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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-22739
CAL DIVE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 95-3409686
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
400 N. SAM HOUSTON PARKWAY E. SUITE 400 77060
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (281) 618-0400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (NO PAR VALUE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 27, 1998 was $145,648,576 based on the last reported
sales price of the Common Stock on March 27, 1998, as reported on the
NASDAQ/National Market System.
The number of shares of the registrant's Common Stock outstanding as of
March 27, 1998 was 14,534,831.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 12, 1998 are incorporated by reference into Part
III hereof.
CAL DIVE INTERNATIONAL, INC. ("CDI") INDEX -- FORM 10-K
PART I
Item 1. Business............................. 1
Item 2. Properties........................... 19
Item 3. Legal Proceedings.................... 22
Item 4. Submission of Matters to a Vote of 23
Security Holders.....................
Unnumbered Executive Officers of Registrant..... 23
Item
PART II
Item 5. Market for the Registrant's Common
Equity and Related Shareholder 25
Matters..............................
Item 6. Selected Financial Data.............. 26
Item 7. Management's Discussion and Analysis
of Financial Condition 26
and Results of Operations............
Results of Operations................ 28
Liquidity and Capital Resources...... 29
Item 7A. Quantitative and Qualitative 31
Disclosure About Market Risk.........
Item 8. Financial Statements and 32
Supplementary Data...................
Independent Auditors' Report......... 33
Consolidated Balance
Sheets -- December 31, 1997 and
1996................................. 34
Consolidated Statements of
Operations -- Three Years Ended
December 31, 1997.................... 35
Consolidated Statements of
Shareholders' Equity -- Three Years
Ended December 31, 1997.............. 36
Consolidated Statements of Cash
Flows -- Three Years Ended
December 31, 1997.................... 37
Notes to Consolidated Financial
Statements........................... 38
Item 9. Changes In and Disagreements With
Accountants on Accounting and 50
Financial Disclosure.................
PART III
Item 10. Directors and Executive Officers of 50
the Registrant.......................
Item 11. Executive Compensation............... 50
Item 12. Security Ownership of Certain 50
Beneficial Owners and Management.....
Item 13. Certain Relationships and Related 50
Transactions.........................
PART IV
Item 14. Exhibits, Financial Statement 51
Schedules and Reports on Form 8-K....
Signatures........................... 53
(i)
PART I
GENERAL
ITEM 1. BUSINESS.
Cal Dive International, Inc. ("CDI" or the "Company") is a leading
subsea contractor providing construction, maintenance and salvage
("decommissioning") services from the shallowest to the deepest waters in the
U.S. Gulf of Mexico (the "Gulf of Mexico" or the "Gulf"). Over three
decades, CDI has developed a reputation for market driven innovation which has
kept it a leader in underwater construction techniques and equipment. The
Company's business involves two primary segments, subsea construction services
on the U.S. Outer Continental Shelf ("OCS") and in the deepwater Gulf and also
abandonment and natural gas and oil operations.
CDI performs its more traditional subsea services in the "spot market" on
the OCS which involves air and saturation ("SAT") diving in support of pipelay
and related marine construction activities in water depth to 1,000 feet. With
five dynamically positioned DP vessels and six which operate in SAT diving mode,
CDI offers the largest fleet of such vessels permanently deployed in the Gulf.
In addition, the Company believes its highly qualified personnel enable it to
compete effectively in the Gulf's unique "spot market" for offshore construction
in which projects are generally of a short duration and of a turnkey nature. The
Company's personnel have the technical and operational experience to manage
turnkey projects and deliver bids which are priced to achieve targeted
profitability.
As Gulf of Mexico Deepwater (greater than 1,000 feet of water depth)
developments have created a need for new applications of subsea services and
technology, there is a corresponding need for a subsea contractor to develop and
deploy that technology. Management, through its Deepwater Technical Services
Group, has targeted a market niche in which the Company functions as a focal
point in the assembly and delivery of vessels (such as its MSV UNCLE JOHN, DP
WITCH QUEEN, DP BALMORAL SEA, DP MERLIN and DP MARIANOS (chartered)) and
technology required for Deepwater projects. Cal Dive has also negotiated formal
alliance agreements with a number of specialized contractors to provide a full
range of services necessary to Deepwater projects, including Quantum Offshore
Contractors, Ltd. ("Quantum"), its venture with Coflexip.
The Company has maintained a leading position in the decommissioning and
abandonment of mature properties in the shallow water Gulf of Mexico since 1992.
According to Offshore Magazine, CDI performed 32% of all structural removal in
the Gulf of Mexico from January 1, 1996 through June 30, 1997 with the next
closest competition at 13%. CDI's subsidiary Energy Resource Technology, Inc.,
("ERT") is one of the few companies acquiring mature properties in the Gulf of
Mexico with the combined attributes of financial strength, reservoir
engineering, operations expertise and the availability of company-owned salvage
assets, resulting in significant strategic and cost advantages.
Since its initial public offering in July of 1997, CDI has taken a number
of important steps to implement the strategy for each of its operating segments,
including:
QUANTUM OFFSHORE CONTRACTORS, LTD.
In late 1997 and early 1998, CDI completed organization of Quantum.
This venture and other alliances with specialized contractors allows Cal
Dive, Coflexip and other partners to provide Deepwater contracting
solutions for full field development. Quantum is pursuing EPIC projects
involving services provided by both Cal Dive and Coflexip. It is owned 51%
by Cal Dive and 49% by Coflexip. "For further details see Description of
Operations -- Deepwater Services".
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VESSELS
In the second half of 1997 Cal Dive purchased, chartered or contracted
to build five vessels and two advanced ROVs which will service it
traditional and Deepwater operations. To expand Deepwater service, it
acquired or chartered three vessels (DSV SEA SORCERESS, DP MERLIN and DP
MARIANOS (chartered)). CDI also began to solve a number of technical
deepwater problems. For example, the MSV UNCLE JOHN, with its new derrick,
performed work eight times at records depths in the Gulf of Mexico and
CDI's new ROVs operated at world record depths for conducting geotechnical
sampling. In addition, to upgrade the quality of the CDI fleet, it has
contracted to build a replacement for its smallest vessel, the DSV "CAL
DIVER IV" for delivery late this year. For further details see
"Description of Operations -- Deepwater Services" and
"Properties -- Marine Equipment and Vessels".
AQUATICA
In February 1998, CDI purchased a significant minority stake in
Aquatica, Inc., a shallow water diving company based in Lafayette,
Louisiana. Aquatica's Chairman, Sonny Freeman is the former Chief Operating
Officer of American Oilfield Divers, Inc. CDI's investment in Aquatica
should permit the Company to benefit from a market segment that is
experiencing strong demand while allowing Cal Dive to continue its focus on
its deepwater strategy. For further details see "Description of
Operations -- Traditional Subsea Services".
ENERGY RESOURCE TECHNOLOGY, INC.
In November of 1997, ERT acquired interests in offshore properties in
Vermilion Blocks 147 and 328 with three producing wells. In January of
1998, it acquired interests in six blocks involving two separate fields at
East Cameron 231 field which currently produces about 8 MMCFD and 100 BOPD
from eight wells. This field includes 46 wells, four platforms, and three
caissons. For further details see "Description of
Operations -- Abandonment and Natural Gas and Oil Operations".
FREQUENTLY USED TERMS:
4-POINT: Anchors set (two each) from the fore and aft position of the
vessel over the contruction work site.
BCFE (BCF): Billions of cubic feet of natural gas equivalent.
CONTINENTAL SHELF: Areas in the Gulf of Mexico from the shore to 1,000
feet of water.
DEEPWATER: Water depths beyond 1,000 feet.
DIVE SUPPORT VESSEL (DSV): Subsea services are typically performed with
the use of specially constructed vessels which serve as an operational base for
divers, ROVs and specialized equipment.
DYNAMIC POSITIONING (DP): Satellite based global positioning systems
ensure the proper counteraction to wind, current and wave forces and enable the
vessel to stay in position without the use of anchors.
EPIC CONTRACT: Single contract to manage engineering, procurement,
installation and commissioning of complex projects.
FSW: Water depths in feet of salt water.
GULF OF MEXICO: Referred in this report as Gulf, Deepwater Gulf, etc.
INITIAL PUBLIC OFFERING (IPO): Cal Dive shares sold to the public in an
offering dated July 1, 1997.
J-LAY/S-LAY: Methods of laying pipe on the ocean floor.
MCF: Thousands of cubic feet of natural gas.
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MINERALS MANAGEMENT SERVICE (MMS): The government regulatory body having
responsibility for United States waters in the Gulf of Mexico.
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 DIVING (SAT): Sat diving, required for work in 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.
For further information on commonly used terminology in CDI's industry, see
"Description of Operations -- The Industry."
3
DESCRIPTION OF OPERATIONS
CDI is a leading contractor providing subsea construction, maintenance and
decommissioning services the Gulf of Mexico. Its services are primarily
performed in support of offshore infrastructure construction projects involving
pipelines, production platforms, risers and subsea production systems.Through
Energy Resource Technology, Inc. ("ERT"), CDI acquires and operates mature
offshore properties producing natural gas and oil, providing customers a cost
effective alternative to the decommissioning process. CDI customers include
major and independent natural gas and oil producers, pipeline transmission
companies and offshore engineering and construction firms.
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. CDI commenced
operations in the Gulf of Mexico in 1975. Since that time, 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 provide the service and (iii) acquiring assets or seeking business
alliances which fill the market gap.
COMPANY STRENGTHS
DIVERSIFIED FLEET OF VESSELS
CDI has focused on owning and operating a diversified fleet which provides
a full complement of subsea construction, maintenance, and decommissioning
project capabilities. The Company operates a fleet of one semi-submersible DP
MSV (the UNCLE JOHN), four DP DSV's (WITCH QUEEN, BALMORAL SEA, MERLIN and
MARIANOS (chartered)), one deepwater service barge (Sea Sorceress), two
four-point moored saturation DSVs (the CAL DIVER I AND II), three other DSVs,
two work class ROVs and a salvage barge. This fleet enables the Company to
operate in all Gulf water depths where development is currently contemplated.
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. 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 Company intends to continue to expand the
capabilities of its diversified fleet through the acquisition of additional
vessels and assets.
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.
The Gulf of Mexico spot market is unique in the world in that projects are
typically of short duration and generally of a turnkey nature. 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. CDI personnel have the technical
expertise and operational experience to effectively manage turnkey projects and
thereby deliver bids which are priced to achieve targeted profitability. Because
of its experience with turnkey contracting and its people, the Company believes
it is well positioned as to capitalize on the trend in the natural gas and oil
industry towards outsourcing additional responsibility to contractors.
DEEPWATER TECHNICAL SERVICES
CDI believes that it has established a unique niche in the Deepwater Gulf
by assembling the specialized assets, technical personnel and exclusive alliance
agreements that represent 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 most weather
conditions. Likewise, the Company's MSV, the UNCLE JOHN, has demonstrated its
ability to perform certain well completion tasks previously undertaken using
more expensive drilling equipment. These vessels in combination with ROVs allow
CDI to control key assets involved in Deepwater subsea construction and field
development. Over the last two years, the Company has
4
employed personnel with experience in Deepwater subsea construction and ROV
operation. Further, CDI has entered into alliance agreements with a team of
specialized contractors that provide access to necessary equipment, technology
and services to meet the fast track requirements of Deepwater development
activities.
MAJOR PROVIDER OF SATURATION DIVING SERVICES
With five DP vessels and six which operate in SAT diving mode, CDI offers
the largest fleet of such vessels permanently deployed in the Gulf. Saturation
diving is required for subsea operations in water depths beyond 300 feet. In
recent years there has been an increasing level of construction activity, a
trend which is expected to accelerate as development of recently discovered
Deepwater fields commences and new Deepwater production is tied into the
existing Gulf infrastructure. Management believes that this trend will result in
increasing demand for SAT diving services.
LEADER IN SHALLOW WATER SALVAGE OPERATIONS
Since 1989, CDI has established a leading position in the decommissioning
and abandonment of facilities in the shallow water Gulf of Mexico. According to
Offshore Magazine, CDI performed 32% of all structural removal in the Gulf from
January 1, 1996 through June 30, 1997. The Company expects the demand for
salvage and P&A services to increase. 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 plugged and abandoned 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 equipment, the Company has successfully project managed
the decommissioning of large fields by subcontracting the heavy lift to third
party vendors.
MANAGEMENT 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 management team of personnel
experienced in geology, reservoir and production engineering, facilities
management and lease operations. The Company has acquired interests in 16 mature
producing leases in the last five years, one of which has been plugged and
abandoned and two of which were sold in May 1997. Mature properties are
generally those properties where decommissioning and abandonment 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
and abandonment of such properties. Management believes that CDI is one of the
few companies acquiring mature properties in the Gulf of Mexico which combines
financial strength, reservoir engineering and operations expertise with the
availability of company-owned salvage assets, resulting in significant strategic
and cost advantages. Since acquiring its initial property in late 1992, the
Company has increased estimated proved reserves to approximately 22.4 Bcfe of
natural gas and oil at December 31, 1997. In January 1998, ERT purchased four
properties which represented approximately 5% of the estimated proved reserves
at December 31, 1997.
GROWTH STRATEGY
FOCUS ON THE GULF OF MEXICO
CDI intends to maintain its primary focus on the Gulf of Mexico where the
Company is well positioned to respond to rising market demand for services in
all water depths, and increasingly to address Deepwater demand. 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)
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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.
Both 1997 and 1998 lease sales by the U.S. Minerals Management Service (MMS) of
Gulf of Mexico properties attracted record bidding levels both in terms of the
number of leases bid and the amount of capital exposed, including a record level
of interest in Deepwater blocks. This has led to new market opportunities as
well as increased demand for the Company's traditional marine services, as
reflected in both higher vessel utilization rates and operating margins.
SIGNIFICANT SHARE OF THE DEEPWATER MARKET
As Gulf of Mexico Deepwater developments have created a need for new
applications of subsea technology, there is a corresponding need for which CDI
has called a new generation of subsea contractor to develop and deploy that
technology. Management, through its Deepwater Technical Services Group, has
targeted a market niche in which CDI functions as a focal point in the assembly
and delivery of technology required for Deepwater projects. In particular, well
completions, subsea installation and infield connection services are more
critical in an era of limited availability of Deepwater drilling equipment and
hardware. The Company's MSV has the capacity to undertake certain well
completion activities, thereby reducing cost to the operator and freeing-up more
expensive drilling rig time for drilling operations. CDI has negotiated formal
alliance agreements with a number of specialized contractors to provide a full
range of services necessary to Deepwater construction projects. These strategic
alliances include Quantum and agreements with Schlumberger, 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 CDI's strategy is to increase
the proportion of Deepwater field development expenditures captured by Cal Dive
while reducing overall costs and project duration for the operator.
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. Coflexip is a world
leader in the design and manufacture of offshore flexible pipe and umbilicals
and is one of the leading subsea construction contractors. Headquartered in
Paris, France, Coflexip employs approximately 3,500 employees spread over five
continents. In 1997, Coflexip had sales of $1.2 billion and total assets of
$1.25 billion at the end of the year.
OFFER FULL FIELD DEVELOPMENT SERVICES
Management believes the significant number of new leases, the number of
Deepwater leases due to expire by 2000 and shortages of well completion
equipment, drilling rigs and production infrastructure will create a demand for
fast track, full field development solutions. CDI's recent acquisitions of
assets and its personnel and technical expertise, combined with strategic
alliances, put the Company in a strong competitive position to respond to this
market need. In addition, CDI intends to apply the technologies and capabilities
developed for Deepwater to "midwater" Gulf (500 to 1,000 feet) as a cost
effective alternative to fixed platforms.
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EXPAND THE COMPANY'S NATURAL GAS AND OIL PRODUCTION
Management believes CDI's reputation in the industry and its size and
experience in salvage and remediation work make the Company 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 and abandoned in accordance with regulatory
requirements. CDI intends to exploit its recent experience contracting and
managing heavy lift salvage to expand the number of mature offshore properties
for which CDI will bid. In addition, CDI will continue, on a selective basis, to
acquire non-operated working interests in fields where there is the potential of
CDI being awarded decommissioning or development work. These fields expand the
universe of potential ERT property acquisitions.
THE INDUSTRY
BACKGROUND
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.
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. In
offering field development services, CDI and its partners intend to provide a
full 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. Contracting for engineering,
procurement, installation and commissioning ("EPIC") 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. EPIC contracting for field
development projects requires that contractors offer a full range of services to
customers. CDI's strategic alliances provide it with the necessary capabilities
to pursue 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
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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 extreme
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 at
depths for tasks where the use of divers is uncompetitive or impossible. One of
the ROVs acquired from Coflexip has been permanently installed on the UNCLE
JOHN. The second ROV is a mobile system working on the other CDI vessels. 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. Subsea operations are conducted by manned or unmanned
intervention. 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 compressed 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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The following table summarizes the equipment and techniques primarily used
in providing subsea services by water depth:
WATER DEPTH
EQUIPMENT/TECHNIQUE USED (IN FEET)
- ------------------------------------- ------------------
Surface Diving....................... 0 to 300
SAT Diving........................... 300 to 1,000
ROVs................................. All depths
DSVs................................. 0 to 1,000
DP Vessels........................... Greater than 300
TRADITIONAL SUBSEA SERVICES
Subsea services that CDI has performed on the OCS for more than two decades
encompass air and saturation diving in support of pipelay and related marine
construction activities to approximately 1,000 feet water depth. In 1997, demand
was unusually strong for four-Point and surface air diving work in the shallow
water markets: i.e., from the shore to 300 ft. To strengthen its presence in
this market, in February 1998 the Company purchased a significant minority state
in Aquatica, Inc. of Lafayette, LA. The Company has committed to lend additional
funds to allow Aquatica to purchase vessels and fund other growth opportunities.
Aquatica purchased Acadiana Divers, a 15 year old surface diving company, in
October 1997. Sonny Freeman, Aquatica's Chairman and Chief Executive Officer,
spent 12 years at American Oilfield Divers Inc., and until April 1997 was its
Chief Operating Officer. 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 its focus on its deepwater
strategy. 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.
With five DP vessels and six which operate in SAT mode, CDI offers the
largest fleet of such vessels 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 four-point moored saturation DSVs, three other DSVs, two work class
ROVs and a salvage barge. The Company has also contracted to build a replacement
for its smallest four-point vessel 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 dynamically positioned DP vessels
that are required to deliver subsea services in water depths beyond 1,000 feet
of water. The Company's diversified fleet includes a semi-submersible
multi-service vessel, four mono-hull DP vessels and one deepwater service barge.
The SEA SORCERESS, MERLIN and MARIANOS (chartered) were acquired by CDI
following its initial public offering in the second half of 1997.
CDI formed its Deepwater Technical Services Group in early 1996 to serve
the emerging Deepwater market. This group is intended to be the focal point for
assembling and delivering the varied technological disciplines required for
Deepwater drilling projects. The limited availability of Deepwater drilling rigs
makes well completions, subsea installations and infield connection services
take on a more critical role. CDI's dynamically positioned vessels are a key
asset the application of Deepwater technologies. The Company's alliances
detailed below are also managed through this group. Services covered by Cal
Dive's Deepwater Technical Services Group include geotechnical investigation,
turnkey field development, umbilical, controls and flexible pipe installations,
well servicing, decommissioning, subsea wellhead installations and pipeline
repair systems and riser installation.
9
As part of its strategy in the Gulf of Mexico Deepwater CDI entered into a
number of strategic alliances, including establishment of Quantum with Coflexip
in February 1998. Quantum, which is owned 51% by CDI and 49% by Coflexip, was
formed to pursue EPIC projects in the offshore oil and gas industry in the Gulf
and the Caribbean exceeding $25 million in value and meeting certain other
criteria. The parties are considering the commitment of one or more vessels to
the venture including the Coflexip vessel CSO Constructor. Cal Dive will
consolidate the financial results of the joint venture into its financial
statements.
CDI's other alliances are intended to enhance its ability to offer a
complete range of subsea full-field development services including those
described below.
ALLIANCE TYPE OF AGREEMENT PRODUCTS AND SERVICES
- ------------------------------------- ------------------------------------ ---------------------------------------
TOPS................................. Preferred Provider Agreement Deepwater projects in the Gulf
Reading & Bates
Development Co..................... Alliance Agreement MSV technology and feasibility
study of a new build MSV
Schlumberger, Ltd.................... Alliance Agreement Well servicing and testing
utilizing DP vessels
Fugro-McClelland Marine
Geoscience, Inc.................... Performance Contract Geoscience services and coring
work
Quality Tubing, Inc.................. Preferred Provider Agreement Installation of coiled line pipe
Shell Offshore, Inc.................. Performance Contracts Subsea well intervention and
research and development of
J-lay procedures
Sonat, Inc........................... Preferred Provider Agreement Traditional marine services
With respect to the alliances with Schlumberger, Ltd., Fugro-McClelland Marine
Geoscience, Inc. and Quality Tubing, Inc., CDI provides vessels and related
operating services and the respective alliance partner provides the specialized
products and services listed in the table above. In the alliances with Shell
Offshore, Inc., Sonat, Inc. and TOPS, CDI provides marine contracting services
in a full field development setting to the alliance partner. In the alliance
with Reading & Bates Development Co., CDI and the alliance partner are
cooperating on the design and testing of the feasibility of a new build MSV.
ABANDONMENT AND NATURAL GAS AND OIL OPERATIONS
Since 1989, CDI has established a leading position in the decommissioning
and abandonment 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 plugged and abandoned in
accordance with government regulations related to the decommissioning and
abandonment 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 equipment,
the Company has successfully project managed the decommissioning of large fields
by subcontracting 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 abandonment
liability and CDI's desire to expand its off-season salvage and decommissioning
activity. ERT has been successful because of the magnitude and complexity of
decommissioning projects as well as regulatory requirements applicable to
offshore natural gas and oil fields in federal waters. Property owners are
required to bond and/or fund the MMS' estimate of the abandonment liability. CDI
believes its financial ability to meet the MMS' requirements and its ownership
of the required equipment provides it with an advantage over smaller
competitors. To maximize the economic value of its properties, CDI also
10
uses its operating expertise to reduce operating costs, maximize production from
the properties and minimize the costs of decommissioning and abandonment. Based
on the Miller & Lents report, the remaining average useful life of the current
properties is approximately 7.4 years based on 1997 production. As of December
31, 1997, the recorded abandonment liability was approximately $6.5 million.
Estimates of abandonment costs and their timing may change due to many factors
including inflation rates, market factors and changes in environmental laws and
regulations.
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 offshore of Louisiana and have
three producing wells with five wells shut-in. 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.
In May 1997, ERT also sold its interest in West Cameron Blocks 542 to Petsec
Energy, Inc. Although a sale is inconsistent with ERT's overall growth plan,
production at the Blocks has dropped so that they represented only approximately
5% of its Proven Reserves.
CUSTOMERS
CDI customers are primarily major and independent oil and gas exploration,
transportation and marine construction companies operating in the Gulf of
Mexico. 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, 1996 and 1997, approximately 24% and
19%, respectively, of the Company's total revenues were attributable to J. Ray
McDermott, S.A. In addition, Shell accounted for 11 percent of consolidated
revenues in 1997. The Company's projects are typically of short duration and are
generally awarded shortly before mobilization. Historically backlog has not been
a meaningful indicator of future activities.
COMPETITION
The subsea services industry is highly competitive. Competition for subsea
construction work in the Gulf of Mexico has historically been based on the
location and type of equipment available, ability to deploy such equipment, the
safety and quality of service in recent years, and price. While price has been
an important factor in obtaining contracts, the ability to acquire specialized
vessels, to attract and retain skilled personnel, and to demonstrate a good
safety record have also been important competitive factors. The Company's
competitors on the OCS include American Oilfield Divers, Inc., Global Industries
Ltd., Oceaneering International, Inc. as well as a number of smaller companies,
some of which only operate a single vessel and often compete solely on price.
For Deepwater projects, CDI'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 believes that its ability to provide a full
range of services and advanced vessels will generally result in less price
competition, higher margins and will enable it to compete effectively,
particularly in water depths greater than 300 feet.
The Company also encounters significant competition for the acquisition of
producing natural gas and oil properties. Many of its competitors are
well-established companies with substantially larger operating staffs and
greater capital resources which, in many instances, have been engaged in the
energy business for a much longer time than CDI. The Company's ability to
acquire
11
additional properties will depend upon its ability to evaluate and select
suitable properties and to consummate transactions in a highly competitive
environment.
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 United States Coast Guard ("USCG"), the Environmental Protection Agency,
MMS and the U.S. Customs Service as well as private industry organizations such
as the American Bureau of Shipping ("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 during 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 Outer Continental Shelf ("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 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 for failure to comply with
applicable bonding requirements or other regulations applicable to plugging and
abandonment. 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, and proposed
additional safety-related regulations concerning the design and operating
procedures for OCS production platforms and pipelines. 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 has recently proposed to amend such regulations to prohibit the
flaring of liquid hydrocarbons and oil 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. Any such suspension or termination 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
12
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.
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 amended the NGPA to remove both price and non-price controls
from natural gas sold in "first sales" as of 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 which are often difficult and costly to comply with and which carry
substantial 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 expose the Company to
liability for the conduct of or conditions caused by others or 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 ("OPA"), as amended, 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" include the owner or operator of an onshore
facility, vessel or pipeline, or the lessee or permittee of the area in which an
offshore
13
facility is located. OPA assigns liability to each responsible party for oil
spill removal costs and a variety of 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 million for onshore
facilities, all removal costs plus up to $75 million for offshore facilities,
and the greater of $500,000 or $600 per gross ton for vessels other than tank
vessels. A party cannot take advantage of liability limits, 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 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 and 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 tan vessels are subject to financial responsibility
limits of the greater $500,000 or $600 per gross ton, while offshore facilities
are subject to financial responsibility limits of not less than $35 million,
with that limit potentially increasing up to $150 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 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's
requirements for financial responsibility under OPA and the proposed
regulations.
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 in reportable
quantities 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.
The Outer Continental Shelf Lands Act ("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. 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.
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
14
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.
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 an action could have a
material adverse effect on the Company's financial condition and results of
operations. As of this date, the Company is not the subject of any civil or
criminal enforcement actions under OCSLA.
OPA also requires owners and operators of vessels over 300 gross tons to
provide the U.S. Coast Guard 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 U.S. Coast Guard for all of
the Company's vessels.
While certain of its onshore waste handling practices may require
upgrading, 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 from 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.
EMPLOYEES
CDI relies on the quality and skill of its workforce and has successfully
hired, trained, and retained highly skilled managers and divers. As of December
31, 1997, the Company had 432 employees, 120 of which were salaried. The Company
also utilized approximately 200 non-US citizens to crew its foreign flag vessels
under a crewing contract with C-MAR Services (UK), Ltd of Aberdeen Scotland.
None of CDI'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.
It is estimated that 150 of CDI's employees own shares of the Company's
Common Stock and 40 others hold options to acquire Common Stock under the
Company's 1995 Amended Incentive Plan, as amended.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF
FORWARD-LOOKING STATEMENTS
The Annual Report on Form 10-K includes certain statements that may be
deemed "forward-looking statements" within the meaning of Section 27 A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts, included in this Annual Report or Form 10-K 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 the
15
Company 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
of which, or a combination, 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.
INDUSTRY VOLATILITY
CDI's subsea and abandonment activities depend on offshore natural gas and
oil exploration, development and production expenditures, which are dependent on
natural gas and oil prices. The level of exploration and development activity
has traditionally been volatile as a result of fluctuations in natural gas and
oil prices and their uncertainty in the future. A significant or prolonged
reduction in natural gas or oil prices in the future would likely depress
offshore drilling and development activity, reduce the demand for CDI's services
and could have a material adverse effect on CDI's financial condition and
results of operations.
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.
Litigation arising from such an occurrence may result in lawsuits asserting
large claims. CDI maintains such insurance protection as it deems prudent,
including 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 CDI. Moreover, no
assurance can be given that CDI will be able to maintain adequate insurance in
the future at rates that it considers reasonable.
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. Between April 15 and October 15, CDI typically bears the risk of delays
caused by adverse weather conditions other than those resulting from named
tropical storms. Accordingly, the results of any one quarter are not necessarily
indicative of annual results or continuing trends.
CONTRACT BIDDING AND ALLIANCE RISKS
A majority of CDI's projects are currently performed on a qualified turnkey
basis. The revenue, costs 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
16
that these alliances will be successful or that contracts resulting from these
alliances will not result in unforeseen operational difficulties.
UNCERTAINTY OF ESTIMATES OF NATURAL GAS AND OIL RESERVES
This Report 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, Ltd. ("Miller &
Lents"), independent petroleum engineers, that relies upon various assumptions,
including assumptions required by the Securities and Exchange Commission (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 reserves set forth in this report.
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 with respect
to offshore properties, the additional hazards relating to, or loss from, severe
weather. In accordance with industry practice, the Company maintains insurance
against some, but not all, of the risks described above.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
CDI's customers consist primarily of major, well-established oil and
pipeline companies and independent oil and gas producers, construction and
engineering 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 the CDI's operating
performance. 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 substantial loss of revenues, increased costs and other
liabilities and could have a material adverse effect on the Company's operating
performance.
DEPENDENCE ON KEY PERSONNEL
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 Messrs. Owen Kratz, Gerald G. Reuhl and S. James Nelson and eight of its
senior officers. The Company has also obtained and is the sole beneficiary under
key person life insurance policies with Messrs. Kratz and Reuhl, each in the
amount of $6 million. CDI believes that its success is also dependent upon its
ability to employ and retain skilled personnel.
REGULATORY AND ENVIRONMENTAL MATTERS
CDI's subsea construction, inspection, maintenance, salvage, and
abandonment operations and its natural gas and oil production from offshore
properties are subject to and affected by various types of government
regulation, including numerous federal, state and local environmental
17
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.
VOTING CONTROL BY PRINCIPAL SHAREHOLDERS
Management, First Reserve and Coflexip own approximately 70% of the
outstanding Common Stock. Certain of these shareholders are parties to a
shareholders agreement which, among other things, provides for the election of
directors. As a result, these shareholders may be able to control the outcome of
certain matters requiring a shareholder vote, including the election of
directors.
18
ITEM 2. PROPERTIES.
MARINE VESSELS AND EQUIPMENT
GENERAL
The Company owns or charters a fleet of twelve 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, BALMORAL SEA, UNCLE JOHN, SEA SORCERESS,
MERLIN and MARIANOS (chartered).
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. Seven of CDI's vessels have
been or are in the process of being modified to provide saturation diving
services. Five of these vessels are being specifically upgraded to respond to
the emerging Deepwater market. The SEA SORCERESS is scheduled for Deepwater
related modifications in 1998 and 1999. 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 April 1997 CDI acquired two, 2,000 meter (6,600 feet), 100 hp Triton XL
ROVs, the newest generation of deepwater work class ROVs to be utilized
offshore. The Triton XL units were manufactured by Perry Tritech, a wholly owned
subsidiary of CDI's strategic partner, Coflexip. The Triton XL 15 has been
installed permanently onboard CDI's multi-service vessel, UNCLE JOHN, making her
the only semi-submersible 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 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, Triton XL 16, is a stand-alone self-contained
system which utilizes a U-boom launch and recovery system, heavy duty winch and
umbilical, control van and work van. This mobile unit can be deployed from CDI's
fleet of DP vessels, or any suitable vessel of opportunity. CDI's goal is not to
become a volume provider of ROVs but rather to utilize these units in support of
deepwater projects and our turnkey business.
In August 1997 CDI chartered the "MARIANOS", a dynamically positioned
dive support vessel. The vessel, which is owned by CDI's alliance partner
Coflexip, is fitted with a moonpool deployed saturation diving system capable of
supporting 16 divers working at three separate depth levels as well as a surface
dive system. The vessel has a fully redundant dynamic positioning system with
thruster units located in individual watertight compartments for added safety.
Her dimensions (297 foot length and 59 foot breadth) provide for a significant
deck load (750 tons), accommodations for 76 people, two cranes (one 60 ton) and
a power plant sufficient to generate a service speed of 12 knots.
In October 1997 CDI acquired a 374 1/4 104 1/4 DSV the SEA SORCERESS with
six-point mooring and accommodations for 50 people. The Canadian flagged vessel
is ice strengthened, has a deck load capacity of 10,000 long 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 to assist in the dredging of four so-called "glory holes"
offshore of Newfoundland in Canada for the "Terra Nova" project. This project
involves the second largest Canadian field with an estimated 300-400 million
barrels of recoverable oil and the latest technology to protect wellheads and
subsea templates from the iceberg flow. After this assignment is completed, the
SEA SORCERESS is currently expected to be modified to compliment CDI's fleet
based in the Gulf.
19
In December 1997, CDI acquired a DP ROV support vessel the "MERLIN". The
vessel is 180 feet long, 38 feet wide and has accommodation for 31 people. The
vessel can be fitted with a portable moonpool diving 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 ST crane. CDI expects to use her primarily
for ROV support, coring and laying of small umbilicals.
CAL DIVE INTERNATIONAL, INC.
LISTING OF VESSELS, BARGES AND ROVS
AS OF DECEMBER 31, 1997
DATE CLEAR DECK
PURCHASED LENGTH SPACE DECK LOAD ACCOM- SAT
VESSEL(1) BY CDI (FEET) (SQ. FEET) (TONS) MODATIONS DIVING CRANE
- ---------------------------------------- --------- ------ ---------- --------- --------- ------ ------------
DP MSV:
Uncle John............................ 11/96 254 11,834 460 102 U 2 100-ton
DP DSVS:
Balmoral Sea(2)....................... 9/94 259 3,443 250 60 U 30-ton
Witch Queen........................... 11/95 278 5,600 500 62 U 50-ton
Marianos(3)........................... 8/97 297 6,300 750 76 U 60-ton
Merlin................................ 12/97 180 1,000 315 31 A-Frame
Sea Sorceress......................... 8/97 374 8,600 10,000 50 --
DSVS:
Cal Diver I........................... 7/84 196 2,400 220 40 U 20-ton
Cal Diver II.......................... 6/85 166 2,816 300 32 U A-Frame
Cal Diver III......................... 8/87 115 1,320 105 18
Cal Diver IV.......................... 10/90 100 1,035 46 16
Cal Diver V........................... 9/91 168 2,324 490 30 A-Frame
BARGE/ROVS:
Cal Dive Barge I...................... 8/90 150 NA 200 26 200-ton
ROVs (2).............................. 4/97 25 -- -- -- -- --
CLASSIFICATION
VESSEL(1) (1)
- ---------------------------------------- --------------
DP MSV:
Uncle John............................ DNV
DP DSVS:
Balmoral Sea(2)....................... DNV
Witch Queen........................... DNV
Marianos(3)........................... DNV
Merlin................................ ABS
Sea Sorceress......................... DNV
DSVS:
Cal Diver I........................... ABS
Cal Diver II.......................... ABS
Cal Diver III......................... ABS
Cal Diver IV.......................... ABS
Cal Diver V........................... ABS
BARGE/ROVS:
Cal Dive Barge I...................... ABS
ROVs (2).............................. --
- ------------
(1) The Company's DSVs also meet standards for seaworthiness and safety set by
the USCG.
(2) 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.
(3) Chartered in August 1997.
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
the American Bureau of Shipping ("ABS"), Det Norske Veritas ("DNV") and the
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 CDI to continue to provide
its customers with well maintained, reliable vessels.
In the normal course of its operations, CDI 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.
20
SUMMARY NATURAL GAS AND OIL RESERVE DATA
The following table sets forth summary data with respect to ERT'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.
TOTAL PROVED(1)
(DOLLARS IN THOUSANDS)
----------------------
Estimated Proved Reserves:
Natural Gas (Mmcf).............. 22,245
Oil and Condensate (MBbls)...... 200
Future net cash flows before income
taxes.............................. $ 29,227
Present value of estimated future net
revenue before income taxes........ $ 27,114
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.
(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.
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 approximately southeast of
Louisiana and have three producing wells with five wells shut-in. The facilities
consist of one four-pile, one eight-pile and a monopod platform structure. In
January of 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.
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
FUNCTION SIZE
------------------------------- ---------------------
Houston, Texas....................... Corporate and ERT Headquarters 30,000 square feet
Project Management
Account Management
Sales Office
Morgan City, Louisiana............... Operations/Docking 28.5 acres
Warehouse/Offices 30,000 square feet/
4,500 square feet
The Company moved to a larger and more modern operating facility near its
previous facility in Morgan City in December 1997. The new facility provides
many advantages when compared to the previous location including, more room
(28.5 acres), more office space (30,000 square feet), more bulkhead (over 1000
feet) for vessel repair and maintenance, new warehouses and mechanics buildings
and more parking. This facility is important to enable CDI to manage operations
effectively as it continues to grow. The Company also has sales offices in
Lafayette and New Orleans, Louisiana.
21
ITEM 3. LEGAL PROCEEDINGS.
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. The
Company insures against these risks at levels consistent with industry
standards. CDI believes its insurance is adequate to protect it against, among
other things, the cost of replacing the total or constructive total loss of its
vessels. 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 CDI considers
financially prudent. CDI's services are provided in hazardous environments where
accidents involving catastrophic damage or loss of life could result, and
litigation arising from such an event may result in the Company being named a
defendant in lawsuits asserting large claims. To date, the Company has been
involved in no such catastrophic lawsuit. Although there can be no assurance
that the amount of insurance carried by CDI is sufficient to protect it fully in
all events, management believes that its insurance protection is adequate for
the Company's business operations. A successful liability claim for which CDI is
underinsured or uninsured could have a material adverse effect on the Company.
CDI 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.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM (UNNUMBERED). EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information as of December 31, 1997
with respect to the executive officers and certain other senior officers of the
Company:
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------- ---- ----------------------------------------
Gerald G. Reuhl...................... 47 Chairman and Director
Owen Kratz........................... 45 President, Chief Executive Officer and
Director
S. James Nelson...................... 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 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................. 41 Vice President -- Operations
A. Wade Pursell...................... 33 Vice President -- Finance
Terrell W. (Jack) Reedy.............. 56 Vice President -- Safety
Lyle K. Kuntz........................ 46 President, ERT
EXECUTIVE AND OTHER SENIOR OFFICERS
GERALD G. REUHL has served as the Company's Chairman of the Board since
1990 and Chief Executive Officer from 1988 until April of 1997. From 1986 to
1988, Mr. Reuhl managed the Company's Domestic Diving Division, and from 1980 to
1986, he held a variety of management positions within both the domestic and
international divisions of the Company. Mr. Reuhl joined the Company as a diver
in 1975.
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 has had management responsibility for client
relations, marketing and estimating.
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 CDI, 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.
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, an MBA from Aberdeen University, Scotland and
is a Chartered Civil Engineer.
23
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 Robins, Kaplan, Miller &
Ciresi of Minneapolis, Minnesota. From 1987 to 1990, Mr. Becher served as Senior
Vice President of Dain Bosworth, Inc., a national investment banking firm.
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.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
CDI's Common Stock is traded in the U.S. on the Nasdaq National Market
("Nasdaq"). The Common Stock is quoted through Nasdaq under the symbol
"CDIS." The following table represents for the periods indicated, the high and
low sales price per share of the Company's Common Stock:
HIGH LOW
------- -------
FISCAL YEAR 1997
Third quarter(1)................ $ 37.75 $ 19.75
Fourth quarter.................. 38.00 22.25
- ------------
(1) CDI completed its initial public offering on July 7, 1997 so that trading
information in the third quarter is only reported after that date.
As of March 27, 1998 there were approximately 548 holders of record of
Common Stock.
CDI 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.
Certain of CDI's financing arrangements restrict the payment of cash dividends
under certain circumstances. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
On April 11, 1997, CDI, First Reserve, 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 CDI, 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 million (the "Purchase
Agreement"). For issuing Common Stock to Coflexip, CDI received $5 million in
consideration, consisting of two newly constructed heavy work class construction
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 CDI, or for value
assets transferred, in the case of Coflexip. Sale of these shares to Coflexip
was exempt from registration under Section 4(2) of the Securities Act of 1933
because Coflexip purchased for investment and not with a view to redistribution.
25
ITEM 6. SELECTED FINANCIAL DATA
The reflected financial data presented below for the five fiscal years
ended December 31, 1997, should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Revenues......................... $ 37,172 $ 38,032 $ 37,524 $ 76,122 $ 109,386
Gross Profit......................... 10,377 10,961 8,849 22,086 33,685
Net Income........................... 3,948 4,034 2,674 8,435 14,482
Net Income Per Share:
Basic........................... 0.31 0.48 0.24 0.76 1.12
Diluted......................... 0.30 0.46 0.24 0.75 1.09
Total Assets......................... 22,798 28,633 44,859 83,056 125,600
Working Capital...................... 5,309 6,052 4,033 13,409 28,927
Long-Term Debt....................... 5,141 3,766 5,300 25,000 --
Shareholders' Equity................. 6,360 10,394 22,408 30,844 89,369
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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
Continental Shelf and twelve to twenty-four 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. The number of offshore rigs working in the Gulf of
Mexico has averaged close to full utilization since mid-1995 which management
expects will lead to increased construction activity over the next several
years. Given worldwide shortages of drilling rigs, subsea hardware and
experienced personnel, efforts to drill Gulf of Mexico leases on a timely basis
have accelerated demand for the Company's subsea services resulting in improved
pricing. The decline in worldwide oil prices in the fourth quarter accelerated
in the first quarter of 1998. Continued low oil prices could cause customers to
scale back or eliminate 1998 drilling programs.
Product prices impact the Company's natural gas and oil 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 with respect to
the offshore properties which the Company has purchased to date. 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, P&A services performed by the
Company's salvage assets, i.e. a stiff-leg derrick barge and well servicing
equipment. In addition, salvage related support, such as debris removal and
preparation of platform legs for removal, is
26
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.
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.
1995 1996
------------------------------------------ ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- --------- --------- --------- --------- --------- ---------
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).................... 4 36 23 10 11 11 25 30
Average Company Vessel Utilization
Rate(4)...............................
Dynamic Positioned.................. 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
------------------------------------------
Q1 Q2 Q3 Q4
--------- --------- --------- ---------
U.S. Natural Gas Prices(1).............. $ 2.67 $ 2.13 $ 2.46 $ 2.88
ERT Gas Production (MMCF)............... 1,519 1,213 1,381 1,252
Rigs Under Contract in the Gulf of
Mexico(2)............................. 165 169 168 169
Platform Installations(3)............... 16 21 29 39
Platform Removals(3).................... 3 21 31 28
Average Company Vessel Utilization
Rate(4)...............................
Dynamic Positioned.................. 60% 79% 92% 94%
Saturation DSV...................... 58% 77% 81% 77%
Surface Diving...................... 53% 80% 90% 81%
Derrick Barge....................... 22% 78% 99% 89%
- ------------
(1) Average of the monthly Henry Hub cash prices in $ per MMBtu, as reported in
Natural Gas Week.
(2) Average weekly number of rigs contracted, as reported by Offshore Data
Services.
(3) Source: Offshore Data Services; installation and removal of platforms with
two or more piles in the Gulf of Mexico.
(4) Average vessel utilization rate is calculated by dividing the total number
of days the vessels in this category generated revenues by the total number
of days in each quarter.
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. As
a result, the Company has historically generated approximately 55 to 65% of its
consolidated revenues in the last six months of the year. 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.
27
RESULTS OF OPERATIONS
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
in 1997 as compared to prior year due to the full year operations of the
BALMORAL SEA and 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 40 weeks during the first two quarters of 1997 for
regulatory inspections, preventative maintenance and/or vessel upgrades. In
addition six weeks of downtime were experienced during the third quarter of 1997
due to a lightning strike on the WITCH QUEEN and an electrical fire on the CAL
DIVER II. 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 13 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
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
increased 35% to $11.2 million in 1997 as compared to 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 subsea 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. Selling and administrative expenses were 10% of
1997 revenues, an improvement from 11% in 1996.
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 IPO. Borrowings under the Revolving
Credit Agreement averaged $10.4 million during 1997 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.
28
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 UNCLE JOHN (placed in service in April and October) 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 (BARGE I and well servicing
equipment) 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 to 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 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
increased 68% in 1996 to $8.3 million from $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 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 Federal
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 First Reserve and its investment funds,
together with internally generated cash flow, enabled the Company to formulate
and implement its deepwater expansion strategy.
As of December 31, 1997, the Company had $28.9 million of working capital
(including $13.0 million of cash on hand) and no debt outstanding. 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
29
outstanding long-term indebtedness. In January, 1998, the Company acquired
interests in six blocks involving two separate fields (including 49 wells) and
assumed the responsibility to decommission the properties in full compliance
with all governmental regulations. The Company also purchased a significant
minority stake in Aquatica, Inc. (a shallow water diving company) in February
1998 for cash and a commitment to lend additional funds to allow Aquatica to
purchase vessels and fund other growth opportunities. As of February 19, 1998,
the Company had no debt outstanding and maintained $12 million of cash on hand
after funding the acquisition of two vessels in late 1997 (SEA SORCERESS and
MERLIN), ERT's purchase of the offshore properties mentioned above and the
equity investment in Aquatica, Inc. Additionally the Company has available all
of a $40.0 million 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 $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 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.
Net cash provided by operating activities was $7.6 million in 1996 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, BALMORAL SEA, UNCLE
JOHN, SEA SORCERESS and MERLIN, improvements to existing vessels and the
acquisition of offshore natural gas and oil properties. 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 DSV SEA
SORCERESS). The Company plans an extensive upgrade program in a joint effort
between the Company and its strategic partner, Coflexip, with funding of the
Company's 51% portion expected to come from cash flow from operations. During
the fourth quarter, the Company acquired a 190 foot by 40 foot DP vessel (the
MERLIN) purpose built 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 1997, the Company had seven vessels out of
service for either regulatory inspection or upgrade programs compared to only
two during 1996.
30
During the second quarter of 1997, the Company sold two offshore natural
gas and oil properties for approximately $1.0 million. This transactions 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.
Since 1993, including the Sonat transaction closed subsequent to year end,
the Company has invested $19 million to acquire 18 offshore natural gas and oil
properties in nine separate transactions. The Company records the amount of cash
paid together with the abandonment liability assumed at the time such properties
are acquired. 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.
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 described
above. The Revolving Credit Agreement, as amended, currently provides for a
$40.0 million revolving line of credit. The Revolving Credit Agreement, which
terminates in December 2000, 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 million. Interest on borrowings under the Revolving Credit Agreement is
equal to LIBOR plus 1.75% with incentive pricing thereafter 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.
During the first two quarters of 1997, the Company repaid $5 million, net
of its borrowings under its Revolving Credit Agreement with Fleet Capital
Corporation and in the third quarter repaid the remaining $20 million
outstanding with proceeds from the initial public offering of common stock.
Also, during the second quarter the Company completed a transaction with
Coflexip whereby Coflexip agreed to accept treasury shares as payment for two
ROVs added in February.
CAPITAL COMMITMENTS. In connection with its business strategy, management
expects the Company to acquire or build additional 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 the next year.
The Company's share of the SEA SORCERESS conversion cost is expected to
approximate $20-25 million in the years 1998 and 1999 if the conversion plan is
approved by both the Cal Dive and Coflexip Boards of Directors. In addition, and
as discussed previously, in connection with its business strategy, management
expects the Company to acquire or build additional vessels such as the SEA
SORCERESS as well as buy additional natural gas and oil properties.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public
Accountants........................ 33
Consolidated Balance
Sheets -- December 31, 1997 and
1996............................... 34
Consolidated Statements of Operations
for the years ended December 31,
1997, 1996 and 1995................ 35
Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1997, 1996 and
1995............................... 36
Consolidated Statements of Cash Flows
for the years ended December 31,
1997, 1996 and 1995................ 37
Notes to Consolidated Financial
Statements......................... 38
32
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, 1997 and 1996, 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, 1997 and 1996, 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
33
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
DECEMBER 31,
------------------------
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 13,025 $ 204
Accounts receivable --
Trade, net of revenue
allowance on gross amounts
billed of $1,822 and
$1,021..................... 23,856 18,849
Unbilled revenue.............. 8,134 7,364
Other current assets............... 4,947 2,755
----------- -----------
Total current assets..... 49,962 29,172
----------- -----------
PROPERTY AND EQUIPMENT.................. 89,499 61,466
Less -- Accumulated depreciation... (20,021) (13,260)
----------- -----------
69,478 48,206
----------- -----------
OTHER ASSETS:
Cash deposits restricted for
salvage operations................ 5,670 5,234
Other assets, net.................. 490 444
----------- -----------
$ 125,600 $ 83,056
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 12,919 $ 9,909
Accrued liabilities................ 7,514 5,758
Income taxes payable............... 602 94
----------- -----------
Total current
liabilities.......... 21,035 15,761
LONG-TERM DEBT.......................... -- 25,000
DEFERRED INCOME TAXES................... 8,745 5,417
DECOMMISSIONING LIABILITIES............. 6,451 6,034
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 60,000 shares
authorized, 21,345 and 18,448
shares issued and outstanding..... 52,832 9,093
Retained earnings.................. 40,288 25,806
Treasury stock, 6,820 and 7,349
shares, at cost................... (3,751) (4,055)
----------- -----------
Total shareholders'
equity............... 89,369 30,844
----------- -----------
$ 125,600 $ 83,056
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
34
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
NET REVENUES:
Subsea and salvage revenues..... $ 92,860 $ 63,870 $ 32,747
Natural gas and oil
production...................... 16,526 12,252 4,777
---------- ---------- ----------
109,386 76,122 37,524
COST OF SALES:
Subsea and salvage.............. 67,538 46,766 25,568
Natural gas and oil
production...................... 8,163 7,270 3,107
---------- ---------- ----------
Gross profit............... 33,685 22,086 8,849
---------- ---------- ----------
SELLING AND ADMINISTRATIVE EXPENSES:
Selling expenses................ 1,429 1,157 939
Administrative expenses......... 9,767 7,134 3,993
---------- ---------- ----------
Total selling and
administrative
expenses................ 11,196 8,291 4,932
---------- ---------- ----------
INCOME FROM OPERATIONS............... 22,489 13,795 3,917
OTHER INCOME AND EXPENSE:
Interest expense, net........... 123 745 135
Other expense................... 85 36 61
---------- ---------- ----------
INCOME BEFORE INCOME TAXES........... 22,281 13,014 3,721
Provision for income taxes...... 7,799 4,579 1,047
---------- ---------- ----------
NET INCOME........................... $ 14,482 $ 8,435 $ 2,674
========== ========== ==========
NET INCOME PER SHARE:
Basic........................... $ 1.12 $ 0.76 $ 0.24
Diluted......................... 1.09 0.75 0.24
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic........................... 12,883 11,099 11,016
Diluted......................... 13,313 11,286 11,055
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
35
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
COMMON STOCK TREASURY STOCK TOTAL
------------------- RETAINED -------------------- SHAREHOLDERS'
SHARES AMOUNT EARNINGS SHARES AMOUNT EQUITY
------- -------- --------- -------- -------- -------------
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
======= ======== ========= ======== ======== =============
The accompanying notes are an integral part of these consolidated financial
statements.
36
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 14,482 $ 8,435 $ 2,674
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization.................. 7,512 5,257 2,794
Deferred income taxes......... 3,789 2,122 635
Gain on sale of property...... (464) -- --
Changes in operating assets and
liabilities:
Accounts receivable, net...... (5,777) (15,287) 2,592
Other current assets.......... (2,653) (299) 1,574
Accounts payable and accrued
liabilities................ 4,766 6,355 1,640
Income taxes payable
(receivable)............... 736 280 (327)
Other noncurrent, net......... (97) 782 414
----------- ----------- -----------
Net cash provided by
operating activities.... 22,294 7,645 11,996
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (28,936) (27,289) (16,857)
Deposits restricted for salvage
operations...................... (436) (255) (2,727)
Proceeds from sale of property..... 1,084 244 --
----------- ----------- -----------
Net cash used in investing
activities.............. (28,288) (27,300) (19,584)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of treasury stock, net of
transaction costs............... 4,359 -- 9,070
Borrowings under term loan
facility........................ 6,700 25,000 8,253
Exercise of stock warrants and
options......................... 99 -- 271
Decrease in short-term borrowing... -- -- (1,900)
Repayments of long-term debt....... (31,700) (5,300) (8,219)
Sale of Common Stock, net of
transaction costs............... 39,357 -- --
----------- ----------- -----------
Net cash provided by
financing activities.... 18,815 19,700 7,475
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 12,821 45 (113)
CASH AND CASH EQUIVALENTS:
Balance, beginning of year......... 204 159 272
----------- ----------- -----------
Balance, end of year............... $ 13,025 $ 204 $ 159
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
37
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.
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 1997 1996
----------- ---------- ----------
Vessels.............................. 15 $ 62,814 $ 40,403
Offshore leases and equipment........ UOP 15,634 14,767
Machinery and equipment.............. 5 8,191 5,125
Leasehold improvements, furniture,
software and computer equipment.... 5 2,651 1,061
Automobiles and trucks............... 3 209 110
---------- ----------
Total property and equipment.... $ 89,499 $ 61,466
========== ==========
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 $6,771,000, $3,655,000 and $2,368,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Upon the
disposition of property and equipment, the related cost and accumulated
38
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, 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 19 percent, 24 percent and 21 percent of consolidated revenues in
the years 1997, 1996 and 1995, 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.
39
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 1997, 1996 and 1995, the Company's cash payments
for interest were approximately $1,033,000, $1,069,000 and $526,000,
respectively, and cash payments for federal income taxes were approximately
$3,200,000, $2,200,000 and $663,000, respectively. In connection with 1997, 1996
and 1995 offshore property acquisitions, ERT assumed net abandonment liabilities
estimated at approximately $1,351,000, $1,200,000 and $3,800,000, 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.
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 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 $3,018,000, $1,996,000 and $875,000 for the
years ended 1997, 1996 and 1995, respectively. In accordance with federal
regulations that require operators in
40
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
1997 1996
--------- ---------
Accrued payroll and related benefits.... $ 4,097 $ 2,961
Workers compensation claims............. 1,100 999
Workers compensation claims to be
reimbursed............................ 1,568 698
Other................................... 749 1,100
--------- ---------
Total accrued liabilities.......... $ 7,514 $ 5,758
========= =========
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.
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:
1997 1996 1995
--------- --------- ---------
Statutory rate....................... 35% 34% 34%
Percentage depletion related to the
natural gas production of ERT
properties......................... -- -- (7)
Other................................ -- 1 1
--------- --------- ---------
Effective rate....................... 35% 35% 28%
========= ========= =========
41
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of the provision for income taxes reflected in the statements of
operations consist of the following (in thousands):
1997 1996 1995
--------- --------- ---------
Current.............................. $ 4,010 $ 2,457 $ 412
Deferred............................. 3,789 2,122 635
--------- --------- ---------
$ 7,799 $ 4,579 $ 1,047
========= ========= =========
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):
1997 1996
--------- ---------
Deferred tax liabilities --
Depreciation.................... $ 8,745 $ 5,417
--------- ---------
Deferred tax assets --
Reserves, accrued liabilities
and other..................... (91) (552)
--------- ---------
Net deferred tax
liability............... $ 8,654 $ 4,865
========= =========
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
$376,000, $262,000 and $240,000 for the years ended December 31, 1997, 1996 and
1995, 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.
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 $1,568,000 and $698,000 as of December
31, 1997 and 1996, 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.
42
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $270,000, $197,000 and $168,000 for the years ended December 31, 1997,
1996 and 1995, 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 1997, 1996 and 1995 would have been $14,023,000, $8,330,000 and $2,607,000,
respectively, and the Company's pro forma diluted earnings per share would have
been $1.07, $0.74 and $0.24, 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.
43
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding are as follows:
1997 1996 1995
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ----------- --------
Options outstanding, beginning of
year............................... 544,500 $ 4.50 447,500 $ 4.50 560,000 $ .35
Granted.............................. 540,000 12.17 135,000 4.50 447,500 4.50
Exercised............................ (22,000) 4.50 -- -- (560,000) .35
Terminated........................... (68,000) 4.50 (38,000) 4.50 -- --
---------- -------- ---------- -------- ----------- --------
Options outstanding,
December 31........................ 994,500 $ 8.66 544,500 $ 4.50 447,500 $ 4.50
Options exercisable,
December 31........................ 199,604 $ 4.50 124,700 $ 4.50 44,000 $ 4.50
========== ======== ========== ======== =========== ========
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, First Reserve Corporation, on behalf of certain of the
investment funds it manages, 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.
44
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,
------------------------------------
1997 1996 1995
----------- ----------- ----------
Revenues --
Subsea and salvage revenues........ $ 92,860 $ 63,870 $ 32,747
Natural gas and oil production..... 16,526 12,252 4,777
----------- ----------- ----------
Total...................... $ 109,386 $ 76,122 $ 37,524
=========== =========== ==========
Income from operations --
Subsea and salvage................. $ 16,411 $ 10,503 $ 3,185
Natural gas and oil production..... 6,078 3,292 732
----------- ----------- ----------
Total...................... $ 22,489 $ 13,795 $ 3,917
=========== =========== ==========
Identifiable assets --
Subsea and salvage................. $ 107,420 $ 63,217 $ 31,473
Natural gas and oil production..... 18,180 19,839 13,386
----------- ----------- ----------
Total...................... $ 125,600 $ 83,056 $ 44,859
=========== =========== ==========
Capital expenditures --
Subsea and salvage................. $ 26,984 $ 20,038 $ 14,260
Natural gas and oil production..... 1,952 7,251 2,597
----------- ----------- ----------
Total...................... $ 28,936 $ 27,289 $ 16,857
=========== =========== ==========
Depreciation and amortization --
Subsea and salvage................. $ 4,000 $ 2,525 $ 1,659
Natural gas and oil production..... 3,512 2,732 1,135
----------- ----------- ----------
Total...................... $ 7,512 $ 5,257 $ 2,794
=========== =========== ==========
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,
----------------------
1997 1996
---------- ----------
Proved properties being amortized....... $ 15,634 $ 14,767
Less -- Accumulated depletion,
depreciation and amortization......... (6,845) (3,998)
---------- ----------
Net capitalized costs.............. $ 8,789 $ 10,769
========== ==========
45
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,
---------------------------------
1997 1996 1995
---------- ---------- ---------
Proved property acquisition costs....... $ 2,687 $ 4,688 $ 6,092
Development costs....................... 385 2,048 310
---------- ---------- ---------
Total costs incurred............... $ 3,072 $ 6,736 $ 6,402
========== ========== =========
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
Revenues................................ $ 16,526 $ 12,252 $ 4,777
Production (lifting) costs.............. 4,651 4,538 1,971
Depreciation, depletion and
amortization.......................... 3,512 2,732 1,136
Pretax income from producing
activities............................ 8,363 4,982 1,670
Income tax expenses..................... 2,927 1,744 568
---------- ---------- ---------
Results of oil and gas producing
activities............................ $ 5,436 $ 3,238 $ 1,102
========== ========== =========
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Proved oil and gas reserve quantities are based on estimates prepared by
Company engineers in accordance with guidelines established by the Securities
and Exchange Commission. The Company's estimates of reserves at December 31,
1997, have been reviewed by Miller and Lents, Ltd., independent petroleum
engineers. 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.
46
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:
1997 1996 1995
----------- ----------- -----------
Future cash inflows.................. $ 59,819 $ 92,393 $ 44,127
Future costs --
Production...................... (23,675) (26,247) (23,990)
Development and abandonment..... (6,917) (7,365) (6,168)
----------- ----------- -----------
Future net cash flows before income
taxes.............................. 29,227 58,781 13,969
Future income taxes............. (7,927) (17,980) (5,072)
----------- ----------- -----------
Future net cash flows................ 21,300 40,801 8,897
Discount at 10% annual rate..... (1,540) (6,996) (1,252)
----------- ----------- -----------
Standardized measure of discounted
future net cash flows.............. $ 19,760 $ 33,805 $ 7,645
=========== =========== ===========
47
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:
1997 1996 1995
----------- ----------- ----------
Standardized measure, beginning of
year............................... $ 33,805 $ 7,645 $ 604
Sales, net of production costs....... (11,441) (9,882) (2,806)
Net change in prices, net of
production costs................... (17,707) 22,201 1,217
Changes in future development
costs.............................. 160 (555) --
Development costs incurred........... 385 2,007 --
Accretion of discount................ 4,870 1,200 60
Net change in income taxes........... 7,544 (10,539) (4,358)
Purchases of reserves in
place.............................. 3,282 21,730 13,068
Sales of reserves in place........... (2,480) -- --
Changes in production rates (timing)
and other.......................... 1,342 (2) (140)
----------- ----------- ----------
Standardized measures, end of year... $ 19,760 $ 33,805 $ 7,645
=========== =========== ==========
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):
1997 1996 1995
---------- ---------- ---------
Beginning balance.................... $ 1,021 $ 402 $ 364
Additions............................ 3,058 1,784 464
Deductions........................... (2,257) (1,165) (426)
---------- ---------- ---------
Ending balance....................... $ 1,822 $ 1,021 $ 402
========== ========== =========
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 stake in
Aquatica, Inc. for cash, in addition to a commitment to lend additional funds 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
48
CAL DIVE INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company ("Sonat"). The 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 1997 and 1996.
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- ---------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
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
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Act of 1934 in connection with the Company's 1998 Annual
Meeting of Shareholders. See also "Executive Officers of the Registrant"
appearing in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Act of 1934 in connection with the Company's 1998 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Act of 1934 in connection with the Company's 1998 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Act of 1934 in connection with the Company's 1998 Annual
Meeting of Shareholders.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following financial statements included on pages 32 through 48 in
this Annual Report are for the fiscal year ended December 31, 1997.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules are omitted because the information
is not required or because the information required is in the financial
statements or notes thereto.
3. Exhibits.
Pursuant to Item 601(b)(4)(iii), the Registrant agrees to forward to
the commission, upon request, a copy of any instrument with respect to
long-term debt not exceeding 10% of the total assets of the Registrant
and its consolidated subsidiaries.
The following exhibits are filed as part of this Annual Report:
EXHIBIT
NUMBER
- ------------------------
3.1 -- Amended and Restated Articles of
Incorporation of Registrant,
incorporated by reference to Exhibits
3.1 to the Form S-1 Registration
Statement filed by the Registrant (Reg.
No 333-11399).
3.2 -- Bylaws of Registrant, incorporated by
reference to Exhibit 3.2 to the Form S-1
Registrant Statement filed by the
Registrant (Reg. No. 333-11399).
4.1 -- Amended and Restated Loan and Security
Agreement by and among the Company, ERT
and Fleet Capital Corporation (f/n/a
Shawmut Capital Corporation) dated as of
May 23, 1995 incorporated by reference
to Exhibit 4.1 to the Form S-1
Registration Statement filed by the
Registrant (Reg. No. 333-11299).
4.2 -- Amendment No. 5 to Loan incorporated by
reference to Exhibit 4.2 to the Form S-1
Registration Statement filed by the
Registrant (Reg. No. 333-11299).
4.3 -- Form of Common Stock certificate,
incorporated by reference to Exhibit 4.1
to the Form S-1 filed by Registrant
(Reg. No. 333-11399).
4.4 -- Shareholders Agreement by and among the
Company, First Reserve Secured Energy
Asset Fund, First Reserve Fund V, First
Reserve Fund V-2, First Reserve Fund
(collectively the "Selling
Shareholders"), Messrs. Reuhl, Kratz,
Nelson and other shareholders of the
Company incorporated by reference to
Exhibit 4.4 to the Form S-1 Registration
Statement filed by the Registrant (Reg.
No. 333-11299).
4.5 -- Registration Rights Agreement by and
between the Company, the Selling
Shareholders, Messrs. Reuhl, Kratz,
Nelson and other shareholders of the
Company incorporated by reference to
Exhibit 4.5 to the Form S-1 Registra-
tion Statement filed by the Registrant
(Reg. No. 333-11299).
51
EXHIBIT
NUMBER
- ------------------------
4.6 -- Registration Rights Agreement by and
between the Company and Coflexip
incorporated by reference to Exhibit 4.6
to the Form S-1 Registration Statement
filed by the Registrant (Reg. No.
333-11299).
10.1 -- Purchase Agreement dated April 11, 1997
by and between Coflexip and the Company
incorporated by reference to Exhibit
10.1 to the Form S-1 filed by Registrant
(Reg. No. 333-11399).
10.2 -- Business Cooperation Agreement dated
April 11, 1997 by and between Coflexip
and the Company incorporated by
reference to Exhibit 10.2 to the Form
S-1 filed by Registrant (Reg. No.
333-11399).
10.3 -- 1995 Long Term Incentive Plan, as
amended incorporated by reference to
Exhibit 10.3 to the Form S-1 filed by
Registrant (Reg. No. 333-11399).
10.4 -- Employment Agreement between Gerald G.
Reuhl and the Company incorporated by
reference to Exhibit 10.4 to the Form
S-1 filed by Registrant (Reg. No.
333-11399).
10.5 -- Employment Agreement between Owen Kratz
and the Company incorporated by
reference to Exhibit 10.5 to the Form
S-1 filed by Registrant (Reg. No.
333-11399).
10.6 -- Employment Agreement between S. James
Nelson and the Company incorporated by
reference to Exhibit 10.6 to the Form
S-1 filed by Registrant (Reg. No.
333-11399).
10.7 -- 1997 Annual Incentive Compensation
Program incorporated by reference to
Exhibit 10.7 to the Form S-1 filed by
Registrant (Reg. No. 333-11399).
21 -- Subsidiaries of the Registrant. The
Company has two subsidiaries, Energy
Resource Technologies, Inc. and Cal Dive
Offshore, Ltd.
- ------------
* Filed herewith.
Reports on Form 8-K -- None
52
SIGNATURES
Pursuant to the requirements option 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned. thereunto duly authorized.
CAL DIVE INTERNATIONAL, INC.
By: S. JAMES NELSON
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER
By: A. WADE PURSELL
VICE PRESIDENT-FINANCE, CHIEF
ACCOUNTING OFFICER
March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
President, Chief Executive Officer March 31, 1998
OWEN KRATZ and Director
Chairman, Director March 31, 1998
GERALD G. REUHL
Executive Vice President, Chief March 31, 1998
S. JAMES NELSON Financial Officer and Director
Director March 31, 1998
WILLIAM E. MACAULAY
Director March 31, 1998
DAVID H. KENNEDY
Director March 31, 1998
GORDON F. AHALT
53