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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the quarterly period ended March 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _____________ to ______________
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Commission File Number: 0-22739
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Cal Dive International, Inc.
(Exact Name of Registrant as Specified in its Charter)
Minnesota 95-3409686
(State of Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
400 N. Sam Houston Parkway E.
Suite 400
Houston, Texas 77060
(Address of Principal Executive Offices)
(281) 618-0400
(Registrants telephone number,
Including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13(b) or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
At May 4, 1998 there were 14,544,831 shares of common stock, no par value
outstanding.
CAL DIVE INTERNATIONAL, INC.
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997........................1
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and
March 31, 1997...........................................2
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and
March 31, 1997...........................................3
Notes to Consolidated Financial Statements.......................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................6
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K........................9
Signatures......................................................10
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, Dec. 31,
1998 1997
--------- ---------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 11,171 $ 13,025
Accounts receivable --
Trade, net of revenue allowance
on gross amounts billed of
$1,220 (unaudited) and $1,822 .......... 21,877 23,856
Unbilled .................................... 8,508 8,134
Other current assets ............................. 8,123 4,947
--------- ---------
Total current assets ......................... 49,679 49,962
--------- ---------
PROPERTY AND EQUIPMENT ............................... 100,245 89,499
Less - Accumulated depreciation .................. (22,001) (20,021)
--------- ---------
78,244 69,478
--------- ---------
OTHER ASSETS:
Cash deposits restricted for salvage
operations .................................. 5,749 5,670
Other assets, net ................................ 6,635 490
--------- ---------
$ 140,307 $ 125,600
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 18,341 $ 12,919
Accrued liabilities .............................. 5,552 7,514
Income taxes payable ............................. 1,516 602
--------- ---------
Total current liabilities ................... 25,409 21,035
LONG-TERM DEBT ....................................... 0 0
DEFERRED INCOME TAXES ................................ 9,945 8,745
DECOMMISSIONING LIABILITIES .......................... 10,226 6,451
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par, 60,000 shares
authorized, 21,355 and 21,345 shares issued
and outstanding ............................. 52,947 52,832
Retained earnings ................................ 45,531 40,288
Treasury stock, 6,821 shares, at cost ............ (3,751) (3,751)
--------- ---------
Total shareholders' equity .................. 94,727 89,369
--------- ---------
$ 140,307 $ 125,600
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
- 1 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
-------------------------
1998 1997
-------- -------
(unaudited)
NET REVENUES:
Subsea and salvage ....................... $ 29,342 $13,588
Natural gas and oil production ........... 3,815 4,856
-------- -------
33,157 18,444
COST OF SALES:
Subsea and salvage ....................... 20,394 10,780
Natural gas and oil production ........... 2,200 2,241
-------- -------
Gross profit ........................ 10,563 5,423
-------- -------
SELLING AND ADMINISTRATIVE EXPENSES:
Selling expenses ......................... 317 362
Administrative expenses .................. 2,523 1,854
-------- -------
Total selling and
administrative expenses ........... 2,840 2,216
-------- -------
INCOME FROM OPERATIONS ....................... 7,723 3,207
OTHER INCOME AND EXPENSE:
Interest (income) expense, net ........... (222) 318
Other (income) expense, net .............. (120) 13
-------- -------
INCOME BEFORE INCOME TAXES ................... 8,065 2,876
Provision for income taxes ............... 2,822 991
-------- -------
NET INCOME ................................... $ 5,243 $ 1,885
======== =======
EARNINGS PER COMMON SHARE:
Basic .................................... $ 0.36 $ 0.17
Diluted .................................. $ 0.35 $ 0.17
======== =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic .................................... 14,535 11,099
Diluted .................................. 15,000 11,272
======== =======
The accompanying notes are an integral part
of these consolidated financial statements.
- 2 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended March 31,
-----------------------
1998 1997
-------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 5,243 $ 1,885
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization ........... 1,996 1,845
Deferred income taxes ................... 1,200 500
Changes in operating assets and liabilities:
Accounts receivable, net ................ 1,605 9,215
Other current assets .................... (3,176) (685)
Accounts payable and accrued liabilities 3,460 (3,210)
Income taxes payable/receivable ......... 914 419
Other non-current, net .................. (1,273) 84
-------- --------
Net cash provided by operating
activities .......................... 9,969 10,053
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................... (6,789) (3,017)
Investment in Aquatica, Inc. ................. (5,000) 0
Purchase of deposits restricted for
salvage operations ......................... (79) (131)
-------- --------
Net cash used in investing
activities .......................... (11,868) (3,148)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options .................... 45 0
Repayments of long-term debt ................. 0 (6,000)
-------- --------
Net cash provided by (used in) financing
activities .......................... 45 (6,000)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................... (1,854) 905
CASH AND CASH EQUIVALENTS:
Balance, beginning of period ................. 13,025 204
-------- --------
Balance, end of period ....................... $ 11,171 $ 1,109
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
- 3 -
CAL DIVE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Cal Dive
International, Inc. (Cal Dive or the Company) and its wholly owned subsidiaries,
Energy Resource Technology, Inc. and Cal Dive Offshore, Ltd. All significant
intercompany accounts and transactions have been eliminated. These financial
statements are unaudited and have been prepared pursuant to instructions for the
Quarterly Report on Form 10-Q required to be filed with the Securities and
Exchange Commission and do not include all information and footnotes normally
included in financial statements prepared in accordance with generally accepted
accounting principles.
Management has reflected all adjustments (which were normal recurring
adjustments) which it believes are necessary for a fair presentation of the
consolidated balance sheets, results of operations, and cash flows, as
applicable. Operating results for the periods ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K.
NOTE 2 - INVESTMENT IN AQUATICA, INC.
In February 1998, CDI purchased a significant minority equity interest in
Aquatica, Inc. for $5 million, in addition to a commitment to lend additional
funds of up to $5 million to allow Aquatica to purchase vessels and fund other
growth opportunities. Aquatica, Inc., headquartered in Lafayette, Louisiana, is
a surface diving company founded in October 1997 with the acquisition of
Acadiana Divers, a 15 year old surface diving company. Dependent upon various
preconditions, as defined, the shareholders of Aquatica, Inc. have the right to
convert their shares into Cal Dive shares at a ratio based on a formula which,
among other things, values their interest in Aquatica, Inc. and must be
accretive to Cal Dive shareholders. CDI will account for this investment on the
equity basis of accounting for financial reporting purposes.
NOTE 3 - ACQUISITION OF OFFSHORE BLOCKS
In January 1998, ERT acquired interests in six blocks involving two separate
fields (a 55% interest in East Cameron 231 and a 10% interest in East Cameron
353) from Sonat Exploration Company ("Sonat"). The properties were purchased in
exchange for cash of $1 million, as well as assumption of Sonat's pro rata share
of the related decommissioning liability.
- 4 -
NOTE 4 - CHANGE IN ACCOUNTING POLICY
Effective January 1, 1998, the Company changed its method of accounting
for regulatory (U.S. Coast Guard, American Bureau of Shipping and Det Norske
Veritas) related drydock inspection and certification expenditures. This change
was made due to the significant changes in the composition of the Company's
fleet which has been expanded to include more sophisticated dynamically
positioned vessels that are capable of working in the deepwater Gulf of Mexico,
a key to Cal Dive's operating strategy. The change also coincides with the first
time these vessels were due for drydock inspection and certification since being
acquired by CDI. The Company previously expensed inspection and certification
costs as incurred; however, effective January 1, 1998, such expenditures will be
capitalized and amortized over the 30-month period between regulatory mandated
drydock inspections and certification. This predominant industry practice
provides better matching of expenses with the period benefited (i.e.,
certification to operate the vessel for a 30-month period between required
drydock inspections and to meet bonding and insurance coverage requirements).
This change had an $800,000 positive impact on net income, or $0.05 per share,
in the Company's first quarter 1998 consolidated financial statements. The
cumulative effect of this change in accounting principle is immaterial to the
Company's consolidated financial statements taken as a whole.
- 5 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report on Form 10-Q may contain or incorporate by reference
certain forward-looking statements, including by way of illustration and not of
limitation, statements relating to liquidity, margins, the Company's business
strategy, plans for future operations, and the industry conditions. The Company
strongly encourages readers to note that some or all of the assumptions, upon
which such forward-looking statements are based, are beyond the Company's
ability to control or estimate precisely, and may in some cases be subject to
rapid and material changes. Accordingly, evaluation of future prospects of the
Company must be made with caution when relying on forward-looking information.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. During the three months ended March 31, 1998, the Company's
revenues increased 80% to $33.2 million compared to $18.4 million for the three
months ended March 31, 1997 with the Subsea and Salvage segment contributing all
of the increase. The majority of the increase was due to increased demand for
services provided by CDI's DP vessels, particularly the UNCLE JOHN which
contributed nearly half of the increase compared to the first quarter of 1997
when the vessel was out of service for six weeks to have its derrick installed.
The chartering of the MARIANOS during the three months ended March 31, 1998
contributed $3.9 million as the vessel filled in while the WITCH QUEEN was in
drydock for scheduled maintenance. During the first three months of 1998 an
increased level of customer emergency repairs created strong demand for the
4-Point moored saturation vessels (CAL DIVERS I AND II). As a result, total
vessel utilization days were 574 for the CDI fleet in the first quarter of 1998,
an increase of 34% over the same period of the prior year.
Natural gas and oil production revenue for the three months ended March
31, 1998 declined 21% to $3.8 million from $4.9 million during the comparable
prior year period due to a decrease in average gas prices realized in the first
quarter of 1998. Production of 1.5 Bcf for the three months ended March 31,1998
was virtually unchanged from first quarter 1997 levels.
GROSS PROFIT. Gross profit of $10.6 million for the first quarter of 1998
nearly doubled the $5.4 million gross profit recorded in the comparable prior
year period with the UNCLE JOHN providing over half of the increase. The
remainder of the increase is due mainly to the aforementioned stronger demand in
1998 for services provided by the 4-Point saturation vessels and to the impact
of a change in the method of accounting for regulatory related drydock
inspection and certification expenditures. The Company previously expensed such
amounts as incurred; however, effective January 1, 1998, such expenditures will
be capitalized and amortized over the 30-month period between regulatory
mandated drydock inspections which is consistent with industry-wide practice.
The impact of this change on CDI's gross profit for the first quarter of 1998
was to increase the results by approximately $1.2 million. Subsea and Salvage
margins increased from 21% in the three months ended March 31, 1997, to 27%
(after deducting the impact of the accounting change) in the three months ended
March 31, 1998 due mainly to the factors mentioned above.
- 6 -
Natural gas and oil production gross profit decreased from $2.6 million
in the first quarter of 1997 to $1.6 million for the three months ended March
31, 1998, due mainly to the decrease in average gas prices.
SELLING & ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were 8.6% of first quarter 1998 revenues, an improvement from 12% in the
comparable prior year period. Such expenses for the three months ended March 31,
1998 were $2.8 million as compared to $2.2 million in the comparable prior year
period. The increase was due mainly to the addition of new personnel to support
the Company's Deepwater strategy and growth in its base business.
NET INTEREST. The Company reported net interest income of $222,000 for the
three months ended March 31, 1998 in contrast to net interest expense of
$318,000 for the three months ended March 31, 1997. This improvement was due to
the repayment of all outstanding debt with proceeds from its initial public
offering of Common Stock in July 1997.
INCOME TAXES. Income taxes increased to $2.8 million for the three months
ended March 31, 1998, compared to $1.0 million in the comparable prior year
period due to increased profitability.
NET INCOME. Net income of $5.2 million for the three months ended
March 31, 1998 was $3.4 million, or 178%, more than the comparable period in
1997 as a result of factors described above. The above-mentioned accounting
change increased CDI's net income for the first quarter of 1998 by approximately
$800,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operating activities principally
from internally generated cash flow. The Company completed an initial public
offering of common stock on July 7, 1997, with the sale of 2,875,000 shares
generating net proceeds to the Company of approximately $39.5 million, net of
underwriting discounts and issuance costs. The proceeds were used to fund
capital expenditures during 1997, and to repay all outstanding long-term
indebtedness. As of March 31, 1998, the Company had $24.3 million of working
capital (including $11.2 million of cash on hand) and no debt outstanding after
funding the acquisition of two vessels in late 1997(SEA SORCERESS AND MERLIN),
ERT's purchase of offshore properties and the equity investment in Aquatica.
Additionally, CDI has approximately $37.0 million available under a Revolving
Credit Agreement. The Company has had, and anticipates having additional
discussions with third parties regarding possible asset acquisitions (including
natural gas and oil properties and vessels). However, the Company can give no
assurance that any such transaction can be completed.
OPERATING ACTIVITIES. Net cash provided by operating activities was
virtually unchanged at $10.0 million in the three months ended March 31, 1998,
as compared to the first quarter of 1997. Increased profitability during the
first quarter of 1998 offset significant accounts receivable collections during
the first quarter of 1997. Accounts payable increased $5.4 million at March 31,
1998 as compared to December 31, 1997 due mainly to significant accruals during
March 1998 for various capital projects (including an upgrade of the SEA
SORCERESS in preparation for the Terra Nova project and costs associated with
placing the MERLIN in service).
INVESTING ACTIVITIES. The Company incurred $6.8 million of capital
expenditures during the first quarter of 1998 compared to $3.0 million during
the comparable prior year period. In January 1998, ERT acquired interests in six
blocks involving two separate fields from Sonat Exploration Company for $1.0
million and assumption of Sonat's pro rata share of the related decommissioning
liability. The remaining balance relates to costs associated with placing the
MERLIN in service and additions to the SEA SORCERESS in preparation for the
Terra Nova project. The Company incurred capital expenditures of $2.1 million in
the first quarter of 1997 related to
- 7 -
the installation of a derrick on the UNCLE JOHN. In February 1998, the Company
purchased a significant minority equity investment in Aquatica, Inc. (a surface
diving company) for $5.0 million, in addition to a commitment to lend additional
funds of $5.0 million to allow Aquatica to purchase vessels and fund other
growth opportunities.
FINANCING ACTIVITIES. The Company was debt free throughout the first
quarter of 1998. Excess cash funds, which averaged $13.3 million, were invested
in U.S. Government securities which yielded approximately 5.5%. During the first
two quarters of 1997, the Company repaid $5.0 million, net of its borrowings
under the Revolving Credit Agreement with Fleet Capital Corporation and in the
third quarter repaid the remaining $20.0 million outstanding with proceeds from
its initial public offering.
CAPITAL COMMITMENTS. The Company does not have any material commitments
for capital expenditures for the next year. However, as discussed previously, in
connection with its business strategy, management expects the Company to acquire
or build additional vessels as well as buy additional natural gas and oil
properties.
IMPACT OF YEAR 2000 ISSUE
The Company has assessed what computer software will require modification
or replacement so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company has purchased, and is presently implementing, a
new project management accounting system which is Year 2000 compliant. This
system, which fully integrates all of its modules, will provide project managers
and accounting personnel with up-to-date information enabling them to better
control jobs in addition to providing benefits inventory control and planned
vessel maintenance. This implementation will be completed during 1998.
Accordingly, the Company believes that with this conversion, the Year 2000 issue
will be resolved in a timely manner and presently does not believe that the cost
to become Year 2000 compliant will have a material adverse effect on the
Company's consolidated financial statements. Finally, CDI's vessel computer DP
systems are dependent on government satellites and the government has not yet
confirmed that they have solved Year 2000 data problems.
- 8 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various routine legal proceedings primarily
involving claims for personal injury under the General Maritime Laws of the
United States and Jones Act as a result of alleged negligence. The Company
believes that the outcome of all such proceedings would not have a material
adverse effect on its consolidated financial position, results of operations or
net cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 18 - Letter from Arhtur Andersen LLP regarding change in
accounting principle.
Exhibit 27 - Financial Data Schedule. (Exhibit 27 is being submitted
as an exhibit only in the electronic format of this Quarterly Report
on Form 10-Q being submitted to the Securities and Exchange
Commission.)
(b) Reports on Form 8-K - None.
- 9 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAL DIVE INTERNATIONAL, INC.
Date: May 4, 1998 By: /s/ S. JAMES NELSON
S. James Nelson, Executive
Vice President and Chief
Financial Officer
Date: May 4, 1998 By: /s/ A. WADE PURSELL
A. Wade Pursell, Vice
President-Finance and
Chief Accounting Officer
- 10 -
EXHIBIT 18.1
March 25, 1998
Cal Dive International, Inc.
400 N. Sam Houston Parkway E., Suite 400
Houston, Texas 77060
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, effective January 1, 1998, the Company changed its
method of accounting for regulatory (U.S. Coast Guard, American Bureau of
Shipping and Det Norske Veritas) related drydock inspection and certification
expenditures. This change was made due to the significant changes in the
composition of the Company's fleet which has been expanded to include more
sophisticated dynamically positioned vessels that are capable of working in the
deepwater Gulf of Mexico, a key to Cal Dive's operating strategy. The change
also coincides with the first time these vessels were due for drydock inspection
and certification since being acquired by CDI. The Company previously expensed
inspection and certification costs as incurred; however, effective January 1,
1998, such expenditures will be capitalized and amortized over the 30-month
period between regulatory mandated drydock inspections and certification. This
predominant industry practice provides better matching of expenses with the
period benefited (i.e., certification to operate the vessel for a 30-month
period between required drydock inspections and to meet bonding and insurance
coverage requirements).
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
Cal Dive International, Inc.
Page 2
March 25, 1998
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to December 31, 1997. Further, we have not examined and
do not express any opinion with respect to your financial statements for the
three months ended March 31, 1998.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP