UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission File Number: 001-33206

 

 

 

 

CAL Dive International, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Registrant’s telephone number, including area code:

(281) 618-0400

 

 

 

 

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

 

 

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

None

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ

 

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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based on the closing sales price of the Registrant’s common stock as of June 30, 2006 was $0 — the Registrant was a wholly-owned subsidiary of Helix Energy Solutions Group, Inc. and had no common equity held by non-affiliates as of June 30, 2006.

 

As of February 23, 2007, the Registrant had 84,322,906 shares of Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 2007, are incorporated by reference into Part III of this Form 10-K.

 

 

CAL DIVE INTERNATIONAL, INC.

 

TABLE OF CONTENTS

 

 

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

 

This annual report contains forward-looking statements that involve risk and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements regarding our future financial position, business strategy, budgets, projected costs and savings, forecasts of trends, and statements of management’s plans and objectives and other matters. You can identify these forward-looking statements by the fact that they do not relate strictly to historic or current facts and often use words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and other words and expressions of similar meaning. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed under Item 1A “Risk Factors” and elsewhere in this report. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such forward-looking statements to reflect new circumstances or unanticipated events as they occur.

 

Unless the context otherwise requires, references in this annual report to (i) “Helix” shall mean Helix Energy Solutions Group, Inc., our former parent corporation, and (ii) “the company,” “our company,” “the registrant,” “we,” “our,” “us” and “Cal Dive International” shall mean Cal Dive International, Inc. and the predecessor shallow water marine contracting business operated by Helix. On March 6, 2006, Helix changed its corporate name from “Cal Dive International, Inc.” to “Helix Energy Solutions Group, Inc.,” at which time the “Cal Dive International, Inc.” name was passed on to us.

 

General

 

We are a marine contractor providing manned diving, pipelay and pipe burial services to the offshore oil and natural gas industry. Based on the size of our fleet, we believe that we are the market leader in the diving support business, which involves services such as construction, inspection, maintenance, repair and decommissioning of offshore production and pipeline infrastructure, on the Gulf of Mexico Outer Continental Shelf, or OCS. We also provide these services in select international offshore markets, such as the Middle East (United Arab Emirates, Oman, Egypt and Saudi Arabia) Southeast Asia and Australia. Based in Houston, Texas, we currently own and operate a diversified fleet of 26 vessels, including 23 surface and saturation diving support vessels as well as three shallow water pipelay vessels. We believe that our fleet of diving support vessels is the largest in the world. Our customers include major and independent oil and natural gas producers, pipeline transmission companies and offshore engineering and construction firms.

 

Since 1975, we have provided essential marine contracting services in support of oil and natural gas infrastructure throughout the production lifecycle, including production platforms, risers, subsea production systems and pipelines, on the Gulf of Mexico OCS. Our services include saturation, surface and mixed gas diving, enabling us to provide a full complement of marine contracting services in water depths of up to 1,000 feet. We provide our saturation diving services in water depths of 200 to 1,000 feet through our fleet of eight saturation diving vessels and eight portable saturation diving systems, which we believe is the largest saturation diving support fleet in the world. In addition, we believe that our fleet of diving support vessels is among the most technically advanced in the world because a number of these vessels have features such as dynamic positioning, or DP, hyperbaric rescue chambers, multi-chamber systems for split-level operations and moon pool deployment, which allow us to operate effectively in challenging offshore environments. We provide surface and mixed gas diving services in water depths typically less than 300 feet through our 15 surface diving vessels. We also have three vessels dedicated exclusively to pipelay and pipe burial services in water depths of up to approximately 400 feet. Pipelay and pipe burial operations typically require extensive use of our diving services; therefore, we consider these services to be complementary.

 

We believe the combination of the scheduling flexibility afforded by our large fleet, the wide range of capabilities of our assets and the advanced technical skills of our personnel distinguishes us from our competitors on the Gulf of Mexico OCS and makes us a leading services provider in this region. Furthermore, we believe that our superior operating capabilities, international experience, existing relationships with globally focused customers and proven acquisition expertise will allow us to achieve a similar leadership position in other economically attractive offshore markets, such as the Middle East, Southeast Asia and Australia.

 

We were organized in February 2006 as a Delaware corporation to facilitate the transfer of Helix’s shallow water marine contracting business to us. Prior to that, we operated as a division of Helix. In December 2006, we completed an initial public offering of 22,173,000 shares of our common stock, which are listed on the New York Stock Exchange under the symbol “DVR.” In connection with the offering, we distributed to Helix approximately $264.4 million in net proceeds from the offering, $200 million in proceeds from borrowings under our credit facility and approximately $11 million in tax benefits over a ten-year period resulting from a step-up in basis of certain assets transferred to us by Helix. We also issued an aggregate of 618,321 shares of restricted stock to our executive officers and employees in connection with our initial public offering. Helix owns 61,506,691 shares of our common stock, representing approximately 73% of the total voting power of our common stock. We are headquartered in Houston, Texas and have offices in New Orleans, Fourchon and New Iberia, Louisiana; Singapore; Perth, Australia; and Dubai, U.A.E.

 

Certain Definitions

 

Defined below are certain terms helpful to understanding the services rendered and equipment utilized in the marine contracting industry:

 

 

 

Recent Acquisitions and Investments

 

In the past 18 months, we have substantially increased the size of our fleet and expanded our operating capabilities on the Gulf of Mexico OCS through the following strategic acquisitions:

 

 

Pursuant to our growth strategy, we have also completed the following transactions in international offshore markets:

 

 

Upon closing these transactions and completing subsequent divestitures, we added a net total of 13 vessels, including three saturation diving vessels, seven portable saturation diving systems and significant diving equipment to our fleet.

 

Geographic Areas

 

Revenues by geographic region were as follows for the past three fiscal years (in thousands):

 

 

Property and equipment, net of depreciation, by geographic region was as follows (in thousands):

 

 

Our Industry

 

Similar to most sectors within the oilfield services industry, marine contracting is cyclical and typically driven by actual or anticipated changes in oil and natural gas prices and capital spending by upstream producers. Sustained high commodity prices historically have led to increases in expenditures for offshore drilling and completion activities and, as a result, greater demand for our services. Therefore, we expect our results of operations will be much stronger in a high commodity price environment compared to those achieved in a low commodity price environment. Current business conditions are strong, and we believe the outlook for our business remains very favorable based on the following industry trends:

 

Increased capital spending by oil and natural gas producers.  Supported by a high commodity price environment, oil and natural gas producers have significantly increased their spending on drilling, completions and acquisitions. According to Spears & Associates, annual offshore drilling and completion spending worldwide has risen from $29.4 billion in 2000 to $44.1 billion in 2005 and is expected to reach $68.6 billion by 2008. In the Gulf of Mexico, the growth in spending has been driven in part by smaller independent producers, which have aggressively acquired offshore properties and invested more heavily than previous operators to improve production. Additionally, several of the larger oil and natural gas companies have renewed their interest in the Gulf of Mexico and are actively pursuing deep-shelf drilling projects (15,000 feet or more below the mudline in water depths up to 1,000 feet) that offer excellent potential for natural gas reserve discoveries. The level of upstream spending in offshore regions has generally served as a leading indicator of demand for marine contracting services.

 

Rising international offshore activity.  Many oil and natural gas producers have recently expanded their operations in international offshore regions with large untapped reserves, such as Southeast Asia, West Africa and the Middle East. According to Spears & Associates, international offshore drilling and completion spending accounts for 67% of worldwide offshore drilling and completion spending and is expected to continue growing at a high rate. In many international markets, significant production infrastructure work is required over the next several years to develop new oil and natural gas discoveries. We believe that we are well positioned to capture a growing share of this work given our superior operating capabilities relative to the smaller regional providers that presently serve these markets. In addition, the size and complexity of these projects often necessitates the funding capabilities and expertise of the major oil and natural gas companies, large independents or national oil companies, which are less sensitive to changes in commodity prices than many producers in the Gulf of Mexico. Therefore, international demand for our services is typically more stable and predictable than on the Gulf of Mexico OCS.

 

Aging production infrastructure in the Gulf of Mexico.  According to the MMS, there are nearly 4,000 oil and natural gas production platforms in the Gulf of Mexico, of which approximately 60% are more than 15 years old. Virtually all of the older platforms and other infrastructure in the Gulf of Mexico lie in water depths of 1,000 feet or less, which is our core market. These structures are generally subject to extensive periodic inspections, require

frequent maintenance and will ultimately be decommissioned as mandated by various regulatory agencies. Consequently, we believe demand for our inspection, maintenance, repair and decommissioning services will remain strong. Demand for these services is less discretionary, and therefore more stable, than that derived from exploration, development and production activities.

 

Significant demand for infrastructure repair projects.  Prior to Hurricanes Katrina and Rita in 2005, demand for our services in the Gulf of Mexico exceeded supply due to higher drilling activity and the repair work generated by Hurricane Ivan in 2004. The severe infrastructure damage caused by these hurricanes significantly increased this demand. According to the MMS, approximately 197 platforms and 474 pipelines in the Gulf of Mexico were damaged or destroyed due to Hurricanes Ivan, Katrina and Rita, shutting in a large amount of oil and natural gas production. While many hurricane-related repairs have been completed, we believe much additional work is required to repair these structures and restore production to targeted levels. Because of this demand pressure and government regulations that impose limits on foreign-domiciled vessels working in U.S. waters, during 2006 we experienced record contract rates and utilization for our vessels and portable saturation diving systems.

 

Growing U.S. demand for natural gas.  The majority of our customers on the Gulf of Mexico OCS are drilling for, producing and transporting natural gas. The Gulf of Mexico is a key region for natural gas supply, producing an estimated 21% of total U.S. natural gas production during the five-year period ending in 2005, according to the EIA. The EIA reports that U.S. demand for natural gas has increased 27% since 1985 and is expected to grow an additional 26% through 2030. The EIA projects a need for approximately 18% growth in annual U.S. natural gas production and an increase in liquefied natural gas imports to meet this demand. Due to the declining productivity of many mature U.S. fields, the number of domestic natural gas wells drilled annually has increased significantly in recent years. We would expect the continuation of this trend to result in strong demand for our services on the Gulf of Mexico OCS.

 

Our Competitive Strengths

 

Our competitive strengths include:

 

 

 

Our Business Strategy

 

The principal elements of our strategy include:

 

 

 

Our History

 

We trace our 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. We commenced operations in the Gulf of Mexico in 1975. Since that time our growth strategy has included acquisitions and investments that enhanced our services and increased our technological capabilities as evidenced by these representative milestones in our history:

 

 

With the recent Torch, Acergy and Fraser Diving acquisitions, we have substantially increased the size of our fleet and expanded our operating capabilities. Upon closing these transactions and completing subsequent divestitures, we added a net total of 13 vessels, including three premium saturation diving vessels, seven portable saturation diving systems and significant other diving equipment to our fleet.

 

Seasonality

 

Historically, we have experienced our lowest vessel utilization rates during the first quarter and, to a lesser extent during the fourth quarter, when weather conditions are least favorable for offshore exploration, development and construction activities. As is common in the industry, we typically bear the risk of delays caused by some, but not all, adverse weather conditions. We believe that the technical capabilities of our fleet and ability to operate effectively in challenging offshore environments will provide an advantage during winter months and reduce the impact of weather-related delays.

 

Customers

 

Our customers include major and independent oil and natural gas producers, pipeline transmission companies and offshore engineering and construction firms. The level of marine contracting capital spending by customer varies from year to year due to the concentrated nature of construction and installation expenditures and the unpredictability of repair work. 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 percent of consolidated revenue of major customers was as follows: 2006 — Chevron 15.6%; 2005 — BP 13% and Lighthouse R&D Enterprises 11%; 2004 — Lighthouse R&D Enterprises 12% and Shell 11%. We estimate we provided marine contracting services to over 100 customers in 2006.

 

Contracting and Tendering

 

Our services are performed under contracts that are typically awarded through a competitive bid process. Contract terms vary depending on the services required and are often determined through negotiation. Most of our contracts can be categorized as either dayrate or qualified turnkey. Under dayrate contracts, we are paid a daily rate, which consists of a base rate for our vessel and crews as well as cost reimbursements for materials and ancillary activities, for as long as we provide our services. Qualified turnkey contracts, on the other hand, define the services that we will provide for an agreed upon fixed price and certain cost protections. This type of contract is most commonly used for complex subsea projects on which customers desire greater control over costs.

 

We seek to optimize our mix of dayrate and qualified turnkey contracts based on prevailing market conditions. As part of that effort, we also attempt to strike the appropriate balance between short-term and long-term dayrate contracts. Our goal is to diversify our sources of revenue while maximizing profitability in a given business environment. For instance, our volume of dayrate contracts increased dramatically following the hurricanes in the Gulf of Mexico during 2004 and 2005, given the difficulty of accurately defining the scope of required services prior to commencing such a project.

 

Our recent acquisitions expanded our operating capabilities. We now offer a comprehensive range of manned diving, pipelay and pipe burial services. These businesses are complementary since pipeline installation and completion work often requires significant diving support. As a result, we frequently enter into contracts to provide each of these services for a particular project. This type of arrangement allows customers to negotiate contract terms and share project information with us as a single contractor, rather than multiple contractors, and enhances the utilization of our fleet.

 

Competitors

 

The marine contracting business is highly competitive. Competition for marine contracting work in the Gulf of Mexico has historically been based on price, the location and type of equipment available, the ability to deploy such equipment and the safety and quality of such services. In recent years, price has been the primary factor in obtaining contracts, but our ability to acquire specialized vessels, to attract and retain skilled personnel, and to demonstrate a good safety record have also been important competitive factors. Our principal competitors for diving services include Global Industries, Ltd., Tetra Technologies Inc. (through its wholly owned subsidiary, Epic Divers & Marine, L.L.C.) and Oceaneering International, Inc., as well as a number of smaller companies that often compete solely on price. Based on the size of our fleet, we are the largest saturation and surface diving service provider on the Gulf of Mexico OCS. Our principal competitors for shallow water pipelay services on the Gulf of Mexico OCS include Global Industries, Horizon Offshore, Inc. and several independent companies. Other foreign-based marine contractors have either positioned, or announced their intention to deploy, certain vessels, equipment and personnel to perform services on the Gulf of Mexico OCS in response to demand for hurricane-related repair projects. However, we believe that our reputation, asset capabilities, highly experienced personnel and low-cost structure are key advantages for us in this market.

 

Employees

 

As of December 31, 2006, we had approximately 1,300 employees, approximately 350 of whom were salaried personnel. As of that date, we also contracted with third parties to utilize approximately 300 non-U.S. citizens to crew our foreign-flagged vessels. None of our employees belong to a union or are employed pursuant to any collective bargaining agreement or any similar arrangement. We believe our relationship with our employees and foreign crew members is good.

 

Training and Safety

 

We have established a corporate culture in which safety is one of our core values. Our goal, based upon the belief that all incidents are preventable, is to provide an injury-free workplace by emphasizing the importance of safe behavior by our employees. Our behavioral safety procedures and training programs were developed by management personnel who have worked at entry level positions within the industry and know firsthand the mental and physical challenges of the ocean worksite. As a result, we believe that our overall safety management system is among the best in the industry. Nevertheless, we are constantly engaged in a company-wide effort to enhance our behavioral safety procedures and training programs with a constant focus on awareness and open communication between management and all offshore and onshore employees. We currently document all daily observations and analyze data both at the immediate worksite and at the corporate level. Worksite conditions inspections, known as “Hazard Hunts,” are conducted bi-weekly with required “actions by” and close out dates. Annual progressive audits are carried out throughout our fleet, facilities and worksites by our environmental, health and safety department to provide an avenue of understanding and mechanism to identify training requirements throughout our diverse fleet. Management site visits are conducted monthly to assist in face to face communication across the fleet and each member of senior management is responsible for personally talking to crewmembers from at least two of our vessels each month to evidence our safety commitment and improve our offshore safety culture.

 

Government Regulation

 

The marine contracting industry is subject to extensive governmental and industry rules and regulations, including those of the U.S. Coast Guard, the U.S. Environmental Protection Agency, the MMS and the U.S. Customs Service, as well as private industry organizations such as the American Bureau of Shipping. We also support and voluntarily comply with standards of the Association of Diving Contractors International. Among the more significant standards we follow are those established by the Coast Guard, which sets safety standards, authorizes investigations into vessel and diving accidents and recommends improved safety standards. We are required by various other governmental and quasi-governmental agencies to obtain various permits, licenses and certificates with respect to our operations.

 

In addition, we depend on the demand for our services from the oil and natural gas industry and, therefore, our business is affected by laws and regulations, as well as changing taxes and policies relating to the oil and natural gas industry generally. In particular, the development and operation of oil and natural gas properties located on the OCS of the United States is regulated primarily by the MMS. In addition, because our operations rely on offshore oil and natural gas production, if the government were to restrict the availability of offshore oil and natural gas leases, such action could materially adversely affect our business, financial condition and results of operations.

 

Environmental Regulation

 

Our operations are subject to a variety of federal, state and local as well as international laws and regulations governing environmental protection, health and safety, including those relating to the discharge of materials into the environment. Numerous governmental departments issue rules and regulations to implement and enforce laws that are often complex and costly to comply with and that carry substantial administrative, civil and possibly criminal penalties for failure to comply. Under these laws and regulations, we may be liable for remediation or removal costs, damages, including damages to natural resources, and other costs associated with releases of hazardous materials, including oil, into the environment, and such liability may be imposed on us even if the acts that resulted in the releases were in compliance with all applicable laws at the time such acts were performed. Some of the environmental laws and regulations that are applicable to our business operations are discussed in the following paragraphs.

 

The Oil Pollution Act of 1990, as amended, or OPA, imposes a variety of requirements on “Responsible Parties” related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. A “Responsible Party” includes the owner or operator of an onshore facility, a vessel or a pipeline, and the lessee or permittee of the area in which an offshore facility is located. OPA imposes liability on each Responsible Party for oil spill removal costs and for other public and private damages from oil spills. Failure to comply with OPA may result in the assessment of civil and criminal penalties. OPA establishes liability limits of $350 million for onshore facilities, all removal costs plus $75 million for offshore facilities and the greater of $600 per gross ton or $500,000 for vessels other than tank vessels. The liability limits are not applicable, however, if the spill is caused by gross negligence or willful misconduct or results from violation of a federal safety, construction, or operating regulation; or if a party fails to report a spill or fails to cooperate fully in the cleanup. Few defenses exist to the liability imposed under OPA.

 

OPA also imposes ongoing requirements on a Responsible Party, including preparation of an oil spill contingency plan and maintenance of proof of financial responsibility to cover a majority of the costs in a potential spill. With respect to financial responsibility, OPA requires the Responsible Party for certain offshore facilities to demonstrate financial responsibility of not less than $35 million, with the financial responsibility requirement potentially increasing up to $150 million if the risk posed by the quantity or quality of oil that is explored for or produced indicates that a greater amount is required. The MMS has promulgated regulations implementing these financial responsibility requirements for covered offshore facilities. Under the MMS regulations, the amount of financial responsibility required for an offshore facility is increased above the minimum amounts if the “worst case” oil spill volume calculated for the facility exceeds certain limits established in the regulations.

 

OPA also requires owners and operators of vessels over 300 gross tons to provide the Coast Guard with evidence of financial responsibility to cover the cost of cleaning up oil spills from such vessels. We currently own and operate six vessels over 300 gross tons. Satisfactory evidence of financial responsibility has been provided to the Coast Guard for all of our vessels.

 

The Federal Water Pollution Control Act, or the Clean Water Act, and analogous state laws impose strict controls on the discharge of pollutants, including oil and other substances, into the navigable waters of the United States and state waters and impose potential liability for the costs of remediating releases of such pollutants. The controls and restrictions imposed under the Clean Water Act and analogous state laws have become more stringent over time, and it is possible that additional restrictions will be imposed in the future. Permits must be obtained to discharge pollutants into state and federal waters. Certain state regulations and the general permits issued under the Federal National Pollutant Discharge Elimination System program prohibit the discharge of produced waters and

sand, drilling fluids, drill cuttings and certain other substances related to the exploration for and production of oil and natural gas into certain coastal and offshore waters. The Clean Water Act and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharge of oil and other hazardous substances and impose liability on responsible parties for the costs of cleaning up any environmental contamination caused by the release of a hazardous substance and for natural resource damages resulting from the release. Our vessels routinely transport diesel fuel to offshore rigs and platforms and also carry diesel fuel for their own use. Offshore vessels operated by us have facility and vessel response plans to deal with potential spills of oil or its derivatives.

 

The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, contains provisions requiring the remediation of releases of hazardous substances into the environment and imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons including current and former owners and operators of contaminated sites where the release occurred and those companies that transport, dispose of or arrange for disposal of hazardous substances released at the site. 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. Neighboring parties and third parties may also file claims for personal injury and property damage allegedly caused by the release of hazardous substances into the environment. In the ordinary course of business, we handle hazardous substances. Governmental agencies or third parties could seek to hold us responsible under CERCLA for all or part of the costs to clean up a site at which such hazardous substances may have been released or deposited.

 

We have incurred in the past, and expect to incur in the future, capital and other expenditures related to environmental compliance. Such expenditures, however, are included within our overall capital and operating budgets and are not separately accounted for. We do not anticipate that compliance with existing environmental laws and regulations will have a material effect upon our capital expenditures, earnings or competitive position. However, changes in the environmental laws and regulations, or claims for damages to persons, property, natural resources or the environment, could result in substantial costs and liabilities, and thus there can be no assurance that we will not incur material environmental costs or liabilities in the future.

 

Available Information

 

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at www.caldive.com as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission, or SEC. Information contained on our website is not part of this annual report.

 

Stockholders should carefully consider the risk factors described below in addition to the other information contained in this annual report. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this annual report could have a material adverse effect on our business, financial condition or results of operations.

 

Risks Related to Our Business

 

Our business largely depends on offshore exploration, development and production activity in the oil and natural gas industry, which is currently at a historically high level and could decline in the future.

 

Our business is substantially dependent upon the condition of the oil and natural gas industry and, in particular, the willingness of oil and natural gas companies to make capital expenditures for offshore exploration, development and production operations. The level of capital expenditures generally depends on the prevailing views of future oil and natural gas prices, which are influenced by numerous factors, including but not limited to:

 

 

 

Oil and natural gas prices have been at historically high levels and recent capital spending levels may not remain the same or increase. A sustained period of low offshore drilling and production activity or the return of lower commodity prices would likely have a material adverse effect on our business, financial condition or results of operations.

 

Market conditions in the marine contracting industry are highly cyclical and subject to rapid change. Due to the short-term nature of most of our contracts, adverse changes in market conditions can have an immediate impact on our results of operations.

 

Historically, the marine contracting industry has been highly cyclical, with periods of high demand and high dayrates often followed by periods of low demand and low dayrates. Periods of low demand intensify the competition in the industry and can result in vessels and diving systems being idle. We may be required to idle vessels or diving systems or reduce contract rates in response to market conditions in the future. On the Gulf of Mexico OCS, contracts are generally short-term, and oil and natural gas companies tend to respond quickly to changes in commodity prices. Due to the historical short-term nature of many of our contracts, changes in market conditions can have an immediate impact on our results of operations. In addition, customers generally have the right to terminate our contracts with little or no notice and without penalty. As a result of the cyclicality of our industry we expect our results of operations to be volatile.

 

Our business is concentrated on the Gulf of Mexico OCS, and the mature nature of this region could result in less exploration, development and production activities in the area, thereby reducing demand for our services.

 

The Gulf of Mexico OCS is a mature oil and natural gas production region that has experienced substantial exploration, development and production activity for many years. Because a large number of oil and natural gas prospects in this region have already been drilled, additional prospects of sufficient size and quality could be more difficult to identify. Moreover, oil and natural gas companies may be unable to obtain the financing necessary to drill prospects in this region. The decrease in the size of oil and natural gas prospects, the decrease in production or the failure to obtain such financing may result in reduced exploration, development and production activity in the Gulf of Mexico and reduced demand for our services.

 

Intense competition in our industry may reduce our profitability and weaken our financial condition.

 

The businesses in which we operate are highly competitive. Our contracts traditionally have been awarded on a competitive bid basis, and while customers may consider, among other things, the reputation, safety record and experience of the contractor, price competition is often the primary factor in determining which qualified contractor is awarded a job. This competition has become more intense in recent years as mergers among oil and natural gas

companies have reduced the number of available customers. Contract pricing is partially dependent on the supply of competing vessels. Generally, excess offshore service capacity puts downward pressure on contract rates. If other companies construct new vessels or relocate existing vessels to our markets, competition may further increase thus driving down the rates we may charge our customers. We believe that the competition for contracts will continue to be intense in the foreseeable future. The impairment of our ability to compete successfully may reduce our profitability and weaken our financial condition.

 

If we fail to manage our growth effectively, our results of operations could be harmed.

 

We have a history of growing through acquisitions of companies and assets. We must plan and manage our acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market. If we fail to manage current and future acquisitions effectively, our results of operations could be adversely affected. Our growth has placed, and is expected to continue to place, significant demands on our personnel, management and other resources. We must continue to improve our operational, financial, management and legal/compliance information systems to keep pace with the growth of our business.

 

Any future acquisitions could present a number of risks, including but not limited to:

 

 

If we are unsuccessful in completing acquisitions of other businesses or assets, our business, financial condition or results of operations could be adversely affected. In addition, if we are unsuccessful in integrating our acquisitions in a timely and cost-effective manner, our business, financial condition or results of operations could be adversely affected.

 

Our operations outside of the United States are subject to additional political, economic, and other uncertainties that could adversely affect our business, financial condition or results of operations, and our exposure to such risks will increase as we expand our international operations.

 

An element of our business strategy is to expand into international oil and natural gas producing areas such as the Middle East, Southeast Asia and Australia. Our operations outside of the United States are subject to risks inherent in foreign operations, including but not limited to:

 

 

 

In addition, laws and policies of the United States affecting foreign trade and taxation may also adversely affect our international operations.

 

As our international operations expand, the exposure to these risks will increase. Our business, financial condition or results of operations could be susceptible to adverse events beyond our control that may occur in the particular country or region in which we are active.

 

We are the subject of an agreed final judgment that prevents us from making acquisitions of certain saturation diving systems without the consent of the U.S. Department of Justice, which could adversely affect our ability to make strategic acquisitions and increase our revenues and profitability.

 

As part of the Acergy and Torch acquisitions in 2005, Helix entered into an agreed final judgment with the U.S. Department of Justice, or DOJ, to remedy certain anti-competitive effects of the acquisitions alleged by the DOJ. The final judgment requires Helix, until January 2009, to notify the DOJ of any proposed direct or indirect acquisition of a saturation diving chamber that has been operated in the Gulf of Mexico at any time since October 1, 2002 or any interest in a company that owns or operates such a chamber. We are also subject to and will continue to be bound by the consent decree. Since we are not able to make any acquisition of this type without obtaining the consent of the DOJ, our ability to satisfy our customers’ demands for services that require us to use saturation diving chambers and to generate revenues from these services may be limited.

 

The loss of the services of one or more of our key employees, or our failure to attract and retain other highly qualified personnel in the future, could disrupt our operations and adversely affect our financial results.

 

Our industry has lost a significant number of experienced subsea professionals over the years due to, among other reasons, the cyclicality of our business. Our continued success depends on the active participation of our key employees. The loss of one or more of our key people could adversely affect our operations. We believe that our success and continued growth are also dependent upon our ability to attract and retain skilled personnel. Unionization or a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in the wage rates we pay, or both. If either of these events occurs for any significant period of time, our revenues and profitability could be diminished and our growth potential could be impaired.

 

The operation of marine vessels is risky, and we may incur losses or other liabilities that are not covered by insurance and could have a material adverse effect on our financial condition and results of operations.

 

Marine contracting involves a high degree of operational risk. Hazards, such as vessels sinking, grounding, colliding and sustaining damage from severe weather conditions, are inherent in marine operations. These hazards can cause personal injury or loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. Damage arising from such occurrences may result in lawsuits asserting large claims. We maintain such insurance protection as we deem prudent, including Jones Act employee coverage, which is the maritime equivalent of workers’ compensation, and hull insurance on our vessels. Such insurance may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. A successful claim for which we are not fully insured could have a material adverse effect on our business, financial condition or results of operations. Moreover, our ability to maintain adequate insurance in the future at rates that we consider reasonable may be limited. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased substantially and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, insurance carriers are now requiring broad exclusions for losses due to war risk and terrorist acts and limitations for wind storm damage. The current insurance on our vessels, in some cases, is in amounts approximating book value, which is less than replacement value. In the event of property loss due to a catastrophic marine disaster, mechanical failure or collision, insurance may not cover a substantial loss of revenues, increased costs and other liabilities, and could have a material adverse effect on our operating performance if we were to lose any of our large vessels.

 

We have substantial debt obligations that could restrict our operations and impair our financial condition.

 

We distributed all of the net proceeds from our initial public offering to Helix as a dividend in December 2006. In addition, we have a $250 million five-year revolving credit facility, from which we borrowed $201 million, $200 million of which was distributed to Helix as a dividend in December 2006. We expect to use the remaining availability under the facility for working capital and other general corporate purposes. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources — Revolving Credit Facility.”

 

This substantial indebtedness could have adverse consequences on us, including:

 

 

If our cash flow and capital resources are insufficient to service our debt obligations, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, seek additional equity or debt capital or restructure or refinance our debt. However, these measures might be unsuccessful or inadequate in permitting us to meet our scheduled debt service obligations. We may be unable to restructure or refinance our obligations or obtain additional equity financing or sell assets on satisfactory terms or at all. As a result, an inability to meet our debt obligations could cause us to default on those obligations. A default under any debt instrument could, in turn, result in defaults under other debt instruments. Any such defaults could materially impair our financial condition and liquidity.

 

Our contracting business declines in winter, and adverse weather conditions in the Gulf of Mexico can adversely affect our revenues.

 

Marine operations conducted in the Gulf of Mexico are typically seasonal and depend, in part, on weather conditions. Historically, we have experienced our lowest vessel utilization rates during the first quarter, and to a lesser extent during the fourth quarter, when weather conditions are least favorable for offshore exploration, development and construction activities. As is common in the industry, we typically bear the risk of delays caused by some, but not all, adverse weather conditions. Accordingly, our results in any one quarter are not necessarily indicative of annual results or continuing trends.

 

Our original estimates of the costs associated with our qualified turnkey projects and capital projects may be incorrect and result in reduced profitability, losses or cost over-runs on those projects.

 

Many of our projects are performed on a qualified turnkey basis where a defined work scope is delivered for a fixed price and extra work, which is subject to customer approval, is billed separately. The revenue, cost and gross profit realized on a turnkey 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 the performance of others, such as alliance partners. These variations and risks inherent in the marine construction business may result in our experiencing reduced profitability or losses on projects. In addition, estimates for capital projects, including recertification costs, may have cost over-runs due to unknown factors associated with the work to be performed and market conditions.

 

We are subject to extensive federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations.

 

Our subsea construction, intervention, inspection, maintenance and decommissioning operations are subject to extensive laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local

governmental authorities. Due to adverse operating market conditions or unfavorable financing conditions, there may be occasions when certain recertification efforts may be postponed, rendering certain vessel operations temporarily out of commission, until more favorable market or cost of capital conditions arise. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations that may, for instance, require us to obtain additional permits, approvals and certificates for proposed projects. Any actual or alleged violation of permit requirements or failure to obtain any required permit could result in restrictions or prohibitions on our operations or criminal sanctions. Alternatively, we may have to incur substantial expenditures to obtain, maintain or renew authorizations to conduct existing projects. If a project is unable to function as planned due to changing requirements or local opposition, we may suffer expensive delays, extended periods of non-operation or significant loss of value in a project. All such costs may have a negative effect on our business, financial condition or results of operations. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on our business, financial condition or results of operations. See Item 1 “Business — Government Regulation.”

 

We may incur substantial costs and liabilities with respect to environmental, health and safety laws and regulations.

 

We may incur substantial costs and liabilities as a result of environmental, health and safety requirements relating to, among other things, our subsea construction and intervention, inspection, maintenance and decommissioning operations. These costs and liabilities could arise under a wide range of environmental, health and safety laws, including regulations and enforcement policies, which have tended to become increasingly strict over time. Failure to comply with these laws and regulations may result in assessment of administrative, civil, and criminal penalties, imposition of cleanup and site restoration costs and liens, and the issuance of orders enjoining or limiting our current or future operations. Compliance with these laws and regulations also increases the cost of our operations and may prevent or delay the commencement or continuance of a given operation. In addition, claims for damages, including damages for natural resources, to persons or property may result from environmental and other impacts of our operations.

 

Strict, joint and several liability to remediate contamination may be imposed under certain environmental laws, which could cause us to become liable for, among other things, the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. New or modified environmental, health or safety laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. Therefore, the costs to comply with environmental, health or safety laws or regulations or the liabilities incurred in connection with them could significantly and adversely affect our business, financial condition or results of operations. See Item 1 “Business — Environmental Regulation.”

 

Risks Related to Our Relationship with Helix and to our Common Stock

 

We have no operating history as an independent company and our historical financial information is not necessarily representative of the results we would have achieved as an independent publicly traded company and may not be a reliable indicator of our future results.

 

The historical financial information included in this report does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as an independent publicly traded company during the periods presented or those results we will achieve in the future. This is primarily a result of the following factors:

 

 

 

Helix owns a controlling interest in our company. The interests of Helix may conflict with those of our other stockholders, and other stockholders’ voting power may be limited.

 

Helix currently owns approximately 73% of the outstanding shares of our common stock. For so long as Helix continues to own shares of our common stock representing more than 50% of the total voting power of our stock, it will have the ability to direct the election of all members of our board of directors and to exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving us, or acquisition or disposition of assets, the incurrence of indebtedness by us, the issuance of any additional common stock or other equity securities by us, the repurchase or redemption of common stock or preferred stock by us and the payment of dividends by us. Similarly, Helix has the power to determine or significantly influence the outcome of matters submitted to a vote of our stockholders, including the power to prevent an acquisition or any other change in control of us. Because Helix’s interests as our controlling stockholder may differ from the interests of our other stockholders, actions taken by Helix with respect to us may not be favorable to such other stockholders.

 

Prior to the completion of our initial public offering, we also entered into a Master Agreement, a Corporate Services Agreement and a number of other agreements with Helix setting forth various matters governing our relationship with Helix while it remains a significant stockholder in us. These agreements govern our relationship with Helix and allow Helix to retain control over, among other things, the provision of corporate services to us and our ability to make certain acquisitions or to merge or consolidate or to sell all or substantially all our assets. The rights of Helix under these agreements may allow Helix to delay or prevent an acquisition of us that our other stockholders may consider favorable. We will not be able to terminate these agreements or amend them in a manner we deem more favorable so long as Helix continues to own shares of our common stock representing more than 50% of the total voting power of our common stock.

 

Conflicts of interest may arise between Helix and us that could be resolved in a manner unfavorable to us.

 

Questions relating to conflicts of interest may arise between Helix and us in a number of areas relating to our past and ongoing relationships. Of our six person board, two of our directors serve as directors and executive officers of Helix and one of our other directors serves as a director of Helix. For as long as Helix continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to direct the election of all the members of our board of directors and to exercise a controlling influence over our business and affairs.

 

Areas in which conflicts of interest between Helix and us could arise include, but are not limited to, the following:

 

 

If Helix engages in the same type of business we conduct or takes advantage of business opportunities that might be attractive to us, our ability to operate successfully and expand our business may be hampered.

 

Our amended and restated certificate of incorporation provides that, subject to any contractual provision to the contrary, Helix will have no obligation to refrain from:

 

 

In addition, the corporate opportunity policy set forth in our amended and restated certificate of incorporation addresses potential conflicts of interest between our company, on the one hand, and Helix and its officers and directors who are officers or directors of our company, on the other hand. The policy provides that if Helix acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both Helix and us, we will have renounced our interest in the corporate opportunity. It also provides that if one of our directors or officers who is also a director or officer of Helix learns of a potential transaction or matter that may be a corporate opportunity for both Helix and us, we will have renounced our interest in the corporate opportunity, unless that opportunity is expressly offered to that person in writing solely in his or her capacity as our director or officer.

 

If one of our officers or directors, who also serves as a director or officer of Helix, learns of a potential transaction or matter that may be a corporate opportunity for both Helix and us, our amended and restated certificate of incorporation provides that the director or officer will have no duty to communicate or present that corporate opportunity to us and will not be liable to us or our stockholders for breach of fiduciary duty by reason of Helix’s actions with respect to that corporate opportunity.

 

This policy could result in Helix having rights to corporate opportunities in which both we and Helix have an interest.

 

Future sales or distributions of our shares by Helix could depress the market price for shares of our common stock.

 

Helix may sell all or part of the shares of our common stock that it owns or distribute those shares to its stockholders, including pursuant to demand registration rights that we granted to Helix. Sales or distributions by Helix of substantial amounts of our common stock in the public market or to its stockholders could adversely affect prevailing market prices for our common stock. Helix is not subject to any contractual obligation that would prohibit it from selling, spinning off, splitting off or otherwise disposing of any shares of our common stock, except that Helix agreed not to sell, spin off, split off or otherwise dispose of any of our shares of common stock for a period of 180 days after the date of our initial public offering without the prior written consent of Banc of America Securities LLC and J.P. Morgan Securities Inc., subject to certain limitations and limited exceptions. Helix has the right to begin liquidating its ownership of our common stock after the 180-day period following the date of our offering.

 

We may be unable to replace the corporate services Helix provides us in a timely manner or on comparable terms.

 

We entered into a Corporate Services Agreement with Helix prior to the completion of our initial public offering. Pursuant to the Corporate Services Agreement, Helix and its affiliates provide us with corporate services, including treasury and other financial services, employment benefit services and insurance, information systems and network services. The Corporate Services Agreement requires us to utilize these services provided by Helix in the conduct of our business until such time as Helix owns less than 50% of the total voting power of our common stock.

 

We negotiated these arrangements with Helix in the context of a parent-subsidiary relationship. Although Helix will be contractually obligated to provide us with services during the term of the Corporate Services Agreement, we may not be able to obtain services of similar scope and quality after the expiration of that agreement. In addition, our costs of procuring those services from third parties may increase.

 

We will not have control over certain tax decisions and could be liable for income taxes owed by Helix.

 

Prior to the closing of our initial public offering, we and certain of our subsidiaries were included in Helix’s consolidated group for U.S. federal income tax purposes. In addition, we or one or more of our subsidiaries may be included in the combined, consolidated or unitary tax returns of Helix or one or more of its subsidiaries for foreign, state and local income tax purposes. Under our Tax Matters Agreement with Helix, Helix will have the right to prepare and file income tax returns that include us or our subsidiaries if Helix has any responsibility for the taxes shown on such income tax returns. The Tax Matters Agreement provides that Helix will have sole authority to respond to and conduct all tax proceedings (including tax audits) relating to such income tax returns. This arrangement may result in conflicts of interest between Helix and us. For example, under the Tax Matters Agreement, Helix will be able to choose to contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to Helix and detrimental to us.

 

Moreover, notwithstanding the Tax Matters Agreement, U.S. federal tax law provides that each member of a consolidated group is liable for the group’s entire tax obligation. Thus, to the extent Helix or other members of the consolidated group fail to make any U.S. federal income tax payments required by law for tax periods for which we or our subsidiaries are included in Helix’s consolidated group, we could be liable for the shortfall. Similar principles may apply for foreign, state and local income tax purposes where we file combined, consolidated or unitary returns with Helix or its subsidiaries for foreign, state and local income tax purposes.

 

We could be responsible for taxes resulting from the transfer of assets to us by Helix.

 

To effect the separation, Helix and its affiliates transferred to us the assets related to our business. Under the Tax Matters Agreement, Helix is generally responsible for any taxes resulting from such transfer. However, under

the Tax Matters Agreement, we have agreed to be responsible for any additional taxes that may result from actions we take following the closing of our offering.

 

Our stock ownership by Helix, provisions in our agreements with Helix and our corporate governance documents and Delaware law may delay or prevent an acquisition of us that our other stockholders may consider favorable.

 

For as long as Helix continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to control decisions regarding an acquisition of us by a third party. In addition, our amended and restated certificate of incorporation, bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our stockholders to remove directors, supermajority voting requirements for stockholders to amend our organizational documents, restrictions on a classified board of directors and limitations on action by our stockholders by written consent. Some of these provisions, such as the limitation on stockholder action by written consent, only become effective once Helix no longer controls us. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding voting stock. These restrictions under Delaware law do not apply to Helix until it beneficially owns less than 15% of our common stock and subsequently increases its shareholdings to once again beneficially own at least 15% of our common stock. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders.

 

Conflicts of interest may arise due to the vesting schedule of grants of restricted stock to our executive officers.

 

Following completion of our initial public offering, we granted shares of restricted stock to our executive officers, a significant portion of which will commence to vest upon the first anniversary of the date on which Helix no longer owns shares of stock representing 51% or more of the total voting power of our common stock. This could create, or appear to create, conflicts of interest when our management is faced with a transaction or transactions that could reduce Helix’s ownership of our common stock to below 51% but that could have different implications for our other stockholders.

 

None.

 

Our Vessels

 

We currently own and operate a diversified fleet of 26 vessels, including 23 surface and saturation diving support vessels capable of operating in water depths of up to 1,000 feet as well as three shallow water pipelay vessels. Our fleet of diving support vessels comprises 15 surface diving support vessels capable of working in water depths up to 300 feet and eight saturation diving support vessels that typically work in water depths of 200 to 1,000 feet. Four of our saturation diving support vessels have DP capabilities.

 

The following table provides select information about each of the vessels we own:

 

 

 

 

In addition to our saturation diving vessels, we currently own nine portable saturation diving systems, including six acquired from Fraser Diving.

 

Pursuant to an agreed final judgment with the DOJ permitting us to complete the Acergy acquisition in November 2005, we agreed to divest ourselves of the Midnight Carrier, the Seaway Defender and a portable saturation diving system. We completed the sale of the portable saturation diving system and the Seaway Defender

during 2006, and as of December 31, 2006, the Midnight Carrier was held for sale. The Midnight Carrier was subsequently sold on January 26, 2007.

 

The Rider, Kestrel, Eclipse, Mystic Viking and Uncle John are subject to vessel mortgages securing our $250 million revolving credit facility. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Revolving Credit Facility.”

 

We incur routine drydock, inspection, maintenance and repair costs pursuant to U.S. Coast Guard regulations and in order to maintain our vessels in class under the rules of the applicable class society. For 2006, these costs were $18.9 million. These costs can fluctuate widely from year to year based on the number of vessels, the scope of the related work plan, availability of drydock capacity and general prevailing market conditions. In addition to complying with these requirements, we have our own vessel maintenance program that we believe permits us to continue to provide our customers with well maintained, reliable vessels. In the normal course of business, we charter other vessels on a short-term basis, such as tugboats, cargo barges, utility boats and dive support vessels.

 

The following table shows the historical size of our fleet and utilization of our vessels:

 

 

 

 

Our Facilities

 

Our corporate headquarters are located at 400 N. Sam Houston Parkway E., Suite 1000, Houston, Texas. Our primary subsea and marine services operations are based in Port of Iberia, Louisiana. All of our facilities are leased except for approximately 61/2 acres that are owned by us at our Port of Iberia, Louisiana facility. The remaining terms of these leases range from two to 14 years. Future minimum rentals under these non-cancelable leases are approximately $4.4 million at December 31, 2006, with $1.0 million due in 2007, $0.8 million in 2008, $0.6 million in 2009, $0.3 million in 2010, $0.3 million in 2011 and $1.4 million thereafter. Total rental expense under these operating leases was approximately $0.8 million, $0.7 million and $0.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

 

 

Insurance and Legal Proceedings

 

Our 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, fires and collisions. We insure against these risks at levels consistent with industry standards. We also carry workers’ compensation, maritime employer’s liability, general liability and other insurance customary in our business. All insurance is carried at levels of coverage and deductibles we consider financially prudent. Our services are provided in hazardous environments where accidents involving catastrophic damage or loss of life could occur, and litigation arising from such an event may result in our being named a defendant in lawsuits asserting large claims. Although there can be no assurance the amount of insurance we carry is sufficient to protect us fully in all events, or that such insurance will continue to be available at current levels of cost or coverage, we believe that our insurance protection is adequate for our business operations. A successful liability claim for which we are underinsured or uninsured could have a material adverse effect on our business, financial condition or results of operations.

 

We are 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. In addition, we from time to time incur other claims, such as contract disputes, in the normal course of business. Under our agreements with Helix, we have assumed and will indemnify Helix for liabilities related to our business.

 

By written consent dated December 9, 2006, Helix, as our sole stockholder at that time (a) approved our Amended and Restated Certificate of Incorporation, 2006 Long-Term Incentive Plan and Employee Stock Purchase Plan, and (b) elected the following additional members to our board of directors effective upon the closing of our initial public offering: William L. Transier, Todd A. Dittmann and David E. Preng. The following directors continue to serve on our board following this action: Owen E. Kratz, Martin R. Ferron and Quinn J. Hébert.

 

Our common stock began trading on the New York Stock Exchange under the symbol “DVR” on December 14, 2006. Prior to that, all of our common stock was held by Helix. The following table sets forth, for the periods indicated, the high and low closing sales price per share of our common stock:

 

 

As of February 23, 2007, there were approximately five registered stockholders (approximately 4,260 beneficial owners) of our common stock.

 

Dividend Policy

 

Other than dividends that we declared prior to the effectiveness of our initial public offering and paid to Helix in connection with our offering, we have not paid cash dividends on our common stock and do not anticipate paying any dividends on the shares of our common stock in the foreseeable future. We currently intend to retain earnings, if any, for the future operation and growth of our business. In addition, our financing arrangements prohibit the payment of cash dividends on our common stock. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Revolving Credit Facility.”

 

Use of Proceeds

 

On December 14, 2006, we commenced our initial public offering of our common stock, $.01 par value per share, pursuant to a Registration Statement on Form S-1 (File No. 333-134609), that was declared effective by the SEC on December 14, 2006. Under the registration statement, we registered 22,173,000 shares of our common stock at a maximum aggregate offering price of $288,249,000. In addition, the registration statement covered up to an additional 3,325,950 shares of our common stock to be sold by Helix solely to cover the underwriters’ over-allotment option. The underwriters did not exercise their over-allotment option and none of the 3,325,950 shares were sold. All 22,173,000 shares of common stock issued by us were sold at a price to the public of $13.00 per share and the offering closed on December 19, 2006. Banc of America Securities LLC and J.P. Morgan Securities Inc. were the representatives of the underwriters for the offering.

 

We received approximately $264.4 million in net proceeds (after approximately $23.8 million of total expenses) from the issuance and sale of 22,173,000 shares, all of which proceeds were distributed to Helix as a dividend. The following table sets forth the actual amount of expenses incurred on our behalf in connection with the initial public offering:

 

 

The historical financial and other data have been prepared on a combined basis from Helix’s consolidated financial statements using the historical results of operations and bases of the assets and liabilities of the shallow water marine contracting business of Helix and give effect to allocations of expenses from Helix. Our historical financial data will not necessarily be indicative of our future performance nor will such data necessarily reflect what

our consolidated and combined financial position and results of operations would have been had we operated as an independent publicly traded company during the periods shown.

 

We have prepared our consolidated and combined financial statements as if Cal Dive International, Inc. had been in existence as a separate company throughout all relevant periods. The consolidated and combined results of operations data and cash flow data for the years ended December 31, 2003, 2004, 2005 and 2006 and the consolidated and combined balance sheet data as of December 31, 2004, 2005 and 2006 presented below were derived from our audited consolidated and combined financial statements and the related notes thereto included elsewhere in this report. The consolidated and combined results of operations data and cash flow data for the year ended December 31, 2002 and the consolidated and combined balance sheet data as of December 31, 2002 and 2003 presented below were derived from our unaudited consolidated and combined financial statements.

 

The operating results of the acquired vessels from the Torch asset purchase are included in these historical consolidated and combined statements of operations since the acquisition date of August 31, 2005. The operating results of the assets acquired from Acergy during 2005 are included in the accompanying historical consolidated and combined statements of operations since the acquisition date of November 1, 2005. Our consolidated and combined statements of operations do not include the operating results of the DLB801 or the Kestrel prior to their acquisitions in January and March 2006, respectively. The operating results of the assets acquired from Fraser Diving are included in the accompanying historical consolidated and combined statements of operations since the acquisition date of July 31, 2006.

 

You should read the information contained in this table in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical audited consolidated and combined financial statements and the accompanying notes thereto of us included elsewhere in this report.

 

 

 

 

 

The following management discussion and analysis should be read in conjunction with our historical consolidated and combined financial statements and their notes included elsewhere in this report. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under Item 1A “Risk Factors‘ and elsewhere in this report.

 

Our Business

 

We generate revenue principally by providing marine contracting services to major and independent oil and natural gas producers, pipeline transmission companies and offshore engineering and construction firms. We perform our services under dayrate or qualified turnkey contracts that are typically awarded through a competitive bid process. Contract terms vary according to market conditions and services rendered. See Item 1 “Business — Contracting and Tendering.”

 

Major Influences on Results of Operations

 

Our business is substantially dependent upon the condition of the oil and natural gas industry and, in particular, the willingness of oil and natural gas companies to make capital expenditures for offshore exploration, drilling and production operations. The level of capital expenditures generally depends on the prevailing views of future oil and natural gas prices, which are influenced by numerous factors, including but not limited to:

 

 

The primary leading indicators we rely upon to forecast the performance of our business are crude oil and natural gas prices and drilling activity on the Gulf of Mexico OCS, as measured by mobile offshore rig counts. Demand for our services generally lags successful drilling activity by six to 18 months. In recent years, crude oil and natural gas prices have increased substantially, with the quarterly average of the NYMEX West Texas Intermediate (WTI) near month crude oil daily average contract price increasing from $28.91 per barrel in the second quarter of 2003 to a high of $70.70 per barrel in the second quarter of 2006 and the quarterly average of the Henry Hub natural gas daily average spot price increasing from $4.87 per one million British thermal units, or Mmbtu, in the third quarter of 2003 to a high of $12.31 per Mmbtu in the fourth quarter of 2005. However, oil and natural gas prices can be extremely volatile. As of December 31, 2006, the NYMEX WTI near month crude oil closing contract price was $61.05 and the Henry Hub natural gas closing spot price was $5.64. The majority of our customers on the Gulf of Mexico OCS are drilling for, producing and transporting natural gas. Therefore, we expect sustained directional changes in natural gas prices will have a greater impact on demand for our services than changes in crude oil prices. While U.S. natural gas prices generally declined in recent months primarily due to moderate weather and the restoration of shut-in Gulf of Mexico production, we believe long-term price trends will be driven by U.S. natural gas demand, the productivity of existing fields and new discoveries, and the availability of imports. From 2003 to 2005, the rig count on the Gulf of Mexico OCS increased more modestly than rig counts in other offshore regions due to the mobilization of rigs from the Gulf of Mexico to other regions and the impairment of offshore rigs caused by hurricane activity in the Gulf of Mexico in 2004 and 2005. While demand for our marine contracting services is typically highly correlated with offshore rig counts, increases in subsea project complexity and capital spending per

project as well as a sharp rise in the demand for hurricane-related repair work have been the primary drivers of the record utilization and day rates we have achieved recently across our fleet of vessels.

 

We believe vessel utilization is one of the most important performance measurements for our business. Utilization provides a good indication of demand for our vessels and, as a result, the contract rates we may charge for our services. As a marine contractor, our vessel utilization is typically lower during the first quarter, and to a lesser extent during the fourth quarter, due to winter weather conditions in the Gulf of Mexico. Accordingly, we normally plan our drydock inspections and other routine and preventive maintenance programs during this period. The bid and award process during the first two quarters typically leads to the commencement of construction activities during the second and third quarters. As a result, we have historically generated a majority of our revenues in the last six months of the year.

 

In recent periods, however, we have not experienced the typical seasonal trends in our business due to the impact of Hurricanes Ivan, Katrina and Rita in the Gulf of Mexico. The severe offshore infrastructure damage caused by these storms has generated significant year-round demand for our services from oil and gas companies trying to restore shut-in production as soon as possible. We believe this production restoration focus, along with the limited number of qualified marine contractors, has created a large backlog of platform installation and removal work. While many hurricane-related repairs have been completed, we believe much additional repair work is required to restore oil and natural gas production in the Gulf of Mexico to targeted levels.

 

The outlook for our business remains very favorable based on our projected demand for construction, inspection, maintenance and repair services in the Gulf of Mexico as well as our significant international growth opportunities; however, we expect that market conditions will ease from the peak levels experienced in recent quarters as the amount of hurricane-related repair activity moderates during 2007. As shown in the table below, during the fourth quarter of 2006 our average fleet utilization rate, while strong at 80%, was below the levels achieved in the fourth quarter of 2005 and the first three quarters of 2006. We believe that our fleet utilization and contract pricing will remain strong in 2007, but we expect they will continue to ease from the recent record levels. However, if future storms cause severe damage to Gulf of Mexico infrastructure, we would expect another sharp rise in the demand for our services.

 

The following table sets forth key indicators and performance metrics for our business:

 

 

 

 

Factors Impacting Comparability of Our Financial Results

 

Our historical results of operations for the periods presented may not be comparable with prior periods or to our results of operations in the future for the reasons discussed below.

 

Recent Acquisitions

 

In August 2005, we acquired six vessels and a portable saturation diving system from Torch at a cost of $26.2 million (including assets held for sale). In November 2005, we completed the acquisition of the diving and shallow water pipelay business of Acergy, which included seven diving support vessels, a portable saturation diving system, general diving equipment and operating bases located in Louisiana, at a purchase price of $42.9 million. Under the terms of the regulatory approval required to remedy certain anti-competitive effects of the Acergy and Torch acquisitions alleged by the DOJ, we were required to divest two diving support vessels and a portable saturation diving system from the combined acquisitions. We completed the sale of the portable saturation diving system and one diving support vessel in 2006, and completed the sale of the second diving support vessel in January 2007. In addition, we acquired the DLB801 from Acergy for $38.0 million in January 2006. We subsequently sold a 50% interest in the vessel in January 2006 for approximately $19.0 million and entered into a 10-year charter lease agreement with the purchaser. The lessee has an option to purchase the remaining 50% interest in the vessel beginning in January 2009. We also acquired the Kestrel from Acergy for approximately $39.9 million in March 2006. Going forward, we believe these acquired assets will be significant contributors to our financial results.

 

In July 2006, we completed the purchase of the business of Singapore-based Fraser Diving, which includes six portable saturation diving systems and 15 surface diving systems operating primarily in the Middle East, Southeast Asia and Australia, for an aggregate purchase price of approximately $29.3 million, subject to post-closing adjustments.

 

Our Relationship with Helix

 

Our consolidated and combined financial statements have been derived from the financial statements and accounting records of Helix using the historical results of operations and historical bases of assets and liabilities of our business. Certain management, administrative and operational services of Helix have been shared between Helix’s shallow water marine contracting business and other Helix business segments for all periods presented. For purposes of financial statement presentation, the costs included in our consolidated and combined statements of operations for these shared services have been allocated to us based on actual direct costs incurred, headcount, work hours or revenues. We and Helix consider these allocations to be a reasonable reflection of our respective utilization of services provided. Our expenses as a separate, stand-alone company may be higher or lower than the amounts reflected in the consolidated and combined statements of operations. Pursuant to the Corporate Services Agreement between Helix and us, we are required to utilize these services from Helix in the conduct of our business until such time as Helix owns less than 50% of the total voting power of our common stock. Additionally, Helix primarily used a centralized approach to cash management and the financing of its operations. Accordingly, all related acquisition activity between Helix and us and all other cash transactions for the period prior to our initial public offering have been reflected in our stockholders’ equity as Helix’s net investment.

 

We believe the assumptions underlying the consolidated and combined financial statements are reasonable. However, the effect of these assumptions, the separation from Helix and our operating as a standalone public entity could impact our results of operations and financial position prospectively by increasing expenses in areas that include but are not limited to litigation and other legal matters, compliance with the Sarbanes-Oxley Act and other corporate compliance matters, insurance and claims management and the related cost of insurance, as well as general overall purchasing power.

 

Critical Accounting Estimates and Policies

 

Our accounting policies are described in the notes to our audited consolidated and combined financial statements included elsewhere in this report. We prepare our financial statements in conformity with GAAP. Our results of operations and financial condition, as reflected in our financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of our business and our customers. We believe the most critical accounting policies in this regard are those described below. While these issues require us to make judgments that are somewhat subjective, they are generally based on a significant amount of historical data and current market data.

 

Revenue Recognition

 

Revenues are derived from contracts that are typically of short duration. These contracts contain either lump-sum turnkey provisions or provisions for specific time, material and equipment charges, which are billed in accordance with the terms of such contracts. We recognize revenue as it is earned at estimated collectible amounts.

 

Revenues generated from specific time, materials and equipment contracts are generally earned on a dayrate basis and recognized as amounts are earned in accordance with contract terms. In connection with these contracts, we may receive revenues for mobilization of equipment and personnel. In connection with new contracts, revenues related to mobilization are deferred and recognized over the period in which contracted services are performed using the straight-line method. Incremental costs incurred directly for mobilization of equipment and personnel to the contracted site, which typically consist of materials, supplies and transit costs, are also deferred and recognized over the period in which contracted services are performed using the straight-line method. Our policy to amortize the revenues and costs related to mobilization on a straight-line basis over the estimated contract service period is consistent with the general pace of activity, level of services being provided and dayrates being earned over the service period of the contract. Mobilization costs to move vessels when a contract does not exist are expensed as incurred.

 

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. In determining whether a contract should be accounted for using the percentage-of-completion method, we consider whether:

 

 

Under the percentage-of-completion method, we recognize estimated contract revenue based on costs incurred to date as a percentage of total estimated costs. Changes in the expected cost of materials and labor, productivity, scheduling and other factors affect the total estimated costs. Additionally, external factors, including weather or other factors outside of our control, may also affect the progress and estimated cost of a project’s completion and, therefore, the timing of income and revenue recognition. We routinely review estimates related to our contracts and reflect revisions to profitability in earnings on a current basis. If a current estimate of total contract cost indicates an ultimate loss on a contract, we recognize the projected loss in full when it is first determined. We recognize additional contract revenue related to claims when the claim is probable and legally enforceable.

 

Unbilled revenue represents revenue attributable to work completed prior to period end that has not yet been invoiced. All amounts included in unbilled revenue at December 31, 2006 are expected to be billed and collected within one year.

 

Accounts Receivable and Allowance for Uncollectible Accounts

 

Accounts receivable are stated at the historical carrying amount net of write offs and allowance for uncollectible accounts. We establish an allowance for uncollectible accounts receivable based on historical experience and any specific customer collection issues that we have identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when we have determined the balance will not be collected.

 

Related Party Cost Allocations

 

Helix has provided us certain management and administrative services including: accounting, treasury, payroll and other financial services; legal and related services; information systems, network and communication services; employee benefit services (including direct third party group insurance costs and 401(k) contribution matching costs of $5.8 million, $3.3 million and $2.5 million for the years ended December 31, 2006, 2005 and 2004, respectively); and corporate facilities management services. Total allocated costs from Helix for such services were approximately $16.5 million, $8.5 million and $7.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. These costs have been allocated based on headcount, work hours and revenues, as applicable.

 

We provide Helix operational and field support services including: training and quality control services; marine administration services; supply chain and base operation services; environmental, health and safety services; operational facilities management services; and human resources. Total allocated cost to Helix for such services were approximately $5.6 million, $4.1 million and $3.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. These costs have been allocated based on headcount, work hours and revenues, as applicable.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is provided primarily on the straight-line method over the estimated useful life of the asset. Our estimates of useful lives of our assets are as follows: vessels — 15 to 20 years; portable saturation diving systems, machinery and equipment — five to 10 years; and buildings and leasehold improvements — four to 20 years.

 

For long-lived assets to be held and used, excluding goodwill, we base our evaluation of recoverability on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. Our marine vessels are assessed on a vessel-by-vessel basis. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on management’s estimate of discounted cash flows. We recorded no impairment charges in 2006, and $790,000 and $3.9 million in 2005 and 2004, respectively, on certain vessels that met the impairment criteria. The assets impaired in 2005 were subsequently sold in 2006 and 2005 for an aggregate gain on the disposals of approximately $322,000.

 

Assets are classified as held for sale when we have a plan for disposal of certain assets and those assets meet the held for sale criteria. At December 31, 2006 and 2005, we classified certain assets intended to be disposed of within a 12-month period as assets held for sale totaling $0.7 million and $7.9 million, respectively. The asset held for sale at December 31, 2006 was sold in January 2007 for its carrying amount.

 

Recertification Costs and Deferred Drydock Charges

 

Our vessels are required by regulation to be recertified after certain periods of time. These recertification costs are incurred while the vessel is in drydock. In addition, routine repairs and maintenance are performed and, at times, major replacements and improvements are performed. We expense routine repairs and maintenance as they are incurred. We defer and amortize drydock and related recertification costs over the length of time for which we

expect to receive benefits from the drydock and related recertification, which is generally 30 months. Vessels are typically available to earn revenue for the 30-month period between drydock and related recertification processes. A drydock and related recertification process typically lasts one to two months, a period during which the vessel is not available to earn revenue. Major replacements and improvements, which extend the vessel’s economic useful life or functional operating capability, are capitalized and depreciated over the vessel’s remaining economic useful life. Inherent in this process are estimates we make regarding the specific cost incurred and the period that the incurred cost will benefit.

 

As of December 31, 2006 and 2005, capitalized deferred drydock charges (included in other assets, net) totaled $20.1 million and $8.3 million, respectively. During the years ended December 31, 2006, 2005 and 2004, drydock amortization expense was $7.1 million, $5.5 million and $4.3 million, respectively. We expect drydock amortization expense to increase in future periods since the size of our fleet has increased significantly and there was only limited amortization expense associated with the vessels we acquired in the Torch and Acergy acquisitions during the year ended December 31, 2006.

 

Goodwill

 

We test for the impairment of goodwill on at least an annual basis. We test for the impairment of other intangible assets when impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions are present. Our goodwill impairment test involves a comparison of the fair value with its carrying amount. The fair value is determined using discounted cash flows and other market-related valuation models. We completed our annual goodwill impairment test as of November 1, 2006. At December 31, 2006 and 2005, we had goodwill of $26.7 million and $27.8 million, respectively. None of our goodwill was impaired based on the impairment test performed as of November 1, 2006. We will continue to test our goodwill annually on a consistent measurement date unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

Equity Investment

 

In July 2005, we acquired a 40% minority ownership interest in OTSL, a Trinidad and Tobago entity, in exchange for our DP DSV Witch Queen. Our investment in OTSL totaled $10.9 million and $11.5 million as of December 31, 2006 and 2005, respectively. We periodically review the investment in OTSL for impairment. Recognition of a loss would occur when the decline in an investment is deemed other than temporary. In determining whether the decline is other than temporary, we consider the cyclical nature of the industry in which the investment operates, its historical performance, its performance in relation to peers and the current economic environment. OTSL has generated net operating losses during 2006 which is an impairment indicator. As a result, we evaluated this investment to determine whether a permanent loss in value had occurred. To determine whether OTSL had the ability to sustain an earnings capacity that would justify the carrying amount of the investment, we determined the current fair value of the investment utilizing a discounted cash flow valuation model to compute the fair value and compared this to its carrying amount. Based on this evaluation, OTSL currently has the ability to sustain an earnings capacity which would justify the carrying amount of the investment. The fair value computed using the discounted cash flow model supports the determination that the existence of operating losses during 2006 is not indicative of a permanent loss in value, and as a result there is no impairment at December 31, 2006.

 

Earnings per Share

 

Basic earnings per share (“EPS”) is computed by dividing the net income available to common stockholders by the weighted-average shares of outstanding common stock. The calculation of diluted EPS is similar to basic EPS, except the denominator includes dilutive common stock equivalents and the income included in the numerator excludes the effects of the impact of dilutive common stock equivalents, if any. Basic and diluted earnings per share for the respective periods were the same. We granted 618,321 restricted shares to certain officers and employees in December 2006 which were anti-dilutive in this calculation.

 

Income Taxes

 

Prior to December 14, 2006, our operations are included in a consolidated federal income tax return filed by Helix. We will file our own short period return for the period December 14, 2006 through the end of fiscal year 2006.

However, for financial reporting purposes, our provision for income taxes has been computed as if we completed and filed separate federal income tax returns except that all tax benefits recognized on employee stock plans are retained by Helix. Deferred income taxes are based on the differences between financial reporting and tax bases of assets and liabilities. We utilize 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. Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized.

 

Workers’ Compensation Claims

 

Our onshore employees are covered by workers’ compensation. Offshore employees, including divers, tenders and marine crews, are covered by our maritime employers liability insurance policy, which covers Jones Act exposures. We incur workers’ compensation claims in the normal course of business, which management believes are substantially covered by insurance. We, together with our insurers and legal counsel, analyze each claim for potential exposure and estimate the ultimate liability of each claim.

 

Stock-Based Compensation Plans

 

Until December 2006, we had no stock-based compensation plans; however, prior to then certain of our employees participated in Helix’s stock-based compensation plans. Helix used the intrinsic value method of accounting for its stock-based compensation programs through December 31, 2005. Accordingly, prior to January 1, 2006, no compensation expense was recognized by Helix or us if the exercise price of an employee stock option was equal to the common share market price on the grant date. All tax benefits recognized on employee stock plans are retained by Helix. See “— Recently Issued Accounting Principles.”

 

On December 9, 2006, our board of directors adopted, and Helix, as our sole stockholder at that time, approved, the Cal Dive International, Inc. 2006 Long-Term Incentive Plan. Under this plan, we may issue up to 7,000,000 shares of our common stock to our officers, employees and non-employee directors as restricted stock, restricted stock units or stock options. On December 19, 2006 in connection with the closing of our initial public offering, our board granted an aggregate of 618,321 shares of restricted stock to certain of our officers and employees. The shares generally vest in equal increments over a two-year or five-year period, depending on the specific award. The market value of the restricted stock was $13.00 per share, or $8,038,173, at the date of grant.

 

Major Customers and Concentration of Credit Risk

 

Our customers consist primarily of major and independent oil and natural gas producers, pipeline transmission companies and offshore engineering and construction firms. The capital expenditures of our customers are generally dependent on their views of future oil and gas prices and successful offshore drilling activity. We perform ongoing credit evaluations of our customers and provide allowances for probable credit losses when necessary. The percent of revenue of major customers was as follows: 2006 — Chevron (15.6%); 2005 — BP (13%) and Lighthouse R&D Enterprises (11%); and 2004 — Lighthouse R&D Enterprises (12%) and Shell (11%).

 

Recently Issued Accounting Principles

 

In December 2004, the FASB issued SFAS No. 123R, which replaces SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim period in fiscal 2006, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Along with Helix, we adopted SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, we use the Black-Scholes fair value model for valuing share-based payments and recognize compensation cost on a straight-line basis over the respective vesting period. We selected the modified-prospective method of adoption, which requires that compensation expense be recorded for all unvested stock options and restricted stock beginning in 2006 as the requisite service is rendered. In addition to the compensation cost recognition requirements, SFAS No. 123R also requires the tax deduction benefits for an award in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow, which was required under SFAS No. 95,

Statement of Cash Flows. The adoption did not have a material impact on our consolidated and combined results of operations and cash flows.

 

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109‘ (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). FIN 48 clarifies the application of SFAS No. 109 by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. Additionally, FIN 48 provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We adopted the provisions of FIN 48. The impact of the adoption of FIN 48 was immaterial to our consolidated and combined financial position, results of operations and cash flows.

 

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. (“SFAS No. 157”) defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, of this statement.

 

Results of Operations

 

Comparison of Years Ended 2006 and 2005

 

Revenues.  For the year ended December 31, 2006, our revenues increased 127% to $509.9 million, compared to $224.3 million for the year ended December 31, 2005. This increase was primarily a result of the Torch and Acergy acquisitions in the third and fourth quarters of 2005, respectively. Revenues derived from assets purchased in these acquisitions were $237.2 million in the year ended December 31, 2006 compared to $28.7 million in 2005. In addition, the increase was due to improved market demand, much of which was the result of infrastructure damage caused by recent hurricanes in the Gulf of Mexico. This resulted in significantly improved utilization rates (91% in 2006 as compared to 79% in 2005) and an overall increase in pricing for our services.

 

Gross profit.  Gross profit for the year ended December 31, 2006 increased 210% to $222.5 million, compared to $71.7 million for the year ended December 31, 2005. This increase was attributable to additional gross profit derived from the Torch and Acergy acquisitions, improved utilization rates and increased average contract pricing. Gross profit derived from assets purchased in these acquisitions was $118.0 million in 2006 compared to $11.1 million in 2005. Gross margins increased to 44% for the year ended December 31, 2006 from 32% in the year ended December 31, 2005 due to the factors noted above.

 

Selling and administrative expenses.  Selling and administrative expenses of $37.4 million for the year ended December 31, 2006 were $20.7 million higher than the $16.7 million incurred in the year 2005 primarily due to additional administrative and sales personnel hired to support the acquired Torch and Acergy vessels in the third and fourth quarters of 2005, respectively. Selling and administrative expenses were 7.3% of revenues for the year ended December 31, 2006, and 7.5% of revenues for the year ended December 31, 2005.

 

Income taxes.  Income taxes increased to $65.7 million for the year ended December 31, 2006, compared to $20.4 million in the year ended December 31, 2005, primarily due to increased profitability. The effective tax rate for the respective periods was 35.5% for 2006 and 35.1% for 2005.

 

Net Income.  Net income of $119.4 million for 2006 was $81.7 million greater than 2005 as a result of the factors described above.

 

Comparison of Years Ended 2005 and 2004

 

Revenues.  For the year ended December 31, 2005, our revenues increased 78% to $224.3 million, compared to $125.8 million for the year ended December 31, 2004. This increase was primarily due to improved market demand, much of which was the result of infrastructure damage caused by recent hurricanes in the Gulf of Mexico. This resulted in significantly improved utilization rates (79% in 2005 as compared to 63% in 2004) and an overall increase in pricing for our services. In addition, revenues increased in 2005 compared with 2004 as a result of the Torch and Acergy acquisitions in the third and fourth quarters of 2005, respectively, with much of the impact of the acquisitions occurring in the fourth quarter. Revenues derived from assets purchased in these acquisitions were $28.7 million in 2005.

 

Gross profit.  Gross profit for the year ended December 31, 2005 increased 196% to $71.7 million, compared to $24.2 million for the year ended December 31, 2004. The increase was primarily due to improved utilization rates, increased average contract pricing and additional gross profit derived from the Torch and Acergy acquisitions. Gross profit derived from assets purchased in these acquisitions was $11.1 million in 2005. Gross profit in 2005 and 2004 was negatively impacted by asset impairments on certain vessels totaling $0.8 million and $3.9 million, respectively, for conditions meeting our asset impairment criteria. Gross margins increased to 32% in 2005 from 19% in 2004 due to the factors noted above.

 

Selling and administrative expenses.  Selling and administrative expenses of $16.7 million for the year ended December 31, 2005 were $4.4 million higher than the $12.3 million incurred in 2004 due to additional administrative and sales personnel hired to support the acquired Torch and Acergy vessels in the third and fourth quarter of 2005, respectively, and increased incentive compensation as a result of increased profitability. Selling and administrative expenses were 7% of revenues in 2005, compared to 10% of revenues in 2004, due to the significant increase in revenue from 2004 to 2005.

 

Income taxes.  Income taxes increased to $20.4 million for the year ended December 31, 2005, compared to $4.2 million in 2004, primarily due to increased profitability. The effective tax rate was 35.1% for 2005 and 35.4% for 2004.

 

Net Income.  Net income of $37.7 million for 2005 was $30.1 million greater than 2004 as a result of the factors described above.

 

Liquidity and Capital Resources

 

We require capital to fund ongoing operations, organic growth initiatives and acquisitions. Our working capital requirements and funding for maintenance capital expenditures, strategic investments and acquisitions have historically been part of the corporate-wide cash management program of Helix. As a part of such program, Helix swept all available cash from our operating accounts periodically and did so on the day immediately prior to the effectiveness of our initial public offering. Subsequent to the offering, we are solely responsible for the provision of funds to finance our working capital and other cash requirements.

 

Our primary sources of liquidity are cash flows generated from our operations, available cash and cash equivalents and availability under a revolving credit facility we secured prior to completion of our offering. We intend to use these sources of liquidity to fund our working capital requirements, maintenance capital expenditures, strategic investments and acquisitions. In connection with our business strategy, we regularly evaluate acquisition opportunities, including vessels and marine contracting businesses. We believe that our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth. We expect to be able to fund our activities for 2007 with cash flows generated from our operations and available borrowings under our revolving credit facility.

 

In November 2006, we entered into a five-year $250 million revolving credit facility with certain financial institutions. The loans mature in November 2011. On December 8, 2006, we borrowed $79 million under the revolving credit facility and distributed $78 million of those proceeds to Helix as a dividend. On December 21, 2006, we borrowed an additional $122 million under the revolving credit facility, which was distributed to Helix as a dividend. At December 31, 2006, we had outstanding debt of $201 million and accrued interest of $543,000 under this credit facility. At February 23, 2007, we had outstanding debt of $175 million under the facility. We may pay down or borrow from this revolving credit facility as business needs merit. See “Revolving Credit Facility.”

 

Cash Flows

 

Operating activities.  Cash flow from operating activities was $86.4 million during 2006, an increase of $54.2 million from the $32.2 million provided during the year ended December 31, 2005. The primary driver of this increase was net income, which rose to $119.4 million during the year ended December 31, 2006 from $37.7 million during the year ended December 31, 2005. However, increases in accounts receivable of $38.1 million negatively impacted cash flow from operations. This change in accounts receivable was primarily the result of the Torch and Acergy acquisitions as well as higher vessel utilization and higher contract rates for our services.

 

Cash flow from operating activities was $32.2 million during 2005, an increase of $3.6 million from the $28.6 million generated during 2004. While net income for 2005 increased to $37.7 million from $7.7 million in

2004, this increase in profitability was offset by a $55.3 million increase in accounts receivable. Cash flow from operating activities was positively impacted by an increase in accounts payable and accrued liabilities of $46.4 million. The increases in accounts receivable and accounts payable were primarily due to the Torch and Acergy acquisitions, higher vessel utilization and larger incentive compensation accruals resulting from increased profitability. In addition, cash flow from operating activities was negatively impacted by an increase in non-current assets of $6.4 million primarily due to cash expenditures for regulatory vessel drydocks.

 

Investing Activities.  Investing activities consist principally of strategic business and asset acquisitions, capital improvements to existing vessels and purchases of operations support facilities and equipment. Net cash used in investing activities was $121.2 million, $79.5 million and $2.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.

 

We incurred $121.3 million for capital expenditures and business acquisitions net of proceeds from property sales of $16.9 million for the year ended December 31, 2006, compared to capital expenditures of $76.4 million net of proceeds from property sales of $3.0 million during the year ended December 31, 2005. Acquisitions and capital expenditures in the year ended December 31, 2006 included the purchases of the DLB801 in January 2006 for approximately $38.0 million, the Kestrel in March 2006 for approximately $39.9 million and the completion of the Fraser Diving acquisition for $22.0 million (net of $2.3 million of cash acquired and $5.0 million of purchase consideration paid 2005) as well as $38.1 million primarily related to vessel upgrades, equipment purchases and leasehold improvements.

 

We incurred $76.4 million for capital expenditures and business acquisitions during 2005, net of proceeds from sale of property, compared to $2.9 million during 2004. The 2005 capital acquisitions and expenditures included $42.9 million for the Acergy acquisition, $26.2 million for the acquisition of the Torch assets (including assets held for sale), and $10.0 million primarily related to vessel upgrades.

 

Financing activities.  We historically operated within Helix’s corporate cash management program. We financed seasonal operating requirements through Helix’s internally generated funds and borrowings under credit facilities on a consolidated basis. Net cash flows provided by operating activities are reflected as cash transfers to Helix. Net cash flows used by investing activities are reflected as cash transfers from Helix.

 

Capital Expenditures

 

We incur capital expenditures for recertification costs relating to regulatory drydocks as well as costs for major replacements and improvements, which extend the vessel’s economic useful life. Capital expenditures incurred for these activities in 2006 include $18.9 million for recertification costs and $35.5 million relating to steel replacement and vessel improvement costs. Capital expenditures planned for 2007 include $29.7 million for recertification costs and $27.7 million for vessel improvements, equipment purchases and operating lease improvements. We also incur capital expenditures for strategic investments and acquisitions. During the year ended December 31, 2006, we incurred $39.9 million for the purchase of the Kestrel and $38.0 million for the purchase of the DLB801.  In July 2006, we completed the Fraser Diving acquisition for an aggregate purchase price of approximately $29.3 million, subject to post-closing adjustments. We have also incurred $4.0 million to purchase a portable saturation diving system which we expect to put into service by the end of 2007.

 

Revolving Credit Facility

 

We, along with CDI Vessel Holdings LLC, or Vessel, one of our subsidiaries that acted as borrower, have entered into a secured credit facility with Bank of America, N.A., as administrative agent, J.P. Morgan Securities Inc. and Banc of America Securities LLC, as joint lead arrangers, and other financial institutions as lenders and ancillary agents identified therein, pursuant to which Vessel may have outstanding at any one time up to $250 million in revolving loans under a five-year revolving credit facility. The loans mature in November 2011. The following is a summary description of the terms of the credit agreement and other loan documents.

 

Loans under the revolving credit facility may consist of loans bearing interest in relation to the Federal Funds Rate or to Bank of America’s base rate, known as Base Rate Loans, and loans bearing interest in relation to a LIBOR rate, known as LIBOR Rate Loans. Assuming there is no event of default, Base Rate Loans will bear interest at a per annum rate equal to the base rate plus a margin ranging from 0% to 0.5%, while LIBOR Rate Loans will bear interest at the LIBOR rate plus a margin ranging from 0.625% to 1.75%. In addition, a commitment fee ranging from 0.20% to 0.375% will be payable on the portion of the lenders’ aggregate commitment which from time to

time is not used for a borrowing or a letter of credit. Margins on the loans and the commitment fee will fluctuate in relation to our consolidated leverage ratio as provided in the credit agreement.

 

The credit agreement and the other documents entered into in connection with the credit agreement include terms and conditions, including covenants, that we consider customary for this type of transaction. The covenants include restrictions on our and our subsidiaries’ ability to grant liens, incur indebtedness, make investments, merge or consolidate, sell or transfer assets and pay dividends. In addition, the credit agreement obligates us to meet minimum financial requirements of EBITDA to fixed charges, funded debt to EBITDA, collateral value to outstanding loans and other specified obligations of us to the lenders and limitations on amount of capital expenditures incurred. The credit facility is secured by vessel mortgages on five of our vessels with an aggregate book value of $120.7 million, a pledge of all of the stock of all of our domestic subsidiaries and 66% of the stock of one of our foreign subsidiaries, and a security interest in, among other things, all of our equipment, inventory, accounts and general intangible assets. At December 31, 2006, we were in compliance with all debt covenants.

 

On December 8, 2006, Vessel borrowed $79 million under the revolving credit facility and distributed $78 million of those proceeds to Helix as a dividend. On December 21, 2006, Vessel borrowed another $122 million under the revolving credit facility, which was distributed to Helix as a dividend. At December 31, 2006 there was $49 million available under the revolving credit facility, and at February 23, 2007 there was $75 million available under the facility. We expect to use the remaining availability under the revolving credit facility for working capital and other general corporate purposes.

 

Contractual and Other Obligations

 

The Company leases several facilities and accommodations for certain employees located outside the U.S. under noncancelable operating leases. Future minimum rentals under these leases are approximately $5.2 million at December 31, 2006, with $1.4 million due in 2007, $1.0 million in 2008, $0.8 million in 2009, $0.4 million in 2010, $0.3 million in 2011 and $1.3 million thereafter. Total rental expense under these operating leases was approximately $1.0 million, $0.7 million and $0.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

 

In September 2006 the Company chartered a vessel for one year for use in the Middle East region. At December 31, 2006, the remaining charter commitment is $14.6 million. Expenses for this charter for the year ended December 31, 2006 were $2.2 million.

 

At December 31, 2006, our contractual obligations for long-term debt and payables and operating leases were as follows:

 

Off-Balance Sheet Arrangements

 

As of December 31, 2006, we have no off-balance sheet arrangements. For information regarding our principles of consolidation, see Note 1 to our consolidated and combined financial statements.

 

 

Market Risk Management

 

We could be exposed to market risk related to interest rates in the future. We have approximately $201 million outstanding under our revolving credit facility as of December 31, 2006. Changes based on the floating interest rates under this facility could result in an increase or decrease in our annual interest expense and related cash outlay.

 

INDEX TO FINANCIAL STATEMENTS

 

 

The Board of Directors and Stockholders of

Cal Dive International, Inc.

 

We have audited the accompanying consolidated and combined balance sheets of Cal Dive International, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated and combined statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

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

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated and combined financial position of Cal Dive International, Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated and combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 2 to the consolidated and combined financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.”

 

 

Houston, Texas

February 28, 2007

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED AND COMBINED BALANCE SHEETS

 

 

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

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

 

 

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

CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY