<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number: 0-22078
DUAL DRILLING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 51-0327704
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5956 SHERRY LANE, SUITE 1500, DALLAS, TEXAS 75225
(Address of principal executive offices) (Zip Code)
(214) 373-6200
(Registrant s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Number of shares of common stock, par value $.01 per share, outstanding as
of April 30, 1996: 15,765,713.<PAGE>
DUAL DRILLING COMPANY AND SUBSIDIARIES
Index to Form 10-Q
For the Three Months Ended March 31, 1996
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995 . . . . . . . . . . . . 3
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 . . . . . . . . 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 . . . . . . . . 5
Notes to Interim Consolidated Financial Statements . . . 6
Item 2. Management s Discussion and Analysis of
Financial Condition and Results of Operations . . . 9
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 19
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Separate financial statements of the subsidiaries of DUAL DRILLING COMPANY
(the "Company") that guarantee the Company's Senior Subordinated Notes due
2004 (the "Notes") are not included herein because such subsidiary
guarantors are jointly and severally liable with respect to the Company's
obligations pursuant to such Notes, and the aggregate total assets, equity
and net income of such subsidiary guarantors are substantially equivalent
to the total assets, equity and net income of the Company on a consolidated
basis. The total assets, equity and net income of subsidiaries of the
Company not guaranteeing the Notes on a combined basis are not significant
compared to the respective amounts reported in the Consolidated Financial
Statements of the Company and its subsidiaries.<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUAL DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
1996 1995
-------- ----------
REVENUE
Drilling contracts......................... $29,461 $18,858
COSTS AND EXPENSES
Drilling Contracts......................... 18,589 14,605
Depreciation and amortization.............. 4,813 5,158
General and administrative................. 2,040 1,914
25,442 21,677
Operating income (loss).................. 4,019 (2,819)
OTHER INCOME (EXPENSE)
Interest expense........................... (3,634) (3,618)
Interest income............................ 527 502
Other, net................................. 92 (32)
(3,015) (3,148)
Income (loss) before income taxes............ 1,004 (5,967)
Income tax expense......................... (30) (56)
NET INCOME (LOSS)............................ $ 974 $(6,023)
NET INCOME (LOSS) PER COMMON SHARE (NOTE 4).. $ 0.06 $ (0.38)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 15,766 15,765
The accompanying notes are an integral part of these financial statements.<PAGE>
DUAL DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(amounts in thousands except share data)
March 31, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
------
Cash and cash equivalents....................... $ 45,217 $ 42,830
Accounts receivable............................. 20,884 18,993
Inventory....................................... 5,444 5,603
Other current assets............................ 7,278 9,819
Total current assets.................... 78,823 77,245
Property and equipment
Drilling equipment............................ 282,071 279,946
Other......................................... 1,638 2,364
Total property and equipment............ 283,709 282,310
Accumulated depreciation...................... (90,229) (85,881)
Net property and equipment.............. 193,480 196,429
Goodwill........................................ 24,600 25,032
Other assets.................................... 6,857 5,056
Total assets............................ $303,760 $303,762
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable................................ $ 5,997 $ 5,069
Accrued liabilities and other................... 9,192 9,162
Income taxes payable............................ 1,033 864
Current maturities of long-term debt............ 7,178 6,538
Total current liabilities............... 23,400 21,633
Deferred income taxes........................... 1,562 1,796
Deferred credits and other...................... 2,428 2,024
Long term debt.................................. 135,249 138,163
Total liabilities....................... 162,639 163,616
COMMITMENTS AND CONTINGENCIES: (NOTE 5)
STOCKHOLDERS' EQUITY
Common stock, $.01 par; 50 million shares
authorized; 15.8 million shares issued and
outstanding in 1995 and 1994................ 158 158
Additional paid in capital.................... 173,793 173,793
Accumulated deficit........................... (32,411) (33,386)
141,540 140,565
Treasury stock at cost........................ (419) (419)
Total stockholders' equity ................. 141,121 140,146
Total liabilities and stockholders' equity.. $303,760 $303,762
The accompanying notes are an integral part of these financial statements.<PAGE>
DUAL DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss)................................... $ 974 $(6,023)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization.................... 4,813 5,158
Deferred income taxes............................ (234) (230)
Gain on disposition of assets.................... (52) (21)
Recognition of deferred income................... (1,705) (952)
Recognition of deferred expense.................. 682 433
Change in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable............................ (1,891) 1,672
Inventory...................................... 158 58
Other current assets........................... 2,074 (94)
Increase (decrease) in current liabilities:
Accounts payable............................... 928 (577)
Accrued liabilities and other.................. (1,208) (2,253)
Income taxes payable........................... 169 (186)
Other............................................ 1,329 (268)
Net cash provided by (used in) operating activities 6,037 (3,283)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................ (1,434) (1,910)
Proceeds on sale of property and equipment......... 54 32
Net cash used in investing activities............ (1,380) (1,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank debt............................. (2,275) (675)
Other.............................................. 5 3
Net cash used in financing activities............ (2,270) (672)
Net increase (decrease) in cash and cash equivalents. 2,387 (5,833)
Cash and cash equivalents at beginning of period..... 42,830 19,925
Cash and cash equivalents at end of period........... $45,217 $14,092
See accompanying notes to consolidated financial statements.<PAGE>
DUAL DRILLING COMPANY AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except share data or as otherwise indicated)
1. GENERAL
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of the management of DUAL DRILLING COMPANY (the "Company"),
all necessary adjustments (consisting only of normal and recurring
adjustments) have been made to fairly state the results for the
periods included herein. Certain reclassifications have been made to
the prior year amounts in order to conform to the current year
presentation. Operating results for the three months ended March 31,
1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. These consolidated
financial statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's 1995 Annual
Report on Form 10-K.
2. MERGER AGREEMENT
On March 21, 1996, the Company, ENSCO International Incorporated
("ENSCO") and DDC Acquisition Company, a wholly owned subsidiary of
ENSCO ("DDC"), signed an agreement and plan of merger (the "Merger
Agreement"), which provides for the merger of the Company with and
into DDC (the "Merger"). The Merger Agreement provides that each
share of Company Common Stock, par value $.01, will be exchanged for
0.625 shares of ENSCO Common Stock, par value $.10. Pursuant to the
Merger Agreement, the consummation of the Merger is conditioned upon
the satisfaction of various terms set forth in the Merger Agreement,
the Company obtaining shareholder approval, both entities obtaining
regulatory approvals and other customary closing conditions. ENSCO
previously announced that it had received early termination of the
waiting period for the merger transaction under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. Concurrent with the
execution of the Merger Agreement, Dual Invest AS, the Company's
largest shareholder holding a 59.6% interest in the Company, entered
into an agreement under which Dual Invest AS agreed to vote in favor
of the merger transaction and the Merger Agreement. Subject to the
approval by the stockholders of the Company and the satisfaction of
other conditions, closing of the transaction is expected by June 30,
1996.
3. CASH FLOW INFORMATION
The statements of cash flows are prepared using the indirect method.
Cash and cash equivalents consist of cash in banks and investments
readily convertible into cash and that mature within three months from
the date of purchase.<PAGE>
Supplemental disclosure of cash flow information:
Three months ended March 31,
----------------------------
1996 1995
---------- ----------
Cash paid during the period for:
Interest............................. $6,022 $5,121
Income taxes......................... 363 483
4. NET INCOME (LOSS) PER COMMON SHARE
The effects of common stock equivalents were either antidilutive or
the dilutive effects were not material for all periods presented.
Therefore, no adjustment was made for the common equivalent shares.
5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES - The Company's March 31, 1996 Cash
and Cash Equivalent balance of $45.2 million includes approximately
$28.6 million in proceeds received from the sale of DUAL RIG 97, the
sale of a 51% interest in SIME DUAL RIG 7, and the sale of DUAL RIG 8,
all of which occurred in 1995. Each of the aforementioned rig sales
constituted an Asset Sale for purposes of the Indenture (the
"Indenture") relating to the Company's Senior Subordinated Notes (the
"Notes"). To the extent that the Company does not, within 365 days
after the date of each Asset Sale, apply the Net Cash Proceeds (as
defined in the Indenture) therefrom towards (i) the purchase of assets
that replace the assets that were sold or other assets that will be
used in the business of the Company and its Restricted Subsidiaries
(as defined in the Indenture) ("Replacement Assets"), or (ii) the
permanent repayment of certain specified senior indebtedness, the
amount of Net Cash Proceeds not so applied shall constitute "Excess
Proceeds". Aggregate Excess Proceeds from all such sales equal to or
exceeding an aggregate amount of $10.0 million must be offered by the
Company for the purchase of Notes and any then outstanding
indebtedness of the Company that is pari passu in right of payment to
the Notes. In addition, the Indenture requires the Company to deliver
a written notice to the Note's trustee within 180 days after each such
Asset Sale if the Company intends to apply the Net Cash Proceeds of
such Asset Sale to Replacement Assets. The Company has delivered such
notice in connection with the sale of DUAL RIG 97, the sale of a 51%
interest in SIME DUAL RIG 7, and the sale of DUAL RIG 8. At this
time, the Company expects that substantially all of the Net Cash
Proceeds received from the 1995 rig sale transactions will be applied
to the purchase of Replacement Assets. If the full amount of net cash
proceeds is not applied to the purchase of Replacement Assets, and the
amount not so applied equals or exceeds $10.0 million, the Company
anticipates that amounts will be applied to the permanent repayment of
certain specified senior indebtedness, or the Company will make an
offer to purchase (a Net Proceeds Offer, as defined in the Indenture)
Notes in accordance with the procedures set forth in the Indenture.
LETTERS OF CREDIT - The Company has a $15.0 million guaranty
facility (the "Guaranty Facility") as part of its Credit Facility with
a group of banks led by Citibank N.A. Letters of credit are issued<PAGE>
under the Guaranty Facility for the purpose of providing bid bonds and
performance bonds required on drilling contracts on which the Company
may bid or be awarded, and for other purposes related to the Company's
operations. On April 30, 1996, the Company was contingently liable
for approximately $7.9 million related to letters of credit issued
under the Guaranty Facility. The Guaranty Facility matures on July
27, 1996 and is renewable subject to the consent of the bank group.
CONTRACTS - A number of the Company's rigs are currently under
contracts that have scheduled expiration dates during 1996. Although
the Company anticipates that, upon expiration of any such contracts,
it will be able to enter into new contracts employing such rigs on
terms acceptable to the Company, there can be no assurance that these
efforts will be successful. If the Company is unable to keep its rigs
employed at satisfactory dayrates and utilization levels, the
Company's results of operations would be materially and adversely
affected.<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the three month
periods ended March 31, 1996 and 1995. It should be read in conjunction
with the Consolidated Financial Statements and the related notes thereto
included in the Company's 1995 Annual Report on Form 10-K.
GENERAL
The Company is an international drilling contractor operating in the jackup
rig and platform rig segments of the drilling industry. The Company
currently has operations in the Gulf of Mexico ( GOM ), California, Mexico,
China, Indonesia, India and the Arabian Gulf. The offshore contract
drilling industry, both domestically and internationally, is heavily
dependent upon the level of oil and gas exploration and development
activity, and more specifically, expenditures of oil and gas companies for
exploration and production. Such activity and expenditures are influenced
by numerous factors, many of which are beyond the Company's control. As a
result, offshore drilling activity and the Company's financial performance
can be volatile.
Overall, industry conditions remained favorable during the first quarter of
1996 and are much improved relative to recent years and the first half of
1995. Factors including rig attrition, minimal new rig building,
consolidation in the industry and strong prices for oil and natural gas
have contributed to the improved industry conditions. Based on information
included in Salomon Brothers' "Oil Service & Drilling Monthly: March 1996,"
the worldwide supply of offshore drilling rigs is continuing its downward
trend. After significant new rig construction during the early to mid-
1980's, the supply of offshore drilling rigs reduced to 643 at year-end
1995 from a peak of 809 rigs in 1985. As a result of attrition and other
factors, it is estimated that the supply may reduce further to 628 units by
the end of 1996. This represents a 22% reduction in the supply of offshore
drilling rigs over an 11-year period. At the same time, demand for
offshore rigs has increased from an average of 518 rigs during the five-
year period of 1986 - 1990 to 542 rigs during 1995, and an estimated 565
rigs for 1996. The improved environment has resulted in the utilization of
contracted offshore drilling rigs increasing to an average of 84% during
1995 from an average of 69% during the period of 1986 - 1990.
In the GOM, drilling activity increased during the first quarter of 1996
compared to the same quarter in 1995 primarily due to average prices for
natural gas that, during the first quarter of 1996, exceeded the average
for the same quarter one year ago by approximately 114%. The cold winter
and unusually low post-winter gas storage levels have resulted in the need
to maintain high production levels to replenish inventories before the
1996 - 1997 winter season begins. Based on data provided by "Offshore Data
Services," the increased drilling activity and demand for rigs in the GOM
has driven the number of working jackup rigs to an average of 112 rigs
during the first quarter of 1996 from 95 rigs during the same quarter in
1995. In international markets, improved oil prices and the need for
<PAGE>
certain developing countries to increase production levels to meet rising
energy demands have contributed to stable rig demand in most markets.
During the first quarter of 1996, the Company realized significant revenue
and gross profit increases when compared to the same quarter in 1995. The
improved performance is primarily the result of increased rig utilization
and improved dayrates in the GOM, and increased utilization of the
Company's rigs in Southeast Asia and the Arabian Gulf.
A summary of the Company's revenue and gross profit performance, as well as
selected Company and industry rig utilization statistics are shown below.
<TABLE>
<CAPTION>
REVENUE & OPERATING INCOME
Qtr. Ended Qtr. Ended Year Ended Year Ended
March 31, March 31, December 31, December 31,
1996 1995 1995 1994
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE ($ millions)
Jackup rigs - Gulf of Mexico $ 6.7 $ 4.0 $ 19.1 $ 26.6
Jackup rigs - International 15.2 7.0 39.9 32.9
Platform rigs - Gulf of Mexico 6.9 4.5 14.9 31.6
Platform rigs - Other markets 0.7 3.4 12.0 13.2
Total revenues $ 29.5 $ 18.9 $ 85.9 $ 104.3
GROSS PROFIT <F1> ($ millions)
Jackup rigs - Gulf of Mexico $ 2.9 $ 0.7 $ 1.7 $ 7.9
Jackup rigs - International 6.8 0.3 13.3 0.3
Platform rigs - Gulf of Mexico 0.8 1.4 3.1 11.6
Platform rigs - Other markets 0.4 1.8 7.6 6.2
Total rig operations 10.9 4.2 25.7 25.7
Corporate expenses (2.1) (1.9) (7.6) (9.0)
EBITDA <F2> $ 8.8 $ 2.3 $ 18.1 $ 16.7
Average dayrate - Total fleet <F3> $ 17,495 $ 16,145 $ 16,520 $ 17,800
Average dayrate - Jackup rig fleet <F3> 24,150 18,615 19,540 21,200
Average dayrate - Jackup rigs - GOM <F3> 24,910 17,415 17,255 20,520
Average dayrate - Jackup rigs - International <F3> 23,830 19,380 20,860 22,125
<FN>
<F1> Excluding depreciation and amortization.
<F2> EBITDA represents net income (loss) plus interest, taxes,
depreciation, amortization of intangible assets, amortization of
other assets, gain or loss on sale of assets and other income
(determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance.
EBITDA is included because it is one measure used by certain
investors to determine the Company's operating cash flow. It is
not intended as an alternative to, or a better indicator of
liquidity than cash flow from operations.<PAGE>
<F3> Calculated based on total revenue for the period for the Company's
rigs compared to the total number of days during the period that
the rigs were under contract.
</FN>
</TABLE>
<TABLE>
<CAPTION>
RIG FLEET UTILIZATION
Qtr. Qtr. Year Year
Ended Ended Ended Ended
March 31, March 31, Dec. 31, Dec. 31,
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COMPANY <F1>
Gulf of Mexico
Total jackup rigs 3 5 4 4
Utilization 99% 51% 79% 86%
Total platform rigs 7 7 7 7
Utilization 79% 49% 42% 83%
All other markets
Total jackup rigs 7 6 7 7
Utilization 100% 67% 81% 62%
Total platform rigs 3 3 3 3
Utilization 100% 100% 100% 87%
INDUSTRY <F2>
Gulf of Mexico
Total jackup rigs 137 141 140 136
Utilization 81% 68% 75% 77%
Total platform rigs 25 26 25 28
Utilization 56% 38% 39% 42%
All other markets
Total jackup rigs 247 250 248 256
Utilization 83% 77% 80% 76%
Total platform rigs 89 103 93 100
Utilization 76% 70% 75% 91%
<FN>
<F1> Number of rigs reported represents the average number of rigs
operated by the Company for the periods presented rounded to the
nearest whole number. Utilization is based on the days in the
period during which the rigs were under contract and earning
revenue.
<F2> Source: Offshore Data Services, Inc. Industry data represents
averages for the respective periods and excludes platform rigs with
less than 20,000 feet drilling depth capacity.
</FN>
/TABLE
<PAGE>
As previously announced on March 21, 1996, the Company entered into an
Agreement and Plan of Merger ("Merger Agreement") providing for the
acquisition of the Company by ENSCO International Incorporated ("ENSCO").
Under the proposed transaction, the Company's common stockholders would
receive 0.625 shares of ENSCO common stock for each share of common stock
of the Company. The transaction is subject to approval by the stockholders
of the Company and the satisfaction of certain other conditions.
Concurrent with the execution of the Merger Agreement, Dual Invest AS, the
Company's largest shareholder holding a 59.6% interest in the Company,
entered into an agreement under which Dual Invest AS agreed to vote in
favor of the merger transaction and the Merger Agreement. Subject to the
approval by the stockholders of the Company and the satisfaction of certain
other conditions, closing of the transaction is expected by June 30, 1996.<PAGE>
RESULTS OF OPERATIONS
THE THREE MONTH PERIOD ENDED MARCH 31, 1996 COMPARED WITH THE THREE MONTH
PERIOD ENDED MARCH 31, 1995.
Revenue for the first three months of 1996 increased $10.6 million or 56%
when compared to first quarter 1995 revenue of $18.9 million. The
improvement is primarily attributable to higher utilization and more
favorable dayrates realized by the Company's jackup rig fleet. In the GOM,
total revenue generated by the Company's jackup rigs increased by 67.5%
mainly due to an improvement in the average dayrate earned by those rigs.
During the first quarter of 1996, the Company's GOM jackup rigs realized a
$7,495 increase in average dayrate when compared to the first three months
of 1995. The Company's GOM jackup rigs also realized higher utilization
when compared to first quarter 1995. During the first quarter of 1996, the
Company's GOM jackup rigs operated a total of 269 days or 99% utilization
compared to 229 days or 51% utilization during the same quarter in 1995.
In the second quarter of 1995, the Company sold DUAL RIG 97 and relocated
DUAL RIG 91 to Mexico. Due to these events, there were 273 available GOM
jackup rig days during the first quarter of 1996 compared to 450 available
days during the first quarter of 1995.
In international markets, revenue generated by the Company's jackup rigs
increased 117% during the first quarter of 1996 compared to the first
quarter of 1995, primarily as a result of increased operating days. In the
first quarter, the international jackup fleet operated a total of 637 days
in 1996, up from 360 days in 1995. The improvement was attributable to new
drilling contracts for DUAL RIG 96 in Qatar and SIME DUAL RIG 7 in
Indonesia, as well as the relocation of DUAL RIG 91 from the Gulf of Mexico
to Mexico. More favorable industry conditions and the new contracts
entered into by the Company in Qatar and Indonesia contributed to a $4,450
increase in the average dayrate earned by the Company's international
jackup fleet during the first quarter of 1996 compared to the first quarter
of 1995.
During the first quarter of 1996, the Company's seven GOM platform rigs
operated a total of 505 days compared to 309 days during the same 1995
quarter. The improvement was primarily due to the increased GOM drilling
activity which led to more platform rig contract opportunities. During
late 1995 and the beginning of the first quarter of 1996, the Company
secured drilling contracts for four of its platform rigs that had been idle
for most of 1995. These contracts contributed to a $2.4 million increase
in GOM platform rig revenue during the first quarter of 1996 compared to
the first quarter of 1995.
In the first quarter of 1996, the additional revenue realized from the GOM
platform rigs was offset by a $2.7 million reduction in platform rig
revenue earned in other markets. This reduction was mainly due to a
reduced drilling program for DUAL RIG 8 located in the South China Sea. In
August 1995, the Company sold the rig under a purchase option that had been
granted by the Company in 1993. The rig is now operated by the Company
under a management contract that provides for a competitive dayrate during
periods that the rig is drilling and a reduced dayrate when the rig is not
drilling and expenses are reduced. As a result of the customer's planned
drilling program, the rig did not drill during the first quarter of 1996
compared to drilling for the entire first quarter of 1995. It is expected
that the rig will not drill during the remainder of 1996.<PAGE>
Drilling contract expense of $18.6 million for the first quarter of 1996
represents a $4.0 million or 27% increase over the first quarter of 1995.
The increase is mainly attributable to (i) the Company's rig fleet
operating for a total of 1,684 days during the first quarter of 1996
compared to 1,168 days during the same period in 1995, (ii) the start-up of
platform rig contracts and a resulting $1.8 million increase in platform
rig mobilization expense during the first quarter of 1996 compared to the
first quarter of 1995, and (iii) increased charter expense associated with
the charter of DUAL RIG 86.
Depreciation expense totaled $4.8 million during the first quarter of 1996,
a $0.3 million or 7% reduction compared to the first quarter of 1995. The
decreased expense is primarily due to (i) the sale of DUAL RIG 97 and the
sale of a 51% interest in SIME DUAL RIG 7 partially offset by the purchase
of DUAL RIG 88, all during the second quarter of 1995, and (ii) the sale of
DUAL RIG 8 during the third quarter of 1995.
In summary, for the first quarter of 1996, the Company reported net income
of $1.0 million or $0.06 per share compared to a net loss of $6.0 million
or $0.38 per share during the same quarter in 1995. The improved
performance during the first quarter of 1996 is primarily the result of
increased utilization and higher dayrates for the Company's GOM jackup rig
fleet and increased utilization of the Company's jackup rigs in Southeast
Asia and the Arabian Gulf.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position improved during the first quarter of 1996
compared to December 31, 1995 mainly due to net income for the quarter.
Cash and cash equivalents totaled $45.2 million at March 31, 1996, a $2.4
million increase over the December 31, 1995 balance. The March 31, 1996
cash and cash equivalents balance includes approximately $28.6 million in
proceeds received from the sale of DUAL RIG 97, the sale of a 51% interest
in SIME DUAL RIG 7, and the sale of DUAL RIG 8, all of which occurred in
1995. Each of the aforementioned rig sales constituted an "Asset Sale" for
purposes of the Indenture (the "Indenture") relating to the Company's
Senior Subordinated Notes (the "Notes"). To the extent that the Company
does not, within 365 days after the date of each Asset Sale, apply the Net
Cash Proceeds (as defined in the Indenture) therefrom towards (i) the
purchase of assets that replace the assets that were sold or other assets
that will be used in the business of the Company and its Restricted
Subsidiaries (as defined in the Indenture) ("Replacement Assets"), or (ii)
the permanent repayment of certain specified senior indebtedness, the
amount of Net Cash Proceeds not so applied shall constitute "Excess
Proceeds". Aggregate Excess Proceeds from all such sales equal to or
exceeding an aggregate amount of $10.0 million must be offered by the
Company for the purchase of Notes and any then outstanding indebtedness of
the Company that is pari passu in right of payment to the Notes. In
addition, the Indenture requires the Company to deliver a written notice to
the Note's trustee within 180 days after each such Asset Sale if the
Company intends to apply the Net Cash Proceeds of such Asset Sale to
Replacement Assets. The Company has delivered such notice in connection
with the sale of DUAL RIG 97, the sale of a 51% interest in SIME DUAL RIG
7, and the sale of DUAL RIG 8. At this time, the Company expects that
substantially all of the Net Cash Proceeds received from the 1995 rig sales
will be applied to the purchase of Replacement Assets. If the full amount<PAGE>
of net cash proceeds is not applied to the purchase of Replacement Assets,
and the amount not so applied equals or exceeds $10.0 million, the Company
anticipates that amounts will be applied to the permanent repayment of
certain specified senior indebtedness, or the Company will make an offer to
purchase (a Net Proceeds Offer, as defined in the Indenture) Notes in
accordance with the procedures set forth in the Indenture.
CASH FLOW AND CAPITAL EXPENDITURES
Net cash provided from operations during the first quarter of 1996 compared
to the first quarter of 1995, increased by $9.3 million primarily as a
result of (i) a $7.0 million improvement in net income between the two
quarters, and (ii) cash of $1.6 million generated from changes in balance
sheet accounts during the first three months of 1996 compared to cash of
$1.6 million consumed by changes in such accounts during the same quarter
in 1995. The positive movement in balance sheet accounts during the 1996
quarter is mainly due to the collection of Saudi Aramco contract retention
funds totaling $3.9 million, less a $2.0 million increase in accounts
receivable and a $1.7 million contribution to the rabbi trust associated
with the Company's Supplemental Executive Retirement Plan. Consistent with
the terms of the rabbi trust agreement, the funding to the rabbi trust was
required as a result of the proposed merger of the Company with ENSCO.
Net cash flow used in investing activities totaled $1.4 million during the
first quarter of 1996 compared to $1.9 million for the first quarter of
1995. In both quarters, the cash was used primarily for ongoing rig
capital maintenance and upgrades.
Scheduled repayments of bank term loans during the first three months of
1996 compared to the first quarter of 1995 increased by $1.6 million due to
semi-annual payments on the Company's credit facility with a bank group led
by Citibank N.A. (the "Citibank Facility"). Amortization of the Citibank
Facility began in September 1995. Under the terms of the Citibank
Facility, semi-annual payments increase to $2.2 million in September 1996
and will total $5.1 million during 1997. The remaining $0.7 million
repayment of bank debt during the first quarter of 1996 and the same amount
repaid during the first quarter of 1995 is represented by equal quarterly
repayments of the Company's term loan with Christiania Bank og Kreditkasse
("CBK").
In total, the Company realized a $2.4 million net increase in cash and cash
equivalents during the first quarter of 1996 compared to a $5.8 million net
decrease during the same quarter in 1995.
FINANCING AND CAPITAL RESOURCES
The Company's capital structure experienced little change during the first
quarter of 1996 compared to December 31, 1995. The repayment of bank debt
during the 1996 quarter reduced total bank debt to $42.4 million on March
31, 1996. The remaining $100.0 million in senior debt as of March 31, 1996
was represented by the Notes that mature in 2004.
At March 31, 1996, $25.0 million was available to the Company under the
Company's $25.0 million revolving working capital loan included as part of
the Citibank Facility. Included in the Citibank Facility is a $15 million
guaranty facility (the "Guaranty Facility"). Letters of credit are issued<PAGE>
under the Guaranty Facility for the purpose of providing bid bonds and
performance bonds required on drilling contracts on which the Company may
bid or be awarded, and for other purposes related to the Company's
operations. On April 30, 1996, the Company was contingently liable for
approximately $7.9 million related to letters of credit issued under the
Guaranty Facility. The Guaranty Facility matures on July 27, 1996 and is
renewable subject to the consent of the bank group.
The improved net income results and reductions in bank debt reduced the
ratio of (i) total senior debt less cash to (ii) stockholder's equity from
72% at December 31, 1995 to 69% at March 31, 1996. On both of these dates,
the Company's working capital was approximately $55.0 million. Cash and
cash equivalents plus accounts receivable totaled $66.0 million or 84% of
current assets at March 31, 1996 compared to $61.8 million or 80% of
current assets at December 31, 1995.
Cash requirements for ongoing capital expenditures and repayment of bank
debt are expected to approximate $6.2 million and $4.3 million,
respectively, during the remainder of 1996. In addition, the Company
anticipates that it will exercise an existing purchase option to acquire
DUAL RIG 86 during the second or third quarter of 1996. The purchase price
of the rig will be approximately $21.0 million and will be funded with cash
proceeds received from the 1995 rig sale transactions and included in the
Company's March 31, 1996 cash and cash equivalents balance. Concurrent
with the rig purchase, charter expense will be reduced by approximately
$2.2 million on an annualized basis thereafter assuming the Company were to
exercise options to extend the term of the current DUAL RIG 86 charter
agreement.
Based on current energy industry and offshore drilling industry conditions,
the Company believes cash flow from operations combined with the Company's
working capital and borrowing availability from the existing Citibank
Facility should be sufficient to fund ongoing capital expenditures, the
purchase of DUAL RIG 86 and scheduled debt service during the next 12
months.
FUTURE OUTLOOK
The Company continues to benefit from improved industry conditions in
domestic and international markets. At April 22, 1996, utilization of the
Company's jackup rigs stood at 100% and the platform rig fleet was 90%
utilized. On that same date, the average dayrate for the Company's jackup
rig fleet in all markets, excluding DUAL RIG 91 which is operating under a
charter arrangement, increased to $25,695 compared to an average of $25,225
for the first quarter of 1996 primarily due to dayrate increases in the
GOM. The Company has additional contracts booked for six of its nine
jackup rigs that should result in further dayrate increases during the
second and third quarters of 1996. At April 22, 1996, all but one of the
Company's platform rigs were under contract. Two of the Company's GOM
platform rig contracts provide for indexed dayrate increases during the
second and third quarters of 1996. DUAL RIG 46 recently completed its
current drilling contract and is being demobilized. The rig is scheduled
to begin a new contract in August 1996 at a dayrate approximately $2,750
higher than the dayrate on the recent contract. In addition, DUAL RIG 39,
which did not drill during the first quarter of 1996 due to a temporary
suspension of the customer's drilling program, is being reactivated for<PAGE>
drilling operations to commence during the second week of May 1996. The
dayrate during drilling operations is approximately $12,000 higher than the
dayrate earned while the rig was not drilling, although rig operating
expenses will also increase during drilling operations.
Based on current industry conditions, the Company expects its financial
performance during the remainder of 1996 to be more favorable than the
first quarter of 1996. However, the offshore drilling industry is volatile
and subject to many factors beyond the Company's control. Therefore, the
Company cannot predict how long industry conditions will remain at current
levels, or if and when industry conditions may deteriorate. If industry
conditions were to become depressed and remain so for a prolonged period of
time, the Company's liquidity and its ability to meets its obligations may
be negatively impacted. To the extent the Company is not able to satisfy
its cash requirements from current liquidity, cash provided from
operations, and available borrowings, other sources of liquidity will be
considered, but are limited. Some of the Company's assets are
unencumbered, although, if the need for additional liquidity arises, there
can be no assurance that the Company would be able to access additional
debt or equity capital.
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS
No. 121"). The Company adopted SFAS 121, effective January 1, 1996, which
did not have an impact on the Company. Consistent with the provisions of
SFAS 121, the Company evaluates the realizability of its long-lived assets,
including property and equipment and goodwill based on undiscounted cash
flows and operating income expected to result from each asset. Also, in
1995, the FASB issued Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation". SFAS No. 123
encourages the adoption of a fair value based method of accounting for
employee stock options, but permits continued application of the accounting
method prescribed by Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" ("APB No. 25"). Entities that continue to
apply the provisions of APB No. 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of
accounting had been applied. The Company currently expects to continue to
account for its employee stock options in accordance with the provisions
APB No. 25. The Company will adopt SFAS No. 123 during 1996.
If the proposed transaction with ENSCO is completed, several of the
Company's agreements that include change of control , merger,
consolidation, or other similar provisions may impose certain obligations
on the Company. Such agreements include the credit facility agreements for
the Citibank Facility and CBK loan and other agreements mainly related to
employee benefits such as employment contracts, severance plans, bonus
plans, stock options and grants issued under the Company's 1993 Long Term
Incentive Plan and executive retirement plans. Under certain conditions,
obligations resulting from the various agreements may require the Company
to offer to pre-pay bank debt and incur significant cash expenses related
to employee benefit plans. In addition, the proposed transaction with
ENSCO will constitute a Change of Control, as defined in the Indenture for
the Company's Notes, and will require the Company to make an offer to
purchase all of the outstanding Notes at a purchase price equal to 100% of
the principal amount of the Notes plus accrued and unpaid interest thereon.<PAGE>
OTHER
Certain statements in this report, including statements of the Company's
and Management's expectations, intentions, plans and beliefs, including
those contained in or implied by this "Management's Discussions and
Analysis of Financial Condition and Results of Operations" and the Notes to
Consolidated Financial Statements are forward-looking statements based on
current expectations that involve a number of risks and uncertainties, many
of which may be outside the Company's control. The forward-looking
statements are made pursuant to safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The factors that could cause
actual results to differ materially include the following: worldwide
expenditures for oil and gas drilling, industry conditions and competition,
cyclical nature of the industry, operational risks and insurance,
international risks, and the risks described from time to time in the
Company's reports to the Securities and Exchange Commission, which includes
the Company's Annual Report on Form 10-K for the year ended December 31,
1995<PAGE>
<TABLE>
<CAPTION>
RIG FLEET DATA
The following table sets forth, as of April 22, 1996, certain information
with respect to drilling rigs operated by the Company.
FIRST
WATER DRILLING QUARTER
YEAR DEPTH DEPTH 1996
ENTERED CAPABILITY CAPABILITY PRESENT OFFSHORE UTILIZATION
TYPE AND NAME SERVICE (FEET) (FEET) LOCATION STATUS <F8>
-------------------------- ------- ---------- ---------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
JACKUP RIGS
Owned Rigs
DUAL RIG 38 <F6> 1983 300 25,000 India Active 100%
DUAL RIG 41 <F1, F2, F6> 1982 300 25,000 Gulf of Mexico Active 100%
DUAL RIG 42 <F1, F3, F6> 1983 300 25,000 Indonesia Active 100%
DUAL RIG 87 <F1> 1981 300 25,000 Bay of Campeche Active 100%
DUAL RIG 88 <F6> 1982 300 25,000 India Active 100%
DUAL RIG 89 <F1, F2, F6> 1982 300 25,000 Gulf of Mexico Active 96%
DUAL RIG 91 <F1, F6> 1981 300 25,000 Bay of Campeche Active 100%
DUAL RIG 96 <F1, F6> 1982 250 20,000 Qatar Active 100%
SIME DUAL RIG 7 <F1, F7> 1982 300 25,000 Indonesia Active 100%
Chartered Rig Under
Purchase Option
DUAL RIG 86 <F1, F2> 1980 250 20,000 Gulf of Mexico Active 100%
PLATFORM RIGS
Owned Rigs
DUAL RIG 23 <F1> 1980 - 25,000 Gulf of Mexico Active 100%
DUAL RIG 24 <F1> 1980 - 25,000 Gulf of Mexico Active 100%
DUAL RIG 25 <F1> 1980 - 25,000 Gulf of Mexico Active 100%
DUAL RIG 29 <F1> 1981 - 25,000 Gulf of Mexico Active 55%
DUAL RIG 39 <F1, F4> 1982 - 25,000 Gulf of Mexico Active 100%
DUAL RIG 44 <F5> 1986 - 25,000 California Active 100%
DUAL RIG 45 <F5> 1987 - 25,000 California Active 100%
DUAL RIG 46 <F1> 1982 - 25,000 Gulf of Mexico Active 100%
DUAL RIG 47 <F1> 1982 - 25,000 Gulf of Mexico Available Idle
Rig Operated Under
Management Contract
DUAL RIG 8 <F1> 1980 - 25,000 S. China Sea Active 100%
<FN>
<F1> Equipped with a top drive unit.
<F2> Operated under well-to-well contracts which can be terminated by the
customer upon completion of drilling operations on each well.
<F3> The rig is currently equipped with legs that limit its water depth
capability to 250 feet.
<F4> The rig's drilling contract is expected to remain in effect for the
life of the development drilling program for the platform, subject
to the periodic modification of terms.
<F5> Designed for earthquake active areas. The rigs also share a top
drive unit and, therefore, at present cannot be operated
simultaneously.
<F6> Mortgaged under a bank credit facility.
<F7> Company owns a 49% interest in the rig.
<F8> 1996 rig utilization is based on the ratio of days during which the
rig was under contract and earning revenue to the total days during
the period in which the rig was owned, under charter to the Company
or under management by the Company.
</FN>
/TABLE
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings: - None
Item 4. Submission of Matters To A Vote Of Security Holders: - None
Item 5. Other Information: - None
Item 6. Exhibits and Reports on Form 8-K:
On February 6, 1996, the Company filed a report on Form 8-K
relating to a Letter of Intent (the "LOI") entered into on
January 25, 1996 between the Company and ENSCO International
Incorporated ("ENSCO") providing for the merger of the Company
with ENSCO.
The February 6, 1996 Form 8-K filing included:
- A copy of the LOI
- A copy of the press release dated January 25, 1996
announcing the execution of the LOI
On April 1, 1996, the Company filed a report on Form 8-K relating
to an Agreement and Plan of Merger entered into by the Company
and ENSCO on March 21, 1996.
The April 1, 1996 Form 8-K filing included:
- A copy of the Agreement and Plan of Merger
- A copy of the press release dated March 22, 1996 issued in
connection with the signing of the Agreement and Plan of
Merger.<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DUAL DRILLING COMPANY
Date: May 3, 1996
/s/ W. Allen Parks
------------------------------------------
W. Allen Parks, Executive Vice-President &
Chief Financial Officer
(Principal Financial Officer and
Authorized Signatory)
/s/ Robert F. Chrone
------------------------------------------
Robert F. Chrone, Corporate Controller &
Company Secretary
Principal Accounting Officer)<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1996 financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 45,217
<SECURITIES> 0
<RECEIVABLES> 20,884
<ALLOWANCES> 0
<INVENTORY> 5,444
<CURRENT-ASSETS> 78,823
<PP&E> 283,709
<DEPRECIATION> 90,229
<TOTAL-ASSETS> 303,760
<CURRENT-LIABILITIES> 23,400
<BONDS> 135,249
<COMMON> 158
0
0
<OTHER-SE> 140,963
<TOTAL-LIABILITY-AND-EQUITY> 303,760
<SALES> 0
<TOTAL-REVENUES> 29,461
<CGS> 0
<TOTAL-COSTS> 18,589
<OTHER-EXPENSES> 6,853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,634
<INCOME-PRETAX> 1,004
<INCOME-TAX> 30
<INCOME-CONTINUING> 974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 974
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
