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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

Commission file number 1-6311

TIDEWATER INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (504) 568-1010

NOT APPLICABLE

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or of 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 whether the registrant is an accelerated file (as defined in Rule 12b-2 of the Exchange Act). YES   x    NO ¨

56,698,689 shares of Tidewater Inc. common stock $.10 par value per share were outstanding on January 9, 2004. Excluded from the calculation of shares outstanding at January 9, 2004 are 3,877,704 shares held by the Registrant’s Grantor Stock Ownership Trust. Registrant has no other class of common stock outstanding.

PART I. FINANCIAL INFORMATION

TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except share and per share data)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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TIDEWATER INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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TIDEWATER INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial information for the interim periods presented herein has not been audited by independent accountants, but in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated balance sheets and the condensed consolidated statements of earnings and cash flows at the dates and for the periods indicated have been made. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years.

Certain previously reported amounts have been reclassified to conform to the quarter and nine-month period ended December 31, 2003 financial statement presentation.

At December 31, 2003 and March 31, 2003, 3,878,441 and 3,941,578 shares, respectively, of common stock were held in a grantor stock ownership plan trust for the benefit of stock-based employee benefits programs. These shares are not included in common shares outstanding for earnings per share calculations and transactions between the company and the trust, including dividends paid on the company’s common stock, are eliminated in consolidating the accounts of the trust and the company.

The company measures compensation expense for its stock-based compensation plan using the intrinsic value recognition and measurement principles prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. The company uses the disclosure provision of Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amended the disclosure provision of SFAS No. 123. The following table illustrates the effect on net earnings and earnings per share for the quarter and nine-month periods ended December 31 had the company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, “Accounting for Stock-Based Compensation.”

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Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The effective tax rate applicable to pre-tax earnings for the quarter and nine-month period ended December 31, 2003 was 27.4% and 31%, respectively. The effective tax rate applicable to pre-tax earnings was 32.5% for the quarter and nine-month period ended December 31, 2002.

On April 1, 2003, the company paid $79 million in cash to ENSCO International Incorporated to purchase its 27-vessel Gulf of Mexico-based marine fleet. The cash sale was funded by a newly-placed $100 million term loan agreement with a group of banks. The mix of vessels the company acquired consists of five anchor handling towing supply vessels, six stretched 220-foot platform supply vessels and 16 supply vessels. In conjunction with this acquisition, it was also agreed that, for a period of two years and subject to satisfactory performance, the company will provide to ENSCO all of its discretionary vessel requirements in the Gulf of Mexico. The day rates to be charged under the arrangement are based upon predetermined pricing criteria. The acquisition enhances the competitive posture of the company in providing anchor handling and towing-supply services in the Gulf of Mexico and better positions the company for an upturn in the domestic market.

On July 8, 2003, the company completed the issuance and funding of $300 million of senior unsecured notes. The multiple series of notes with maturities ranging from 7 years to 12 years have an average outstanding life to maturity of 9.5 years and can be paid off anytime before maturity. The average interest rate on the notes sold to private institutional investors is 4.35%. The terms of the debt obligation limit the amount of debt the company can maintain, and, as such, the company cannot exceed a debt to total capitalization ratio greater than 55%. The note proceeds were used to refinance the then-existing $245 million debt outstanding, with the balance of the issue to be used to fund future capital expenditures.

On August 15, 2003, the company signed a new $295 million revolving credit agreement which replaced the existing $200 million revolving credit and term loan agreement. Under the new agreement, borrowings bear interest at the company’s option, at prime or Federal Funds rates plus .5% or LIBOR rates plus margins from .75% to 1.25% based on the company’s funded debt to total capitalization ratio. The new revolving credit commitment will expire on April 30, 2008. Any borrowings under the agreement are unsecured and the company pays an annual fee of .20% on the unused portion of the facility. The company had $10 million in outstanding borrowings from the revolving credit facility at December 31, 2003.

Under the terms of the agreement, the company has agreed to limitations on future levels of investments and aggregate indebtedness, and maintenance of certain debt to capitalization ratios and also debt to earnings ratios. The agreement also limits the company’s ability to encumber its assets for the benefit of others.

As a result of its ongoing examinations of the company’s income tax returns covering fiscal years 1999 and 2000, the Internal Revenue Service (IRS) has issued an examination report challenging the depreciation methods historically utilized by the company and the entire offshore marine support industry. The IRS position could result in additional income tax due approximating $28.5 million related to fiscal years 1999 and 2000. Subsequent to the issuance of the examination report, the IRS has informed the company that it does not intend to propose a second adjustment covering the cumulative effect of such a depreciation method change.

Such additional taxes due, if any, would result in a reclassification of a previously recorded non-current deferred income tax liability to a current income tax payable. Other than a charge for interest related to amounts due, if any, this issue would have no effect on the company’s statement of earnings. The

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company intends to vigorously contest the audit deficiency as issued by the IRS and believes that the final outcome of this controversy will not have a material adverse effect on its financial position or results of operations.

In December 2003, the Financial Accounting Standards Board (FASB) published a revision to Interpretation 46 (FIN 46R) to clarify certain provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” and to exempt certain entities from its requirements. FIN 46R requires a company to consolidate a variable interest entity (VIE), as defined, when the company will absorb a majority of the variable interest entity’s expected losses, receive a majority of the variable interest entity’s expected residual returns, or both. FIN 46R also requires consolidation of existing, non-controlled affiliates if the VIE is unable to finance its operations without investor support, or where the other investors do not have exposure to the significant risks and rewards of ownership. FIN 46R applies immediately to a VIE created or acquired after January 31, 2003. For a VIE acquired before February 1, 2003, FIN 46R applies in the first interim period ending after March 15, 2004. The company has not completed its assessment of the impact of FIN 46R, but does not anticipate a material impact on its financial position and results of operations.

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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

The Board of Directors and Shareholders

Tidewater Inc.

We have reviewed the accompanying condensed consolidated balance sheet of Tidewater Inc. and subsidiaries as of December 31, 2003, and the related condensed consolidated statements of earnings and cash flows for the three-month and nine-month periods ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Tidewater Inc. and subsidiaries as of March 31, 2003, and the related consolidated statements of earnings, stockholders’ equity and cash flows for the year then ended, not presented herein, and in our report dated April 21, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ ERNST & YOUNG LLP

New Orleans, Louisiana

January 16, 2004

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Overview

The company provides services to the global offshore energy industry through the operation of a diversified fleet of marine service vessels. Revenues, net earnings and cash flows from operations are dependent upon the activity level of the vessel fleet, which is ultimately dependent upon oil and natural gas prices which, in turn, are determined by the supply/demand relationship for crude oil and natural gas. The following information contained in this Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and related disclosures.

Forward Looking Information and Cautionary Statement

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect the company’s current view with respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties and the company’s future results of operations could differ materially from historical results or current expectations. Some of these risks are discussed in this report, and include, without limitation, fluctuations in oil and gas prices; level of fleet additions by competitors and vessel overcapacity; changes in capital spending by customers in the energy industry for exploration, development and production; changing customer demands for different vessel specifications; acts of terrorism; unsettled political conditions, war, civil unrest and governmental actions, especially in higher risk countries of operations; foreign currency fluctuations; and environmental and labor laws.

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “will,” “continue,” “intend,” “seek,” “plan,” “should,” “would” and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Any forward-looking statements are based on current industry, financial and economic information, which the company has assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. The company’s actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in Items 1, 2 and 7 included in the company’s Annual Report on Form 10-K for the year ended March 31, 2003, filed with the Securities and Exchange Commission on April 22, 2003 and elsewhere in this Form 10-Q. Investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Management disclaims any obligation to update or revise the forward-looking statements contained herein to reflect new information, future events or developments.

General Market Conditions and Results of Operations

Offshore service vessels provide a diverse range of services and equipment to the energy industry. Fleet size, utilization and vessel day rates primarily determine the amount of revenues and operating profit because operating costs and depreciation do not change proportionally when revenue changes. Operating costs primarily consist of crew costs, repair and maintenance, insurance, fuel, lube oil and supplies. Fleet size and utilization are the major factors that affect crew costs. The timing and amount of repair and maintenance costs are influenced by customer demands, vessel age and scheduled drydockings to satisfy safety and inspection requirements mandated by regulatory agencies. Whenever possible, vessel drydockings are done during seasonally slow periods to minimize any impact on vessel operations and are only done if economically justified, given the vessel’s age and physical condition.

The following table compares revenues and operating costs (excluding general and administrative expense and depreciation expense) for the quarters and nine-month periods ended December 31 and for

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the quarter ended September 30, 2003. Vessel revenues and operating costs relate to vessels owned and operated by the company while other marine services relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.

Marine support services are conducted worldwide with assets that are highly mobile. Revenues are principally derived from offshore service vessels, which regularly and routinely move from one operating area to another, often to and from offshore operating areas in different continents. Because of this asset mobility, revenues and long-lived assets attributable to the company’s international marine operations in any one country are not “material” as that term is defined by SFAS No. 131.

As a result of the uncertainty of a certain customer to make payment of vessel charter hire, the company has deferred the recognition of approximately $2.3 million of billings as of December 31, 2003 ($5.6 million of billings as of March 31, 2003), which would otherwise have been recognized as revenue. The company will recognize the amounts as revenue as cash is collected or at such time as the uncertainty has been significantly reduced.

The prolonged weakness in the natural gas drilling market in the U.S. Gulf of Mexico continues to impact the company’s domestic results of operations. With the addition of several new-build vessels delivered to the domestic fleet in the last year and the additional vessels acquired from ENSCO on April 1, 2003, domestic-based vessel revenues increased from prior year levels, but utilization rates, especially for the company’s towing supply/supply vessels, remain at a depressed level. Strong natural gas commodity prices and tight inventory levels for the resource for the majority of calendar year 2003 did not result in an increase in gas drilling in the Gulf of Mexico market. The reasons for the continuing low level of offshore drilling and exploration activity are not fully known. Market analysts have increased calendar year 2004’s average annual expected natural gas commodity price forecast on the expectation that demand for the resource will increase due to the global economic recovery that they believe is underway. Industry pundits are also predicting that commodity prices for the resource will be sustainable at the higher level, which is a positive indicator for increased drilling activity.

International results of operations for fiscal 2004 have been negatively impacted by reduced utilization of the supply and towing supply vessels in certain international markets, particularly in Nigeria and Venezuela. Although international results have benefited from stable average day rates, the effect was insufficient in alleviating the negative impact lower utilization had on international results of operations. At present time, crude oil commodity prices are at attractive levels and consumer demand for crude oil remains high. Market

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analysts forecast demand for crude to remain strong throughout calendar 2004 due to global economic recovery and expect commodity prices for oil to remain stable, which is an optimistic gauge for steady international exploration and production.

Marine operating profit/(loss) and other components of earnings before income taxes for the quarters and nine-month periods ended December 31 and for the quarter ended September 30, 2003 consist of the following:

U.S.-based vessel revenues for the quarter and nine-month period ended December 31, 2003 increased approximately 8% and 23%, respectively, as compared to the same periods in fiscal 2003 primarily due to an increased number of company vessels operating in the domestic market resulting from the addition of several new-build vessels during the fourth quarter of fiscal 2003 and the first nine months of fiscal 2004 and the acquisition of the ENSCO vessels on April 1, 2003. Although the company’s deepwater class of vessels contributed the greatest percentage of revenue growth for the quarter and nine-month period ended December 31, 2003 as compared to the same periods in fiscal 2003, it is the company’s towing supply/supply vessel class that is the major income producing vessel class in the domestic market. Utilization rates for the towing supply/supply vessels decreased approximately 9% for the current quarter and remained relatively stable for the nine-month period ended December 31, 2003, as compared to the same periods in fiscal 2003. Average day rates for the towing supply/supply vessels declined slightly for the current quarter and decreased approximately 4% for the current nine-month period as compared to the same periods in fiscal 2003. The company’s average day rates still remain at high levels as compared to the average day rates experienced during the last industry downturn. Utilization rates in the U.S. Gulf of Mexico, however, still remain at the lowest level the company has experienced in over a decade due in part to management’s strategic decision to maintain higher average day rates at the expense of lower utilization. Due to the lack of demand at the higher day rate level, the company currently has 90 stacked towing supply/supply vessels; all but four vessels require a drydock before returning to service. Also, the company’s offshore tugs operating in the Gulf experienced a large increase in utilization and a modest increase in average day rates for the nine-month period ended December 31, 2003 versus the same period in fiscal 2003 due to an increase in construction activity, ocean barge towing and due to an increase in rig moving for ENSCO. In conjunction with the acquisition of ENSCO vessels, it was agreed that, for a period of two years and subject to satisfactory performance, the company would provide to ENSCO all of their discretionary vessel requirements in the Gulf of Mexico.

U.S.-based operating loss for the current quarter increased approximately $962,000 as compared to the same period in fiscal 2003 due to higher depreciation expense as a result of the increase in the number of vessels operating in the domestic market. U.S.-based operating loss for the current nine-month period ended December 31, 2003 increased approximately $4.4 million as compared to the same period in fiscal 2003 as a result of higher depreciation expense due to an increase in the number of vessel operating in

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the domestic market and also due to higher vessel operating costs, primarily crew costs, repair and maintenance costs and vessel insurance costs as a result of acquiring the ENSCO vessel fleet.

Current quarter U.S.-based vessel revenues decreased modestly as compared to the previous quarter due primarily to lower average day rates despite increases in utilization rates for the period. The company’s offshore tugs experienced a 17% decline in averages day rates but experienced a 10% increase in utilization rates for the current quarter as compared to the previous quarter as a result of performing more ocean barge towing jobs and less construction work which generally commands a higher day rate than barge towing.

U.S.-based operating loss for the current quarter decreased approximately $2.5 million or 56% as compared to the previous quarter due to implementing significant cost cutting measures during the latter part of the second quarter of fiscal 2004 that resulted in the reduction of U.S. shore-based and fleet personnel and due to decreases in repair and maintenance costs, fuel lube and supplies and a decrease in vessel insurance costs.

Due to the level of vessel activity experienced and to a positive safety performance on a year to date basis, current quarter marine results of operations includes $3 million of insurance premium rebates as provided for in our insurance program. The company recorded $1.5 million of premium rebates during the second quarter of fiscal 2004 and has an opportunity to obtain additional insurance premium rebates in the future should the positive safety performance continue.

International-based vessel revenues decreased slightly for the current quarter and decreased approximately 3% for the current nine-month period ended December 31, 2003, as compared to the same periods in fiscal 2003 due to lower utilization, primarily in Nigeria and Venezuela. Average day rates during the current periods increased versus the comparative prior year periods but were insufficient to mitigate the negative effects lower utilization had on revenues.

The company has two deepwater vessels that are currently fulfilling bareboat contractual obligations that existed at the time the vessels were purchased (November 2000). The bareboat charter agreements on the two vessels will expire at various times over the next year. In a bareboat charter agreement, the bareboat charterer leases a vessel for a pre-arranged fee and is able to market the vessel and is also responsible for providing the crew and all other operating costs related to the vessel. For the vessels that the company has under bareboat contracts, only revenue and depreciation expense are recorded related to the vessels’ activity. As the company incurs no operating costs related to the vessels, the related bareboat day rates are less than comparable vessels operating under normal charter hire arrangements. For the quarter and nine-month period ended December 31, 2003, the two bareboat-chartered deepwater vessels experienced 100% utilization for each respective period and average day rates of approximately $8,144 and $7,940, respectively.

International-based vessel operating profit for the quarter and nine-month period ended December 31, 2003 decreased approximately 23% and 25%, respectively, as compared to the same periods in fiscal 2003, due to earning lower revenues resulting from reduced vessel utilization and due to higher vessel operating costs driven primarily by higher repair and maintenance costs; greater crew costs related to the new vessels added to the fleet since last year; and due to increases in fuel, lube and supply costs resulting from furnishing the new vessels and mobilizing them to their areas of operations.

Current quarter international-based vessel revenues increased approximately 3% as compared to the previous quarter due primarily to an increase in average day rates and utilization for the company’s deepwater vessels. International-based vessel operating profit for the current quarter increased approximately 28% as compared to the previous quarter due to higher revenues and lower repair and maintenance costs due to a decrease in the number of vessel drydockings performed during the quarter.

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Vessel Class Statistics

Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are determined by the demand created through the level of offshore exploration, development and production spending by energy companies relative to the supply of offshore service vessels. Suitability of equipment and the degree of service provided also influence vessel day rates. The following tables compare day-based utilization percentages and average day rates by vessel class and in total for the quarters and nine-month periods ended December 31 and for the quarter ended September 30, 2003:

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The following table compares the average number of vessels by class and geographic distribution for the quarters and nine-month periods ended December 31 and for the quarter ended September 30, 2003:

On April 1, 2003, the company purchased from ENSCO International Incorporated its 27-vessel Gulf of Mexico-based marine fleet. The mix of ENSCO vessels acquired consists of one deepwater anchor handling/towing supply vessel and 26 towing-supply/supply vessels. Also during the current fiscal year, the company took delivery of one large deepwater platform supply vessel, five 220-foot platform supply vessels, one anchor handling towing supply vessel, eight crewboats and one offshore tug. The company also sold and/or scrapped five towing-supply/supply vessels, two crewboats, three offshore tugs and three other type vessels.

During fiscal 2003, the company took delivery of seven large deepwater platform supply vessels, three 220-foot platform supply vessels, three crewboats and entered into an agreement to bareboat charter one large platform supply vessel. Also during fiscal 2003, the company sold two vessels to one of its 49%-owned unconsolidated joint ventures. Additionally, the company sold and/or scrapped 24 vessels during fiscal 2003. The mix of vessels disposed of includes 12 towing-supply/supply vessels, three offshore tugs, five crew/utility vessels and four other type vessels.

General and Administrative Expenses

Consolidated general and administrative expenses for the quarters and nine-month periods ended December 31 and for the quarter ended September 30, 2003:

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Liquidity, Capital Resources and Other Matters

The company’s current ratio, level of working capital and amount of cash flows from operations for any period are directly related to fleet activity and vessel day rates. Fleet activity and vessel day rates are ultimately determined by the supply/demand relationship for oil and natural gas. Variations from year-to-year in these items are primarily the result of market conditions. Cash from operations, in combination with an available line of credit, provides the company, in management’s opinion, with adequate resources to satisfy current financing requirements. At December 31, 2003, $285 million of the company’s $295 million revolving line of credit was available for future financing needs. Continued payment of dividends, currently $.15 per quarter per common share, is subject to declaration by the Board of Directors.

During the second quarter of fiscal 2004, the company signed a new $295 million revolving credit agreement which replaced the existing $200 million revolving credit and term loan agreement. Under the new agreement, borrowings bear interest at the company’s option, at prime or Federal Funds rates plus .5% or LIBOR rates plus margins from .75% to 1.25% based on the company’s funded debt to total capitalization ratio. The new revolving credit commitment will expire on April 30, 2008. Any borrowings under the agreement are unsecured and the company pays an annual fee of .20% on the unused portion of the facility.

On July 8, 2003, the company issued $300 million of senior unsecured debt notes. The multiple series of notes with maturities ranging from 7 years to 12 years have an average outstanding life to maturity of 9.5 years and can be paid off anytime before maturity. The average interest rate on the notes sold to private institutional investors is 4.35%. The note proceeds were used to refinance the then-existing $245 million debt outstanding, with the balance of the issue to be used to fund future capital expenditures.

Net cash provided by operating activities for any period will fluctuate according to the level of business activity for the applicable period. For the nine months ended December 31, 2003, net cash from operating activities was less than the same period in fiscal 2003 primarily due to lower accounts receivable collections.

Investing activities for the nine months ended December 31, 2003 used $247.5 million of cash, which included $8.2 million from proceeds from the sale of assets. Sale proceeds were offset by additions to properties and equipment, which was comprised of approximately $17.4 million in capitalized repairs and maintenance, $.3 million in vessel enhancements, $.9 million in other properties and equipment purchases, $159.3 million for the construction of offshore marine vessels and $77.8 million for the purchase of 27 ENSCO vessels on April 1, 2003. Investing activities for the nine months ended December 31, 2002 used $211 million of cash, which included $8.0 million from proceeds from the sale of assets. Sale proceeds were offset by additions to properties and equipment, which was comprised of approximately $11 million in capitalized repairs and maintenance, $8.4 million in vessel enhancements, $2.6 million in other properties and equipment purchases and $197 million for the construction of offshore marine vessels.

Financing activities for the nine months ended December 31, 2003 provided $145.8 million of cash, which included $300 million of privately placed senior unsecured debt borrowings, a $100 million term loan placed with a group of banks primarily to finance the purchase of the ENSCO vessels, $36 million of borrowings from the company’s original revolving and term loan agreement and $10 million of borrowings from the company’s new $295 million revolving credit agreement. Borrowings were offset primarily by repayments of debt of $275 million, which consists of the payoff of the $100 million term loan and the payoff of $175 million of outstanding debt under the company’s original revolving and term loan agreement and $25.5 million of cash used for quarterly cash dividends of $.15 per share. Financing activities for the nine months ended December 31, 2002 provided $46 million of cash, which included $85 million of credit facility borrowings that were offset primarily by repayments of debt of $20 million and $25.4 million of cash used for quarterly cash dividends of $.15 per share.

On January 10, 2001, the company entered into agreements with a shipyard in Far East Asia for the construction of five large anchor handling towing supply vessels which are capable of working in most deepwater markets of the world. Scheduled deliveries for the five vessels have been delayed. The

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company expects the first vessel to be delivered to the market in March 2004 while the remaining four vessels are expected to be delivered throughout calendar year 2004. The total estimated cost for the vessels is approximately $177.2 million, which includes shipyard commitments and other incidental costs such as spare parts, management and supervision, and outfitting costs. The company has fixed cost contracts supported by performance bonds with the shipyard and does not anticipate any cost overruns related to these vessels. As of December 31, 2003, $154.7 million has been expended on the vessels.

The company is also constructing eight anchor handling towing supply vessels varying in size from 5,500 brake horsepower (BHP) to 9,000 BHP. Four international shipyards will each construct two vessels. Scheduled delivery of the eight vessels is expected to begin in December 2004 with the last vessel delivered in November 2005. As of December 31, 2003, $22.7 million has been expended on the vessels of the total $115.6 commitment cost. The company is also committed to the purchase of one 5,500 BHP anchor handling towing supply vessel for approximately $11.2 million. The company will take delivery of the vessel in January 2004.

The company is also committed to the construction of five next generation supply vessels, ranging in size from 205-foot to 220-foot, for approximately $57.2 million. The company’s shipyard, Quality Shipyard, LLC, is constructing one of the next generation supply vessels and two other shipyards are constructing the remaining four vessels. The five vessels are intermediate in size and are technically capable of working in certain deepwater markets; however, these vessels are being constructed in order to replace older supply vessels. Scheduled delivery of the five vessels is expected to commence in January 2004 with final delivery in May 2004. As of December 31, 2003, $53.1 million has been expended on these vessels.

In August 2003, the company committed $13.8 million for the construction of two, 175-foot, state-of-the-art, fast, crew/supply boats that blend the speed of a crewboat with the capabilities of a supply vessel. The vessels are being constructed at a U.S. shipyard and are scheduled for delivery in August and November of 2004. As of December 31, 2003, $.9 million has been expended on the two vessels.

The table below summarizes the various vessel commitments as discussed above by vessel class and type as of December 31, 2003:

The company has been financing its vessel commitment programs from its current cash balances, its operating cash flow and its $300 million senior unsecured debt notes and revolving credit facility. Of the total $374.9 million of capital commitments for vessels currently under construction the company has expended $231.4 million as of December 31, 2003.

While the company has not formally committed to any future new build vessel contracts at the present time, other than what has been discussed above, the company anticipates over the next several years continuing its vessel building program in order to replace its aging vessels. The majority of the company’s supply and towing supply vessels were constructed between 1976 to 1983. As such, most of this vessel class exceeds 20 years of age and will ultimately need to be replaced. In addition to age, market conditions will also help determine when a vessel is no longer economically viable. The company anticipates using future operating cash flows and borrowing capacities to fund significant capital expenditures over the next several years.

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The company is capitalizing a portion of its interest costs incurred on borrowed funds used to construct vessels. Interest and debt costs incurred, net of interest capitalized for the quarter and nine-month period ended December 31, 2003, was approximately $.9 million and $2.2 million, respectively. Interest costs capitalized for the quarter and nine month period ended December 31, 2003 was approximately $2.7 million and $6.1 million, respectively.