SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
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 Holding 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.)
2700 Fountain Place
1445 Ross Avenue, Dallas Texas 75202 - 2792
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 922-1500
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 twelve 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
There were 1,000 shares of Common Stock, $.10 par value, of the registrant
outstanding as of May 1, 1998.
<PAGE>
DUAL HOLDING COMPANY
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
March 31, 1998 and December 31, 1997 3
Consolidated Statement of Operations
Three months ended March 31, 1998 and 1997 4
Consolidated Statement of Cash Flows
Three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
Separate financial statements of the subsidiaries of Dual Holding Company (the
"Company") that guarantee the Company's Senior Subordinated Notes due 2004 (the
"Notes") are not included herein. 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 (loss) of such
subsidiary guarantors are substantially equivalent to the total assets, equity
and net income (loss) of the Company on a consolidated basis. The total assets,
equity and net income (loss) 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 HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED BALANCE SHEET
(In thousands, except for share amounts)
March 31, December 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 8,726 $ 10,071
Accounts receivable, net ....................... 9,557 12,108
Prepaid expenses and other ..................... 8,846 9,009
-------- --------
Total current assets .................... 27,129 31,188
-------- --------
PROPERTY AND EQUIPMENT, AT COST ................... 372,550 326,670
Less accumulated depreciation .................. 37,156 32,923
-------- --------
Property and equipment, net ............. 335,394 293,747
-------- --------
OTHER ASSETS, NET ................................. 110,087 110,524
-------- --------
$472,610 $435,459
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Payable to ENSCO ............................... $ 10,838 $ 5,633
Accounts payable ............................... 651 661
Accrued liabilities ............................ 24,135 22,471
-------- --------
Total current liabilities ............... 35,624 28,765
-------- --------
LONG-TERM DEBT .................................... 98,606 98,762
NOTE PAYABLE TO ENSCO ............................. 25,000 --
DEFERRED INCOME TAXES ............................. 15,841 14,545
OTHER LIABILITIES ................................. 14,372 14,490
STOCKHOLDER'S EQUITY
Common stock ($.10 par value, 10,000
shares authorized and 1,000 shares
issued and outstanding) ..................... -- --
Additional paid-in capital .................... 264,824 264,824
Retained earnings ............................. 18,343 14,073
-------- --------
Total stockholder's equity ............. 283,167 278,897
-------- --------
$472,610 $435,459
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
------------ -------------
OPERATING REVENUES
Drilling services ........................... $ 11,952 $ 14,078
ENSCO charter fees .......................... 8,422 3,796
-------- --------
20,374 17,874
-------- --------
OPERATING EXPENSES
Operating costs ............................. 5,115 11,573
Depreciation and amortization ............... 4,967 6,358
ENSCO administrative charge ................. 1,200 1,200
-------- --------
11,282 19,131
-------- --------
OPERATING INCOME (LOSS) ........................ 9,092 (1,257)
-------- --------
OTHER INCOME (EXPENSE)
Interest income ............................. 201 323
Interest expense, net ....................... (2,345) (2,947)
Other, net .................................. (33) (11)
-------- --------
(2,177) (2,635)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES .............. 6,915 (3,892)
PROVISION FOR INCOME TAXES ..................... 2,645 553
-------- --------
NET INCOME (LOSS) .............................. $ 4,270 $ (4,445)
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
------------- -------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) .................................... $ 4,270 $ (4,445)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ..................... 4,967 6,358
Deferred income taxes ............................. 1,296 52
Other ............................................. (104) (151)
Changes in operating assets and liabilities:
(Increase)decrease in accounts receivable ........ 2,551 (1,512)
(Increase)decrease in prepaid expenses
and other assets ............................... (118) 2,929
Increase in accounts payable ..................... 5,122 10,881
Decrease in accrued liabilities and other ........ (3,484) (6,140)
-------- --------
Net cash provided by operating activities .. 14,500 7,972
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment ................. (40,872) (15,787)
Proceeds from sale of assets ........................ 27 167
-------- --------
Net cash used by investing activities ............. (40,845) (15,620)
-------- --------
FINANCING ACTIVITIES
Long-term borrowings from ENSCO ..................... 25,000 --
Reduction of long-term borrowings ................... -- (251)
Reduction in restricted cash ........................ -- 1,075
-------- --------
Net cash provided by financing activities ......... 25,000 824
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS................... (1,345) (6,824)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......... 10,071 9,397
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............... $ 8,726 $ 2,573
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited Financial Statements
The consolidated financial statements included herein have been prepared by Dual
Holding Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
generally accepted accounting principles and, in the opinion of management,
reflect all adjustments (which consist of normal recurring adjustments) which
are necessary for a fair statement of the financial position and results of
operations for the interim periods presented.
It is recommended that these statements be read in conjunction with the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K.
Note 2 - Change in Depreciable Lives
During the latter part of 1997, the Company performed an engineering and
economic study of the Company's asset base. As a result of this study, the
Company, effective January 1, 1998, extended the depreciable lives of its
drilling rigs by an average of four years. The Company believes that this change
provides a better matching of the revenues and expenses of the Company's assets
over their anticipated useful lives. The effect of this change on the Company's
financial results for the three months ended March 31, 1998 was to reduce
depreciation expense by approximately $2.3 million.
The Company's drilling rigs and related equipment are depreciated over useful
lives determined by the original construction date or major enhancement date of
the asset. The useful lives of the Company's existing drilling rigs currently
range from 8 to 16 years.
Note 3 - Related Party Transactions
On March 31, 1998, the Company executed a promissory note and borrowed $25.0
million from its parent company, ENSCO International Incorporated ("ENSCO"). The
purpose of the loan is to provide additional cash to the Company for the ongoing
and planned capital upgrades to the Company's drilling rigs. The terms of the
loan provide for payment of the principal amount and interest on or before March
31, 2000. The note bears interest at 5% per annum.
At March 31, 1998, the Company's three jackup rigs and seven platform rigs in
the Gulf of Mexico were under bareboat charter to a wholly owned subsidiary of
ENSCO to achieve certain operating and marketing efficiencies. The terms of the
bareboat charter agreements with ENSCO provide for fixed daily rates to be paid
to the Company, which the Company believes are reasonable and representative of
the environment in which the rigs operate. Each respective bareboat charter rate
is increased for any capital additions made by the Company for a chartered rig
and the rate is reduced to 50% of the normal rate if a rig is idle more than 30
consecutive days. The initial term of the bareboat charter agreements is one
year, with automatic one year extensions, unless either party gives at least one
month's prior notice of termination. Revenues from the charter agreements were
approximately $8.4 million and $3.8 million for the three months ended March 31,
1998 and 1997, respectively.
The Company has a Master Services Agreement with ENSCO. Under the terms of the
Master Services Agreement, ENSCO provides certain shorebase and corporate
support services for the Company's domestic and foreign operations. The Company
pays ENSCO a monthly fee of $400,000 for these services, which the Company
believes is reasonable for the services provided.
Note 4 - Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." The adoption of this
statement had no effect on the Company's financial statements as it has no
items, other than net income, which are considered in the determination of
comprehensive income. As a result, the Company's financial statements do not
include separate reporting of comprehensive income.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Dual Holding Company (the "Company") contracts its offshore drilling equipment
for use in the Gulf of Mexico and the Asia Pacific region. Worldwide offshore
drilling activity remained strong in the first quarter of 1998 with demand
absorbing substantially all drilling rigs that are in working condition and
being actively marketed in the major offshore drilling markets throughout the
world. However, the decrease in oil prices, which began in November 1997, has
continued into 1998 resulting in recent reductions in day rates and utilization.
Because of this, the Company anticipates that its financial results may be
adversely affected for the remainder of 1998, as compared to the first three
months of 1998. As day rates and utilization for the Company's drilling rigs are
dependent on the market conditions in which the Company operates, the extent of
such adverse change cannot be accurately predicted.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
For the three months ended March 31, 1998, revenues increased $2.5 million, or
14% due primarily to increased utilization for the Company's drilling rigs,
offset, in part, by the sale of two jackup rigs in May and December 1997. In the
prior year quarter, the Company had five jackup rigs in shipyards for all or a
portion of the period, whereas in the current year period only two rigs were in
the shipyard. The Company's platform rig utilization also improved significantly
due to reduced shipyard downtime. The two jackup rigs currently in the shipyard
are anticipated to return to work in the second half of 1998.
The Company's operating margin (defined as revenues less operating expenses,
exclusive of depreciation and general and administrative expenses) increased
approximately $9.0 million, or 142%, for the three months ended March 31, 1998
as compared with the prior year period. The increase in operating margin is
primarily due to the increase in utilization discussed above, and the reversal
of $1.0 million previously accrued for the settlement of maritime claims that
was no longer considered necessary.
In June 1997, the Company sold its 49% interest in a jointly-owned jackup rig to
ENSCO. In December 1997, the Company sold another jackup rig to ENSCO. The
impact of the sale of these rigs on the first quarter's operating margin in
1998, as compared to 1997, was more than offset by higher day rates for the
remaining fleet due to improved market conditions and increased utilization due
to reduced shipyard downtime.
Depreciation and amortization decreased by $1.4 million, or 22% for the quarter
ended March 31, 1998 compared with the prior year period, due primarily to the
sale of the two jackup rigs to ENSCO and the impact of a change in estimated
depreciable lives. See Note 2 to the financial statements of the Company,
"Change in Depreciable Lives."
Interest expense decreased from the prior year period due to a decrease in
average debt outstanding. Interest expense will increase in the remaining
quarters of 1998 as compared to the first quarter, due to the additional
borrowings from ENSCO.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Capital Expenditures
The Company's cash provided by operations and cash used for capital expenditures
for the three months ended March 31, 1998 and 1997 were as follows (in
thousands):
1998 1997
--------- ---------
Cash provided by operations $14,500 $ 7,972
======= =======
Capital expenditures $40,872 $15,787
======= =======
Cash flow from operations increased by $6.5 million for the three months ended
March 31, 1998 as compared with the prior year period. The increase in cash flow
from operations is primarily a result of the increase in operating margin
resulting from the reduction of shipyard downtime during the first quarter of
1998, offset, in part, by the net change in various working capital accounts.
Capital expenditures for the three months ended March 31, 1998 primarily relate
to enhancements to the two jackup rigs currently in the shipyard, the completion
of enhancement projects near the end of 1997 and enhancements to the Company's
platform rigs. The Company anticipates that capital expenditures for rig
upgrades and sustaining operations may approximate $100.0 million to $130.0
million in 1998.
Financing and Capital Resources
The Company's liquidity position at March 31, 1998 and December 31, 1997 is
summarized in the table below (in thousands, except ratios):
March 31, December 31,
1998 1997
----------- -----------
Cash $ 8,726 $ 10,071
Working capital (8,495) 2,423
Current ratio .8 1.1
Management expects that the Company will need to supplement its cash flow from
operations in the remaining quarters of 1998 with additional borrowings from
ENSCO in order to meet its planned capital expenditures.
MARKET RISK
The Company uses financial instruments, on a limited basis, to hedge against its
exposure to changes in foreign currencies. The Company does not use financial
instruments for trading purposes. Management believes that the Company's hedging
activities do not expose the Company to any material interest rate risk, foreign
currency exchange rate risk, commodity price risk or any other market rate or
price risk.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates", "the
Company believes", "the Company anticipates" and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. 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
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) the cyclical nature of the industry, (iii)
worldwide expenditures for oil and gas drilling, (iv) operational risks and
insurance, (v) risks associated with operating in foreign jurisdictions, (vi)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (vii) the impact of current and future laws and
government regulation, as well as repeal or modification of same, affecting the
oil and gas industry and the Company's operations in particular, (vii) and the
risks described from time to time in the Company's reports to the Securities and
Exchange Commission, which include the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed with this Report
Exhibit No.
4.1 Promissory Note with ENSCO International Incorporated,
dated March 31, 1998.
27.1 Financial Data Schedule. (Exhibit 27.1 is being
submitted as an exhibit only in the electronic format of
this Quarterly Report on Form 10-Q being submitted to
the Securities and Exchange Commission.)
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dual Holding Company
Date: May 12, 1998 /s/ C. Christopher Gaut
-------------- ------------------------
C. Christopher Gaut
President
(Principal Executive Officer and
Financial Officer)
/s/ H. E. Malone
------------------------
H. E. Malone
Secretary
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1998 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000907245
<NAME> Dual Drilling Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,726
<SECURITIES> 0
<RECEIVABLES> 9,557
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,129
<PP&E> 372,550
<DEPRECIATION> 37,156
<TOTAL-ASSETS> 472,610
<CURRENT-LIABILITIES> 35,624
<BONDS> 123,606
0
0
<COMMON> 0
<OTHER-SE> 283,167
<TOTAL-LIABILITY-AND-EQUITY> 472,610
<SALES> 0
<TOTAL-REVENUES> 20,374
<CGS> 0
<TOTAL-COSTS> 5,115
<OTHER-EXPENSES> 6,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,345
<INCOME-PRETAX> 6,915
<INCOME-TAX> 2,645
<INCOME-CONTINUING> 4,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,270
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
PROMISSORY NOTE
March 31, 1998
Dallas, Texas
$25,000,000.00
For value received, Dual Holding Company ("Maker"), a Delaware
corporation, promises to pay to the order of ENSCO International Incorporated
("Payee"), the principal amount of Twenty-Five Million Dollars
($25,000,000.00), with interest as follows:
1. All payments are to be made at the office of Payee, located at
2700 Fountain Place, 1445 Ross Avenue, Dallas, Texas 75202.
2. The principal amount and interest of this Promissory Note are
payable in full on or before March 31, 2000.
3. The principal amount shall bear interest at the rate of five
percent (5%) per annum, compounded annually.
4. This Promissory Note may be prepaid in part or in full at any
time without penalty.
5. Maker agrees to pay on demand all costs of collection, legal
expenses, and attorney's fees incurred or paid by any Holder in
collecting or enforcing this Promissory Note on default.
6. No delay or omission on the part of any Holder in exercising any
right under this Promissory Note will operate as a waiver of such
right or of any other right under this Promissory Note. A waiver
on any one occasion will not be construed as a bar to or waiver
of any right or remedy on any future occasion.
7. As used in this Promissory Note, the term "Holder" means Payee or
other indorsee of this Promissory Note who is in possession of
it. If this Note is signed by more than one person in the
capacity of Maker, it shall be the joint and several liabilities
of these persons.
8. It is expressly acknowledged that this Promissory Note is
subordinate in right of payment to the Securities and to the
Senior Indebtedness as such terms are defined in the Trust
Indenture between Maker, certain Subsidiary Guarantors and
Shawmut Bank, National Association, Trustee, dated January 15,
1994, and as thereafter supplemented.
Dual Holding Company, Maker
C.C. Gaut
-----------------------------
Signature
C. Christopher Gaut, President
------------------------------
Printed Name, Title
