PROSPECTUS
2,493,104 SHARES
[LOGO] CAL DIVE INTERNATIONAL, INC.
COMMON STOCK
------------------------
ALL OF THE 2,493,104 SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
SELLING SHAREHOLDERS. THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SHARES
OF COMMON STOCK. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY'S COMMON
STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CDIS." ON MAY
21, 1998 THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET WAS $33 7/8 PER SHARE.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 13 HEREOF FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $33 1/2 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
--------------- --------------------- ---------------------
<S> <C> <C> <C>
PER SHARE................. $33.500 $1.675 $31.825
TOTAL(3).................. $83,518,984 $4,175,949 $79,343,035
</TABLE>
- ------------
(1) THE COMPANY AND THE SELLING SHAREHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITERS."
(2) THE EXPENSES OF THE OFFERING, ESTIMATED AT $330,000, WILL BE PAYABLE BY
THE COMPANY.
(3) CERTAIN OF THE SELLING SHAREHOLDERS HAVE GRANTED THE UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO
AN AGGREGATE OF 373,966 ADDITIONAL SHARES, AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS, FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL,
THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, AND
PROCEEDS TO SELLING SHAREHOLDERS WILL BE $96,046,845, $4,802,342 AND
$91,244,503, RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN, AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY VINSON & ELKINS L.L.P., COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT THE
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT MAY 28, 1998 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y. AGAINST PAYMENT THEREFOR IN
IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY DEAN WITTER RAYMOND JAMES & ASSOCIATES, INC.
SIMMONS & COMPANY INTERNATIONAL
MAY 21, 1998
<PAGE>
-------------------------------------
[Picture of Uncle John Vessel]
-------------------------------------
The UNCLE JOHN is a dynamically positioned, multi-service vessel, which is
capable of providing well intervention services and supporting full field
development activities in the Deepwater Gulf of Mexico.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. IN
CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS,
IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE
"UNDERWRITERS."
2
<PAGE>
-------------------------------------
[Schematic depicting the services
provided by the Company at various
water depths]
-------------------------------------
FREQUENTLY USED TERMS:
4-POINT: Anchors set (two each) from the fore and aft position of the
vessel.
DECOMMISSIONING: The process, supervised by the MMS, of plugging the well,
capping and burying the pipelines serving the field, removing the platform and
clearing the site of all debris.
DIVE SUPPORT VESSEL (DSV): Specially equipped vessel which performs
services and acts as an operational base for divers, ROVs and specialized
equipment.
DYNAMIC POSITIONING (DP): Computer-directed thruster systems that use
satellite-based positioning combined with other positioning technologies to
ensure the proper counteraction to wind, current and wave forces enabling the
vessel to maintain position without the use of anchors. Two or more DP systems
are used to provide the redundancy necessary to support safe deployment of
divers and ROV equipment.
MOONPOOL: An opening in the center of a vessel through which a SAT diving
system or ROV may be deployed, allowing the safest diver or ROV deployment in
adverse weather conditions.
REMOTELY OPERATED VEHICLE (ROV): Robotic vehicles used to complement,
support and increase the efficiency of diving and subsea operations and for
tasks beyond the capability of manned diving operations.
SATURATION (SAT) DIVING: Saturation diving involves divers working from
special chambers for extended periods at a pressure equivalent to the depth of
the work site. SAT diving is required for work in water depths greater than 300
feet.
<PAGE>
SPOT MARKET: Market unique to the Gulf of Mexico characterized by projects
generally short in duration and of a turnkey nature. These projects require
constant rescheduling and the availability and interchangeability of multiple
vessels.
FOR FURTHER INFORMATION ON COMMONLY USED TERMINOLOGY IN CDI'S INDUSTRY, SEE
"BUSINESS -- THE INDUSTRY."
-------------------------------------
[Picture of Witch Queen Vessel]
-------------------------------------
The WITCH QUEEN is a 278-foot
dynamically positioned DSV that has
SAT diving and ROV capabilities for
subsea construction projects at any
water depth.
-------------------------------------
[Picture of Platforms at Block 231]
-------------------------------------
EAST CAMERON BLOCK 231 is one of 18
natural gas and oil properties owned
by Energy Resource Technology, Inc.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Available Information................ 4
Prospectus Summary................... 5
Risk Factors......................... 13
The Company.......................... 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Price Range of Common Stock.......... 18
Capitalization....................... 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 28
Management........................... 45
Certain Relationships and Related
Transactions....................... 50
Principal and Selling Shareholders... 52
Description of Capital Stock......... 53
Shares Eligible for Future Sale...... 56
Underwriters......................... 57
Legal Matters........................ 58
Experts.............................. 58
Index to Consolidated Financial
Statements......................... F-1
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company with
the Commission pursuant to the informational requirements of the Exchange Act
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington,
D.C. 20549, as well as at the Commission's Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company; the address of such site
is http://www.sec.gov. The Company's Common Stock (the "Common Stock") is
quoted on the Nasdaq National Market. Reports, proxy and information statements
and other information concerning the Company can also be inspected at the Nasdaq
National Market at 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, omits certain of the
information contained in the Registration Statement and the exhibits and
schedules thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission thereunder. For further information
with respect to the Company and its Common Stock, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus regarding the contents of any agreement or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such agreement
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, can be inspected and copied at the
Commission's offices as described above.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED. UNLESS THE CONTEXT INDICATES OTHERWISE, ANY
REFERENCE IN THIS PROSPECTUS TO THE "GULF OF MEXICO" OR THE "GULF" REFERS TO
THE U.S. GULF OF MEXICO, AND "CDI", "CAL DIVE" OR THE "COMPANY" REFERS TO
CAL DIVE INTERNATIONAL, INC. AND ITS PREDECESSORS, TOGETHER WITH ITS WHOLLY
OWNED SUBSIDIARIES, INCLUDING ENERGY RESOURCE TECHNOLOGY, INC. ("ERT"), ITS
INTEREST IN THE VENTURE WITH COFLEXIP, QUANTUM OFFSHORE CONTRACTORS, L.L.C.
("QUANTUM"), AND ITS EQUITY OWNERSHIP IN AQUATICA, INC. ("AQUATICA").
THE COMPANY
GENERAL
CDI is a leading subsea contractor providing construction, maintenance and
decommissioning services to the oil and gas industry from the shallowest to the
deepest waters in the Gulf of Mexico. Over three decades, CDI has developed a
reputation for innovation in underwater construction techniques and equipment.
With its diversified fleet of 12 vessels, CDI performs services in support of
drilling, well completion and construction projects involving pipelines,
production platforms and risers and subsea production systems. Through ERT, the
Company acquires and operates mature offshore natural gas and oil properties to
provide customers a cost-effective alternative to the decommissioning process.
In 1997, CDI derived 85% of its revenues from its subsea contracting operations
and 15% from ERT's production of natural gas and oil. The Company's customers
include major and independent natural gas and oil producers, pipeline
transmission companies and offshore engineering and construction firms.
In the shallower waters of the Gulf (depths less than 1,000 feet), CDI
performs traditional subsea services which include air and saturation ("SAT")
diving in support of marine construction activities. CDI is uniquely qualified
to provide these services in the Gulf "spot market" where projects are
generally turnkey in nature, short in duration (two to 30 days) and require
constant rescheduling and availability of multiple vessels. Each of the
Company's 12 vessels perform these traditional services, six of which support
SAT diving and four of these have dynamic positioning ("DP") systems. CDI has
the largest fleet of SAT and DP vessels permanently deployed in the Gulf. In
addition, the Company's highly qualified personnel have the technical and
operational experience to manage turnkey projects to satsify customers'
requirements and achieve CDI's targeted profitability. Leases awarded in the
Gulf's shallower waters between 1993 and 1996 more than doubled pushing offshore
rig utilization in the Gulf over 90%. Management believes demand for CDI's
traditional services will continue to increase because the need for marine
construction services typically follows drilling activity by six to 18 months.
As the activity in the Gulf in water depths greater than 1,000 feet (the
"Deepwater") continues to increase, technological challenges inherent to this
environment are requiring subsea contractors to develop new technology. Through
its Deepwater Technical Services Group, CDI provides integrated solutions to
satisfy its customers' Deepwater construction and maintenance needs. With a
fleet of six Deepwater-capable vessels, CDI has the most technically diverse
fleet permanently deployed in the Gulf for the delivery of these subsea
solutions. This fleet includes the DP multi-service vessel ("MSV"), the UNCLE
JOHN, three DP vessels, the WITCH QUEEN, the BALMORAL SEA and the MERLIN, and
the Deepwater service barge, the SEA SORCERESS. Coflexip has recently chartered
the sixth Deepwater vessel, the CSO CONSTRUCTOR, to Quantum, the Company's joint
venture with Coflexip. The CSO CONSTRUCTOR will also be available to CDI,
subject to Quantum's needs. The alliance with Coflexip and other alliances with
offshore service and equipment providers enhance CDI's ability to provide both
full field development and life of field services. In 1997, the Deepwater Gulf
experienced record lease sales, increased drilling activity, new discoveries,
increased subsea development and advances in drilling and completion technology.
The Company believes that the Deepwater Gulf of Mexico will continue to be among
the most active exploration and development areas in the world.
5
<PAGE>
The Company is a leader in the decommissioning of mature oil and gas
properties in the shallow water Gulf of Mexico. According to Offshore Magazine,
CDI performed 32% of all structure removal projects in the Gulf of Mexico from
January 1, 1996 through June 30, 1997, with the next closest competitor at 13%.
Through its subsidiary ERT, the Company acquires, produces and develops mature
properties prior to decommissioning and as such is one of few companies with the
combined attributes of financial strength, reservoir engineering, operations
expertise and company-owned salvage assets that is acquiring mature properties
in the Gulf of Mexico.
The Company traces its origins to California Divers Inc., a company which
pioneered the use of mixed gas diving in the early 1960s when oilfield
exploration off the Santa Barbara coast moved to water depths beyond 250 feet.
Cal Dive commenced operations in the Gulf of Mexico in 1975. In recent years,
CDI has experienced increased demand for its services due to the increased
offshore drilling and production activities in the Gulf, particularly in the
Deepwater. The Company's growth strategy has consisted of three basic elements:
(i) identifying niche markets that are underserviced or where no service exists,
(ii) developing the technical expertise to service such markets and (iii)
acquiring assets or seeking business alliances which fill the market gap. As a
result, CDI's revenues have increased by a compound annual growth rate of 71%
from $37.5 million in 1995 to $109.4 million in 1997. Similarly, net income has
increased by a compound annual growth rate of 133%, from $2.7 million in 1995 to
$14.5 million in 1997. Revenues for the three months ended March 31, 1998 were
$33.2 million, an 80% increase from $18.4 million recorded for the first quarter
of 1997. Net income of $5.2 million for the three months ended March 31, 1998
represented a 178% increase compared to $1.9 million recorded for the first
quarter of 1997.
COMPANY STRENGTHS
DIVERSIFIED FLEET OF VESSELS
CDI's fleet provides a full complement of subsea construction, maintenance
and decommissioning project capabilities. CDI distinguishes itself by having the
largest fleet of vessels with fully redundant DP systems permanently deployed in
the Gulf. The services provided by the Company's vessels are both overlapping
and complementary in a number of market segments, enabling the Company to deploy
its vessels to areas of highest utility and margin potential in all water depths
where development is currently contemplated.
DEEPWATER TECHNICAL SERVICES
The Company has established a unique niche by assembling the specialized
assets, technical personnel and exclusive alliance agreements that provide a
cost-effective solution to the rising demand for Deepwater services. As a
result, the Company is able to meet the fast-track requirements of Deepwater
development projects. In April 1997, CDI and Coflexip established Quantum to
undertake Deepwater construction projects and provide integrated services and
advanced technology to its customers by drawing upon the capabilities and
strengths of both companies. Coflexip chartered the DP vessel CSO CONSTRUCTOR to
Quantum in 1998. The CSO CONSTRUCTOR will also be available to CDI, subject to
Quantum's needs.
MAJOR PROVIDER OF SATURATION DIVING SERVICES
Management believes that CDI is the largest provider of SAT diving services
in the Gulf of Mexico. All of CDI's SAT diving vessels have moonpool systems,
which allow safe diver deployment in adverse weather conditions. Because
Deepwater field developments must be tied into the existing Gulf infrastructure,
management believes there will be increasing demand for the Company's SAT diving
services.
EXPERIENCED PERSONNEL AND TURNKEY CONTRACTING
The Company's highly qualified personnel enable it to compete effectively
in the Gulf's unique "spot market" for offshore construction projects and to
manage turnkey projects to satisfy customer needs and achieve CDI's targeted
profitability. The Company believes the recognized skill of its personnel
positions it to capitalize on the trend in the oil and gas industry towards
outsourcing additional responsibility to contractors.
6
<PAGE>
LEADER IN SHALLOW WATER SALVAGE OPERATIONS
The Company has established a leading position in the decommissioning of
facilities in the shallow water Gulf of Mexico, performing 32% of all structure
removal projects from January 1, 1996 to June 30, 1997. The Company expects the
demand for decommissioning services to increase due to the significant number of
platforms that must be removed in accordance with government regulations. Over
75% of the 3,800 platforms in the Gulf are over ten years old, and there are
approximately 15,000 wells that must ultimately be decommissioned.
OPERATION OF MATURE NATURAL GAS AND OIL PROPERTIES
CDI is one of the few companies with the combined attributes of financial
strength, reservoir engineering, operations expertise and company-owned salvage
assets that is acquiring mature properties in the Gulf of Mexico. These
attributes result in significant strategic and cost advantages. The Company has
personnel experienced in geology and reservoir and production engineering which
allows ERT to maximize production of the properties until they are
decommissioned.
GROWTH STRATEGY
CAPTURE A SIGNIFICANT SHARE OF THE DEEPWATER MARKET
As the activity in the Deepwater Gulf of Mexico continues to increase,
there exists a growing need for new applications of subsea services and
technology and for subsea contractors to develop and deploy such technology.
Customers purchasing these services typically prefer a specialized vessel with
redundant DP systems as a work platform. CDI has the largest fleet of such
vessels operating in the Gulf. The Company believes that well completion, subsea
installation and infield connection projects have become more critical in an era
of limited availability of Deepwater drilling equipment. Through its Deepwater
Technical Services Group, the Company provides integrated solutions to satisfy
its customers' Deepwater subsea construction and maintenance needs. The
Company's MSV UNCLE JOHN has the capacity to undertake certain well completion
activities at a lower day rate than a semisubmersible drilling rig, thereby
reducing cost to the operator and releasing the drilling rig for other projects.
CDI has negotiated alliance agreements with a number of specialized contractors,
as well as establishing Quantum with Coflexip, to provide the full range of
services necessary for Deepwater subsea construction projects. The objective of
this strategy is to increase the proportion of the Deepwater field development
expenditures captured by Cal Dive while reducing the project duration and
overall cost to the operator.
To gain a greater share of the Deepwater market, the Company is designing
the first sixth-generation multi-service vessel, the MSV 3500. The vessel would
be a new generation of the MSV UNCLE JOHN semisubmersible design and unique due
to the absence of lower hull cross bracing. Planned variable deck load of
approximately 4,000 metric tons and a large deck area would make the vessel
particularly well suited for large offshore construction projects in the
Deepwater. High transit speed would allow it to move rapidly from one location
to another. CDI is currently attempting to secure long-term utilization
contracts and industry partners for the vessel. There can be no assurance that
the MSV 3500 will be built or that such contracts or industry partners will be
obtained.
CAPITALIZE ON SYNERGIES WITH COFLEXIP
CDI entered into a strategic alliance with Coflexip to strengthen its
position in the Deepwater Gulf and to respond to the trend toward full field
development services. Management believes that Coflexip and CDI together offer
complementary products and services which significantly expand CDI's ability to
provide full field development and life of field services. A product of this
alliance is Quantum which was formed in April 1997. Coflexip is a world leader
in the design and manufacture of flexible pipe and umbilicals and is one of the
leading subsea construction contractors. Coflexip operates 10 of the 31 globally
competitive Deepwater construction vessels, which is the largest concentration
of Deepwater vessels in the world. Headquartered in Paris, France,
7
<PAGE>
Coflexip employs approximately 3,900 people on five continents. In 1997,
Coflexip had sales of $1.2 billion and total assets of $1.25 billion at
year-end.
FOCUS ON THE GULF OF MEXICO
Cal Dive intends to maintain its focus on the Gulf of Mexico where the
Company is well positioned to respond to rising market demand for services in
all water depths. In recent years there have been significant new field
discoveries in the Deepwater Gulf of Mexico, including 11 in 1997. These
Deepwater discoveries are resulting in increased demand for CDI's services, as
reflected in both continued high vessel utilization rates and increased
operating margins. The 1997 and 1998 Gulf of Mexico lease sales by the Minerals
Management Service ("MMS") attracted record bidding levels both in terms of
the number of leases receiving bids and the amount of capital exposed, including
a record level of interest in Deepwater blocks. Even though 20% less acreage was
offered in the 1998 Central Gulf lease sale, the total capital exposed was $1.4
billion in 1998 versus $1.2 billion for the prior year. The anticipated increase
in drilling activity following these record lease sales should result in
increased demand for CDI's services.
RESPOND TO SHALLOWER WATER FAST-TRACK FIELD DEVELOPMENT
Management believes that the large amount of leased acreage in the
shallower waters of the Gulf and the shortages of drilling rigs and completion
equipment will create a demand for fast-track drilling and development
solutions. CDI's recent acquisitions of assets, its skilled personnel and its
technical expertise put the Company in a strong competitive position to be able
to respond to the vessel and other equipment needs for developing new oil or
natural gas fields. CDI's strategic alliances also provide many of the
non-vessel assets required in offshore drilling and production. CDI intends to
apply these assets, technologies and capabilities in a cost-effective manner to
shallower water projects to satisfy the fast-track drilling and development
needs of a broader base of customers.
EXPAND DECOMMISSIONING AND NATURAL GAS AND OIL OPERATIONS
Management believes CDI's reputation in the industry and its experience in
decommissioning projects make it a preferred buyer of mature natural gas and oil
properties. In the last three years, ERT has purchased properties from Unocal,
Texaco, Conoco, Sonat and Total. CDI is pursuing a number of opportunities to
expand the number of mature offshore properties for which the Company will bid.
In addition, the Company will continue, on a selective basis, to acquire
non-operated working interests in fields where there is the potential that Cal
Dive will be awarded the decommissioning work.
RECENT DEVELOPMENTS
1998 FIRST QUARTER FINANCIAL RESULTS
During the three months ended March 31, 1998, CDI's revenues increased 80%
to $33.2 million compared to $18.4 million for the three months ended March 31,
1997. Gross profit of $10.6 million for the first quarter of 1998 nearly doubled
the $5.4 million of gross profit recorded in the first quarter of 1997. In
addition, net income of $5.2 million for the three months ended March 31, 1998
represented a 178% improvement over the $1.9 million of net income for the
comparable period in 1997.
OTHER DEVELOPMENTS SINCE THE INITIAL PUBLIC OFFERING
Since CDI's initial public offering in July 1997, CDI has (i) expanded and
strengthened its relationship with Coflexip; (ii) added two deepwater vessels,
the MERLIN and the SEA SORCERESS, and taken delivery of two Triton ROVs; (iii)
purchased a significant minority equity stake in Aquatica, a shallow water
diving company; (iv) acquired interests in four mature offshore producing oil
and gas fields; and (v) added to its management team.
o EXPANDED AND STRENGTHENED COFLEXIP RELATIONSHIP. As part of its
strategy in the Deepwater Gulf of Mexico, CDI established Quantum with
its venture partner Coflexip in April 1997. Quantum will pursue
8
<PAGE>
full field service projects in the Gulf utilizing the services of both
companies. Coflexip has chartered the DP vessel, the CSO CONSTRUCTOR,
to Quantum in 1998. The CSO CONSTRUCTOR will also be available to CDI,
subject to Quantum's needs. The financial results of the joint venture
will be consolidated into CDI's financial statements.
o NEW VESSELS AND ROVS.
In December 1997, CDI acquired a DP ROV support vessel, the MERLIN.
This vessel is specifically designed for Deepwater ROV intervention,
survey, and coring. Twin moonpools facilitate deployment and recovery
of ROVs in rough seas.
In October 1997, CDI acquired the SEA SORCERESS, a 374 foot Deepwater
service barge with a 6-point mooring system and a large moonpool. The
vessel has a deck load capacity of 10,000 tons and is certified to
handle 65,000 barrels of hydrocarbon storage.
In May and June 1997, CDI took delivery of two Triton XL ROVs, the
newest generation of Deepwater work class ROVs. CDI's goal is to
utilize these units in support of Deepwater projects and its turnkey
business rather than to become a volume provider of ROVs.
o AQUATICA INVESTMENT. In February 1998, CDI purchased a significant
minority stake in Aquatica, a new shallow water diving company formed
by Sonny Freeman, the former Chief Operating Officer of American
Oilfield Divers. This investment allows CDI to increase its
participation in the shallow water market segment, which is
experiencing strong demand, while maintaining the Company's focus on
its Deepwater strategy.
o PURCHASE OF MATURE GAS PROPERTIES. In November 1997 and January 1998,
ERT acquired interests in four mature properties located offshore of
Louisiana, which combined have 12 producing wells and 11 structures.
o MANAGEMENT SUCCESSION. As part of a three year succession plan, Jerry
Reuhl, CDI's Chairman since 1990, intends to resign his position and
become a consultant to CDI in the second quarter of 1998. Owen Kratz,
who became President of CDI in 1993 and Chief Executive Officer in
April 1997, is expected to also assume the role of Chairman. In
January 1998, Martin Ferron became Chief Operating Officer of CDI. He
has over 16 years of experience in the oilfield industry, including
the last seven years in senior management positions with J. Ray
McDermott and Oceaneering International, Inc. in Europe.
9
<PAGE>
THE OFFERING
Common Stock offered by:
The Selling Shareholders........ 2,493,104 shares(1)
Common Stock to be outstanding after 14,544,831 shares(2)(3)
the Offering.......................
Use of proceeds...................... The Company will not receive any proceeds
from the sale of Common Stock offered
hereby.
Nasdaq National Market Symbol........ CDIS
- ------------
(1) Does not include 373,966 shares which may be sold by certain Selling
Shareholders pursuant to the Underwriters' over-allotment option. See
"Principal and Selling Shareholders" and "Underwriters."
(2) Excludes 1,059,500 shares issuable upon exercise of outstanding options. See
"Management -- Compensation Pursuant to Plans."
(3) Excludes shares which may be issued to shareholders of Aquatica. Dependent
upon various pre-conditions, the shareholders of Aquatica have the right to
convert their shares into Cal Dive shares at a ratio based on a formula
which, among other things, must result in accretion to Cal Dive's earnings
per share.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following summary financial and operating data is qualified in its
entirety by the more detailed information appearing in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Subsea and salvage............ $ 32,747 $ 63,870 $ 92,860 $ 13,588 $ 29,342
Natural gas and oil
production.................. 4,777 12,252 16,526 4,856 3,815
--------- --------- ---------- --------- ----------
Total revenues........... 37,524 76,122 109,386 18,444 33,157
--------- --------- ---------- --------- ----------
Gross profit....................... 8,849 22,086 33,685 5,423 10,563
Operating income................... 3,917 13,795 22,489 3,207 7,723
Income before taxes................ 3,721 13,014 22,281 2,876 8,065
Net income......................... $ 2,674 $ 8,435 $ 14,482 $ 1,885 $ 5,243
Diluted net income per share....... $ .24 $ .75 $ 1.09 $ .17 $ .35(2)
OTHER DATA:
Net cash provided by (used in):
Operating activities.......... $ 11,996 $ 7,645 $ 22,294 $ 10,053 $ 9,969
Investing activities.......... (19,584) (27,300) (28,288) (3,148) (11,868)
Financing activities.......... 7,475 19,700 18,815 (6,000) 45
EBITDA(1).......................... 6,650 19,017 29,916 5,039 9,839
Depreciation and amortization...... 2,794 5,257 7,512 1,845 1,996
Capital expenditures............... 16,857 27,289 28,936 3,017 6,789
OPERATING DATA:
Number of Vessels (at end of
period):
DP MSV........................ 0 1 1 1 1
DP DSVs....................... 2 2 3 2 3(3)
DSVs.......................... 5 5 5 5 5
Other......................... 1 1 2 1 2
--------- --------- ---------- --------- ----------
Total vessels............ 8 9 11 9 11
Natural Gas & Oil Properties:
Producing properties
acquired.................... 7 5 2 0 4
Total properties.............. 9 14 14 14 18
Natural Gas & Oil Production:
Gas (MMcf).................... 2,382 4,310 5,385 1,519 1,489
Oil (MBbls)................... 33 38 51 10 18
</TABLE>
- ------------
(1) As used herein, EBITDA represents earnings before net interest and other
expense, taxes, depreciation and amortization. EBITDA is frequently used by
security analysts and is presented here to provide additional information
about the Company's operations. EBITDA should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a more appropriate measure
of liquidity.
(2) Includes the impact of the change in the Company's method of accounting for
drydock certification and inspection costs of $.05 per share. See Note 2 to
the Consolidated Financial Statements.
(3) Does not include the recent charter of the CSO CONSTRUCTOR and its
availability to CDI.
11
<PAGE>
AS OF
MARCH 31,
1998
---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 11,171
Working capital................. 24,270
Total assets.................... 140,307
Long-term debt.................. --
Shareholders' equity............ 94,727
SUMMARY NATURAL GAS AND OIL RESERVE DATA
The following table sets forth summary data with respect to the Company's
estimated proved natural gas and oil reserves and related estimated future net
revenue at December 31, 1997, and is based upon the report of Miller & Lents,
Ltd. ("Miller & Lents"), independent petroleum engineers. For additional
information relating to the Company's natural gas and oil reserves, see "Risk
Factors -- Uncertainty of Estimates of Oil and Gas Reserves" and
"Business -- Decommissioning and Natural Gas and Oil Operations" and the
Supplemental Oil and Gas Disclosures included in Note 11 of the Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
TOTAL PROVED(1)
----------------------
(DOLLARS IN THOUSANDS)
Estimated Proved Reserves:
Natural Gas (MMcf)................. 22,245
Oil and Condensate (MBbls)......... 200
Standardized measure of discounted
future net cash flows(2)........... $ 19,760
- ------------
(1) East Cameron Blocks 231 and 353 purchased in January 1998 described below
are not included in the above December 31, 1997 summary. The estimated
proved reserves for these blocks as of the end of 1997 were 6,504 MMcf of
natural gas and 58 MBbls of oil.
(2) The standardized measure of discounted future net cash flows attributable to
the Company's reserves was prepared using constant prices as of December 31,
1997, discounted at 10% per annum.
12
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. THIS
PROSPECTUS INCLUDES CERTAIN STATEMENTS THAT MAY BE DEEMED "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE EXCHANGE ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL
FACTS, INCLUDED IN THIS PROSPECTUS THAT RELATE TO BUSINESS PLANS OR STRATEGIES,
PROJECTED OR ANTICIPATED BENEFITS OR OTHER CONSEQUENCES OF SUCH PLANS OR
STRATEGIES, PROJECTED OR ANTICIPATED BENEFITS FROM ACQUISITIONS MADE BY OR TO BE
MADE BY CDI OR PROJECTIONS INVOLVING ANTICIPATED REVENUES, EARNINGS, OR OTHER
ASPECTS OF OPERATING RESULTS ARE FORWARD-LOOKING STATEMENTS. THE WORDS
"EXPECT," "BELIEVE," "ANTICIPATE," "PROJECT," "ESTIMATE," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY
CAUTIONS READERS THAT SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
OR EVENTS AND ARE SUBJECT TO A NUMBER OF FACTORS THAT MAY TEND TO INFLUENCE THE
ACCURACY OF THE STATEMENTS AND THE PROJECTIONS UPON WHICH THE STATEMENTS ARE
BASED, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED BELOW. AS NOTED ELSEWHERE,
ALL PHASES OF CDI'S OPERATIONS ARE SUBJECT TO A NUMBER OF UNCERTAINTIES, RISKS
AND OTHER INFLUENCES, MANY OF WHICH ARE OUTSIDE THE CONTROL OF CDI, AND ANY ONE
OR A COMBINATION OF WHICH COULD MATERIALLY AFFECT THE RESULTS OF CDI'S
OPERATIONS AND THE ACCURACY OF FORWARD-LOOKING STATEMENTS MADE BY CDI. THE
FOLLOWING DISCUSSION OUTLINES CERTAIN FACTORS THAT COULD AFFECT CDI'S
CONSOLIDATED RESULTS OF OPERATIONS FOR 1998 AND BEYOND AND CAUSE THEM TO DIFFER
MATERIALLY FROM THOSE THAT MAY BE SET FORTH IN FORWARD-LOOKING STATEMENTS MADE
BY OR ON BEHALF OF THE COMPANY.
VOLATILITY OF OIL AND NATURAL GAS PRICES AND CYCLICALITY OF THE OIL AND GAS
INDUSTRY
The Company's business is substantially dependent upon the condition of the
oil and gas industry and, in particular, the willingness of oil and gas
companies to make capital expenditures on exploration, drilling and production
operations offshore. The level of capital expenditures is generally dependent on
the prevailing view of future oil and gas prices, which are influenced by
numerous factors affecting the supply and demand for oil and gas, including
worldwide economic activity, interest rates and the cost of capital,
environmental regulation, tax policies, coordination by the Organization of
Petroleum Exporting Countries ("OPEC"), the cost of exploring for and
producing oil and gas, the sale and expiration dates of offshore leases in the
United States and overseas, the discovery rate of new oil and gas reserves in
offshore areas and technological advances. Oil and gas prices and the level of
offshore drilling and production activity have been characterized by significant
volatility in recent years. Although the level of offshore exploration, drilling
and production activity in the Gulf has not declined, there can be no assurance
that such activity levels will be sustained and that there will not be continued
volatility in the level of drilling and production related activities. A
sustained period of low hydrocarbon prices would likely have a material adverse
effect on the Company's results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
VESSEL OPERATING RISKS AND LIMITATION OF INSURANCE COVERAGE
Marine construction involves a high degree of operational risk. Hazards,
such as vessels sinking, grounding, colliding and sustaining damage from severe
weather conditions are inherent in marine operations. These hazards can cause
personal injury or loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.
Damage arising from such an occurrence may result in lawsuits asserting large
claims. CDI maintains such insurance protection as it deems prudent, including
Jones Act employee coverage (the maritime equivalent of workers compensation)
and hull insurance on its vessels. There can be no assurance that any such
insurance will be sufficient or effective under all circumstances or against all
hazards to which CDI may be subject. A successful claim for which CDI is not
fully insured could have a material adverse effect on the Company. Moreover, no
assurance can be given that CDI will be able to maintain adequate insurance in
the future at rates that it considers reasonable. As construction activity moves
into deeper water in the Gulf of Mexico, construction projects tend to be larger
and more complex than shallow water projects. As a result, the Company's
revenues and profits are increasingly dependent on its larger vessels. While the
Company currently insures its vessels against property loss due to a
catastrophic marine disaster, mechanical failure or collision, the loss of any
of the Company's large vessels as a result of such event could result in a
13
<PAGE>
substantial loss of revenues, increased costs and other liabilities and could
have a material adverse effect on the Company's operating performance. See
"Business -- Insurance and Litigation."
SHORTAGES OF RIGS, EQUIPMENT AND PERSONNEL
There is currently a shortage of drilling rigs, equipment and personnel in
the Gulf, particularly relating to Deepwater Gulf exploration and development.
The costs and delivery times of rigs, equipment and personnel have been
increasing and could continue to escalate. Prolonged shortages of drilling rigs,
equipment or personnel could delay the exploration for and development of
natural gas and oil in the Gulf and have an adverse effect on the Company's
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
SEASONALITY AND ADVERSE WEATHER RISKS
Marine operations conducted in the Gulf of Mexico are seasonal and depend,
in part, on weather conditions. Historically, CDI has enjoyed its highest vessel
utilization rates during the third and fourth quarters of the year when weather
conditions are favorable for offshore exploration, development and construction
activities and has experienced its lowest utilization rates in the first
quarter. During certain periods of the year, CDI typically bears the risk of
delays caused by adverse weather conditions. Accordingly, the results of any one
quarter are not necessarily indicative of annual results or continuing trends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONTRACT BIDDING AND ALLIANCE RISKS
A majority of CDI's projects are currently performed on a qualified turnkey
basis. The revenue, cost and gross profit realized on a contract can vary from
the estimated amount because of changes in offshore job conditions, variations
in labor and equipment productivity from the original estimates and performance
of others such as alliance partners. These variations and risks inherent in the
marine construction industry may result in CDI experiencing reduced
profitability or losses on projects. Although CDI has entered into a number of
strategic alliances, there can be no assurance that CDI will be able to enter
into such alliances in the future, that these alliances will be successful or
that contracts resulting from these alliances will not result in unforeseen
operational difficulties. Since the Quantum venture is in its early stages, the
number of projects, if any, and the benefits to the Company's business prospects
and financial condition from the venture are uncertain. See
"Business -- Deepwater Services" and " -- Coflexip Strategic Alliance."
UNCERTAINTY OF ESTIMATES OF NATURAL GAS AND OIL RESERVES
This Prospectus contains an estimate of the Company's proved natural gas
and oil reserves and the estimated future net cash flows therefrom based upon a
report prepared as of December 31, 1997 by Miller & Lents, which report relies
upon various assumptions, including assumptions required by the Commission as to
natural gas and oil prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. The process of estimating natural
gas and oil reserves is complex, requiring significant decisions and assumptions
in the evaluation of available geological, geophysical, engineering and economic
data for each reservoir. As a result, such estimates are inherently imprecise.
Actual future production, cash flows, development expenditures, operating
expenses and quantities of recoverable natural gas and oil reserves may vary
substantially from those estimated in the report. Any significant variance in
these assumptions could materially affect the estimated quantity and value of
the Company's proved reserves. See "Business -- Decommissioning and Natural Gas
and Oil Operations."
NATURAL GAS AND OIL OPERATING RISKS
The Company's natural gas and oil operations are subject to the usual risks
incident to the operation of natural gas and oil wells, including, but not
limited to, uncontrollable flows of oil, natural gas, brine or well fluids into
the environment, blowouts, cratering, mechanical difficulties, fires,
explosions, pollution and other risks, any of which could result in substantial
losses to the Company. In accordance with industry practice, CDI maintains
insurance against some, but not all, of the risks described above. See
"Business -- Insurance and Litigation."
14
<PAGE>
COMPETITION
The business in which the Company operates is highly competitive. Several
of the Company's competitors are companies that are substantially larger and
have greater financial and other resources than the Company. If other companies
relocate or acquire vessels for operations in the Gulf of Mexico, levels of
competition may increase and the Company's business could be adversely affected.
See "Business -- Competition."
CUSTOMER CONCENTRATION
CDI's customers consist primarily of major and independent natural gas and
oil producers, pipeline transmission companies and offshore engineering and
construction companies. During 1996 and 1997, the Company derived approximately
24% and 19% of its consolidated revenue, respectively, from one customer and 11%
of its consolidated revenue in 1997 from another customer. While CDI currently
has a good relationship with its customers, the loss of any one of its largest
customers, or a sustained decrease in demand, could result in a substantial loss
of revenues and could have a material adverse effect on CDI's operating
performance. See "Business -- Customers."
DEPENDENCE ON KEY PERSONNEL AND RETENTION OF EMPLOYEES
CDI's success depends on the continued active participation of key
management personnel. The loss of key people could adversely affect CDI's
operations. The Company has two-year employment and non-compete agreements with
each of its twelve senior officers. CDI believes that its success and continued
growth is also dependent upon its ability to employ and retain skilled
personnel. While the Company believes that its wage rates are competitive and
that its relationship with its workforce is good, a significant increase in the
wages paid by other employers could result in a reduction in the Company's
workforce, increases in the wage rates paid by the Company, or both. If either
of these events occur for any significant period of time, the Company's
profitability could be diminished and the growth potential of the Company could
be impaired. See "Management" and "Business -- Employees."
REGULATORY AND ENVIRONMENTAL MATTERS
CDI's subsea construction, inspection, maintenance and decommissioning
operations and its natural gas and oil production from offshore properties
(including decommissioning of such properties) are subject to and affected by
various types of government regulation, including numerous federal, state and
local environmental protection laws and regulations. These laws and regulations
are becoming increasingly complex, stringent and expensive and there can be no
assurance that continued compliance with existing or future laws or regulations
will not adversely affect the operations of CDI. Significant fines and penalties
may be imposed for non-compliance. See "Business -- Government Regulation" and
"Business -- Environmental Regulations."
POSSIBLE VOLATILITY OF MARKET PRICE
The market price of the Common Stock may fluctuate depending on various
factors, including the general economy, stock market conditions, general trends
in the oilfield services industry, announcements by CDI or its competitors and
variations in the Company's operating results. See "Price Range of Common
Stock."
VOTING CONTROL BY PRINCIPAL SHAREHOLDERS
After giving effect to this Offering, certain shareholders of CDI who are
parties to a shareholders agreement will own approximately 47% of the
outstanding Common Stock (44% if the Underwriters' over-allotment option is
exercised in full). The shareholders agreement provides for, among other things,
the election of directors. As a result, these current shareholders may be able
to control the outcome of certain matters requiring a shareholder vote,
including the election of directors. See "Business -- Coflexip Strategic
Alliance," "Certain Relationships and Related Transactions" and "Principal
and Selling Shareholders."
ABSENCE OF DIVIDENDS
CDI has never paid cash dividends on its Common Stock and intends for the
foreseeable future to retain any earnings otherwise available for dividends for
the future operation and growth of CDI's business. In addition,
15
<PAGE>
CDI's financing arrangements prohibit the payment of cash dividends on its
capital stock. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Selling Shareholders, Coflexip and
the directors and officers of CDI will beneficially own approximately 7,125,106
shares of the Common Stock, which represents approximately 49% of the issued and
outstanding shares (46% if the Underwriters' over-allotment option is exercised
in full). The Company, the Selling Shareholders, Coflexip and the directors and
officers of CDI have agreed, pursuant to certain lock-up agreements, that they
will not offer, sell, contract to sell, grant any option to sell, pledge,
hypothecate or otherwise dispose of, directly or indirectly, any shares of
Common Stock owned by them, or that could be purchased by them through the
exercise of options or warrants to purchase Common Stock of the Company, for a
period of 90 days after the date of this Prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated. After the expiration of the
agreements, however, such shareholders may sell shares pursuant to Rule 144
under the Securities Act. In addition, certain shareholders, including Coflexip,
have been granted "demand" and "piggyback" registration rights by the
Company with respect to all of the shares of Common Stock owned by them.
Although the Company cannot predict the timing or amount of future sales of
Common Stock or the effect that the availability of such shares for sale will
have on the market price prevailing from time to time, sales of substantial
amounts of Common Stock in the public market could adversely affect the market
price of the Common Stock. See "Principal and Selling Shareholders,"
"Description of Capital Stock -- Registration Rights" and "Shares Eligible
for Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors of CDI has the authority, without any action by the
shareholders, to fix the rights and preferences on up to 5,000,000 shares of
undesignated preferred stock, including dividend, liquidation and voting rights.
In addition, CDI's Articles of Incorporation divide the Company's Board of
Directors into three classes. Except for a transaction involving Coflexip (which
is specifically excluded), CDI also is subject to certain anti-takeover
provisions of the Minnesota Business Corporations Act ("MBCA"). In addition,
CDI is a party to a Shareholders Agreement that provides Coflexip with a right
of first refusal in connection with certain acquisition proposals for CDI. Any
or all of the provisions or factors described above may have the effect of
discouraging a takeover proposal or tender offer not approved by management and
the Board of Directors of CDI, and could result in shareholders who may wish to
participate in such a proposal or tender offer receiving less for their shares
than otherwise might be available in the event of a takeover attempt. See
"Description of Capital Stock -- Certain Anti-Takeover Provisions" and
"Certain Relationships and Related Transactions."
16
<PAGE>
THE COMPANY
Cal Dive is a leading provider of subsea construction, maintenance and
decommissioning services to the offshore natural gas and oil industry from the
shallowest to the deepest waters in the Gulf of Mexico. In July 1990, the
Company was purchased by a group of investors including current management and
key employees. In September 1992, Cal Dive formed ERT as a wholly owned
subsidiary to purchase producing offshore natural gas and oil properties which
are in the later stages of their economic lives. In January 1995, certain of the
funds managed by First Reserve Corporation ("First Reserve Funds") acquired
5,549,630 shares of the Company's Common Stock. In 1997, Coflexip purchased
3,699,788 shares of Common Stock, and Quantum was organized. Most of the
Company's senior and middle operations management have been actively involved
with Cal Dive since the mid-1980s.
The Company traces its origins to California Divers Inc., which pioneered
the use of mixed gas diving in the early 1960s when oilfield exploration off the
Santa Barbara coast moved to water depths beyond 250 feet. Cal Dive commenced
operations in the Gulf of Mexico in 1975. CDI's growth strategy has frequently
involved expanding beyond the Company's main contracting base and developing
innovative service capabilities to meet customer needs, including the following
significant milestones:
o 1984 -- SATURATION VESSELS: Custom designed the first DSV with
moonpool deployed SAT diving systems dedicated for use in
the Gulf of Mexico.
o 1986 -- TURNKEY CONTRACTING: Began providing subsea construction
work on a fixed price basis enabling Gulf customers to
better control project costs.
o 1989 -- SALVAGE OPERATIONS: Chartered, and later acquired, the CAL
DIVE BARGE I for shallow water salvage operations, a
business synergistic with the Company's traditional diving
services.
o 1992 -- NATURAL GAS PRODUCTION: Formed a natural gas production
company, ERT, to expand customer options for
decommissioning of mature offshore properties and to expand
off-season salvage activity.
o 1993 -- WELL SERVICING: Added a new upstream service, well
servicing, as a complement to the Company's salvage
services and to exploit the value of ERT properties through
enhanced recovery techniques.
o 1994 -- DYNAMIC POSITIONING: Chartered a DP DSV for use in the Gulf
of Mexico, enabling the Company to work through the winter
months and in deeper water. This vessel, the BALMORAL SEA,
was subsequently acquired in August 1996.
o 1995 -- DP DSV: Acquired and enhanced a DP DSV, the WITCH QUEEN, to
expand the Company's marine construction and subsea
services to include flexible pipelay, umbilical lay, coiled
line pipe installation, decommissioning and ROV support.
o 1996 -- MULTI-SERVICE VESSEL: Acquired and enhanced a
semisubmersible MSV, the UNCLE JOHN, as the cornerstone of
the Company's Deepwater strategy, thereby expanding its
product line to include geotechnical investigation, laying
of infield flowlines, installation of flexible jumpers,
hard jumpers, platforms and risers, and turnkey field
development.
o 1997 -- STRATEGIC ASSET ACQUISITIONS AND ALLIANCES: Added three
Deepwater vessels, created the Quantum venture with
Coflexip and implemented other formal alliance agreements
with offshore service and equipment providers to enhance
CDI's ability to provide the necessary services and assets
for full field development and life of field management.
The Company was organized under the laws of Minnesota in June 1990. The
principal executive offices of the Company are located at 400 N. Sam Houston
Parkway E., Suite 400, Houston, Texas 77060, and its telephone number is (281)
618-0400.
17
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common Stock
offered hereby.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
intend to pay cash dividends in the foreseeable future. The Company currently
intends to retain earnings, if any, for the future operation and growth of its
business. In addition, the Company's financing arrangements prohibit the payment
of cash dividends on its capital stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market ("Nasdaq") under
the symbol "CDIS." The following table sets forth, for the periods indicated,
the high and low closing sale prices of the Common Stock as reported on Nasdaq
since the Company's initial public offering in July 1997.
Year ended December 31, 1997 HIGH LOW
---- ----
Third Quarter................... $ 37 3/4 $19 1/2
Fourth Quarter.................. 38 22 1/4
Year ending December 31, 1998
First Quarter................... 33 23 1/4
Second Quarter (through May 21). 39 3/8 32
A recent last reported sale price for the Common Stock is set forth on the
front cover page of this Prospectus. As of April 15, 1998 there were
approximately 550 holders of record of the Common Stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus.
AS OF
MARCH 31, 1998
--------------
(IN THOUSANDS)
Short-term debt......................... --
Long-term debt.......................... --
Shareholders' equity:
Common Stock, no par value,
60,000,000 shares authorized;
21,355,040 shares issued and
outstanding....................... $ 52,947
Additional paid-in capital......... --
Retained earnings.................. 45,531
Treasury Stock, 6,820,209 shares... (3,751)
--------------
Total shareholders' equity.... 94,727
--------------
Total capitalization.................... $ 94,727
==============
19
<PAGE>
SELECTED FINANCIAL DATA
The historical financial data presented in the table below for and at the
end of each of the years in the five-year period ended December 31, 1997 are
derived from the consolidated financial statements of the Company audited by
Arthur Andersen LLP, independent public accountants. The historical financial
data presented in the table below as of March 31, 1998 and for the three-month
periods ended March 31, 1997 and 1998 are derived from the unaudited
consolidated condensed financial statements of the Company. In the opinion of
management of the Company, such unaudited consolidated condensed financial
statements include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial data for such periods. The
results for the three months ended March 31, 1997 and 1998 are not necessarily
indicative of the results to be achieved for the full year. The data should be
read in conjunction with the Company's Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Subsea and salvage.......... $ 35,365 $ 35,718 $ 32,747 $ 63,870 $ 92,860 $ 13,588 $ 29,342
Natural gas and oil
production................ 1,807 2,314 4,777 12,252 16,526 4,856 3,815
--------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 37,172 38,032 37,524 76,122 109,386 18,444 33,157
--------- --------- --------- --------- --------- --------- ---------
Cost of sales:
Subsea and salvage.......... 26,208 25,477 25,568 46,766 67,538 10,780 20,394
Natural gas and oil
production................ 587 1,594 3,107 7,270 8,163 2,241 2,200
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 10,377 10,961 8,849 22,086 33,685 5,423 10,563
Selling and administrative
expenses....................... 4,075 4,657 4,932 8,291 11,196 2,216 2,840
--------- --------- --------- --------- --------- --------- ---------
Operating income................. 6,302 6,304 3,917 13,795 22,489 3,207 7,723
Other income and expenses:
Interest (income) expense,
net....................... 395 428 135 745 123 318 (222 )
Other (income) expense,
net....................... 148 69 61 36 85 13 (120 )
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes....... 5,759 5,807 3,721 13,014 22,281 2,876 8,065
Provision for income
taxes..................... 1,811 1,773 1,047 4,579 7,799 991 2,822
--------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 3,948 $ 4,034 $ 2,674 $ 8,435 $ 14,482 $ 1,885 $ 5,243
========= ========= ========= ========= ========= ========= =========
Net income per share:
Basic....................... $ .31 $ .48 $ .24 $ .76 $ 1.12 $ .17 $ .36 (2)
Diluted..................... .30 .46 .24 .75 1.09 .17 .35 (2)
Weighted average number of shares
outstanding:
Basic....................... 12,908 8,319 11,016 11,099 12,883 11,099 14,535
Diluted..................... 13,014 8,836 11,055 11,286 13,313 11,272 15,000
OTHER FINANCIAL DATA:
Net cash provided by (used in):
Operating activities........ $ 4,944 $ 857 $ 11,996 $ 7,645 $ 22,294 $ 10,053 $ 9,969
Investing activities........ (1,803) (3,049) (19,584) (27,300) (28,288) (3,148) (11,868 )
Financing activities........ (2,283) 291 7,475 19,700 18,815 (6,000) 45
EBITDA(1)........................ 7,637 8,252 6,650 19,017 29,916 5,039 9,839
Depreciation and amortization.... 1,483 2,017 2,794 5,257 7,512 1,845 1,996
Capital expenditures............. 1,203 1,397 16,857 27,289 28,936 3,017 6,789
AS OF DECEMBER 31, AS OF
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.................. $ 5,309 $ 6,052 $ 4,033 $ 13,411 $ 28,927 $ 24,270
Total assets..................... 22,798 28,633 44,859 83,056 125,600 140,307
Long-term debt................... 5,141 3,766 5,300 25,000 -- --
Shareholders' equity............. 6,360 10,394 22,408 30,844 89,369 94,727
- ------------
</TABLE>
(1) As used herein, EBITDA represents earnings before net interest expense,
taxes, depreciation and amortization. EBITDA is frequently used by security
analysts and is presented here to provide additional information about the
Company's operations. EBITDA should not be considered as an alternative to
net income as an indicator of the Company's operating performance or as an
alternative to cash flow as a more appropriate measure of liquidity.
(2) Includes the impact of the change in the Company's method of accounting for
drydock certification and inspection costs of $.05 per share. See Note 2 to
the Consolidated Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In recent years, Cal Dive has experienced increased demand for its services
due to the increased offshore drilling and production activities in the Gulf,
particularly in deeper waters over 1,000 feet. The increase in offshore drilling
and production activity has been driven by a number of factors, including (i)
the prospect for relatively larger hydrocarbon discoveries in deepwater areas
and (ii) recent technological advances in offshore drilling and production
equipment, seismic data collection and interpretation techniques, and drilling
techniques, which have enhanced the economics of offshore drilling and
production. As a result, Cal Dive's revenues have increased by a compound annual
growth rate of 71% from $37.5 million in 1995 to $109.4 million in 1997.
Similarly, net income has grown 133% compounded annually from $2.7 million in
1995 to $14.5 million in 1997. More recently, revenues in the three months ended
March 31, 1998 were $33.2 million, an 80% increase from $18.4 million recorded
in the first quarter of 1997. Net income of $5.2 million in the three months
ended March 31, 1998 represented a 178% increase compared to $1.9 million
recorded in the first quarter of 1997.
Natural gas and oil prices, the offshore mobile rig count and Gulf of
Mexico lease activity are three of the primary indicators management uses to
predict the level of the Company's business. CDI's construction services
generally follow successful drilling activities by six to eighteen months on the
OCS and twelve to twenty-four months in the Deepwater arena. The level of
drilling activity is related to both short and long-term trends in natural gas
and oil prices. A decline in natural gas and oil prices generally leads to a
reduction in offshore drilling activity which can lower demand for construction
services. Recently, this relationship has been less pronounced due to a number
of industry trends, including advances in technology that have increased
drilling success rates and efficiency, and a worldwide growth in the demand for
both natural gas and oil. U.S. oil and gas companies spent $24.3 billion on
exploration and development in 1997 (both offshore and onshore), up 37% from
1996. The number of offshore rigs working in the Gulf of Mexico has averaged
close to full utilization since mid-1995 which has led to, and management
expects will lead to further, increased construction activity over the next
several years. Given worldwide shortages of drilling rigs, subsea hardware and
experienced personnel, efforts to drill Deepwater Gulf of Mexico leases on a
timely basis have accelerated demand for the Company's subsea services resulting
in improved pricing. Worldwide oil prices began to decline during the fourth
quarter of 1997. The decline accelerated in the first quarter of 1998. Continued
low oil prices could cause customers to scale back or eliminate 1998 drilling
programs and could reduce demand for the Company's services.
Natural gas and oil prices impact the Company's operations in several
respects. The Company seeks to acquire producing natural gas and oil properties
that are generally in the later stages of their economic life. These properties
typically have few, if any, unexplored drilling locations, so the potential
abandonment liability is a significant consideration. Although higher natural
gas prices tended to reduce the number of mature properties available for sale,
these higher prices contributed to improved operating results for the Company in
1996 and 1997. Salvage operations consist of platform decommissioning, removal
and abandonment services. In addition, salvage related support, such as debris
removal and preparation of platform legs for removal, is often provided by the
Company's surface diving vessels. In 1989, management targeted platform removal
and salvage operations as a regulatory driven activity which offers a partial
hedge against fluctuations in the commodity price of natural gas. In particular,
MMS regulations require removal of platforms within eighteen months from the
date production ceases and also require remediation of the seabed at the well
site to its original state. In 1996 and 1997, the Company contracted and
managed, on a turnkey basis, all aspects of the decommissioning and abandonment
of certain large fields using third party heavy lift derrick barges, a service
the Company intends to expand in the future.
21
<PAGE>
The following table sets forth for the periods presented (i) average U.S.
natural gas prices, (ii) the Company's natural gas production, (iii) the average
number of offshore rigs under contract in the Gulf of Mexico, (iv) the number of
platforms installed and removed in the Gulf of Mexico and (v) the vessel
utilization rates for each of the major categories of the Company's fleet.
<TABLE>
<CAPTION>
1995 1996
------------------------------------------ ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Natural Gas Prices(1)........... $ 1.46 $ 1.57 $ 1.47 $ 1.98 $ 3.16 $ 2.37 $ 2.15 $ 2.81
ERT Gas Production (MMcf)............ 241 481 865 795 970 918 1,169 1,253
Rigs Under Contract in the Gulf of
Mexico(2).......................... 119 131 143 148 149 156 161 164
Platform Installations(3)............ 12 17 26 22 12 35 31 30
Platform Removals(3)................. 14 36 23 10 11 11 25 30
Average Company Vessel Utilization
Rate(4)............................
Dynamically Positioned(5)........ 77% -- -- 90% 81% 71% 82% 92%
Saturation DSV................... 38 53% 88% 88 55 73 82 88
Surface Diving................... 45 63 77 74 62 77 85 74
Derrick Barge.................... 21 46 63 32 16 57 91 65
1997 1998
------------------------------------------ ---------
Q1 Q2 Q3 Q4 Q1
--------- --------- --------- --------- ---------
U.S. Natural Gas Prices(1)........... $ 2.67 $ 2.13 $ 2.46 $ 2.88 $ 2.17
ERT Gas Production (MMcf)............ 1,519 1,213 1,381 1,252 1,489
Rigs Under Contract in the Gulf of
Mexico(2).......................... 165 169 168 169 170
Platform Installations(3)............ 16 21 29 39 15
Platform Removals(3)................. 3 21 31 28 1
Average Company Vessel Utilization
Rate(4)............................
Dynamically Positioned(5)........ 60% 79% 92% 94% 78%
Saturation DSV................... 58 77 81 77 88
Surface Diving................... 53 80 90 81 33
Derrick Barge.................... 22 78 99 89 28
- ------------
</TABLE>
(1) Average of the monthly Henry Hub cash prices in dollars per MMBtu, as
reported in Natural Gas Week.
(2) Average weekly number of rigs contracted, as reported by Offshore Data
Services.
(3) Number of installation and removal of platforms with two or more piles in
the Gulf of Mexico, as reported by Offshore Data Services.
(4) Average vessel utilization rate is calculated by dividing the total number
of days the vessels in each category generated revenues by the total number
of days in each quarter.
(5) The BALMORAL SEA was operated by the Company under charters from September
1994 to February 1995 and from April 1996 to August 8, 1996, at which time
it was acquired by the Company. The Company purchased its first DP vessel,
the WITCH QUEEN, in November 1995.
Vessel utilization is historically lower during the first quarter due to
winter weather conditions in the Gulf of Mexico. Accordingly, the Company plans
its drydock inspections and other routine and preventive maintenance programs
during this period. During the first quarter, a substantial number of the
Company's customers finalize capital budgets and solicit bids for construction
projects. The bid and award process during the first two quarters leads to the
commencement of construction activities during the second and third quarters.
The Company's operations can also be severely impacted by weather during the
fourth quarter. The Company's salvage barge, which has a shallow draft, is
particularly sensitive to adverse weather conditions, and its utilization rate
will be lower during such periods. To minimize the impact of weather conditions
on the Company's operations and financial condition, CDI began operating DP
vessels and expanded into the acquisition of mature offshore properties. The
unique station-keeping ability offered by dynamic positioning enables these
vessels to operate throughout the winter months and in rough seas. Operation of
natural gas and oil properties tends to offset the impact of weather since the
first and fourth quarters are typically periods of high demand for natural gas
and of strong natural gas prices. Due to this seasonality, full year results are
not likely to be a direct multiple of any particular quarter or combination of
quarters.
22
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. During the three months ended March 31, 1998, the Company's
revenues increased 80% to $33.2 million compared to $18.4 million for the three
months ended March 31, 1997 with the Subsea and Salvage segment contributing all
of the increase. The majority of the increase was due to increased demand for
services provided by CDI's DP vessels, particularly the UNCLE JOHN, which
contributed nearly half of the increase compared to the first quarter of 1997
when the vessel was out of service for six weeks to have its derrick installed.
The chartering of the MARIANOS during the three months ended March 31, 1998
contributed $3.9 million as the vessel filled in while the WITCH QUEEN was in
drydock for scheduled maintenance. During the first three months of 1998 an
increased level of customer emergency repairs created strong demand for the 4-
Point moored SAT diving vessels (the CAL DIVER I and the CAL DIVER II). As a
result, total vessel utilization days were 574 for the CDI fleet in the first
quarter of 1998, an increase of 34% over the same period of the prior year.
Natural gas and oil production revenue for the three months ended March 31,
1998 declined 21% to $3.8 million from $4.9 million during the comparable prior
year period due to a decrease in average gas prices realized in the first
quarter of 1998. Production of 1.5 Bcf for the three months ended March 31, 1998
was virtually unchanged from first quarter 1997 levels.
GROSS PROFIT. Gross profit of $10.6 million for the first quarter of 1998
nearly doubled the $5.4 million gross profit recorded in the comparable prior
year period with the UNCLE JOHN providing over half of the increase. The
remainder of the increase is due mainly to the aforementioned stronger demand in
1998 for services provided by the 4-Point saturation vessels and to the impact
of a change in the method of accounting for regulatory related drydock
inspection and certification expenditures. The Company previously expensed such
amounts as incurred; however, effective January 1, 1998, such expenditures will
be capitalized and amortized over the 30-month period between regulatory
mandated drydock inspections and certification which is consistent with
industry-wide practice. The impact of this change on CDI's gross profit for the
first quarter of 1998 was to increase the results by approximately $1.2 million.
Subsea and Salvage margins increased from 21% in the three months ended March
31, 1997, to 27% (after deducting the impact of the accounting change) in the
three months ended March 31, 1998 due mainly to the factors mentioned above.
Natural gas and oil production gross profit decreased from $2.6 million in
the first quarter of 1997 to $1.6 million for the three months ended March 31,
1998, due mainly to the decrease in average gas prices.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were 8.6% of first quarter 1998 revenues, an improvement from 12% in the
comparable prior year period. Such expenses for the three months ended March 31,
1998 were $2.8 million as compared to $2.2 million in the comparable prior year
period. The increase was due mainly to the addition of new personnel to support
the Company's Deepwater strategy and growth in its base business.
NET INTEREST. The Company reported net interest income of $222,000 for the
three months ended March 31, 1998 in contrast to net interest expense of
$318,000 for the three months ended March 31, 1997. This improvement was due to
the repayment of all outstanding debt with proceeds from its initial public
offering of Common Stock in July 1997.
INCOME TAXES. Income taxes increased to $2.8 million for the three months
ended March 31, 1998, compared to $1.0 million in the comparable prior year
period due to increased profitability.
NET INCOME. Net income of $5.2 million for the three months ended March
31, 1998 was $3.4 million, or 178%, more than the comparable period in 1997 as a
result of factors described above. The accounting change discussed above
increased CDI's net income for the first quarter of 1998 by approximately
$800,000.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Consolidated revenues of $109.4 million in 1997 were 44% more
than the $76.1 million reported during 1996 due primarily to the addition of DP
vessels, improved demand for traditional subsea services and increased natural
gas and oil production. Revenues from DP vessels increased 89% to $47.6 million
23
<PAGE>
in 1997 as compared to the prior year due to the full year operations of the
BALMORAL SEA and the UNCLE JOHN (vessels placed in service in April and October
1996, respectively). This increase, combined with stronger market conditions for
surface diving and supply boats, offset the impact of seven vessels being out of
service for a combined 48 weeks for regulatory inspections, preventative
maintenance, vessel upgrades and unscheduled repairs. During 1996, only two such
vessels were out of service for any significant length of time.
Revenue from natural gas and oil production was $16.5 million for the year
ended 1997 from 14 properties as compared to $12.3 million in 1996 from nine
properties. The 1997 revenue benefited from prior year well enhancement efforts.
Average gas sales prices improved slightly in 1997 compared to 1996.
GROSS PROFIT. Gross profit increased by $11.6 million, or 53%, from $22.1
million in 1996 to $33.7 million in 1997. The addition of the UNCLE JOHN and the
BALMORAL SEA to the Company's fleet were responsible for over half of the
increase. The remaining increase was due to improved demand for traditional
subsea services and increased natural gas and oil production. Subsea and Salvage
margins were unchanged between 1997 and 1996 despite the Company encountering
difficulties on a large construction project in the third quarter of 1997 and
the unusually active 1997 regulatory inspection and maintenance program which
resulted in Subsea and Salvage repair costs of $6.3 million as compared to $3.4
million in 1996.
Natural gas and oil production gross profit was $8.4 million for the year
ended December 31, 1997 as compared to $5.0 million for the prior year. The
increase was due mainly to the acquisition of five blocks during the second half
of 1996 and the gain recorded on the sale of two properties during the second
quarter of 1997.
SELLING & ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were 10% of 1997 revenues, an improvement from 11% in 1996. Such expenses in
1997 were $11.2 million as compared to $8.3 million in 1996. The increase was
due mainly to the addition of new personnel to support the Company's deepwater
strategy and growth in its base business and to higher levels of bonuses. The
remainder of the increase was due to the ERT incentive compensation program
whereby key management personnel share in the improved earnings of the natural
gas and oil production segment.
NET INTEREST. Net interest expense decreased by $622,000 (from $745,000 in
1996 to $123,000 in 1997) due mainly to the Company retiring all debt in July
1997 with the proceeds received from the initial public offering. Borrowings
under the Revolving Credit Agreement averaged $20.1 million during the first
half of 1997 prior to the July 1997 retirement as compared to $13.0 million
during 1996.
INCOME TAXES. Income taxes were $7.8 million for 1997 as compared to $4.6
million for the prior year. The increase was due to the Company's increased
profitability. Higher depreciation related to the newly acquired DP vessels
resulted in a reduction of the amount of cash taxes paid (as a percentage of
pre-tax income) in 1997 compared to 1996 and also a corresponding increase in
the deferred tax liability.
NET INCOME. Net income increased 72% to $14.5 million for the year ended
December 31, 1997 as compared to $8.4 million in 1996 as a result of factors
described above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Consolidated revenues of $76.1 million in 1996 were more than
double the $37.5 million reported in the prior year due primarily to the
addition of new DP vessels and to higher commodities prices and increased
production from natural gas and oil properties. A full year of operations from
the WITCH QUEEN (placed in service in November 1995) and the additions of the
BALMORAL SEA and the UNCLE JOHN (placed in service in April and October 1996)
increased revenues from the DP vessels to 33% of consolidated 1996 revenues
compared to 10% in 1995. The establishment of a new management team resulted in
improved performance in the operation of the salvage assets, which included the
removal of four large structures by subcontracting heavy lift barges. Natural
gas and oil production from 14 offshore blocks owned at year-end 1996 was $12.3
million compared to $4.8 million in 1995. This increase of $7.5 million, or
156%, was a result of natural gas prices increasing by approximately 58% and the
production from the five properties acquired in 1996, as well as the full year
contributions of the Company's other properties.
GROSS PROFIT. Gross profit increased by $13.2 million in 1996, from $8.8
million in 1995 to $22.1 million in 1996. Improved rates and performance on
turnkey contracts resulted in Subsea and Salvage margins increasing
24
<PAGE>
from 22% in 1995 to 27% in 1996. This increase reflects in part the benefit of
operating five specialized vessels capable of supporting saturation diving.
Gross profit from salvage assets was $2.2 million in 1996, or 13% of that
generated by Subsea and Salvage operations, in contrast to "break-even"
results for the prior year. Natural gas and oil production gross profit was $5.0
million in 1996 compared to $1.7 million in the prior year, with the $3.3
million increase resulting from higher natural gas prices and greater production
levels.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were 11% of 1996 revenues, an improvement from 13% in 1995. Such expenses in
1996 were $8.3 million as compared to $4.9 million in 1995. Payments of $2.3
million made under 1996 incentive plans represented an increase of $2.0 million
over 1995. The balance of the increase reflected higher sales and administrative
costs necessary to support the 103% increase in 1996 revenues.
NET INTEREST. Net interest expense increased by $610,000 (from $135,000 in
1995 to $745,000 in 1996) due to the borrowings incurred in conjunction with the
acquisition of the BALMORAL SEA and the UNCLE JOHN. Borrowings under the
Revolving Credit Agreement averaged $13.0 million in 1996 compared to $6.0
million in 1995.
INCOME TAXES. Income taxes of $4.6 million compares to $1.0 million in
1995 as a result of significant increases in 1996 margins and profitability. The
effective tax rate increased significantly, from 28% to 35%, because the Company
no longer qualified for the "Small Producer" tax benefit of percentage
depletion. Higher depreciation related to the new DP vessels resulted in a
reduction in the amount of cash taxes paid. In 1996, cash payments for income
taxes were $2.2 million, or 48% of the total $4.6 million tax provision.
NET INCOME. In 1996, net income of $8.4 million increased $5.8 million, or
215%, from 1995 as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operating activities principally
from internally generated cash flow, even in an industry-depressed year such as
1992. The 1995 equity infusion from the First Reserve Funds, together with
internally generated cash flow, enabled the Company to formulate and implement
its Deepwater expansion strategy.
The Company completed an initial public offering of common stock on July 7,
1997, with the sale of 2,875,000 shares generating net proceeds to the Company
of approximately $39.5 million, net of underwriting discounts and issuance
costs. The proceeds were used to fund capital expenditures during 1997, and to
repay all outstanding long-term indebtedness. As of March 31, 1998, the Company
had $24.3 million of working capital, no debt outstanding and maintained $11.2
million of cash on hand after funding the acquisition of two vessels in late
1997 (the SEA SORCERESS and the MERLIN), ERT's purchase of offshore properties
and the equity investment in Aquatica, Inc. Additionally, the Company has
approximately $37.0 million available under a Revolving Credit Agreement with
Fleet Capital Corporation, as amended, which terminates on December 31, 2000
(the "Revolving Credit Agreement"). The Company has had, and anticipates
having additional discussions with third parties regarding possible asset
acquisitions (including natural gas and oil properties and vessels). However,
the Company can give no assurance that any such transaction can be completed.
OPERATING ACTIVITIES. Net cash provided by operating activities was
virtually unchanged at $10.0 million in the three months ended March 31, 1998,
as compared to the first quarter of 1997. Increased profitability during the
first quarter of 1998 offset significant accounts receivable collections during
the first quarter of 1997. Accounts payable increased $5.4 million at March 31,
1998 as compared to December 31, 1997 due mainly to significant accruals during
March 1998 for various capital projects (including an upgrade of the SEA
SORCERESS in preparation for the Terra Nova project and costs associated with
placing the MERLIN in service).
Net cash provided by operating activities was $22.3 million in 1997, as
compared to $7.6 million provided in 1996. This increase was primarily the
result of increased profitability and a decline in the level of funding required
to fund accounts receivable increases ($5.8 million required in 1997 compared to
$15.3 million in 1996). In addition, depreciation and amortization increased as
a result of vessel and natural gas and oil properties acquisitions. The Company
experienced improved collections of its billed accounts receivable during 1997
as compared to the prior year. Total accounts receivable increased $5.8 million
at December 31, 1997, as compared
25
<PAGE>
to December 31, 1996, due to the 44% growth in revenues. The revenue allowance
on gross amounts billed increased $800,000 as of December 31, 1997 compared to
$1,021,000 at December 31, 1996 due to the aforementioned increase in activity
and certain billing issues that were subsequently negotiated within the
allowances provided. Resolution of these billing issues accounted for the
decline in the revenue allowance on gross amounts billed to $1,220,000 as of
March 31, 1998.
Net cash provided by operating activities was $7.6 million in 1996 as
compared to $12.0 million in 1995, with the decrease principally a result of
$15.3 million necessary to fund an increase in accounts receivable. Accounts
receivable increased 140% over the prior year, a level greater than the 103%
increase in revenues due to the significant increase in revenues from offshore
activity at the end of the Company's fiscal year 1996 which led to a much higher
accounts receivable balance at December 31, 1996. This increase in activity and
revenues also resulted in a significant increase in the revenue allowance on
gross amounts billed for the reasons described above. Depreciation and
amortization also increased by $2.5 million as a result of the new vessel
additions. However, as noted previously, overall Subsea and Salvage margins
increased from 22% in 1995 to 27% in 1996 notwithstanding higher depreciation
charges. The additional depreciation increased the provision for deferred income
taxes which was $2.1 million in 1996, compared to $600,000 in the prior year.
INVESTING ACTIVITIES. Capital expenditures have consisted principally of
strategic asset acquisitions including the WITCH QUEEN, the BALMORAL SEA, the
UNCLE JOHN, the SEA SORCERESS and the MERLIN, improvements to existing vessels
and the acquisition of offshore natural gas and oil properties. The Company
incurred $6.8 million of capital expenditures during the first quarter of 1998
compared to $3.0 million during the comparable prior year period. In January
1998, ERT acquired interests in six blocks involving two separate fields from
Sonat Exploration Company for $1.0 million and assumption of Sonat's pro rata
share of the related decommissioning liability. The remaining balance relates to
costs associated with placing the MERLIN in service and additions to the SEA
SORCERESS in preparation for the Terra Nova project. The Company incurred
capital expenditures of $2.1 million in the first quarter of 1997 related to the
installation of a derrick on the UNCLE JOHN. In February 1998, the Company
purchased a significant equity investment in Aquatica for $5.0 million, in
addition to a commitment to lend additional funds of $5.0 million to allow
Aquatica to purchase vessels and fund other growth opportunities.
The Company incurred $28.9 million of capital expenditures during 1997.
During the third quarter, the Company acquired a 374 foot by 104 foot
ice-strengthened vessel (the SEA SORCERESS). During the fourth quarter, the
Company acquired a 198 foot by 40 foot DP vessel (the MERLIN) designed for long
term ROV, survey and coring support. The remaining capital expenditures included
the acquisition of two work class ROVs from Coflexip, the costs associated with
installation of a derrick on the UNCLE JOHN and the cash portion of the fourth
quarter natural gas and oil properties acquisition discussed below.
During the second quarter of 1997, the Company sold two offshore natural
gas and oil properties for approximately $1.0 million. While divesting
properties runs counter to the corporate goal of growing ERT, the transaction
enabled CDI to lock in acquisition economics and to dispose of a major
exploratory block where ERT was not the operator. This transaction was
structured as a Section 1031 "Like Kind" exchange for tax purposes.
Accordingly, the cash received was restricted to use for acquisition of
additional natural gas and oil properties. This restriction was removed in the
fourth quarter with the acquisition of property interests in two offshore
blocks.
From 1993 through January 1998, the Company has invested $19.0 million,
including $8.0 million in cash, to acquire 18 offshore natural gas and oil
properties in nine separate transactions. ERT offshore property acquisitions are
recorded at the value exchanged at closing together with an estimate of its
proportionate share of the decommissioning liability assumed in the purchase
based upon its working interest ownership percentage. Only the cash paid at
closing is reflected in the Company's statement of cash flows together with bond
and escrow deposits required in connection with these purchases. The MMS
requires an operator bond, and certain of the purchase and sale agreements have
required the Company to fund portions of the estimated decommissioning
liability. Accordingly, the Company's balance sheet as of December 31, 1997
included $5.7 million of cash deposits restricted for abandonment obligations
which aggregated $6.5 million on that date. In addition, the Company had also
issued letters of credit totaling $2.9 million at December 31, 1997 in lieu of
cash deposits in connection with property acquisitions.
26
<PAGE>
FINANCING ACTIVITIES. The Company has financed seasonal operating
requirements and capital expenditures with internally generated funds,
borrowings under credit facilities and the sale of Common Stock. The Revolving
Credit Agreement currently provides for a $40.0 million revolving line of
credit, of which $37.0 million is currently available. The Revolving Credit
Agreement is secured by trade receivables and mortgages on the Company's
vessels. The Revolving Credit Agreement prohibits the payment of dividends on
the Company's capital stock and contains only one financial covenant (a fixed
charge coverage ratio) and a limitation that debt not exceed $60.0 million.
Interest on borrowings under the Revolving Credit Agreement is equal to LIBOR
plus a percentage (currently 1.25%) pursuant to a formula based upon EBDIT (as
defined therein). No borrowings were outstanding at December 31, 1997. Letters
of credit are also available under the Revolving Credit Agreement which the
Company typically uses if performance bonds are required or, in certain cases,
in lieu of purchasing U.S. Treasury Bonds in conjunction with gas and oil
property acquisitions.
The Company was debt free throughout the first quarter of 1998. Excess cash
funds, which averaged $13.3 million, were invested in U.S. Government securities
which yielded approximately 5.5%. During the first two quarters of 1997, the
Company repaid $5.0 million, net of its borrowings under the Revolving Credit
Agreement and in the third quarter repaid the remaining $20.0 million
outstanding with proceeds from its initial public offering. Also, during the
second quarter the Company completed a transaction with Coflexip whereby
Coflexip agreed to accept treasury shares as payment for two ROVs ordered in
February.
CAPITAL COMMITMENTS. In connection with its business strategy, management
expects the Company to acquire or build additional vessels, upgrade or convert
existing vessels, acquire other assets such as ROVs, as well as seek to buy
additional natural gas and oil properties. Depending upon the size of any future
acquisitions, the Company may require additional debt financing, possibly in
excess of the Revolving Credit Agreement, as amended, or additional equity
financing. Other than potential asset acquisitions, management believes the net
cash generated from operations and available borrowing capacity under the
Revolving Credit Agreement will be adequate to meet funding requirements for
1998.
CHANGE IN ACCOUNTING POLICY
Effective January 1, 1998, the Company changed its method of accounting for
regulatory (U.S. Coast Guard, American Bureau of Shipping and Det Norske
Veritas) related drydock inspection and certification expenditures. This change
was made due to the significant changes in the composition of the Company's
fleet which has been expanded to include more sophisticated DP vessels that are
capable of working in the Deepwater, a key to Cal Dive's operating strategy. The
change also coincides with the first time these vessels were due for drydock
inspection and certification since being acquired by CDI. The Company previously
expensed inspection and certification costs as incurred; however, effective
January 1, 1998, such expenditures will be capitalized and amortized over the
30-month period between regulatory mandated drydock inspections and
certification. This predominant industry practice provides better matching of
expenses with the period benefited (i.e., certification to operate the vessel
for a 30-month period between required drydock inspections and to meet bonding
and insurance coverage requirements). This change had an $800,000 positive
impact on net income, or $.05 per share, in the Company's first quarter 1998
consolidated financial statements. The cumulative effect of this change in
accounting principle is immaterial to the Company's consolidated financial
statements taken as a whole.
IMPACT OF YEAR 2000 ISSUE
The Company has assessed what computer software will require modification
or replacement so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has purchased, and is presently implementing, a
new project management accounting system which is Year 2000 compliant. This
system, which fully integrates all of its modules, will provide project managers
and accounting personnel with up-to-date information enabling them to better
control jobs in addition to providing benefits of inventory control and planned
vessel maintenance. This implementation will be completed during 1998.
Accordingly, the Company believes that with this conversion, the Year 2000 issue
will be resolved in a timely manner and presently does not believe that the cost
to become Year 2000 compliant will have a material adverse effect on the
Company's consolidated financial statements. Finally, CDI's vessel computer DP
systems are dependent on government satellites and the government has not yet
confirmed that they have solved Year 2000 data problems.
27
<PAGE>
BUSINESS
GENERAL
CDI is a leading subsea contractor providing construction, maintenance and
decommissioning services to the oil and gas industry from the shallowest to the
deepest waters in the Gulf of Mexico. Over three decades, CDI has developed a
reputation for innovation in underwater construction techniques and equipment.
With its diversified fleet of 12 vessels, CDI performs services in support of
drilling, well completion and construction projects involving pipelines,
production platforms and risers and subsea production systems. Through ERT, the
Company acquires and operates mature offshore natural gas and oil properties to
provide customers a cost-effective alternative to the decommissioning process.
The Company's customers include major and independent natural gas and oil
producers, pipeline transmission companies and offshore engineering and
construction firms. See Note 10 of the Notes to Consolidated Financial
Statements for financial information with respect to the Company's business
segments.
In water depths up to 1,000 feet, CDI performs traditional subsea services
which include air and SAT diving in support of marine construction activities.
CDI is uniquely qualified to provide these services in the Gulf "spot market"
where projects are generally turnkey in nature, short in duration (two to 30
days) and require constant rescheduling and availability of multiple vessels.
Each of the Company's 12 vessels perform these traditional services, six of
which support SAT diving and four of these have DP systems. CDI has the largest
fleet of SAT and DP vessels permanently deployed in the Gulf. In addition, the
Company's highly qualified personnel have the technical and operational
experience to manage turnkey projects to satsify customers' requirements and
achieve CDI's targeted profitability. Leases awarded in the Gulf's shallower
waters between 1993 and 1996 more than doubled pushing offshore rig utilization
in the Gulf over 90%. Management believes demand for CDI's traditional services
will continue to increase because the need for marine construction services
typically follows drilling activity by six to 18 months.
As the activity in the Deepwater Gulf of Mexico continues to increase,
technological challenges inherent to this environment are requiring subsea
contractors to develop new technology. Through its Deepwater Technical Services
Group, CDI provides integrated solutions to satisfy its customers' Deepwater
construction and maintenance needs. With a fleet of six Deepwater-capable
vessels, CDI has the most technically diverse fleet permanently deployed in the
Gulf for the delivery of these subsea solutions. This fleet includes the DP
multi-service vessel UNCLE JOHN, three DP vessels, the WITCH QUEEN, the BALMORAL
SEA and the MERLIN, and the Deepwater service barge, the SEA SORCERESS. Coflexip
has recently chartered the sixth Deepwater vessel, the CSO CONSTRUCTOR, to
Quantum, the Company's joint venture with Coflexip. The CSO CONSTRUCTOR will
also be available to CDI, subject to Quantum's needs. The alliance with Coflexip
and other alliances with offshore service and equipment providers enhance CDI's
ability to provide both full field development and life of field services. In
1997, the Deepwater Gulf experienced record lease sales, increased drilling
activity, new discoveries, increased subsea development and advances in drilling
and completion technology. The Company believes that the Deepwater Gulf of
Mexico will continue to be among the most active exploration and development
areas in the world.
The Company is a leader in the decommissioning of mature oil and gas
properties in the shallow water Gulf of Mexico. According to Offshore Magazine,
CDI performed 32% of all structure removal projects in the Gulf of Mexico from
January 1, 1996 through June 30, 1997, with the next closest competitor at 13%.
Through its subsidiary ERT, the Company acquires, produces and develops mature
properties prior to their decommissioning and as such is one of few companies
with the combined attributes of financial strength, reservoir engineering,
operations expertise and company-owned salvage assets that is acquiring mature
properties in the Gulf of Mexico.
COMPANY STRENGTHS
DIVERSIFIED FLEET OF VESSELS
CDI's fleet provides a full complement of subsea construction, maintenance,
and decommissioning project capabilities. CDI distinguishes itself by having the
largest fleet of vessels with fully redundant DP systems
28
<PAGE>
permanently deployed in the Gulf. The Company's fleet consists of one
semisubmersible DP MSV (the UNCLE JOHN), four DP DSV's (the WITCH QUEEN, the
BALMORAL SEA, the MERLIN and the chartered CSO CONSTRUCTOR), one Deepwater
service barge (the SEA SORCERESS), two 4-point moored saturation DSVs (the CAL
DIVER I and the CAL DIVER II), three other DSVs, two work class ROVs and a
salvage barge. The vessels serve as work platforms for activities performed by
divers in water depths of less than 1,000 feet and by ROVs for projects at all
depths. The services provided by the Company's vessels are both overlapping and
complementary in a number of market segments, enabling the Company to deploy its
vessels to areas of highest utility and margin potential in all water depths
where development is currently contemplated. The Company intends to continue to
expand the capabilities of its diversified fleet through the acquisition of
additional vessels and assets.
DEEPWATER TECHNICAL SERVICES
CDI has established a unique niche by assembling the specialized assets,
technical personnel and exclusive alliance agreements that provide a
cost-effective solution to the rising demand for Deepwater services. CDI's
mono-hulled DP vessels provide a flexible work platform to launch ROVs and
support subsea construction in adverse weather conditions. Likewise, the
Company's MSV UNCLE JOHN has demonstrated the ability to perform certain well
completion tasks previously undertaken using more expensive drilling equipment.
These vessels, in combination with the ROVs, allow CDI to control key assets
involved in Deepwater subsea construction and field development. As a result,
the Company is able to meet the fast-track requirements of Deepwater development
projects. In April 1997, CDI and Coflexip established Quantum to undertake
Deepwater construction projects and provide integrated services and advanced
technology to its customers by drawing upon the capabilities and strengths of
both companies. Coflexip chartered the DP vessel CSO CONSTRUCTOR to Quantum in
1998. The CSO CONSTRUCTOR will also be available to CDI, subject to Quantum's
needs.
MAJOR PROVIDER OF SATURATION DIVING SERVICES
Saturation diving is required for diving operations in water depths beyond
300 feet. Management believes that CDI is the largest provider of SAT diving
services and operates the largest fleet of SAT diving vessels permanently
deployed in the Gulf. All of CDI's SAT diving vessels have moonpool systems,
which allow safe diver deployment in adverse weather conditions. Because
Deepwater field developments must be tied into the existing Gulf infrastructure,
management believes there will be increasing demand for the Company's SAT diving
services.
EXPERIENCED PERSONNEL AND TURNKEY CONTRACTING
A shortage of experienced personnel has resulted in a trend in the oil and
gas industry of transferring more responsibility to contractors and suppliers.
Management believes that a key element of its growth strategy and success has
been its pioneering role in providing turnkey contracting and its ability to
attract and retain experienced industry personnel. The Company's highly
qualified personnel enable it to compete effectively in the Gulf's unique "spot
market" for offshore construction projects and to manage turnkey projects to
satisfy customer needs and achieve CDI's targeted profitability. Because of its
experience with turnkey contracting and the recognized skill of its personnel,
the Company believes it is well positioned to capitalize on the trend in the
natural gas and oil industry towards outsourcing additional responsibility to
contractors.
LEADER IN SHALLOW WATER SALVAGE OPERATIONS
The Company has established a leading position in the decommissioning of
facilities in the shallow water Gulf of Mexico. According to Offshore Magazine,
CDI performed 32% of all structure removal projects in the Gulf from January 1,
1996 through June 30, 1997. The Company expects the demand for decommissioning
services to increase due to the significant number of platforms that must be
removed in accordance with government regulations. Over 75% of the 3,800
platforms in the Gulf of Mexico are over ten years old and there are
approximately 15,000 wells that must ultimately be decommissioned. Since 1989,
Cal Dive has undertaken a wide variety of decommissioning assignments, most on a
turnkey basis. When the structure to be removed exceeds the capacity of CDI's
equipment, the Company has successfully project managed the decommissioning of
large fields by subcontracting the heavy lift to third party vendors.
29
<PAGE>
OPERATION OF MATURE NATURAL GAS AND OIL PROPERTIES
CDI formed ERT in 1992 to exploit a market opportunity to provide a more
efficient solution to the abandonment of offshore properties, to expand Cal
Dive's off season salvage and decommissioning activity and to support full field
development projects. CDI has assembled a team of personnel experienced in
geology, reservoir and production engineering, facilities management and lease
operations which allows ERT to maximize production at the properties until they
are decommissioned. The Company has acquired interests in 21 mature producing
leases in the last five years, one of which has been decommissioned and two of
which were sold in May 1997. Mature properties are generally those properties
where decommissioning costs are significant relative to the value of remaining
natural gas and oil reserves. CDI seeks to acquire properties that it can
operate to enhance remaining production, control operating expenses and manage
the cost and timing of the decommissioning. Management believes that CDI is one
of the few companies which combines financial strength, reservoir engineering,
operations expertise and the availability of company-owned salvage assets that
is acquiring mature properties in the Gulf of Mexico. These attributes result in
significant strategic and cost advantages. Since acquiring its initial property
in late 1992, the Company has increased estimated proved reserves to
approximately 23.4 Bcfe of natural gas and oil at December 31, 1997. In January
1998, ERT purchased two properties which represent a 29% increase in the
estimated proved reserves at December 31, 1997.
GROWTH STRATEGY
CAPTURE A SIGNIFICANT SHARE OF THE DEEPWATER MARKET
As activity in the Deepwater Gulf of Mexico continues to increase, there
exists a growing need for new applications of subsea services and technology and
for subsea contractors to develop and deploy such technology. Customers
purchasing these services typically prefer a specialized vessel with redundant
DP systems as a work platform. CDI has the largest fleet of such vessels
operating in the Gulf. The Company believes that well completion, subsea
installation and infield connection projects have become more critical in an era
of limited availability of Deepwater drilling equipment. Through its Deepwater
Technical Services Group, the Company provides integrated solutions to satisfy
its customers' Deepwater subsea construction and maintenance needs. The
Company's MSV UNCLE JOHN has the capacity to undertake certain well completion
activities at a lower day rate than a semisubmersible drilling rig, thereby
reducing cost to the operator and releasing the drilling rig for other projects.
CDI has negotiated formal alliance agreements with a number of specialized
contractors, as well as establishing Quantum with Coflexip, to provide the full
range of services necessary for Deepwater subsea construction projects. These
strategic alliances include Quantum and exclusive agreements with Schlumberger,
Ltd., Shell Offshore, Inc., Reading & Bates Development Co., Fugro-McClelland
Marine GeoSciences, Inc., Sonat, Inc. and Quality Tubing, Inc. CDI is also a
preferred installation contractor to Total Offshore Productions Systems
("TOPS"), a company formed by Reading & Bates Development Co. and Intec
Engineering, Inc. to conduct Deepwater full field development projects. The
objective of this strategy is to increase the proportion of the Deepwater field
development expenditures captured by Cal Dive while reducing the project
duration and overall cost to the operator.
To gain a greater share of the Deepwater market, the Company is designing
the first sixth-generation multi-service vessel, the MSV 3500. The vessel would
be a new generation of the MSV UNCLE JOHN'S semisubmersible design and unique
due to the absence of lower hull cross bracing. Planned variable deck load of
approximately 4,000 metric tons and a large deck area would make the vessel
particularly well suited for large offshore construction projects in the
Deepwater. High transit speed would allow it to move rapidly from one location
to another. CDI is currently attempting to secure long-term utilization
contracts and industry partners for the vessel. There can be no assurance that
the MSV 3500 will be built or that such contracts or industry partners will be
obtained.
CAPITALIZE ON SYNERGIES WITH COFLEXIP
CDI entered into a strategic alliance with Coflexip to strengthen its
position in the Deepwater Gulf and to respond to the trend toward full field
development services. Management believes that Coflexip and CDI together offer
complementary products and services which significantly expand CDI's ability to
provide full field development and life of field services. A product of this
alliance is Quantum which was formed in April 1997.
30
<PAGE>
Coflexip is a world leader in the design and manufacture of flexible pipe and
umbilicals and is one of the leading subsea construction contractors. Coflexip
operates 10 of the 31 globally competitive Deepwater construction vessels, which
is the largest concentration of deepwater vessels in the world. Headquartered in
Paris, France, Coflexip employs approximately 3,900 people on five continents.
In 1997, Coflexip had sales of $1.2 billion and total assets of $1.25 billion at
year-end.
FOCUS ON THE GULF OF MEXICO
CDI intends to maintain its focus on the Gulf of Mexico where the Company
is well positioned to respond to rising market demand for services in all water
depths. Natural gas and oil exploration, development and production activity
levels in the Gulf of Mexico have increased significantly as a result of several
factors, including: (i) improvements in exploration technologies such as
computer aided exploration and 3D seismic, which have enhanced reservoir
mapping, increased drilling success rates and led to entirely new prospects such
as the "Subsalt" play; (ii) improvements in subsea completion and production
technologies, which have resulted in increased Deepwater drilling and
development; (iii) expansion of the region's production infrastructure, which
has improved the economics of developing both Deepwater and smaller natural gas
and oil fields; and (iv) the short reserve life characteristic of Gulf of Mexico
natural gas production, which requires continuous drilling to replace reserves
and maintain production. In recent years there have been significant new field
discoveries in the Deepwater Gulf of Mexico, including 11 in 1997. These
Deepwater discoveries have led to new market opportunities as well as increased
demand for the Company's services as reflected in both continued higher vessel
utilization rates and increased operating margins. The 1997 and 1998 Gulf of
Mexico lease sales by the MMS attracted record bidding levels both in terms of
the number of leases receiving bids and the amount of capital exposed, including
a record level of interest in Deepwater blocks. Even though 20% less acreage was
being offered in the 1998 Central Gulf lease sale, the total capital exposed was
$1.4 billion in 1998 versus $1.2 billion for the prior year. The anticipated
increase in drilling activity following these record lease sales should result
in increased demand for CDI's services.
RESPOND TO SHALLOWER WATER FAST-TRACK FIELD DEVELOPMENT
Management believes that the large amount of leased acreage in the
shallower waters of the Gulf and the shortages of drilling rigs and completion
equipment will create a demand for fast-track drilling and development
solutions. CDI's recent acquisitions of assets, its skilled personnel and its
technical expertise put the Company in a strong competitive position to be able
to respond to the vessel and other equipment needs for developing new oil or
natural gas fields. CDI's strategic alliances also provide many of the
non-vessel assets required in offshore drilling and production. CDI intends to
apply these assets, technologies and capabilities in a cost-effective manner to
shallower water projects to satisfy the fast-track drilling and development
needs of a broader base of customers.
EXPAND DECOMMISSIONING AND NATURAL GAS AND OIL OPERATIONS
Management believes CDI's reputation in the industry and its experience in
decommissioning projects make it a preferred buyer of mature natural gas and oil
properties. Specifically, customers can sell an offshore property at a
reasonable price with the assurance that the offshore property will be
decommissioned in accordance with regulatory requirements. In the last three
years, ERT has purchased properties from Unocal, Texaco, Conoco, Sonat and
Total. CDI is pursuing a number of opportunities to expand the number of mature
offshore properties for which the Company will bid. In addition, CDI will
continue, on a selective basis, to acquire non-operated working interests in
fields where there is the potential that CDI will be awarded the decommissioning
work.
THE INDUSTRY
INDUSTRY OVERVIEW
In the Gulf of Mexico, demand for offshore exploration, development and
production services has increased considerably due to, among other factors, (i)
increased exploration and development expenditures by major and independent oil
companies, (ii) the potential for relatively large oil and gas discoveries in
offshore areas, particularly in previously unexplored Deepwater areas, (iii)
technological advances in exploration, development and production techniques,
including seismic data collection and interpretation (particularly with respect
to 3-D
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<PAGE>
seismic data), drilling techniques, subsea completion and production equipment,
and mobile production units, (iv) increasing demand for natural gas and oil, (v)
stable North American natural gas prices and (vi) royalty relief granted by the
U.S. government for oil and gas produced from wells drilled in newly acquired
Deepwater blocks in the Gulf of Mexico. These factors have increased exploration
for and development of new reserves in Deepwater areas that were previously
considered commercially marginal.
This increased interest in offshore exploration, development and production
has also been evidenced by the significant increase in Gulf of Mexico lease
sales by the MMS and the record breaking results of these sales. Importantly,
the results of these lease sales demonstrate the increasing interest in the
Deepwater. The following table sets forth for the periods presented results from
recent MMS lease sales in the Gulf.
<TABLE>
<CAPTION>
MMS LEASE SALES
-----------------------------------------------------
WESTERN GULF SALES CENTRAL GULF SALES
-------------------- -------------------------------
1996 1997 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Blocks receiving bids........... 617 804 924 1,032 794
Deepwater bids.................. 321 603 401 535 539
Total capital exposed ($MM)..... $ 504 $ 939 $ 716 $ 1,242 $ 1,350
Average dollars bid per block
($000).......................... $ 577 $ 766 $ 563 $ 799 $ 1,020
</TABLE>
Additionally, a study by the MMS forecasts that production from the Gulf will
shift toward the Deepwater areas. In 1995, 7% of total Gulf of Mexico production
came from Deepwater areas compared to 43% estimated by the year 2000.
This activity has resulted in increased demand for drilling and production
equipment and services, as evidenced by the increase in the average Gulf of
Mexico contracted utilization rate for all marketed offshore drilling rigs from
73% in 1992 to 99% in 1997 and 98% in the first quarter of 1998. Recently, most
offshore drilling contractors have announced plans to upgrade existing rigs to
drill in deeper water and harsher environments or to build new Deepwater capable
rigs. Based on reports from Offshore Data Services related to new drilling rig
construction, it is anticipated that the number of rigs worldwide capable of
drilling in greater than 1,000 feet of water will increase from 156 at December
31, 1997 to 203 by the year 2000. In addition, subsea installations (number of
production trees) in the Gulf of Mexico will increase 60% to 40 planned or under
construction in 1998 from 25 in 1997. See "Risk Factors."
SUBSEA SERVICES
The subsea services industry in the Gulf of Mexico originated in the early
1960s to assist natural gas and oil companies with their offshore operations.
The industry has grown significantly since the early 1970s as these companies
have increasingly relied upon offshore fields for production. Subsea services
are required throughout the economic life of an offshore field and include at
various phases the following services, among others:
o EXPLORATION. Pre-installation survey; rig positioning and
installation assistance; drilling inspection; subsea equipment
maintenance; search and recovery operations.
o DEVELOPMENT. Installation of production platforms; installation of
subsea production systems; pipelay support including connecting
pipelines to risers and subsea assemblies; pipeline stabilization,
testing and inspection; cable and umbilical lay and connection.
o PRODUCTION. Inspection, maintenance and repair of production
structures, risers and pipelines and subsea equipment.
o DECOMMISSIONING. Decommissioning and remediation services; plugging
and abandonment services; platform salvage and removal; pipeline
abandonment; site inspections.
The industry has grown principally due to the economic benefits of new and
advanced technologies and custom designed equipment and recently has focused
more on Deepwater projects and the integrated "full field development" service
concept described below.
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FULL FIELD DEVELOPMENT
CDI and its alliance partners can offer oil and gas companies a range of
services from subcontracting to complete field development solutions. CDI and
its partners are able to provide a complete range of subsea systems and
services, from procurement and installation of flowlines, wellheads, control
systems, umbilicals and manifolds to installation and commissioning of the
complete production system. Many oil and gas companies prefer to contract with a
consortium capable of undertaking major portions or all of an entire field
development project. Full field development services can relieve a customer of
substantially all of the burdens of management of field development and thereby
avoid many of the risks inherent in traditional contracting strategies. Field
development partnerships can also allow oil and gas companies to increase
outsourcing of development work. CDI's strategic alliances provide it with the
necessary capabilities to pursue full field development contracts.
OPERATIONS AND EQUIPMENT
SUBSEA CONSTRUCTION VESSELS. Subsea services are typically performed with
the use of specialized subsea construction vessels which provide an above water
platform that functions as an operational base for divers in water depths up to
1,000 feet and ROVs at all water depths. Distinguishing characteristics of
subsea construction vessels include DP systems, SAT diving capabilities, deck
space, deck load, craneage and moonpool launching. Deck space, deck load and
craneage are important features of the vessel's ability to transport and
fabricate hardware, supplies and equipment necessary to complete subsea
projects. Vessels with greater deck space and load capacities have the
flexibility to service more complex projects in deeper water. A moonpool is a
structure built into the center of the vessel, which enables safe and efficient
launching of ROVs and SAT diving systems in harsh weather conditions. These
characteristics will generally dictate the types of jobs undertaken and the
conditions and water depths in which the vessel is capable of working.
DYNAMIC POSITIONING. DP systems allow a vessel to maintain position
without the use of anchors, and therefore enhance productivity in adverse
weather conditions and are preferred for Deepwater applications. Computer
controlled thrusters mounted on the vessel's hull ensure the proper
counteraction to wind, current and wave forces to maintain position. Since no
anchors are required, risks associated with objects snagging on pipelines or
other underwater structures are minimized. The capabilities provided by the
Company's DP vessels have allowed CDI to penetrate new markets and provide
additional services to the Deepwater market such as flexible pipelay, well
servicing, coring and general field support.
REMOTELY OPERATED VEHICLES. ROVs are robotic vehicles used to complement,
support and increase the efficiency of diving and subsea operations and to
operate at depths where the use of divers is uncompetitive or impossible. The
ROVs acquired from Coflexip have been permanently installed on the UNCLE JOHN
and on the MERLIN. CDI believes that purchasing ROVs will enable it to better
control the quality and cost of its services, replacing the need to rely upon
third party equipment and personnel for critical path operations.
SATURATION DIVING. SAT diving, required at water depths greater than 300
feet, involves divers working from special chambers for extended periods at a
pressure equivalent to the depth of the work site. The divers are transferred
from the surface to the work site by a diving bell. After completion of the
work, the bell is lifted back to the DSV and the divers return to the chamber to
be replaced by a new group of divers who are lowered to the job site to continue
the work. SAT diving systems allow for continuous operations to be conducted 24
hours a day. The primary advantage of SAT diving is that divers can remain under
pressure and make repeated dives for extended periods before beginning
decompression. Overall productivity and safety is therefore enhanced due to
fewer decompressions, diver continuity and a lower likelihood of delays caused
by adverse weather conditions.
SURFACE DIVING. Surface diving is the primary diving technique performed
in water depths less than 300 feet. Divers are linked to the surface by a diving
umbilical containing air lines and communications equipment. The diver enters
the water directly and descends to the work site, accomplishes the prescribed
tasks and begins to decompress in the water during a gradual ascent to the
surface. The length of time a diver is able to remain at the work site depends
upon, and is limited by, the water depth.
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<PAGE>
TRADITIONAL SUBSEA SERVICES
Subsea services that CDI has performed in shallower waters of the Gulf for
more than two decades include air and saturation diving in support of pipelay
and related marine construction activities. In 1997, demand was unusually strong
for 4-point and surface air diving work in the shallow water from the shore to
water depths of 300 feet.
In February 1998, CDI purchased a significant minority stake in Aquatica, a
new shallow water diving company formed by Sonny Freeman, the former Chief
Operating Officer of Ceanic Corporation (formerly American Oilfield Divers). The
Company has committed to lend $5.0 million of additional funds to allow Aquatica
to purchase vessels and fund other growth opportunities. Management believes the
CDI investment in Aquatica should permit the Company to benefit from a market
segment that is experiencing strong demand while allowing Cal Dive to continue
to focus on its Deepwater strategy. Dependent upon various preconditions, the
shareholders of Aquatica have the right to convert their shares into Cal Dive
shares at a prescribed ratio which, among other things, must be accretive to Cal
Dive's earnings per share.
CDI offers the largest fleet of DP vessels with SAT diving capabilities
permanently deployed in the Gulf. Cal Dive's diversified fleet provides a full
complement of traditional subsea construction, maintenance and salvage project
capabilities and includes one DP MSV, four DP DSVs, two 4-point moored
saturation DSVs, three other DSVs, two work class ROVs, a Deepwater service
barge and a salvage barge. The Company has also contracted to build a
replacement for its smallest 4-point DSV, the CAL DIVER IV. The services
provided by these vessels both overlap and are complementary in a number of
market segments, enabling the Company to deploy its vessels to areas of highest
utility and margin potential.
DEEPWATER SERVICES
In 1994, CDI began to assemble a fleet of DP vessels which are required to
deliver subsea services in the Deepwater. The Company's diversified fleet
serving the Deepwater includes a semisubmersible MSV, four mono-hull DP vessels
and one Deepwater service barge. Four of these DP vessels have fully redundant
DP systems which are preferred by customers for Deepwater projects, especially
during adverse weather conditions. This Deepwater fleet includes the recent
additions of the SEA SORCERESS and the MERLIN. The CSO CONSTRUCTOR has recently
been chartered by Coflexip to Quantum. The CSO CONSTRUCTOR will also be
available to CDI, subject to Quantum's needs.
CDI formed its Deepwater Technical Services Group in early 1996 to serve
the emerging Deepwater market. This group is the focal point for assembling and
delivering the varied technological disciplines required for Deepwater drilling
projects. The limited availability of Deepwater drilling rigs has increased
demand for well completions, subsea installations and infield connection
services. CDI's DP vessels are a key asset to the application of Deepwater
technologies. Services provided by Cal Dive's Deepwater Technical Services Group
include geotechnical investigation, turnkey field development, installation of
umbilicals, controls and flexible pipe, well servicing, decommissioning, subsea
wellhead installations and pipeline repair systems and riser installation. In
1997, the Company completed or was awarded 13 Deepwater projects requiring DP
vessels which management believes represent most of those projects in the Gulf
during 1997. These projects allowed CDI to perform work numerous times at what
management believes to be record depths. The Company's alliances detailed below
are also managed through this group.
As part of its strategy in the Deepwater Gulf of Mexico, CDI entered into a
number of strategic alliances, including establishment of Quantum with Coflexip
in April 1997. Quantum, which is owned 51% by CDI and 49% by Coflexip, was
formed to pursue full field development projects in the Gulf and the Caribbean
that exceed $25.0 million in value and meet certain other criteria. Coflexip has
chartered the DP vessel CSO CONSTRUCTOR to Quantum. The CSO CONSTRUCTOR will
also be available to CDI, subject to Quantum's needs. Cal Dive will consolidate
the financial results of the joint venture into its financial statements.
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<PAGE>
CDI's other alliances, intended to enhance its ability to offer a complete
range of subsea full field development services, are described in the following
table:
<TABLE>
<CAPTION>
ALLIANCE DESCRIPTION 1997/1998 CONTRIBUTIONS
- ---------------------------------------------------------------------- ------------------------------
<S> <C> <C>
Schlumberger, Ltd................ Alliance Agreement whereby CDI Downhole equipment played
provides DP vessels and related major roles in several complex
operating services for well servicing well intervention jobs
and testing
Fugro-McClelland Marine.......... Performance Contract whereby CDI Coring work identified the
provides
Geoscience, Inc. vessels and related operating underwater aquifers causing
services for geoscience services and Deepwater sand flow
coring work
Quality Tubing, Inc.............. Preferred Provider Agreement whereby Laid a significant amount of
CDI provides vessels and related coiled line pipe, a new CDI
operating services for the service offering
installation of coiled line pipe
Shell Offshore, Inc.............. Performance Contract whereby CDI Contracted to provide well
provides vessels and related intervention services over a
operating services for subsea well two-year period
intervention and the development of
J-lay procedures
Sonat, Inc....................... Preferred Provider Agreement whereby Provided diving services on
CDI provides marine contracting several pipeline contracts
services in a life of field services
setting
TOPS............................. Preferred Provider Agreement whereby Marine construction services
CDI provides marine contracting contracts in process
services in a full field development
setting to TOPS in the Deepwater Gulf
of Mexico
Reading & Bates
Development Co................. Alliance Agreement to cooperate on Preliminary study indicated
the design and testing of the feasibility of the MSV 3500
feasibility of a new build MSV
</TABLE>
DECOMMISSIONING AND NATURAL GAS AND OIL OPERATIONS
Since 1989, CDI has established a leading position in the decommissioning
of facilities in the shallow water Gulf of Mexico. Over 75% of the 3,800
platforms in the Gulf of Mexico are over ten years old and there are
approximately 15,000 wells that must ultimately be decommissioned in accordance
with government regulations related to the decommissioning of offshore
production facilities. Since 1989, Cal Dive has undertaken a wide variety of
decommissioning assignments, most on a turnkey basis. When the structure to be
removed exceeds the capacity of CDI's salvage equipment, the Company
subcontracts the heavy lift to third party vendors.
CDI's wholly owned subsidiary ERT was formed in 1992 in response to a
market opportunity to provide a more efficient solution to offshore
decommissioning liability and CDI's desire to expand its off-season salvage and
decommissioning activity. Within ERT, the Company has assembled experienced
personnel with proven track records in geology, reservoir and production
engineering as well as offshore facilities management. CDI generates numerous
opportunities to acquire mature properties through its established contacts in
the industry. The Company's property analysis utilizes both the expertise of its
executives and CDI's years of experience in performing turnkey contracts for
decommissioning work.
To maximize the economic value of its properties, CDI also uses its
operating expertise to reduce operating costs, maximize production from the
properties and minimize the costs of decommissioning. Based on the Miller &
Lents report, the remaining average useful life of the current properties is
approximately 7.4 years based on 1997 production. Unless exempt under MMS
regulations, property owners are required to bond and/or fund the MMS' estimate
of the decommissioning liability. As of December 31, 1997, the recorded
decommissioning liability was approximately $6.5 million. Estimates of
decommissioning costs and their timing may change due to many factors including
inflation rates, market factors and changes in environmental laws and
regulations.
The table below sets forth information, as of December 31, 1997, with
respect to the Company's estimated net proved reserves and the present value of
estimated future net cash flows at such date, based on estimates by Miller &
Lents. Also see "Risk Factors -- Uncertainty of Estimates of Natural Gas and
Oil Reserves."
35
<PAGE>
TOTAL PROVED(1)
----------------
(DOLLARS IN
THOUSANDS)
Estimated Proved Reserves:
Natural Gas (MMcf).............. 22,245
Oil and Condensate (MBbls)...... 200
Standardized measure of discounted
future net cash flows(2)........... $ 19,760
- ------------
(1) East Cameron Blocks 231 and 353 purchased in January 1998 described below
are not included in the above December 31, 1997 summary. In November 1997,
ERT acquired interests in offshore properties ranging from 50-55% in
Vermilion Blocks 147 and 328 from Spirit Energy 76, a business unit of
Unocal Corporation. These blocks are located southeast of Louisiana and have
three producing wells with five shut-in wells. The facilities consist of one
four-pile, one eight-pile and a monopod platform structure. In January 1998,
ERT acquired interests in six blocks involving two separate fields from
Sonat Exploration Company (SONAT). The East Cameron 231 field (blocks 231
and 223) currently produces about 8 MMCFD and 100 BOPD from eight wells.
Structures located in the EC 231 area include 46 wells, four platforms, and
three caissons. The East Cameron 353 field currently produces about 10 MMCFD
from three wells.
(2) The standardized measure of discounted future net cash flows attributable to
the Company's reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum.
As of December 31, 1997, the Company owned an interest in 49 gross (38.1
net) natural gas wells and one gross (0.5 net) oil well located in federal
offshore waters in the Gulf of Mexico. With its 1998 acquisitions, ERT now owns
interests in 18 offshore leases and has accumulated a significant backlog of
decommissioning work in 14 ERT operated fields which include 23 platforms, nine
caissons and 98 wells.
MARINE VESSELS AND EQUIPMENT
GENERAL
The Company owns or charters a fleet of 12 vessels and two ROVs. The size
of the Company's fleet and its capabilities have increased in recent years with
the addition of the WITCH QUEEN, the BALMORAL SEA, the UNCLE JOHN, the SEA
SORCERESS, the MERLIN and the chartered CSO CONSTRUCTOR.
Management believes that the Gulf of Mexico market increasingly will
require specially designed or equipped vessels to deliver the necessary subsea
construction services, especially in the Deepwater. Five of CDI's vessels have
the permanent capability to provide SAT diving services. Five of CDI's vessels
have DP capabilities specifically designed to respond to the Deepwater market.
CDI's vessels serve as work platforms for services provided by alliances with
partners who are internationally recognized contractors and manufacturers.
NEW VESSELS AND ROVS
In May and June 1997, CDI took delivery of two, 2,000 meter (6,600 feet),
100 hp Triton XL ROVs, the newest generation of deepwater work class ROVs. The
Triton XL units were manufactured by Perry Tritech, a wholly owned subsidiary of
CDI's strategic partner, Coflexip. One of these ROVs, the Triton XL 15, has been
installed permanently onboard CDI's MSV UNCLE JOHN, making it the only
semisubmersible in the Gulf of Mexico with this capability. Operating through a
designated moonpool and equipment which deploys the ROV 50 feet below the water
line, the Triton XL 15 is able to perform projects in severe offshore sea
conditions without the usual loss of time associated with the deployment of
ROVs. The second work class ROV, the Triton XL 16, is permanently installed on
the MERLIN which utilizes a U-boom launch and recovery system, heavy duty winch
and umbilical, control van and work van. CDI's goal is not to become a volume
provider of ROVs, but rather to utilize these units in support of Deepwater
projects and CDI's turnkey business.
In October 1997, CDI acquired a 374 foot Deepwater service barge, the SEA
SORCERESS, with 6-point mooring and accommodations for 50 people. The vessel is
ice strengthened, has a deck load capacity of 10,000 tons and is certified to
handle 65,000 barrels of hydrocarbon storage. A large moonpool located near
mid-ship is available to facilitate pipelay, coring, drilling and production
riser operations. The vessel is scheduled to be on an approximately three month
contract starting in the third quarter of 1998 to assist in the development of
the "Terra Nova" project offshore of Newfoundland, Canada. This project
involves the second largest Canadian offshore field with an estimated 300-400
million barrels of recoverable oil and the latest technology to protect
wellheads and subsea templates from iceberg flow.
In December 1997, CDI acquired a DP ROV support vessel, the MERLIN. The
vessel is 198 feet long, 40 feet wide and has accommodations for 42 people. The
vessel can be fitted with a portable moonpool diving
36
<PAGE>
system and has one fully functioning ROV control station and maintenance store.
The vessel also has Nautronics station keeping and tracking systems and has an
"A Frame" 30 ton hydraulic lift and one deck mounted crane. CDI has
permanently installed its Triton 16 ROV on the MERLIN and expects to use the
vessel primarily for ROV support, coring and laying of small umbilicals.
CDI is currently in the process of designing the MSV 3500, a sixth
generation, multi-service vessel which is a new generation of the MSV UNCLE
JOHN'S column stabilized, semisubmersible design and is unique due to the
absence of lower hull cross bracing which decreases vessel weight and increases
operating efficiency. Variable deck load of 4,000 tons and a large deck area
would make the vessel particularly well suited for large offshore construction
projects in Deepwater. High transit speed would allow it to move rapidly from
one location to another while operability (thruster power and motion
characteristics) would provide for well intervention in an extremely cost
efficient manner. Finally, management expects that there would be a derrick
similar to that installed on the MSV UNCLE JOHN for well completion and well
servicing projects. There is no assurance, however, that the MSV 3500 will be
constructed.
In April 1998, Coflexip chartered the CSO CONSTRUCTOR to Quantum. The CSO
CONSTRUCTOR will also be available to CDI, subject to Quantum's needs. The
vessel is 367 feet long, 67 feet wide, has accommodations for 109 people and has
an especially large deck area of over 8,600 square feet with 2,210 tons of deck
load capacity. The SAT diving system is moonpool based and can support 18 divers
allowing for split work levels of the dive crews. Dynamic positioning is
controlled by a fully redundant Kongeberg system with four independent reference
systems. Cranage is provided from both a 100-ton pedestal crane and a 100-ton A
frame. Both CDI and Quantum expect to use the CSO CONSTRUCTOR on a variety of
heavy construction projects ranging from pipelay to coring, subsea well
servicing, decommissioning, drilling support and production riser operations.
CAL DIVE INTERNATIONAL, INC.
LISTING OF VESSELS, BARGES AND ROVS
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
DATE MOONPOOL
PLACED IN CLEAR DECK LAUNCH/
SERVICE LENGTH SPACE DECK LOAD ACCOMMO- SAT CLASSIFI-
BY CDI (FEET) (SQ. FEET) (TONS) DATIONS DIVING CRANE CATION
--------- ------ ---------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DP MSV:
Uncle John........................... 11/96 254 11,863 460 102 * 2 x 100- DNV
ton
DP DSVS:
Balmoral Sea(1)...................... 9/94 259 3,443 250 60 * 30-ton DNV
Witch Queen.......................... 11/95 278 5,600 500 62 * 50-ton DNV
Merlin............................... 12/97 198 955 308 42 A-Frame ABS
CSO Constructor(2)................... 4/98 367 8,612 2,210 109 * 100-ton DNV
DSVS:
Cal Diver I.......................... 7/84 196 2,400 220 40 * 20-ton ABS
Cal Diver II......................... 6/85 166 2,816 300 32 * A-Frame ABS
Cal Diver III........................ 8/87 115 1,320 105 18 ABS
Cal Diver IV......................... 10/90 100 1,035 46 16 ABS
Cal Diver V.......................... 9/91 168 2,324 490 30 A-Frame ABS
OTHER:
Sea Sorceress........................ 8/97 374 8,600 10,000 50 -- DNV
Cal Dive Barge I..................... 8/90 150 NA 200 26 200-ton ABS
ROVs x 2............................. 4/97 25 -- -- -- -- --
- ------------
</TABLE>
(1) This vessel was operated by the Company under charters from September 1994
to February 1995 and from April 1996 to August 8, 1996, at which time it was
acquired by the Company.
(2) This vessel is chartered to Quantum and, subject to Quantum's needs, the
vessel will also be available to CDI.
37
<PAGE>
Under government regulations and CDI's insurance policies, the Company is
required to maintain its vessels in accordance with standards of seaworthiness
and safety set by government regulations and classification organizations. CDI
maintains its fleet to the standards for seaworthiness, safety and health set by
both the American Bureau of Shipping ("ABS"), Det Norske Veritas ("DNV") and
the United States Coast Guard ("USCG"). The ABS is one of several
classification societies used by ship owners to certify that their vessels meet
certain structural, mechanical and safety equipment standards, including Lloyd's
Register, Bureau Veritas and DNV among others.
CDI incurs routine drydock inspection, maintenance and repair costs under
USCG Regulations and to maintain ABS or DNV classification for its vessels. In
addition to complying with these requirements, the Company has its own vessel
maintenance program which management believes permits Cal Dive to continue to
provide its customers with well maintained, reliable vessels.
In the normal course of its operations, the Company also charters other
vessels on a short-term basis, such as tugboats, cargo barges, utility boats and
dive support vessels. All of the Company's vessels are subject to ship
mortgages. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
COFLEXIP STRATEGIC ALLIANCE
BACKGROUND
As part of CDI's strategy in the Deepwater Gulf of Mexico and to respond to
the growing trend towards integrated contracting of packages for full field
development services, CDI entered into a strategic alliance with Coflexip in
April 1997. Coflexip is the worldwide leader in the design and manufacture of
flexible pipe and umbilicals and is a leading integrated subsea contractor to
the offshore oil and gas industry. Deepwater full field developments have
shifted toward greater use of subsea and floating production systems and away
from conventional fixed production platform development systems. These
developments have increased the demand for services and products offered by CDI
and Coflexip.
The alliance was formed by Coflexip acquiring 3,699,788 shares of the
Common Stock of the Company, pursuant to a purchase agreement dated as of April
11, 1997 (the "Purchase Agreement") and entering into the Business Cooperation
Agreement. In addition, CDI is a party to a shareholders agreement that provides
Coflexip with a right of first refusal in connection with certain acquisition
proposals for CDI. See "Certain Relationships and Related Transactions." In
connection with the closing under the Purchase Agreement, Coflexip and the
Company entered into certain related agreements, including two-year employment
agreements with the Company's nine senior executives, a registration rights
agreement and a shareholders agreement and amended the Company's Articles of
Incorporation and Bylaws. See "Management" and "Description of Capital
Stock."
THE BUSINESS COOPERATION AGREEMENT
As part of the transaction, the companies entered into the Business
Cooperation Agreement and formed Quantum in April 1997 which is owned 51% by Cal
Dive and 49% by Coflexip. CDI will consolidate financial results from the joint
venture into its financial statements. CDI and Coflexip are now bidding on
projects as a subcontractor to Quantum for their respective services. Cal Dive's
assets and services include ROV operation, diving, coiled tubing, flexible lay
operations with deck load requirements up to 600 metric tons, riser
installation, well servicing, DP DSV's and related services and 4-point DSV's.
Coflexip's assets and services include flexible lay operations in excess of
alliance vessel capabilities (including risers), product sales, manufacture and
supply of umbilicals/flex hose/flex pipe, ROV manufacture and sale, full field
project design and engineering and project management, reeled hard pipelay
(including risers), pipelay operations (excluding coiled tubing), and
construction vessels in excess of Company and alliance capabilities. Quantum is
pursuing Gulf of Mexico and Caribbean projects that require at least one Cal
Dive service and one Coflexip service, where the aggregate contract value of the
combined services is at least $25.0 million, and any such other projects as the
parties may agree.
COMPLEMENTARY PRODUCTS AND SERVICES
Management believes that Coflexip and CDI offer highly complementary
products and services and that the strategic alliance with Coflexip
significantly expands CDI's ability to provide full field development and life
of
38
<PAGE>
field services. The table below illustrates some of the individual strengths,
products and services offered by Coflexip and CDI that combined permit them to
offer a new approach for Deepwater Gulf subsea contracting activities:
CAL DIVE
o Significant Gulf market presence
o Deepwater position in the Gulf
o DP vessels
o Spot market turnkey expertise
o Flexible pipe installation
o ROV operation and marketing
o Engineering utilization and marketing
o Well servicing capability: alliance with Schlumberger in the Gulf
COFLEXIP
o Worldwide presence
o Deepwater expertise and credibility
o Large DP construction vessels
o Large project EPIC contractor
o Umbilical and flexible pipe manufacturer/installer
o ROV manufacturer
o Significant subsea engineering group
o Well servicing capability: alliance with Schlumberger in the North Sea
INFORMATION ON COFLEXIP
Coflexip is a world leader in the design and manufacture of flexible pipe
and umbilicals, and one of the leading subsea contractors to the offshore oil
and gas industry, providing integrated subsea services on large subsea projects
throughout the world. Coflexip was established in 1971 to manufacture and market
flexible pipe designed by the Institute Francais du Petrole, a French research
and development organization that holds a controlling interest in one of
Coflexip's principal shareholders. In December 1994, Coflexip acquired Stena
Offshore N.V., a contractor providing subsea services to the oil and gas
industry, from Stena International B.V. ("Stena International"), and Stena
International became a significant shareholder of Coflexip.
Coflexip targets the subsea production systems segment of the subsea
oilfield services industry involving the installation of a wellhead on the
seabed rather than on a platform. Subsea production systems generally require
flowlines that are less than 12 inches in internal diameter and less than 20
kilometers in length. This segment corresponds with the Company's technological
capabilities and represents its key market.
Coflexip designs and manufactures offshore flexible pipe, a number of
products that apply similar technology, including umbilicals and ROVs. Coflexip
also performs project management and engineering services in connection with
large subsea contracts, installs rigid and flexible pipes, umbilicals and
floating production storage and offloading facilities, performs inspection,
repair and maintenance and provides a number of related services such as
lifting, diving and testing. Its fleet of vessels and equipment is one of the
largest and most advanced technologically in the industry.
Coflexip has manufacturing and assembly facilities in five countries and
markets its integrated services worldwide. Its principal markets are the North
Sea (UK and Norwegian sectors), offshore Brazil, the Asia-Pacific region and
other markets including North America and North and West Africa. Coflexip
employs approximately 3,900 employees in five continents and has subsidiaries in
France, the United Kingdom, Brazil, Norway, the United States, Australia and
India.
CUSTOMERS
The Company's customers include major and independent natural gas and oil
producers, pipeline transmisstion companies and offshore and engineering and
construction firms. The level of construction services required by any
particular customer depends on the size of that customer's capital expenditure
budget devoted to construction plans in a particular year. Consequently,
customers that account for a significant portion of contract revenues in one
fiscal year may represent an immaterial portion of contract revenues in
subsequent fiscal years. The Company estimates that in 1997 it provided subsea
services to approximately 100 customers. For the years ended December 31, 1997
and 1996, approximately 19% and 24%, respectively, of the Company's total
revenues were attributable to J. Ray McDermott, S.A. In addition, Shell
Offshore, Inc. represented 11% of consolidated revenues in 1997. The Company's
projects are typically of short duration and are generally awarded shortly
before remobilization. Accordingly, backlog is not a meaningful indicator of
future activities.
39
<PAGE>
MARKETING
Contracts for work in the Gulf of Mexico are typically awarded on a
competitive bid basis with customers usually requesting bids on projects several
months prior to commencement. CDI maintains a focused marketing effort through a
12-person direct sales force operating from Houston, Texas together with sales
offices in Lafayette and New Orleans, Louisiana. Most contracts are awarded on a
turnkey basis, but CDI also performs work on a cost-plus or day rate basis, or
on a combination of such bases. Under a qualified turnkey project, Cal Dive
agrees to provide a portion of services for a fixed price (regardless of the
time and materials actually required) and other services on a day rate basis.
For projects involving day rates, CDI charges are based upon a rate schedule for
the services provided.
CDI sells substantially all of its natural gas and oil under short-term
contracts (maximum of one year in duration) at pricing based on spot market
indexes. CDI has not engaged in hedging transactions.
COMPETITION
The subsea services industry is highly competitive. Competition has
historically been based on factors such as the location and type of equipment
available, the ability to deploy such equipment, the safety and quality of
service in recent years and price. While price is a factor, the ability to
acquire specialized vessels, to attract and retain skilled personnel, and to
demonstrate a good safety record are important competitive factors. CDI's
competitors in the shallower waters of the Gulf include Ceanic Corporation
(formerly American Oilfield Divers, Inc.), Torch, Inc., Horizon Offshore, Inc.,
Global Industries Ltd. and Oceaneering International, Inc. as well as a number
of smaller companies, some of which only operate a single vessel, that often
compete solely on price. For Deepwater projects, Cal Dive's principal U.S. based
competitors include Oceaneering International, Inc., Global Industries, Ltd. and
J. Ray McDermott, S.A. Other large foreign based subsea contractors, including
Stolt Comex Seaway, A/S, DSND, Ltd., Saipem and Rockwater, Ltd., have announced
their intention to perform services in the Gulf. CDI also encounters significant
competition for the acquisition of producing natural gas and oil properties. The
Company's ability to acquire additional properties will depend upon its ability
to evaluate and select suitable properties and to consummate transactions in a
highly competitive environment. Many of the Company's competitors are
well-established companies with substantially larger operating staffs and
greater capital resources than CDI which, in many instances, have been engaged
in the energy business for a much longer time than CDI.
TRAINING, SAFETY AND QUALITY ASSURANCE
CDI maintains a stringent safety and quality assurance program. In 1994,
the Company devised and instituted a comprehensive revision to its safety
program which emphasizes team building by assembling a core group of personnel
specifically for each vessel to promote offshore efficiency and safety.
Assembling core groups of personnel specifically assigned to each vessel has
also reduced recorded incidents. As a result, management believes that CDI's
safety programs are among the best in the industry.
FACILITIES
CDI is headquartered at 400 N. Sam Houston Parkway E., in Houston, Texas.
The Company's subsea and marine services operations are based in Morgan City,
Louisiana. All of CDI's facilities are leased.
PROPERTY AND FACILITIES SUMMARY
<TABLE>
<CAPTION>
LOCATION FUNCTION SIZE
- ------------------------------------- ------------------------------------------ -------------------
<S> <C>
Houston, Texas....................... Corporate and ERT Headquarters 37,800 square feet
Project Engineering
Account Management
Sales Office
Morgan City, Louisiana............... Operations/Docking 28.5 acres
Warehouse 30,000 square feet
Offices 4,500 square feet
</TABLE>
The Company also has sales offices in Lafayette and New Orleans, Louisiana.
40
<PAGE>
GOVERNMENT REGULATION
Many aspects of the offshore marine construction industry are subject to
extensive governmental regulation. The Company is subject to the jurisdiction of
the USCG, the Environmental Protection Agency, MMS and the U.S. Customs Service
as well as private industry organizations such as the ABS.
CDI supports and voluntarily complies with the Association of American
Diving Contractor Standards. The USCG sets safety standards and is authorized to
investigate vessel and diving accidents and recommend improved safety standards,
and the U.S. Customs Service is authorized to inspect vessels at will. CDI is
required by various governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to its operations. The
Company believes that it has obtained or can obtain all permits, licenses and
certificates necessary for the conduct of its business.
In addition, CDI depends on the demand for its services from the oil and
gas industry and, therefore, the Company's business is affected by laws and
regulations, as well as changing taxes and policies relating to the oil and gas
industry generally. In particular, the development and operation of natural gas
and oil properties located on the OCS of the United States is regulated
primarily by the MMS.
The MMS requires lessees of OCS properties to post bonds in connection with
the plugging and abandonment of wells located offshore and the removal of all
production facilities. Operators in the OCS waters of the Gulf of Mexico are
currently required to post an area wide bond of $3.0 million or $500,000 per
producing lease. The Company currently has bonded its offshore leases as
required by the MMS. Under certain circumstances, the MMS has the authority to
suspend or terminate operations on federal leases. Any such suspensions or
terminations of the Company's operations could have a material adverse effect on
the Company's financial condition and results of operations.
The Company acquires production rights to offshore mature oil and gas
properties under federal oil and gas leases, which the MMS administers. These
leases contain relatively standardized terms and require compliance with
detailed MMS regulations and orders pursuant to the Outer Continental Shelf
Lands Act ("OCSLA") (which are subject to change by the MMS). The MMS has
promulgated regulations requiring offshore production facilities located on the
OCS to meet stringent engineering and construction specifications. These latter
regulations were withdrawn pending further discussions among interested federal
agencies. The MMS also has issued regulations restricting the flaring or venting
of natural gas and prohibiting the burning of liquid hydrocarbons without prior
authorization. Similarly, the MMS has promulgated other regulations governing
the plugging and abandonment of wells located offshore and the removal of all
production facilities. Finally, under certain circumstances, the MMS may require
any operations on federal leases to be suspended or terminated, and the MMS has
recently proposed, but not yet enacted, regulations that would allow it to expel
unsafe operators from existing OCS platforms and bar them from obtaining future
leases. Any such suspension or termination or ban could materially and adversely
affect the Company's financial condition and operations.
The MMS has also issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and the
valuation of crude oil produced from federal leases. The proposed rule would
modify the valuation procedures for both arm's length and non-arm's length crude
oil transactions to decrease reliance on oil posted prices and assign a value to
crude oil that better reflects market value, establish a new MMS form for
collecting value differential data, and amend the valuation procedure for the
sale of federal royalty oil. The Company cannot predict at this stage of the
rulemaking proceeding how it might be affected by this amendment to the MMS'
regulations. In addition, the MMS recently issued a final rule amending its
regulations regarding costs for gas transportation which are deductible for
royalty valuation purposes when gas is sold offlease. Among other matters, for
purposes of computing royalty owed, the rule disallows as deductions certain
costs, such as aggregator/marketer fees and transportation imbalance charges and
associated penalties.
Historically, the transportation and sale for resale of natural gas in
interstate commerce has been regulated pursuant to the Natural Gas Act of 1938,
the Natural Gas Policy Act of 1978 (the "NGPA"), and the regulations
promulgated thereunder by the Federal Energy Regulatory Commission (the
"FERC"). In the past, the federal government has regulated the prices at which
gas and oil could be sold. While sales by producers of natural gas, and all
sales of crude oil, condensate, and natural gas liquids can currently be made at
uncontrolled market prices, Congress could reenact price controls in the future.
Deregulation of wellhead sales in the natural gas industry began with the
enactment of the NGPA. In 1989, the Natural Gas Wellhead Decontrol Act was
enacted. This act
41
<PAGE>
amended the NGPA to remove both price and non-price controls from natural gas
sold in "first sales" no later than January 1, 1993.
Sales of natural gas are affected by the availability, terms and cost of
transportation. The price and terms for access to pipeline transportation remain
subject to extensive federal and state regulation. Several major regulatory
changes have been implemented by Congress and the FERC from 1985 to the present
that affect the economics of natural gas production, transportation and sales.
In addition, the FERC continues to promulgate revisions to various aspects of
the rules and regulations affecting those segments of the natural gas industry,
most notably interstate natural gas transmission companies that remain subject
to the FERC's jurisdiction. These initiatives may also affect the intrastate
transportation of gas under certain circumstances. The stated purpose of many of
these regulatory changes is to promote competition among the various sectors of
the natural gas industry. The ultimate impact of the complex rules and
regulations issued by the FERC since 1985 cannot be predicted. In addition, many
aspects of these regulatory developments have not become final but are still
pending judicial and FERC final decisions.
The Company cannot predict what further action the FERC will take on these
matters, however, the Company does not believe that it will be affected by any
action taken materially differently than other companies with which it competes.
Additional proposals and proceedings before various federal and state
regulatory agencies and the courts could affect the oil and gas industry. The
Company cannot predict when or whether any such proposals may become effective.
In the past, the natural gas industry has been heavily regulated. There is no
assurance that the regulatory approach currently pursued by the FERC will
continue indefinitely. Notwithstanding the foregoing, the Company does not
anticipate that compliance with existing federal, state and local laws, rules,
and regulations will have a material effect upon the capital expenditures,
earnings, or competitive position of the Company.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to a variety of federal, state and
local laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws that are often complex and costly to comply with, and that carry
substantial administrative, civil and possibly criminal penalties for failure to
comply. Aside from possible liability for damages and costs associated with
releases of hazardous materials including oil into the environment, such laws
and regulations may impose liability on the Company for the conduct of or
conditions caused by others, or by acts of the Company that were in compliance
with all applicable laws at the time such acts were performed.
The Oil Pollution Act of 1990, as amended ("OPA"), imposes a variety of
requirements on "responsible parties" related to the prevention of oil spills
and liability for damages resulting from such spills in waters of the United
States. A "responsible party" includes the owner or operator of an onshore
facility, vessel or pipeline, or the lessee or permittee of the area in which an
offshore facility is located. OPA imposes liability on each responsible party
for oil spill removal costs and for other public and private damages from oil
spills. Failure to comply with OPA may result in the assessment of civil and
criminal penalties. OPA establishes liability limits of up to $350.0 million for
onshore facilities, all removal costs plus up to $75.0 million for offshore
facilities, and the greater of $500,000 or $600 per gross ton for vessels other
than tank vessels. The liability limits are not applicable, however, if the
spill is caused by gross negligence or willful misconduct, if the spill resulted
from violation of a federal safety, construction, or operating regulation, or if
a party fails to report a spill or fails to cooperate fully in the cleanup. Few
defenses exist to the liability imposed under OPA. Management of the Company is
currently unaware of any oil spills for which the Company has been designated as
a responsible party under OPA that will have a material adverse impact on the
Company or its operations.
OPA also imposes ongoing requirements on a responsible party including
preparation of an oil spill contingency plan and proof of financial
responsibility to cover a majority of the costs in a potential spill. The
Company believes it has appropriate spill contingency plans in place. Vessels
subject to OPA other than tank vessels are subject to financial responsibility
limits of the greater of $500,000 or $600 per gross ton, while offshore
facilities are subject to financial responsibility limits of not less than $35.0
million, with that limit potentially increasing up to $150.0 million if a formal
risk assessment indicates that a greater amount is required. In March 1997, the
MMS proposed regulations implementing these financial responsibility
requirements. The
42
<PAGE>
Company believes that it currently has established adequate proof of financial
responsibility for its vessels and onshore and offshore facilities, and fully
anticipates that in the future it will be able to satisfy the MMS requirements
for financial responsibility under OPA and the proposed regulations, once they
are adopted.
OPA also requires owners and operators of vessels over 300 gross tons to
provide the USCG with evidence of financial responsibility to cover the cost of
cleaning up oil spills from such vessels. The Company currently owns and
operates five vessels over 300 gross tons. Satisfactory evidence of financial
responsibility has been provided to the USCG for all of the Company's vessels.
The Clean Water Act imposes strict controls on the discharge of pollutants
into the navigable waters of the U.S., and imposes potential liability for the
costs of remediating releases of petroleum and other substances. The Clean Water
Act provides for civil, criminal and administrative penalties for any
unauthorized discharge of oil and other hazardous substances and imposes
substantial potential liability for the costs of removal, remediation and
damages. Many states have laws which are analogous to the Clean Water Act and
also require remediation of accidental releases of petroleum in reportable
quantities in state waters. The Company's vessels routinely transport diesel
fuel to offshore rigs and platforms, and also carry diesel fuel for their own
use. The Company's supply boats transport bulk chemical materials used in
drilling activities, and also transport liquid mud which contains oil and oil
by-products. In addition, offshore facilities and vessels operated by the
Company have facility and vessel response plans to deal with potential spills of
oil or its derivatives.
OCSLA provides the federal government with broad discretion in regulating
the release of offshore resources of natural gas and oil production as well as
regulating safety and environmental protection applicable to lessees and
permittees operating in the OCS. Specific design and operational standards may
apply to OCS vessels, rigs, platforms, vehicles and structures. Violations of
lease conditions or regulations issued pursuant to OCSLA can result in
substantial civil and criminal penalties, as well as potential court injunctions
curtailing operations and cancellation of leases. Because the Company's
operations rely on offshore oil and gas exploration and production, if the
government were to exercise its authority under OCSLA to restrict the
availability of offshore oil and gas leases, such action could have a material
adverse effect on the Company's financial condition and the results of
operations. As of this date, the Company believes it is not the subject of any
civil or criminal enforcement actions under OCSLA.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") contains provisions dealing with remediation of releases of
hazardous substances into the environment and imposes liability without regard
to fault or the original conduct, on certain classes of persons including owners
and operators of contaminated sites where the release occurred and those
companies who transport, dispose of or who arrange for disposal of hazardous
substances released at the sites. Under CERCLA, such persons may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources and for the costs of certain health studies, and it is not uncommon
for third parties to file claims for personal injury and property damage
allegedly caused by the release of hazardous substances. Although the Company
handles hazardous substances in the ordinary course of business, the Company is
not aware of any hazardous substance contamination for which it may be liable.
Management believes the Company is in compliance in all material respects
with all applicable environmental laws and regulations to which it is subject.
The Company does not anticipate that compliance with existing environmental laws
and regulations will have a material effect upon the capital expenditures,
earnings or competitive position of the Company. However, changes in the
environmental laws and regulations, or claims for damages to persons, property,
natural resources or the environment, could result in substantial costs and
liabilities to the Company and thus there can be no assurance that the Company
will not incur significant environmental compliance costs in the future.
INSURANCE AND LITIGATION
CDI's operations are subject to the inherent risks of offshore marine
activity including accidents resulting in personal injury and the loss of life
or property, environmental mishaps, mechanical failures and collisions. CDI
insures against these risks at levels consistent with industry standards. The
Company also carries workers' compensation, maritime employer's liability,
general liability and other insurance customary in its business. All insurance
is carried at levels of coverage and deductibles that management considers
financially prudent. The Company's services are provided in hazardous
environments where accidents involving catastrophic damage or
43
<PAGE>
loss of life could result, and litigation arising from such an event may result
in CDI being named a defendant in lawsuits asserting large claims. To date, CDI
has been involved in no such catastrophic lawsuit. Although there can be no
assurance that the amount of insurance carried by Cal Dive is sufficient to
protect it fully in all events, management believes that its insurance
protection is adequate for CDI's business operations. A successful liability
claim for which the Company is underinsured or uninsured could have a material
adverse effect on CDI.
The Company is involved in various legal proceedings primarily involving
claims for personal injury under the General Maritime Laws of the United States
and the Jones Act as a result of alleged negligence. The Company believes that
the outcome of all such proceedings, even if determined adversely, would not
have a material adverse effect on its business or financial condition.
EMPLOYEES
CDI relies on the high quality of its workforce and has successfully hired,
trained, and retained skilled managers and divers. As of December 31, 1997, the
Company had 524 employees, 120 of which were salaried. The Company also utilized
160 non-US citizens to crew its foreign flag vessels under a crewing contract
with C-MAR Services (UK), Ltd. of Aberdeen, Scotland. None of the Company's
employees belong to a union or are employed pursuant to any collective
bargaining agreement or any similar arrangement. Management believes that the
Company's relationship with its employees and foreign crew members is good.
Of the Company's employees, 150 persons own shares of Common Stock and 45
other employees hold options to acquire Common Stock under the Company's 1995
Long Term Incentive Plan, as amended.
44
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information as of the date of this
Prospectus with respect to the executive officers, directors and certain other
senior officers of the Company:
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------ --- -------------------------------------
Gerald G. Reuhl..................... 47 Chairman and Director (retiring)
Owen Kratz.......................... 44 President, Chief Executive Officer
and Director
S. James Nelson, Jr................. 56 Executive Vice President, Chief
Financial Officer and Director
Martin R. Ferron.................... 41 Executive Vice President and Chief
Operating Officer
Andrew C. Becher.................... 52 Senior Vice President and General
Counsel
Louis L. Tapscott................... 60 Senior Vice President -- Business
Development
Kenneth Duell....................... 47 Senior Vice President -- Special
Projects and Deepwater
Jon M. Buck......................... 40 Vice President -- Sales
Randall W. Drewry................... 52 Vice President -- Bids and Proposals
Michael P. Middleton................ 45 Vice President -- Operations
A. Wade Pursell..................... 33 Vice President -- Finance
Terrell W. (Jack) Reedy............. 56 Vice President -- Safety
Lyle K. Kuntz....................... 46 President, ERT
Gordon F. Ahalt..................... 70 Director
Thomas M. Ehret..................... 46 Director
Jean-Bernard Fay.................... 52 Director
Kenneth Hulls....................... 54 Director
David H. Kennedy.................... 48 Director
William E. Macaulay................. 52 Director
- ------------
GERALD G. REUHL has served as the Company's Chairman of the Board since
1990. Mr. Reuhl is planning to retire and become a consultant to CDI in the
second quarter of 1998.
OWEN KRATZ has served as the Company's Chief Executive Officer since April
1997, President since 1993 and Chief Operating Officer and director since 1990.
He joined the Company in 1984 and has held various offshore positions, including
SAT diving supervisor, and management responsibility for client relations,
marketing and estimating. From 1982 to 1983, Mr. Kratz was the owner of an
independent marine construction company operating in the Bay of Campeche. Prior
to 1982, he was a supervisor for various international diving companies and a
SAT diver in the North Sea.
S. JAMES NELSON, JR., has served as Executive Vice President, Chief
Financial Officer and a director of the Company since 1990. From 1985 to 1988,
Mr. Nelson was the Senior Vice President and Chief Financial Officer of
Diversified Energies, Inc., the former parent of Cal Dive, at which time he had
corporate responsibility for the Company. From 1980 to 1985, Mr. Nelson served
as Chief Financial Officer of Apache Corporation, an oil and gas exploration and
production company. From 1966 to 1980, Mr. Nelson was employed with Arthur
Andersen & Co., and from 1976 to 1980, he was a partner serving on the firm's
worldwide oil and gas industry team. Mr. Nelson received his undergraduate
degree from Holy Cross College (B.S.) in 1964 and a masters in business
administration (M.B.A.) from Harvard University in 1966.
MARTIN R. FERRON became Executive Vice President and Chief Operating
Officer in January 1998. Mr. Ferron has over sixteen years of experience in the
oilfield industry, the last seven of which were in senior management positions
with international operations of McDermott Marine Construction and Oceaneering
International Services Limited. Mr. Ferron has a Civil Engineering degree from
the City University in London, a Masters Degree in Marine Technology from
Strathclyde University in Glasgow, and an MBA from Aberdeen University, Scotland
and is a Chartered Civil Engineer.
ANDREW C. BECHER has served as Senior Vice President and General Counsel of
the Company since January 1996. Mr. Becher served as outside general counsel for
the Company from 1990 to 1996, while a partner with the national law firm
Robins, Kaplan, Miller & Ciresi. From 1987 to 1990, Mr. Becher served as Senior
Vice
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President of Dain Raucher, Inc., a regional investment banking firm. From 1976
to 1987, he was a partner specializing in mergers and acquisitions with the law
firm of Briggs and Morgan.
LOUIS L. TAPSCOTT joined the Company as Senior Vice President of Business
Development in August 1996. From 1992 to 1996, he was a Senior Vice President
for Sonsub International, Inc., a company which operates a deepwater fleet of
ROVs. From 1984 to 1988, he was a director and Chief Operating Officer of
Oceaneering International, Inc. Mr. Tapscott has over thirty years of executive
management and operational experience working with subsea contractors and subsea
technology organizations in the United States and internationally.
JON M. BUCK has served as the Company's Vice President of Sales since
August 1996 and as Sales Coordinator since 1994. From 1987 to 1994, Mr. Buck
served as one of the Company's Account Managers. Prior to 1987, he held various
positions in the hyperbaric welding and sales groups of SubSea International,
Inc.
RANDALL W. DREWRY has served as the Company's Vice President of Bids and
Proposals since 1992. He has held a number of management positions since joining
the Company in 1980 and was responsible for custom designing the CAL DIVER I in
1984. Mr. Drewry has 24 years of experience in the industry as a diver, project
manager, marine manager and sales coordinator and is a specialist in pipeline
construction and saturation project specifications.
KENNETH DUELL joined Cal Dive in November of 1994 and was appointed Vice
President -- Special Projects in November 1996. From 1989 to 1994, he was
employed by ABB Soimi, Milan, Italy, in connection with a modular refining
systems development in Central Asia. From 1974 to 1988, he held various
positions with Santa Fe International, including the ROV and diving division.
Mr. Duell has over 22 years of worldwide experience in all aspects of the
onshore and offshore construction and diving industry.
MICHAEL P. MIDDLETON has served as the Company's Vice President of
Operations since 1991. Since joining the Company in 1981, Mr. Middleton has held
a number of offshore and management positions, including dive tender, diver,
diving superintendent, diving personnel manager, marine operations manager and
general manager.
A. WADE PURSELL joined the Company in May 1997 as Vice President -- Finance
and Chief Accounting Officer. From 1988 through 1997 he was with Arthur Andersen
LLP, most recently as an Experienced Manager specializing in the offshore
services industry. Mr. Pursell is a Certified Public Accountant.
TERRELL W. (JACK) REEDY has been the Company's Vice President of Safety
since 1991, becoming Vice President of Safety and Training in 1994. Prior to
joining the Company in 1990, Mr. Reedy worked for McDermott International, Inc.
as a diving supervisor and in offshore operations and the safety area. Prior
thereto, he served in the United States Navy as a SAT diver, a diving medical
technician and a member of the Experimental Diving Unit.
LYLE K. KUNTZ has served as President of the Company's subsidiary, Energy
Resource Technology, Inc., since its inception in 1992. Prior to forming ERT,
Mr. Kuntz spent 17 years with ARCO Oil and Gas Co. in a broad range of senior
engineering and management positions.
GORDON F. AHALT has served on the Company's Board of Directors since July
1990 and has extensive experience in the oil and gas industry. Since 1982, Mr.
Ahalt has been the President of GFA, Inc., a petroleum industry management and
financial consulting firm. From 1979 to 1982, he served as Senior Vice President
and Chief Financial Officer of Ashland Oil Company. Prior thereto, Mr. Ahalt
spent a number of years in executive positions with Chase Manhattan Bank.
THOMAS M. EHRET has served on the Company's Board of Directors since April
1997. Mr. Ehret has been Senior Executive Vice President of Coflexip Stena
Offshore since 1995 and served as Chief Operating Officer for the Group from
December 1994 to January 1996 and since February 1998. From 1989 through 1994,
Mr. Ehret served as President and Chief Executive Officer of the Stena Offshore
Group based in Aberdeen, Scotland.
JEAN-BERNARD FAY has served on the Company's Board of Directors since April
1997. Mr. Fay has been Senior Executive Vice President Finance and
Administration and Chief Financial Officer of Coflexip since 1990. From 1986 to
1990, he was a Managing Director with SCOR (UK), a French reinsurance group.
KENNETH HULLS has served on the Company's Board of Directors since May
1997. Mr. Hulls has served as President and Chief Executive Officer of Coflexip
Stena Offshore, Inc., the North American subsidiary of Coflexip since May 1997,
and has held various positions in the Coflexip Stena Offshore Group from 1991 to
May 1997. From 1977 to 1991, Mr. Hulls held various international positions in
the offshore construction industry.
46
<PAGE>
DAVID H. KENNEDY has served on the Company's Board of Directors since
January 1995 and has more than 20 years of experience in the energy industry. In
1981, Mr. Kennedy joined First Reserve Corporation, a corporate manager of
private investments focusing on the energy and energy-related sectors and since
1981, has served as one of its Managing Directors. From 1976 to 1981, he was
with Price Waterhouse & Co. where his responsibilities included tax and audit
services for major energy companies. Mr. Kennedy is a director of Maverick Tube
Corporation, a manufacturer of steel pipe and casing, and of Berkley Petroleum
Corporation, Best Pacific Resources and Pursuit Resources Corporation, three
Canadian exploration and production companies.
WILLIAM E. MACAULAY has served on the Company's Board of Directors since
January 1995. Since 1983, Mr. Macaulay has served as President and since 1990
also as the Chief Executive Officer of First Reserve Corporation, a corporate
manager of private investments focusing on the energy and energy-related
sectors. Mr. Macaulay serves as a director of Weatherford Enterra, Inc., an
oilfield service company, Maverick Tube Corporation, a manufacturer of steel
pipe and casing, TransMontaigne Oil Company, a downstream oil and gas
transportation, marketing and distribution company, and production company,
National-Oilwell Inc., a manufacturer and distributor of oil field equipment,
and Domain Energy Corporation, an independent oil and gas company.
The Company's Bylaws provide for the Board of Directors to be divided into
three classes of directors with each class to be as nearly equal in number of
directors as possible, serving staggered three-year terms. The terms of the
Class I directors, Owen Kratz and Thomas M. Ehret, expire in 2001. The terms of
the Class II directors, William E. Macaulay, Gerald G. Reuhl, Gordon F. Ahalt
and Jean-Bernard Fay will expire in 1999. The terms of the Class III directors,
David H. Kennedy, S. James Nelson, Jr. and Kenneth Hulls will expire in 2000.
Each director serves until the end of his term or until his successor is elected
and qualified. Based upon the sale of shares by the First Reserve Funds and
Gerald G. Reuhl, as herein described, Mr. Reuhl will resign from the Board of
Directors, the First Reserve Funds will have the right to nominate only two
directors (one director if the Underwriters' over-allotment option is exercised
in full) and the total number of directors will decrease to eight (seven
directors if the Underwriters' over-allotment option is exercised in full) as
required by the Shareholders Agreement. As also required in the Shareholders
Agreement, the Board of Directors is expected to begin a process to choose an
additional independent director which will bring the total number of directors
to nine (eight directors if the Underwriters' over-allotment option is exercised
in full). See "Description of Capital Stock -- Certain Anti-Takeover
Provisions."
COMMITTEES
As authorized by CDI's Bylaws (and as provided in the Shareholders
Agreement among the Company, certain of its executives, Coflexip and the First
Reserve Funds dated April 11, 1997, as amended (the "Shareholders Agreement"),
the Board has established the following four committees: (i) a five-member
Executive Committee comprised of one First Reserve Funds director, one Coflexip
director, one independent director and two directors appointed by management
which, when the Board is not in session, shall exercise such power and authority
of the Board in the management of the business of the Company pursuant to the
unanimous vote of such Committee as the Board may from time to time authorize,
(ii) a four-member Audit Committee including two independent directors, which
shall consult with the independent public auditors of the Company in connection
with such auditors' audit and review of the financial statements of CDI and
shall consult with CDI's Chief Financial Officer and staff in connection with
the preparation of the Company's financial statements, subject to such
limitations as the Board may from time to time impose; (iii) a five-member
Compensation Committee comprised of one First Reserve Funds director, one
Coflexip director, one director appointed by management and two independent
directors, which shall administer awards under any Stock Option Plan and shall
evaluate and make recommendations with respect to the compensation arrangements
of executive officers of the Company, subject to such limitations as the Board
may from time to time impose; and (iv) a three-member Nominating Committee
comprised of one First Reserve Funds director, one Coflexip director and one
director appointed by management, which shall be responsible for searching for
and selecting nominees to serve as independent directors from a list of
acceptable potential nominees prepared by the First Reserve Funds director and
Coflexip director with the advice of the director appointed by management, from
which list the director appointed by management shall select a nominee.
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<PAGE>
COMPENSATION OF DIRECTORS
The Company pays the reasonable out-of-pocket expenses incurred by each
Director in connection with attending the meetings of the Board, any Subsidiary
Board and any committee thereof. In addition, the Company pays its Directors who
are not employed by CDI ("Non-Affiliate Directors") a fee of $20,000 per year
and $1,000 for attending each of four regularly scheduled quarterly meetings.
Furthermore, the Non-Affiliate Directors receive a fee of $500 for each
committee meeting they attend.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash compensation paid or accrued for
services rendered in all capacities to the Company in 1997, to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
---------------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- ------------------------------------- ---- -------- -------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Owen Kratz........................... 1997 $169,728 $169,728 250,000 $ 4,000
President and Chief and
Executive Officer (2)
Gerald G. Reuhl...................... 1997 151,840 151,840 -- 4,000
Chairman (2)
S. James Nelson, Jr.................. 1997 133,432 133,432 -- 4,000
Executive Vice President and
Chief Financial Officer
Lyle Kuntz (3)....................... 1997 106,329 640,085 -- 4,000
President, ERT
Louis L. Tapscott.................... 1997 140,000 70,000 70,000 3,570
Senior Vice
President -- Business
Development
</TABLE>
- ------------
(1) Represents the Company's matching contribution to the Company's 401(k) Plan.
(2) Owen Kratz succeeded Mr. Reuhl as Chief Executive Officer in April 1997. In
connection with closing the Coflexip transaction, Mr. Kratz exchanged
certain rights for a five year option for 250,000 shares with an exercise
price of $9.50 per share.
(3) Mr. Kuntz's bonus compensation varies depending on the net income before
taxes of ERT.
Except as indicated above, no stock options were granted to the Named
Executives during 1997 and none of these individuals exercised a stock option
during 1997.
Three of CDI's principal executive officers, Gerald G. Reuhl, Owen Kratz
and S. James Nelson, Jr., have entered into two-year employment agreements with
the Company each of which expire on April 30, 1999. A fourth principal executive
officer, Louis L. Tapscott, has entered into a five-year employment agreement
with the Company that expires on April 30, 2002. These agreements provide, among
other things, that until the later of April 30, 2002 or the first or second
anniversary of the date of termination of the executive's employment with CDI
(depending on the event of termination), the executive shall not, directly or
indirectly either for himself or any other individual or entity, participate in
any business which engages or which proposes to engage in the business of
providing diving services in the Gulf of Mexico or any other business actively
engaged in by CDI on the date of termination of employment, so long as the
Company continues to make payments to such executive, including his base salary
and insurance benefits received by senior executives of CDI. In connection with
the Coflexip transaction, CDI also entered into employment agreements with eight
of the Company's other senior officers substantially similar to the above
agreements.
COMPENSATION PURSUANT TO PLANS
BONUS PLANS
CDI has established bonus compensation plans for several classes of its
employees. Payments under each plan are based on the Company's performance. A
separate plan is applicable to the three principal employees of ERT and provides
for a bonus of between 1% to 10% of net income before taxes of ERT up to a
maximum total of 15% of such net income.
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<PAGE>
PROFIT SHARING AND RETIREMENT PLAN
CDI's Retirement Plan (the "Retirement Plan") is a 401(k) savings plan.
The Retirement Plan permits each employee to become a participant in the savings
plan feature on January 1, April 1, July 1, or October 1 following the
employee's completion of 90 consecutive days of employment.
Under the Retirement Plan, each active participant may elect, subject to
certain limitations required by law, to defer payment of from 1% to 15% of his
or her compensation. Upon such an election, CDI contributes such deferred
amounts to the Retirement Plan on behalf of such participant. Such contributions
to the 401(k) savings plan are invested according to the instructions of the
participant in investment funds designated by the plan administrator. Subject to
reduction or elimination based on its financial performance and needs as
described in the Retirement Plan, CDI's contributions are determined annually as
50% of each employee's contribution (up to a maximum of 5% of the employee's
annual salary).
Employee contributions to the 401(k) savings plan and earnings thereon are
100% vested at all times. Contributions by CDI to the profit sharing feature,
and earnings thereon, vest based on the participant's years of service with the
Company, vesting 20% after two years of service, increasing to 50% with three
years of service, and becoming 100% vested following four years of service. All
contributions vest, regardless of years of service, upon termination of
employment by reason of death or disability, attainment of age 65 or the
termination or discontinuance of the Retirement Plan. After termination of
employment, an employee is entitled to receive a lump-sum distribution of his or
her entire vested interest in the Retirement Plan.
STOCK OPTION PLAN
The Company's 1995 Long Term Incentive Plan, as amended (the "Stock Option
Plan") is administered by the Board and its Compensation Committee and provides
for grants of incentive and nonqualified options as defined by the Internal
Revenue Code of 1986, as amended, (the "Code") to employees as determined by
the Compensation Committee. The Stock Option Plan provides that options for a
maximum of 10% of the total shares of Common Stock issued and outstanding may be
granted. No options may be granted under the Stock Option Plan after October
2005. Options granted to employees under the Stock Option Plan have a maximum
term of five years and, subject to certain exceptions, are not transferable.
The number and exercise price of options granted to employees will be
determined by the Compensation Committee; provided, however, that (i) the
exercise price of an incentive option may not be less than the fair market value
of the shares subject to the option on the date of the grant, and (ii) the
exercise price of a non-qualified option may not be less than 85% of the fair
market value of the shares subject to the option on the date of the grant. The
Stock Option Plan provides that, upon a change of control, the options
immediately vest and become exercisable.
To date, options to purchase approximately 1,059,500 shares of Common Stock
at exercise prices ranging from $4.50 to $37.125 have been granted to 45
employees.
STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Plan") is administered
by the Employee Benefits Committee and allows all eligible employees to receive
purchase rights for the Company's Common Stock. Once every six months, each
employee can set-aside between 1% and 10% of their base compensation via payroll
deductions to purchase shares at 85% of the lower of market price at the
beginning or end of the plan period. The Plan is intended to qualify for tax
benefits under Section 423 of the Code so that there is no tax to the
participant at the time of grant and, if held long enough, the sale would be
eligible for capital gains treatment.
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DESCRIBED BELOW ARE CERTAIN RELATED AGREEMENTS. THE FOLLOWING DESCRIPTIONS
ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE
RELEVANT AGREEMENTS, COPIES OF WHICH ARE FILED AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART AND ARE INCORPORATED BY REFERENCE
HEREIN.
PURCHASE AGREEMENT
On April 11, 1997, CDI, the Selling Shareholders, Messrs. Reuhl, Kratz and
Nelson and certain other shareholders of the Company entered into an agreement
with Coflexip pursuant to which (i) CDI sold to Coflexip 528,541 shares of
Common Stock and (ii) certain shareholders of the Company, including Messrs.
Reuhl, Kratz and Nelson, sold to Coflexip 3,171,247 shares of Common Stock, all
at a purchase price of $9.46 per share for an aggregate price of $35.0 million
(the "Purchase Agreement"). For issuing Common Stock to Coflexip, the Company
received $5.0 million in consideration, consisting of two Triton XL ROVs. Among
other terms of the Purchase Agreement, CDI was required to make a number of
specific representations, warranties and covenants about its business, capital
structure, assets and liabilities. Individual selling shareholders were required
to make separate representations. CDI and Coflexip also agreed to indemnify each
other against certain claims and liabilities arising in connection with the
transaction for a minimum of three years for up to the amount of consideration
transferred for shares, in the case of the Company, or for the value of the
assets transferred, in the case of Coflexip.
SHAREHOLDERS AGREEMENT
COMPOSITION OF THE BOARD
Pursuant to the Shareholders Agreement, the Board currently consists of 10
members, three nominated by Coflexip, three nominated by the First Reserve Funds
and Messrs. Kratz, Reuhl, Nelson and Ahalt. In addition, the Board will nominate
two additional directors by a majority vote of the entire Board to serve in
separate classes. The Shareholders Agreement provides that the Company will
nominate and use its best efforts to take all necessary action to elect to the
Board the individuals required to be nominated for election as directors. The
Shareholders Agreement provides that the number of director nominees to be
designated by a shareholder shall be reduced if such shareholder's holdings of
Common Stock fall below certain levels. Consequently, upon completion of this
Offering, Mr. Reuhl will resign from the Board, the First Reserve Funds will
have the right to nominate only two directors and the number of directors will
be reduced to eight. As required in the Shareholders Agreement, the Board of
Directors is expected to begin a process to choose an additional independent
director which will bring the total number of directors to nine.
RIGHT OF FIRST OFFER
The Shareholders Agreement provides that CDI will not enter into any
agreement (i) to sell the Company (ii) to retain an advisor to sell the Company
or (iii) to pursue any acquisition in excess of 50% of the Company's market
capitalization (based on the 30-day average trading value of the Common Stock)
without first notifying Coflexip in writing and providing Coflexip (including
its affiliates) with the right to acquire CDI on terms substantially equivalent
to any proposal. If Coflexip does not notify CDI of its intent to pursue a
transaction within 15 days of the notice (the "Notice Period"), the Board will
have the right to pursue the transaction.
If Coflexip elects to pursue an acquisition of CDI, the Company will take
no further action with respect thereto for 120 days from the date of Coflexip's
notice. If Coflexip does not pursue an acquisition of CDI, Coflexip has the
right to acquire the Company's interest in Quantum by providing notice within
the Notice Period. The purchase price for Quantum shall be based on a valuation
prepared by an independent appraiser appointed by the Board. Coflexip retains
the foregoing rights to acquire the Company or Quantum so long as it owns at
least five percent of CDI's Common Stock.
LIMITED PREEMPTIVE RIGHTS
The Shareholders Agreement provides that, except under limited
circumstances (including issuances of securities under stock option plans or in
connection with acquisitions), CDI shall provide preemptive rights to acquire
the Company's securities to each of Coflexip, the First Reserve Funds and
Messrs. Reuhl, Kratz and
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Nelson. In the event of any public offering (by the Company), Coflexip and the
First Reserve Funds shall have the opportunity to acquire their pro rata share
unless the managing underwriters for such offering believe it would materially
and adversely affect the marketability of such offering.
LIMITATIONS ON TRANSFERS
The Shareholders Agreement contains certain customary transfer restrictions
that prohibit the parties from transferring any Common Stock, except for certain
permitted transfers.
BUSINESS COOPERATION AGREEMENT
In connection with the Purchase Agreement, the Company and Coflexip entered
into a Business Cooperation Agreement pursuant to which the parties formed
Quantum. See "Business -- Coflexip Strategic Alliance -- The Business
Cooperation Agreement."
REGISTRATION RIGHTS AGREEMENTS
In January 1995, the Company and certain shareholders entered into an
agreement pursuant to which they sold an aggregate of 5,549,630 shares of Common
Stock to the First Reserve Funds at a purchase price of $4.50 per share. In
connection with the purchases of such shares of Common Stock, each of the First
Reserve Funds, Gerald G. Reuhl, Owen Kratz, S. James Nelson, Jr. and the other
shareholders of the Company entered into a registration rights agreement (the
"1995 Registration Rights Agreement") with the Company providing for demand
and piggyback registration rights with respect to such shares. In connection
with the Purchase Agreement, the Company and Coflexip entered into a
registration rights agreement (the "1997 Registration Rights Agreement")
providing for demand and piggyback registration rights with respect to such
shares. In April 1997, the 1995 Registration Rights Agreement was amended and
restated (the "First Amended and Restated 1995 Registration Rights Agreement")
in its entirety to conform its terms to the 1997 Registration Rights Agreement.
These registration rights agreements provide that if the Company proposes to
register any of its securities under the Securities Act, the holder is entitled
to include shares of Common Stock owned by such holder in such offering
provided, among other conditions, that the underwriters of any offering have the
right to limit the number of such shares included in such registration. Such
registration rights agreements further provide for registration upon the request
of holders of at least 5% of the shares of Common Stock subject to the
agreement. See "Description of Capital Stock -- Registration Rights."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of April 30, 1998,
with respect to the beneficial ownership of Common Stock by (i) each shareholder
of the Company who owns more than 5% of the outstanding stock, (ii) each
director of the Company, (iii) each of the Named Executives, (iv) all directors
and executive officers as a group and (v) each Selling Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING SHARES AFTER OFFERING(1)
------------------- BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C>
Gerald G. Reuhl(2)(3)................ 912,731 6.2% 912,731 -- --
Owen Kratz(2)(3)(4).................. 1,490,929 10.2 -- 1,490,929 10.2%
S. James Nelson, Jr.(2).............. 303,125 2.1 100,000 203,125 1.4
Lyle K. Kuntz........................ 3,110 * -- 3,110 *
Louis L. Tapscott(5)................. 15,333 * -- 15,333 *
Gordon F. Ahalt...................... 32,000 * -- 32,000 *
William E. Macaulay(6)............... 2,980,373 20.4 1,480,373 1,500,000 10.3
John A. Hill(6)...................... 2,980,373 20.4 1,480,373 1,500,000 10.3
David H. Kennedy(7).................. -- -- -- -- --
Thomas M. Ehret...................... -- -- -- -- --
Jean-Bernard Fay..................... -- -- -- -- --
Kenneth Hulls........................ -- -- -- -- --
First Reserve Corporation(6)......... 2,980,373 20.4 1,480,373 1,500,000 10.3
First Reserve Fund VI(7)............. 1,549,221 10.6 749,221 800,000 5.5
First Reserve Fund V(7).............. 1,097,371 7.5 547,371 550,000 3.8
First Reserve Fund V-2(7)............ 322,753 2.2 172,753 150,000 1.0
First Reserve Secured Energy Assets
Fund(7)............................ 11,028 * 11,028 -- --
Coflexip(8).......................... 3,699,788 25.3 -- 3,699,788 25.3
Cambridge Investments, Ltd.(9)....... 800,888 5.5 -- 800,888 5.5
All directors and executive officers
as a group
(15 persons)(10)................... 5,918,422 40.3 2,493,104 3,425,318 23.3
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the persons listed in the table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) The address of each executive officer is 400 N. Sam Houston Parkway E.,
Suite 400, Houston, Texas 77060.
(3) Messrs. Reuhl and Kratz are parties to an option agreement pursuant to
which Mr. Kratz can purchase up to 168,320 shares of Common Stock from Mr.
Reuhl. It is expected that Mr. Reuhl will repurchase this option in
connection with the closing of this Offering by paying Mr. Kratz, for each
share covered by the option, the difference between the option exercise
price and the price on the cover of this Prospectus net of all costs and
commissions. Mr. Reuhl's beneficial ownership includes the 168,320 shares
of Common Stock subject to this option. Mr. Kratz's beneficial ownership
excludes such shares as such option is not currently exercisable.
(4) Includes 50,000 shares issuable upon exercise of options.
(5) Includes 14,000 shares issuable upon exercise of options.
(6) First Reserve Corporation and Messrs. Macaulay and Hill do not directly own
any Common Stock. The number of shares shown as beneficially owned by First
Reserve Corporation and Messrs. Macaulay and Hill consists of all the
shares owned by the First Reserve Funds. First Reserve Corporation may be
deemed to have beneficial ownership of the shares of voting stock held by
the First Reserve Funds because it is the managing general partner of each
of the First Reserve Funds and has voting and dispositive power over those
shares. Messrs. Macaulay and Hill may be deemed to have beneficial
ownership over the shares held by the First Reserve Funds because of their
ownership of a controlling interest in the common stock of First Reserve
Corporation and their positions as managing directors of First Reserve
Corporation. Messrs. Macaulay and Hill disclaim beneficial ownership of
such shares. Mr. Macaulay is a director of the Company. The address of
First Reserve Corporation and Messrs. Macaulay and Hill (c/o First Reserve
Corporation) is 475 Steamboat Rd., Greenwich, Connecticut 06830.
(7) The addresses of David H. Kennedy, First Reserve Fund VI, First Reserve
Fund V, First Reserve Fund V-2 and First Reserve Secured Energy Assets Fund
are c/o First Reserve Corporation, 475 Steamboat Road, Greenwich,
Connecticut 06830.
(8) The address of Coflexip is 23 Avenue de Neuilly, 75116 Paris, France.
(9) Cambridge Investments, Ltd., whose address is 600 Montgomery Street, 43rd
Floor, San Francisco, California 94111, reported on its Schedule 13G
beneficial ownership of 800,888 shares of Common Stock as of April 5, 1998
with the following affiliates: Cambridge Energy Fund International, Ltd.,
Cambridge Energy, L.P., Cambridge Oil & Gas, L.P., Cambridge Oil & Gas
International, Ltd., Palamundo, LDC and Quantum Partners, LDC.
(10) Includes 158,000 shares issuable upon exercise of options to directors and
executive officers.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
CDI's Amended and Restated Articles of Incorporation (the "Articles of
Incorporation") provide for authorized capital stock of 60,000,000 shares of
Common Stock, no par value per share, of which 14,544,831 shares will be
outstanding upon completion of this Offering, and 5,000,000 shares of Preferred
Stock, $.01 par value per share ("Preferred Stock"), of which no shares will
be outstanding upon completion of this Offering. The following summary
description of the capital stock of CDI is qualified in its entirety by
reference to the Articles of Incorporation and the Company's Amended and
Restated Bylaws (the "Bylaws"), a copy of each of which is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted on by shareholders, and except as otherwise required by law or as
provided in any resolution adopted by the Board of Directors with respect to any
series of Preferred Stock, the holders of shares of Common Stock exclusively
possess all voting power.
Subject to any preferential rights of any outstanding series of Preferred
Stock created by the Board of Directors from time to time, the holders of Common
Stock are entitled to such dividends as may be declared from time to time by the
Board of Directors from funds available therefor, and upon liquidation will be
entitled to receive pro rata all assets of CDI available for distribution to
such holders. The Common Stock is not convertible or redeemable and there are no
sinking fund provisions therefor. Holders of the Common Stock are not entitled
to any preemptive rights except under the Shareholders Agreement. See "Certain
Relationships and Related Transactions."
PREFERRED STOCK
The Board of Directors of CDI, without any action by the shareholders of
the Company, is authorized to issue up to 5,000,000 shares of Preferred Stock,
in one or more series and to determine the voting rights, preferences as to
dividends and assets in liquidation and the conversion and other rights of each
such series. There are no shares of Preferred Stock outstanding. See
"-- Certain Anti-takeover Provisions" with regard to the effect that the
issuance of Preferred Stock might have on attempts to take over CDI.
REGISTRATION RIGHTS
CDI has entered into both a First Amended and Restated 1995 Registration
Rights Agreement and a 1997 Registration Rights Agreement (collectively, the
"Registration Rights Agreements") with certain of its current shareholders,
the latter with Coflexip and the former with Gerald G. Reuhl, Owen Kratz, S.
James Nelson, Jr. and the First Reserve Funds, pursuant to which the holders are
entitled to certain demand and piggyback rights with respect to the registration
of such shares under the Securities Act. These Registration Rights Agreements
provide that if CDI proposes to register any of its securities under the
Securities Act, the holder is entitled to include shares of Common Stock owned
by such holder in such offering provided, among other conditions, that the
underwriters of any offering have the right to limit the number of such shares
included in such registration. Such Registration Rights Agreements further
provide for registration upon the request of holders of at least 5% of the
shares of Common Stock subject to the agreement. Gerald G. Reuhl is exercising
his registration rights in connection with this Offering. The other parties to
the Registration Rights Agreements, with the exception of certain other Selling
Shareholders, have waived their right to include shares of Common Stock owned by
each of them in this Offering. Holders of the Company's options have similar
registration rights.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Articles of Incorporation and Bylaws contain a number of provisions
that could make the acquisition of CDI by means of a tender or exchange offer, a
proxy contest or otherwise more difficult. The description of such provisions
set forth below is intended to be only a summary and is qualified in its
entirety by reference to the pertinent sections of the Articles of Incorporation
and the Bylaws, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
CLASSIFIED BOARD OF DIRECTORS; REMOVAL OF DIRECTORS. The classification of
directors will have the effect of making it more difficult for shareholders to
change the composition of the Board of Directors. At least two annual meetings
of shareholders generally will be required to effect a change in a majority of
the Board of Directors. Such a delay may help ensure that CDI's directors, if
confronted by a shareholder attempting to force a proxy contest, a tender or
exchange offer or an extraordinary corporate transaction, would have sufficient
time to
53
<PAGE>
review the proposal as well as any available alternatives to the proposal and to
act in what they believe to be the best interest of the shareholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board of Directors
would be beneficial to CDI and its shareholders and whether a majority of the
Company's shareholders believes that such a change would be desirable.
The Articles of Incorporation provide that directors of CDI may only be
removed by the affirmative vote of the holders of 68% of the voting power of all
of the then outstanding shares of stock entitled to vote generally in the
election of directors (the "Voting Stock").
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender or exchange offer
or otherwise attempting to obtain control of CDI, even though such an attempt
might be beneficial to the Company and its shareholders. These provisions could
thus increase the likelihood that incumbent directors will retain their
positions. In addition, the classification provisions may discourage
accumulations of large blocks of the Common Stock that are effected for purposes
of changing the composition of the Board of Directors. Accordingly, shareholders
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.
PREFERRED STOCK. The Articles of Incorporation authorize the Board of
Directors to establish one or more series of Preferred Stock and to determine,
with respect to any series of Preferred Stock, the terms and rights of such
series, including (i) the designation of the series, (ii) the number of shares
of the series, which number the Board may thereafter (except where otherwise
provided in the certificate of designation) increase or decrease (but not below
the number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative and the dividend rate of the series, (iv)
the dates at which dividends, if any, will be payable, (v) the redemption rights
and price or prices, if any, for shares of the series, (vi) the terms and
amounts of any sinking fund provided for the purchase or redemption of shares of
the series, (vii) the amounts payable on shares of the series in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of CDI, (viii) whether the shares of the series will be convertible into
shares of any other class or series, or any other security, of CDI or any other
corporation, and, if so, the specification of such other class or series or such
other security, the conversion price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares shall be convertible and all
other terms and conditions upon which such conversion may be made, (ix)
restrictions, if any, on the issuance of shares of the same series or of any
other class or series, and (x) voting rights, if any, of the shareholders of
such series, which may include the right of such shareholders to vote separately
as a class on any matter.
CDI believes that the ability of the Board of Directors to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financing and acquisitions and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's shareholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which CDI's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of
doing so, it could issue a series of Preferred Stock that, depending on the
terms of such series, might impede the completion of a merger, tender offer or
other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of CDI and its
shareholders. The Board of Directors, in so acting, could issue Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquiror may be otherwise able to change the composition of the Board of
Directors, including a tender or exchange offer or other transaction that some,
or a majority, of CDI's shareholders might believe to be in their best interests
or in which shareholders might receive a premium for their stock over the then
current market price of such stock.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The Articles
of Incorporation and Bylaws provide that shareholder action can be taken only at
an annual or special meeting of shareholders and prohibit shareholder action by
written consent in lieu of a meeting. The Bylaws provide that special meetings
of shareholders can be called only upon a written request by the Chief Executive
Officer or a majority of the members of the Board of Directors. Shareholders are
not permitted to call a special meeting or to require that the Board call a
special meeting.
The provisions of the Articles of Incorporation and the Bylaws prohibiting
shareholder action by written consent may have the effect of delaying
consideration of a shareholder proposal, including a shareholder proposal
54
<PAGE>
that a majority of shareholders believes to be in the best interest of CDI,
until the next annual meeting unless a special meeting is called. These
provisions would also prevent the holders of a majority of the voting stock from
unilaterally using the written consent procedure to take shareholder action.
Moreover, a shareholder could not force shareholder consideration of a proposal
over the opposition of the Board by calling a special meeting of shareholders
prior to the time a majority of the Board believes such consideration to be
appropriate.
AMENDMENT OF CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND
BYLAWS. Under the MBCA, the shareholders have the right to adopt, amend or
repeal the Bylaws and, with the approval of the Board of Directors, the Articles
of Incorporation. The Articles of Incorporation provide that the affirmative
vote of the holders of at least 80% of the voting power of the then outstanding
shares of Voting Stock, voting together as a single class, and in addition to
any other vote required by the Articles of Incorporation or Bylaws, is required
to amend provisions of the Articles of Incorporation or Bylaws relating to: (i)
the prohibition of shareholder action without a meeting; (ii) the prohibition of
shareholders calling a special meeting; (iii) the number, election and term of
CDI's directors; (iv) the removal of directors or (v) fixing a quorum for
meetings of shareholders. The vote of the holders of a majority of the voting
power of the then outstanding shares of Voting Stock is required to amend all
other provisions of the Articles of Incorporation. The Bylaws further provide
that the Bylaws may be amended by the Board of Directors. These super-majority
voting requirements will have the effect of making more difficult any amendment
by shareholders of the Bylaws or of any of the provisions of the Articles of
Incorporation described above, even if a majority of CDI's shareholders believes
that such amendment would be in their best interests.
ANTI-TAKEOVER LEGISLATION. As a public corporation, CDI will be governed
by the provisions of Section 302A.673 of the MBCA. This anti-takeover provision
may eventually operate to deny shareholders the receipt of a premium on their
Common Stock and may also have a depressive effect on the market price of CDI's
Common Stock. Section 302A.673 prohibits a public corporation (except Coflexip)
from engaging in a "business combination" with an "interested shareholder"
for a period of four years after the date of the transaction in which the person
became an interested shareholder, unless the business combination is approved by
a committee of all of the disinterested members of the Board of Directors of CDI
before the interested shareholder's share acquisition date. A "business
combination" includes mergers, asset sales and other transactions. An
"interested shareholder" is a person who is the beneficial owner of 10% or
more of the corporation's Voting Stock. Reference is made to the detailed terms
of Section 302A.673 of the MBCA.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation contain a provision that eliminates, to the
extent currently allowed under the MBCA, the personal monetary liability of a
director to CDI and its shareholders for breach of his fiduciary duty of care as
a director, except in certain circumstances. If a director were to breach the
duty of care in performing his duties as a director, neither the Company nor its
shareholders could recover monetary damages from the director, and the only
course of action available to the Company's shareholders would be equitable
remedies, such as an action to enjoin or rescind a transaction involving a
breach of the fiduciary duty of care. To the extent certain claims against
directors are limited to equitable remedies, this provision of the Articles of
Incorporation may reduce the likelihood of derivative litigation and may
discourage shareholders or management from initiating litigation against
directors for breach of their duty of care. Additionally, equitable remedies may
not be effective in many situations. If a shareholder's only remedy is to enjoin
the completion of the Board of Directors' action, this remedy would be
ineffective if the shareholder does not become aware of a transaction or event
until after it has been completed. In such a situation, such shareholder would
not have effective remedy against the directors.
The Company's Bylaws require the Company to indemnify directors and
officers to the fullest extent permitted under Minnesota law. The MBCA provides
that a corporation organized under Minnesota law shall indemnify any director,
officer, employee or agent of the corporation made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity (as
defined in the MBCA) of the person, against judgments, penalties, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceedings if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration or
investigative proceeding, including one by or in the right of the corporation.
Section 302A.521 contains detailed terms regarding such rights of
indemnification and reference is made thereto for a complete statement of such
indemnification rights.
55
<PAGE>
All of the foregoing indemnification provisions include statements that
such provisions are not to be deemed exclusive of any other right to indemnity
to which a director or officer may be entitled under any by-law, agreement, vote
of shareholders or disinterested directors or otherwise.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
CDI has 14,544,831 shares of Common Stock outstanding. The 2,493,104 shares
sold in this Offering (plus any additional shares sold upon exercise of the
Underwriters' over-allotment option) and substantially all of the other shares
of the Common Stock outstanding are freely tradeable in the public market
without restriction or further registration under the Securities Act, except for
any shares purchased by "affiliates" of CDI, as that term is defined in Rule
144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate of CDI, who
beneficially owns "restricted securities" acquired from the Company or an
affiliate of CDI at least one year prior to the sale is entitled to sell within
any three-month period a number of shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (145,448) shares
based on the number of shares outstanding immediately after completion of this
Offering, and (ii) the average weekly reported trading volume of the Common
Stock during the four calendar weeks immediately preceding the date on which
notice of such sale is filed with the Commission, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information concerning the Company are satisfied. Under Rule 144(k), a
person who has not been an affiliate of CDI for a period of three months
preceding a sale of securities by him, and who beneficially owns such
"restricted securities" acquired from CDI or an affiliate of the Company at
least two years prior to such sale, would be entitled to sell shares without
regard to volume limitations, manner of sale provisions, notification
requirements or requirements as to the availability of current public
information concerning CDI. Shares held by persons who are deemed to be
affiliates of CDI, including any shares acquired by affiliates in this Offering,
are subject to such volume limitations, manner of sale provisions, notification
requirements and requirements as to availability of current public information
concerning the Company, regardless of how long the shares have been owned or how
they were acquired, and, in addition, the sale of any "restricted securities"
beneficially owned by affiliates is subject to the one-year holding period
requirement. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly or indirectly through the use of one or more intermediaries
controls, or is controlled by, or is under common control with, such issuer.
CDI, its directors and officers, the Selling Shareholders and Coflexip have
agreed that, for a period of 90 days after the date of this Prospectus, they
will not, directly or indirectly, offer, sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock (or securities convertible into or exchangeable for, or any rights
to purchase or acquire, Common Stock, other than options under the Stock Option
Plan and upon exercise of options granted under the Stock Option Plan) without
prior written consent of the Representatives of the Underwriters.
In connection with the purchase of Common Stock by the First Reserve Funds
in January 1995 and the purchase of Common Stock by Coflexip in April 1997, the
Company entered into registration rights agreements that provide certain demand
and piggyback registration rights, subject to customary terms and conditions,
with the First Reserve Funds, Coflexip and Messrs. Kratz, Nelson and Reuhl, who
after this Offering will hold an aggregate of 6,893,842 shares of Common Stock
(6,519,876 shares of Common Stock if the Underwriters' over-allotment option is
exercised on full). Such registration rights are subject to certain notice
requirements, timing restrictions and volume limitations. Holders of the
Company's options have similar registration rights. See "Certain Relationships
and Related Transactions" and "Description of Capital Stock -- Registration
Rights."
CDI has granted options to purchase an aggregate of 1,059,500 shares of
Common Stock under the Stock Option Plan. See "Management --Compensation
Pursuant to Plans." The Company intends to register under the Securities Act
the shares issuable upon exercise of options granted under the Stock Option Plan
and, upon such registration, such shares will be eligible for resale in the
public market, except that any such shares issued to affiliates are subject to
the volume limitations and other restrictions of Rule 144.
56
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date of this Prospectus (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Morgan Stanley & Co.
Incorporated, Raymond James & Associates, Inc. and Simmons & Company
International are acting as Representatives (the "Representatives"), have
severally agreed to purchase, and the Selling Shareholders have agreed to sell
to them, severally, the respective number of shares of Common Stock set forth
opposite the names of such Underwriters below:
NUMBER OF
NAME SHARES
- ------------------------------------- ----------
Morgan Stanley & Co. Incorporated.... 631,036
Raymond James & Associates, Inc...... 631,034
Simmons & Company International...... 631,034
Gaines, Berland Inc.................. 150,000
Jefferies & Company, Inc............. 150,000
Sanders Morris Mundy Inc............. 150,000
Van Kasper & Company................. 150,000
----------
Total........................... 2,493,104
==========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than those
covered by the overallotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price, which represents a
concession not in excess of $0.98 a share under the public offering price. Any
Underwriter may allow, and such dealers may re-allow, a concession not in excess
of $0.10 a share to other Underwriters or to certain dealers. After the initial
offering of shares of Common Stock, the offering price and other selling terms
may from time to time be varied by the Representatives.
Certain of the Selling Shareholders have granted to the Underwriters an
option, exercisable for 30 days after the date of this Prospectus, to purchase
up to an aggregate of 373,966 additional shares of Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering overallotments, if any, made in connection with the offering
of the shares of Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock set forth next to the
names of all Underwriters in the preceding table.
Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of this Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exerciseable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The restrictions described in this
paragraph do not apply to (x) the sale of Common Stock to the Underwriters, (y)
the issuance by the Company of shares of Common Stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the date of
this Prospectus of which the Underwriters have been advised in writing or (z)
57
<PAGE>
transactions by any person other than the Company relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the offering of the Common Stock.
In order to facilitate the Offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Underwriters and dealers may engage in passive marketing making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two month prior period or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
From time to time, Simmons & Company International has provided advisory
services to the Company and First Reserve Corporation and entities owned by the
First Reserve Funds, for which it has received customary compensation.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by the Company's General Counsel, Andrew C. Becher. Certain legal
matters will be passed upon for the Company by Fulbright & Jaworski L.L.P.,
Houston, Texas. Certain legal matters will be passed upon for the Selling
Shareholders by Gibson, Dunn & Crutcher LLP, Denver, Colorado. Vinson & Elkins
L.L.P., Houston, Texas will pass upon certain legal matters for the
Underwriters.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1997, and the
consolidated statements of operations, cash flows and shareholders' equity for
the three years in the period ended December 31, 1997 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
The estimated reserve evaluations and related calculations of Miller &
Lents, Ltd. set forth in this Registration Statement have been included herein
in reliance upon the authority of said firm as an expert in petroleum
engineering.
58
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public
Accountants........................ F-2
Consolidated Balance
Sheets -- December 31, 1996 and
1997 and March 31, 1998
(unaudited)........................ F-3
Consolidated Statements of Operations
for the years ended December 31,
1995, 1996 and 1997 and three
months ended March 31, 1997 and
1998 (unaudited)................... F-4
Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1995, 1996 and
1997 and three months ended March
31, 1998 (unaudited)............... F-5
Consolidated Statements of Cash Flows
for the years ended December 31,
1995, 1996 and 1997 and three
months ended March 31, 1997 and
1998 (unaudited)................... F-6
Notes to Consolidated Financial
Statements......................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cal Dive International, Inc.:
We have audited the accompanying consolidated balance sheets of Cal Dive
International, Inc. (a Minnesota corporation), and subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the three years in the period ended
December 31, 1997. These consolidated 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cal Dive
International, Inc., and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 19, 1998
F-2
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1997
AND MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 204 $ 13,025 $ 11,171
Accounts receivable --
Trade, net of revenue
allowance on gross amounts
billed of $1,021, $1,822 and
$1,220 (unaudited).......... 18,849 23,856 21,877
Unbilled revenue.............. 7,364 8,134 8,508
Other current assets............... 2,755 4,947 8,123
---------- ---------- ------------
Total current assets..... 29,172 49,962 49,679
---------- ---------- ------------
PROPERTY AND EQUIPMENT.................. 61,466 89,499 100,245
Less -- Accumulated depreciation... (13,260) (20,021) (22,001)
---------- ---------- ------------
48,206 69,478 78,244
---------- ---------- ------------
OTHER ASSETS:
Cash deposits restricted for
salvage operations............... 5,234 5,670 5,749
Other assets, net.................. 444 490 6,635
---------- ---------- ------------
$ 83,056 $ 125,600 $140,307
========== ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 9,909 $ 12,919 $ 18,341
Accrued liabilities................ 5,758 7,514 5,552
Income taxes payable............... 94 602 1,516
---------- ---------- ------------
Total current
liabilities............ 15,761 21,035 25,409
LONG-TERM DEBT.......................... 25,000 -- --
DEFERRED INCOME TAXES................... 5,417 8,745 9,945
DECOMMISSIONING LIABILITIES............. 6,034 6,451 10,226
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 60,000 shares
authorized, 18,448, 21,345 and
21,335 shares issued and
outstanding...................... 9,093 52,832 52,947
Retained earnings.................. 25,806 40,288 45,531
Treasury stock, 7,349, 6,820 and
6,820 shares, at cost............ (4,055) (3,751) (3,751)
---------- ---------- ------------
Total shareholders'
equity................. 30,844 89,369 94,727
---------- ---------- ------------
$ 83,056 $ 125,600 $140,307
========== ========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Subsea and salvage revenues..... $ 32,747 $ 63,870 $ 92,860 $ 13,588 $ 29,342
Natural gas and oil
production...................... 4,777 12,252 16,526 4,856 3,815
--------- --------- ---------- --------- ---------
37,524 76,122 109,386 18,444 33,157
COST OF SALES:
Subsea and salvage.............. 25,568 46,766 67,538 10,780 20,394
Natural gas and oil
production...................... 3,107 7,270 8,163 2,241 2,200
--------- --------- ---------- --------- ---------
Gross profit............... 8,849 22,086 33,685 5,423 10,563
--------- --------- ---------- --------- ---------
SELLING AND ADMINISTRATIVE EXPENSES:
Selling expenses................ 939 1,157 1,429 362 317
Administrative expenses......... 3,993 7,134 9,767 1,854 2,523
--------- --------- ---------- --------- ---------
Total selling and
administrative
expenses................. 4,932 8,291 11,196 2,216 2,840
--------- --------- ---------- --------- ---------
INCOME FROM OPERATIONS............... 3,917 13,795 22,489 3,207 7,723
OTHER INCOME AND EXPENSE:
Interest (income) expense,
net............................. 135 745 123 318 (222)
Other (income) expense.......... 61 36 85 13 (120)
--------- --------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES........... 3,721 13,014 22,281 2,876 8,065
Provision for income taxes...... 1,047 4,579 7,799 991 2,822
--------- --------- ---------- --------- ---------
NET INCOME........................... $ 2,674 $ 8,435 $ 14,482 $ 1,885 $ 5,243
========= ========= ========== ========= =========
NET INCOME PER SHARE:
Basic........................... $ 0.24 $ 0.76 $ 1.12 $ 0.17 $ 0.36
Diluted......................... 0.24 0.75 1.09 0.17 0.35
========= ========= ========== ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic........................... 11,016 11,099 12,883 11,099 14,535
Diluted......................... 11,055 11,286 13,313 11,272 15,000
========= ========= ========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-4
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
----------------- RETAINED ------------------ SHAREHOLDERS'
SHARES AMOUNT EARNINGS SHARES AMOUNT EQUITY
------ ------- --------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.............. 18,388 $ 1,178 $14,697 (10,069) $(5,481) $ 10,394
NET INCOME.............................. -- -- 2,674 -- -- 2,674
ACTIVITY IN COMPANY STOCK PLANS......... 60 121 -- 500 150 271
SALE OF TREASURY STOCK, NET............. -- 7,794 -- 2,220 1,276 9,070
------ ------- --------- ------- ------- --------------
BALANCE, DECEMBER 31, 1995.............. 18,448 9,093 17,371 (7,349) (4,055) 22,409
NET INCOME.............................. -- -- 8,435 -- -- 8,435
------ ------- --------- ------- ------- --------------
BALANCE, DECEMBER 31, 1996.............. 18,448 9,093 25,806 (7,349) (4,055) 30,844
NET INCOME.............................. -- -- 14,482 -- -- 14,482
ACTIVITY IN COMPANY STOCK PLANS......... 22 327 -- -- -- 327
SALE OF TREASURY STOCK, NET............. -- 4,055 -- 529 304 4,359
SALE OF COMMON STOCK, NET............... 2,875 39,357 -- -- -- 39,357
------ ------- --------- ------- ------- --------------
BALANCE, DECEMBER 31, 1997.............. 21,345 52,832 40,288 (6,820) (3,751) 89,369
NET INCOME (UNAUDITED).................. -- -- 5,243 -- -- 5,243
ACTIVITY IN COMPANY STOCK PLANS
(UNAUDITED)........................... 10 115 -- -- -- 115
------ ------- --------- ------- ------- --------------
BALANCE, MARCH 31, 1998 (UNAUDITED)..... 21,355 $52,947 $45,531 (6,820) $(3,751) $ 94,727
====== ======= ========= ======= ======= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,674 $ 8,435 $ 14,482 $ 1,885 $ 5,243
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization.................. 2,794 5,257 7,512 1,845 1,996
Deferred income taxes......... 635 2,122 3,789 500 1,200
Gain on sale of property...... -- -- (464) -- --
Changes in operating assets and
liabilities:
Accounts receivable, net...... 2,592 (15,287) (5,777) 9,215 1,605
Other current assets.......... 1,574 (299) (2,653) (685) (3,176)
Accounts payable and accrued
liabilities................ 1,640 6,355 4,766 (3,210) 3,460
Income taxes payable
(receivable)............... (327) 280 736 419 914
Other noncurrent, net......... 414 782 (97) 84 (1,273)
---------- ---------- ---------- --------- ---------
Net cash provided by
operating activities..... 11,996 7,645 22,294 10,053 9,969
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (16,857) (27,289) (28,936) (3,017) (6,789)
Investment in Aquatica, Inc........ -- -- -- -- (5,000)
Deposits restricted for salvage
operations...................... (2,727) (255) (436) (131) (79)
Proceeds from sale of property..... -- 244 1,084 -- --
---------- ---------- ---------- --------- ---------
Net cash used in investing
activities............... (19,584) (27,300) (28,288) (3,148) (11,868)
---------- ---------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of treasury stock, net of
transaction costs............... 9,070 -- 4,359 -- --
Borrowings under term loan
facility........................ 8,253 25,000 6,700 -- --
Exercise of stock warrants and
options......................... 271 -- 99 -- 45
Decrease in short-term borrowing... (1,900) -- -- -- --
Repayments of long-term debt....... (8,219) (5,300) (31,700) (6,000) --
Sale of Common Stock, net of
transaction costs............... -- -- 39,357 -- --
---------- ---------- ---------- --------- ---------
Net cash provided by
financing activities..... 7,475 19,700 18,815 (6,000) 45
---------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (113) 45 12,821 905 (1,854)
CASH AND CASH EQUIVALENTS:
Balance, beginning of year......... 272 159 204 204 13,025
---------- ---------- ---------- --------- ---------
Balance, end of year............... $ 159 $ 204 $ 13,025 $ 1,109 $ 11,171
========== ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Cal Dive International, Inc. (Cal Dive, CDI or the Company), headquartered
in Houston, Texas, owns, staffs and operates ten marine construction vessels and
a derrick barge in the Gulf of Mexico. The Company provides a full range of
services to offshore oil and gas exploration and production and pipeline
companies, including underwater construction, maintenance and repair of
pipelines and platforms, and salvage operations.
In September 1992, Cal Dive formed a wholly owned subsidiary, Energy
Resource Technology, Inc. (ERT), to purchase producing offshore oil and gas
properties which are in the later stages of their economic lives. ERT is a fully
bonded offshore operator and, in conjunction with the acquisition of properties,
assumes the responsibility to decommission the property in full compliance with
all governmental regulations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
INTERIM FINANCIAL STATEMENTS
The unaudited financial information presented for the three-month periods
ended March 31, 1997 and 1998 reflects all adjustments (which were normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the consolidated balance sheets, results of operations, and
cash flows, as applicable.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
primarily on the straight-line method over the estimated useful lives of the
assets.
All of the Company's interests in natural gas and oil properties are
located offshore in United States waters. Under the successful efforts method,
the costs of successful wells and leases containing productive reserves are
capitalized.
ERT offshore property acquisitions are recorded at the value exchanged at
closing together with an estimate of its proportionate share of the
decommissioning liability assumed in the purchase based upon its working
interest ownership percentage. In estimating the decommissioning liability to be
assumed in offshore property acquisitions, the Company performs very detailed
estimating procedures, including engineering studies. All capitalized costs are
amortized on a unit-of-production basis (UOP) based on the estimated remaining
oil and gas reserves. Properties are periodically assessed for impairment in
value, with any impairment charged to expense.
The following is a summary of the components of property and equipment
(dollars in thousands):
ESTIMATED
USEFUL LIFE 1996 1997
----------- --------- ---------
Vessels.............................. 15 $ 40,403 $ 62,814
Offshore leases and equipment........ UOP 14,767 15,634
Machinery and equipment.............. 5 5,125 8,191
Leasehold improvements, furniture,
software and computer equipment.... 5 1,061 2,651
Automobiles and trucks............... 3 110 209
--------- ---------
Total property and equipment.... $ 61,466 $ 89,499
========= =========
The cost of repairs and maintenance of vessels and equipment is charged to
operations as incurred, while the cost of improvements is capitalized. Total
repair and maintenance charges were $2,368,000, $3,655,000 and $6,771,000 for
the years ended December 31, 1995, 1996 and 1997, respectively. Upon the
disposition of
F-7
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
property and equipment, the related cost and accumulated depreciation accounts
are relieved, and the resulting gain or loss is included in other income
(expense).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company earns the majority of its service revenues during the summer
and fall months. Revenues are derived from billings under contracts (which are
typically of short duration) that provide for either lump-sum turnkey charges or
specific time, material and equipment charges which are billed in accordance
with the terms of such contracts. The Company recognizes revenue as it is earned
at estimated collectible amounts. Revenue on significant turnkey contracts is
recognized on the percentage-of-completion method based on the ratio of costs
incurred to total estimated costs at completion. Contract price and cost
estimates are reviewed periodically as work progresses and adjustments are
reflected in the period in which such estimates are revised. Provisions for
estimated losses on such contracts are made in the period such losses are
determined. Unbilled revenue represents revenue attributable to work completed
prior to year-end which has not yet been invoiced. All amounts included in
unbilled revenue at December 31, 1996 and 1997, are expected to be billed and
collected within one year.
REVENUE ALLOWANCE ON GROSS AMOUNTS BILLED
The Company bills for work performed in accordance with the terms of the
applicable contract. The gross amount of revenue billed will include not only
the billing for the original amount quoted for a project but also include
billings for services provided which the Company believes are outside the scope
of the original quote. The Company establishes a Revenue Allowance for these
additional billings based on its collections history if conditions warrant such
a reserve.
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The market for the Company's services is the offshore oil and gas industry,
and the Company's customers consist primarily of major, well-established oil and
pipeline companies and independent oil and gas producers. The Company performs
ongoing credit evaluations of its customers and provides allowances for probable
credit losses when necessary; however, such losses have historically been
insignificant.
Two customers merged during 1995 (J. Ray McDermott, S.A.) and together
accounted for 21 percent, 24 percent and 19 percent of consolidated revenues in
the years 1995, 1996 and 1997, respectively. In addition, Shell accounted for 11
percent of consolidated revenues in 1997.
INCOME TAXES
Deferred taxes are recognized for revenues and expenses reported in
different years for financial statement purposes and income tax purposes in
accordance with SFAS No. 109, "Accounting for Income Taxes." The statement
requires, among other things, the use of the liability method of computing
deferred income taxes. The liability method is based on the amount of current
and future taxes payable using tax rates and laws in effect at the balance sheet
date.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share". This statement
replaces APB Opinion No. 15 and establishes standards for computing and
presenting earnings per share. The Company adopted this standard, as required,
for the year
F-8
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1997. Adoption of this standard did not have a material
effect on the Company's reported earnings per share amounts.
SFAS 128 requires the presentation of "basic" EPS and "diluted" EPS on
the face of the statement of operations. Basic EPS is computed by dividing the
net income available to common shareholders by the weighted-average shares of
outstanding common stock. The calculation of diluted EPS is similar to basic EPS
except that the denominator includes dilutive common stock equivalents, which
were stock options, less the number of treasury shares assumed to be purchased
from the proceeds from the exercise of stock options.
STATEMENT OF CASH FLOW INFORMATION
The Company defines cash and cash equivalents as cash and all highly liquid
financial instruments with original maturities of less than three months. During
the years ended December 31, 1995, 1996 and 1997, the Company's cash payments
for interest were approximately $526,000, $1,069,000 and $1,033,000,
respectively, and cash payments for federal income taxes were approximately
$663,000, $2,200,000 and $3,200,000, respectively. In connection with 1995, 1996
and 1997 offshore property acquisitions, ERT assumed net abandonment liabilities
estimated at approximately $3,800,000, $1,200,000 and $1,351,000, respectively
(see Note 3).
RECLASSIFICATIONS
Certain reclassifications were made to previously reported amounts in the
consolidated financial statements and notes to make them consistent with the
current presentation format.
INVESTMENTS
The Company follows SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, debt securities, including
treasury bills and notes, that the Company has both the intent and ability to
hold to maturity, are carried at amortized cost and are included in cash
deposits restricted for salvage operations in the accompanying consolidated
balance sheets. As all of these securities as of December 31, 1997, are U.S.
Treasury securities and notes, the majority of which mature beyond one year, the
Company believes the recorded balance of these securities approximates their
fair market value.
CHANGE IN ACCOUNTING POLICY
Effective January 1, 1998, the Company changed its method of accounting for
regulatory (U.S. Coast Guard, American Bureau of Shipping and Det Norske
Veritas) related drydock inspection and certification expenditures. This change
was made due to the significant changes in the composition of the Company's
fleet which has been expanded to include more sophisticated dynamically
positioned vessels that are capable of working in the deepwater Gulf of Mexico,
a key to Cal Dive's operating strategy. The change also coincides with the first
time these vessels were due for drydock inspection and certification since being
acquired by CDI. The Company previously expensed inspection and certification
costs as incurred; however, effective January 1, 1998, such expenditures will be
capitalized and amortized over the 30-month period between regulatory mandated
drydock inspections and certification. This predominant industry practice
provides better matching of expenses with the period benefited (i.e.,
certification to operate the vessel for a 30-month period between required
drydock inspections and to meet bonding and insurance coverage requirements).
This change had an $800,000 positive impact on net income, or $.05 per share, in
the Company's first quarter 1998 consolidated financial statements. The
cumulative effect of this change in accounting principle is immaterial to the
Company's consolidated financial statements taken as a whole.
3. OFFSHORE PROPERTY ACQUISITIONS:
During 1995, net working interests of 50 percent to 100 percent in seven
offshore blocks were acquired in exchange for cash of $1,780,000 and ERT
assuming the related abandonment liabilities. The 1996 property acquisitions
included net working interests of 33 percent to 100 percent in four offshore
blocks which were
F-9
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired for cash of $3,600,000 and assumption of a pro rata share of the
decommissioning liability. During 1997, ERT acquired net working interest of 50
percent to 100 percent in 3 offshore blocks in exchange for $1.3 million in cash
and assumption of a pro rata share of the decommissioning liability.
ERT production activities are regulated by the federal government and
require significant third-party involvement, such as refinery processing and
pipeline transportation. The Company records revenue from its offshore
properties net of royalties paid to the Minerals Management Service. Royalty
fees paid totaled approximately $875,000, $1,996,000 and $3,018,000 for the
years ended 1995, 1996 and 1997, respectively. In accordance with federal
regulations that require operators in the Gulf of Mexico to post an areawide
bond of $3,000,000, cash deposits restricted for salvage operations include U.S.
Treasury bonds of $3,300,000 at December 31, 1997 (see Note 2). In addition, the
terms of certain of the 1993 purchase and sale agreements require that ERT
deposit a portion of a property's net production revenue into interest-bearing
escrow accounts until such time as a specified level of funding has been set
aside for salvaging and abandoning the properties. As of December 31, 1997, such
deposits totaled $2,370,000 and are included in cash deposits restricted for
salvage operations in the accompanying balance sheet.
4. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following (in thousands):
1996 1997
--------- ---------
Accrued payroll and related benefits.... $ 2,961 $ 4,097
Workers compensation claims............. 999 1,100
Workers compensation claims to be
reimbursed............................ 698 1,568
Other................................... 1,100 749
--------- ---------
Total accrued liabilities.......... $ 5,758 $ 7,514
========= =========
5. REVOLVING CREDIT FACILITY:
During 1995, the Company entered into a $30 million revolving credit
facility, maturing in May 2000, which is secured by property and equipment and
trade receivables. At the Company's option, interest was at a rate equal to 2.00
percent above a Eurodollar base rate (2.25 on borrowings less than $10 million)
or .5 percent above prime. Pursuant to these terms, borrowings at December 31,
1996, included $22 million at 7.37 percent (Eurodollar option) and $3 million at
8.75 percent. The Company drew upon the revolving credit facility throughout the
three years ended December 31, 1997. Under this credit facility, letters of
credit (LOC) are also available which the Company typically uses if performance
bonds are required and, in certain cases, in lieu of purchasing U.S. Treasury
bonds in conjunction with ERT property acquisitions. At December 31, 1996 and
1997, LOC totaling $4.25 million and $2.92 million were outstanding pursuant to
these terms.
During April 1997, the revolving credit facility was amended, increasing
the amount available to $40 million and reducing the financial covenant
restrictions to one (a fixed charge ratio) and reducing the interest rate from
.5% above prime and 2% above the Eurodollar base rate to prime and 1.25 to 2.50
percent above Eurodollar based on specific provisions set forth in the loan
agreement. The Company was in compliance with these debt covenants at December
31, 1997.
F-10
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FEDERAL INCOME TAXES:
Federal income taxes have been provided based on the statutory rate of 34
percent in 1995 and 1996 and 35 percent in 1997 adjusted for items which are
allowed as deductions for federal income tax reporting purposes, but not for
book purposes. The primary differences between the statutory rate and the
Company's effective rate are as follows:
1995 1996 1997
--------- --------- ---------
Statutory rate....................... 34% 34% 35%
Percentage depletion related to the
natural gas production of ERT
properties......................... (7) -- --
Other................................ 1 1 --
--------- --------- ---------
Effective rate....................... 28% 35% 35%
========= ========= =========
Components of the provision for income taxes reflected in the statements of
operations consist of the following (in thousands):
1995 1996 1997
--------- --------- ---------
Current.............................. $ 412 $ 2,457 $ 4,010
Deferred............................. 635 2,122 3,789
--------- --------- ---------
$ 1,047 $ 4,579 $ 7,779
========= ========= =========
Deferred income taxes result from those transactions which affect financial
and taxable income in different years. The nature of these transactions and the
income tax effect of each as of December 31, 1997 and 1996, is as follows (in
thousands):
1996 1997
--------- ---------
Deferred tax liabilities --
Depreciation.................... $ 5,417 $ 8,745
--------- ---------
Deferred tax assets --
Reserves, accrued liabilities
and other...................... (552) (91)
--------- ---------
Net deferred tax
liability............... $ 4,865 $ 8,654
========= =========
7. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company occupies several facilities under noncancelable operating
leases, with the more significant leases expiring in the years 2004 and 2007.
Future minimum rentals under these leases are $4.35 million at December 31, 1997
with $495,000 in 1998, $559,000 in 1999, $553,000 in 2000, $569,000 in 2001 and
the balance thereafter. Total rental expense under operating leases was
$240,000, $262,000 and $376,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
INSURANCE AND LITIGATION
The Company carries hull protection on vessels, indemnity insurance and a
general umbrella policy. All onshore employees are covered by workers'
compensation, and all offshore employees, including divers and tenders, are
covered by Jones Act employee coverage, the maritime equivalent of workers'
compensation. The Company is exposed to deductible limits on its insurance
policies, which vary from $5,000 to a maximum of $100,000 per accident
occurrence. Effective August 1, 1992, the Company adopted a self-insured (within
specified limits) medical and health benefits program for its employees whereby
the Company is exposed to a maximum of $15,000 per claim.
F-11
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company incurs workers' compensation claims in the normal course of
business, which management believes are covered by insurance. The Company, its
insurers and legal counsel analyze each claim for potential exposure and
estimate the ultimate liability of each claim. Amounts accrued and receivable
from insurance companies, above the applicable deductible limits, are reflected
in other current assets in the consolidated balance sheet. See related accrued
liabilities at Note 4. Such amounts were $698,000 and $1,568,000 as of December
31, 1996 and 1997, respectively. The Company has not incurred any significant
losses as a result of claims denied by its insurance carriers. In the opinion of
management, the ultimate liability to the Company, if any, which may result from
these claims will not materially affect the Company's consolidated financial
position, results of operations or net cash flows.
8. EMPLOYEE BENEFIT PLANS:
DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401(k) retirement plan covering
substantially all of its employees. The Company's contributions and cost are
determined annually as 50 percent of each employee's contribution up to 5
percent of the employee's salary. The Company's costs related to this plan
totaled $168,000, $197,000 and $270,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
INCENTIVE AND STOCK OPTION PLAN
During 1995, the board of directors and shareholders approved the 1995
Long-Term Incentive Plan (the Incentive Plan). Under the Incentive Plan, a
maximum of 10% of the total shares of Common Stock issued and outstanding may be
granted to key executives and selected employees who are likely to make a
significant positive impact on the reported net income of the Company. The
Incentive Plan is administered by a committee which determines, subject to
approval of the Compensation Committee of the Board of Directors, the type of
award to be made to each participant and sets forth in the related award
agreement the terms, conditions and limitations applicable to each award. The
committee may grant stock options, stock appreciation rights, or stock and cash
awards. Options granted to employees under the Incentive Plan vest 20% per year
for a five year period, have a maximum exercise life of five years and, subject
to certain exceptions, are not transferable.
The stock option plan is accounted for using APB Opinion No. 25, and
therefore no compensation expense is recorded. If SFAS Statement No. 123 had
been used for the accounting of these plans, the Company's pro forma net income
for 1995, 1996 and 1997 would have been $2,607,000, $8,330,000 and $14,023,000,
respectively, and the Company's pro forma diluted earnings per share would have
been $0.24, $0.74 and $1.07, respectively. These pro forma results exclude
consideration of options granted prior to January 1, 1995, and therefore may not
be representative of that to be expected in future years.
All of the options outstanding at December 31, 1997, have exercise prices
as follows: 454,500 shares at $4.50, 470,000 shares at $9.50 and 70,000 shares
at a range of $26.75 to $32.75 and a weighted average remaining contractual life
of 3.68 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: risk-free interest rates of 5.9
percent; expected dividend yields of 0 percent; expected lives of five years;
and expected volatility of 0 percent as the Company was a privately held entity
and accordingly estimating the expected volatility was not feasible. The same
weighted average assumptions were used for grants in 1997 with the exception of
expected volatility which is assumed to be 36 percent and risk-free interest
rate assumed to be 5.5 percent.
F-12
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year............................... 560,000 $ 0.35 447,500 $ 4.50 544,500 $ 4.50
Granted.............................. 447,500 4.50 135,000 4.50 540,000 12.17
Exercised............................ (560,000) 0.35 -- -- (22,000) 4.50
Terminated........................... -- -- (38,000) 4.50 (68,000) 4.50
---------- -------- --------- -------- ---------- --------
Options outstanding,
December 31........................ 447,500 $ 4.50 554,500 $ 4.50 994,500 $ 8.66
Options exercisable,
December 31........................ 44,000 $ 4.50 124,700 $ 4.50 199,604 $ 4.50
========== ======== ========= ======== ========== ========
</TABLE>
9. COMMON STOCK:
During 1995, the board of directors and shareholders approved an amendment
to the Articles of Incorporation increasing the number of authorized shares from
2,000,000 to 20,000,000. In connection with this measure, a 10-for-1 stock split
was also approved. Accordingly, all of the share and per share information
included in the financial statements and notes thereto has been restated
retroactively to reflect the 10-for-1 stock split.
During 1995, certain investment funds managed by First Reserve Corporation
(the "First Reserve Funds") acquired a 50 percent ownership position in the
Company by purchasing 3,329,780 shares held by employees and 2,219,850 treasury
shares held by the Company, increasing shareholders' equity by $10,000,000
($9,070,000, net of transaction costs).
On April 11, 1997, Coflexip purchased approximately 3,700,000 shares of the
Company's stock, consisting of approximately 2.1 million shares sold by
management of the Company, 1.1 million shares sold by First Reserve Funds and
approximately 500,000 shares sold by the Company at a price of $9.46 per share.
The Company had previously, in February of 1997, contracted with Coflexip to
acquire two ROVs at published retail prices. Coflexip agreed to accept
approximately 500,000 shares of the Company's Common Stock as payment for the
ROVs and as part of the transaction described above.
In conjunction with this transaction, the Company entered into a new
Shareholders Agreement. The new Shareholders Agreement provides that, except in
limited circumstances (including issuance of securities under stock option plans
or in conjunction with acquisitions), the Company shall provide preemptive
rights to acquire the Company's securities to each of Coflexip, First Reserve
and the Executive Directors. The Shareholders Agreement also provides that the
Company will not enter into an agreement (i) to sell the Company, (ii) to retain
an advisor to sell the Company or (iii) to pursue any acquisition in excess of
50% of the Company's market capitalization without first notifying Coflexip in
writing and providing Coflexip the opportunity to consummate an acquisition on
terms substantially equivalent to any proposal.
The Company completed an initial public offering of common stock on July 7,
1997, with the sale of 4.1 million shares at $15 per share. Of the 4.1 million
shares, 2,875,000 shares were sold by the Company and 1,265,000 shares were sold
by First Reserve Funds. Net proceeds to the Company of approximately $39.4
million were used to retire all of its then outstanding long-term indebtedness
of $20 million.
F-13
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. BUSINESS SEGMENT INFORMATION (IN THOUSANDS):
The following summarizes certain financial data by business segment:
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
Revenues --
Subsea and salvage revenues........ $ 32,747 $ 63,870 $ 92,860
Natural gas and oil production..... 4,777 12,252 16,526
--------- ---------- ----------
Total...................... $ 37,524 $ 76,122 $ 109,386
========= ========== ==========
Income from operations --
Subsea and salvage................. $ 3,185 $ 10,503 $ 16,411
Natural gas and oil production..... 732 3,292 6,078
--------- ---------- ----------
Total...................... $ 3,917 $ 13,795 $ 22,489
========= ========== ==========
Identifiable assets --
Subsea and salvage................. $ 31,473 $ 63,217 $ 107,420
Natural gas and oil production..... 13,386 19,839 18,180
--------- ---------- ----------
Total...................... $ 44,859 $ 83,056 $ 125,600
========= ========== ==========
Capital expenditures --
Subsea and salvage................. $ 14,260 $ 20,038 $ 26,984
Natural gas and oil production..... 2,597 7,251 1,952
--------- ---------- ----------
Total...................... $ 16,857 $ 27,289 $ 28,936
========= ========== ==========
Depreciation and amortization --
Subsea and salvage................. $ 1,659 $ 2,525 $ 4,000
Natural gas and oil production..... 1,135 2,732 3,512
--------- ---------- ----------
Total...................... $ 2,794 $ 5,257 $ 7,512
========= ========== ==========
11. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED):
The following information regarding the Company's oil and gas producing
activities is presented pursuant to SFAS No. 69, "Disclosures About Oil and Gas
Producing Activities" (in thousands).
CAPITALIZED COSTS
Aggregate amounts of capitalized costs relating to the Company's oil and
gas producing activities and the aggregate amount of related accumulated
depletion, depreciation and amortization as of the dates indicated are presented
below. The Company has no capitalized costs related to unproved properties.
AS OF DECEMBER 31,
--------------------
1996 1997
--------- ---------
Proved properties being amortized....... $ 14,767 $ 15,634
Less -- Accumulated depletion,
depreciation and amortization......... (3,998) (6,845)
--------- ---------
Net capitalized costs.............. $ 10,769 $ 8,789
========= =========
F-14
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The following table reflects the costs incurred in oil and gas property
acquisition and development activities during the dates indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Proved property acquisition costs....... $ 6,092 $ 4,688 $ 2,687
Development costs....................... 310 2,048 385
--------- --------- ---------
Total costs incurred............... $ 6,402 $ 6,736 $ 3,072
========= ========= =========
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Revenues................................ $ 4,777 $ 12,252 $ 16,526
Production (lifting) costs.............. 1,971 4,538 4,651
Depreciation, depletion and
amortization.......................... 1,136 2,732 3,512
Pretax income from producing
activities............................ 1,670 4,982 8,363
Income tax expenses..................... 568 1,744 2,927
--------- --------- ---------
Results of oil and gas producing
activities............................ $ 1,102 $ 3,238 $ 5,436
========= ========= =========
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Proved oil and gas reserve quantities are based on estimates prepared by
Miller & Lents in accordance with guidelines established by the Securities and
Exchange Commission. Reserve quantities for periods prior to December 31, 1995,
were estimated by the Company's internal engineers and not independent engineers
since the Company was a privately held entity. The internal engineers did not
revise their estimates for 1994 because the Company's properties were proved and
producing in the latter stages of their respective lives and revisions to the
reserve data were insignificant. Accordingly, no revisions of estimates prior to
December 31, 1995 have been reflected. All of the Company's reserves are located
in the United States. Proved reserves cannot be measured exactly because the
estimation of reserves involves numerous judgmental determinations. Accordingly,
reserve estimates must be continually revised as a result of new information
obtained from drilling and production history, new geological and geophysical
data and changes in economic conditions.
F-15
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, all of the Company's proved reserves were
developed. As of December 31, 1996 and 1997, 4,500 Bbls. of oil and 6,325,700
Mcf. of gas of the Company's proved reserves were undeveloped.
OIL GAS
RESERVE QUANTITY INFORMATION (BBLS.) (MCF.)
- ---------------------------------------- ------- ---------
Total proved reserves at December 31,
1994.................................... 75 3,336
Production......................... (33) (2,382)
Purchases of reserves in place..... 80 19,444
------- ---------
Total proved reserves at December 31,
1995.................................. 122 20,398
Revisions of previous estimates.... 32 (365)
Production......................... (38) (4,310)
Purchases of reserves in place..... 8 8,873
------- ---------
Total proved reserves at December 31,
1996.................................. 124 24,596
Revisions of previous estimates.... (21) 1,831
Production......................... (51) (5,385)
Purchases of reserves in place..... 149 2,115
Sales of reserves in place......... (1) (912)
------- ---------
Total proved reserves at December 31,
1997.................................. 200 22,245
======= =========
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES
The following table reflects the standardized measure of discounted future
net cash flows relating to the Company's interest in proved oil and gas reserves
as of December 31:
1995 1996 1997
---------- ---------- ----------
Future cash inflows.................. $ 44,127 $ 92,393 $ 59,819
Future costs --
Production...................... (23,990) (26,247) (23,675)
Development and abandonment..... (6,168) (7,365) (6,917)
---------- ---------- ----------
Future net cash flows before income
taxes.............................. 13,969 58,781 29,227
Future income taxes............. (5,072) (17,980) (7,927)
---------- ---------- ----------
Future net cash flows................ 8,897 40,801 21,300
Discount at 10% annual rate..... (1,252) (6,996) (1,540)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows.............. $ 7,645 $ 33,805 $ 19,760
========== ========== ==========
F-16
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Company's proved oil and gas reserves are as follows:
1995 1996 1997
--------- ---------- ----------
Standardized measure, beginning of
year............................... $ 604 $ 7,645 $ 33,805
Sales, net of production costs....... (2,806) (9,882) (11,441)
Net change in prices, net of
production costs................... 1,217 22,201 (17,707)
Changes in future development
costs.............................. -- (555) 160
Development costs incurred........... -- 2,007 385
Accretion of discount................ 60 1,200 4,870
Net change in income taxes........... (4,358) (10,539) 7,544
Purchases of reserves in place....... 13,068 21,730 3,282
Sales of reserves in place........... -- -- (2,480)
Changes in production rates (timing)
and other.......................... (140) (2) 1,342
--------- ---------- ----------
Standardized measures, end of year... $ 7,645 $ 33,805 $ 19,760
========= ========== ==========
12. REVENUE ALLOWANCE ON GROSS AMOUNTS BILLED:
The following table sets forth the activity in the Company's Revenue
Allowance on Gross Amounts Billed for each of the three years in the period
ended December 31, 1997 (in thousands):
1995 1996 1997
--------- --------- ---------
Beginning balance.................... $ 364 $ 402 $ 1,021
Additions............................ 464 1,784 3,058
Deductions........................... (426) (1,165) (2,257)
--------- --------- ---------
Ending balance....................... $ 402 $ 1,021 $ 1,822
========= ========= =========
The Company also regularly reviews its trade receivable balances for
collectibility and provides Reserves for Bad Debts when necessary; however, as
the Company's customers consist primarily of major, well-established oil and
pipeline companies and independent oil and gas producers such reserves have
historically been insignificant. See Note 2 for a detailed discussion regarding
the Company's accounting policy on the revenue allowance on gross amounts
billed.
13. SUBSEQUENT EVENTS:
INVESTMENT IN AQUATICA, INC.
In February 1998, the Company purchased a significant minority equity
interest in Aquatica, Inc. for $5 million, in addition to a commitment to lend
additional funds of up to $5 million to allow Aquatica to purchase vessels and
fund other growth opportunities. Aquatica, Inc., headquartered in Lafayette,
Louisiana, is a surface diving company founded in October 1997 with the
acquisition of Acadiana Divers, a 15 year old surface diving company. Dependent
upon various preconditions, as defined, the shareholders of Aquatica, Inc. have
the right to convert their shares into Cal Dive shares at a ratio based on a
formula which, among other things, values their interest in Aquatica, Inc. and
must be accretive to Cal Dive shareholders. The Company will account for this
investment on the equity basis of accounting for financial reporting purposes.
ACQUISITION OF OFFSHORE BLOCKS
In January 1998, ERT acquired interests in six blocks involving two
separate fields (a 55% interest in East Cameron 231 and a 10% interest in East
Cameron 353) from Sonat Exploration Company ("Sonat"). The
F-17
<PAGE>
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
properties were purchased in exchange for cash of $1 million, as well as
assumption of Sonat's pro rata share of the related decommissioning liability.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The offshore marine construction industry in the Gulf of Mexico is highly
seasonal as a result of weather conditions and the timing of capital
expenditures by the oil and gas companies. Historically, a substantial portion
of the Company's services has been performed during the period from June through
November. As a result, historically a disproportionate portion of the Company's
revenues and net income is earned during the third (July through September) and
fourth (October through December) quarters of its fiscal year. The following is
a summary of consolidated quarterly financial information for 1996 and 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL 1996
Revenues............................. $11,184 $ 17,605 $23,906 $ 23,427
Gross profit......................... 3,148 5,497 7,508 5,933
Net income........................... 1,156 2,403 3,412 1,464
Net income per share:
Basic........................... $ 0.10 $ 0.22 $ 0.31 $ 0.13
Diluted......................... 0.10 0.22 0.30 0.13
FISCAL 1997
Revenues............................. $18,444 $ 28,628 $28,859 $ 33,455
Gross profit......................... 5,423 9,282 8,419 10,561
Net income........................... 1,886 4,604 3,983 4,009
Net income per share:
Basic........................... $ 0.17 $ 0.40 $ 0.28 $ 0.28
Diluted......................... 0.17 0.39 0.27 0.27
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
ISSUING
VESSEL ITEM# OUTSTANDING ITEM BODY
- ---------------------------------------- ----------------------------------------------------------
<S> <C>
CALDIVER I 1 M/E TO GEARBOX COUPLING TO ABS
BE RENEWED BY NOV 1998
CALDIVER I 2 CORRODED BRACKETS IN ABS
RUDDER ROOM - RENEW BY NOV
1998
CALDIVER I 3 CORRODED STIFFENERS IN AFTER ABS
PEAKS - RENEW BY NOV 1998
CALDIVER I 4 DENT IN NO. 3 BALLAST - ABS
RENEW BY NOV 1998
CALDIVER I 5 WHEELHOUSE WINDOW FRAMES ABS
- RENEW BY NOV 1998
CALDIVER I 6 SMALL HOLE IN DECK PLATE AT ABS
FRAME 33 - RENEW BY
NOV 1998
CALDIVER I 7 CHANGE PLUG VENTS TO BALL ABS
VENTS NO. 3 TANKS BY NOV 1998
CALDIVER II 1 NONE N/A
CALDIVER III 1 NONE N/A
CALDIVER IV 1 NONE N/A
CALDIVER V 1 NONE N/A
CD BARGE I 1 NONE N/A
BALMORAL SEA 1 SEE DNV LIST DNV
WITCH QUEEN 1 SEE DNV LIST DNV
UNCLE JOHN 1 SEE DNV LIST DNV
</TABLE>
<PAGE>
[CAL DIVE LOGO]
