, 2005 due to OPA 90. These vessels are currently inactive.
This coastwise tanker, formerly known as the M/V W.K. McWilliams, Jr., acquired on November 15, 2001, is not currently certified to
transport petroleum products and, therefore, barrel capacity is not applicable to this vessel. This vessel is currently inactive.

(2)

(3)

(4)

Additional information with respect to our tug and tank barge segment can be found in

Note 14 of our consolidated financial statements.

Our Competitive Strengths

Technologically Advanced Fleet of New Generation OSVs. Our technologically
advanced, new generation OSVs were designed with the specifications necessary for
operations in complex and challenging drilling environments, including deepwater, deep well
and other logistically demanding projects. Our new generation OSVs have significantly more
capacity and operate more efficiently than conventional 180' OSVs. While operators are
especially concerned with a vessel’s ability to avoid collisions with multi-million dollar drilling
rigs or production platforms during adverse weather conditions, they are hesitant to stop
operations under such conditions due to the high daily cost of halting such complex
operations. Our proprietary vessels incorporate sophisticated technologies and are designed
specifically to operate safely in complex exploration and production environments. These
technologies include dynamic positioning, roll reduction systems and controllable pitch
thrusters, which allow our vessels to maintain position with minimal variance, and our unique
cargo handling systems, which permit high volume transfer rates of liquid mud and dry bulk.
We believe that we earn higher average dayrates and maintain higher utilization rates than
our competitors due to the superior capabilities of our OSVs, our seven-year track record of
safe and reliable performance and the collaborative efforts of our in-house design team in
providing marine engineering solutions to our customers.

Young OSV Fleet with Lower Cost of Ownership. We believe that we operate one of the

youngest fleets of U.S.-flagged OSVs. While the average age of the conventional 180' U.S.-
flagged OSV fleet is approximately 24 years, the average age of our OSV fleet is
approximately four years. Newer vessels generally experience less downtime and require
significantly less maintenance and scheduled drydocking costs compared to older vessels.
The average intermediate drydocking for recertification for one of our OSVs generally lasts
five to ten days in the shipyard and costs approximately $0.3 million. In contrast, the typical
drydocking for recertification of a conventional 180' OSV may last up to 90 days in the
shipyard and can cost as much as $1.5 million. We believe that our operation of new,
technologically advanced OSVs gives us a competitive advantage in obtaining long-term
contracts for our vessels and in attracting and retaining crews. Since we accepted delivery of
our first OSV in November 1998, the average utilization rate for our OSVs has been
approximately 93%. According to ODS-Petrodata, the U.S. Gulf of Mexico industry average
was approximately 73% over the same time period, based on vessels available for service.
We expect that our newer, larger, faster and more cost-efficient vessels will remain in high
demand as deepwater and other complex and challenging exploration, development and
production activities continue to increase globally.

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Commitment to Safety and Quality. As part of our commitment to safety and quality, we

have voluntarily pursued and received certifications that are not generally held by other
companies in our industry. We have maintained certifications to the requirements of the
International Standards Organization, or ISO, Standards 9002 and 14000 for quality and
environmental management, respectively, with respect to the eight tugs and nine tank barges
acquired from the Spentonbush/Red Star Group. We are one of the few OSV companies
operating in the U.S. Gulf of Mexico that is approved under the U.S. Coast Guard’s
Streamlined Inspection Program in which we and the Coast Guard cooperate to develop
training, inspection and compliance processes, with our personnel conducting periodic
examinations of vessel systems to the requirements of the vessels’ Coast Guard
certifications, and taking corrective actions where necessary. Both of our principal office
locations in Covington, Louisiana and Brooklyn, New York, as well as the majority of our
vessels, including all of our OSVs and our tugs and tank barges acquired from the
Spentonbush/Red Star Group, are also certified under the International Safety Management
Code, or ISM Code, developed by the International Maritime Organization to provide
internationally recognized standards for the safe management and operation of ships and for
pollution prevention. We are currently combining the ISO and ISM certification of our fleetwide
operations to standards of the American Bureau of Shipping’s Safety, Quality and
Environmental Certification, or ABS SQE, which integrates the elements of these
certifications into a single program. Quality, Safety and Environmental Certificates are an
increasingly important consideration for both our OSV and tank barge customers due to the
environmental and regulatory sensitivity associated with offshore drilling and production
activity and waterborne transportation of petroleum products, respectively. We believe that
customers recognize our commitment to safety and that our strong reputation and
performance history provide us with a competitive advantage.

Leading Market Presence in Core Target Markets. Our 23 U.S.-flagged OSVs comprise
the second largest fleet of technologically advanced, new generation OSVs qualified for work
in the U.S. Gulf of Mexico. Currently, 18 of our 23 U.S.-flagged OSVs operate in that area.
We also operate one of the largest fleets of tugs and tank barges for the transportation of
petroleum products in Puerto Rico and believe that we are the fourth largest tank barge
transporter of petroleum products in New York Harbor. We believe that having scale in our
selected markets benefits our customers and provides us with operating efficiencies.

Successful Track Record of Vessel Construction and Acquisitions. Our management
has significant naval architecture, marine engineering and shipyard experience. We believe
we are unique in the manner in which we design our own vessels and work closely with our
contracted shipyards in their construction. We typically source and supply many of the
manufactured components (owner-furnished equipment), comprising a large portion of the
aggregate cost of a vessel, directly from vendors rather than through the shipyard. In addition
to substantial cost savings, we believe our approach enables us to better control the
construction process, resulting in a higher quality vessel and an enhanced level of service
from these vendors during the applicable warranty periods. We believe that our history of
designing and constructing 17 new generation OSVs on time and on budget provides us with
a competitive advantage in obtaining contracts for our vessels prior to their actual delivery.
Our company has designed its operations and management systems in contemplation of
additional growth through new vessel construction and acquisitions. To date, we have
successfully completed and integrated five acquisitions involving 15 ocean-going tugs and 13

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ocean-going tank barges, one acquisition of a coastwise tanker, two acquisitions involving six
220' new generation OSVs, one acquisition of a 165’ fast supply vessel, and one acquisition
of an AHTS vessel.

Favorable OPA 90 Fleet Status. Data provided by a U.S. Coast Guard report dated
September 2001 indicates that 5.5 million barrels of single-hulled tank barge capacity would
need to be retired by 2005 and an additional 3.5 million barrels by 2010, as mandated by
OPA 90. According to the report, this represented on a cumulative basis as of each such
retirement date, 22% and 36%, respectively, of the total 24.9 million barrel single- and double-
hulled tank barge capacity that existed in 2001. Because 10 of our 12 active single-hulled
tank barges are not required to be replaced or retrofitted with double hulls until 2015, we
believe we have a competitive advantage over operators who have a higher percentage of
single-hulled tank barges that must be retired or modified to add double hulls before 2010.

Experienced Management Team with Proven Track Record. Our executive
management team has an average of 21 years of domestic and international marine
transportation industry-related experience. We believe that our team has successfully
demonstrated its ability to grow our fleet through new construction and strategic acquisitions
and to secure profitable contracts for our vessels in both favorable and unfavorable market
conditions. Moreover, our in-house engineering team has significant operating experience
that enables us to more effectively design and manage our new vessel construction program,
adapt our vessels for specialized purposes, oversee and manage the drydocking process and
provide custom marine engineering solutions to our customers. We believe this will continue
to result in a lower overall cost of ownership over the life of our vessels compared to our
competitors, as well as a competitive advantage in securing contracts for our OSVs as the
benefits of our proprietary designs and in-house engineering capabilities are recognized by
our customers.

Our Strategy

Apply Existing and Develop New Technologies to Meet our Customers’ Vessel Needs.

Our new generation OSVs are designed to meet the higher capacity and performance needs
of our clients’ increasingly more complex drilling and production programs. In addition, our
proprietary double-hulled tank barges currently under construction are designed to maximize
transit speed, improve cargo through-put rates and enhance crew safety features. Our new
generation OSVs are equipped with sophisticated propulsion and cargo handling systems,
dynamic positioning capabilities and have larger capacities than conventional 180' OSVs. We
are committed to applying existing and developing new technologies to maintain a
technologically advanced fleet that will enable us to continue to provide a high level of
customer service and meet the developing needs of our customers for OSVs and ocean-
going tugs and tank barges, as well as other types of vessels that complement our two
business segments. Improvements in exploration and production technologies have enabled
operators to pursue larger scale, more complex drilling programs in remote locations and
under more challenging operating conditions. We believe that the trend toward increasingly
more complex projects will increase the demand for our technologically advanced fleet of new
generation OSVs. Oil and natural gas exploration and development activity in these regions
has increased recently as a result of several factors, including world-class exploration
potential, improvements in exploration and production technologies for deepwater projects,

15

and slowing or declining production from onshore and shallow water fields. We believe that
deepwater regions worldwide and deep well drilling on the Continental Shelf will continue to
be active areas for exploration and development in the foreseeable future, and that demand
for our OSVs, which are uniquely equipped to serve the current and planned drilling programs
in these markets, will continue to be strong.

Expand Fleet Through Newbuilds and Strategic Acquisitions. We plan to expand our
fleet through construction of new vessels, including construction of new generation OSVs and
double-hulled tank barges as market conditions warrant, retrofitting of certain vessels and
through strategic acquisitions. Market demand for vessels, including demand for new
generation OSVs in domestic and international markets, will be the main determinant of the
level and timing of construction of additional vessels. We believe that acquisition opportunities
are likely to arise as consolidation continues in our two industry segments. We intend to use
our expertise and experience to evaluate and execute strategic acquisitions where the
opportunity exists to expand our service offerings in our core markets and create or enhance
long-term client relationships. As of March 1, 2005, we have completed ten acquisitions
involving 37 vessels and have constructed 17 proprietary OSVs, with five additional double-
hulled tank barges expected for delivery during 2005.

Pursue Optimal Mix of Long-Term and Short-Term Contracts. We seek to balance our
portfolio of customer contracts by entering into both long-term and short-term charters. Long-
term charters, which contribute to higher utilization rates, provide us with more predictable
cash flow. Most of our long-term charters contain annual dayrate escalation provisions. Short-
term charters provide the opportunity to benefit from increasing dayrates in favorable market
cycles. We plan our mix of long-term and spot market contracts with respect to our OSVs
based on anticipated market conditions. Our contract of affreightment with Amerada Hess for
the services of tugs and tank barges in the northeastern United States has an initial term of
June 1, 2001 through March 31, 2006. Our other tug and tank barge contracts typically have
been renewed annually over the last several years. By design, substantially all of our tank
barges operate under long-term contracts.

Build Upon Existing Customer Relationships. We intend to build upon existing customer

relationships by expanding the services we offer to those customers with diversified marine
transportation needs. Many integrated oil and gas companies require OSVs to support their
exploration and production activities and ocean-going tugs and tank barges to support their
refining, trading and retail distribution activities. Moreover, many of our customers that
conduct operations internationally have expressed interest in chartering our OSVs in such
markets. We now have 28% of our supply vessel fleet, with five OSVs in Trinidad & Tobago
and one OSV and our fast supply vessel offshore Mexico, chartered for use in international
markets. Our management team has significant international experience and will continue to
evaluate such opportunities.

Optimize Tug and Tank Barge Operations. Due to OPA 90 phase-out requirements of

single-hulled barges, the total barrel-carrying capacity of existing tank vessels transporting
petroleum products domestically is projected to decline from its current level without a
commensurate increase in newbuildings and retrofittings. In addition, the energy industry is
increasingly outsourcing its marine transportation requirements and focusing on safety and
reliability as a key determinant in awarding new business. We believe that these trends will

16

improve the balance of supply and demand, and result in improved tank barge utilization and
dayrates.

Customers and Charter Terms

Major oil companies, large independent oil and gas exploration, development and

production companies and large oil service companies constitute the majority of our
customers for our OSV services, while refining, marketing and trading companies constitute
the majority of our customers for our tug and tank barge services. The percentage of
revenues attributable to a customer in any particular year depends on the level of oil and
natural gas exploration, development and production activities undertaken or refined
petroleum products or crude oil transported by a particular customer, the availability and
suitability of our vessels for the customer’s projects or products and other factors, many of
which are beyond our control. For the year ended December 31, 2004, Amerada Hess
Corporation accounted for more than 10% of our total revenues. Under the terms of our
contract of affreightment with Amerada Hess, we are required to meet certain performance
criteria and, if we fail to meet such criteria, Amerada Hess would be entitled to terminate the
contract. Our contract of affreightment provides for minimum annual cargo volumes to be
transported and allows Amerada Hess to reduce its minimum commitment, subject to
significant adjustment penalties. Because the tank barge market in the northeastern United
States is currently operating at or near capacity, we believe that we would be able to replace
through other customers any volumes that Amerada Hess does not transport as contemplated
by the contract. For a discussion of significant customers in prior periods, see Note 13 of the
notes to our consolidated financial statements.

We enter into a variety of contract arrangements with our customers, including spot and

time charters, contracts of affreightment and consecutive voyage contracts. Our contracts are
obtained through competitive bidding or, with established customers, through negotiation.

Most of the contracts for our OSVs contain early termination options in favor of the
customer; however some have substantial early termination penalties designed to discourage
the customers from exercising such options. Similarly, 11 of our 13 active tank barges provide
services under long-term contracts with initial terms of one year or longer. Since we
commenced operations, our OSVs have performed services for more than 60 different
customers, and our tugs and tank barges have performed services for more than 250 different
customers. Because of the variety and number of customers historically using the services of
our fleet, and the approximate balance between supply and demand in both the OSV and tug
and tank barge markets, we believe that the loss of any one customer would not have a
material adverse effect on our business.

Because we have established a reputation for on-time delivery and reliability, charterers
have contacted us in certain circumstances to construct vessels to meet their needs. In such
circumstances, we have generally contracted these specially designed vessels for three to
five years, with renewal options, before construction is completed. Although we will design
vessels to meet the specific needs of a charterer, we ensure in our design that customization
does not preclude efficient operation of these vessels for other customers, for other purposes
or in other situations.

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Competition

We operate in a highly competitive industry. Competition in the OSV and ocean-going tug
and tank barge segments of the marine transportation industry primarily involves factors such
as:

• quality and capability of the vessels;

• ability to meet the customer’s schedule;

•

•

safety record;

reputation;

• price; and

• experience.

The terms of the Jones Act restrict the ability of vessels that are not built in the United
States, documented under the laws of the United States and controlled by U.S. citizens to
engage in the coastwise trade in the United States and Puerto Rico. See “—Environmental
and Other Governmental Regulation” for a more detailed discussion of the Jones Act.

We do not anticipate significant competition in the near term from pipelines as an
alternative method of petroleum product delivery in the northeastern United States or Puerto
Rico. No pipelines are currently under construction that could provide significant competition
to tank barges in the northeastern United States or Puerto Rico, nor are any new pipelines
likely to be built in the near future due to cost constraints and logistical and environmental
requirements.

We believe that only 30% of the new generation OSVs currently operating in the U.S.

Gulf of Mexico are owned by publicly-traded companies. We believe we operate the second
largest fleet of new generation OSVs in the U.S. Gulf of Mexico, and are the only publicly
traded company with a significant fleet of U.S.-flagged, new generation OSVs. In contrast,
approximately 75% of the conventional 180’ OSVs operating on the Continental Shelf of the
U.S. Gulf of Mexico are owned by publicly-traded companies. We operate one of the largest
tank barge fleets in Puerto Rico and we believe that we are the fifth largest transporter by
tank barge of petroleum products in New York Harbor. Most of our competitors in the tug and
tank barge industry are privately held.

Although some of our principal competitors are larger and have greater financial

resources and, with respect to OSVs, extensive international operations, we believe that our
operating capabilities and reputation enable us to compete effectively with other fleets in the
market areas in which we operate. In particular, we believe that the relatively young age and
advanced features of our OSVs provide us with a competitive advantage. The ages of our
OSVs range from eleven months to seven years, while the average age of the industry’s
conventional 180’ U.S.-flagged OSV fleet is approximately 25 years. Retirement of older
vessels has already commenced and we believe that many more of these older vessels will
be retired in the next few years. The young age of our fleet, together with the advanced
capabilities of our vessels, position us to take advantage of the expanding deepwater, deep
well and other logistically demanding exploration and production projects in the U.S. Gulf of
Mexico and around the world. In addition, our new generation OSVs are also increasingly in

18

demand by our customers for conventional drilling projects because of the ability of our OSVs
to reduce overall offshore logistics costs for the customer through the vessels’ greater
capacities and operating efficiencies.

Environmental and Other Governmental Regulation

Our operations are significantly affected by a variety of federal, state, local and
international laws and regulations governing worker health and safety and the manning,
construction and operation of vessels. Certain U.S. governmental agencies, including the
Department of Homeland Security and agencies under its auspices (such as the U.S. Coast
Guard and the U.S. Customs and Border Protection), the National Transportation Safety
Board, and the Maritime Administration of the U.S. Department of Transportation, have
jurisdiction over our operations. In addition, private industry organizations such as the
American Bureau of Shipping oversee aspects of our business. The U.S. Coast Guard and
the National Transportation Safety Board establish safety criteria and are authorized to
investigate vessel accidents and recommend improved safety standards.

The U.S. Coast Guard regulates and enforces various aspects of marine offshore vessel

operations. Among these are classification, certification, routes, drydocking intervals, manning
requirements, tonnage requirements and restrictions, hull and shafting requirements and
vessel documentation. Coast Guard regulations require that each of our vessels be
drydocked for inspection at least twice within a five-year period.

Under Section 27 of the Merchant Marine Act of 1920, also known as the Jones Act, the

privilege of transporting merchandise or passengers for hire in the coastwise trade in U.S.
domestic waters is restricted to only those vessels that are controlled by U.S. citizens and are
built in and documented under the laws of the United States. To engage in coastwise trade, a
corporation is not considered a U.S. citizen unless, among other things:

•

the corporation is organized under the laws of the United States or of a state, territory
or possession of the United States;

• at least 75% of the ownership of voting interests with respect to its capital stock is held

by U.S. citizens;

•

the corporation’s chief executive officer, president and chairman of the board are U.S.
citizens; and

• no more than a minority of the number of directors necessary to constitute a quorum

for the transaction of business are non-U.S. citizens.

We meet all of the foregoing requirements. If we should fail to comply with these

requirements, our vessels would lose their eligibility to engage in coastwise trade within U.S.
domestic waters. To facilitate compliance, our certificate of incorporation:

•

limits ownership by non-U.S. citizens of any class of our capital stock (including our
common stock) to 20%, so that foreign ownership will not exceed the 25% permitted;

• permits withholding of dividends and suspension of voting rights with respect to any

shares held by non-U.S. citizens that exceed 20%;

• permits a stock certification system with two types of certificates to aid tracking of

ownership;

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• permits our board of directors to redeem any shares held by non-U.S. citizens that

exceed 20%; and

• permits our board of directors to make such determinations to ascertain ownership

and implement such measures as reasonably may be necessary.

Jones Act restrictions have been challenged by interests seeking to facilitate foreign
competition for coastwise trade. Historically, their efforts have been defeated by large margins
when considered by the U.S. Congress. Industry associations and participants actively
responded to and successfully defeated the latest challenges involving the nature, extent and
availability of lease-finance alternatives permitted by a 1996 amendment of the Jones Act.
Under the provisions of that amendment, certain foreign interests operated and proposed to
operate in the U.S. coastwise trade.

On August 9, 2004, following an initiative by the U.S. marine industry interested in
protecting the Jones Act, Congress enacted and the President signed into law Public Law
No. 108-293. Section 608 of that law amends the lease financing criteria of such Act, adding
new requirements that effectively eliminate the ability of foreign interests engaged in the
marine business to control vessels engaged in U.S. coastwise trade by structuring lease-
finance transactions. In addition, the legislation requires the United States Coast Guard to, by
August 9, 2007, revoke the authorization of any offshore service vessel that received an
endorsement to engage in coastwise trade utilizing the challenged lease-finance structure,
unless the vessel otherwise complies with the Jones Act’s U.S.-control requirements.
Following enactment of the foregoing legislation, we are aware of one foreign marine interest
that is subject to the three-year sunset provision and another foreign marine interest that had
announced its intention to avail itself of the lease-finance structure, but aborted its plan.
Instead, the latter is now utilizing a foreign mortgage-finance structure covering 100% of the
construction costs of its vessels, which is currently being challenged by the U.S. marine
industry. Should foreign competition be permitted to enter the U.S. coastwise market to any
significant extent, it could have an adverse effect on the U.S. OSV industry and on us.

Our operations are also subject to a variety of federal, state, local and international laws

and regulations regarding the discharge of materials into the environment or otherwise
relating to environmental protection. The requirements of these laws and regulations have
become more complex and stringent in recent years and may, in certain circumstances,
impose strict liability, rendering a company liable for environmental damages and remediation
costs without regard to negligence or fault on the part of such party. Aside from possible
liability for damages and costs including natural resource damages associated with releases
of hazardous materials including oil into the environment, such laws and regulations may
expose us to liability for the conditions caused by others or even acts of ours that were in
compliance with all applicable laws and regulations at the time such acts were performed.
Failure to comply with applicable laws and regulations may result in the imposition of
administrative, civil and criminal penalties, revocation of permits, issuance of corrective action
orders and suspension or termination of our operations. Moreover, it is possible that changes
in the environmental laws, regulations or enforcement policies that impose additional or more
restrictive requirements or claims for damages to persons, property, natural resources or the
environment could result in substantial costs and liabilities to us. We believe that we are in
substantial compliance with currently applicable environmental laws and regulations.

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OPA 90 and regulations promulgated pursuant thereto impose a variety of regulations on

“responsible parties” related to the prevention of oil spills and liability for damages resulting
from such spills. A “responsible party” includes the owner or operator of an onshore facility,
pipeline or vessel or the lessee or permittee of the area in which an offshore facility is located.
OPA 90 assigns liability to each responsible party for oil removal costs and a variety of public
and private damages. Under OPA 90, “tank vessels” of over 3,000 gross tons that carry oil or
other hazardous materials in bulk as cargo, a term, which includes our tank barges, are
subject to liability limits of the greater of $1,200 per gross ton or $10 million. For any vessels,
other than “tank vessels,” that are subject to OPA 90, the liability limits are the greater of
$500,000 or $600 per gross ton. A party cannot take advantage of liability limits if the spill was
caused by gross negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. If the party fails to report a spill or to cooperate fully in
the cleanup, the liability limits likewise do not apply. Moreover, OPA 90 imposes on
responsible parties the need for proof of financial responsibility to cover at least some costs in
a potential spill. We have provided satisfactory evidence of financial responsibility to the U.S.
Coast Guard for all of our vessels over 300 tons.

OPA 90 also imposes ongoing requirements on a responsible party, including

preparedness and prevention of oil spills, preparation of an oil spill response plan and proof of
financial responsibility (to cover at least some costs in a potential spill) for vessels in excess
of 300 gross tons. We have engaged the National Response Corporation to serve as our
independent contractor for purposes of providing stand-by oil spill response services in all
geographical areas of our fleet operations. In addition, our Oil Spill Response Plan has been
approved by the U.S. Coast Guard.

OPA 90 requires that all newly-built tank vessels used in the transport of petroleum
products be built with double hulls and provides for a phase-out period for existing single hull
vessels. Modifying existing vessels to provide for double hulls will be required of all tank
barges and tankers in the industry by the year 2015. We are in a favorable position
concerning this provision because a significant number of vessels in our fleet of tank barges
measure less than 5,000 gross tons. Vessels of such tonnage may continue to operate
without double hulls through the year 2015. Under existing legal requirements, therefore, we
will be required to modify or replace only two of our existing tank barges before 2015. We
previously retired from service three single-hulled tank barges at the end of 2004 pursuant to
OPA 90. Although we are not aware of anything that would lead us to believe this current
schedule will change, it remains possible that a change in the law affecting the requirement
for double hulls or other aspects of our operations may occur that would require us to modify
or replace our existing tank barge fleet earlier than currently anticipated.

The Clean Water Act imposes strict controls on the discharge of pollutants into the
navigable waters of the United States. The Clean Water Act also provides for civil, criminal
and administrative penalties for any unauthorized discharge of oil or other hazardous
substances in reportable quantities and imposes substantial liability for the costs of removal
and remediation of an unauthorized discharge. Many states have laws that are analogous to
the Clean Water Act and also require remediation of accidental releases of petroleum in
reportable quantities. Our OSVs routinely transport diesel fuel to offshore rigs and platforms
and also carry diesel fuel for their own use. Our OSVs also transport bulk chemical materials
used in drilling activities and liquid mud, which contain oil and oil by-products. In addition, our

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tank barges are specifically engaged to transport a variety of petroleum products. We
maintain vessel response plans as required by the Clean Water Act to address potential oil
and fuel spills.

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980,

also known as “CERCLA” or “Superfund,” and similar laws impose liability for releases of
hazardous substances into the environment. CERCLA currently exempts crude oil from the
definition of hazardous substances for purposes of the statute, but our operations may involve
the use or handling of other materials that may be classified as hazardous substances.
CERCLA assigns strict liability to each responsible party for all response and remediation
costs, as well as natural resource damages and thus we could be held liable for releases of
hazardous substances that resulted from operations by third parties not under our control or
for releases associated with practices performed by us or others that were standard in the
industry at the time.

The Resource Conservation and Recovery Act regulates the generation, transportation,

storage, treatment and disposal of onshore hazardous and non-hazardous wastes and
requires states to develop programs to ensure the safe disposal of wastes. We generate non-
hazardous wastes and small quantities of hazardous wastes in connection with routine
operations. We believe that all of the wastes that we generate are handled in all material
respects in compliance with the Resource Conservation and Recovery Act and analogous
state statutes.

LEEVAC Marine, Inc., a predecessor entity to one of our current subsidiaries, was
notified in March 1996 regarding the possibility of remediating on a voluntary basis certain
waste pits at the SBA Shipyards site in Jennings, Louisiana. This site is not identified as a
federal Superfund site. Subsequent to this initial notice, in December 2000, LEEVAC Marine
was one of approximately 14 companies that formed a limited liability company, SSIC
Remediation, LLC, to address this matter. LEEVAC Marine accrued a $100,000 liability at the
time of our formation to cover this expense. Our subsidiary’s current percentage of liability for
cleanup efforts within the SSIC Remediation group at this site is estimated at approximately
2.64%, and, to date, it has contributed approximately $34,000 towards this cleanup effort and
an additional $17,000 to pay certain costs discussed below, thereby reducing the accrued
liability with respect to this matter to $44,600. The $34,000 contribution represents our
subsidiary’s current share of a $1.9 million voluntary cleanup plan submitted to the limited
liability company’s members by an independent contractor who has agreed to clean up the
site in a manner that will meet both state and federal standards. In June 1997, Cari
Investment Company, the former parent of LEEVAC Marine, Inc., agreed to indemnify us for
certain matters, including those discussed in this paragraph. The indemnity would also be
applicable to all liabilities, obligations, damages and expenses related to the SBA Shipyard
matter in excess of $100,000. Christian G. Vaccari, who served as our Chairman and Chief
Executive Officer until February 2002 and as one of our directors until May 2004, is a minority
shareholder and President, Chief Executive Officer and Chairman of the Board of Cari
Investment Company. In July 2002, our subsidiary entered into a contractual agreement
whereby it paid an additional $17,000 to SSIC Remediation, LLC in order to limit its exposure
to certain future costs incurred by the independent contractor at the site. This limitation on
payment of future monies relates primarily to certain legal and administrative costs of SSIC
Remediation, LLC and does not bar future payment of monies for potential Superfund cleanup

22

costs or for costs associated with any suits brought by third parties. In late 2002, SSIC
Remediation, LLC commenced interim phase remedial activities at the SBA Shipyards site
pursuant to a December 9, 2002 “Order and Agreement” that it entered into with EPA. These
remedial efforts are on-going at this site.

In addition to laws and regulations affecting us directly, our operations are also

influenced by laws, regulations and policies which affect our customers’ drilling programs and
the oil and natural gas industry as a whole.

The Outer Continental Shelf Lands Act gives the federal government broad discretion to
regulate the release of offshore resources of oil and natural gas. Because our operations rely
primarily on offshore oil and natural gas exploration, development and production, if the
government were to exercise its authority under the Outer Continental Shelf Lands Act to
restrict the availability of offshore oil and natural gas leases, such an action would have a
material adverse effect on our financial condition and results of operations.

We currently have in place protection and indemnity insurance that includes coverage for
pollution incidents. Our OSVs have $5 million in primary insurance coverage for such offshore
pollution incidents, with an additional $100 million in excess umbrella coverage. In addition,
our tugs and tank barges have insurance coverage for oil spills with a coverage limit of $1
billion.

Our tugs and tank barges acquired from the Spentonbush/Red Star Group obtained
certifications for environmental management according to the requirements of ISO Standard
14000. Both of our principal office locations in Covington, Louisiana and Brooklyn, New York,
as well as the majority of our vessels, including all of our proprietary OSVs and our tugs and
tank barges acquired from the Spentonbush/Red Star Group, are also certified to the
standards of the ISM Code for the safe management and operation of ships and for pollution
prevention. We are currently combining the ISO and ISM Code certification of our fleetwide
operations to the standards of ABS SQE, which integrates the elements of these certifications
into a single program. Additionally, our OSVs participate in the U.S. Coast Guard’s
Streamlined Inspection Program (SIP), which ensures the overall readiness level of our
vessel lifesaving and other critical safety and emergency systems. We believe that our
voluntary attainment and maintenance of these certifications and participation in these
programs provides evidence of our commitment to operate in a manner that minimizes any
impact on the environment from our fleet operations.

Operating Hazards and Insurance

The operation of our vessels is subject to various risks, such as catastrophic marine
disaster, adverse weather conditions, mechanical failure, collision and navigation errors, all of
which represent a threat to personnel safety and to our vessels and cargo. We maintain
insurance coverage that we consider customary in the industry against certain of these risks,
including, as discussed above, $1 billion in pollution insurance for the tug and tank barge fleet
and $105 million of pollution coverage for the OSVs. We believe that our current level of
insurance is adequate for our business and consistent with industry practice, and we have not
experienced a loss in excess of our policy limits. We may not be able to obtain insurance
coverage in the future to cover all risks inherent in our business, or insurance, if available,

23

may be at rates that we do not consider to be commercially reasonable. In addition, as more
single-hulled vessels are retired from active service, insurers may be less willing to insure and
customers less willing to hire single-hulled vessels. The terms of our entry into a mutual
protection and indemnity association covering our marine risks allows additional premiums to
be called for from time to time, and paid by association members in respect of unanticipated
reserve requirements of the association. We recently were called upon to pay such a
supplemental premium.

Employees

On December 31, 2004, we had 601 employees, including 496 operating personnel and

105 corporate, administrative and management personnel. None of our employees are
represented by a union or employed pursuant to a collective bargaining agreement or similar
arrangement. We have not experienced any strikes or work stoppages, and our management
believes that we continue to enjoy good relations with our employees.

Properties

Our corporate headquarters are located in Covington, Louisiana. Our office lease covers
23,756 sq. ft. and has an initial term of five years, which commenced in September 2003, with
two additional five-year renewal periods. We also hold a one-year lease on a 4,500-square-
foot warehouse near our corporate headquarters to maintain spare parts inventory. For local
support in Puerto Rico, we lease an office consisting of approximately 1,900 square feet. To
support our operations in the northeastern United States, we lease office space and
warehouse space in Brooklyn, New York, consisting of approximately 66,760 square feet. We
also lease dock space, consisting of approximately 36,000 square feet, in Brooklyn, New
York. We operate our tug and tank barge fleet from these New York facilities. The lease on
our Brooklyn facilities expires in March 2006. We believe that our facilities, including
waterfront locations used for vessel dockage and certain vessel repair work, provide an
adequate base of operations for the foreseeable future. Information regarding our fleet is set
forth above in “—Offshore Supply Vessels—Our OSV Business” and “—Tugs and Tank
Barges—Our Tug and Tank Barge Business.”

Seasonality of Business

Demand for our OSV services is directly affected by the levels of offshore drilling activity.

Budgets of many of our customers are based upon a calendar year, and demand for our
services has historically been stronger in the third and fourth calendar quarters when
allocated budgets are expended by our customers and weather conditions are more favorable
for offshore activities. Many other factors, such as the expiration of drilling leases and the
supply of and demand for oil and natural gas, may affect this general trend in any particular
year.

Tank barge services are significantly affected by the strength of the U.S. economy,
changes in weather patterns and population growth that affect the consumption of and the
demand for refined petroleum products and crude oil. The tug and tank barge market, in
general, is marked by steady demand over time, although such demand is seasonal and often
dependent on weather conditions. Unseasonably mild winters result in significantly lower

24

demand for heating oil in the northeastern United States, which is a significant market for our
tank barge services. Conversely, the summer driving season can increase demand for
automobile fuel and, accordingly, the demand for our services.

Availability of Reports, Certain Committee Charters and Other Information

Our website address is www.hornbeckoffshore.com. We make available on this website,
free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports, as well as other documents
that we file with or furnish to the Commission pursuant to Sections 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after such documents are filed with, or
furnished to, the Commission.

Our Corporate Governance Guidelines, Employee Code of Business Conduct and Ethics

(which applies to all employees, including our Chief Executive Officer and certain Financial
and Accounting Officers), Board of Directors Code of Business Conduct and Ethics, and the
charters for our Audit, Nominating/Corporate Governance and Compensation Committees,
can all be found on the Investor Relations page of our website (http://www.hornbeckoffshore
.com/) under “Corporate Governance”. We intend to disclose any changes to or waivers from
the Employee Code of Business Conduct and Ethics that would otherwise be required to be
disclosed under Item 5.05 of Form 8-K on our website. We will also provide printed copies of
these materials to any shareholder upon request to Hornbeck Offshore Services Inc., Attn:
Chief Compliance Officer, 103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433.
The information on our website is not, and shall not be deemed to be, a part of this report or
incorporated into any other filings we make with the Commission.

Item 3—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 4—Submission of Matters to a Vote of Security Holders

On November 23, 2004, we completed a consent solicitation and cash tender offer to

acquire our outstanding 10.625% senior notes due 2008. Approximately 91% of such notes
were validly tendered and accepted. In connection with the tender offer, holders of over a
majority in aggregate principal amount of the 10.625% senior notes consented to certain
amendments to the indenture governing such notes and pursuant thereto of certain restrictive
covenants and defined events of default in the indenture were deleted. We redeemed the
remaining 9% of such notes on January 14, 2005.

25

PART II

Item 5—Market for the Registrant’s Common Stock and Related Stockholder Matters

Our common stock, $0.01 par value, trades on the New York Stock Exchange, or NYSE,

under the trading symbol “HOS”. The table sets forth, for the quarterly period indicated, the
high and low sale prices for our common stock as reported by the NYSE during 2004. Our
shares of common stock were not publicly traded prior to March 26, 2004.

First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter

High

Low

$13.55
$13.75
$17.00
$21.50

$13.00
$10.15
$11.12
$14.44

On March 1, 2005, we had 113 holders of record representing approximately 3,145

beneficial owners of our common stock.

We have not previously declared or paid and we do not plan to declare or pay in the
foreseeable future, any cash dividends on our common stock. We presently intend to retain all
of the cash our business generates to meet our working capital requirements and fund future
growth. Any future payment of cash dividends will depend upon the financial condition, capital
requirements and earnings of our Company, as well as other factors that our Board of
Directors may deem relevant. In addition, our indenture and revolving credit facility include
restrictions on our ability to pay cash dividends on our common stock.

See Item 12 “Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters” for information regarding shares of common stock authorized
for issuance under our equity compensation plans.

Pursuant to a Registration Statement on Form S-1 (Registration No. 333-108943) (as
amended, the “Registration Statement”) that was declared effective on March 25, 2004, we
completed an initial public offering of six million shares of our common stock and on April 28,
2004, we issued an additional 126,000 shares of common stock pursuant to the exercise by
the underwriters of the initial public offering of an option to purchase additional shares of
common stock, resulting in total net proceeds of approximately $73 million. We used a portion
of the proceeds to repay the debt outstanding under our revolving credit facility of $40 million
on March 31, 2004. From March 31, 2004 to December 31, 2004, the Company also used the
remaining net proceeds of approximately $33 million to fund expenditures related to our tank
barge newbuild program, the acquisition and retrofit of two ocean-going tugs, the acquisition
of one fast supply vessel and for general corporate purposes. None of these expenditures
were paid directly or indirectly to any of our directors or officers (or their associates) or
persons owning ten percent or more of any common stock or to any of our affiliates, except
for $12.9 million paid to a shipyard affiliated with our former Chairman of the Board, Chief
Executive Officer, and board member under a shipyard construction contract awarded to it
following competitive bidding.

26

Item 6—Selected Financial Data

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except operating and per share data)

Our selected historical consolidated financial information as of and for the periods ended

December 31, 2004, 2003, 2002, 2001 and 2000 was derived from our audited historical
consolidated financial statements prepared in accordance with generally accepted accounting
principles, or GAAP. The data should be read in conjunction with and is qualified in its entirety
by reference to “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our historical consolidated financial statements and the notes to those
statements included elsewhere in this Annual Report on Form 10-K.

2004

2003

2002

2001

2000

Year Ended December 31,

Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,261
58,520
Operating expenses . . . . . . . . . . . . . . . . . . . . .
23,135
Depreciation and amortization . . . . . . . . . . . . .
14,759
General and administrative expenses . . . . . . .
35,847
Operating income . . . . . . . . . . . . . . . . . . . . . . .
22,443
Loss on early extinguishment of debt . . . . . . .
356
Interest income . . . . . . . . . . . . . . . . . . . . . . . . .
17,698
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
135
Other income (expense)(1) . . . . . . . . . . . . . . .
(3,803)
Income (loss) before income taxes . . . . . . . . .
(1,320)
Income tax expense (benefit)
. . . . . . . . . . . . .
Net income (loss)(2) . . . . . . . . . . . . . . . . . . . . .
(2,483)
Per Share Data:
Basic net income (loss) . . . . . . . . . . . . . . . . . . $
Diluted net income (loss) . . . . . . . . . . . . . . . . . $
Weighted average basic shares

(0.13)
(0.13)

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .

19,330

Weighted average diluted shares

outstanding(3) . . . . . . . . . . . . . . . . . . . . . . . .

Balance Sheet Data (at period end):
Cash and cash equivalents . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, and equipment, net
. . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term debt(4) . . . . . . . . . . . . . . . . . .
Total long-term debt(5) . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . .
Statement of Cash Flows Data:
Net cash provided by (used in):

19,330

54,301
52,556
361,219
460,571
15,449
225,000
182,904

Operating activities . . . . . . . . . . . . . . . . . . $
Investing activities . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . .

21,405
(61,378)
81,358

Other Financial Data (unaudited):
EBITDA(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital expenditures . . . . . . . . . . . . . . . . . . . . .
Other Operating Data (unaudited):
Offshore Supply Vessels:

59,473
61,378

$ 110,813
46,805
17,590
10,731
35,687

—
178
18,523
706
18,048
6,858
11,190

0.84
0.82

13,397

13,604

12,899
17,698
316,715
365,242

—

212,677
112,395

25,499
(98,166)
63,322

54,161
105,816

$
$

$

$

$

$

$
$

$

$

$

92,585
36,337
12,296
9,681
34,271

—
667
16,207
55
18,786
7,139
11,647

$ 68,791
25,135
7,670
8,039
27,947
3,029
1,455
13,617

—

12,756
5,737
7,019

$ 36,102
13,542
7,145
3,078
12,337

—
305
15,478
(138)
(2,974)
1,550
(4,524)

0.96
0.94

$
$

0.68
0.67

$
$

(0.90)
(0.90)

12,098

10,265

12,428

10,514

22,228
22,265
226,232
278,290

—

172,306
71,876

$ 53,203
48,516
180,781
258,817

—

171,976
59,866

5,038

5,038

$ 32,988
29,524
98,935
147,148
6,834
82,557
38,197

24,955
(55,771)
(159)

$ 33,345
(88,328)
75,198

$ 5,741
(15,324)
36,427

47,289
55,771

$ 37,072
88,328

$ 17,667
15,324

Average number(7) . . . . . . . . . . . . . . . . . .
Average utilization rate(8)
. . . . . . . . . . . .
Average dayrate(9) . . . . . . . . . . . . . . . . . . $

22.8
87.5 %

17.3
88.6 %

11.0
94.9 %

7.8
99.1 %

6.8
93.4 %

10,154

$

10,940

$

12,176

$ 11,872

$ 8,435

Tugs and Tank Barges:

Average number of tank barges(10) . . . .
Average fleet capacity (barrels)(10)
Average barge size (barrels) . . . . . . . . . .
. . . . . . . . . . . .
Average utilization rate(8)
Average dayrate(11) . . . . . . . . . . . . . . . . . $

16.0
. . . . 1,156,330
72,271

15.9
1,145,064
72,082

16.0
1,130,727
70,670

12.3
847,780
68,109

7.0
451,655
64,522

82.2 %

73.6 %

78.1 %

84.4 %

71.4 %

11,620

$

10,971

$

9,499

$ 8,944

$ 8,982

27

(1) Represents other operating income and expenses, including gains (or losses) on disposition of assets and equity in income from investments.
Includes goodwill amortization of $126 for each of the two years in the period ended December 31, 2001. Effective January 1, 2002, SFAS
(2)
No. 142, “Goodwill and Other Intangible Assets” required that goodwill and other indefinite-lived assets no longer be amortized, but instead
be reviewed for impairment annually or more frequently if circumstances indicate potential impairment. Net income (loss) would have been
$7,145 and $(4,398) for the years ended December 31, 2001 and 2000, respectively, if SFAS 142 had been in effect on January 1, 2000.
(3) For the year ended December 31, 2004, stock options representing rights to acquire 273 shares of common stock were excluded from the
calculation of diluted earnings per share because the effect was antidilutive. Stock options are antidilutive when the results from operations
are a net loss or when the exercise price of the options is greater than the average market price of the common stock for the period.

(4) Represents the remaining balance of $15.5 million in aggregate principal amount of the Company’s 10.625% senior notes due 2008 that was
redeemed on January 14, 2005 and excludes original issue discount associated with our 10.625% senior notes in the amount of $97 as of
December 31, 2004.

(5) Excludes original issue discount associated with our 10.625% senior notes in the amount of $2,323, $2,694 and $3,024 as of December 31,
2003, 2002 and 2001, respectively. The amount as of December 31, 2003 includes $40,000 outstanding under our long-term, revolving credit
facility.

(6) See our discussion of EBITDA as a non-GAAP financial measure immediately following these footnotes.
(7) We owned 23 OSVs at December 31, 2004. We took delivery of a newly constructed OSV on January 21, 2004.
(8) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(9) 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.

(10) The averages for the year ended December 31, 2003 give effect to our sale of the Energy 5502 on January 28, 2003 and our acquisition of the
Energy 8001 on February 28, 2003. As of December 31, 2004, our tank barge fleet consisted of 16 vessels. Three of these tank barges were
retired from service by the end of 2004. As of March 1, 2005, we had five double-hulled tank barges under construction.

(11) 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 of in-
chartering third-party equipment paid by customers.

Reconciliation of EBITDA to Net Income

EBITDA consists of earnings (net income) before interest expense, income tax expense,

depreciation, amortization and loss on early extinguishment of debt. 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 believe EBITDA is useful to an investor in evaluating our operating performance

because:

•

•

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;

28

•

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.

In March 2003, the Securities and Exchange Commission, or Commission, adopted rules

regulating the use of non-GAAP financial measures, such as EBITDA, in filings with the
Commission, 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. The following table reconciles
EBITDA with our net income (loss) for the following periods:

Year Ended December 31,

2004

2003

2002

2001

2000

Net income (loss)
Interest expense:

. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,483) $11,190 $11,647 $ 7,019 $ (4,524)

Debt obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Put warrants (1) . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt (2) . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . .

17,698

—

22,443
(1,320)
23,135

18,523

—
—
6,858
17,590

16,207

—
—
7,139
12,296

10,665
2,952
3,029
5,737
7,670

8,216
7,262
—
1,550
5,163

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,473 $54,161 $47,289 $37,072 $17,667

(1)

Interest expense from put warrants represents an adjustment to the estimated fair value of the put warrants. According to the Emerging Issues
Task Force, or EITF, Issue 88-9, as supplemented by EITF Issue 00-19, which we have adopted, we are required to account for warrants that
contain put options at their estimated fair value with the changes reported as interest. We repurchased and terminated all of the warrants for
$14,500 in October 2001.

(2) A loss on early extinguishment of debt was recorded during 2001 resulting from the write-off of deferred financing costs upon the refinancing
of all our debt through the issuance of our 10.625% senior notes in July 2001. For the year ended December 31, 2004, amount includes the
repurchase premium, related fees and expenses and the write-off of unamortized original issue discount and deferred financing costs related
to the repurchase of 91% the 10.625% senior notes in November 2004. We redeemed the remaining 9% of the 10.625% senior notes in
January 2005.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of

Operations

The following management’s discussion and analysis should be read in conjunction with

our historical consolidated financial statements and their notes included elsewhere in this
annual report on Form 10-K. 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 or as a result
of certain factors such as those set forth below under “Forward Looking Statements.”

29

General

We own and operate a fleet of 24 technologically advanced, new generation OSVs,

which includes one AHTS vessel that is primarily operating as a supply vessel and towing
jack-up rigs. We also own and operate one fast supply vessel. Currently, 18 of our OSVs are
operating in the U.S. Gulf of Mexico, five of our OSVs are operating offshore Trinidad &
Tobago and one OSV and our fast supply vessel are working offshore Mexico. We also own
and operate 14 ocean-going tugs and 13 active ocean-going tank barges, one of which is
double-hulled. Currently, 11 of our tank barges are operating in the northeastern United
States, primarily New York Harbor, and two are operating in Puerto Rico. By the end of
calendar 2005, our tug and tank barge segment is expected to consist of at least 14 ocean-
going tugs and 18 ocean-going tank barges, six of which will be double-hulled. This projected
fleet count reflects five double-hulled tank barges under construction as of March 1, 2005 and
is net of the retirement of three single-hulled tank barges at the end of 2004, which are now
inactive and ineligible to transport petroleum products in navigable waters of the United
States. Upon completion of this newbuild program, 46% of our tank barge fleet barrel capacity
is currently expected to be double-hulled, up from 7% today.

We charter our OSVs on a dayrate basis, under which the customer pays us a specified

dollar amount for each day during the term of the contract, pursuant to either fixed term or
spot time charters. A fixed term time charter is a contract for a fixed period with a specified
dayrate, generally paid monthly. Spot time charters in the OSV industry are generally charter
contracts with either relatively short fixed or indefinite terms. In all time charters, spot or fixed,
the vessel owner absorbs crew, insurance and repair and maintenance costs in connection
with the operation of the vessel, while customers absorb all other direct operating costs. In
addition, in a typical time charter, the charterer obtains the right to direct the movements and
utilization of the vessel while the vessel owner retains operational control over the vessel.

All of our OSVs and our fast supply vessel operate under time charters, including ten that
are chartered under long-term contracts with expiration dates ranging from June 2005 through
April 2007. The long-term contracts for our supply vessels are consistent with those used in
the industry and are typically either fixed for a term of one or more 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.

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 these factors
compared to conventional shelf projects.

30

We have developed five different classes of proprietary, new generation OSVs to meet

the diverse needs of our customers. The acquisition of six 220’ OSVs from Candy Fleet in
2003 broadened the mix of equipment in our fleet, adding a sixth class of vessels well suited
for deep shelf gas exploration and other complex shelf drilling applications. In addition, these
new generation vessels complement our ability to fill the increasing demand for modern
equipment for conventional drilling on the Continental Shelf. Because these acquired vessels
were 220 class OSVs, our complement of OSVs smaller in size than the 240 class increased
from 33% to 50% of our fleet as of June 30, 2003, resulting in a commensurate decrease in
our fleetwide average dayrates beginning at such time. However, we have achieved a
comparable reduction in both our fleetwide average capital costs and our daily operating
expense per vessel. We have continued our efforts to expand the services that we offer our
customers with the addition of one AHTS vessel in early 2005. Our AHTS vessel is primarily
functioning as a supply vessel and towing jack-up rigs.

Market conditions in the U.S. Gulf of Mexico continue to show positive trends. Based on
feedback from our customers operating in the Gulf of Mexico, we believe that our customers
recognize the superior capabilities of our proprietary OSVs, which has contributed to our
ability to achieve higher dayrates and utilization rates and increased overall operating cost
efficiencies than our competitors. Although the demand for new generation equipment has
historically been driven by deepwater, deep shelf and highly complex projects, we are
observing increased demand for our vessels for all types of projects, including transition zone
and shelf activity, irrespective of water depth, drilling depth or project type. Notably, this
prevailing shift in customer preference does not appear to be limited to the U.S. Gulf of
Mexico, as we have observed this preference in foreign areas such as Mexico, Trinidad &
Tobago, Brazil and West Africa.

Soft market conditions for OSVs in the U.S. Gulf of Mexico persisted from the second half

of 2002 through the first half of 2004. Since the second half of 2004, OSV market conditions
in the U.S. Gulf of Mexico have improved. Our average dayrates have risen approximately
$1,800 since April 2004 to approximately $11,400 per day at the end of 2004, while our
fleetwide OSV utilization has risen from roughly 70% to 94% over the same period. Further
indications of improvement in the U.S. Gulf of Mexico OSV market include the continued
support for the expansion of deepwater and deep shelf projects, as evidenced by public
comments from offshore drilling contractors relating to the increased demand for rigs, and
public comments from oil and gas producers on increases to their capital budgets or
acceleration of their development plans for these offshore areas. Additionally, there are signs
that the improved market conditions in the U.S. Gulf of Mexico could be a long-term trend. For
example, in the offshore oil and natural gas lease sale held in August 2004 by MMS, interest
in acquiring leases was the highest it has been in the last six years, a 22% increase from a
year ago, with 44% of the leases bid on being located in ultra-deep water. Additional evidence
of a strengthening OSV market in the U.S. Gulf of Mexico is offshore rig fleet utilization.
According to ODS-Petrodata, offshore rig fleet utilization is up to 85% from the year-ago
range of 71%.

31

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 time charters, contracts of
affreightment and consecutive voyage contracts. A fixed term time charter is a contract for a
fixed period of time with a specified day rate, generally paid monthly. Spot time charters in the
tug and tank barge industry are generally single-voyage contracts of affreightment,
consecutive voyage contracts, or time charter contracts with either relatively short fixed or
indefinite terms . 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 voyages. We may also charter vessels to a third party under a
bareboat charter. 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. We also provide tug services to third party vessels on a
periodic basis. Typically, these services include vessel docking and towage assistance.

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 first and fourth quarters of a given year are typically higher
due to normal seasonal winter-weather patterns that typically result in a drop-off of activity
during the second and third quarters. We generally take advantage of this seasonality to
prepare our tug and tank barge fleet for peak demand periods by performing our regulatory
drydocking and maintenance programs during the second and third quarters. In addition, we
regularly evaluate our customers’ needs and often elect to accelerate scheduled drydockings
to take advantage of certain market opportunities.

As the next major OPA 90 milestone approached on January 1, 2005 and since that date,

customer demand for double-hulled equipment has led to increases in dayrates for this
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 double-hulled tank barge newbuild program to replace
some of our existing single-hulled tank barges that will be retired from service in accordance
with OPA 90. Since then, we have contracted with shipyards for the construction of five
double-hulled tank barges. This newbuild program will replace about 270,000 barrels of
single-hulled capacity that we retired from service at the end of 2004 pursuant to OPA 90 with
approximately 600,000 barrels of new double-hulled capacity. Our first two new double-hulled
tank barges were expected to be delivered in December 2004 to replace the capacity of the
Energy 9801, Energy 9501, and Energy 8701, all of which were retired from service at the
end of 2004. However, as a result of start-up delays at the shipyards and steel shortages, we
now expect to take delivery of these two tank barges by the end of the second quarter of 2005
and the remaining three tank barges during the fourth quarter of 2005. Due to these delays,
based on delivery date protections contained in our shipyard contracts, we expect to receive a
favorable adjustment to the construction costs for the two affected vessels, which will partially
offset the opportunity cost of such delays.

32

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 are incurred 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.

As expected, tug and tank barge segment activity during the fourth quarter of 2004 was

seasonally higher than the third quarter 2004 due to the early stages of winter. Our 2004
fourth quarter results also surpassed the year-ago quarter. The fourth quarter 2004 was
favorably impacted by the fact that single-hulled tank barges were removed from service by
our competitors earlier than required by OPA 90, coupled with colder than expected
conditions during the early stages of winter. These factors contributed to higher dayrates and
utilization due to a tightening tank barge market in the northeastern United States. We expect
these market conditions to continue because additional single-hulled equipment was removed
from service at the end of 2004. However, the early part of the first quarter 2005 has been
somewhat warmer than normal, which has mitigated the effect of favorable market conditions
stemming from fewer single-hulled tank barges being available for service.

Critical Accounting Policies

Our consolidated financial statements included in this Annual Report on Form 10-K have

been prepared in accordance with accounting principles generally accepted in the United
States. 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
available information. We base our estimates and judgments on historical experience and
various other factors that we believe are reasonable based upon the information available.
Actual results may differ from these estimates under different assumptions and conditions.
We believe that of our significant accounting policies discussed in Note 2 to our consolidated
financial statements, the following may involve estimates that are inherently more subjective.

33

Purchase Accounting. Purchase accounting requires extensive use of estimates and

judgments to allocate the cost of an acquired enterprise to the assets acquired and liabilities
assumed. The cost of each acquired operation is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. These estimates are revised during
an allocation period as necessary when, and if, information becomes available to further
define and quantify the value of the assets acquired and liabilities assumed. For example,
costs related to the recertification of acquired vessels that are drydocked within the allocation
period immediately following the acquisition of such vessels are reflected as an adjustment to
the value of the vessels acquired and the liabilities assumed related to the drydocking. The
adjusted basis of the vessel is depreciated over the estimated useful lives of the vessel. The
allocation period does not exceed one year from the date of the acquisition. To the extent
additional information to refine the original allocation becomes available during the allocation
period, the allocation of the purchase price is adjusted. For example, if an acquired vessel
was subsequently disposed of within the allocation period, the sales price of the vessel would
be used to adjust the original assigned value to the vessel at the date of acquisition such that
no gain or loss would be recognized upon disposition during the allocation period. If
information becomes available after the allocation period, those items are reflected in
operating results.

Carrying Value of Vessels. We depreciate our tugs, tank barges, and OSVs over
estimated useful lives of 14 to 25 years, three to 18 years and 25 years, respectively. The
useful lives used for single-hulled tank barges is based on their classification under OPA 90,
and for double-hulled tank barges it is 25 years. In assigning depreciable lives to these
assets, we have considered the effects of both physical deterioration largely caused by wear
and tear due to operating use and other economic and regulatory factors that could impact
commercial viability. To date, our experience confirms that these policies are reasonable,
although there may be events or changes in circumstances in the future that indicate the
recoverability of the carrying amount of a vessel might not be possible. Examples of events or
changes in circumstances that could indicate that the recoverability of a vessel’s carrying
amount should be assessed might include a change in regulations such as OPA 90, a
significant decrease in the market value of a vessel and current period operating or cash flow
losses combined with a history of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with a vessel. If events or changes in
circumstances as set forth above indicate that a vessel’s carrying amount may not be
recoverable, we would then be required to estimate the undiscounted future cash flows
expected to result from the use of the vessel and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the vessel, we would be
required to recognize an impairment loss.

34

Recertification Costs. Our tugs, tank barges and OSVs are required by regulation to be

recertified after certain periods of time. These recertification costs are incurred while the
vessel is in drydock where other routine repairs and maintenance are performed and, at
times, major replacements and improvements are performed. We expense routine repairs and
maintenance as they are incurred. Recertification costs can be accounted for in one of three
ways: (1) defer and amortize, (2) accrue in advance, or (3) expense as incurred. Companies
in our industry use either the defer and amortize or the expense as incurred accounting
method. We defer and amortize recertification costs over the length of time in which the
recertification is expected to last, which is generally 30 or 60 months. Major replacements and
improvements, which extend the vessel’s economic useful life or functional operating
capability, are capitalized and depreciated over the vessel’s remaining economic useful life.
Inherent in this process are estimates we make regarding the specific cost incurred and the
period that the incurred cost will benefit.

Revenue Recognition. We charter our OSVs to customers under time charters based
on a daily rate of hire and recognize revenue as earned on a daily basis during the contract
period of the specific vessel. Tugs and tank barges are contracted to customers primarily
under contracts of affreightment, under which revenue is recognized based on the number of
days incurred for the voyage as a percentage of total estimated days applied to total
estimated revenues. Voyage related costs are expensed as incurred. Substantially all
voyages under these contracts are less than 10 days in length. We also contract our tugs and
tank barges under time charters based on a daily rate of hire. Revenue is recognized on such
contracts as earned on a daily basis during the contract period of the specific vessel.

Allowance for Doubtful Accounts. Our customers are primarily major and independent,

domestic and international, oil and oil service companies. Our customers are granted credit
on a short-term basis and related credit risks are considered minimal. We usually do not
require collateral. We provide an estimate for uncollectible accounts based primarily on
management’s judgment. Management uses historical losses, current economic conditions
and individual evaluations of each customer to make adjustments to the allowance for
doubtful accounts. Our historical losses have not been significant. However, because
amounts due from individual customers can be significant, future adjustments to the
allowance can be material if one or more individual customers balances are deemed
uncollectible.

Income Taxes. We follow SFAS No. 109, “Accounting for Income Taxes.” SFAS 109

requires the use of the liability method of computing deferred income taxes. Under this
method, deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The
assessment of the realization of deferred tax assets, particularly those related to tax operating
loss carryforwards, involves the use of management’s judgment to determine whether it is
more likely than not that we will realize such tax benefits in the future.

35

Results of Operations

The tables below set forth, by segment, the average dayrates and utilization rates for our
vessels and the average number of vessels owned during the periods indicated. These OSVs
and tugs and tank barges generate substantially all of our revenues and operating profit. The
table does not include the results of operations of the HOS Hotshot, a 165-ft. fast supply
vessel that we had been operating under a bareboat charter since it was delivered in April
2003. We exercised our option to purchase that vessel in May 2004.

Offshore Supply Vessels:

Average number of vessels . . . . . . . . . . . . . . . . . . . . . . . . .
Average utilization rate(1)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

22.8
87.5%
10,154 $

17.3
88.6%
10,940 $

11.0
94.9%

12,176

Tugs and Tank Barges:

Years Ended December 31,

2004

2003

2002

Average number of tank barges . . . . . . . . . . . . . . . . . . . . .
Average fleet capacity (barrels) . . . . . . . . . . . . . . . . . . . . . .
Average barge size (barrels) . . . . . . . . . . . . . . . . . . . . . . . .
Average utilization rate(1)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

16.0
1,156,330
72,271

15.9
1,145,064
72,082

16.0
1,130,727
70,670

82.2%
11,620 $

73.6%
10,971 $

78.1%

9,499

(1) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(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.

(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.

36

Summarized financial information concerning our reportable segments is shown below in

the following table (in thousands):

Year Ended December 31,

2004

2003

2002

Revenues by segment:

Offshore supply vessels

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,886 $ 50,044 $43,702
2,676
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,358

15,407

Tugs and tank barges

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating expenses by segment:

75,293

62,402

46,378

50,465
6,503

56,968

43,206
5,205

36,020
10,187

48,411

46,207

$132,261 $110,813 $92,585

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,724 $ 22,786 $14,367
21,970
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24,019

28,796

Depreciation and amortization

$ 58,520 $ 46,805 $36,337

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,876 $ 9,381 $ 5,830
6,466
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,259

8,209

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,135 $ 17,590 $12,296

Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,443 $

— $ —

General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,759 $ 10,731 $ 9,681

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,698 $ 18,523 $16,207

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

356 $

178 $

667

Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,320) $ 6,858 $ 7,139

(1)

Included are the amounts applicable to our Puerto Rico tug and tank barge operations, even though Puerto Rico is considered a possession of
the United States and the Jones Act applies to vessels operating in Puerto Rican waters.

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

Revenues. Revenues were $132.3 million in 2004, compared to $110.8 million in 2003,
an increase of $21.5 million or 19.4%. The increase in revenues was primarily the result of the
year-over-year increase in the size of our fleet. Our operating fleet grew from an average of
45 vessels during 2003 to an average of 51 vessels during 2004. The additional revenues
generated by newly constructed or acquired vessels that were not in operation during all of
2003 and 2004 accounted for $15.8 million of the increase in our revenues. We also
experienced a $5.7 million increase in revenues from our 45 vessels that were in service
during each of the years ended December 31, 2004 and 2003 due to improving market
conditions in both of our business segments.

37

Revenues from our OSV segment increased to $75.3 million in 2004, compared to $62.4

million for 2003, an increase of $12.9 million or 20.7%. Our average OSV fleet size grew by
5.5 vessels during 2004 compared to 2003. The average utilization rate was 87.5% for 2004,
compared to 88.6% for 2003. Although there was a 1.1% decrease in utilization for 2004, the
early stages of 2004 were marked with utilization in the mid to low-80’s while the latter part of
2004 had utilization in the low to mid-90’s. Our OSV average dayrate was $10,154 for 2004,
compared to $10,940 for 2003, a decrease of $786 or 7.2%. The decrease in average
dayrates primarily reflected the change in our average vessel size as 2004 was the first full
year of operating results for the six 220’ class vessels that were acquired in mid-2003. While
our annual average dayrates were lower in 2004 compared to 2003, average dayrates for the
fourth quarter of 2004 have returned to annual 2003 levels. Domestic revenues were also
higher in 2004 than the prior year due mainly to the recovery of the OSV market in the U.S.
Gulf of Mexico. Foreign revenues were positively impacted by having two additional vessels
working internationally during 2004. Based on current market trends, we anticipate that our
OSV utilization and average dayrates for each vessel class will remain at least above fourth
quarter 2004 levels for 2005 and 2006.

Revenues from our tug and tank barge segment totaled $57.0 million in 2004, compared
to $48.4 million in 2003, an increase of $8.6 million or 17.8%. Our utilization rate increased to
82.2% for 2004, compared to 73.6% for 2003, primarily due to extended cold weather in the
spring of 2004, fewer days out of service for drydockings and repairs in 2004 compared to
2003, and increased movements of diesel and unleaded gasoline barrels as gasoline
inventories during the summer of 2004 were at 30-year seasonal record lows. Our average
dayrates were $649 higher in 2004 than the prior year as a tightening tank barge market in
the northeastern United States contributed to higher freight rates and fuel shortages during
the summer of 2004 that caused higher barrel movements for gasoline and diesel fuel.

Operating Expenses. Our operating expenses increased to $58.5 million for 2004,

compared to $46.8 million in 2003, an increase of $11.7 million or 25.0%. The increase in
operating expenses was the result of having more vessels in service during 2004 compared
to 2003 and increasing costs related to newly instituted Homeland Security measures,
training, repair and maintenance, and insurance.

Operating expenses for our OSV segment increased $6.9 million, or 30.3%, in 2004 to

$29.7 million, compared to $22.8 million in 2003. This increase was primarily the result of
having an average of six more new OSVs in service during 2004 compared to 2003. Daily
operating costs per vessel in the OSV segment decreased over the same period in 2003,
commensurate with the change in our fleet complement with the addition of six 220’ vessels in
mid-2003.

Operating expenses for our tug and tank barge segment was $28.8 million for 2004,
compared to $24.0 million in 2003, an increase of $4.8 million or 20.0%. The increase in
operating expenses was primarily the result of higher fuel, insurance and personnel costs
along with the increased cost of compliance of newly instituted Homeland Security measures.
Average daily operating costs per vessel for 2004 increased over 2003 commensurately with
the overall increase in operating expenses discussed above.

38

Depreciation and Amortization. Our depreciation and amortization expense of $23.1

million for the year ended December 31, 2004 increased $5.5 million or 31.3% compared to
$17.6 million for the same period in 2003. Depreciation and amortization were higher in 2004
as a result of having an average of six additional vessels in our fleet and increased
drydocking activity compared to the same period in 2003. These expenses are expected to
increase further with the recent acquisition of two ocean-going tugs, one AHTS vessel and the
construction of five double-hulled tank barges, and when these and any other recently
acquired and newly constructed vessels undergo their initial 30 and 60 month recertifications.

Loss on Early Extinguishment of Debt. On November 3, 2004, we commenced a cash

tender offer for all of the $175 million in aggregate principal amount of our 10.625% senior
notes. Senior notes totaling approximately $159.5 million, or 91% of such notes outstanding,
were validly tendered during the designated tender period. The remaining $15.5 million of our
10.625% senior notes were redeemed on January 14, 2005. A loss on early extinguishment of
debt of approximately $22.4 million was recorded during the fourth quarter of 2004 and
includes the tender offer costs and an allocable portion of the write off of unamortized
financing costs and original issue discount, and a bond redemption premium. A loss on early
extinguishment of debt of approximately $1.7 million will be recorded for the first quarter of
2005 for those costs allocable to the $15.5 million of our 10.625% senior notes redeemed on
January 14, 2005.

General and Administrative Expenses. Our general and administrative expenses were

$14.8 million for 2004, compared to $10.7 million in 2003, an increase of $4.1 million or
38.3%. This increase primarily resulted from increased overhead relating to the additional
vessels purchased, the increased costs of operating as a public company and, during the
fourth quarter 2004, several discrete charges related to increased employee bonuses,
insurance and legal fees. General and administrative expenses are expected to trend higher
in 2005 to accommodate our continued growth via vessel acquisitions, the construction of five
double-hulled tank barges, and our increased reporting obligations under federal securities
and corporate governance laws and stock exchange requirements. However, we expect the
ratio of general and administrative expenses to revenues to remain at our historical levels at
approximately 11% of revenues.

Interest Expense.

Interest expense from debt obligations was $17.7 million in 2004,

compared to $18.5 million in 2003, a decrease of $0.8 million or 4.3%. The decrease in
interest expense primarily relates to having an average balance outstanding under our
revolving credit facility of $12.0 million during 2004 compared to $20.0 million during 2003
and having outstanding balances on such facility during only three months of 2004 compared
to 11 months of 2003. Other factors causing a decrease in interest expense are continued
increases in our capitalized interest due to the construction of double-hulled tank barges and
the November 2004 issuance of 6.125% senior notes to repurchase a portion of our
outstanding 10.625% senior notes. See “Liquidity and Capital Resources” for further
discussion. Capitalization of interest costs relating to new construction of vessels was
approximately $3.0 million for 2004 compared to $2.7 million for 2003.

39

Interest Income.

Interest income was $0.4 million in 2004, compared to $0.2 million in

2003, an increase of $0.2 million or 100%. The increase in interest income resulted from
increased interest rates along with higher average cash balances invested during 2004
compared to 2003. Average cash balances were $33.6 million and $17.6 million for the years
ended December 31, 2004 and 2003, respectively.

Income Tax Expense. We recorded an income tax benefit for 2004, compared to an
income tax provision for 2003, due to a pre-tax loss attributable to an early extinguishment of
debt. See “Liquidity and Capital Resources” for further discussion. We also recorded deferred
taxes due to our federal tax net operating loss carryforwards primarily generated by
accelerated depreciation for tax purposes of approximately $95 million as of December 31,
2004. These loss carryforwards are available through 2018 to offset future taxable income.
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.

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

Revenues. Revenues were $110.8 million for 2003, compared to $92.6 million for 2002,

an increase of $18.2 million or 19.7%. This increase in revenues is primarily the result of the
year-over-year growth of our fleet. Our operating fleet grew from an average of 39 vessels
during 2002 to an average of 45 vessels during 2003. The additional revenues generated by
these six vessels accounted for $14.5 million of the increase in our revenues. We also
experienced a $3.7 million increase in revenues from our 39 vessels that were in service
during each of the years ended December 31, 2003 and 2002.

Revenues from our OSV segment increased to $62.4 million for 2003, compared to $46.4

million for 2002, an increase of $16.0 million or 34.5%. Our utilization rate was 88.6% for
2003, compared to 94.9% in 2002. The increase in revenues was primarily the result of the
year-over-year increase in the size of our fleet. The decrease in utilization was due to having
fewer OSVs on long-term contracts and an increased proportion of vessels operating in the
spot market, which is more susceptible to market fluctuations. The soft OSV spot market that
began in mid-2002 continued throughout 2003, and ended in April 2004. Our OSV average
dayrate was $10,940 for 2003, compared to $12,176 in 2002, a decrease of $1,236 or 10.2%.
The decrease in average dayrates primarily reflects the addition of six 220 class OSVs, which
typically experience lower dayrates, regardless of market conditions, than our 240 or 265
class vessels and continued dayrate weakness in the U.S. Gulf of Mexico. The fourth quarter
of 2003 was the first quarter that reflected a full contribution of the operating results from all
six of the new 220 class OSVs we acquired in mid-2003, causing a shift in our OSV vessel
mix.

Revenues from our tug and tank barge segment totaled $48.4 million for 2003 compared
to $46.2 million for 2002, an increase of $2.2 million or 4.8%. The segment revenue increase
was primarily due to the acquisition of one 80,000-barrel double-hulled tank barge on
February 28, 2003. Our utilization rate decreased to 73.6% for 2003, compared to 78.1% for
the same period of 2002 primarily due to more drydocking days occurring in 2003 and an
increase in vessels operating under contracts of affreightment during the 2003 period. Our
average dayrate increased $1,472, or 15.5%, to $10,971 for 2003 compared to $9,499 for
2002. The increased dayrates were primarily driven by higher average barge capacities and a
bareboat charter contract that was replaced by a time charter contract, the latter of which
commands a higher dayrate.

40

Operating Expenses. Our operating expenses increased to $46.8 million for 2003,

compared to $36.3 million for 2002, an increase of $10.5 million or 28.9%. The increase in
operating expenses was primarily the result of having more vessels in service in 2003
compared to 2002.

Operating expenses for our OSV segment increased $8.4 million or 58.3% for 2003 to
$22.8 million, compared to $14.4 million for 2002. This increase was primarily the result of five
newly constructed, larger class OSVs being in service for substantially more days during 2003
compared to 2002, and the acquisition of six 220 class OSVs in mid-2003. Daily operating
costs per vessel for 2003 decreased over 2002, primarily due to a change in the OSV fleet
complement in the second half of 2003.

Operating expenses for our tug and tank barge segment were $24.0 million for 2003,

compared to $22.0 million for 2002, an increase of $2.0 million or 9.1%. The operating
expense increase was primarily due to the acquisition of the Energy 8001 in February 2003.
Average daily operating expenses per vessel in the tug and tank barge segment remained
fairly constant.

Depreciation and Amortization. Our depreciation and amortization expense of $17.6
million in 2003 increased $5.3 million or 43.1% compared to $12.3 million for the same period
in 2002. Depreciation and amortization was higher in 2003 as a result of having an average of
six additional vessels in our fleet and increased drydocking activity compared to the same
period in 2003. These expenses are expected to increase further with the delivery of one OSV
in early 2004 and as other recently acquired or newly constructed vessels undergo their initial
30 and 60-month recertifications.

General and Administrative Expenses. Our general and administrative expenses were

$10.7 million for 2003, compared to $9.7 million for 2002, an increase of $1.0 million or
10.3%. This increase primarily resulted from increased overhead relating to the costs
associated with increased reporting obligations under federal securities laws incurred during
2003 but not in 2002 and the expansion of our fleet during 2003.

Interest Expense.

Interest expense was $18.5 million in 2003, compared to $16.2

million in 2002, an increase of $2.3 million or 14.2%. The increase in interest expense
resulted from lower capitalized interest in 2003 of $2.7 million related to the construction in
progress of four vessels compared to $3.9 million related to the construction of eight vessels
in progress during 2002. In addition, the net increase in interest expense was impacted by an
average balance outstanding under our revolving credit facility during calendar 2003 of $20.0
million compared to 2002, when the facility was undrawn all year.

Interest Income.

Interest income was $0.2 million in 2003 compared to $0.7 million in
2002, a decrease of $0.5 million or 71.4%. Average cash balances were $17.6 million and
$37.7 million for the years ended December 31, 2003 and 2002, respectively, which
substantially contributed to the decrease in interest income during the year ended
December 31, 2003.

41

Income Tax Expense. Our effective tax rate was 38.0% for 2003 and 2002. Our income

tax expense primarily consists of deferred taxes due to our federal tax net operating loss
carryforwards primarily generated by accelerated depreciation for tax purposes, of
approximately $37.4 million as of December 31, 2003, that are available through 2018 to
offset future taxable income. 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,

proceeds from issuances of our debt and common equity securities, and borrowings under
our credit facilities. We require capital to fund ongoing operations, construction of new
vessels, acquisitions, vessel recertifications, discretionary capital expenditures and debt
service. The nature of our capital requirements and the types of our financing sources are not
expected to change significantly during 2005.

We have a five-year $100 million senior secured revolving credit facility with a current

borrowing base of $60 million. As of December 31, 2004, we had $60 million of credit
immediately available under such facility. We have made, and may make additional, short-
term draws on our revolving credit facility from time to time to satisfy scheduled capital
expenditure requirements or for other corporate purposes. Any liquidity in excess of our
planned capital expenditures will be utilized to repay debt or finance the implementation of our
growth strategy, which includes expanding our fleet through the construction of new vessels,
retrofit of existing vessels or acquisition of additional vessels, including OSVs, and ocean-
going tugs and tank barges, as needed to take advantage of the demand for such vessels.
Upon completion, the five double-hulled tank barges anticipated to be delivered in 2005 will
replace three single-hulled vessels that were retired from service pursuant to OPA 90 prior to
January 1, 2005 and increase the net barrel-carrying capacity of our fleet by approximately
320,000 barrels or 28%.

We believe that our current working capital, projected cash flow from operations and

available capacity under our revolving credit facility, will be sufficient to meet 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 refined petroleum products, or declines in
expenditures for exploration, development and production activity may affect our financial
condition or results of operations. However, depending on the market demand for OSVs, tugs
and tank barges and other growth opportunities that may arise, we may require additional
debt or equity financing.

Operating Activities. We rely primarily on cash flows from operations to provide working

capital for current and future operations. Cash flows from operating activities totaled $21.4
million in 2004, $25.5 million in 2003, and $25.0 million in 2002. The decrease in operating
cash flows from 2003 to 2004 was due to increased cash outlays associated with OSV
drydocking activity and the timing of interest payments resulting from the early extinguishment
of debt in November 2004. Our cash flows from operations is expected to trend higher as we
will have a full year of revenue contribution from one OSV added in 2004 and partial year

42

contributions from the five new double-hulled tank barges that we expect to be delivered
during 2005 and one AHTS acquired during January 2005. In 2005, we expect to drydock a
total of eight OSVs, two tugs, and four tank barges for recertification and/or discretionary
vessel enhancements, which together with non-vessel capital expenditures related primarily
to information technology initiatives, is estimated to cost in the range of $13.0 million to $14.0
million.

As of December 31, 2004, we had federal tax net operating loss carryforwards of
approximately $95 million available through 2018 to offset future federal taxable income.
These federal tax net operating losses were generated primarily through accelerated tax
depreciation applied to our vessels. Our use of these 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
projected fleet, we expect to continue generating federal tax net operating losses over the
near term.

Investing Activities.

Investing activities for 2004 were approximately $61.4 million,

primarily for the construction of new double-hulled tank barges, acquisition of a fast supply
vessel and the acquisition and retrofitting of two ocean-going tugs, and miscellaneous capital
expenditures. During 2003 investing activities were approximately $99.8 million, primarily for
the construction of new vessels, acquisitions of six OSVs and a double-hulled tank barge, and
miscellaneous capital expenditures. These 2003 expenditures were offset by $1.7 million in
cash proceeds from the sale of one tank barge. During 2002, investing activities were $56.1
million for new construction of vessels offset by $0.3 million in cash proceeds from the sale of
a tug. In 2005, investing activities are anticipated to include costs to complete construction of
our five double-hulled tank barges, the acquisition of one AHTS vessel, and miscellaneous
capital expenditures, including discretionary vessel modifications and various corporate
projects. See “Contractual Obligations” for a brief overview of anticipated vessel construction
commitments in 2005.

Financing Activities. Financing activities during 2004 generated $81.4 million and
consisted of cash inflows generated by the November 2004 issuance of 6.125% senior notes
and the initial public offering of our common stock, which was completed in March 2004.
These cash inflows were offset by the repurchase of 91% of our outstanding 10.625% senior
notes and the repayment of amounts then outstanding on our revolving credit facility in March
2004. Financing activities during 2003 consisted primarily of the private placement of
approximately 1.9 million shares of our common stock, raising net cash proceeds of
approximately $23.3 million that were used in part, together with borrowings under our
revolving credit facility of $40 million, to fund certain vessel purchases. In 2002, financing
activities consisted primarily of the incurrence of variable rate debt financing under our
revolving credit facility for asset purchases.

On November 3, 2004, we commenced a tender offer and solicitation of consents relating

to the repurchase of our existing 10.625% senior notes. The tender offer expired on
December 3, 2004. On November 23, 2004, we completed the private placement of our
6.125% Series A senior notes, resulting in offering proceeds of approximately $219 million,
net of estimated transaction costs. In connection with the tender offer and related consent
solicitation, we used $181 million, plus accrued interest, of such proceeds to repurchase
approximately 91% of our outstanding $175 million aggregate principal amount of 10.625%

43

senior notes. In addition, approximately $17 million, plus accrued interest, of the offering
proceeds was used to redeem the remaining 10.625% senior notes on January 14, 2005.

As a result of the repurchase of 91% of the 10.625% senior notes in the fourth quarter of

2004, we recorded a charge for a pre-tax loss on early extinguishment of debt of
approximately $22.4 million. The per share impact of this loss is $0.75 per diluted share for
the year ended December 31, 2004 and $0.70 per diluted share for the fourth quarter 2004.
For the first quarter of 2005, we expect to record an after-tax loss on early extinguishment of
debt of approximately $1.1 million, or $0.05 per diluted share, in connection with the
redemption of the remaining 10.625% senior notes on January 14, 2005. We expect the
issuance of the 6.125% Series A notes and the repurchase and redemption of the outstanding
10.625% senior notes to result in pre-tax savings, before allocation of construction period
interest, of approximately $5.2 million in annualized net interest expense, even though our
long-term debt has increased by $50 million. This bond refinancing lowered our effective
interest rate on our long-term fixed rate debt obligations from 11.18% to 6.38%.

Contractual Obligations

The following table sets forth our aggregate contractual obligations as of December 31,

2004 (in thousands).

Contractual Obligations

Total

Less than
1 Year

1-3 Years

3-5 Years

Thereafter

Senior notes(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 240,449 $15,449
1,074
Operating leases(2) . . . . . . . . . . . . . . . . . . . . . . .
53,224
Vessel construction commitments(3) . . . . . . . . .

2,130
53,224

$ —

797
—

$ —

$225,000

259
—

—
—

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $295,803, $69,747

$797

$259

$225,000

(1) The current portion of the outstanding senior notes represents the remaining balance of our 10.625% senior notes that were not repurchased
in November 2004 and includes original issue discount of $97. The current portion of debt was redeemed in January 2005. The long-term
portion of the senior notes represents the outstanding balance of our 6.125% senior notes.
Included in operating leases are commitments for office space, vessel rentals, office equipment, and vehicles. On June 30, 2003, we entered
into a lease for our principal executive offices in Covington, Louisiana. The lease covers 23,756 sq. ft. and has an initial term of five years,
which commenced September 1, 2003, with two optional five-year renewal periods. The cost of leasing this new facility is included in the table.
(3) The timing of the incurrence of these costs is subject to change among periods based on the achievement of shipyard milestones, however,

(2)

the amounts are not expected to change materially in the aggregate.

We have a $100 million revolving credit facility with a current borrowing base of $60
million. As of December 31, 2004, we had no outstanding balance thereunder, as we used a
portion of the net proceeds from our March 2004 initial public offering of our common stock to
re-pay all borrowings thereunder. Thus, we have $60 million of borrowing capacity
immediately available under that facility.

As of December 31, 2004, we had outstanding debt of $240.5 million, net of original issue

discount, that was comprised of $225 million in aggregate principal amount of 6.125% senior
notes and $15.5 million in remaining principal amount of 10.625% senior notes, the latter of
which were redeemed in January 2005. The effective interest rate on the 6.125% senior notes
is 6.38% and is payable semi-annually each June 1 and December 1. The 6.125% senior
notes do not require any payments of principal prior to their stated maturity of December 1,
2014, but pursuant to the indenture under which they were issued, we are required to make
offers to purchase such senior notes upon the occurrence of specified events, such as certain
asset sales or a change in control.

44

In February 2005, we commenced a registered exchange offer to exchange our 6.125%
senior notes due December 1, 2014, which were initially sold pursuant to exemptions under
the Securities Act of 1933, or Securities Act, for 6.125% senior notes with substantially the
same terms, except that the issuance of the senior notes issued in the exchange offer was
registered under the Securities Act. Both series of senior notes were issued under and are
entitled to the benefits of the same indenture. The exchange offer was completed on March 7,
2005.

For additional information with respect to our revolving credit facility and our senior notes,

please refer to Note 7 of our consolidated financial statements included herein.

For the year ended December 31, 2004, we expended $41.8 million for acquisitions and

new vessel construction, before allocation of construction period interest, which was
comprised of a final construction draw of $1.5 million for an OSV and $40.3 million for our
tank barge newbuild program and the acquisition and retrofit of two ocean-going tugs. The
five barges now under construction, along with the purchase of the two higher horsepower,
ocean-going tugs, are expected to cost approximately $105 million in the aggregate, of which
approximately $51.4 million has been incurred and paid from October 2003 through the end of
2004. We expect to incur the remaining balance of $53.6 million in 2005. The timing of the
incurrence of these costs is subject to change among periods based on the achievement of
shipyard milestones. However, the amounts are not expected to change materially in the
aggregate.

Inflation

To date, general inflationary trends have not had a material effect on our operating

revenues or expenses.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which is a revision
of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). SFAS
123R supersedes Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for
Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash
Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS
123. However, SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on their fair
values. Accordingly, the adoption of SFAS 123R’s fair value method will have a significant
impact on our results of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had we adopted
SFAS 123R in prior periods, the impact of that standard would have approximated the impact
of SFAS 123 as described in the disclosure of pro forma net income (loss) and earnings (loss)
per share in Note 8 to our consolidated financial statements. SFAS 123R also requires the
benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net financing cash flows in

45

periods after adoption. While we cannot estimate what those amounts will be in the future
because they depend on, among other things, when employees exercise stock options, the
amount of operating cash flows recognized for such excess tax deductions was $0.4 million in
2004. SFAS 123R must be adopted no later than July 1, 2005 and we expect to adopt this
standard at such time.

Forward-Looking Statements

We make forward-looking statements in this Annual Report on Form 10-K, including

certain information set forth in the sections entitled “Business and Properties” and
“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 cautionary
statements we make in this Annual Report on Form 10-K.

Among the risks, uncertainties and assumptions to which these forward-looking

statements may be subject are:

• activity levels in the energy markets;

•

•

•

changes in oil and natural gas prices;

increases in supply of vessels in our markets;

the effects of competition;

• our ability to complete vessels under construction or refurbishment without significant

delays or cost overruns;

• our ability to integrate acquisitions successfully;

• our ability to obtain or maintain adequate levels of insurance;

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

•

•

•

•

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

changes in laws;

changes in international economic and political conditions;

changes in foreign currency exchange rates;

• adverse domestic or foreign tax consequences;

• uncollectible foreign accounts receivable or longer collection periods on such

accounts;

financial stability of our customers;

retention of skilled employees and our management;

•

•

46

•

•

laws governing the health and safety of our employees working offshore;

catastrophic marine disasters;

• adverse weather and sea conditions;

• oil and hazardous substance spills;

• war and terrorism;

• acts of God;

• our ability to finance our operations on acceptable terms and access the debt and

equity markets to fund our capital requirements, which may depend on general market
conditions and our financial condition at the time;

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

• 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 Annual Report on Form 10-K may
not occur.

Item 7A—Quantitative and 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.

Changes in interest rates may result in changes in the fair market value of our financial
instruments, interest income and interest expense. Our financial instruments that are exposed
to interest rate risk are cash equivalents and long-term borrowings. Due to the short duration
and conservative nature of our cash equivalent investment portfolio, we do not expect any
material loss with respect to our investments. The book value for cash equivalents is
considered to be representative of its fair value.

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 currently
outstanding senior notes accrue interest at the rate of 6.125% per annum and mature on
December 1, 2014 and the effective interest rate on such notes is 6.38%.

Our revolving credit facility has a variable interest rate and, therefore, is not subject to

interest rate risk. At December 31, 2004, the weighted average interest rate under our
revolving credit facility, had we had outstanding borrowings under such facility, would have
been approximately 4.5%. Assuming a 200 basis point increase in market interest rates
during the year ended December 31, 2004, our interest expense, net of capitalization, would
have increased approximately $0.2 million, net of taxes, resulting in a $0.01 per diluted share
reduction in earnings.

47

Our operations are primarily conducted between U.S. ports, including along the coast of

Puerto Rico, and historically we have not been exposed to foreign currency fluctuation.
However, as we expand our operations to international markets, we may become exposed to
certain risks typically associated with foreign currency fluctuation. We currently have time
charters for five of our OSVs for service in Trinidad & Tobago. Although such contracts are
denominated and will be paid in U.S. Dollars, value added tax, or VAT, payments are paid in
Trinidad & Tobago dollars which creates an exchange risk related to currency fluctuations. In
addition, we are currently operating under a fixed time charter with one of our other OSVs and
our fast supply vessel for service offshore 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
charters. 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, gains or losses
associated with such fluctuations have not been material.

Item 8—Financial Statements and Supplementary Data

The financial statements and information required by this Item appear on pages F-1

through F-24 of this Annual Report on Form 10-K.

Item 9—Changes in and Disagreements with Accountants on Accounting and Financial

Disclosures

None.

Item 9A—Controls and Procedures

Disclosure Controls And 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

48

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.

Item 9B—Other Information

None.

49

PART III

Item 10—Directors and Executive Officers of the Registrant

The information required under this item is incorporated by reference herein from the
Company’s definitive 2005 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2004.

Item 11—Executive Compensation

The information required under this item is incorporated by reference herein from the
Company’s definitive 2005 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2004.

Item 12—Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters

The information required under this item is incorporated by reference herein from the
Company’s definitive 2005 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2004.

Item 13—Certain Relationships and Related Transactions

The information required under this item is incorporated by reference herein from the
Company’s definitive 2005 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2004.

Item 14—Principal Accounting Fees and Services

The information required under this item is incorporated by reference herein from the
Company’s definitive 2005 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2004.

50

PART IV

Item 15—Exhibits and Financial Statement Schedules

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

1. Financial Statements. The financial statements and information required by Item 8

appear on pages F-1 through F-24 of this report. The Index to Consolidated
Financial Statements appears on page F-1.

2. Financial Statement Schedules. All schedules are omitted because they are not

applicable or the required information is shown in the financial statements or the
notes thereto.

3. Exhibits.

Exhibit
Number

Description of Exhibit

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).

3.3

—Fourth Restated Bylaws of the Company adopted June 30, 2004 (incorporated
by reference to Exhibit 3.3 to the Company’s Form 10-Q for the quarter ended
June 30, 2004).

4.1

—Indenture dated as of November 23, 2004 between the Company, the guarantors

named therein and Wells Fargo Bank, National Association (as Trustee),
including table of contents and cross-reference sheet (incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 18,
2004).

4.2

—Registration Rights Agreement, dated as of November 23, 2004, among

Goldman, Sachs & Co., Bear, Stearns & Co., Inc., Jefferies & Company, Inc.,
Hornbeck Offshore Services, Inc. and the guarantors party thereto (incorporated
by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated
November 18, 2004).

4.3

—Specimen 6.125% Series B Senior Note due 2014 (incorporated by reference to
Exhibit 4.5 to the Company’s Amendment No. 1 to Registration Statement on
Form S-4 dated February 7, 2005, Registration No. 333-121557).

51

Exhibit
Number

Description of Exhibit

4.4

—Rights Agreement dated 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).

4.5

—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).

4.6

—Second Amendment to Rights Agreement dated as of September 3, 2004 by and

between the Company and Mellon Investor Services, LLC as Rights Agent
(incorporated by reference to Exhibit 4.3 to the Company’s Form 8-A/A file
September 3, 2004, Registration No. 333-108943).

4.7

—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).

10.1† —Amended and Restated Incentive Compensation Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Form 10-Q for the period ended September 30,
2003).

10.2

10.3

10.4

10.5

10.6

—Senior Employment Agreement dated effective January 1, 2001 by and between
Todd M. Hornbeck and the Company (incorporated by reference to Exhibit 10.2
to the Company’s Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).

—Employment Agreement dated effective January 1, 2001 by and between Carl
Annessa and the Company (incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).

—Employment Agreement dated effective January 1, 2001 by and between James
O. Harp, Jr. and the Company (incorporated by reference to Exhibit 10.5 to the
Company’s Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).

—Amendment to Senior Employment Agreement dated effective February 17, 2003
by and between Todd M. Hornbeck and the Company (incorporated by reference
to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 dated
September 19, 2003, Registration No. 333-108943).

—Amendment to Employment Agreement dated effective February 17, 2003 by
and between Carl G. Annessa and the Company (incorporated by reference to
Exhibit 10.16 to the Company’s Registration Statement on Form S-1 dated
September 19, 2003, Registration No. 333-108943).

52

Exhibit
Number

10.7

Description of Exhibit

—Amendment to Employment Agreement dated effective February 17, 2003 by
and between James O. Harp, Jr. and the Company (incorporated by reference
to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 dated
September 19, 2003, Registration No. 333-108943).

*10.8

—Second Amendment to Employment Agreement dated effective March 11, 2005

by and between Todd M. Hornbeck and the Company

*10.9

—Second Amendment to Employment Agreement dated effective March 11, 2005

by and between Carl G. Annessa and the Company

*10.10

—Second Amendment to Employment Agreement dated effective March 11, 2005

by and between James O. Harp, Jr. and the Company

10.11

—Amended and Restated Credit Agreement dated as of February 13, 2004

among Hornbeck Offshore Services, Inc. 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).

10.12

—Form of Indemnification Agreement for directors, officers and key employees

(incorporated by reference to Exhibit 10.9 to the Company’s Registration
Statement of Form S-1 filed July 22, 2002, Registration No. 333-96833).

10.13

—Form of First Amendment to Indemnification Agreement for Directors, Officers

and Key Employees (incorporated by reference to Exhibit 10.6 to the
Company’s Form 10-Q for the period ended September 30, 2003).

10.14

—Asset Purchase Agreement dated as of June 20, 2003 by and among HOS-IV,

LLC, Candy Marine Investment Corporation, Candy Fleet Corporation and
Kenneth I. Nelkin, and joined for limited purposes by Hornbeck Offshore
Services, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K filed July 7, 2003).

*10.15† —Director & Advisory Director Compensation Policy.

*10.16

*10.17

*10.18

—Form of Executive Non-Qualified Stock Option Agreement.

—Form of Director Non-Qualified Stock Option Agreement.

—Form of Employee Non-Qualified Stock Option Agreement.

10.19

—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).

10.20

—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).

53

Exhibit
Number

Description of Exhibit

10.21 —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).

10.22 —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).

10.23 —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).

*21

*23.1

*31.1

—Subsidiaries of the Company.

—Consent of Ernst & Young, LLP.

—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.

*32.2

—Certification of the Chief Financial Officer pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002.

99.1

—Amended and Restated Credit Agreement Confirmation dated December 29,

2004 (incorporated by reference to Exhibit 99.4 to the Company’s Amendment
No. 1 to Registration Statement on Form S-4 dated February 7, 2005,
Registration No. 333-121557).

* Filed herewith.
† Compensatory plan or arrangement under which executive officers or directors of the Company may participate.

54

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS OF HORNBECK OFFSHORE SERVICES, INC.:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and 2003

Consolidated Statements of Operations for Each of the Three Years in the Period

Ended December 31, 2004

Consolidated Statements of Changes in Stockholders’ Equity for Each of the

Three Years in the Period Ended December 31, 2004

Consolidated Statements of Cash Flows for Each of the Three Years in the

Period Ended December 31, 2004

Notes to Consolidated Financial Statements

Page

F-2

F-3

F-4

F-5

F-6

F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Hornbeck Offshore Services, Inc.

We have audited the accompanying consolidated balance sheets of Hornbeck Offshore

Services, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material

respects, the consolidated financial position of Hornbeck Offshore Services, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004 in conformity
with U.S. generally accepted accounting principles.

ERNST & YOUNG LLP

New Orleans, Louisiana
February 18, 2005

F-2

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

December 31,

2004

2003

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,301 $ 12,899
Accounts receivable, net of allowance for doubtful accounts of $407 and

$454, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
Goodwill, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,028
530
2,936
1,934

81,729

361,219
2,628
14,863
132

16,544
291
2,144
1,661

33,539

316,715
2,628
12,316
44

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $460,571 $365,242

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,845 $ 3,884
7,799
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,911
Accrued payroll and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Current portion of long-term debt, net of original issue discount of $97 . . . .
247
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,391
3,991
1,723
15,449
774

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,173

Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of original issue discount of $0 and $2,323,

—

15,841

40,000

respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

225,000
22,247
1,247

172,677
23,567
762

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

277,667

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; 20,822 and

14,528 shares issued and outstanding, respectively . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .

208
163,264
19,400
32

145
90,351
21,883
16

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

182,904

112,395

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $460,571 $365,242

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

F-3

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Year Ended December 31,

2004

2003

2002

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,261 $110,813 $ 92,585
Costs and expenses:

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . .

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other income (expense):

Loss on early extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58,520
23,135
14,759

96,414

35,847

46,805
17,590
10,731

75,126

35,687

36,337
12,296
9,681

58,314

34,271

(22,443)
356
(17,698)

(39,785)
135

—
178
(18,523)

(18,345)
706

—
667
(16,207)

(15,540)
55

(39,650)

(17,639)

(15,485)

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit)

(3,803)
(1,320)

18,048
6,858

18,786
7,139

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,483) $ 11,190 $ 11,647

Basic earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . $

(0.13) $

0.84 $

0.96

Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . $

(0.13) $

0.82 $

0.94

Weighted average basic shares outstanding . . . . . . . . . . . . . . . . . . . .

19,330

13,397

12,098

Weighted average diluted shares outstanding . . . . . . . . . . . . . . . . . . .

19,330

13,604

12,428

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

F-4

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)

Common Stock

Shares Amount

Balance at January 1, 2002 . . . . . . . . . . . . .
Shares issued . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase and retirement of shares . . . .

Balance at December 31, 2002 . . . . . . . . . .
Private placement of common stock . . . . . .
Other shares issued . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . .

Total comprehensive income . . . . . . . . . . . .

12,054
75
—

(7)

12,122
2,400
6

—
—

Balance at December 31, 2003 . . . . . . . . . .
Initial public offering of common stock . . . .
Other shares issued . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . .

14,528
6,126
168

—
—

Total comprehensive income . . . . . . . . . . . .

$120
1
—
—

$121
24
—

—
—

$145
61
2

—
—

Additional
Paid-In
Capital

$ 60,700
412
—
(50)

$ 61,062
29,243
46

Retained
Earnings

$ (954)

—

11,647

—

$10,693

—
—

—
—

11,190

—

$ 90,351
71,743
1,170

$21,883

—
—

—
—

(2,483)
—

Accumulated
Other
Comprehensive
Income

Total
Stockholders’
Equity

$—
—
—
—

$—
—
—

—
16

$ 16
—
—

—
16

$ 59,866
413
11,647
(50)

$ 71,876
29,267
46

11,190
16

11,206

$112,395
71,804
1,172

(2,483)
16

(2,467)

Balance at December 31, 2004 . . . . . . . . . .

20,822

$208

$163,264

$19,400

$ 32

$182,904

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

F-5

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Year Ended December 31,

2004

2003

2002

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,483) $ 11,190 $ 11,647
Adjustments to reconcile net income (loss) to net cash provided by

operating activities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income from investment
Loss on early extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid insurance and other current assets . . . . . . . . . . . . . . . . . . . . . .
Deferred charges and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM INVESTING ACTIVITIES:

Construction of new vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM FINANCING ACTIVITIES:

17,408
5,727
(47)
(1,320)
(65)
(87)
22,443
1,532

(5,437)
(1,305)
(12,965)
1,130
503
1,723
(5,352)
21,405

(41,624)
(10,000)

—
(9,754)
(61,378)

14,393
3,197
56
6,858
(712)
(17)
—
1,531

(2,297)
(1,338)
(6,397)
(1,627)
610
—
52
25,499

10,351
1,945
336
7,139
(32)
(27)
—
1,455

(3,926)
69
(4,389)
(295)
1,095
—
(413)
24,955

(38,047)
(55,400)
1,650
(6,369)
(98,166)

(48,359)

—
315
(7,727)
(55,771)

Proceeds from issuance of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for bond refinancing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from (payments on) borrowings under revolving credit

facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings under other debt agreements . . . . . . . . . . . . . . .
Payments on borrowings under other debt agreements . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross proceeds from initial public offering . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for initial public offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash proceeds from other shares issued . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . .

225,000
(159,454)
(21,006)

—
—
—

(40,000)

—
—
3,842
79,643
(7,839)
—
1,172
81,358

40,000
1,656
(1,488)
(159)
—
—
—

23,313
63,322

Effects of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

16

—
—
—

—
60
(453)
(129)
—
—
(50)
413
(159)

—

(30,975)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . .
53,203
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,301 $ 12,899 $ 22,228

(9,329)
22,228

41,402
12,899

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:

Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,023 $ 19,718 $ 19,075

Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

— $ — $

65

NONCASH FINANCING ACTIVITIES:

Issuance of common stock to partially fund the purchase of offshore

supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

— $ 6,000 $ —

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

F-6

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Formation

Hornbeck Offshore Services, Inc. (or the Company) was incorporated in the state of
Delaware in 1997. The Company wholly owns Hornbeck Offshore Transportation (HOT),
Hornbeck Offshore Services (HOS), HOS-IV (HOS-IV), Hornbeck Offshore Operators (HOO),
Energy Services Puerto Rico (ESPR), Hornbeck Offshore Trinidad & Tobago (HOTT), and
Hornbeck Offshore Military Ventures (HOMV), each of which are limited liability companies (or
LLCs). The accompanying financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.

Nature of Operations

HOS, HOTT and HOS-IV operate offshore supply vessels (OSVs) to provide support and
specialty services to the offshore oil and gas exploration and production industry, primarily in
the U.S. Gulf of Mexico and select international markets. In two separate acquisitions, on
June 26, 2003 and August 8, 2003, a wholly-owned subsidiary of the Company, HOS-IV,
acquired a total of six new generation OSVs from Candy Marine Investment Corporation (see
Note 15). HOT operates ocean-going tugs and tank barges that provide transportation of
petroleum products. HOO is a service subsidiary that provides administrative and personnel
support to the other subsidiaries. ESPR provides administrative and personnel support to
vessels operating in Puerto Rico. HOMV is an inactive company.

During 2002, the Company obtained a 49% interest in Hornbeck Offshore Trinidad &

Tobago Limited (HOTT-Ltd). HOTT-Ltd is a vessel crewing and management services
company established to support the Company’s Trinidad & Tobago-based operations. The
49% interest owned by the Company is being recorded using the equity method. The
Company’s equity in income from investments is not material.

2. Summary of Significant Accounting Policies

Revenue Recognition

The Company charters its OSVs to clients under time charters based on a daily rate of

hire and recognizes revenue as earned on a daily basis during the contract period of the
specific vessel.

The Company contracts its tank barges to clients primarily under contracts of

affreightment, under which revenue is recognized based on the number of days incurred for
the voyage as a percentage of total estimated days applied to total estimated revenues.
Voyage related costs are expensed as incurred. Substantially all voyages under these
contracts are less than 10 days in length. The Company also contracts certain of its tank
barges under time charters based on a daily rate of hire. Revenue is recognized on such
contracts as earned on a daily basis during the contract period of the specific vessel.

F-7

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred revenue represents payments received from customers in advance of vessels

commencing time charters.

Cash and Cash Equivalents

Cash and cash equivalents consist of all highly liquid investments in money market
funds, deposits and investments available for current use with an initial maturity of three
months or less.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation and amortization of

equipment and leasehold improvements are computed using the straight-line method based
on the estimated useful lives of the related assets. Major modifications and improvements,
which extend the useful life of the vessel, are capitalized and amortized over the remaining
useful life of the vessel. Gains and losses from retirements or other dispositions are
recognized as incurred.

The estimated useful lives by classification are as follows:

Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Non-vessel related property, plant and equipment

14-25 years
3-25 years
25 years
5-10 years

All of the Company’s single-hulled tank barges have estimated useful lives based on their

classification under the Oil Pollution Act of 1990 and three of such barges were retired from
service at December 31, 2004. The Company’s double-hulled tank barges have an estimated
useful life of 25 years.

Deferred Charges

The Company’s tugs, tank barges, and OSVs are required by regulation to be recertified
after certain periods of time. The Company defers the drydocking expenditures incurred due
to regulatory marine inspections and amortizes the costs on a straight-line basis over the
period to be benefited from such improvements (generally 30 or 60 months). Financing
charges are amortized over the term of the related debt using the interest method.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences

attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using currently enacted tax rates. The

effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in

F-8

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the period that includes the enactment date. The provision for income taxes includes
provisions for federal, state and foreign income taxes.

Use of Estimates

The preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

Concentration of Credit Risk

Customers are primarily major and independent, domestic and international, oil and oil
service companies. The Company’s customers are granted credit on a short-term basis and
related credit risks are considered minimal. The Company usually does not require collateral.
The Company provides an estimate for uncollectible accounts based primarily on
management’s judgment. Management uses historical losses, current economic conditions
and individual evaluations of each customer to make adjustments to the allowance for
doubtful accounts. The Company’s historical losses have not been significant. However,
because amounts due from individual customers can be significant, future adjustments to the
allowance can be material if one or more individual customer’s balances are deemed
uncollectible.

The following table represents the allowance for doubtful accounts (in thousands):

Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes to provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write off of uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$454
(47)
—

$469
56
(71) —

$133
336

Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$407

$454

$469

December 31,

2004

2003

2002

Property taxes receivable represents assessed property taxes on the Company’s vessels

by local municipalities that are refunded upon the filing of state tax returns.

Goodwill

Goodwill reflects the excess of cost over the estimated fair value of the net assets
acquired. Fair value is determined based on discounted cash flow or appraised values, as
appropriate. The Company has performed goodwill impairment reviews by reporting unit
based on a fair value concept as required by Statement of Financial Accounting Standards
(SFAS) No. 142, “Goodwill and Other Intangible Assets”, using a multiple of earnings before
interest, depreciation, taxes and amortization (EBITDA) and earnings. Such fair value
calculations have not resulted in the impairment of goodwill.

F-9

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation

SFAS No. 123, “Accounting for Stock-Based Compensation” established accounting and

disclosure requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As provided for under SFAS 123, the Company accounts for
stock-based compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” For all
periods presented, the Company has used the intrinsic value method, in which compensation
cost for stock options, if any, is measured as the excess of the estimated fair value market
price of the Company’s stock at the date of grant over the amount an employee must pay to
acquire the stock. Refer to Recent Accounting Pronouncements below.

Impairment of Long-Lived Assets

When events or circumstances indicate that the carrying amount of long-lived assets to

be held and used or intangible assets might not be recoverable, the expected future
undiscounted cash flows from the assets are estimated and compared with the carrying
amount of the assets. If the sum of the estimated undiscounted cash flows is less than the
carrying amount of the assets, an impairment loss is recorded. The impairment loss is
measured by comparing the fair value of the assets with their carrying amounts. Fair value is
determined based on discounted cash flow or appraised values, as appropriate.

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which is a revision
of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).
SFAS 123R supersedes Accounting Principles Board Opinion No. 25 (APB 25), “Accounting
for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash
Flows.” Generally, the approach in SFAS 123R is similar to the approach described in
SFAS 123. However, SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their
fair values. Accordingly, the adoption of SFAS 123R’s fair value method will have a significant
impact on the Company’s results of operations, although it will have no impact on its overall
financial position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. However,
had the Company adopted SFAS 123R in prior periods, the impact of that standard would
have approximated the impact of SFAS 123 as described in the disclosure of pro forma net
income (loss) and earnings (loss) per share in Note 8 to the Company’s consolidated financial
statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after adoption. While the Company
cannot estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating cash flows

F-10

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

recognized for such excess tax deductions was $0.4 million in 2004. SFAS 123R must be
adopted no later than July 1, 2005 and the Company expects to adopt this standard at such
time.

3. Earnings Per Share and Reverse Stock Split

Basic earnings (loss) per common share was calculated by dividing net income (loss) by

the weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per common share was calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the year 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. The table below reconciles the company’s earnings (loss) per share (in
thousands, except for per share data):

Year Ended December 31,

2004

2003

2002

Net income (loss)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (2,483)

$11,190

$11,647

Weighted average number of shares of common stock

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Net effect of dilutive stock options (1) . . . . . . . . . . . . . .

19,330

—

13,397
207

12,098
330

Adjusted weighted average number of shares of common

stock outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,330

13,604

12,428

Earnings (loss) per common share: . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.13)

$ 0.84

$ 0.96

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.13)

$ 0.82

$ 0.94

(1) At December 31, 2004, stock options representing rights to acquire 273 shares of common stock were excluded from the calculation of diluted
earnings per share because the effect was antidilutive. Stock options are antidilutive when the exercise price of the options is greater than the
average market price of the common stock for the period or when the results from operations are a net loss.

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 decrease from approximately 36.3
million to 14.5 million. 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 earnings per common share are each calculated based on the
weighted average number of shares outstanding during the periods adjusted for the effect of
the reverse stock split.

4. Defined Contribution Plan

The Company offers a 401(k) plan to all full time employees. Employees must be at least

twenty-one years of age and have completed three months of service to be eligible for
participation. Participants may elect to defer up to 60% of their compensation, subject to
certain statutorily established limits. The Company may elect to make annual matching and/or

F-11

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

profit sharing contributions to the plan. During the years ended December 31, 2004, 2003 and
2002, the Company made contributions of approximately $0.5 million, $0.1 million and $0.1
million, respectively.

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):

Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vessel related property, plant and equipment . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .

December 31,

2004

2003

$ 30,036
40,663
287,222
53,232
6,170
(56,104)

$ 28,876
37,121
265,729
20,319
3,382
(38,712)

$361,219

$316,715

Interest expense of approximately $3.0 million, $2.7 million and $3.9 million was

capitalized for the years ended December 31, 2004, 2003 and 2002, respectively.

6. Long-Term Debt

Senior Notes

On July 24, 2001, the Company issued $175 million in aggregate principal amount of

10.625% senior notes, or old senior notes. The Company realized net proceeds of
approximately $165 million, a substantial portion of which was used to repay and fully
extinguish all of the Company’s then-existing credit facilities. The old senior notes were due to
mature on August 1, 2008 and required semi-annual interest payments at an annual rate of
10.625% on February 1 and August 1 of each year until maturity. The effective interest rate
on the old senior notes was 11.18%. No principal payments were due until maturity. On
November 3, 2004, the Company commenced a cash tender offer for all of the old senior
notes. Old senior notes totaling approximately $159.5 million, or 91% of the notes
outstanding, were validly tendered during the designated tender period and repurchased. The
remaining $15.5 million of old senior notes were redeemed on January 14, 2005. A loss on
early extinguishment of debt for the old senior notes of approximately $22.4 million was
recorded during 2004 and includes the tender offer costs, an allocable portion of the write off
of unamortized financing costs and original issue discount, and a bond redemption premium.
A loss on early extinguishment of debt of approximately $1.7 million will be recorded for the
first quarter 2005 for those costs allocable to the $15.5 million of old senior notes redeemed
on January 14, 2005.

On November 23, 2004, the Company issued $225 million in aggregate principal amount

of 6.125% senior notes, or new senior notes. The net proceeds to the Company from the
offering were approximately $219 million, net of estimated transaction costs. The Company

F-12

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

used $181 million of proceeds to repurchase approximately 91% of the old senior notes
pursuant to its tender offer. The $181 million comprised the total consideration paid for the old
senior notes tendered, including related accrued interest and consent fees. The residual
proceeds were available to redeem the remaining 9% of old senior notes and for general
corporate purposes, which may include funding for the acquisition, construction or retrofit of
vessels. The new senior notes mature on December 1, 2014 and require semi-annual interest
payments at an annual rate of 6.125% on June 1 and December 1 of each year until maturity.
The effective interest rate on the new senior notes is 6.38%. No principal payments are due
until maturity. The new 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 Company’s
new senior notes are guaranteed by certain of its subsidiaries. The guarantees are full and
unconditional, joint and several, and any subsidiaries that are not guarantors are minor as
defined in the Securities and Exchange Commission regulations. Hornbeck Offshore
Services, Inc., as the parent company issuer of the new senior notes, has no independent
assets or operations. There are no significant restrictions on the Company’s ability or the
ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or
loan, except for certain restrictions contained in the Company’s revolving credit facility
restricting the payment of dividends by two subsidiaries to the parent. The Company may, at
its option, redeem all or part of the new 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.

In February 2005, the Company commenced a registered exchange offer to exchange its
6.125% senior notes due December 1, 2014, which were initially sold pursuant to exemptions
under the Securities Act of 1933, or Securities Act, for 6.125% senior notes with substantially
the same terms, except that the issuance of the senior notes issued in the exchange offer
were registered under the Securities Act. Both series of senior notes were issued under and
are entitled to the benefits of the same indenture. The exchange offer was completed on
March 7, 2005.

Revolving Credit Facility

Effective February 13, 2004, the Company amended and restated its senior secured

revolving credit facility to increase its size to $100 million and extend its maturity. The
borrowing base remains unchanged at $60 million. The revolving credit facility now matures
on February 13, 2009. Pursuant to the indenture governing the 6.125% senior notes, unless
the Company meets a specified consolidated interest coverage ratio test, the level of
permitted borrowings under this facility is limited to the greater of $75 million or 20% of the
Company’s consolidated net tangible assets determined as of the end of the Company’s most
recently completed fiscal quarter for which internal financial statements are available.
Borrowings under the revolving credit facility accrue interest, at the Company’s 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%. Unused

F-13

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

commitment fees are payable quarterly at the annual rate of one-quarter to one-half of one
percent on the revolving credit facility, based on the leverage ratio defined by the agreement.
As of December 31, 2004, the Company had no outstanding balance under the revolving
credit facility. As of such date, seven OSVs and four ocean-going tugs and associated
personalty collateralized the revolving credit facility.

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.

As of the dates indicated, the Company had the following outstanding long-term debt (in

thousands):

Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.625% senior notes due 2008, net of original issue discount of

$97 and $2,323, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.125% senior notes due 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2004

2003

$

—

$ 40,000

15,449
225,000

240,449
15,449

172,677

—

212,677

—

$225,000

$212,677

Annual maturities of debt during each year ending December 31, are as follows (in

thousands):

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15,449

—
—
—
—

225,000

$240,449

7. Stockholders’ Equity

Preferred Stock

The Company’s certificate of incorporation authorizes 5.0 million shares of preferred
stock. The Board of Directors has the authority to issue preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation of such
series, without further vote or action by the Company’s shareholders.

F-14

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stockholder Rights Plan

On June 18, 2003, the Company’s Board of Directors implemented a stockholder rights

plan, as amended on March 5, 2004 and September 3, 2004, declaring a dividend of one right
for each outstanding share of common stock to stockholders of record on June 18, 2003. One
right will also attach to each share of common stock issued after June 28, 2003. The rights
become exercisable, and transferable apart from the Company’s common stock, 10 business
days following a public announcement that a person or group has acquired beneficial
ownership of, or has commenced a tender or exchange offer for, 10% or more of the
Company’s common stock.

The rights have anti-takeover effects, causing substantial dilution to a person or group
who attempts to acquire the Company without the approval of the Board of Directors. As a
result, the overall effect of the rights may be to render more difficult or discourage any attempt
to acquire the Company even if such acquisition may be favorable to the interests of the
Company’s stockholders. Because the Board of Directors can redeem the rights or approve
certain offers, the rights should not interfere with any merger or other business combination
approved by the Company’s Board of Directors.

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 approximately $30 million, including $6 million
of common stock, or 0.5 million shares, issued to the seller as partial consideration for the
June 26, 2003 acquisition of five deepwater OSVs. The private placement was completed in
July 2003 with 1.9 million shares distributed for gross cash proceeds of approximately $24
million. Costs incurred for the private placement were approximately $0.7 million and were
recorded as a reduction of additional paid-in capital.

Initial Public Offering

On March 31, 2004, the Company completed an initial public offering of 6 million shares

of its common stock at $13.00 per share, for total gross proceeds of approximately $78
million. On April 28, 2004, the Company issued an additional 0.1 million shares of its common
stock pursuant to the exercise by the underwriters of 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. The Company used the net proceeds of the aggregate offering of
approximately $73 million to repay the $40 million balance then-outstanding under its
revolving credit facility on March 31, 2004 and, from March 31, 2004 to December 31, 2004,
used approximately $33 million of the net proceeds to fund expenditures related to its tank
barge new build program, the acquisition and retrofit of two ocean-going tugs, the acquisition
of one fast supply vessel, and for general corporate purposes. The Company’s shares of
common stock trade on the New York Stock Exchange under the symbol “HOS”.

F-15

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8.

Incentive Compensation Plan

SFAS No. 123 “Accounting for Stock-Based Compensation” established financial
accounting and reporting standards for stock-based compensation plans. The Company’s
incentive compensation 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 compensation cost using
the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to
Employees.” 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.

The Company established an incentive compensation plan which provides the Company

with the ability to grant options for a maximum of 3.5 million 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.
During 2004, 2003 and 2002, options for approximately 168,000, 6,000 and 45,000 shares,
respectively, were exercised. All options granted expire five to ten years after the date of
grant, have an exercise price equal to or greater than the estimated market price of the
Company’s stock at the date of grant and vest over a two- to four-year period.

The following summarizes the option activity in the plan during 2004, 2003 and 2002 (in

thousands, except for per share data):

2004

2003

2002

Number of
Options
Outstanding

Outstanding, beginning of year . . . .
Granted . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . .

925
380
(168)
(19)

Outstanding, end of year . . . . . . . . .

1,118

Exercisable, end of year

. . . . . . . . .

572

Weighted-average fair value of
options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . .

Average
Price
Per
Share

$ 7.45
13.88
6.55
9.96

$ 9.73

Number of
Options
Outstanding

773
209
(6)
(51)

925

455

Average
Price
Per
Share

$ 6.40
11.30
6.63
7.15

$ 7.45

Average
Price
Per
Share

$6.28
6.63
4.88
6.63

$6.40

Number of
Options
Outstanding

696
133
(45)
(11)

773

363

$ 4.60

$ 3.55

$2.10

F-16

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a summary of outstanding stock options at December 31, 2004 (in

thousands, except for years and per share data):

Options Outstanding

Options
Exercisable

Range of exercise prices:
$ 4.63 to $ 6.63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11.20 to $13.83 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15.80 to $19.30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares

550
558
10

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,118

Weighted
Average
Remaining
Contractual
Life (Years)

Weighted
Average
Exercise
Price

Weighted
Average
Exercise
Price

Shares

6.19
8.83
9.78

7.54

$ 6.35
12.93
16.81 —

508
64

$ 6.33
11.29
—

9.73

572

6.88

If 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 net
income (loss) for the years ended December 31, 2004, 2003 and 2002 would have been as
indicated below (in thousands, except per share data):

Year Ended December 31,

2004

2003

2002

Net income (loss):

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,483) $11,190 $11.647
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(671)

(281)

(217)

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,154) $10,909 $11,430

Basic earnings (loss) per common share:

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.13) $ 0.84 $ 0.96
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.03)

(0.02)

(0.02)

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.16) $ 0.82 $ 0.94

Diluted earnings (loss) per common share:

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.13) $ 0.82 $ 0.94
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.03)

(0.02)

(0.02)

Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.16) $ 0.80 $ 0.92

The fair value of the options granted under the Company’s stock option plan during each
of the three years ended December 31, 2004, 2003 and 2002, was estimated using the Black-
Scholes pricing model using the minimum value method whereby volatility is not considered.
The other assumptions used were: an average interest rate of 4.05%, 3.84% and 3.83%,
respectively, and an expected life of five to seven years with no expected dividends for each
year.

F-17

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9.

Income Taxes

The net long-term deferred tax liabilities in the accompanying consolidated balance

sheets include the following components (in thousands):

December 31,

2004

2003

Deferred tax liabilities:

Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,606 $ 34,927
2,406
Deferred charges and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,451

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets:

Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57,057

37,333

(34,708)
(148)
(49)

(34,905)
95

(13,666)
(165)
(30)

(13,861)
95

Total deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,247 $ 23,567

The components of the income tax expense (benefit) follow (in thousands):

Year Ended December 31,

2004

2003

2002

Current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ —
Deferred tax expense (benefit)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,320)

6,858

7,139

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,320) $6,858 $7,139

At December 31, 2004, the Company had federal tax net operating loss carryforwards of

approximately $95 million. The carryforward benefit from the federal tax net operating loss
carryforwards begins to expire in 2018. The Company has a state tax net operating loss
carryforward of approximately $1.5 million related to one state tax jurisdiction. This
carryforward can only be utilized if the Company generates taxable income in the appropriate
tax jurisdiction. A valuation allowance of approximately $0.1 million has been established to
fully offset the deferred tax asset related to the state tax jurisdiction.

The following table reconciles the difference between the Company’s income tax

provision calculated at the federal statutory rate and the actual income tax provision (in
thousands):

Year Ended December 31,

2004

2003

2002

Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,331) $6,317 $6,575
275
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95
Non-deductible expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194
Foreign taxes and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(49)
57
3

235
47
259

$(1,320) $6,858 $7,139

F-18

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Commitments and Contingencies

Vessel Construction

At December 31, 2004, the Company was committed under vessel construction contacts
with two shipyards for the total of five double-hulled tank barges – two 135,000-barrel barges
and three 110,000-barrel barges. As of December 31, 2004, the remaining amount expected
to be incurred to complete construction with respect to the five barges was approximately
$53.2 million. The Company is obligated under the terms of these contracts to remit funds to
the shipyards based on vessel construction milestones, which are subject to change during
vessel construction.

Operating Leases

The Company is obligated under certain operating leases for marine vessels, office
space and vehicles. The Covington facility lease, which commenced on September 1, 2003,
provides for an initial term of five years with two five-year renewal options. The Brooklyn
facility lease, which expires on March 31, 2006, provides for an initial term of five years with
five one-year renewal options.

Future minimum payments under noncancelable leases for years subsequent to 2004

follow (in thousands):

Year Ended December 31,

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,074
446
351
259
—

$2,130

In addition, the Company leases marine vessels used in its operations under month-to-
month operating lease agreements. Total rent expense related to leases was approximately
$1.7 million; $1.0 million and $1.6 million during the years ended December 31, 2004, 2003
and 2002, respectively.

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.

F-19

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. Deferred Charges

Deferred charges include the following (in thousands):

Year Ended December 31,

2004

2003

2002

Deferred financing costs, net of accumulated amortization

of $7,487, $2,702 and $1,549, respectively . . . . . . . . . . . .

$ 5,616

$ 5,019

$ 6,019

Deferred drydocking costs, net of accumulated
amortization of $6,557, $5,330 and $4,352,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred equity offering costs and other . . . . . . . . . . . . . . . .

8,978
269

6,175
1,122

3,261
833

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,863

$12,316

$10,113

12. Related Party Transactions

During 2004 and 2003, the Company was committed under vessel construction contracts
to construct OSVs and double-hulled tank barges, and during 2002, to construct OSVs with a
shipyard affiliated with a former member of the Company’s Board of Directors. The Company
incurred approximately $16.3 million, $25.2 million, and $21.1 million, respectively, of
construction costs related to such vessels.

During 2004 the Company recorded approximately $0.8 million of OSV revenue and had
receivables of approximately $0.3 million as of December 31, 2004 from a customer, of which
a member of the Company’s Board of Directors is Chairman of the Board of Directors, Chief
Executive Officer and President.

13. Major Customers

In the years ended December 31, 2004, 2003 and 2002, revenues from the following

customers exceeded 10% of total revenues:

Year Ended December 31,

2004

2003

2002

Customer A (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Customer B (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11%
22% 23% 24%

—

(1) Offshore supply vessel segment.
(2) Tug and tank barge segment.

14. Segment Information

The Company provides marine transportation services through two business segments.
The Company operates new generation offshore supply vessels in the U.S. Gulf of Mexico,
Trinidad & Tobago and Mexico through its offshore supply vessel segment. The offshore
supply vessels principally support complex exploration and production projects by
transporting cargo to offshore drilling rigs and production facilities and provide support for

F-20

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 shows reportable segment information for the years
ended December 31, 2004, 2003 and 2002, reconciled to consolidated totals and prepared on
the same basis as the Company’s consolidated financial statements (in thousands).

Year Ended December 31,

2004

2003

2002

Operating Revenues:

Offshore supply vessels

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,886 $ 50,044 $43,702

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tugs and tank barges

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,407

75,293

12,358

2,676

62,402

46,378

50,465
6,503

56,968

43,206
5,205

36,020
10,187

48,411

46,207

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,261 $110,813 $92,585

Operating Expenses:

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,724 $ 22,786 $14,367
21,970
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28,796

24,019

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,520 $ 46,805 $36,337

Depreciation and Amortization:

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,876 $ 9,381 $ 5,830
6,466
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,259

8,209

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,135 $ 17,590 $12,296

General and Administrative Expenses:

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,342 $ 4,952 $ 3,840
5,841
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,779

8,417

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,759 $ 10,731 $ 9,681

Operating Income:

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,351 $ 25,283 $22,341
11,930
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,404

9,496

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,847 $ 35,687 $34,271

Capital Expenditures:

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,568 $ 92,054 $51,865
3,295
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
611
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49,842
968

12,453
1,309

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,378 $105,816 $55,771

F-21

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Year Ended December 31,

2004

2003

2002

Identifiable Assets:

Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $328,857 $276,567 $195,825
72,490
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,975
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119,980
11,734

68,589
20,086

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $460,571 $365,242 $278,290

Long-Lived Assets:

Offshore supply vessels

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $202,382 $221,332 $155,476
19,200
Foreign (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,744

54,978

Tugs and tank barges

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

257,360

258,076

174,676

95,301
5,875

101,176
2,683

46,444
10,470

56,914
1,725

42,357
8,440

50,797
759

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $361,219 $316,715 $226,232

(1) The Company’s vessels conduct operations in international areas. Vessels will routinely move to and from international and domestic
in

operating areas. As these assets are highly mobile,
international areas as of December 31, 2004, 2003 and 2002, respectively.
Included are amounts applicable to our Puerto Rico tug and tank barge operations, even though Puerto Rico is considered a possession of the
United States and the Jones Act applies to vessels operating in Puerto Rican waters.

the long-lived assets reflected above represent

the assets that were present

(2)

15. Candy Fleet Offshore Supply Vessel Acquisitions

On June 26, 2003, the Company acquired five 220-foot new generation offshore supply
vessels and their related business from Candy Marine Investment Corporation, an affiliate of
Candy Fleet Corporation (collectively, Candy Fleet), for approximately $45 million, comprised
of $39 million in cash and $6 million of common stock, for the purpose of diversifying its
offshore supply vessel fleet and expanding its service offering. 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
discussed in Note 6, and with part of the cash proceeds generated by the private placement
of its common stock discussed in Note 7. The new vessel names are HOS Explorer, HOS
Express, HOS Pioneer, HOS Trader, and HOS Voyager.

On August 6, 2003, the Company completed the acquisition of an additional 220-foot new

generation offshore supply vessel 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 approximately $13.5 million in proceeds relating to a $30 million
private placement of common stock and the satisfactory completion of a drydocking and
survey of the vessel in early August. The purchase price of approximately $9 million was
negotiated by the parties on an arms-length basis. The vessel was renamed the HOS

F-22

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Mariner. In connection with the acquisition, the Company was also granted options to
purchase three conventional 180-foot offshore supply vessels from Candy Fleet for an
aggregate exercise price of approximately $4.5 million. These options expired on August 6,
2004.

The purchase method was used to account for the acquisitions of the six new generation

offshore supply vessels from Candy Fleet. There were no intangible assets or goodwill
recorded as a result of the acquisitions. Included in the purchase price allocation was
approximately $0.3 million of acquisition costs comprised of legal, consulting and accounting
fees. As of December 31, 2003, the final purchase price was allocated to the acquired assets
based on the estimated fair values as follows (in thousands):

Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$54,437
183
(275)

Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$54,345

The unaudited pro forma income statement data from the Candy Fleet acquisition would

not have had a material impact on the Company’s consolidated results of operations for the
years ended December 31, 2003 and 2002, if the acquisition had taken place at the beginning
of such fiscal years.

16. Employment Agreements

The Company has employment agreements with certain members of its executive

management team. These agreements include, among other things, contractually stated base
level salaries and a structured bonus plan dependent upon the Company achieving EBITDA
and earnings per share targets for 2002, 2003 and 2004. In the event such a member of the
executive management team is terminated due to events as defined in such officer’s
agreement, the employee will continue to receive salary, bonus and other payments equal to
the full amount payable under the agreement. In February 2005, the Company and such
members of its executive management team agreed in principle to amend these agreements
to include a discretionary component of the bonus plan in lieu of the earnings per share
targets.

Effective February 27, 2002, the Company’s former Chairman of the Board and Chief
Executive Officer ceased serving in that capacity and his employment under the terms of his
agreement terminated. The Company accrued its contractual obligation as of the date of
termination and has since paid all amounts that were payable under such agreement.

F-23

HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Supplemental Selected Quarterly Financial Data (Unaudited) (in thousands, except

per share data):

The following table contains selected unaudited quarterly financial data from the

consolidated statements of operations for each quarter of fiscal 2004 and 2003. The operating
results for any quarter are not necessarily indicative of results for any future period.

Quarter Ended

Mar 31

Jun 30

Sep 30

Dec 31

Fiscal Year 2004

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,347 $30,288 $32,892 $ 37,784
10,186
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(1)
(10,058)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) per common share:

7,640
1,930

9,239
3,303

8,829
2,338

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.09 $ 0.16 $ (0.48)
(0.48)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.15

0.09

0.15

Fiscal Year 2003

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,347 $26,010 $28,215 $ 29,240
8,433
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,068
Earnings per common share:

10,358
4,290

8,276
2,159

8,620
2,673

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.35 $ 0.21 $ 0.15 $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.15

0.35

0.21

0.14
0.14

The sum of the four quarters may not equal annual results due to rounding.

(1) Refer to Note 6 for information about the loss on early extinguishment of debt recorded in the fourth quarter ended December 31, 2004

18. Subsequent Events

On January 14, 2005, the Company redeemed the remaining balance of $15.5 million in

aggregate principal amount of its 10.625% Senior Notes due 2008 (see Note 6). The
redemption was funded with proceeds raised in the Company’s November 2004 issuance of
$225 million in aggregate principal amount of 6.125% Senior Notes due 2014.

F-24

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act

of 1934, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Covington, the State of
Louisiana, on March 11, 2005.

HORNBECK OFFSHORE SERVICES, INC.

By:

/S/ TODD M. HORNBECK

Todd M. Hornbeck
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

Signature

Title

Date

/S/ TODD M. HORNBECK

(Todd M. Hornbeck)

/S/

JAMES O. HARP, JR.
(James O. Harp, Jr.)

President, Chief Executive Officer,
Secretary and Director (Principal
Executive Officer)

March 11, 2005

Executive Vice President and

March 11, 2005

Chief Financial Officer (Principal
Financial and Accounting
Officer)

/S/ BERNIE W. STEWART

Director and Chairman of the

March 11, 2005

(Bernie W. Stewart)

Board

/S/ LARRY D. HORNBECK

Director

March 11, 2005

(Larry D. Hornbeck)

/S/ BRUCE W. HUNT

Director

March 11, 2005

(Bruce W. Hunt)

/S/ PATRICIA B. MELCHER

Director

March 11, 2005

(Patricia B. Melcher)

/S/ DAVID A. TRICE
(David A. Trice)

Director

March 11, 2005

/S/ ANDREW L. WAITE

Director

March 11, 2005

(Andrew L. Waite)

S-1

CERTIFICATION

Exhibit 31.1

I have reviewed this Annual Report on Form 10-K of Hornbeck Offshore Services, Inc.;

I, Todd M. Hornbeck, certify that:
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information

included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
report;

4. The registrant’s other certifying officer and I are responsible for establishing and

maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in
which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures

and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent

evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of

internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial
information; and

b) Any fraud, whether or not material, that involves management or other employees

who have a significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2005

/s/ Todd M. Hornbeck

Todd M. Hornbeck
President and Chief Executive Officer
(Principal Executive Officer)

CERTIFICATION

Exhibit 31.2

I have reviewed this Annual Report on Form 10-K of Hornbeck Offshore Services, Inc.;

I, James O. Harp, Jr., certify that:
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information

included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
report;

4. The registrant’s other certifying officer and I are responsible for establishing and

maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in
which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures

and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent

evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of

internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial
information; and

b) Any fraud, whether or not material, that involves management or other employees

who have a significant role in the registrant’s internal control over financial reporting.

Date: March 11, 2005

/s/ James O. Harp, Jr.

James O. Harp, Jr.
Executive Vice President and
Chief Executive Officer
(Principal Financial Officer)

Corporate Information

Board of Directors

Executive Ofﬁcers

Standing L to R: David A. Trice, Larr y D. Hornbeck, Andrew L. Waite,
Bruce W. Hunt, Bernie W. Stewart, R. Clyde Parker, Jr.
Seated: Todd M. Hornbeck, Patricia B. Melcher

Standing L to R: Carl G. Annessa, Samuel A. Giberga,
James O. Harp, Jr. Seated: Todd M. Hornbeck

Bernie W. Stewart 1,2,3,4
Former President
R & B Falcon Drilling U.S.
Spicewood, Texas

Andrew L. Waite 3,4
Managing Director
SCF Partners
Houston, Texas

Todd M. Hornbeck
President and
Chief Executive Ofﬁcer
Hornbeck Offshore Services, Inc.
Covington, Louisiana

David A. Trice 3,4
Chairman, President and
Chief Executive Ofﬁcer
Newﬁeld Exploration Company
Houston, Texas

Larry D. Hornbeck
Former Chairman, President
and Chief Executive Ofﬁcer of
the original Hornbeck Offshore
Services, Inc. (1980 – 1996)
Lovelady, Texas

Patricia B. Melcher 2,3
President
Allegro Capital
Management, Inc.
Houston, Texas

Bruce W. Hunt 2,4
President
Petro-Hunt LLC
Dallas, Texas

R. Clyde Parker, Jr.
Advisory Director to the HOS Board
Shareholder
Winstead Sechrest & Minick P.C.
The Woodlands, Texas

Todd M. Hornbeck
President and
Chief Executive Ofﬁcer

James O. Harp, Jr.
Executive Vice President
and Chief Financial Ofﬁcer

Carl G. Annessa
Executive Vice President
and Chief Operating Ofﬁcer

Samuel A. Giberga
Senior Vice President
and General Counsel

1 Chairman of the Board
2 Audit Committee Member (2004)
3 Compensation Committee Member (2004)
4 Nominating/Corporate Governance Committee (2004)

Corporate Headquarters
Hornbeck Offshore Services, Inc.
103 Northpark Boulevard, Suite 300,
Covington, Louisiana  70433

Tel 985-727-2000 Fax 985-727-2006
Internet www.hornbeckoffshore.com
Email ir@hornbeckoffshore.com

Transfer Agent and Registrar
Mellon Investor Services, LLC
85 Challenger Road
Ridgeﬁeld Park, NJ 07660

Tel 800-635-9270
Internet www.melloninvestor.com
Email shrrelations@melloninvestors.com

Financial Information
Stockholders and other interested parties
desiring information about Hornbeck
Offshore Services, Inc. should write to
the Investor Relations Department or call
985-727-2000. Additional information about
the company, including its ﬁlings with the
Securities and Exchange Commission, may
also be obtained without charge by
visiting the Company’s website at
w w w.hornbeckoffshore.com

Legal Counsel
Winstead Sechrest & Minick P.C.
Houston, Texas

Auditors
Ernst & Young LLP
New Orleans, Louisiana

Stock Exchange Listing
The Company’s shares of common stock
are listed on the New York Stock Exchange
(NYSE) under the symbol “HOS.” Trading
of its shares on the NYSE commenced
March 26, 2004.

Annual Stockholders’ Meeting
The 2005 Annual Meeting of Stockholders
will be held on Tuesday May 3, 2005, at
9:00 a.m. (Central) at the Pan-American Life
Conference Center located at 601 Poydras
Street, New Orleans, Louisiana, 70130.

Leading the next generation, the newly constructed
Energy 13501on its maiden voyage in March 2005, 
powered by the recently acquired 6,140 horsepower
ocean-going tug, the Liberty Service.

103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433
tel 985.727.2000 fax 985.727.2006 www.hornbeckoffshore.com