1997 THIRD QUARTER REPORT November 4, 1997

To Our Shareholders:

We are not particularly proud of third quarter performance. Disappointing financial results on a large job for McDermott/Bridgeline were mitigated somewhat by accomplishing a first of its kind subsea task tieing in initial production from Texaco's Deepwater Discovery prospect. Two unusual events - a lightning strike on the Witch Queen and an electrical fire onboard the Cal Diver II - put those two vessels out of service a combined six weeks during the quarter. On a more positive note, the November 3 issue of Forbes magazine includes an article (New Issues Review) that discusses the 375 companies new to the market which raised $17.8 billion in equity during the first nine months of the year. Cal Dive International was determined to be the second best performing new issue during the third quarter.

Financial Highlights

Third quarter gross profit margins of 29%, after absorbing the unusual events and sub-par financial performance on the Bridgeline job, are an indication of the market strength and the versatility of the CDI fleet.

Third Quarter Nine Months
1997 1996 Increase
<Decrease>
1997 1996 Increase
<Decrease>
Revenues $28,859,000 $23,906,000 21% $75,931,000 $52,689,000 44%
Net Income 3,983,000 3,412,000 17% 10,473,000 6,971,000 50%
Earnings Per Share 0.27 0.31 <13%> 0.82 0.63 30%


  • Revenues: On a net basis the entire increase in third quarter revenues was due to the DPMSV Uncle John (the vessel commenced 1996 operations in the month of October). Nine month revenues of $76 million equal the revenue reported for the entire year 1996.
  • Gross Profit: The McDermott/Bridgeline job, which commenced in May and which was substantially completed by the end of the third quarter, includes work performed by five of our vessels with only the Uncle John turning in a lack luster performance. Overall gross profit margins on this project are estimated at roughly one third of what we normally expect, not good but not the end of the world.
  • SG&A: Selling, General and Administrative expenses were $2.5 million, an increase of 19% over the third quarter of 1996, as we have added a number of high-priced technical people to support the Deepwater Technical Services Group. This expansion of personnel has been accomplished with no impact upon operating margins; i.e., SG&A was slightly below 9% of revenues in both quarters.
  • EPS: Decreased by $0.04 per share due to the additional shares issued in conjunction with the IPO in July, funds which have yet to be converted to revenue generating assets.
  • Liquidity: CDI had no debt and $13 million of cash on hand at September 30, 1997 after the acquisition of the Sea Sorceress and an unused $40 million credit facility . Shareholder Equity stood at $85 million in contrast to $31 million at the beginning of 1997.


Operational Highlights

  • MSV Uncle John: The vessel was 100% utilized during the third quarter performing mainly CDI construction projects. Participation in the Bridgeline job involved installing 30" diameter risers and setting 12 riser clamps, each weighing three tons, in 980 feet of water. To put this task in perspective, the work was equivalent to hanging risers at the base of the Transco Tower assuming that the vessel was on top of the building. While not the financial success we had hoped for, this project was quite a technical accomplishment and one which resulted in a very satisfied customer. At month end, the vessel was wowing everyone on a British Petroleum job at Troika setting 170 foot pipespool pieces in 1500 to 2700 feet of water.
  • CSO: We are pleased with the manner in which our relationship with alliance partner Coflexip Stena Offshore is developing. During the quarter, CSO made a dynamically positioned vessel (the Marianos) available to augment our fleet; the CSO construction group agreed to assist in the design plans for the conversion of our newly acquired vessel, the Sea Sorceress; and CDI will have access to the new M J Lay system being designed by the Coflexip engineering group. The joint venture between our two companies to pursue EPIC contracts in the Gulf of Mexico now has a name: Quantum Offshore Contractors.
  • Deepwater Market: We have completed and/or been awarded thirteen Deepwater projects requiring dynamically positioned construction vessels while losing only three, a statistic which confirms the embryonic stage of this market. Historically the construction segment has tended to kick in six to eighteen months after the discovery of a productive well. This lag time is lengthening considerably given the logistic and engineering support required for Deepwater projects; a trend which highlights the niche CDI fills. Our DP vessels are able to be deployed profitably in the Gulf spot market in the interim between all of the current Deepwater drilling and commencement of completion/construction work.
  • Alliances: Schlumberger featured our alliance in the Summer 1997 issue of Sonde Off, the NAM Wireline & Testing Newsletter. All time high exploration and completion activity in the Deepwater Gulf has driven rates to a range of $130,000 to $250,000 per day for anchored semis and drill ships, respectively. These dayrates, coupled with steep mobilization fees, created the need for a lower cost solution to intervene on existing subsea wells needing remedial through tube repairs. Under the alliance, CDI provides vessels, ROV and diving support, subsea construction, pipeline installation and removal, well intervention and project management. Schlumberger (Modular Equipment & Services) provides wireline, testing, pumping and coiled tubing services, stimulation services and project management. The Sonde Off article also describes in detail the outstanding success of the alliance's first subsea well intervention at Tahoe #4, the first ever live well intervention in the Gulf of Mexico from a DP vessel.
  • Salvage Operations: The CDI Barge I was also fully utilized during the quarter working on 12 decommissioning projects. The November 1997 issue of Offshore Magazine confirms the dominance of Cal Dive in the shallow water salvage market. Specifically, CDI had a 32% share of the market of all structures removed in water depths of up to 150 feet from January 1, 1996 through June 30, 1997; two other companies are in second place, each with 13% of the market.
  • Shallow Water: Demand for diving and construction services in water depths of up to 300 feet has resulted in an industry wide increase in rates for utility boats and diver/tender teams. Revenues from general diving and the three CDI vessels serving this market represented 23% of consolidated third quarter sales and for the nine months have increased 74% over 1996 levels.


Respectfully Submitted,

Gerald G. Reuhl
Chairman
Owen E. Kratz
Chief Executive Officer
S. James Nelson, Jr.
Executive Vice President