CAL DIVE INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-Q

(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 2004

( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________to ______________

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Commission File Number: 0-22739

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Cal Dive International, Inc.
(Exact Name of Registrant as Specified in its Charter)

Minnesota 95-3409686
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)

400 N. Sam Houston Parkway E.
Suite 400
Houston, Texas 77060
(Address of Principal Executive Offices)

(281) 618-0400
(Registrant's telephone number,
including area code)

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Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13(b) or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).

Yes [x] No [ ]

At May 6, 2004 there were 38,212,923 shares of common stock, no par
value, outstanding.

CAL DIVE INTERNATIONAL, INC.
INDEX

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

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

1

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

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

2

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

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

3

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 - Basis of Presentation

The accompanying condensed consolidated financial statements include
the accounts of Cal Dive International, Inc. ("Cal Dive", "CDI" or the
"Company") and its majority owned subsidiaries. The Company accounts for its 50%
interest in Deepwater Gateway, L.L.C. using the equity method of accounting as
the Company does not have voting or operational control of this entity. All
material intercompany accounts and transactions have been eliminated. These
condensed consolidated financial statements are unaudited, have been prepared
pursuant to instructions for the Quarterly Report on Form 10-Q required to be
filed with the Securities and Exchange Commission and do not include all
information and footnotes normally included in annual financial statements
prepared in accordance with generally accepted accounting principles.

Management has reflected all adjustments (which were normal recurring
adjustments) that it believes are necessary for a fair presentation of the
condensed consolidated balance sheets, results of operations, and cash flows, as
applicable. Operating results for the period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. The Company's balance sheet as of December 31, 2003 included
herein has been derived from the audited balance sheet as of December 31, 2003
included in the Company's 2003 Annual Report on Form 10-K. These condensed
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
2003 Annual Report on Form 10-K.

Certain reclassifications were made to previously reported amounts in
the condensed consolidated financial statements and notes to make them
consistent with the current presentation format.

Note 2 - New Accounting Pronouncements

In January 2003, Financial Accounting Standards Board Interpretation
No. 46, Consolidation of Variable Interest Entities ("FIN No. 46"), was issued.
FIN No. 46 requires companies that control another entity through interests
other than voting interests to consolidate the controlled entity. The Company
adopted FIN No. 46 during the first quarter of 2004. The adoption had no impact
on the Company's consolidated financial position or its results of operations.
The Company had no involvement with any variable interest entity covered by the
scope of FIN No. 46.

Note 3 - 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.
The Company had $2.4 million of restricted cash as of December 31, 2003, of
which $2.3 million represented amounts securing a performance bond which was
released in March 2004. As of March 31, 2004, the Company had $2.2 million of
restricted cash, of which $2.0 million related to Energy Resource Technology,
Inc. ("ERT") escrow funds for decommissioning liabilities associated with the
South Marsh Island 130 ("SMI 130") field acquisitions in 2002. Further, the
Company made no cash payments for federal income taxes during the quarters ended
March 31, 2004 and 2003.

During the three month ended March 31, 2004 and 2003, the Company made
cash payments for interest charges, net of capitalized interest, of $1.3 million
and $451,000, respectively.

4

Note 4 - Major Customers and Concentration of Credit Risk

In March 2004, the Company elected not to renew its alliance with
Horizon Offshore, Inc. As part of the settlement of outstanding trade accounts
receivable with Horizon, the Company obtained exclusive use of a Horizon
spoolbase facility for a period of five years. Utilization of the spoolbase
facility is valued at approximately $2.0 million with the Company offsetting a
corresponding amount of trade accounts receivable in exchange for the
utilization agreement. The $2.0 million will be amortized over the five year
term of the agreement. Net trade receivables from Horizon at March 31, 2004 were
approximately $5.0 million.

Note 5 - Comprehensive Income

The components of total comprehensive income for the three months ended
March 31, 2004 and 2003 are as follows (in thousands):

The components of accumulated other comprehensive income are as follows
(in thousands):

Note 6 - Derivatives

The Company's price risk management activities involve the use of
derivative financial instruments to hedge the impact of market price risk
exposures primarily related to the Company's oil and gas production. All
derivatives are reflected in the Company's balance sheet at fair market value.

During 2003 and first three months of 2004, the Company entered into
various cash flow hedging swap and costless collar contracts to fix cash flows
relating to a portion of the Company's expected oil and gas production. All of
these qualified for hedge accounting and none extended beyond a year and a half.
The aggregate fair value of the hedge instruments was a liability of $3.4
million as of March 31, 2004. The Company recorded $772,000 of unrealized
losses, net of taxes of $414,000, in other comprehensive income within
shareholders' equity as these hedges were highly effective. During the first
quarter of 2004, the Company reclassified approximately $1.7 million of losses
from other comprehensive income to oil and gas production revenues upon the sale
of the related oil and gas production.

5

As of March 31, 2004, the Company had the following volumes under
derivative contracts related to its oil and gas producing activities:

Stock options to purchase approximately 80,000 shares for the three
months ended March 31, 2004 and 1.2 million shares for the three months ended
March 31, 2003, respectively, were not dilutive and, therefore, were not
included in the computations of diluted income per common share amounts. In
addition, approximately 1.0 million shares attributable to the convertible
preferred stock were excluded in the three months ended March 31, 2003,
calculation of diluted EPS, as the effect was antidilutive. Net income for the
diluted earnings per share calculation for the three months ended March 31, 2004
was adjusted to add back the preferred stock dividends and accretion.

Note 9 - Stock Based Compensation Plans

The Company uses the intrinsic value method of accounting to account
for its stock-based compensation programs. Accordingly, no compensation expense
is recognized when the exercise price of an employee stock option is equal to
the Common Share market price on the grant date. The following table reflects
the Company's pro forma results if the fair value method had been used for the
accounting for these plans (in thousands, except per share amounts):

7

Earnings per common share before change in
accounting principle:
Basic, as reported ...................... $ 0.36 $ 0.15
Stock-based employee
compensations cost, net of tax ....... (0.01) (0.03)
------------ ------------
Basic, pro forma ........................ $ 0.35 $ 0.12
============ ============
Diluted, as reported .................... $ 0.36 $ 0.15
Stock-based employee
compensation cost, net of tax ........ (0.01) (0.03)
------------ ------------
Diluted, pro forma ...................... $ 0.35 $ 0.12
============ ============

For the purposes of pro forma disclosures, 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: expected
dividend yields of 0 percent; expected lives ranging from three to ten years,
risk-free interest rate assumed to be 4.0 percent and 3.8 percent in 2004 and
2003 respectively, and expected volatility to be 56 percent and 59 percent,
respectively in 2004 and 2003. The fair value of shares issued under the
Employee Stock Purchase Plan was based on the 15 percent discount received by
the employees. The weighted average per share fair value of the options granted
during the three months ended March 31, 2004 and 2003 was $16.89 and $12.43,
respectively. The estimated fair value of the options is amortized to pro forma
expense over the vesting period.

Note 10 - Business Segment Information (in thousands)

During the quarters ended March 31, 2004 and 2003, respectively, the
Company derived $12.7 million and $5.6 million of its revenues from the U.K.
sector utilizing $100.0 million and $87.5 million, respectively, of its total
assets in this region. Additionally, $2.2 million and $10.3 million of revenues
were derived from the Latin America sector during the three months ended March
31, 2004 and 2003, respectively. The majority of the remaining revenues were
generated in the U.S. Gulf of Mexico.

Note 11 - Long-Term Debt

At March 31, 2004, $137.9 million was outstanding on our long-term
financing for construction of the Q4000. This U.S. Government guaranteed
financing is pursuant to Title XI of the Merchant Marine Act of 1936 which is
administered by the Maritime Administration ("MARAD Debt"). The MARAD Debt is

8

payable in equal semi-annual installments which began in August 2002 and matures
25 years from such date. The MARAD Debt is collateralized by the Q4000, with CDI
guaranteeing 50% of the debt, and bears interest at a rate which currently
floats at a rate approximating AAA Commercial Paper yields plus 20 basis points
(approximately 1.33% as of March 31, 2004). For a period up to ten years from
delivery of the vessel in April 2002, CDI has the ability to lock in a fixed
rate. In accordance with the MARAD Debt agreements, CDI is required to comply
with certain covenants and restrictions, including the maintenance of minimum
net worth, working capital and debt-to-equity requirements. As of March 31,
2004, the Company was in compliance with these covenants.

The Company has a $70 million revolving credit facility due in February
2005. This facility is collateralized by accounts receivable and certain of the
Company's Marine Contracting vessels, bears interest at LIBOR plus 125-250 basis
points depending on CDI leverage ratios (approximately 2.63% as of March 31,
2004) and, among other restrictions, includes three financial covenants (cash
flow leverage, minimum interest coverage and fixed charge coverage). The Company
was in compliance with these covenants as of March 31, 2004. As of March 31,
2004, the Company had drawn $15.9 million and the balance was included in
current maturities of long-term debt in the accompanying condensed consolidated
balance sheet. As of April 30, 2004, this balance had been repaid resulting in
no outstanding balance in this facility. A new revolving credit facility is
currently being negotiated.

The Company has a $35 million term loan facility which was obtained to
assist CDI in funding its portion of the construction costs of the spar for the
Gunnison field. The loan is payable in quarterly installments of $1.75 million
for three years after delivery of the spar (which was December 2003) with the
remaining $15.75 million due at the end of the three years (2006). The facility
bears interest at LIBOR plus 225-300 basis points depending on CDI leverage
ratios (approximately 3.46% as of March 31, 2004) and includes, among other
restrictions, three financial covenants (cash flow leverage, minimum interest
coverage and debt to total book capitalization). The Company was in compliance
with these covenants as of March 31, 2004.

In August 2003, Canyon Offshore, Ltd. (a U.K. subsidiary - "COL") (with
a parent guarantee from Cal Dive) completed a capital lease with a bank
refinancing the construction costs of a newbuild 750 horsepower trenching unit
and a ROV. COL received proceeds of $12 million for the assets and agreed to pay
the bank sixty monthly installment payments of $217,174 (resulting in an
implicit interest rate of 3.29%). No gain or loss resulted from this
transaction. COL has an option to purchase the assets at the end of the lease
term for $1. The proceeds were used to reduce the Company's revolving credit
facility, which had initially funded the construction costs of the assets. This
transaction was accounted for as a capital lease with the present value of the
lease obligation (and corresponding asset) being reflected on the Company's
consolidated balance sheet beginning in the third quarter of 2003.

Scheduled maturities of Long-term Debt outstanding as of March 31, 2004
were as follows (in thousands):

9

Excluded from long-term debt as of March 31, 2004 is the Company's
guarantee of an estimated $22.5 million balloon payment due in 2008 related to
the Company's investment in Deepwater Gateway, L.L.C. Terms of the project
financing for construction of the tension leg platform require a Company
guarantee, however, the Company has not recorded any liability for this
guarantee as management believes that it is unlikely the Company will be
required to pay the balloon payment.

The Company capitalized interest totaling $243,000 and $930,000 during
the quarters ended March 31, 2004 and 2003, respectively. The Company incurred
interest expense of $1.4 million and $723,000 during the quarters ended March
31, 2004 and 2003, respectively.

Note 12 - Income Taxes

An examination of the Company's 2001 and 2002 income tax returns by the
Internal Revenue Service ("IRS") was concluded in the first quarter of 2004. As
a result of the conclusion of the exam during the first quarter of 2004, the
Company recorded an income tax provision benefit of $1.7 million primarily
related to research and development credits offset by $430,000 of interest
expense related to timing differences with respect to research and development
deductions.

The effective tax rate of 26% in the first quarter of 2004 is lower
than the 36% effective tax rate for the first quarter of 2003, primarily due to
the impact of the research and development credits, as a result of the
conclusion of the IRS examination of the Company's income tax returns for 2001
and 2002.

Note 13 - Litigation and Claims

The Company is involved in various routine 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. In addition,
the Company from time to time incurs other claims, such as contract disputes, in
the normal course of business. In that regard, in 1998, one of the Company's
subsidiaries entered into a subcontract with Seacore Marine Contractors Limited
("Seacore") to provide the Sea Sorceress to a Coflexip subsidiary in Canada
("Coflexip"). Due to difficulties with respect to the sea and soil conditions,
the contract was terminated and an arbitration to recover damages was commenced.
A preliminary liability finding has been made by the arbitrator against Seacore
and in favor of the Coflexip subsidiary. The Company was not a party to this
arbitration proceeding. Seacore and Coflexip settled this matter prior to the
conclusion of the arbitration proceeding with Seacore paying Coflexip $6.95
million CDN. Seacore has initiated an arbitration proceeding against Cal Dive
Offshore Ltd. ("CDO"), a subsidiary of Cal Dive, seeking contribution of
one-half of this amount. One of the grounds in the preliminary findings by the
arbitrator is applicable to CDO, and CDO holds substantial counterclaims against
Seacore.

During 2002, the Company engaged in a large construction project
offshore Trinidad and in late September of that year, supports engineered by a
subcontractor failed resulting in over a month of downtime for two of CDI's
vessels. Management believes that under the terms of the contract the Company is
entitled to indemnification for the contractual stand-by rate for the vessels
during their downtime. The customer has disputed these invoices along with
certain other change orders. Of the amounts billed by CDI for this project, $9.6
million had not been collected as of March 31, 2004. The Company has initiated
arbitration proceedings, in accordance with the terms of the contract, to
resolve this dispute.

Although the above discussed matters have the potential of significant
additional liability, the Company believes that the outcome of all such matters
and proceedings will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.

10

Note 14 - Canyon Offshore

In January 2002, CDI purchased Canyon, a supplier of remotely operated
vehicles (ROVs) and robotics to the offshore construction and telecommunications
industries. In connection with the acquisition, the Company committed to
purchase the redeemable stock in Canyon at a price to be determined by Canyon's
performance during the years 2002 through 2004 from continuing employees at a
minimum purchase price of $13.53 per share (or $7.5 million). The Company also
agreed to make future payments relating to the tax impact on the date of
redemption, whether employment continued or not. As they are employees, any
share price paid in excess of the $13.53 per share will be recorded as
compensation expense. These remaining shares have been classified as long-term
debt in the accompanying balance sheet and will be adjusted to their estimated
redemption value at each reporting period based on Canyon's performance. In
April 2004 and 2003, the Company purchased approximately one-third and
one-third, respectively, of the redeemable shares at the minimum purchase price
of $13.53 per share. Consideration included approximately $344,000 and $400,000,
respectively, of contingent consideration relating to tax gross-up payments paid
to the Canyon employees in accordance with the purchase agreement. These
gross-up amounts were recorded as goodwill in the period paid (i.e., the second
quarters of 2004 and 2003).

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD LOOKING STATEMENTS AND ASSUMPTIONS

This Quarterly Report on Form 10-Q includes certain statements that may
be deemed "forward looking statements" under applicable law. Forward looking
statements and assumptions in this Form 10-Q that are not statements of
historical fact involve risks and assumptions that could cause actual results to
vary materially from those predicted, including among other things, unexpected
delays and operational issues associated with turnkey projects, the price of
crude oil and natural gas, offshore weather conditions, change in site
conditions, and capital expenditures by customers. The Company strongly
encourages readers to note that some or all of the assumptions upon which such
forward looking statements are based are beyond the Company's ability to control
or estimate precisely, and may in some cases be subject to rapid and material
change. For a complete discussion of risk factors, we direct your attention to
our Annual Report on Form 10-K for the year ended December 31, 2003, filed with
the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements. We prepare
these financial statements in conformity with accounting principles generally
accepted in the United States. As such, we are required to make certain
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. We base our estimates on
historical experience, available information and various other assumptions we
believe to be reasonable under the circumstances. These estimates may change as
new events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. There have been no material
changes or developments in our evaluation of the accounting estimates and the
underlying assumptions or methodologies that we believe to be Critical
Accounting Policies and Estimates as disclosed in our Form 10-K for the year
ended December 31, 2003. The adoption of FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities, requires companies that control
another entity through interests other than voting interests to consolidate the
controlled entity. The Company adopted FIN No. 46 in the first quarter of 2004.
The adoption had no impact on the Company's financial condition or its results
of operations. The Company had no involvement with any variable interest entity
covered by the scope of FIN No. 46.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 AND 2003

Revenues. During the three months ended March 31, 2004, the Company's
revenues increased 36% to $120.7 million compared to $88.9 million for the three
months ended March 31, 2003. Of the overall $31.8 million increase, $20.5
million was generated by the Oil and Gas Production segment due to increased oil
and gas production and to a lesser extent higher commodity prices. Marine
Contracting revenues increased $11.3 million from $54.2 million for the first
quarter of 2003 to $65.5 million for the first quarter of 2004 due primarily to
increased utilization for the Company's Well Operations vessels (the Q4000 and
Seawell).

Oil and Gas Production revenue for the three months ended March 31,
2004 increased $20.5 million, or 59%, to $55.2 million from $34.7 million during
the comparable prior year period. The average realized natural gas price of
$5.58 per Mcf, net of hedges in place, during the first quarter of 2004 was 7%
higher than the $5.22 per Mcf realized in the comparable prior year quarter
while average realized oil prices, net of hedges in place, increased 7% to
$30.66 per barrel compared to $28.67 per barrel realized during the first
quarter of 2003. The 47% increase in production (10.0 Bcfe for the three months
ended

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March 31, 2004 compared to 6.8 Bcfe in the first quarter of 2003) is primarily a
result of our successful well exploitation program, bringing a subsea PUD
development at High Island 544 online and the Gunnison spar wells which began
producing in December 2003.

Gross Profit. Gross profit of $31.7 million for the first quarter of
2004 represented a 65% increase compared to the $19.2 million recorded in the
comparable prior year period with the Oil and Gas Production segment
contributing 68% of the increase. Marine Contracting gross profit increased to
$4.0 million, for the three months ended March 31, 2004, from essentially
breakeven in the prior year period. The majority of the increase was
attributable to our Well Ops vessels, Seawell and Q4000. Utilization of these
vessels was 82% in the first quarter of 2004 compared with 51% in the first
quarter of 2003. Oil and gas production gross profit increased $8.6 million, or
45%, due to higher levels of production (47%) and commodity price increases.

Gross margins of 26% in the first quarter of 2004 were four points
better than the 22% in the prior year period. Marine Contracting margins
increased six points to 6% for the three months ended March 31, 2004, from
essentially breakeven in the comparable prior year quarter, due to the factors
noted above. In addition, margins in the Oil and Gas Production segment
decreased five points to 50% for the three months ended March 31, 2004, from 55%
in the year ago quarter, due primarily to higher depreciation and amortization
of $17.5 million in the first quarter of 2004 compared with $8.2 million in the
first quarter of 2003. This increase is due in part to the relatively high (36%)
amortization rate on the Gunnison wells.

Selling & Administrative Expenses. Selling and administrative expenses
of $11.2 million for the three months ended March 31, 2004 were $2.2 million
higher than the $9.0 million incurred in the first quarter of 2003 due to an
increase in the costs associated with the ERT incentive compensation program
(which is tied directly to the Oil and Natural Gas Production segment
profitability that was significantly higher in the first quarter of 2004
compared to the first quarter of 2003) and a new 2004 Marine Contracting
compensation program. Selling and administrative expenses at 9% of revenues for
the first quarter improved one point as compared to the comparable prior year
period.

Other (Income) Expense. The Company reported other expense of $1.6
million for the three months ended March 31, 2004 compared to other expense of
$1.1 million for the three months ended March 31, 2003. Net interest expense of
$1.4 million in the first quarter of 2004 is higher than the $713,000 incurred
in the three months ended March 31, 2003 with approximately $430,000 related to
interest on the tax audit settlement discussed below.

Income Taxes. Income taxes increased to $5.0 million for the three
months ended March 31, 2004 compared to $3.3 million in the comparable prior
year period due to increased profitability. The effective tax rate of 26% in the
first quarter of 2004 is lower than the 36% effective tax rate for the first
quarter of 2003 primarily due to the impact of the research and development
credits as a result of the conclusion of the Internal Revenue Service ("IRS")
examination of the Company's income tax returns for 2001 and 2002.

Net Income. Net income of $13.6 million for the three months ended
March 31, 2004 was $7.6 million greater than the comparable period in 2003 as a
result of factors described above.

13

LIQUIDITY AND CAPITAL RESOURCES

In August 2000, we closed the long-term MARAD financing for
construction of the Q4000. This U.S. Government guaranteed financing is pursuant
to Title XI of the Merchant Marine Act of 1936 which is administered by the
Maritime Administration. We refer to this debt as MARAD Debt. In January 2002,
we acquired Canyon Offshore, Inc., in July 2002 we acquired the Well Operations
Business Unit of Technip-Coflexip and in August 2002, ERT made two significant
property acquisitions. These acquisitions significantly increased our debt to
total book capitalization ratio from 31% at December 31, 2001 to 40% at December
31, 2002. The private placement of convertible preferred stock in January 2003
and cash flow from operations have enabled us to reduce this ratio to 33% as of
March 31, 2004.

Derivative Activities. The Company's price risk management activities
involve the use of derivative financial instruments to hedge the impact of
market price risk exposures primarily related to the Company's oil and gas
production. All derivatives are reflected in the Company's balance sheet at fair
market value.

During 2003 and the first three months of 2004, the Company entered
into various cash flow hedging swap and costless collar contracts to fix cash
flows relating to a portion of the Company's expected oil and gas production.
All of these qualified for hedge accounting and none extended beyond a year and
a half. The aggregate fair value of the hedge instruments was a liability of
$3.4 million as of March 31, 2004. The Company recorded $772,000 of unrealized
losses, net of taxes of $414,000, in other comprehensive income within
shareholders' equity as these hedges were highly effective. During the first
quarter of 2004, the Company reclassified approximately $1.7 million of losses
from other comprehensive income to oil and gas production revenues upon the sale
of the related oil and gas production.

Operating Activities. Net cash provided by operating activities was
$34.9 million during the three months ended March 31, 2004, as compared to $1.6
million during the first three months of 2003 due primarily to an increase in
profitability ($7.6 million), a $10.4 million increase in depreciation and
amortization resulting from the aforementioned increase in production levels
(including the Gunnison spar wells that began producing in December 2003) and
funding from accounts receivable collections increasing $10.4 million.

In March 2004, the Company elected not to renew its alliance with
Horizon Offshore, Inc. As part of the settlement of outstanding trade accounts
receivable with Horizon, the Company obtained exclusive use of a Horizon
spoolbase facility for a period of five years. Utilization of the spoolbase
facility is valued at approximately $2.0 million with the Company offsetting a
corresponding amount of trade accounts receivable in exchange for the
utilization agreement. The $2.0 million will be amortized over the five year
term of the agreement. Net trade receivables from Horizon at March 31, 2004 were
approximately $5.0 million.

Investing Activities. We incurred $14.2 million of capital expenditures
during the first three months of 2004 compared to $18.8 million during the
comparable prior year period. Included in the capital expenditures during the
first quarter of 2004 was $5.5 million for the purchase of our intervention
riser system installed on the Q4000 and $7.6 million for ERT well exploitation
programs and further Gunnison field development. Included in the capital
expenditures during the first quarter of 2003 was $7.1 million for the Canyon
Master Service Agreement with Technip/Coflexip, $3.0 million related to an ERT
offshore property acquisition and wellwork and $7.2 million related to Gunnison
development costs, including the spar.

In March 2003, ERT acquired additional interests, ranging from 45% to
84%, in four fields acquired in 2002, enabling ERT to take over as operator of
one field. ERT paid $858,000 in cash and assumed Exxon/Mobil's pro-rata share of
the abandonment obligation for the acquired interests.

14

In June 2002, CDI, along with GulfTerra Energy Partners L.P.
("GulfTerra"), formed Deepwater Gateway, L.L.C. (a 50/50 venture) to design,
construct, install, own and operate a tension leg platform ("TLP") production
hub primarily for Anadarko Petroleum Corporation's Marco Polo field discovery in
the Deepwater Gulf of Mexico. Our share of the construction costs is estimated
to be approximately $126 million (approximately $118 million of which had been
incurred as of March 31, 2004). In August 2002, the Company along with
GulfTerra, completed a non-recourse project financing for this venture, terms of
which include a minimum equity investment for CDI of $33 million, all of which
had been paid as of March 31, 2004, and is recorded as Investment in Production
Facilities in the accompanying consolidated balance sheet. Terms of the
financing also require CDI to guarantee a balloon payment at the end of the
financing term in 2008 (estimated to be $22.5 million). The Company has not
recorded any liability for this guarantee as management believes that it is
unlikely the Company will be required to pay the balloon payment.

In April 2000, ERT acquired a 20% working interest in Gunnison, a
Deepwater Gulf of Mexico prospect of Kerr-McGee Oil & Gas Corp. Consistent with
CDI's philosophy of avoiding exploratory risk, financing for the exploratory
costs of approximately $20 million was provided by an investment partnership
(OKCD Investments, Ltd. or "OKCD"), the investors of which include current and
former CDI senior management, in exchange for a revenue interest that is an
overriding royalty interest of 25% of CDI's 20% working interest. CDI provided
no guarantees to the investment partnership. The Board of Directors established
three criteria to determine a commercial discovery and the commitment of Cal
Dive funds: 75 million barrels (gross) of reserves, estimated development costs
of $500 million consistent with 75 MBOE, and a CDI estimated shareholder return
of no less than 12%. Kerr-McGee, the operator, drilled several exploration wells
and sidetracks in 3,200 feet of water at Garden Banks 667, 668 and 669 (the
Gunnison prospect) and encountered significant potential reserves resulting in
the three criteria being achieved during 2001. The exploratory phase was
expanded to ensure field delineation resulting in the investment partnership,
which assumed the exploratory risk, funding approximately $20 million of
exploratory drilling costs. With the sanctioning of a commercial discovery, the
Company funded ongoing development and production costs. Cal Dive's share of
such project development costs is estimated to be $120 million ($110 million of
which had been incurred as of March 31, 2004) with over half of that for
construction of the spar which was placed in service in December 2003. The
Company's Chief Executive Officer, as a Class A limited partner of OKCD,
personally owns approximately 57% of the partnership. Other executive officers
of the Company own approximately 6% combined, of the partnership. OKCD has also
awarded Class B limited partnership interests to key CDI employees. See footnote
11 to the Company's Condensed Consolidated Financial Statements included herein
for discussion of the financing related to the spar construction. Production
began in December 2003.

Financing Activities. We have financed seasonal operating requirements
and capital expenditures with internally generated funds, borrowings under
credit facilities, the sale of equity and project financings. Our largest debt
financing has been the MARAD debt. No draws were made on this facility in 2004
and 2003. The MARAD debt is payable in equal semi-annual installments which
began in August 2002 and matures 25 years from such date. We made one payment
each during the three months ended March 31, 2004 and 2003 totaling $1.5 million
and $1.4 million, respectively. The MARAD Debt is collateralized by the Q4000,
with Cal Dive guaranteeing 50% of the debt, and bears an interest rate which
currently floats at a rate approximating AAA Commercial Paper yields plus 20
basis points (approximately 1.33% as of March 31, 2004). For a period up to ten
years from delivery of the vessel in April 2002, the Company has options to lock
in a fixed rate. In accordance with the MARAD Debt agreements, we are required
to comply with certain covenants and restrictions, including the maintenance of
minimum net worth, working capital and debt-to-equity requirements. As of March
31, 2004, we were in compliance with these covenants.

The Company has a $70 million revolving credit facility which expires
in February 2005. This facility is collateralized by accounts receivable and
certain of the Company's Marine Contracting vessels, bears interest at LIBOR
plus 125-250 basis points depending on CDI leverage ratios (approximately 2.63%
as of March 31, 2004) and, among other restrictions, includes three financial
covenants (cash flow leverage, minimum interest coverage and fixed charge
coverage). The Company was in compliance with these covenants as of March 31,
2004. As of March 31, 2004, the Company had drawn $15.9 million and

15

the balance was included in current maturities of long-term debt in the
accompanying condensed consolidated balance sheet. As of April 30, 2004, this
balance had been repaid resulting in no outstanding balance in this facility. A
new revolving credit facility is currently being negotiated. Based on the
Company's current liquidity position and expected cash flows, we believe this
has no impact on our ability to achieve our planned growth.

The Company has a $35 million term loan facility which was obtained to
assist CDI in funding its portion of the construction costs of the spar for the
Gunnison field. The loan is payable in quarterly installments of $1.75 million
for three years after delivery of the spar (which was December 2003) with the
remaining $15.75 million due at the end of the three years (2006). The facility
bears interest at LIBOR plus 225-300 basis points depending on CDI leverage
ratios (approximately 3.46% as of March 31, 2004) and includes, among other
restrictions, three financial covenants (cash flow leverage, minimum interest
coverage and debt to total book capitalization). The Company was in compliance
with these covenants as of March 31, 2004.

In January 2003, CDI completed the private placement of $25 million of
preferred stock which is convertible into 833,334 shares of CDI common stock at
$30 per share. The preferred stock was issued to a private investment firm. The
preferred stock holder has the right to purchase as much as $30 million in
additional preferred stock for a period of two years beginning in July 2003. The
conversion price of the additional preferred stock will equal 125% of the then
prevailing price of Cal Dive common stock, subject to a minimum conversion price
of $30 per common share. The preferred stock has a minimum annual dividend rate
of 4%, or LIBOR plus 150 basis points if greater, payable quarterly in cash or
common shares at Cal Dive's option. CDI paid these dividends in 2004 and 2003 on
the last day of the respective quarter in cash. After the second anniversary,
the holder may redeem the value of its original investments in the preferred
shares to be settled in common stock at the then prevailing market price or cash
at the discretion of the Company. Under certain conditions, the holder could
redeem its investment prior to the second anniversary. Prior to the conversion,
common shares issuable will be assessed for inclusion in the weighted average
shares outstanding for the Company's diluted earnings per share under the if
converted method based on the Company's common share price at the beginning of
the applicable period.

During the first three months of 2004 and 2003, we made payments of
$1.0 million and $367,000, respectively, on capital leases relating to Canyon.
The only other financing activity during the three months ended March 31, 2004
and 2003 involved the exercise of employee stock options ($2.5 million and $2.8
million, respectively).

The following table summarizes our contractual cash obligations as of
March 31, 2004 and the scheduled years in which the obligation are contractually
due (in thousands):

(A) Excludes CDI guarantee of balloon payment due in 2008 on non-recourse
project financing (estimated to be $22.5 million).

16

In addition, in connection with our business strategy, we regularly
evaluate acquisition opportunities (including additional vessels as well as
interest in offshore natural gas and oil properties). We believe that
internally-generated cash flow, borrowings under existing credit facilities and
use of project financings along with other debt and equity alternatives will
provide the necessary capital to meet these obligations and achieve our planned
growth.

17

ITEM 3. Quantitative and qualitative disclosure about market risk

The Company is currently exposed to market risk in three major areas:
interest, commodity prices and foreign currency. Because the majority of the
Company's debt at March 31, 2004 was based on floating rates, changes in
interest would, assuming all other things equal, have a minimal impact on the
fair market value of the debt instruments, but every 100 basis points move in
interest rates would result in $2.0 million of annualized interest expense or
savings, as the case may be, to the Company.

Commodity Price Risk

The Company has utilized derivative financial instruments with respect
to a portion of 2004 and 2003 oil and gas production to achieve a more
predictable cash flow by reducing its exposure to price fluctuations. The
Company does not enter into derivative or other financial instruments for
trading purposes.

As of March 31, 2004, the Company has the following volumes under
derivative contracts related to its oil and gas producing activities:

Subsequent to March 31, 2004, the Company entered into an additional
oil swap for the period July through December 2004. The contract covers 10 MBbl
per month at $31.65. The Company also entered into an additional natural gas
costless collar for the period July through December 2004. The contract covers
300,000 MMBtu per month at a floor price of $5.00 and a ceiling price of $7.77.

Changes in NYMEX oil and gas strip prices would, assuming all other
things being equal, cause the fair market value of these instruments to increase
or decrease inversely to the change in NYMEX prices.

Foreign Currency Exchange Rates

Because we operate in various oil and gas exploration and production
regions in the world, we conduct a portion of our business in currencies other
than the U.S. dollar (primarily with respect to Well Ops (U.K.) Limited). The
functional currency for Well Ops (U.K.) Limited is the applicable local currency
(British Pound). Although the revenues are denominated in the local currency,
the effects of foreign currency fluctuations are partly mitigated because local
expenses of such foreign operations also generally are denominated in the same
currency. The impact of exchange rate fluctuations during the three months ended
March 31, 2004 and 2003, respectively, did not have a material effect on
reported amounts of revenues or net income.

18

Assets and liabilities of Well Ops (U.K.) Limited are translated using
the exchange rates in effect at the balance sheet date, resulting in translation
adjustments that are reflected in accumulated other comprehensive income (loss)
in the shareholders' equity section of our balance sheet. Approximately 13% of
our assets are impacted by changes in foreign currencies in relation to the U.S.
dollar. We recorded gains (losses) of $2.0 million and $(803,000), net of taxes,
to our equity account for the three months ended March 31, 2004 and 2003,
respectively, to reflect the net impact of the decline of the U.S. dollar
(British Pound - 2003) against the British Pound (U.S. dollar - 2003).

Canyon Offshore, the Company's ROV subsidiary, has operations in the
United Kingdom and Southeast Asia sectors. Canyon conducts the majority of its
affairs in these regions in U.S. dollars which it considers the functional
currency. When currencies other than the U.S. dollar are to be paid or received
the resulting gain or loss from translation is recognized in the statements of
operations. These amounts for the three months ended March 31, 2004 and 2003,
respectively, were not material to the Company's results of operations or cash
flows.

ITEM 4. CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's
principal executive officer (CEO) and principal financial officer (CFO),
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
fiscal quarter ended March 31, 2004. Based on this evaluation, the CEO and CFO
have concluded that the Company's disclosure controls and procedures were
effective as of the end of the fiscal quarter ended March 31, 2004 to ensure
that information that is required to be disclosed by the Company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the fiscal quarter ended March 31, 2004 that has materially
affected, or is reasonable likely to materially affect, the Company's internal
control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item I, Note 13 to the Condensed Consolidated Financial
Statements, which is incorporated herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -

Exhibit 15.1 - Independent Accountants' Acknowledgement Letter

Exhibit 31.1 - Certification Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934 by Owen Kratz, Chief
Executive Officer

Exhibit 31.2 - Certification Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934 by A. Wade Pursell, Chief
Financial Officer

Exhibit 32.1 - Section 1350 Certification by Owen Kratz, Chief
Executive Officer

Exhibit 32.2 - Section 1350 Certification by A. Wade Pursell,
Chief Financial Officer

Exhibit 99.1 - Independent Accountants' Review Report

19

(b) Reports on Form 8-K -

Current Report on Form 8-K furnished to the SEC on February
25, 2004 to report the Company's 2003 fourth quarter and full
year financial results, and forecast for 2004.

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SIGNATURES

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

CAL DIVE INTERNATIONAL, INC.

Date: May 10, 2004 By: /s/ Owen Kratz
----------------------------------------
Owen Kratz, Chairman
and Chief Executive Officer

Date: May 10, 2004 By: /s/ A. Wade Pursell
----------------------------------------
A. Wade Pursell, Senior Vice President
and Chief Financial Officer

21

EXHIBIT INDEX

Exhibits -

Exhibit 15.1 - Independent Accountants' Acknowledgement Letter

Exhibit 31.1 - Certification Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934 by Owen Kratz, Chief
Executive Officer

Exhibit 31.2 - Certification Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934 by A. Wade Pursell, Chief
Financial Officer

Exhibit 32.1 - Section 1350 Certification by Owen Kratz, Chief
Executive Officer

Exhibit 32.2 - Section 1350 Certification by A. Wade Pursell,
Chief Financial Officer

Exhibit 99.1 - Independent Accountants' Review Report