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Article by DailyStocks_admin    (01-14-08 03:13 AM)

The Daily Magic Formula Stock for 01/12/2008 is Cal Dive International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 50-75%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

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:


• Dive support vessel (DSV): Specially equipped vessel that performs services and acts as an operational base for divers, ROVs and specialized equipment.

• Drydock: The process of docking a vessel so that it is fully supported out of the water for the purposes of regulatory certification, inspection, maintenance and repair. Drydocking allows full work access to the vessel hull.

• Dynamic positioning (DP): Computer-directed thruster systems that use satellite-based positioning and other positioning technologies to ensure the proper counteraction to wind, current and wave forces, enabling the vessel to maintain its position without the use of anchors. Two DP systems (DP-2) are necessary to provide the redundancy required to support safe deployment of divers, while only a single DP system is necessary to support ROV operations.

• EIA: United States Department of Energy, Energy Information Administration.

• 4 point mooring: A mooring system that uses four anchors, which are spooled out to the sea floor by deck-mounted anchor winches, to secure a vessel in open waters.

• Gulf of Mexico OCS: The Outer Continental Shelf in the Gulf of Mexico, defined as the area in the Gulf of Mexico extending from the shoreline to water depths up to 1,000 feet.

• Hyperbaric rescue chamber (HRC): An additional chamber, connected to the saturation diving system, that acts as a floating pressurized lifeboat in the event of a vessel emergency.

• Mixed gas diving: Diving technique used in water depths between 170 and 300 feet. The inert nitrogen normally found in air is replaced with helium, which provides longer bottom times at greater depths and eliminates the narcotic effect of nitrogen under pressure.

• MMS: United States Department of Interior, Minerals Management Service.

• Moon pool: An opening in the bottom center of a vessel through which a saturation diving system or ROV may be deployed, allowing safer deployment in adverse weather conditions.

• Multi-purpose support vessel (MSV): A DP DSV that is capable of performing coring and well operations in addition to working in diving and ROV modes.

• Pipelay and pipe burial: Pipelay barges provide an offshore work station that allow for the welded assembly of multiple sections of pipe on deck. After completing nondestructive testing, the barge pulls forward on the anchor spread moorings and lays out the pipeline on the seafloor. In water depths less than 200 feet, the pipeline is required to have a minimum of three feet of burial cover. Burial is accomplished by digging and jetting out a trenched ditch from under the pipeline.

• Portable saturation diving system: Saturation diving system that is transportable to various offshore locations. These systems are typically deployed on barges and rigs that do not consistently require deep dive support.

• Qualified turnkey: Lump-sum bid sent in response to a client’s request for quote. Our bid response contains the following: a defined scope of work, a lump-sum price to complete that work, extra work rates for anything outside the defined scope of work and a list of clarifications and qualifications applicable to the project or contract.

• Remotely operated vehicle (ROV): Robotic vehicles used to complement, support and increase the efficiency of diving and subsea operations and for tasks beyond the capability of manned diving operations.

• Saturation diving: Provides for efficient work time on the seafloor in water depths between 200 and 1,000 feet. Divers stay under pressure in a vessel-mounted chamber and are transported to the sea floor in a diving bell. One-time decompression is conducted after completion of the job or a 30-day period, whichever is shorter. A split-level saturation diving system has an additional chamber that allow extra divers to “store” at a different pressure level, which allows the divers to work at different depths.

• Surface diving: Diving operations conducted in shallower waters, typically limited to depths of approximately 170 feet. At greater depths, bottom times become limited and decompression times increase significantly. Compressed air and communications are supplied to the diver through a dive umbilical tethered to the surface. Based on factors of depth and time, divers must decompress after each dive.

• Surface diving system: Dive equipment components required for air or gas surface diving operations, which typically includes air compressors, dive hoses, communication radios, air/gas manifolds and decompression chambers.

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:


• In August 2005, we acquired six vessels and a portable saturation diving system from Torch Offshore, Inc., or Torch, for an aggregate purchase price of $26.2 million (including assets held for sale).

• In late 2005 and early 2006, we acquired all of the diving and shallow water pipelay business of Acergy US, Inc. (formerly known as Stolt Offshore Inc.), or Acergy, operating in the Gulf of Mexico and Trinidad, including nine vessels and one portable saturation diving system, for an aggregate purchase price of $124.3 million.

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


• In July 2005, we obtained a 40% interest in Offshore Technology Solutions Limited, or OTSL, a diving services provider in the Trinidad market.

• In July 2006, we completed the acquisition of the business of Singapore-based Fraser Diving International Limited, or Fraser Diving, which includes six portable saturation diving systems and 15 surface diving systems operating primarily in the Middle East, Southeast Asia and Australia.

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.

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:


• Leader in the Gulf of Mexico OCS diving services market. We believe the size of our fleet and workforce makes us the market leader for diving services on the Gulf of Mexico OCS. We currently own and operate a diversified fleet of 26 vessels and employ approximately 1,300 diving and marine personnel. We believe our size advantage allows us to provide the highest quality diving services on the Gulf of Mexico OCS and contributes to our leading share of diving services contracts in this market. Furthermore, we expect to achieve similar leadership in new offshore markets due to our superior operating capabilities, international experience, existing relationships with globally focused customers and proven acquisition expertise.

• High-quality asset base. Our diverse fleet of vessels and diving systems, particularly our saturation diving fleet, is among the most technically advanced in the industry. Our saturation diving fleet has a combination of modern features, including DP, multi-chamber systems for split-level operations and moon pool deployment, that allow us to operate effectively in challenging offshore environments. The diversity of our fleet also enables us to provide a wide range of marine contracting services. We possess complementary diving, pipelay and pipe burial capabilities that are often required for more complex subsea projects. As a result, we can effectively execute this higher margin business while enhancing the utilization of our diving support vessels.

• Highly skilled workforce. The quality of our workforce has been, and will continue to be, a vital contributor to our success. We invest significant resources in training programs to ensure that our divers, supervisors and support staff have the best technical, operational and safety skills in the industry, which allows us to deliver innovative solutions to our customers. In addition, our market leadership provides an advantage with regards to employee retention, which is a major issue in our sector in the current tight labor environment. The compensation of our divers is typically determined by their logged diving time, so divers and others are strongly incentivized to work for us due to our high vessel utilization, which is driven by our relationships with the most active Gulf of Mexico producers and proven operating history. We believe these qualities, along with our commitment to effective training and safety, help us to attract and retain skilled employees.


• Excellent, long-standing customer relationships. We have built a reputation as a premier diving services contractor during our more than 30 years operating in the Gulf of Mexico. We have developed a large and stable customer base, which includes virtually all of the top 20 energy producers in the Gulf of Mexico, by consistently providing superior and comprehensive services on schedule while maintaining a strong safety track record.

• Successful acquisition track record. We have a proven track record of identifying and executing acquisitions that complement our fleet and workforce and enhance our service capabilities. In 2005, we added 13 vessels, including three premium saturation diving vessels, and two portable saturation diving systems to our fleet. More recently, in July 2006, we completed the acquisition of six portable saturation diving systems and 15 surface diving systems operating primarily in the Middle East, Southeast Asia and Australia from Singapore-based Fraser Diving. We attribute much of the growth of our business to our success making acquisitions, and we believe that acquisitions will remain a key element of our growth strategy. Furthermore, we believe that our ability to integrate acquisitions efficiently is one of our core organizational competencies. We have consistently demonstrated the ability to add to our revenue base and retain key personnel from acquired businesses, while improving margins by leveraging our existing cost structure.

• Proven management team with extensive experience in the marine contracting business. Most of our executive officers and senior managers have spent the majority of their respective careers in the marine contracting business, working at various levels of the industry in the Gulf of Mexico and internationally. This senior management team, which has an average of 22 years of industry experience, includes recognized leaders in diving services and offshore construction. Several of these individuals serve in high-ranking positions in industry organizations for standards and safety. We believe the knowledge and experience of our management team provides a valuable competitive advantage.

Our Business Strategy

The principal elements of our strategy include:


• Strengthen leadership position on the Gulf of Mexico OCS. We will seek to expand our leadership position in the Gulf of Mexico OCS diving services market by enhancing the capabilities of our existing assets, making acquisitions of complementary assets or businesses and continuing to provide a high level of customer service. Pursuant to this strategy, we have increased the crane capacity of the DP DSV Kestrel and plan to convert the DSV Midnight Star surface diving vessel to a saturation diving vessel in the second or third quarter of 2007. We believe these upgrades will increase the demand for those assets, and we intend to invest future available capital in similar fleet enhancements. As evidence of our continued success in this market, in 2006 we entered into a new diving services contract with a major oil company, the largest such contract in our history based on potential revenues of approximately $80 million for work that we expect to continue through the end of 2007.

• Expand into high-growth international markets through acquisitions. Several international regions, such as the Middle East, Southeast Asia and Australia, offer excellent growth potential attributable to the recent and planned increases in upstream capital spending and the highly fragmented nature of the existing marine contracting markets. We are continually evaluating potential acquisition targets that can provide us with a more meaningful presence in these markets. Our goal is to replicate our Gulf of Mexico OCS leadership in the most attractive international offshore regions by leveraging our operating capabilities, international experience, customer relationships and acquisition expertise. Pursuant to this strategy, in July 2006, we completed an acquisition of the business of Singapore-based Fraser Diving.

• Continue to attract, develop and retain highly skilled personnel. Our market leadership and future growth plans are predicated on our ability to employ the most highly-skilled divers, supervisors and support staff in the industry. We invest significant resources in developing the technical, operational and safety skills of our workforce. We will continue to invest significant resources in training and development courses that will provide our workforce with superior knowledge and skills relevant to diving operations and safety, as well as facilitate their long-term career development. We will also continue our practice of structuring compensation and benefit plans that are competitive with our peers and properly incentivize our workforce.


• Maintain a disciplined cost structure. We seek to contain the costs of our operations and identify new opportunities to reduce costs. We believe that our cost discipline will enhance our profitability in strong market environments and better position us to withstand market downturns. Furthermore, the size and diversity of our fleet provide meaningful economies of scale and scope advantages, which we have realized through the efficient integration of recent acquisitions and ongoing cost-savings initiatives.

• Optimize our mix of dayrate and qualified turnkey work. We seek to optimize the allocation of our resources between dayrate and qualified turnkey work in order to diversify our sources of revenue and enhance overall profitability. We believe that this strategy allows us to respond effectively to the increasing demand from larger customers for integrated solutions while ensuring that a segment of our fleet is positioned to capitalize on attractive opportunities in the spot market. As business conditions change, we will adjust our resource allocation.

• Improve financial flexibility. We intend to improve our financial flexibility in the near term by utilizing our strong operating cash flows to reduce the debt incurred by us in connection with our initial public offering. As of December 31, 2006, we had $201 million of outstanding debt and $49 million of borrowing capacity, and as of February 23, 2007, we had $175 million of outstanding debt and $75 million of borrowing capacity, under our revolving credit agreement, which we believe is sufficient to support our business. However, we seek to achieve a more conservative capital structure over the long term so that we may continue to actively pursue value-enhancing growth initiatives and mitigate some of the financial risk associated with a market downturn.


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:


1980 Acquired International Oilfield Divers, our first acquisition in the Gulf of Mexico market
1984 Completed a major conversion of the Cal Diver I , introducing the first DSV dedicated for use in the Gulf of Mexico
1986 Began providing subsea construction, maintenance and inspection work on a qualified turnkey basis, enabling clients to better control project costs
1989 Launched shallow water salvage business
1994 Acquired our first DP DSV, the Witch Queen , improving our abilities to operate in winter months and work in deeper waters
1996 Acquired and enhanced the Uncle John , the first semi-submersible MSV dedicated for use in the Gulf of Mexico in heavy construction and saturation mode
1997 Acquired Aquatica, Inc. (previously known as Acadiana Divers) in Lafayette, Louisiana to expand our call out diving support capabilities
2001 Acquired Professional Divers of New Orleans, adding an additional 4 point surface DSV and three utility boats
2005 Acquired six DSVs and a portable saturation diving system from Torch
Acquired all of the diving and shallow water pipelay business of Acergy operating in the Gulf of Mexico and Trinidad, including nine vessels and one portable saturation diving system
2006 Acquired the business of Singapore-based Fraser Diving and its six portable saturation diving systems and 15 surface diving systems operating primarily in the Middle East, Southeast Asia and Australia
Entered into a new diving services contract with a major oil company, the largest such contract in our history based on potential revenues of approximately $80 million, for work that we expect to continue through the end of 2007.

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.

CEO BACKGROUND

Owen Kratz
Executive Chairman
Helix Energy Solutions Group, Inc. Director since 2006
age 52

Mr. Kratz has served on our board of directors since February 2006 and is Chairman of the Board. He is currently Executive Chairman of Helix. He was Chairman of Helix from May 1998 to September 2006 and served as Chief Executive Officer of Helix from April 1997 to September 2006. Mr. Kratz served as President of Helix from 1993 until February 1999, and as a Director since 1990. He served as Chief Operating Officer of Helix from 1990 through 1997. Mr. Kratz joined Helix in 1984 and has held various offshore positions, including saturation diving supervisor, and has had management responsibility for client relations, marketing and estimating. Mr. Kratz has a Bachelor of Science degree in Biology and Chemistry from the State University of New York at Stony Brook.



David E. Preng
President and CEO
Preng & Associates Director since 2006
age 60


Mr. Preng has served on our Board of Directors since December 2006. He has served as President and CEO of Preng & Associates, an executive search firm, since 1980. Previously, he spent six years in the executive search industry with two international and one national search firm. Mr. Preng was a director of Remington Oil and Gas Corp. prior to its acquisition by Helix in July 2006. Mr. Preng is also Chairman of the Board of Directors of Maverick Oil and Gas, Inc., an oil and gas exploration, development and production company, and a director of BPI Energy Holdings Inc., a company engaged in the exploration, production and commercial sale of coalbed methane. Mr. Preng holds a Bachelor of Science degree in Finance from Marquette University and an M.B.A. from DePaul University.

Chairman of the Corporate Governance and Nominating Committee and member of the Audit Committee and Compensation Committee of the Board of Directors.



William L. Transier
Chairman, CEO and President
Endeavour International Corporation Director since 2006
age 51

Mr. Transier has served on the Company’s Board of Directors since December 2006. He has served as Chairman, Chief Executive Officer and President of Endeavour International Corporation, an international oil and gas exploration and production company focused on the North Sea since October 2006. He served as Co-Chief Executive Officer of Endeavour from its formation in February 2004 through September 2006. He served as Executive Vice President and Chief Financial Officer of Ocean Energy, Inc. from March 1999 to April 2003, when Ocean Energy merged with Devon Energy Corporation. From September 1998 to March 1999, Mr. Transier served as Executive Vice President and Chief Financial Officer of Seagull Energy Corporation when Seagull Energy merged with Ocean Energy. From May 1996 to September 1998, he served as Senior Vice President and Chief Financial Officer of Seagull Energy Corporation. Prior thereto, Mr. Transier served in various roles including partner from June 1986 to April 1996 in the audit department of KPMG LLP. He graduated from the University of Texas with a B.B.A. in Accounting and has a M.B.A. from Regis University. He is also a director of Helix and Reliant Energy, Inc., a provider of electricity and energy services to retail and wholesale customers in the United States.

Martin Ferron
President and Chief Executive Officer
Helix Energy Solutions Group, Inc. Director since 2006
age 50

Mr. Ferron has served on the Company’s Board of Directors since February 2006. He is currently the President and Chief Executive Officer and a member of the board of directors of Helix. He was elected to the Board of Directors of Helix in September 1998 and has served as President of Helix since February 1999 and as Chief Executive Officer of Helix since October 2006. He also served as Chief Operating Officer of Helix from January 1998 until August 2005. Mr. Ferron has 27 years of worldwide experience in the oilfield industry, seven of which were in senior management positions with McDermott Marine Construction and Oceaneering International Services Limited immediately prior to his joining Helix. Mr. Ferron has a Civil Engineering degree from City University, London; a Masters Degree in Marine Technology from the University of Strathclyde, Glasgow; and a M.B.A. from the University of Aberdeen. Mr. Ferron is also a Chartered Civil Engineer.




Quinn J. HĂ©bert
President and Chief Executive Officer
Cal Dive International, Inc. Director since 2006
age 43

Mr. Hébert has served as our President and Chief Executive Officer since November 2005 and has been a member of our Board of Directors since May 2006. He served as the President, Vice President Commercial, and General Counsel of Acergy US Inc. (formerly Stolt Offshore) for the North Americas Region from 1998 to 2005. Mr. Hébert terminated his working relationship with Acergy on October 31, 2005. Prior to his employment with Acergy, Mr. Hébert served as Vice President, General Counsel and Secretary of American Oilfield Divers, Inc. (also known as Ceanic Corporation). Mr. Hébert’s professional career began as an associate attorney at Jones, Walker, Waechter, Poitevent, Carrère & Denègre, LLP in New Orleans, Louisiana. Mr. Hébert holds a Bachelor of Arts in History from Louisiana State University and Juris Doctor from Boston College Law School.


Todd A. Dittmann
Managing Director
D.B. Zwirn & Co., L.P. Director since 2006
age 39

Mr. Dittmann has served on our Board of Directors since December 2006. He has served as Managing Director of D.B. Zwirn & Co., L.P., a private investment firm, since April 2004. From April 1997 to April 2004, he worked for Jefferies & Co., where he most recently served as Managing Director in the Energy Investment Banking Group. From 1996 to April 1997, he served as Vice President in the Energy Investment Banking Group of Paine Webber. From 1990 until 1996, he held various positions in commercial and investment banking at Chase Manhattan Bank and its predecessors. Mr. Dittmann received an M.B.A. and a B.B.A. in Finance from the University of Texas at Austin. He is a Chartered Financial Analyst.







Scott T. Naughton age 52
Executive Vice President and
Chief Operating Officer

Mr. Naughton has served as our Executive Vice President and Chief Operating Officer since November 2005. He became Vice President of Helix’s Shelf Contracting Services segment in May 1998. Mr. Naughton terminated his working relationship with Helix on March 6, 2006. Mr. Naughton has been in the commercial diving industry since 1972, working offshore for 14 years as both a diver and a supervisor. He joined Helix in 1981 following its acquisition of J & J Marine Diving, and worked as an Operations Manager and a Project Manager.


G. Kregg Lunsford age 38
Executive Vice President and
Chief Financial Officer

Mr. Lunsford has served as our Executive Vice President, Chief Financial Officer and Treasurer since January 2006. He became the Vice President of Finance and Audit for Helix in February 2003. Mr. Lunsford terminated his working relationship with Helix on March 6, 2006. Mr. Lunsford was a senior manager in the Transaction Advisory Services practice of Ernst & Young LLP and Arthur Andersen LLP from March 2001 until February 2003. Prior to this he served as Director of Corporate Development with PSINet Consulting Solutions and as Manager of Corporate Development with Consolidated Graphics, Inc. from April 1998 until March 2001. Mr. Lunsford began his career in the audit practice of Arthur Andersen LLP in September 1992 and was promoted to manager in 1996. He held this position until April 1998. Mr. Lunsford graduated magna cum laude from Sam Houston State University with a B.B.A. in Accounting in 1992 and is a certified public accountant.





Lisa Manget Buchanan age 46
Vice President, General Counsel and Secretary

Ms. Buchanan has served as our Vice President, General Counsel and Secretary since June 2006. Ms. Buchanan joined Jones, Walker, Waechter, Poitevent, Carrère & Denègre, LLP as an associate attorney in September 1987 and became a partner of the firm in January 1994, a position she held until June 2006. Ms. Buchanan holds a Bachelor of Science in Commerce from the University of Virginia and a Juris Doctor from Louisiana State University Law Center.





COMPENSATION

The primary objectives of our compensation program, including the compensation program for the executive officers named in the summary compensation table below, or “Named Executive Officers”, are to attract and retain key employees, to motivate them to achieve superior performance and to support and implement our business strategies, and to reward those employees (including the Named Executive Officers) for successful performance in a manner commensurate with those rewards given to their peers in the industry. We attempt to provide incentive and rewards intended to create a positive environment in which the employees, including the Named Executive Officers, are enthusiastic about our Company and its objectives, core values and culture, and are working toward the successful long-term performance of the Company.

All elements of the compensation program are designed to:


• be competitive with the Company’s peer group;

• reflect the complexity/difficulty of the position;

• reflect performance of both the individual and the Company; and

• reflect internal fairness within the Company.

We use each element of compensation to satisfy one or more of our stated compensation objectives. Annual executive compensation consists of a base salary, cash bonus, long-term equity incentive awards and certain benefits, including health, disability and life insurance. To ensure appropriate linkage between our objectives and our compensation levels, we intend to periodically review the goals and the levels of each element of compensation. In establishing executive compensation, Cal Dive strives to develop a compensation program that achieves the foregoing objectives by establishing the following targets:


• base salaries, once combined with our annual cash bonus opportunity and long term equity incentive grants, should be at levels competitive with peer companies that compete with Cal Dive for executive talent;

• the annual cash bonus for an executive officer should reflect the achievement of Company-wide financial objectives, department budget goals and the achievement of personal performance goals and objectives;

• in the event the executive achieves the Company, department and personal performance objectives, such executive’s total cash compensation should be at the 50th or 75th percentile of the members of our peer group with whom we compete for executive talent; and

• long-term equity incentive compensation should be at the 50th or 75th percentile of the peer group based upon the complexity of the officer’s duties and recent performance by the individual and the Company.

Design of the Compensation Program

The Compensation Committee is responsible for establishing the compensation policies and administering the compensation programs for our Named Executive Officers, and for administering the grant of stock-based incentive awards under the Company’s 2006 Plan. The Compensation Committee’s charter (i) empowers the Compensation Committee to review, evaluate, and approve the Company’s executive officer compensation agreements, plans, policies and programs, (ii) delegates to the Compensation Committee all authority of the Board required or appropriate to fulfill such purpose, and (iii) grants to the Compensation Committee the sole authority to retain and terminate any independent compensation consultant.

In determining each executive officer’s base salary for 2006, Helix’s Chief Executive Officer working together with our Chief Executive Officer reviewed the information and peer group data provided by the compensation consultants, as discussed below, and Helix management’s recommendation regarding each of these components, and then determined a base salary intended to place each executive officer at approximately the 50th percentile of the applicable peer group. A total cash bonus opportunity for 2006 was also determined for each such officer by Helix’s Chief Executive Officer working together with our Chief Executive Officer at the time that we became a subsidiary of Helix in an amount necessary to place such officer at the 50th or 75th percentile of total cash compensation for companies in the peer group (although it was recognized that in certain cases a reduction, or additional discretionary award may be warranted and awarded by our Board). The cash bonus program for 2006, which was similar in structure to Helix’s, for each of our Named Executive Officers was based on achieving the following goals:


• 40% achieving personal performance criteria or goals;

• 40% Cal Dive exceeding budgeted pre-tax income for the year; and

• 20% Helix’s Marine Contracting Services Group (of which Cal Dive was a member) exceeding its budgeted pre-tax income for the year.

In measuring an executive officer’s performance for purposes of the cash bonus, the Compensation Committee considers numerous factors including discipline with respect to the Company’s finances and individual goals or criteria that, going forward, will be established by the officer and the Compensation Committee at the beginning of the applicable fiscal year. For 2006, the bonus criteria were determined by Helix’s Chief Executive Officer working in conjunction with our Chief Executive Officer. The Compensation Committee may also consider intangible criteria including demonstrating leadership qualities and adherence to the Company’s culture and core values. The Compensation Committee has the authority to grant a portion of the total bonus in its discretion. For the 2007 fiscal year, the amount of such discretionary portion is expressly established at an amount up to 30% of the personal performance portion of the target bonus, or 12% of the total target bonus. In addition, the Compensation Committee retains the authority to adjust any cash bonus or alter any of the criteria or goals based on changes in circumstances during the applicable year.

In addition, each officer receives a long-term equity incentive award (restricted stock) in an amount based on the value of the underlying award necessary to place the applicable officer in the 50th or 75th percentile for equity incentive compensation for companies in the peer group. In determining each executive officer’s equity incentive grant, the Compensation Committee reviews the information and peer group data provided by the compensation consultants, as discussed below, and the Chief Executive Officer’s recommendation regarding the grant. The Chief Executive Officer reviews the data and makes his recommendation to the Compensation Committee prior to its meeting. The Compensation Committee has ample time to review the data and the recommendation prior to its December meeting. Beginning in 2007, the Compensation Committee will approve the equity grants to be issued in December based upon the closing price of the stock on the date of grant.

No element of an officer’s compensation is directly linked to any other element and the Compensation Committee does not have an exact formula for allocating between cash and non-cash compensation. We strive to design a compensation package to use total cash compensation (salary plus annual cash bonus) to recognize each individual officer’s responsibilities, role in the organization, and experience and contributions to the Company and to use long-term equity-based incentives (including restricted stock awards and through a tax-qualified employee stock purchase plan) to align employee and stockholder interests, as well as to attract, retain and motivate employees. We pay close attention to our peer group’s practices. The Compensation Committee retains the authority to adjust any element of the executive officer’s compensation based upon objective or intangible criteria. In addition, included in the cash bonus for the year 2007, the Compensation Committee has the authority to grant a purely discretionary amount, which has been expressly established at 12% of the total proposed bonus.

Generally speaking, the elements of the Company’s compensation program, as well as the percentage mix of the various elements, are in line with those of our peer companies, as is evidenced by data obtained by the Company from its compensation consultant, as described below. Our compensation package mix for executive officers for fiscal 2006 ranges from 15% to 29% in cash compensation and 85% to 71% in non-cash compensation. The compensation mix for 2006 was more heavily weighted in non-cash compensation than usual due to the Cal Dive initial public offering. In 2006, each of the Named Executive Officers other than Mr. Hébert received two grants of restricted stock during the year, one from Helix and one at the closing of the Cal Dive initial public offering. In future years we expect only one annual grant of equity incentives to the Named Executive Officers, and would expect for 2007 that total cash compensation (assuming the total bonus opportunities were earned) and expected long term equity grants would result in a mix ranging from 32% to 41% in cash compensation and 68% to 59% in non-cash compensation. It is our belief that the compensation program as adopted by the Compensation Committee achieves our objectives of attracting and retaining key executive officers, motivating such officers to achieve superior performance and rewarding such officers for successfully achieving their objectives.

Compensation Consultants

We plan to perform an annual comparison of our compensation levels with that of similar positions at companies in our peer group as described below. Pursuant to the authority granted to the Compensation Committee by its charter, the Compensation Committee may periodically review peer group compensation and engage independent compensation consultants to assist in this process

In 2005, Helix retained the services of Mercer Human Resource Consulting (“Mercer”), an independent consultant that specializes in executive compensation matters, to assist in its compensation determinations for the calendar year 2006. As part of the services Mercer provided to Helix in 2005, Mercer also provided data with respect to compensation levels for our executive officers. Mercer has provided similar services to Helix for a number of years. The Helix Compensation Committee selected Mercer based upon the recommendation of certain directors and a review of Mercer’s experience and qualifications as compared to similar organizations. Mercer reports to, and acts at the direction of, the Helix Compensation Committee. Helix management worked closely with Mercer to determine an appropriate peer group (as discussed below) and received Mercer’s reports and data. Moreover, the Helix Compensation Committee retained ultimate control and authority over Mercer.

Mercer was engaged to assess the competitiveness of the Helix compensation package for all employees located in the United States. Mercer did a survey of the current compensation of the applicable employees and provided information regarding the compensation practices for executive officers of Helix’s peer group. Mercer utilized a peer group as proposed by Helix’s management and approved by Helix’s Compensation Committee. In order to ensure that the most appropriate companies are included in the peer group, management includes companies consisting of Helix’s (and our) direct competitors in the energy services industry that are comparable in size (based on revenue and market capitalization) to Helix and other companies in our industry that Helix’s management believes compete with Helix for executive talent. The peer group is determined on an annual basis based on the recommendations of management. The officer compensation peer group companies for 2006 were Cooper Cameron Corporation, Global Industries, Ltd., Oil States International, Inc., Grant Prideco Inc., Oceaneering International, Inc., Tidewater Inc., Superior Energy Services Inc., W-H Energy Services, Inc. and Veritas DGC Inc.

Mercer provided data on total compensation (base salary, total cash compensation including bonus, and long-term incentive awards) with respect to the 25th percentile, market median (50th percentile), and 75th percentile of the peer group. This data was presented to the Helix Board, the Helix Chief Executive Officer and the Helix Chief Financial Officer and our Chief Executive Officer for their review and analysis. The survey results were taken into consideration by our Chief Executive Officer when determining his recommendations regarding base salary, cash bonus and equity incentive compensation for each of the other executive officers. The Helix Compensation Committee and certain members of Helix’s management received Mercer’s report within a time frame that provided adequate time for analysis and discussion before the last Compensation Committee meeting of the year. After reviewing the data in such report, our Chief Executive Officer evaluated each person’s compensation based upon each executive officer’s current and historical compensation, the compensation of peers in similarly situated positions in Helix, information provided by the compensation consultant regarding the compensation practices of similarly situated competitors, and the difficulty and complexity of the position.

Compensation Components and Processes

As described above, annual executive compensation consists of a base salary, cash bonus and long-term equity incentive awards plus benefits. The Compensation Committee will review, approve and adopt each component of such compensation, other than benefits that are available to all employees, for the next fiscal year at its meeting in December of each year and intends to also approve grants of restricted stock awards to all executive officers and certain other eligible employees. At its first meeting of the following year, once performance results for the preceding year for individual, department and company-wide performance criteria are available, the Compensation Committee approves the cash bonus for each of the executive officers payable with respect to the preceding year.

The Compensation Committee is provided with the survey data, and a recommendation of the Chief Executive Officer with respect to the appropriate percentile of cash compensation (salary and bonus) and long term incentive compensation (in terms of total value of equity grants) to award to each executive officer. The recommendations of the Chief Executive Officer regarding cash compensation and equity grants are based on the difficulty and complexity of the position. In the event that senior management determines that the data obtained from Mercer does not reflect the job responsibilities and complexity of the employee’s position at the Company, management’s recommendation regarding cash compensation is adjusted to reflect what we believe to be the market value of such services. The decision with respect to total compensation for executive officers ultimately lies with the Compensation Committee, which has an ample opportunity to review the survey and make inquiries of management.

Senior members of the management team including our Chief Financial Officer, our Chief Operating Officer and our President and Chief Executive Officer provide recommendations regarding many aspects of our compensation program, including executive compensation. The Compensation Committee does not, however, delegate any of its functions or authority to management (other than the issuance of certain equity incentive compensation awards to new non-executive officer hires or promotions).

Base Salary

Annual base salary typically will be determined for each officer at the end of the preceding year. Base salary for our Named Executive Officers for 2006 was set by the Chief Executive Officer of Helix together with our Chief Executive Officer prior to the time that we became a separate subsidiary of Helix or by our three-member Board for those named executive officers who joined us after that time. For 2007, base salary for our Named Executive Officers was set by our three-member Board in December 2006 prior to the closing of our initial public offering and prior to the establishment of our Compensation Committee. For future years, we intend to have the Compensation Committee set annual base salary at the regularly scheduled December meeting of our Compensation Committee. In setting base salary, the Chief Executive Officer and the Compensation Committee will review the information provided by Mercer regarding the compensation of officers with comparable qualifications, experience and responsibilities at companies in our peer group, and the recommendations of our Chief Executive Officer as to the salary levels of the executive officers who report to him. It is not our policy to pay executive officers at the highest level relative to his or her peers, but rather to set their base salary at a level that is at approximately the 50th percentile of our peer group taking into account their responsibilities and the complexity of their respective positions. We believe that this, once combined with our annual cash bonus opportunity and long term equity incentive grants, gives us the opportunity to attract and retain talented managerial employees both at the senior executive level and below.

Cash Bonus

The annual incentive compensation plan provides a cash bonus designed to award our employees, including our Named Executive Officers, for the achievement of certain goals. Prior to payment of a bonus with respect to the prior year, management reviews each of the components of each officer’s annual cash bonus award. Management then determines whether the goals and criteria were achieved during the prior year and makes a recommendation to the Compensation Committee. The Compensation Committee expects to award bonuses for the previous year at its first meeting of the year based upon its review of the data provided by management, and bonuses are typically paid in March. The total cash bonus opportunity for each Named Executive Officer is set at a level necessary to place such officer at the 50th or 75th percentile of total cash compensation for companies in the peer group.

The cash bonus program for 2006, for each of our Named Executive Officers was based on achieving the following goals:


• 40% achieving personal performance criteria or goals;

• 40% Cal Dive exceeding budgeted pre-tax income for the year; and

• 20% Helix’s Marine Contracting Services Group (of which Cal Dive was a member) exceeding its budgeted pre-tax income for the year.

For 2007, there will be two components of the bonus payment for the Named Executive Officers:


• 40% achieving personal performance criteria or goals; and

• 60% the Company exceeding its budgeted pre-tax income for the year.

Performance criteria linked to an individual’s attaining individual performance goals is established by the officer and the Chief Executive Officer and provided to the Compensation Committee. These performance criteria are established at the beginning of the year and are provided to the Compensation Committee at its first meeting of the applicable year. In addition, with respect to the cash bonus for the year 2007, there is a portion of the bonus equal to 12% of the total potential bonus that will be within the discretion of the Compensation Committee.

Company economic performance is determined by whether the Company has met its financial objectives for the year. This component is based on exceeding the pre-tax income budget determined prior to the beginning of the year. The Compensation Committee retains the authority to adjust any element of the executive officer’s annual cash bonus payment whether resulting from performance criteria or one of the budget related goals.

Personal performance criteria for our Named Executive Officers for 2006, which primarily included the successful integration of the Acergy and Torch acquisitions, the completion of the acquisition of Fraser Diving and the completion of the initial public offering of Cal Dive, were exceeded and full bonus amounts under this component of the total bonus were earned. Budgeted pre-tax income for the year for each of Cal Dive and Helix’s Marine Contracting Services Group (of which Cal Dive was a member) were also exceeded, and full bonus amounts were earned under these components of the total bonus as well.

Ms. Buchanan, our Vice President and General Counsel, joined our Company in mid-2006 and her cash bonus was set at the time she was hired and was not based on the criteria described for the other executive officers. Mr. Lunsford, our Executive Vice President and Chief Financial Officer, was paid an additional $59,000 discretionary bonus for 2006 for his efforts throughout 2006 in the initial public offering process and the syndication of the Company’s $250 million revolving credit facility.

Long-Term Equity Compensation

We grant long-term equity compensation in order to provide long-term incentives to employees, providing an important retention tool with respect to such employees, including the executive officers. Each of our executive officers received restricted stock grants from us and from Helix in 2006. We believe that long-term equity incentive compensation advances the best interests of the Company, its affiliates and its stockholders, by providing those persons who have substantial responsibility for the management and growth of our company with additional performance incentives as well as the opportunity to obtain or increase their proprietary interest in the Company, thereby encouraging them to continue in their employment with the Company. We believe that as a result of their proprietary interest in the Company, the economic interests of our executive officers are more closely aligned to those of the stockholders. As a result of the changes to regulatory, tax and accounting treatment of certain types of long-term equity incentives, we currently believe that restricted stock awards are the most efficient way to reward executive officers and provide them with the chance to receive a proprietary interest in the Company, but we will periodically reevaluate that determination and may grant other types of equity based incentive compensation in the future.

It is intended that each executive officer receive a long-term equity incentive award in an amount based on the value of the underlying award necessary to place the applicable officer in the 50th or 75th percentile for equity incentive compensation for officers in similar positions at companies in the peer group. Our Chief Executive Officer received a grant of Helix restricted stock in November 2005 when he joined our Company. This grant vested in part at the time of our initial public offering and the balance vested in February 2007. In determining each other executive officer’s equity incentive grant made in 2006, the Compensation Committee of Helix reviewed the information and peer group data provided by the compensation consultants and our Chief Executive Officer’s recommendation. We then determined a dollar value for the restricted stock award for each executive officer and divided that amount by, in the case of the Helix restricted stock, the trading price at the time of grant, and in the case of the Cal Dive restricted stock, the initial public offering price. In 2007 and future years, management will review the data each year and make its recommendation to the Compensation Committee at its December meeting.

To encourage the executive officers to remain with our Company, the Helix restricted stock vests in annual increments over a five-year period, and 53% of the Cal Dive restricted stock granted at the initial public offering vests in 20% annual increments over a five-year period and the balance will vest in 20% annual increments over a five-year period beginning on the first anniversary of the date that Helix no longer owns at least 51% of the total voting power of our Common Stock.

With respect to future restricted stock grants to all employees, including grants to the Named Executive Officers, the practice of the Company will be to make the grants in December, and the amount of the grant is based on dividing the dollar value of each proposed grant by the closing price for the Company’s Common Stock on the date of grant. In addition, restricted stock may be awarded on certain other dates during the year including the start date of new employees and the promotion date of existing employees.

Perquisites

We limit the perquisites that we make available to our executive officers, particularly in light of recent developments with respect to corporate abuse involving perquisites. Our executives are entitled to few benefits that are not otherwise available to all of our employees. In this regard it should be noted that we do not provide pension arrangements, post-retirement health coverage, or similar benefits for our executives or employees.

Severance Benefits

We currently have Employment Agreements with Messrs. Hébert, Naughton and Lunsford that provide severance benefits if the officer is terminated under certain circumstances that are described in detail below under “Potential Payments Upon Termination or Change in Control.”

Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code of 1986, as amended, prohibits us from deducting more than $1 million in compensation paid to certain executive officers in a single year. An exception to the $1 million limit is provided for “performance-based compensation” that meets certain requirements, including approval by the stockholders. The annual cash compensation paid and the restricted stock granted to our executive officers have not been structured to qualify as performance-based compensation. Our Compensation Committee intends to monitor compensation levels and to consider in the future qualifying the annual incentive bonus and restricted stock grants under Section 162(m).

The Compensation Committee’s policy is to structure compensation that will be fully deductible where doing so will further the purpose of our executive compensation programs. The Committee also considers it important to retain flexibility to design compensation programs that recognize a full range of criteria important to our success, even where compensation payable under the programs may not be fully deductible.

Other Benefits

All employees (including our executive officers) who participate in our 401(k) plan receive matching funds in an amount equal to 50% of the employee’s contribution, up to 5% of salary (including bonus) subject to contribution limits.

MANAGEMENT DISCUSSION FROM LATEST 10K

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:


• changes in United States and international economic conditions;

• demand for oil and natural gas, especially in the United States, China and India;

• worldwide political conditions, particularly in significant oil-producing regions such as the Middle East, West Africa and Latin America;

• actions taken by OPEC;

• the availability and discovery rate of new oil and natural gas reserves in offshore areas;

• the cost of offshore exploration for, and production and transportation of, oil and natural gas;

• the ability of oil and natural gas companies to generate funds or otherwise obtain external capital for exploration, development and production operations;

• the sale and expiration dates of offshore leases in the United States and overseas;

• technological advances affecting energy exploration, production, transportation and consumption;

• weather conditions;

• environmental or other government regulations; and

• tax policies.

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.

(1) Quarterly average of the Henry Hub natural gas daily average spot price (the midpoint index price per Mmbtu for deliveries into a specific pipeline for the applicable calendar day as reported by Platts Gas Daily in the “Daily Price Survey” table).

(2) Quarterly average of NYMEX West Texas Intermediate near month crude oil daily average contract price.

(3) Average monthly number of rigs contracted, as reported by ODS-Petrodata — Offshore Rig Locator.

(4) Source: Minerals Management Service; installation and removal of platforms in the Gulf of Mexico.

(5) As of the end of the period and excluding acquired vessels prior to their in-service dates, vessels taken out of service prior to their disposition and vessels jointly owned by a third party.

(6) Average vessel utilization is calculated by dividing the total number of days the vessels generated revenues by the total number of days the vessels were available for operation in each quarter and does not reflect acquired vessels prior to their in-service dates, vessels in drydocking, vessels taken out of service for upgrades or prior to their disposition and vessels jointly owned by a third party.

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:


• the customer provides specifications for the construction of facilities or for the provision of related services;

• we can reasonably estimate our progress towards completion and our costs;

• the contract includes provisions as to the enforceable rights regarding the goods or services to be provided, consideration to be received and the manner and terms of payment;

• the customer can be expected to satisfy its obligations under the contract; and

• we can be expected to perform our contractual obligations.

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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Recent Developments

On June 11, 2007 the Company and Horizon Offshore, Inc. (“Horizon”) announced that they had entered into an agreement under which the Company will acquire Horizon in a transaction valued at approximately $650.0 million, including approximately $22.0 million of Horizon’s net debt as of March 31, 2007. Under the terms of the agreement, Horizon stockholders will receive a combination of 0.625 shares of Cal Dive common stock and $9.25 in cash for each share of Horizon common stock outstanding, or an estimated total of 20.4 million Cal Dive shares and $302.5 million in cash. The boards of directors of Cal Dive and Horizon unanimously approved the transaction. Closing of the transaction is subject to regulatory approvals and other customary conditions, as well as Horizon stockholder approval, and is expected to occur in the fourth quarter of 2007. In limited circumstances, if Horizon fails to close the transaction, it must pay the Company a termination fee of $18.9 million. The cash portion of the transaction will be funded through a $675.0 million commitment from a bank, consisting of a $375.0 million senior secured term loan and a $300.0 million senior secured revolving credit facility. On September 28, 2007, the parties each received a request for additional information from the Antitrust Division of the U.S. Department of Justice. The request was issued under the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and has the effect of extending the waiting period for a period of 30 calendar days from the date of the parties’ substantial compliance with the request. Both parties intend to continue to work cooperatively to respond to the request and obtain termination of the waiting period as soon as practicable.

Vessel Utilization

We believe vessel utilization is one of the most important performance measurements for our business. 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. In recent periods, 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. However, market conditions are easing from the peak levels experienced in recent quarters as the amount of hurricane-related repair activity moderates, and we are returning to more customary seasonal conditions. As shown in the table below, this has impacted primarily our surface diving vessels, while utilization for our saturation diving and pipelay vessels has remained strong.

(1)

As of the end of the period and excluding acquired vessels prior to their in-service dates, vessels taken out of service prior to their disposition and vessels jointly owned with a third party.


(2)

Effective vessel utilization is calculated by dividing the total number of days the vessels generated revenues by the total number of days the vessels were available for operation in each quarter and does not reflect acquired vessels prior to their in-service dates, vessels in drydocking, vessels taken out of service for upgrades or prior to their disposition and vessels jointly owned with a third party.


Our Relationship with Helix

For periods prior to our IPO, our condensed 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 condensed 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. 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 condensed 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 in our 2006 Annual Report on Form 10-K. 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 in our 2006 Annual Report on Form 10-K. 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. There have been no material changes or developments in authoritative accounting pronouncements or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be critical accounting policies and estimates as disclosed in our 2006 Annual Report on Form 10-K.

Recently Issued Accounting Principles

In September 2006, the FASB issued SFAS No. 157 which 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.

In February 2007, the FASB issued SFAS No. 159, which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. The provisions of SFAS No. 159 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 Three Months Ended September 30, 2007 and 2006

Revenues. For the three months ended September 30, 2007, our revenues increased $48.6 million, or 37.8%, to $176.9 million, compared to $128.4 million for the three months ended September 30, 2006. This increase was primarily a result of the initial deployment of certain assets we acquired through the Acergy and Fraser Diving acquisitions subsequent to the second quarter of 2006. Incremental revenue derived from these assets was $42.6 million in the third quarter of 2007. In addition, an increase in revenues due to higher demand for domestic general diving and higher utilization of our saturation diving vessels and systems was partially offset by a decrease in revenues due to lower utilization of our surface diving vessels.

Gross profit. Gross profit for the three months ended September 30, 2007 increased $12.2 million, or 21.1%, to $69.9 million, compared to $57.7 million for the three months ended September 30, 2006. This increase was attributable to additional gross profit derived from the initial deployment of certain assets we acquired through the Acergy and Fraser Diving acquisitions subsequent to the second quarter of 2006. Gross margins decreased to 39.5% for the three months ended September 30, 2007 from 45.0% in the three months ended September 30, 2006 due to lower margin contracts in our international markets and increased depreciation and amortization related to deferred drydock costs on newly deployed vessels and other vessel upgrades.

Selling and administrative expenses. Selling and administrative expenses of $13.1 million for the three months ended September 30, 2007 were $3.4 million higher than the $9.7 million incurred in the three months ended September 30, 2006 primarily due to $1.2 million in external fees relating to the ongoing integration efforts related to our pending acquisition of Horizon Offshore, increased investment in international overhead and infrastructure and additional incentive compensation accruals. Selling and administrative expenses were 7.4% of revenues for the three months ended September 30, 2007, and 7.6% of revenues for the three months ended September 30, 2006.

Net interest expense. Net interest expense in the third quarter of 2007 was $2.1 million as compared to net interest income of $48,000 in the third quarter of 2006. Interest expense in the quarter is due to debt assumed in connection with the Company’s IPO in December 2006.

Income taxes. Income taxes were $17.4 million and $15.8 million for the three months ended September 30, 2007 and 2006, respectively. The effective tax rate for the respective periods was 31.6% for 2007 and 35.3% for 2006. The rate decrease was primarily due to an increased percentage of income being earned in foreign jurisdictions with lower tax rates.

Net income. Net income of $37.5 million for the three months ended September 30, 2007 was $8.5 million more than net income of $29.1 million for the three months ended September 30, 2006 as a result of the factors described above.

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