CAL DIVE INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 0-22739

CAL DIVE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

MINNESOTA 95-3409686
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

400 N. SAM HOUSTON PARKWAY E.,
SUITE 400
HOUSTON, TEXAS 77060
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(281) 618-0400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK (NO PAR VALUE)
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 28, 2002 was $759,567,754 based on the last reported
sales price of the Common Stock on June 28, 2002, as reported on the
NASDAQ/National Market System.

The number of shares of the registrant's Common Stock outstanding as of
March 17, 2003 was 37,632,058.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 14, 2003, are incorporated by reference into Part
III hereof.
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CAL DIVE INTERNATIONAL, INC. ("CDI") INDEX -- FORM 10-K

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PART I

ITEM 1. BUSINESS.

OVERVIEW

We are an energy services company specializing in subsea construction and
well operations as well as providing oil and gas companies with alternatives to
traditional approaches of equity sharing in offshore properties. We operate
primarily in the Gulf of Mexico, or Gulf, and recently in the North Sea with
services that cover the lifecycle of an offshore oil and gas field. We believe
we have a longstanding reputation for innovation in our subsea construction
techniques, equipment design and methods of partnering with customers. Our
diversified fleet of 23 vessels and 21 remotely operated vehicles (or ROVs) and
trencher systems perform services that support drilling, well completion,
intervention, construction and decommissioning projects involving pipelines,
production platforms, risers and subsea production systems. We also have
acquired significant interests in oil and gas properties and related production
facilities as part of our Production Partnering business. Our customers include
major and independent oil and gas producers, pipeline transmission companies and
offshore engineering and construction firms.

We have positioned ourselves for work in water depths greater than 1,000
feet, referred to as the Deepwater, by continuing to grow our technically
advanced fleet of dynamically positioned, or DP, vessels, ROVs and the number of
highly experienced support professionals we employ. In early 2002, we purchased
our new ROV subsidiary, Canyon Offshore, Inc., that offers survey, engineering,
repair, maintenance and international cable burial services in the Gulf, North
Sea and Southeast Asia. Later in mid-2002, our Well Ops (U.K.) Limited
subsidiary purchased the North Sea well operations business unit of
Technip-Coflexip ("Technip") including one large DP vessel, work contracts and
personnel. This fleet of DP vessels serves as advanced work platforms for the
subsea solutions that we provide with our alliance partners, a group of
internationally recognized contractors and manufacturers. Most notably, the
Q4000, our Deepwater semi-submersible multi-service vessel, or MSV, incorporates
patented technologies that can improve Deepwater well completion, intervention
and construction economics for our customers. Availability of the Q4000, and
four other large vessels that we recently purchased or upgraded, the Eclipse,
Mystic Viking, Intrepid and Seawell, enables us to offer a diverse fleet of DP
subsea construction and intervention vessels (four of which are based in the
Gulf).

On the Outer Continental Shelf, or OCS, in water depths up to 1,000 feet,
we perform traditional subsea services, including air and saturation diving and
salvage work. Our shallow operations division, Aquatica, provides a full
complement of services in the shallow water market from the shore to a depth of
300 feet. Aquatica's eight vessels are permanently dedicated to performing
traditional diving services. In depths from 300 feet to 1,000 feet, these
services are provided by our two four-point saturation diving vessels, with
another five DP vessels capable of providing such services, on the OCS. We
provide marine construction services in the OCS "spot market" where projects are
generally turnkey in nature, short in duration (two to thirty days), and require
the availability of multiple vessels due to frequent rescheduling. The technical
and operational experience of our personnel and the scheduling flexibility
offered by our large fleet enable us to manage turnkey projects and to meet our
customers' requirements. We have also established a presence in the salvage
market by offering customers a number of options to address their
decommissioning obligations in a cost-efficient manner, particularly the removal
of smaller structures. Our alliance with Horizon Offshore, Inc. provides derrick
barge and heavy lift capacity for the removal of larger structures.

In our Production Partnering business, our subsidiary Energy Resource
Technology, Inc., or ERT, acquires and produces mature, non-core offshore
property interests, offering customers a cost-effective alternative to the
decommissioning process required by law. Market conditions in 2002 allowed ERT
to add significantly to its property base through large property acquisitions
from Williams Production RMT Company (a subsidiary of the Williams Companies),
Amerada Hess Corporation, subsidiaries of Shell Exploration and Production
Company, and a venture consisting of Murphy Exploration & Production Company
("Murphy") and Callon Petroleum Operating Company ("Callon"), adding over 70
BCFe to ERT's reserves. In the acquisition from the Murphy/Callon joint venture,
ERT acquired and successfully developed a "Stranded

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Field" property, i.e., one where the exploratory well had encountered proven
reserves yet the reserves were of a marginal size to Murphy while Callon was
constrained by capital expenditure requirements. We also expanded our Production
Partnering strategy through participation in the ownership of the TLP production
facility for the Marco Polo field, a Deepwater Gulf oil and gas exploration
project operated by Anadarko Petroleum Corporation. We expect that owning this
tension-leg platform, or TLP, in a 50/50 joint venture with El Paso Energy
Partners, L.P. will generate income for us in the future and also provide us
with additional construction work for Cal Dive and farm-in opportunities for
ERT. ERT's reservoir engineering and geophysical expertise enabled us in 2000 to
acquire a working interest in Gunnison, a Deepwater Gulf oil and natural gas
exploration project, in partnership with the operator, Kerr-McGee Corporation.
We anticipate that these investments will generate income for us in the future
and will also help secure utilization for our subsea assets. At both Gunnison
and Marco Polo, we participate in field development planning and have been
contracted to perform subsea construction work.

Cal Dive was incorporated in Minnesota in 1983 as a successor to California
Divers, Inc. a company originally incorporated in 1964. We make available
through our website, www.caldive.com, our Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.

Our overall corporate goal is to increase shareholder value by
strengthening our market position to provide a return that leads our Peer Group.
We have been able to achieve our return on capital objective by focusing on the
following business strengths and strategies.

OUR STRENGTHS

Fleet of DP Vessels. Our fleet of DP vessels and ROVs is one of the
largest permanently deployed in the Gulf, with one of the most diverse and
technically advanced collections of subsea intervention and construction
capabilities. The comprehensive services provided by our DP vessels are both
complementary and overlapping, enabling us to provide customers the redundancy
essential for most projects, especially in the Deepwater.

Formation of New Well Operations Subsidiary as a "First In" Advantage. In
2002 we formed a new wholly owned subsidiary, Well Ops Inc., to provide offshore
oil and gas operators with the experience, expertise and technology for
cost-effective subsea well operations. Establishment of the Well Ops group
followed the construction of the purpose-built Q4000 and the acquisition of the
Subsea Well Operations Business Unit of Technip in Aberdeen, Scotland. The
mission of the new companies is to provide the industry with a single,
comprehensive source for addressing current well operations needs and to
engineer for future needs.

Experienced Personnel and Turnkey Contracting. A key element of our
successful growth has been our ability to attract and retain experienced
personnel who are among the best in the industry at providing turnkey
contracting. We believe the recognized skill of our personnel and our successful
operating history uniquely position us to capitalize on the trend in the oil and
gas industry of increased outsourcing to contractors and suppliers.

Major Provider of Marine Construction Services on the OCS. We believe that
our expansion of Aquatica, our alliance with Horizon, and our position in the
Gulf for saturation diving services make us the largest supplier of marine
construction services on the OCS. We expect the ongoing depletion of existing
reserves, coupled with growing demand for natural gas, to require increased
exploitation and development of OCS reservoirs.

Production Partnering. The strategy of ERT's oil and gas production
business differentiates us from our competitors and helps to offset the cyclical
nature of our marine construction operations. Each of ERT's oil and gas
investments is designed to secure utilization of CDI construction vessels. Our
long-term goal is that 40% of all of our construction utilization is provided by
ERT's ownership of offshore fields and production facilities.

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Decommissioning Operations. Over the last decade, we have established a
presence in decommissioning offshore facilities, particularly in the removal of
the smaller structures and caissons that make up approximately half of the
structures in the Gulf. We expect demand for decommissioning services to
increase due to the significant backlog of platforms and caissons that must be
removed in accordance with government regulations.

OUR STRATEGIES

Focusing on the Gulf. We will continue to focus on the Gulf of Mexico,
where we have provided marine construction services since 1975. We expect oil
and gas exploration and development activity in the Gulf, particularly in the
Deepwater, to increase over the next several years.

Capturing a Leading Presence in the Deepwater Market. We have recently
expanded our fleet to service Deepwater projects by purchasing the Mystic
Viking, a 242 foot DP vessel; the Eclipse, a large mono-hull vessel with
significant deck load capacity; and the Seawell, a purpose built DP well
operations vessel. In addition, in 2002 we took delivery of the Q4000 and the
Intrepid. Our fleet now includes nine world-class DP vessels, seven of which are
based in the Gulf of Mexico. In addition, through Canyon we now own and operate
21 ROV and trencher systems. Canyon represents an integration that is consistent
with our strategy of controlling all aspects along the critical path of
significant projects. In addition, we are presently building a "T750" Super
Trencher as well as 3 Triton XLS ROV systems to fulfill requirements under a
Master Service Agreement entered into with Technip.

Developing Well Operations Niche. It is estimated that over 2,000 subsea
trees will be installed in the years 2002 through 2006. Currently there are few
cost-effective solutions for subsea well operations to troubleshoot or enhance
production, shift zones or perform recompletions, as all such work today must
generally be done from drilling rigs. Our three purpose-built vessels serve as
work platforms for well operations services at costs significantly less than
drilling rigs. In the Gulf of Mexico, the new, multi-service semi-submersible
Q4000 and the Uncle John have set a series of "firsts" in increasingly deep
water without the use of a rig. In the North Sea, the Seawell has provided
intervention and abandonment services for more than 400 North Sea wells since
her commissioning in 1987. Competitive advantages of the CDI vessels stem from
their lower operating costs, ability to mobilize quickly and to maximize
productive time by performing a broad range of tasks for intervention,
construction, inspection, repair and maintenance.

Acquiring Mature Oil and Gas Properties. Through ERT we have been
acquiring mature or sunset properties since 1992, thereby providing customers a
cost effective alternative to the decommissioning process. In the last ten years
we have acquired interests in 89 leases and currently are the operator of 42 of
63 active offshore leases. ERT has been able to achieve a significant return on
capital by efficiently developing acquired reserves, lowering lease operating
expenses and adding new reserves through well work. Our customers consider ERT a
preferred buyer as ERT is a bonded offshore operator and has access to Cal
Dive's decommissioning assets. As the industry wide leader of acquiring mature
properties, ERT has a significant flow of potential acquisitions. At December
31, 2002, ERT's total proven reserves were 157.5 BCFe, including 73.8 BCFe of
initial proved reserves assigned to our ownership position in Gunnison.

Expanding Ownership in Deepwater Developments. Cal Dive has a 20% working
interest position in the Deepwater Gunnison field and owns 50% of the tension
leg production platform being constructed with El Paso Energy Partners for the
Marco Polo field. Ownership of the TLP provides a transmission type return which
does not entail any reservoir or commodity price risk. The Company plans to seek
additional opportunities to invest in such production facilities.

Expanding the Stranded Field Model. Drilling activity in the Gulf since
1998 has consistently exceeded 70 exploratory wells per year with approximately
30% resulting in new discoveries. Because of the smaller size of the reservoirs
today, there are many commercial discoveries in the Deepwater Gulf of Mexico
that have yet to be brought into production. In addition, many of the wells
deemed non-commercial or those in non-core areas are attractive to the Company.
During 2002, the Company acquired and successfully developed its first proved
undeveloped reserve ("PUD") prospect, East Cameron 374, a field acquired from
Murphy Exploration and Callon. The Eclipse and Cal Diver I assisted in the
successful development of this field. Depending upon

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the water depth, development of these fields may require state of the art
equipment such as the Q4000, a more specialized asset such as the Intrepid, for
pipelay or a combination of Cal Dive contracting assets. The Company is
considering a number of alternatives that would provide outside investor funding
to expand this market niche.

THE INDUSTRY

The offshore oilfield services industry in the Gulf originated in the early
1950s to assist companies as they began to explore and develop offshore fields.
The industry has grown significantly since the early 1970s as the domestic oil
and gas industry has increasingly relied upon these fields for new production.
The oilfield services industry benefits from a number of trends including the
following:

- lack of growth in natural gas production and failure to construct new
subsea construction assets in the face of foreign dependency and
increasing U.S. and world demand;

- advances in exploration, extraction and production technology that have
enabled industry participants to more cost-effectively enter the
Deepwater Gulf; and

- increased demand for decommissioning services as the offshore oil and gas
industry continues to mature.

In response to the oil and gas industry's ongoing migration to the
Deepwater, equipment and vessel requirements have changed. Most vessels
currently operating in the Deepwater Gulf were designed in the 1970s and 1980s
for work in a maximum depth of approximately 1,000 feet. These vessels have been
modified to take advantage of new technologies and now operate in depths up to
4,000 feet. We believe there is demand in the Gulf for new generation vessels,
such as the Q4000 and Intrepid, that are specifically designed to work in water
depths up to 10,000 feet.

Defined below are certain terms and ideas helpful to understanding the
services we perform in support of offshore development:

BCFe: When describing oil and gas, the term converts oil volumes to
their energy equivalent in natural gas and combines them in billions of
cubic feet equivalent.

Deepwater: Water depths beyond 1,000 feet.

Dive Support Vessel (DSV): Specially equipped vessel which performs
services and acts as an operational base for divers, ROVs and specialized
equipment.

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 enable 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.

DP-2: Redundancy allows the vessel to maintain position even with
failure of one DP system. Required for vessels which support both manned
diving and robotics and for those working in close proximity to platforms.

EHS: Environment, Health and Safety programs to protect the
environment, safeguard employee health and eliminate injuries.

E&P: Companies involved in oil and gas exploration and production
activities.

Life of Field Services: Includes services performed on facilities,
trees and pipelines from the beginning to the economic end of the life of
an oil field, including installation, inspection, maintenance, repair,
contract operations, well intervention, recompletion and abandonment.

MBbl: When describing oil, refers to 1,000 barrels containing 42
gallons each.

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Minerals Management Service (MMS): The federal regulatory body having
responsibility for United States waters in the Gulf.

MMcf: When describing natural gas, refers to 1 million cubic feet.

Moonpool: An opening in the center of a vessel through which a
saturation diving system or ROV may be deployed, allowing safe deployment
in adverse weather conditions.

Outer Continental Shelf (OCS): For purposes of our industry, areas in
the Gulf from the shore to 1,000 feet of water depth.

Peer Group: Defined in this Annual Report as comprising Global
Industries, Ltd. (Nasdaq: GLBL), Horizon Offshore, Inc. (Nasdaq: HOFF),
McDermott International, Inc. (NYSE: MDR), Oceaneering International, Inc.
(NYSE: OII), Stolt Offshore SA (Nasdaq: SOSA), Technip-Coflexip (NYSE:
TKP), and Torch Offshore, Inc. (Nasdaq: TORC).

Production Partnering: Alternative approach (i) to equity sharing in
offshore properties through the purchase of mature fields and those fields
where exploratory drilling encountered less than expected reserves and (ii)
to ownership of production facilities.

Proved Undeveloped Reserve (PUD): Proved undeveloped oil and gas
reserves that are expected to be recovered from a new well on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion.

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: Saturation diving, required for work in water
depths between 300 and 1,000 feet, involves divers working from special
chambers for extended periods at a pressure equivalent to the pressure at
the work site.

Spar: Floating production facility anchored to the sea bed with
catenary mooring lines.

Spot Market: Prevalent market for subsea contracting in the Gulf,
characterized by projects generally short in duration and often of a
turnkey nature. These projects often require constant rescheduling and the
availability or interchangeability of multiple vessels.

Stranded Field: Smaller reservoir that standing alone may not justify
the economics of a host production facility and/or infrastructure
connections.

Subsea Construction Vessels: Subsea services are typically performed
with the use of specialized construction vessels which provide an
above-water platform that functions as an operational base for divers and
ROVs. Distinguishing characteristics of subsea construction vessels include
DP systems, saturation diving capabilities, deck space, deck load, craneage
and moonpool launching. Deck space, deck load and craneage are important
features of the vessel's ability to transport and fabricate hardware,
supplies and equipment necessary to complete subsea projects.

Tension Leg Platform (TLP): A floating Deepwater compliant structure
designed for offshore hydrocarbon production.

Trencher or Trencher System: A subsea robotics system capable of
providing post lay trenching, inspection and burial (PLIB) and maintenance
of submarine cables and flowlines in water depths of 30 to 7,200 feet
across a range of seabed and environmental conditions.

Ultra-Deepwater: Water depths beyond 4,000 feet.

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SUBSEA CONTRACTING

We and our alliance partners provide a full range of subsea construction
services in both the shallow water and Deepwater Gulf including:

- Exploration. Pre-installation surveys; rig positioning and installation
assistance; drilling inspection; subsea equipment maintenance; well
completion; search and recovery operations.

- Development. Installation of production platforms; installation of
subsea production systems; pipelay support including connecting pipelines
to risers and subsea assemblies; pipeline stabilization, testing and
inspection; cable and umbilical lay and connection.

- Production. Inspection, maintenance and repair of production structures,
risers and pipelines and subsea equipment; well intervention; life of
field support.

- Decommissioning. Decommissioning and remediation services; plugging and
abandonment services; platform salvage and removal; pipeline abandonment;
site inspections.

Deepwater Contracting and Well Operations

In 1994, we began to assemble a fleet of DP vessels in order to deliver
subsea services in the Deepwater and Ultra-Deepwater. Today, our fleet consists
of two semi-submersible DP MSVs, the Q4000 and the Uncle John; a dedicated well
operations vessel, the Seawell; an umbilical and rigid pipelay vessel, the
Intrepid; three construction DP DSVs, the Witch Queen, the Mystic Viking, and
the Eclipse; and two ROV support vessels, the Merlin and the Northern Canyon. In
2001, we began vessel enhancements to the Q4000 (well completion) and the
Intrepid (DP-2 capability and a 400-ton crane). The Q4000 and Intrepid were
placed into service, respectively, in April and May 2002. We purchased the
Eclipse in October of 2001 and the Seawell in July of 2002.

In 2002, we increased our ROV and trenching fleet to 21 by acquiring Canyon
Offshore, Inc. Canyon's ROVs and trenchers are designed for offshore
construction, rather than drilling rig support, and its management team added
industry experience in a setting where our vessels can add value in support of
its ROVs. As marine construction support in the Gulf of Mexico moves to deeper
waters, ROV systems will play an increasingly important role and will help to
provide our customers with vessel availability and schedule flexibility to meet
the technological challenges of Deepwater construction developments in the Gulf
and internationally. Our ROVs operate in three regions: the Americas (8),
Southeast Asia (5), and the North Sea (4). In addition to the ROVs, Canyon also
has four trenchers that operate in Southeast Asia (2) and the North Sea (2).
Furthermore, Canyon has ordered 3 new Triton XLS ROV systems and a state of the
art 750 horsepower trenching unit to fulfill its future contract obligations
under its agreement with Technip.

We assist customers in solving the operational challenges encountered in
Deepwater projects by using methods or technologies we have developed. To
enhance our ability to provide both full field development and life of field
services, we have alliances with other offshore service and equipment providers.
These alliances enable us to offer state-of-the-art products and service while
maintaining our low overhead base. These alliances are:

- Fugro-McClelland Marine Geoscience, Inc. -- Geotechnical coring and
survey

- Horizon Offshore, Inc. -- Small diameter reeled pipelay equipment

- Schlumberger Limited -- Deepwater downhole services

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Utilization of 82% was very close to last year's record of 87% even though
we added three new vessels and elected to take several vessels out of service in
the third quarter for accelerated regulatory inspections. Major projects in 2001
and 2002 were:

In late 2002, we formed a new wholly owned subsidiary, Well Ops Inc., to
provide offshore oil and gas operators with the industry's largest collection of
experience, expertise and technology for cost-effective subsea well operations.
Establishment of the Well Ops Group (Well Ops Inc. and Well Ops (U.K.) Limited)
follows the construction of the purpose-built Q4000 and the acquisition of the
subsea well operations business unit of CSO Ltd., a subsidiary of Technip. The
mission of these new companies is to provide the industry with a single,
comprehensive source for addressing current well operations needs and to
engineer for future needs. Our purpose-built vessels serve as work platforms for
well operations services at costs significantly less than drilling rigs. In the
Gulf of Mexico, the Q4000 and the Uncle John have set a series of "firsts" in
increasingly deep water without the use of a rig including: first "live subsea
well" intervention; first through tubing subsea well decommission; first "live
subsea well" intervention using wireline lubricator; first Deepwater full field
decommission; first re-entry and decommission through horizontal tree; first
removal and recovery of subsea well templates and horizontal trees; first use of
test tree in open water as a lower riser package (LRP); first subsea transfer of
tree from one well to another during decommissioning operations; first use of
coil tubing drilling in subsea decommissioning; and first installation of a
"storm choke" as replacement for subsurface safety control valve; all of which
utilized a semi-submersible DP MSV instead of a drilling rig. The Seawell has
provided intervention and abandonment services for more than 400 North Sea wells
since her commissioning in 1987. Competitive advantages of our vessels stem from
their lower operating costs and the ability to mobilize quickly and maximize
productive time by performing a broad range of tasks for intervention,
construction, inspection, repair and maintenance. Well Ops Inc. also
collaborates with the leading downhole service providers to provide a superior,
comprehensive solution. An alliance is currently in place with Schlumberger to
provide these services.

Shelf Contracting

On the OCS in water depths up to 1,000 feet, we perform traditional subsea
services including air and saturation diving in support of marine construction
activities. Eleven of our vessels are permanently dedicated to performing
traditional diving services, with another five DP vessels capable of providing
such services, on the OCS. Seven of these vessels support saturation diving. In
addition, our highly qualified personnel have the technical and operational
experience to manage turnkey projects to satisfy customers' requirements and
achieve our targeted profitability.

We deliver our services in the shallow water market, from the beach to a
depth of 300 feet, through our shallow operations division, Aquatica. In
addition, our saturation diving vessels can deliver services in depths up to
1,000 feet. We also perform numerous projects on the OCS in an alliance with
Horizon. In the late 1980s, we demonstrated that pipelay operations would be
much more effective if the expensive barge spreads

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simply laid the pipe, allowing our DSVs to follow along and perform the more
time-consuming task of commissioning the line. Under the alliance, we have the
exclusive right to provide DSV and diving services for Horizon pipelay barges,
while Horizon supplies pipelay, derrick barge and heavy lift capacity to us. Our
interaction with Horizon is multi-faceted, including operations in addition to
those that flow from the formal alliance to provide services on the OCS. For
example, much of our work in Mexican waters has been subcontracted from Horizon.

Since 1989, we have undertaken a wide variety of decommissioning
assignments, mostly on a turnkey basis. We have established a leading position
in the removal of smaller structures, such as caissons and well protectors,
which represent approximately half of the structures in the Gulf.

PRODUCTION PARTNERING

We formed ERT in 1992 to exploit a market opportunity to provide a more
efficient solution to offshore abandonment, to expand our off-season salvage and
decommissioning activity, and to support full field production development
projects. Through Production Partnering, we offer customers the option of
selling mature offshore fields as an alternative to contracting and managing the
many phases of the decommissioning process. The benefits of our Production
Partnering strategy are fourfold. First, oil and gas revenues counteract the
volatility in revenues we experience in offshore construction. Second, in
periods of excess capacity, such as in 2002, we have the flexibility to stay out
of the competitive bid market and instead focus on negotiated contracts. Third,
our oil and gas operations generate significant cash flow that has partially
funded construction and/or modification of assets such as the Q4000, Intrepid
and Eclipse, enabling us to add technical talent to support our expansion into
the new Deepwater frontier. Finally, a major objective of our investments in oil
and gas properties is to secure the associated marine construction work.

There are over 100 discoveries in the Deepwater Gulf that have yet to be
brought into production. Many of these are smaller reservoirs that standing
alone cannot justify the economics of a host production facility. As a result,
we expect that the Deepwater Gulf will be developed in a hub and satellite field
concept that resembles the approach the airline industry has used with regional
hub locations. We expect significant opportunities as this occurs. For example,
Gunnison, our first Deepwater field development project, is a hub location where
we will provide infrastructure and tie-back marine construction services. At the
Marco Polo field, our 50% ownership in the production facility will allow us to
realize a return on investment consisting of both a fixed monthly demand charge
and a volumetric tariff charge. In addition, we will assist with the
installation of the TLP and work to develop the surrounding acreage that can be
tied back to the platform by our construction vessels.

Within ERT we have assembled a team of personnel with experience in
geology, geophysics, reservoir engineering, drilling, production engineering,
facilities management, lease operations and land. ERT generates income in three
ways: lowering salvage costs by using our assets, operating the field more cost
effectively, and extending reservoir life through well exploitation operations.
When a company sells an OCS property, they retain the financial responsibility
for plugging and decommissioning if their purchaser becomes financially unable
to do so. Thus, it becomes important that a property be sold to a purchaser who
has the financial wherewithal to perform their contractual obligations. Although
there is significant competition in this mature field market, ERT's reputation,
supported by Cal Dive's financial strength, have made it the purchaser of choice
of many major independent oil and gas companies. Despite this competition we
significantly expanded our property base in 2002 with four large acquisitions,
including one successful completion of a "stranded" field.

In June, ERT acquired a package of offshore properties from Williams
Production RMT Company (a subsidiary of the Williams Companies). The blocks
purchased represent an average 30% net working interest in 23 federal leases and
three Texas leases with 23 wells that produce the equivalent of 7.5 MMcf per
day. In August, ERT acquired the 74.8% working interest of subsidiaries of Shell
Exploration & Production Company in the South Marsh Island 130 (SMI 130) field
and completed the purchase of seven Gulf of Mexico fields from Amerada Hess
Corporation, including Hess's 25% interest in SMI 130. Currently the SMI 130
Field, with approximately 155 wells on five 8-pile platforms, produces
approximately 4,000 barrels of oil per day from

8

50 active wells. In August 2002, ERT completed the #1 well at East Cameron 374
in three zones using Cal Dive vessels. With production commingled from the lower
two zones the well is currently producing at 15.5 MMCFD and 75 BOPD. The
completion marked the first Gulf of Mexico application of Baker Oil Tools
"Intelligent Well System". The "InForce(TM) Intelligent Well System" allows ERT
to change zones via hydraulic controls on the production platform without
requiring a rig re-enter the well. This type of completion also minimizes future
well maintenance requirements.

The table below sets forth information, as of December 31, 2002, with
respect to estimates of net proved reserves and the present value of estimated
future net cash flows at such date, prepared in accordance with guidelines
established by the Securities and Exchange Commission. The Company's estimates
of reserves at December 31, 2002, excluding Gunnison, have been reviewed by
Miller and Lents, Ltd., independent petroleum engineers. These non-Gunnison
reserves totaled (as of December 31, 2002) 43,323 MMcf of natural gas and 6,727
MBbls of oil with a standardized measure of discounted future net cash flows
(pre-tax) of $161,565,600 (see note (2) in table below). Since the Company does
not own a license to the geophysical data, reserves attributable to Gunnison
(which total 47% of our proved reserves as of December 31, 2002) have been
determined based on information provided by the operator. These reserve
estimates were reviewed by our engineers, including an assessment of the
operator's assumptions and their engineering, geologic and evaluation principles
and techniques. All of the Company's reserves are located in the United States.
Proved reserves cannot be measured exactly because the estimation of reserves
involves numerous judgmental determinations. Accordingly, reserve estimates must
be continually revised as a result of new information obtained from drilling and
production history, new geological and geophysical data and changes in economic
conditions.

- ---------------

(1) Includes both Company's reserves reviewed by Miller & Lents (as noted above)
and Gunnison reserves reviewed by Company's engineers.

(2) The standardized measure of discounted future net cash flows attributable to
our reserves was prepared using constant prices as of the calculation date,
discounted at 10% per annum. As of December 31, 2002, we owned an interest
in 157 gross (105 net) natural gas wells and 302 gross (265 net) oil wells
located in federal and state offshore waters in the Gulf of Mexico.

CUSTOMERS

Our customers include major and independent oil and gas producers, pipeline
transmission companies and offshore engineering and construction firms. The
level of construction services required by any particular customer depends on
the size of that customer's capital expenditure budget devoted to construction
plans in a particular year. 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: 2002 -- Horizon
Offshore, Inc. (10%) and BP Trinidad & Tobago LLC (11%); 2001 -- Horizon
Offshore, Inc. (18%) and Enron Corp. (10%) and 2000 -- Enron Corp. (13%). We
estimate that in 2002 we provided subsea services to over 200 customers. Our
projects are typically of short duration and are generally awarded shortly
before mobilization. Accordingly, we believe backlog is not a meaningful
indicator of future business results.

COMPETITION

The subsea services industry is highly competitive. While price is a
factor, the ability to acquire specialized vessels, to attract and retain
skilled personnel, and to demonstrate a good safety record are also

9

important. Our competitors on the OCS include Global Industries Ltd.,
Oceaneering International, Inc., Stolt Offshore S.A., Torch Offshore, Inc., and
a number of smaller companies, some of which only operate a single vessel and
often compete solely on price. For Deepwater projects, our principal competitors
include Stolt Offshore S.A., Subsea 7, Technip-Coflexip and Torch.

ERT encounters significant competition for the acquisition of mature oil
and gas properties. Our ability to acquire additional properties depends upon
our ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. Many potential purchasers of
oil and gas properties are well-established companies with substantially larger
operating staffs and greater capital resources.

TRAINING, SAFETY AND QUALITY ASSURANCE

We have established a corporate culture in which safety is expected to be
among the highest priorities. Our corporate goal, based on the belief that all
accidents are preventable, is to provide an injury-free workplace by focusing on
correct safety behavior. Our safety procedures and training programs were
developed by management personnel who came into the industry as divers and who
know first hand the physical challenges of the ocean work site. As a result,
management believes that our safety programs are among the best in the industry.
We have introduced a company-wide effort to enhance a behavioral safety process
and training program that makes safety a constant focus of awareness through
open communication with all offshore and yard employees. The process includes
the documentation of all daily observations and the collection of this data. In
addition, we initiated regular monthly visits by project managers to conduct
"Hazard Hunts" on each vessel, providing a "safety audit" with a fresh
perspective. Results from this program were evident as our safety performance
improved significantly in 2001 and 2002.

GOVERNMENT REGULATION

Many aspects of the offshore marine construction industry are subject to
extensive governmental regulations. We are subject to the jurisdiction of the
Coast Guard, the Environmental Protection Agency, the MMS and the U.S. Customs
Service, as well as private industry organizations such as the American Bureau
of Shipping. In the North Sea, regulations govern working hours and a specified
working environment, as well as standards for diving procedures, equipment and
diver health. These North Sea standards are some of the most stringent
worldwide. In the absence of any specific regulation, our North Sea branch
adheres to standards set by the International Marine Contractors Association and
the International Maritime Organisation.

We support and voluntarily comply with standards of the Association of
Diving Contractors International. The Coast Guard sets safety standards and is
authorized to investigate vessel and diving accidents, and to recommend improved
safety standards. The Coast Guard also is authorized to inspect vessels at will.
We are required by various governmental and quasi-governmental agencies to
obtain various permits, licenses and certificates with respect to our
operations. We believe that we have obtained or can obtain all permits, licenses
and certificates necessary for the conduct of our business.

In addition, we depend on the demand for our services from the oil and gas
industry and, therefore, our business is affected by laws and regulations, as
well as changing taxes and policies relating to the oil and gas industry
generally. In particular, the development and operation of oil and gas
properties located on the OCS of the United States is regulated primarily by the
MMS.

The MMS requires lessees of OCS properties to post bonds in connection with
the plugging and abandonment of wells located offshore and the removal of all
production facilities. Operators on the OCS are currently required to post an
area-wide bond of $3.0 million, or $500,000 per producing lease. We currently
have bonded our offshore leases as required by the MMS. Under certain
circumstances, the MMS has the authority to suspend or terminate operations on
federal leases. Any such suspensions or terminations of our operations could
have a material adverse effect on our financial condition and results of
operations.

10

We acquire production rights to offshore mature oil and gas properties
under federal oil and gas leases, which the MMS administers. These leases
contain relatively standardized terms and require compliance with detailed MMS
regulations and orders pursuant to the Outer Continental Shelf Lands Act, or
OCSLA. These MMS directives are subject to change. The MMS has promulgated
regulations requiring offshore production facilities located on the OCS to meet
stringent engineering and construction specifications. The MMS also has issued
regulations restricting the flaring or venting of natural gas and prohibiting
the burning of liquid hydrocarbons without prior authorization. Similarly, the
MMS has promulgated other regulations governing the plugging and abandonment of
wells located offshore and the removal of all production facilities. Finally,
under certain circumstances, the MMS may require any operations on federal
leases to be suspended or terminated. In December 1999, the MMS issued
regulations that would allow it to expel unsafe operators from existing OCS
platforms and bar them from obtaining future leases.

Under OCSLA and the Federal Oil and Gas Royalty Management Act, MMS also
administers oil and gas leases and establishes regulations that set the basis
for royalties on oil and gas produced from the leases. The MMS amends these
regulations from time to time. For example, on March 15, 2000, the MMS issued a
final rule governing the calculation of royalties and the valuation of crude oil
produced from federal leases. The rule modifies the valuation procedures for
both arm's length and non-arm's length crude oil transactions to decrease
reliance on oil posted prices and assign a value to crude oil that better
reflects market value. The rule has been challenged by two industry trade
associations and is currently under judicial review in the United States
District Court for the District of Columbia. In addition, the MMS recently
issued a final rule amending its regulations regarding costs for natural gas
transportation that are deductible for royalty valuation purposes when natural
gas is sold off-lease. Among other matters, for purposes of computing royalties
owed, the rule disallows as deductions certain costs, such as
aggregator/marketer fees and transportation imbalance charges and associated
penalties. A United States District Court enjoined substantial portions of this
rule on March 28, 2000. The United States appealed the district court decision.
On February 8, 2002, the Court of Appeals for the District of Columbia reversed
the District Court and reinstated the regulations. The United States Supreme
Court denied the trade associations' petition for review on January 13, 2003.

Historically, the transportation and sale for resale of natural gas in
interstate commerce has been regulated pursuant to the Natural Gas Act of 1938,
the Natural Gas Policy Act of 1978, or NGPA, and the regulations promulgated
thereunder by the Federal Energy Regulatory Commission, or FERC. In the past,
the federal government has regulated the prices at which oil and gas could be
sold. While sales by producers of natural gas, and all sales of crude oil,
condensate and natural gas liquids currently can be made at uncontrolled market
prices, Congress could reenact price controls in the future. Deregulation of
wellhead sales in the natural gas industry began with the enactment of the NGPA.
In 1989, the Natural Gas Wellhead Decontrol Act was enacted. This act amended
the NGPA to remove both price and non-price controls from natural gas sold in
"first sales" no later than January 1, 1993.

Sales of natural gas are affected by the availability, terms and cost of
transportation. The price and terms for access to pipeline transportation remain
subject to extensive federal and state regulation. Several major regulatory
changes have been implemented by Congress and the FERC from 1985 to the present
that affect the economics of natural gas production, transportation and sales.
In addition, the FERC continues to promulgate revisions to various aspects of
the rules and regulations affecting those segments of the natural gas industry,
most notably interstate natural gas transmission companies that remain subject
to FERC jurisdiction. These initiatives may also affect the intrastate
transportation of natural gas under certain circumstances. The stated purpose of
many of these regulatory changes is to promote competition among the various
sectors of the natural gas industry. The ultimate impact of the complex rules
and regulations issued by the FERC since 1985 cannot be predicted.

We cannot predict what further action the FERC will take on these matters,
but we do not believe any such action will materially affect us differently than
other companies with which we compete.

Additional proposals and proceedings before various federal and state
regulatory agencies and the courts could affect the oil and gas industry. We
cannot predict when or whether any such proposals may become effective. In the
past, the natural gas industry has been heavily regulated. There is no assurance
that the

11

regulatory approach currently pursued by the FERC will continue indefinitely.
Notwithstanding the foregoing, we do not anticipate that compliance with
existing federal, state and local laws, rules and regulations will have a
material effect upon our capital expenditures, earnings or competitive position.

ENVIRONMENTAL REGULATION

Our operations are subject to a variety of national (including federal,
state and local) and international laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. Numerous governmental departments issue rules and regulations to
implement and enforce such 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 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, but the discussion does
not cover all environmental laws and regulations that govern our operations.

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 $500,000 or $600 per gross ton for vessels other than tank vessels.
The liability limits are not applicable, however, if the spill is caused by
gross negligence or willful misconduct; if the spill 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. Management is currently unaware of any oil
spills for which we have been designated as a Responsible Party under OPA that
will have a material adverse impact on us or our operations.

OPA also imposes ongoing requirements on a Responsible Party, including
preparation of an oil spill contingency plan and maintaining proof of financial
responsibility to cover a majority of the costs in a potential spill. We believe
we have appropriate spill contingency plans in place. 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. We believe that we currently have
established adequate proof of financial responsibility for our onshore and
offshore facilities and that we satisfy the MMS requirements for financial
responsibility under OPA and applicable 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 Clean Water Act imposes strict controls on the discharge of pollutants
into the navigable waters of the U.S. and imposes potential liability for the
costs of remediating releases of petroleum and other substances. The controls
and restrictions imposed under the Clean Water Act 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

12

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 gas into certain coastal and offshore waters. The Clean
Water Act provides for civil, criminal and administrative penalties for any
unauthorized discharge of oil and other hazardous substances and imposes
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. Many states have laws that are
analogous to the Clean Water Act and also require remediation of releases of
petroleum and other hazardous substances in state waters. Our vessels routinely
transport diesel fuel to offshore rigs and platforms and also carry diesel fuel
for their own use. Our supply boats transport bulk chemical materials used in
drilling activities and also transport liquid mud which contains oil and oil by-
products. Offshore facilities and vessels operated by us have facility and
vessel response plans to deal with potential spills of oil or its derivatives.
We believe that our operations comply in all material respects with the
requirements of the Clean Water Act and state statutes enacted to control water
pollution.

OCSLA provides the federal government with broad discretion in regulating
the production of offshore resources of oil and gas, including authority to
impose safety and environmental protection requirements applicable to lessees
and permittees operating in the OCS. Specific design and operational standards
may apply to OCS vessels, rigs, platforms, vehicles and structures. Violations
of lease conditions or regulations issued pursuant to OCSLA can result in
substantial civil and criminal penalties, as well as potential court injunctions
curtailing operations and cancellation of leases. Because our operations rely on
offshore oil and gas exploration and production, if the government were to
exercise its authority under OCSLA to restrict the availability of offshore oil
and gas leases, such action could have a material adverse effect on our
financial condition and results of operations. As of this date, we believe we
are not the subject of any civil or criminal enforcement actions under OCSLA.

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 owners and operators of contaminated sites where the release occurred
and those companies who transport, dispose of or who arrange for disposal of
hazardous substances released at the sites. 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. Third parties
may also file claims for personal injury and property damage allegedly caused by
the release of hazardous substances. Although we handle hazardous substances in
the ordinary course of business, we are not aware of any hazardous substance
contamination for which we may be liable.

We operate in foreign jurisdictions that have various types of governmental
laws and regulations relating to the discharge of oil or hazardous substances
and the protection of the environment. Pursuant to these laws and regulations,
we could be held liable for remediation of some types of pollution, including
the release of oil, hazardous substances and debris from production, refining or
industrial facilities, as well as other assets we own or operate or which are
owned or operated by either our customers or our sub-contractors.

Management believes that we are in compliance in all material respects with
all applicable environmental laws and regulations to which we are subject. 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 significant environmental
compliance costs in the future.

EMPLOYEES

We rely on the high quality of our workforce. As of December 31, 2002, we
had 1,184 employees, 227 of which were salaried. As of that date we also
utilized approximately 450 non-U.S. citizens to crew our foreign flag vessels
under a crewing contract with C-MAR Services (UK), Ltd. of Aberdeen, Scotland.
None of our employees belong to a union or are employed pursuant to any
collective bargaining agreement or any similar arrangement. We believe that our
relationship with our employees and foreign crew members is good.

13

FACTORS INFLUENCING FUTURE RESULTS AND
ACCURACY OF FORWARD-LOOKING STATEMENTS

Shareholders should carefully consider the following risk factors in
addition to the other information contained herein. This Annual Report on Form
10-K includes certain statements that may be deemed "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. You can identify these statements by forward-looking words such as
"anticipate," "believe," "budget," "could," "estimate," "expect," "forecast,"
"intend," "may," "plan," "potential," "should," "will" and "would' or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future
financial position or results of operations or state other forward-looking
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to predict or control accurately. The factors listed below in
this section, captioned "Factors Influencing Future Results and Accuracy of
Forward-Looking Statements," as well as any cautionary language in this Annual
Report, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of the
events described in these risk factors and elsewhere in this Annual Report could
have a material adverse effect on our business, results of operations and
financial position.

OUR BUSINESS IS ADVERSELY AFFECTED BY LOW OIL AND GAS PRICES AND BY THE
CYCLICALITY OF THE OIL AND GAS INDUSTRY.

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

- Worldwide economic activity,

- Economic and political conditions in the Middle East and other
oil-producing regions,

- Coordination by the Organization of Petroleum Exporting Countries, or
OPEC,

- The cost of exploring for and producing oil and gas,

- The sale and expiration dates of offshore leases in the United States and
overseas,

- The discovery rate of new oil and gas reserves in offshore areas,

- Technological advances,

- Interest rates and the cost of capital,

- Environmental regulations, and

- Tax policies.

The level of offshore construction activity did not increase despite higher
commodity prices in 2002. We cannot assure you that activity levels will
increase anytime soon. A sustained period of low drilling and production
activity or the return of lower commodity prices would likely have a material
adverse effect on our financial position and results of operations.

THE OPERATION OF MARINE VESSELS IS RISKY, AND WE DO NOT HAVE INSURANCE COVERAGE
FOR ALL RISKS.

Marine construction involves a high degree of operational risk. Hazards,
such as vessels sinking, grounding, colliding and sustaining damage from severe
weather conditions, are inherent in marine operations. These hazards can cause
personal injury or loss of life, severe damage to and destruction of property
and equipment, pollution or environmental damage and suspension of operations.
Damage arising from such occurrences may result in lawsuits asserting large
claims. We maintain such insurance protection as we deem

14

prudent, including Jones Act employee coverage, which is the maritime equivalent
of workers' compensation, and hull insurance on our vessels. We cannot assure
you that any such insurance will be sufficient or effective under all
circumstances or against all hazards to which we may be subject. A successful
claim for which we are not fully insured could have a material adverse effect on
us. Moreover, we cannot assure you that we will be able to maintain adequate
insurance in the future at rates that we consider reasonable. As a result of
market conditions, premiums and deductibles for certain of our insurance
policies have increased substantially, and could escalate further. In some
instances, certain insurance could become unavailable or available only for
reduced amounts of coverage. For example, insurance carriers are now requiring
broad exclusions for losses due to war risk and terrorist acts. As construction
activity expands into deeper water in the Gulf, a greater percentage of our
revenues may be from Deepwater construction projects that are larger and more
complex, and thus riskier, than shallow water projects. As a result, our
revenues and profits are increasingly dependent on our larger vessels. The
current insurance on our vessels, in some cases, is in amounts approximating
book value, which is less than replacement value. In the event of property loss
due to a catastrophic marine disaster, mechanical failure or collision,
insurance may not cover a substantial loss of revenues, increased costs and
other liabilities, and could have a material adverse effect on our operating
performance if we were to lose any of our large vessels.

OUR CONTRACTING BUSINESS DECLINES IN WINTER, AND BAD WEATHER IN THE GULF OR
NORTH SEA CAN ADVERSELY AFFECT OUR OPERATIONS.

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

IF WE BID TOO LOW ON A TURNKEY CONTRACT, WE SUFFER CONSEQUENCES.

A majority of our projects are performed on a qualified turnkey basis where
described work is delivered for a fixed price and extra work, which is subject
to customer approval, is billed separately. The revenue, cost and gross profit
realized on a turnkey contract can vary from the estimated amount because of
changes in offshore job conditions, variations in labor and equipment
productivity from the original estimates, and the performance of others such as
alliance partners. These variations and risks inherent in the marine
construction industry may result in our experiencing reduced profitability or
losses on projects.

ESTIMATES OF OUR OIL AND GAS RESERVES, FUTURE CASH FLOWS AND ABANDONMENT COSTS
MAY BE SIGNIFICANTLY INCORRECT.

Our proved reserves at December 31, 2002, included the reserves assigned to
our ownership position in the Gunnison project, a Deepwater Gulf of Mexico oil
and gas field operated by Kerr-McGee Corporation. These reserves constitute 47%
of our total proved reserves as of December 31, 2002. The reserves assigned to
Gunnison were not generated by our reservoir engineers, as we do not own the
seismic data for the three fields that comprise Gunnison. Instead, they were
determined based on information provided by the operator, Kerr-McGee Oil & Gas
Corporation. These reserve estimates were reviewed by our engineers, including
an assessment of the operator's assumptions and their engineering, geologic and
evaluation principles and techniques. This Annual Report also contains estimates
of our other proved oil and gas reserves and the estimated future net cash flows
therefrom based upon reports for the years ended December 31, 2000, 2001 and
2002, reviewed by Miller and Lents, Ltd., independent petroleum engineers. These
reports rely upon various assumptions, including assumptions required by the
Securities and Exchange Commission, as to oil and gas prices, drilling and
operating expenses, capital expenditures, abandonment costs, taxes and
availability of funds. The process of estimating oil and gas reserves is
complex, requiring significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
reservoir. As a result, these estimates are inherently imprecise. Actual future
production, cash flows,

15

development expenditures, operating and abandonment expenses and quantities of
recoverable oil and gas reserves may vary substantially from those estimated in
these reports. Any significant variance in these assumptions could materially
affect the estimated quantity and value of our proved reserves. You should not
assume that the present value of future net cash flows from our proved reserves
referred to in this prospectus is the current market value of our estimated oil
and gas reserves. In accordance with Securities and Exchange Commission
requirements, we base the estimated discounted future net cash flows from our
proved reserves on prices and costs on the date of the estimate. Actual future
prices and costs may differ materially from those used in the net present value
estimate. In addition, if costs of abandonment are materially greater than our
estimates, they could have an adverse effect on earnings.

THE GUNNISON PROJECT MAY NOT RESULT IN THE EXPECTED CASH FLOWS OR SUBSEA ASSET
UTILIZATION WE ANTICIPATE AND COULD INVOLVE SIGNIFICANT FUTURE CAPITAL OUTLAYS.

The Gunnison project is subject to a number of assumptions and
uncertainties, including estimates of the capital outlays necessary to develop
the prospect and the cash flows that we may ultimately derive. We cannot assure
you that we will be able to fund all required capital outlays or that these
outlays will be profitable. Moreover, although we have contracts for subsea
construction work, the extent of utilization of our subsea assets for such work
has not been fully determined. We have a $35.0 million loan facility to provide
for the financing of part of our portion of the construction costs of the spar,
of which we had drawn down $29.3 million as of December 31, 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

EXPECTED CASH FLOWS FROM THE Q4000, INTREPID AND SEAWELL, AS WELL AS CANYON, MAY
NOT BE IMMEDIATE OR AS HIGH AS EXPECTED.

The Q4000, Intrepid and the Seawell are vessels that were placed into
service during 2002. In addition, during 2002 we acquired Canyon Offshore, Inc.,
a supplier of ROVs to the offshore construction and telecommunications industry.
We will not receive any material increase in revenue or cash flow from their
operation until there is significant utilization of these vessels and Canyon's
services. We cannot assure you that customer demand for these vessels and
Canyon's services will be as high as currently anticipated and, as a result, our
future cash flows may be adversely affected. New vessels from third parties may
also enter the market in the coming years and compete with the Q4000, Intrepid
and the Seawell for contracts.

OUR OIL AND GAS OPERATIONS INVOLVE SIGNIFICANT RISKS, AND WE DO NOT HAVE
INSURANCE COVERAGE FOR ALL RISKS.

Our oil and gas operations are subject to risks incident to the operation
of oil and gas wells, including, but not limited to, uncontrollable flows of
oil, gas, brine or well fluids into the environment, blowouts, cratering,
mechanical difficulties, fires, explosions, pollution and other risks, any of
which could result in substantial losses to us. We maintain insurance against
some, but not all, of the risks described above.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

The business in which we operate is highly competitive. Several of our
competitors are substantially larger and have greater financial and other
resources than we have. If other companies relocate or acquire vessels for
operations in the Gulf or the North Sea, levels of competition may increase and
our business could be adversely affected.

THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY EMPLOYEES, OR OUR FAILURE TO
ATTRACT AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE, COULD DISRUPT
OUR OPERATIONS AND ADVERSELY AFFECT OUR FINANCIAL RESULTS.

Our industry has lost a significant number of experienced subsea people
over the years due to, among other reasons, the volatility in commodity prices.
Our continued success depends on the active participation of our key employees.
The loss of our key people could adversely affect our operations. We believe
that our

16

success and continued growth are also dependent upon our ability to attract and
retain skilled personnel. We believe that our wage rates are competitive;
however, unionization or a significant increase in the wages paid by other
employers could result in a reduction in our workforce, increases in the wage
rates we pay, or both. If either of these events occurs for any significant
period of time, our revenues and profitability could be diminished and our
growth potential could be impaired.

IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH, OUR RESULTS OF OPERATIONS COULD BE
HARMED.

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

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IN RESPONSE TO
CHANGES IN GOVERNMENT REGULATIONS.

Our subsea construction, intervention, inspection, maintenance and
decommissioning operations and our oil and gas production from offshore
properties, including decommissioning of such properties, are subject to and
affected by various types of government regulation, including numerous federal,
state and local environmental protection laws and regulations. These laws and
regulations are becoming increasingly complex, stringent and expensive to comply
with, and significant fines and penalties may be imposed for noncompliance. We
cannot assure you that continued compliance with existing or future laws or
regulations will not adversely affect our operations.

CERTAIN PROVISIONS OF OUR CORPORATE DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE A
THIRD PARTY FROM MAKING A TAKEOVER PROPOSAL.

In addition to the 55,000 shares of preferred stock issued or issuable to
Fletcher International, Ltd. under the First Amended and Restated Agreement
dated January 17, 2003, but effective as of December 31, 2002, by and between
Cal Dive and Fletcher International, Ltd., our board of directors has the
authority, without any action by our shareholders, to fix the rights and
preferences on up to 4,945,000 shares of undesignated preferred stock, including
dividend, liquidation and voting rights. In addition, our by-laws divide the
board of directors into three classes. We are also subject to certain
anti-takeover provisions of the Minnesota Business Corporation Act. We also have
employment contracts with all of our senior officers that require cash payments
in the event of a "change of control." Any or all of the provisions or factors
described above may have the effect of discouraging a takeover proposal or
tender offer not approved by management and the board of directors and could
result in shareholders who may wish to participate in such a proposal or tender
offer receiving less for their shares than otherwise might be available in the
event of a takeover attempt.

ITEM 2. PROPERTIES

OUR VESSELS

We own a fleet of 22 vessels and 21 ROVs and trenchers. We believe that the
Gulf market requires specially designed and/or equipped vessels to competitively
deliver subsea construction services. Nine of our vessels have DP capabilities
specifically designed to respond to the Deepwater market requirements. Eight of
our vessels (seven of which are based in the Gulf) have the capability to
provide saturation diving services. Recent developments in our fleet include:

Q4000: We began construction of our newest Ultra-Deepwater MSV, the
Q4000, in 1999, and accepted her delivery in early 2002. The vessel cost
$182 million and incorporates our latest semi-submersible technologies,
including various patented elements such as the absence of lower hull cross
bracing. A variable deck load of over 4,000 metric tons and upgraded well
completions capability make

17

the vessel particularly well suited for large offshore construction
projects in the Ultra-Deepwater. Its Huisman-Itrec multi-purpose tower has
an open face which allows free access from three sides, an advantage for a
construction and intervention vessel.

Intrepid: The Intrepid (formerly Sea Sorceress) offers customers a
pipelay/construction vessel capable of carrying an 8,000 metric ton deck
load. She began work in June of 2002.

Eclipse: This large DP DSV is 370 feet long, 67 feet wide and has
recently been refitted into a DSV by installing a saturation diving system,
restoring the ballast system and upgrading to DP-2. The Eclipse began work
in March 2002.

Seawell: This purpose-built 364 foot mono-hull DP vessel, capable of
supporting both manned diving and ROVs, was recently upgraded for coiled
tubing deployment and well testing. The Seawell was purchased in July 2002.

Northern Canyon: Canyon took delivery of this purpose-built, 270 foot
state-of-the-art ROV support vessel in July 2002. The vessel, which is
deployed in the North Sea, is leased from a third party.

ROVs: To enable us to control critical path equipment involved in our
deepwater projects, we acquired Canyon in January 2002. Canyon currently
operates 17 ROVs and four trencher systems. In 2001, Canyon introduced the
next-generation work-class ROV, the Quest. Advantages of the Quest include:
electric instead of hydraulic systems, 50% smaller footprint, fewer moving
parts (i.e., lower operating costs), a dynamic positioning system and
improved depth rating. The average age of the Canyon ROV fleet is
approximately two years. Furthermore, Canyon has ordered three new Triton
XLS ROV systems and a state of the art 750 horsepower trenching unit to
fulfill its future contract obligations under its agreement with Technip.

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LISTING OF VESSELS, BARGE AND ROVS

- ---------------

(1) Under government regulations and our insurance policies, we are required to
maintain our vessels in accordance with standards of seaworthiness and
safety set by government regulations and classification organizations. We
maintain our fleet to the standards for seaworthiness, safety and health set
by the American Bureau of Shipping, or ABS, Det Norske Veritas, or DNV, and
the U.S. Coast Guard, or USCG. The ABS is one of several classification
societies used by ship owners to certify that their vessels meet certain
structural, mechanical and safety equipment standards, including Lloyd's
Register, Bureau Veritas and DNV among others.

(2) The Q4000 commenced work in April 2002.

(3) This leased vessel became available in June 2002.

(4) The Intrepid modifications were completed in May 2002 and the vessel began
work in June 2002.

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(5) The Eclipse was purchased in October 2001 and began work in March 2002.

(6) The Seawell was purchased and began work in July 2002.

(7) In March 2001, we acquired substantially all of the assets of Professional
Divers including the Mr. Sonny (a 165-foot four-point moored DSV), three
utility vessels and associated diving equipment including two saturation
diving systems.

(8) Average age of ROV fleet is two years.

We incur routine drydock inspection, maintenance and repair costs pursuant
to Coast Guard regulations and in order to maintain ABS or DNV classification
for our vessels. In addition to complying with these requirements, we have our
own vessel maintenance program that we believe permits us to continue to provide
our customers with well maintained, reliable vessels. In the normal course of
business, we charter other vessels on a short-term basis, such as tugboats,
cargo barges, utility boats and dive support vessels. All of our vessels are
subject to ship mortgages to secure our $70.0 million revolving credit facility,
except the Northern Canyon (leased),and the Q4000 (subject to liens to secure
the MARAD financing guarantees).

SUMMARY OF NATURAL GAS AND OIL RESERVE DATA

The table below sets forth information, as of December 31, 2002, with
respect to estimates of net proved reserves and the present value of estimated
future net cash flows at such date, prepared in accordance with guidelines
established by the Securities and Exchange Commission. The Company's estimates
of reserves at December 31, 2002, excluding Gunnison, have been reviewed by
Miller and Lents, Ltd., independent petroleum engineers. These non-Gunnison
reserves totaled (as of December 31, 2002) 43,323 MMcf of natural gas and 6,727
MBbls of oil with a standardized measure of discounted future net cash flows
(pre-tax) of $161,565,600 (see note (2) in table below). Since the Company does
not own a license to the geophysical data, reserves attributable to Gunnison
(which total 47% of the proved reserves as of December 31, 2002) have been
determined based on information provided by the operator. These reserve
estimates were reviewed by our engineers, including an assessment of the
operator's assumptions and their engineering, geologic and evaluation principles
and techniques. All of the Company's reserves are located in the United States.
Proved reserves cannot be measured exactly because the estimation of reserves
involves numerous judgmental determinations. Accordingly, reserve estimates must
be continually revised as a result of new information obtained from drilling and
production history, new geological and geophysical data and changes in economic
conditions.

ITEM 3. LEGAL PROCEEDINGS

INSURANCE AND LITIGATION

Our operations are subject to the inherent risks of offshore marine
activity, including accidents resulting in personal injury and the loss of life
or property, environmental mishaps, mechanical failures, fires and collisions.
We insure against these risks at levels consistent with industry standards. We
also carry workers' compensation, maritime employer's liability, general
liability and other insurance customary in our business. All insurance is
carried at levels of coverage and deductibles that we consider financially
prudent. Our services are provided in hazardous environments where accidents
involving catastrophic damage or loss of life could occur, and litigation
arising from such an event may result in our being named a defendant in lawsuits
asserting large claims. To date, we have been involved in only one such claim,
where the cost of our vessel, the Balmoral Sea, was fully covered by insurance.
Although there can be no assurance that the amount of insurance we carry is
sufficient to protect us fully in all events, or that such insurance will
continue to be available at current levels of cost or coverage, we believe that
our insurance protection is adequate for our business operations. A successful
liability claim for which we are underinsured or uninsured could have a material
adverse effect on our business.

We are involved in various legal proceedings, primarily involving claims
for personal injury under the General Maritime Laws of the United States and the
Jones Act as a result of alleged negligence. In addition, we from time to time
incur other claims, such as contract disputes, in the normal course of business.
In that regard, in 1998, one of our subsidiaries entered into a subcontract with
Seacore Marine Contractors Limited ("Seacore") to provide the Sea Sorceress to a
Coflexip subsidiary in Canada ("Coflexip"). Due to difficulties with respect to
the sea states and soil conditions the contract was terminated and an
arbitration to recover damages was commenced. A preliminary liability finding
has been made by the arbitrator against Seacore and in favor of the Coflexip
subsidiary. We were not a party to this arbitration proceeding. Seacore and
Coflexip

21

settled this matter prior to the conclusion of the arbitration proceeding with
Seacore paying Coflexip $6.95 million CDN. Seacore has now made demand on Cal
Dive Offshore Ltd. ("CDO"), a subsidiary of Cal Dive, for one-half of this
amount. Because only one of the grounds in the preliminary findings by the
arbitrator is applicable to CDO, and because CDO holds substantial counterclaims
against Seacore, management believes that in the event Seacore continues to seek
contribution from our subsidiary, which would require another arbitration, it is
anticipated that our subsidiary's exposure, if any, should be less than
$500,000.

During 2002, the Company engaged in a large construction project and, in
late September, supports engineered by a subcontractor failed resulting in over
a month of downtime for two of CDI's vessels. Management believes that under the
terms of the contract the Company is entitled to the contractual stand-by rate
for the vessels during their downtime. The customer is currently disputing these
invoices along with certain other change orders. Of the amounts billed by CDI
for this project, $12.1 million had not been collected as of February 18, 2003.
Due to the size of the dispute, inherent uncertainties with respect to a
mediation and relationship issues with the customer, CDI provided a reserve in
the fourth quarter of 2002 resulting in a loss for the Company on the project as
a whole. In another lengthy commercial dispute, EEX Corporation sued Cal Dive
and others alleging breach of fiduciary duty by a former EEX employee and
damages resulting from certain construction and property acquisition agreements.
Cal Dive had responded alleging EEX Corporation breached various provisions of
the same contracts. EEX's acquisition by Newfield during the fourth quarter 2002
enabled CDI to enter meaningful settlement discussions prior to the trial date,
which was set for February 2003. This resulted in a settlement including CDI
making a cash payment, subsequent to yearend, and agreeing to provide work
credits for its services over the next three years. The total value of the
settlement was recorded in the Company's statement of operations for the year
ended December 31, 2002. This settlement combined with the reserves on the
project discussed above resulted in approximately $10 million of pre-tax charges
recorded in the accompanying statement of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM (UNNUMBERED). EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of Cal Dive are as follows:

Owen Kratz is Chairman and Chief Executive Officer of Cal Dive
International, Inc. He was appointed Chairman in May 1998 and has served as our
Chief Executive Officer since April 1997. Mr. Kratz served as President from
1993 until February 1999, and as a Director since 1990. He served as Chief
Operating Officer from 1990 through 1997. Mr. Kratz joined Cal Dive in 1984 and
has held various offshore positions, including saturation diving supervisor, and
has had management responsibility for client relations, marketing and
estimating. From 1982 to 1983, Mr. Kratz was the owner of an independent marine
construction company operating in the Bay of Campeche. Prior to 1982, he was a
superintendent for Santa Fe and various international diving companies, and a
saturation diver in the North Sea.

22

Martin R. Ferron has served on our board of directors since September 1998.
Mr. Ferron became President in February 1999 and has served as Chief Operating
Officer since January 1998. Mr. Ferron has 20 years of experience in the
oilfield industry, including seven in senior management positions with the
international operations of McDermott Marine Construction and Oceaneering
International Services, Limited. Mr. Ferron has a civil engineering degree, a
master's degree in marine technology, an MBA and is a chartered civil engineer.

S. James Nelson, Jr. is Vice Chairman and has been a Director of Cal Dive
since 1990. Prior to October 2000, he was Executive Vice President and Chief
Financial Officer. From 1985 to 1988, Mr. Nelson was the Senior Vice President
and Chief Financial Officer of Diversified Energies, Inc., the former parent of
Cal Dive, at which time he had corporate responsibility for Cal Dive. From 1980
to 1985, Mr. Nelson served as Chief Financial Officer of Apache Corporation, an
oil and gas exploration and production company. From 1966 to 1980, Mr. Nelson
was employed with Arthur Andersen & Co., and, from 1976 to 1980, he was a
partner serving on the firm's worldwide oil and gas industry team. Mr. Nelson
received an undergraduate degree from Holy Cross College (B.S.) and an MBA from
Harvard University; he is also a Certified Public Accountant.

James Lewis Connor, III became Senior Vice President and General Counsel of
Cal Dive in May 2002 and Corporate Secretary in July 2002. He had previously
served as Deputy General Counsel since May 2000. Mr. Connor has been involved
with the oil and gas industry for nearly 20 years, including 11 years in his
capacity as legal counsel to both companies and individuals. Prior to joining
Cal Dive, Mr. Connor was a Senior Counsel at El Paso Production Company
(formerly Sonat Exploration Company) from 1997 to 2000 and previously from 1995
to 1997 was a senior associate in the oil, gas and energy law section of
Hutcheson & Grundy, L.L.P. Mr. Connor received his Bachelor of Science degree
from Texas A&M University in 1979 and his law degree, with honors, from the
University of Houston in 1991.

A. Wade Pursell is Senior Vice President and Chief Financial Officer of Cal
Dive International, Inc. In this capacity, which he was appointed to in October
2000, Mr. Pursell oversees the treasury, accounting, information technology,
tax, administration and corporate planning functions. He joined Cal Dive in May
1997, as Vice President -- Finance and Chief Accounting Officer. From 1988
through 1997 he was with Arthur Andersen LLP, lastly as an Experienced Manager
specializing in the offshore services industry (which included servicing the Cal
Dive account from 1990 to 1997). Mr. Pursell received an undergraduate degree
(B.S.) from the University of Central Arkansas and is a Certified Public
Accountant.

Johnny Edwards has been President of ERT since March 2000. He joined ERT in
1994 as Engineering and Acquisitions Manager, where he has been instrumental in
the growth of the company. Prior to joining ERT, Mr. Edwards worked for ARCO Oil
& Gas Company for 19 years and held various technical and management positions
in engineering and operations. Mr. Edwards received a Bachelor of Science degree
in Chemical Engineering from Louisiana Tech University in 1975.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol
"CDIS." The following table sets forth, for the periods indicated, the high and
low closing sale prices per share of our common stock:

On March 17, 2003, the closing sale price of our common stock on the Nasdaq
National Market was $18.64 per share. As of March 17, 2003, there were an
estimated 8,467 beneficial holders of our common stock.

On January 2, 2002, CDI purchased Canyon Offshore, Inc. for cash of $52.8
million, the assumption of $9.0 million of Canyon debt (offset by $3.1 million
of cash acquired), securities exchangeable for 181,000 shares of Cal Dive common
stock and a commitment to purchase the redeemable stock in Canyon for cash at a
price to be determined by Canyon's performance during the years 2002 through
2004 from continuing employees at a minimum purchase price of $13.53 per share.
The securities exchangeable for Cal Dive common stock were issued to certain
former shareholders of Canyon in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended. The three
persons acquiring the securities exchangeable for Cal Dive common stock are
sophisticated investors who represented to Cal Dive that the securities were
being acquired for investment purposes and not with a view to distribution.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock and do
not intend to pay cash dividends in the foreseeable future. We currently intend
to retain earnings, if any, for the future operation and growth of our business.
In addition, our financing arrangements prohibit the payment of cash dividends
on our common stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

ITEM 6. SELECTED FINANCIAL DATA

The financial data presented below for each of the five years ended
December 31, 2002, should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations

24

and the Consolidated Financial Statements and Notes to Consolidated Financial
Statements included elsewhere in this Form 10-K (in thousands, except per share
amounts).

25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Oil and gas prices, the offshore mobile rig count, and Deepwater
construction activity are three of the primary indicators we use to forecast the
future performance of our business. Our construction services generally follow
successful drilling activities by six to eighteen months on the OCS and twelve
months or longer in the Deepwater arena. The level of drilling activity is
related to both short- and long-term trends in oil and gas prices. In the second
quarter of 1999, oil prices reached their highest levels since the First Gulf
War and natural gas prices reached $10.00 per Mcf in early 2001, pushing
offshore mobile rig utilization rates back to virtually full utilization.
However, a slowing world economy and record levels of natural gas in storage
resulted in significantly lower offshore mobile rig utilization rates in the
second half of 2001 and throughout 2002. Commodity prices have recently
recovered to very robust levels; however, with the instability in the Middle
East and a slow world economy, drilling activity has yet to respond. Our primary
leading indicator, the number of offshore mobile rigs contracted, is currently
at approximately 115 rigs employed in the Gulf of Mexico, compared to 182 during
the first quarter of 2001. The Deepwater Gulf is principally being developed for
oil, with the complexity of developing these reservoirs resulting in significant
lead times to first production.

Product prices impact our oil and gas operations in several respects. We
seek to acquire producing oil and gas properties that are generally in the later
stages of their economic life. The sellers' potential abandonment liabilities
are a significant consideration with respect to the offshore properties we have
purchased to date. Although higher natural gas prices tend to reduce the number
of mature properties available for sale, these higher prices typically
contribute to improved operating results for ERT. In contrast, lower natural gas
prices, typically contribute to lower operating results for ERT and a general
increase in the number of mature properties available for sale. We have expanded
the scope of our gas and oil operations by taking a working interest in
Gunnison, a Deepwater Gulf development of Kerr-McGee Oil & Gas Corporation which
has discovered significant reserves, and participating in the ownership of the
Marco Polo production facility.

Vessel utilization is historically lower during the first quarter due to
winter weather conditions in the Gulf and the North Sea. Accordingly, we plan
our drydock inspections and other routine and preventive maintenance programs
during this period. During the first quarter, a substantial number of our
customers finalize capital budgets and solicit bids for construction projects.
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 up to 65% of our marine contracting
revenues in the last six months of the year. Our operations can also be severely
impacted by weather during the fourth quarter. Our salvage barge, which has a
shallow draft, is particularly sensitive to adverse weather conditions, and its
utilization rate tends to be lower during such periods. Operation of oil and gas
properties and production facilities tends to offset the impact of weather since
the first and fourth quarters are typically periods of high demand and strong
prices for natural gas. Due to this seasonality, full year results are not
likely to be a direct multiple of any particular quarter or combination of
quarters.

26

The following table sets forth for the periods presented average U.S.
natural gas prices, our equivalent natural gas production, the average number of
offshore rigs under contract in the Gulf, the number of platforms installed and
removed in the Gulf and the vessel utilization rates for each of the major
categories of our fleet.

- ---------------

(1) Average of the monthly Henry Hub cash prices per Mcf, as reported in Natural
Gas Week.

(2) Average monthly number of rigs contracted, as reported by Offshore Data
Services.

(3) Source: Offshore Data Services; installation and removal of platforms with
two or more piles in the Gulf.

(4) Average vessel utilization rate is calculated by dividing the total number
of days the vessels in this category generated revenues by the total number
of days in each quarter.

CRITICAL ACCOUNTING POLICIES

Our results of operations and financial condition, as reflected in the
accompanying financial statements and related footnotes, are subject to
management's evaluation and interpretation of business conditions, changing
capital market conditions and other factors which could affect the ongoing
viability of our business segments and/or our customers. We believe the most
critical accounting policies in this regard are the estimation of revenue
allowance on gross amounts billed and evaluation of recoverability of property
and equipment and goodwill balances. 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. Another area
which requires us to make subjective judgments is that of revenue recognition.
Our revenues are derived from billings under contracts, which are typically of
short duration, that provide for either lump-sum turnkey charges or 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. Revenue on significant turnkey contracts is recognized on
the percentage-of-completion method based on the ratio of costs incurred to
total estimated costs