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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
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. [X]
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) and is therefore filing this Form with the reduced disclosure format.
Aggregate market value of voting stock held by non-affiliates of the registrant:
None
Number of shares outstanding at March 15, 1999: Common Stock: 1,000
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TABLE OF CONTENTS
PAGE
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PART ITEMS 1-2. BUSINESS AND PROPERTIES......................................1
I General...................................................1
Contract Drilling Operations..............................1
Jackup Rigs...............................................1
Platform Rigs.............................................1
Contracts.................................................1
Major Customers...........................................2
Industry Conditions and Competition.......................2
Governmental Regulation...................................2
Environmental Matters.....................................2
Operational Risks and Insurance...........................3
International Operations..................................3
Other Properties..........................................3
Employees.................................................3
ITEM 3. LEGAL PROCEEDINGS.............................................3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...................................................3
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PART ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
II RELATED STOCKHOLDER MATTERS...............................4
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATIONS DATA.......................................4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................4
Business Environment......................................4
Results of Operations.....................................5
Year 2000 Update..........................................6
Forward-Looking Statements................................7
New Accounting Pronouncements.............................7
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................21
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PART ITEMS 10-13.
III DIRECTORS AND EXECUTIVE OFFICERS, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.......................22
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PART ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
IV REPORTS ON FORM 8-K..........................................23
SIGNATURES.............................................................25
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
General
Dual Holding Company ("Dual" or the "Company") is a domestic and international
offshore drilling contractor. The Company owns 15 offshore drilling rigs,
consisting of eight jackup rigs and seven platform rigs. In addition, the
Company operates one platform rig off the coast of China, which is not owned but
managed by the Company. The Company's strategy is to market and operate quality
jackup and platform drilling rigs in geographically diverse markets.
On June 12, 1996, the Company was acquired by ENSCO International Incorporated
("ENSCO") in a purchase acquisition (the "Merger"), and became a wholly-owned
subsidiary of ENSCO on that date. See Note 2 to the Consolidated Financial
Statements.
The Company was formerly known as DUAL DRILLING COMPANY prior to the Merger.
From 1990 to 1993, the Company was wholly-owned by Dual Invest AS ("Dual
Invest"), a Norwegian corporation. In August 1993, the Company completed an
initial public offering of shares of its common stock, which reduced Dual
Invest's ownership interest in the Company to approximately 59.6% of the
Company's outstanding common stock.
Contract Drilling Operations
The Company's 15 offshore drilling rigs are located in North America and the
Asia Pacific region. The Company's North America drilling rigs consist of three
jackup rigs and seven platform rigs located in the Gulf of Mexico. The Company's
five Asia Pacific jackup rigs currently consist of three jackup rigs offshore
Singapore, one offshore Qatar and one offshore Abu Dhabi. In addition, the
Company operates one platform rig off the coast of China, which is not owned but
managed by the Company. The Company's three jackup rigs offshore Singapore are
not currently under contract and, as of the end of February 1999, the Company no
longer operates the platform rig off the coast of China. All of the Company's
remaining drilling rigs are currently under contract to ENSCO or another third
party.
Financial information regarding the Company's geographic operations is presented
in Note 9 to the Consolidated Financial Statements included in "Item 8.
Financial Statements and Supplementary Data." Additional financial information
regarding the Company's operations is presented in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Jackup Rigs
Jackup rigs are mobile self-elevating drilling platforms equipped with legs that
can be lowered to the ocean floor to provide a foundation for supporting a
drilling platform and to allow the drilling platform to be elevated above the
water. The entire drilling platform is self-contained with the rig hull
incorporating the drilling equipment and derrick, the jacking system for the
legs, crew quarters, storage and loading facilities, helicopter landing pad and
related equipment. All of the Company's jackup rigs are of the independent leg
design which are the most versatile and can accommodate most drilling sites on
which a jackup rig can be used.
Platform Rigs
A platform rig consists of drilling equipment and machinery arranged in modular
packages which are transported to, assembled, and then installed on fixed
offshore platforms owned by the customer. Fixed offshore platforms are steel
tower-like structures which stand on the ocean floor, with the top portion, or
platform, being above the water level and providing the foundation upon which
the platform rig is placed. A self-contained platform rig contains living
quarters for the crew, power generating units, and facilities for storing
drilling fluid and well tubular supplies to sustain drilling operations between
resupplyings.
Contracts
The drilling services provided by the Company are conducted on a "daywork"
contract basis. Under daywork contracts, the Company receives a fixed amount per
day for drilling the well and the customer bears a major portion of the
out-of-pocket costs of drilling. The customer may pay the cost of moving the
equipment to and from the job site and assembling and dismantling the equipment.
Certain of the Company's drilling rigs are bareboat chartered to a wholly-owned
subsidiary of ENSCO to achieve operating and marketing efficiencies. The terms
of the bareboat charter agreements provide for fixed daily rates to be paid to
the Company with ENSCO bearing the cost of maintaining and operating the rigs.
The bareboat charter rates are reviewed at least annually and adjusted in
accordance with the charter agreements. The charter rate is reduced to 50% of
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the normal rate if a rig is idle for more than 30 consecutive days. The bareboat
charter agreements provide for automatic yearly extensions but may be terminated
with one month's prior notice. At December 31, 1998, the Company had four jackup
rigs and seven platform rigs under bareboat charter to ENSCO.
Major Customers
The Company's customer base consists of ENSCO, major international oil and gas
companies, independent oil and gas companies and government-owned oil and gas
companies. In 1998, the Company's customers which individually accounted for 10%
or more of the Company's consolidated revenues consisted of ENSCO (48%),
Petronas Carigali Sdn Bhd. (24%) and Maersk Oil Qatar AS (20%).
Industry Conditions and Competition
The market for offshore drilling services is largely determined by the supply of
and demand for equipment. From the mid-1980's to the early 1990's, demand for
offshore drilling equipment was generally flat, while the over supply of
offshore drilling rigs gradually decreased, primarily due to attrition. Between
1994 and the first part of 1998, oil company spending steadily improved and, as
a result, day rates and utilization for offshore drilling rigs increased.
Technological advancements, such as three dimensional seismic, extended reach
drilling, and multilateral drilling techniques, have improved the economics of
finding and developing oil and gas reserves. During 1998, concern over excess
oil supplies, due in part to the economic slowdown in Southeast Asia, caused oil
prices to decrease to levels not experienced since the mid-1980's. As a result,
oil companies have decreased their exploration and production budgets, which has
led to a decrease in demand for drilling services. The supply of drilling rigs
currently exceeds demand on a worldwide basis. This has resulted in a decrease
in day rates and utilization across the industry.
The contract drilling business is highly competitive and Dual competes with
other drilling contractors on the basis of quality of service, price, equipment
suitability and availability, reputation and technical expertise. Competition is
usually on a regional basis, but drilling rigs are mobile and may be moved from
one region to another in response to demand. Drilling operations are generally
conducted throughout the year with some seasonal declines in winter months.
Governmental Regulation
The Company's business is affected by political developments and by federal,
state, foreign and local laws and regulations that relate directly to the oil
and gas industry. The industry is also affected by changing tax laws, price
controls and other laws affecting the energy business. The adoption of laws and
regulations curtailing exploration and development drilling for oil and gas for
economic, environmental or other policy reasons adversely affects the Company's
operations by limiting available drilling and other opportunities in the energy
service industry, as well as increasing the costs of operations.
The Company and its rigs are subject to federal, state, local and foreign laws
and regulations relating to engineering, design, structural, safety and
operational and inspection standards.
Environmental Matters
The Company's operations are subject to federal, state and local laws and
regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment. Laws and regulations
specifically applicable to the Company's business activities could impose
significant liability on the Company for damages, clean-up costs and penalties
in the event of the occurrence of oil spills or similar discharges of pollutants
into the environment in the course of the Company's operations, although, to
date, such laws and regulations have not had a material adverse effect on the
Company's results of operations, nor has the Company experienced an accident
that has exposed it to material liability for discharges of pollutants into the
environment. In addition, events in recent years have heightened environmental
concerns about the oil and gas industry in general. From time to time,
legislative proposals have been introduced which would materially limit or
prohibit offshore drilling in certain areas. To date, no proposals which would
materially limit or prohibit offshore drilling in the Company's principal areas
of operation have been enacted into law. If laws are enacted or other
governmental action is taken that restrict or prohibit offshore drilling in the
Company's areas of operation or impose environmental protection requirements
that materially increase the cost of offshore exploration, development or
production of oil and gas, the Company could be materially adversely affected.
The United States Oil Pollution Act of 1990 ("OPA 90") and similar legislation
in Texas, Louisiana and other coastal states address oil spill prevention and
control and significantly expand liability exposure across all segments of the
oil and gas industry. OPA 90, such similar legislation and related regulations
impose a variety of obligations on the Company related to the prevention of oil
spills and the liability for resulting damages. OPA 90 imposes strict and, with
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limited exceptions, joint and several liability upon each responsible party for
oil removal costs and a variety of damages. OPA 90 imposes ongoing financial
responsibility requirements. A failure to comply with OPA 90 may subject a party
to civil or criminal enforcement action.
Operational Risks and Insurance
Contract drilling and oil and gas operations are subject to various risks
including blowouts, craterings, fires and explosions, each of which could result
in damage to or destruction of drilling rigs and oil and gas wells, personal
injury and property damage, suspension of operations or environmental damage
through oil spillage or extensive, uncontrolled fires. The Company generally
insures its drilling rigs for amounts not less than the estimated fair market
value thereof. The Company also maintains liability insurance coverage in
amounts and scope which the Company believes are comparable to the levels of
coverage carried by other energy service companies. To date, the Company has not
experienced difficulty in obtaining insurance coverage. While the Company
believes its insurance coverages are customary for the energy service industry,
the occurrence of a significant event not fully insured against could have a
material adverse effect on the Company. Also, there can be no assurance that any
particular insurance claim will be paid or that the Company will be able to
procure adequate insurance coverage at commercially reasonable rates in the
future.
International Operations
A significant portion of the Company's operations are conducted in foreign
countries. Revenues from international operations were 54% of the Company's
total revenues in 1998. The Company's international operations are subject to
political, economic, and other uncertainties, such as the risks of expropriation
of its equipment, expropriation of a customer's property or drilling rights,
repudiation of contracts, adverse tax policies, general hazards associated with
international sovereignty over certain areas in which the Company operates and
fluctuations in international economies.
The Company's international operations also face the risk of fluctuating
currency values and exchange controls. Occasionally the countries in which the
Company operates have enacted exchange controls. Historically, the Company has
been able to limit these risks by obtaining compensation in U.S. dollars or
freely convertible international currency, and to the extent possible, by
limiting acceptance of foreign currency to amounts which match its expenditure
requirements in such currencies.
The Company has operations in Asian countries that have experienced substantial
devaluations of their currencies compared to the U.S. dollar. However, as the
Company's drilling contracts generally stipulate payment in U.S. dollars, the
Company has experienced no significant losses due to the devaluation of such
currencies.
Other Properties
Prior to the Merger, the Company leased office space for its corporate
headquarters in Dallas, Texas. This space is no longer occupied by the Company
and has been sublet under the lease agreement which extends through February
1999. The Company leases minimal space and materials storage space in India,
Malaysia and Saudi Arabia.
Employees
As of December 31, 1998, the Company had no employees. In connection with the
Merger, all of the Company's employees who were retained became employees of
ENSCO. The Company has a Master Services Agreement with ENSCO for shorebase and
corporate support services under which the Company pays ENSCO a monthly fee of
$400,000 for accounting, treasury, human resources, engineering, insurance
administration, management information systems, purchasing, safety and legal
services. Either party may cancel this agreement upon 30 days notice. In
addition, ENSCO provides personnel, at cost, for the Company's drilling rigs not
chartered to ENSCO.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not involved in any litigation which, in the opinion of
management, would have a material adverse effect on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required under the reduced disclosure format.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the common stock of the Company is owned by ENSCO. The shares were
acquired by ENSCO on June 12, 1996 as a result of the Merger in a transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to section 4(2) thereof. As such, there is no established
public trading market for the Company's common stock.
The Company has never declared any cash dividends on its common stock and does
not anticipate paying dividends on the common stock in the foreseeable future.
The Company's ability to pay dividends is restricted by certain provisions
contained in the indenture to which its publicly traded notes were issued. See
Note 4 to the Consolidated Financial Statements.
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATIONS DATA
Not required under the reduced disclosure format.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information presented herein is only intended to present a narrative
analysis of material changes in operating results between fiscal years 1998 and
1997. This reduced analysis is in accordance with the reduced disclosure format
set forth in General Instruction I(1)(a) and (b).
BUSINESS ENVIRONMENT
The Company owns 15 offshore drilling rigs located in North America and the Asia
Pacific region. The Company's North America drilling rigs consist of three
jackup rigs and seven platform rigs located in the Gulf of Mexico. The Company's
five Asia Pacific jackup rigs currently consist of three jackup rigs offshore
Singapore, one offshore Qatar and one offshore Abu Dhabi. In addition, the
Company operates one platform rig off the coast of China, which is not owned but
managed by the Company. The Company's three jackup rigs offshore Singapore are
not currently under contract and, as of the end of February 1999, the Company no
longer operates the platform rig off the coast of China.
Demand for the Company's services is significantly affected by expenditures for
oil and gas drilling. Expenditures for oil and gas drilling activity fluctuate
based upon many factors including world economic conditions, the legislative
environment in the U.S. and other major countries, production levels and other
activities of OPEC and other oil and gas producers, and the impact that these
and other events have on the current and expected future pricing of oil and
natural gas.
During 1998, oil prices decreased significantly to levels not seen since the
mid-1980's. As a result, oil companies have curtailed or deferred their
exploration and development programs causing a decrease in demand for drilling
rigs. As demand for drilling rigs declines, day rates and utilization are
adversely affected. Although members of OPEC and some other oil and gas
producers have attempted to reduce oil production levels, there can be no
assurance that these efforts will reduce oil production levels or if or when
these measures will increase oil prices for a sustained period.
The Company currently expects that day rates and utilization levels for drilling
rigs will continue to deteriorate in 1999 as a result of current industry
conditions and expected reductions in spending for exploration and production
programs by oil companies in 1999. The Company's drilling rigs that are bareboat
chartered to ENSCO are not as sensitive to day rate fluctuations as the
Company's drilling rigs contracted directly to third parties, due to the fact
that the charter rates with ENSCO are generally fixed for longer periods of time
and are not directly impacted by market day rates. However, if a charter rig
is idle for more than 30 consecutive days, the charter rate is reduced to
one-half the normal rate.
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RESULTS OF OPERATIONS
Revenues
The information below provides a summary of the Company's revenues for the years
indicated (in thousands).
1998 1997
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Revenues
Contract Drilling..................... $45,780 $61,362
ENSCO Charter Fees.................... 41,838 29,492
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Total Revenues..................... $87,618 $90,854
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Contract drilling revenues are derived from rigs contracted to third parties.
During 1998, the Company's five jackup rigs and one platform rig in the Asia
Pacific region generated all of the Company's contract drilling revenues.
Beginning in October 1998, one of these jackup rigs was bareboat chartered to
ENSCO through the remainder of 1998.
ENSCO charter fee revenues are derived from rigs contracted to a wholly-owned
subsidiary of ENSCO under bareboat charter agreements. These rigs are bareboat
chartered to ENSCO to achieve operating and marketing efficiencies. The Company
currently has three jackup rigs in the Gulf of Mexcio, one jackup rig in the
Asia Pacific region and seven platform rigs in the Gulf of Mexico under bareboat
charter to ENSCO.
Contract Drilling
Contract drilling revenues decreased by $15.6 million, or 25%, in 1998 as
compared to 1997. This decrease is due primarily to shipyard downtime for two
jackup rigs that were in the shipyard for the majority of 1998 and have remained
idle since the leaving the shipyard in the third and fourth quarters of 1998. In
addition, the Company experienced more idle time during 1998 due to the reduced
demand for offshore drilling rigs resulting from decreasing oil prices. Contract
drilling revenues also decreased due to the sale of the Company's 49% interest
in one jackup rig to ENSCO in May 1997.
ENSCO Charter Fees
ENSCO charter fee revenues increased by $12.3 million, or 42%, in 1998 as
compared to 1997. This increase is due primarily to increased utilization
resulting from less shipyard downtime in 1998 and increased charter rates
resulting from higher jackup rig values and capital additions to the platform
rigs. Also, beginning in October 1998, an additional jackup in the Asia Pacific
region was bareboat chartered to ENSCO which increased the number of jackup rigs
bareboat chartered to ENSCO to four.
Contract Drilling Expenses
Contract drilling expenses decreased by $12.3 million, or 35%, in 1998 as
compared to 1997. This decrease is due primarily to lower utilization resulting
from two rigs undergoing shipyard enhancements or being idle for all of 1998.
The current year expenses were also reduced by $1.0 million resulting from the
favorable settlement of a foreign personnel tax matter in 1998 and the reversal
of $2.1 million related to amounts previously accrued for the settlement of
maritime claims. Additionally, the Company sold its 49% interest in one jackup
rig to ENSCO in May 1997, which resulted in a decrease in contract drilling
expenses of approximately $2.9 million.
Depreciation and Amortization
Depreciation and amortization expense decreased by $4.6 million, or 17%, in 1998
as compared to 1997. This decrease is due primarily to the sale of two jackup
rigs to ENSCO during 1997 and the impact of a change in the estimated
depreciable lives of the Company's drilling rigs effective January 1, 1998.
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 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 year
ended December 31, 1998, was to reduce depreciation expense by approximately
$5.1 million.
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Interest Expense, Net
Interest expense, net decreased by $2.8 million in 1998 as compared to 1997, due
primarily to a $2.0 million increase in capitalized interest in the current year
and lower average interest rates on debt outstanding in 1998 as a result of
replacing bank debt with borrowings from ENSCO in 1998.
Provision for Income Taxes
The Company's provision for income taxes increased in 1998 as compared to 1997
as a result of the increased profitability of the Company offset, in part, by
the reversal of $2.7 million previously accrued for a foreign tax matter that
was settled in the Company's favor during 1998.
YEAR 2000 UPDATE
The Company's Year 2000 issues are being addressed in conjunction with ENSCO's
worldwide Year 2000 Plan. The following disclosure is from ENSCO's Form 10-K for
the year ended December 31, 1998 and addresses ENSCO's Year 2000 status.
The Company has completed its assessment of its critical information technology
(IT) systems and non-IT systems and is working to correct the deficiencies
identified. The Company believes that it is on schedule to successfully
implement the required systems and equipment modifications necessary to make the
Company's critical systems Year 2000 compliant by mid-1999.
The Company's critical IT systems are comprised primarily of a general ledger
accounting software package and related application modules, a fixed asset
system, payroll system and procurement and purchasing system. The assessment of
the Company's IT systems found that some of the IT systems were not Year 2000
compliant. Changes to make these systems Year 2000 compliant are being made in
conjunction with the Company's planned upgrade cycle, which should be completed
by mid-1999.
Non-IT systems are comprised primarily of computer controlled equipment and
electronic devices, including equipment with embedded microprocessors which are
used to operate equipment on the Company's drilling rigs and marine vessels.
Additionally, telephone systems and other office based electronic equipment are
considered in the assessment of non-IT systems. With respect to drilling rig and
marine vessel based systems, the Company's assessment indicates that there will
be no disruption in the operations of its drilling rigs and marine vessels as a
result of the Year 2000 problem. The Company conducted testing of its drilling
rig based equipment with manufacture representatives during the fourth quarter
of 1998 which verified the Company's assessment. With respect to other office
based non-IT systems, the Company's assessment found that it will be necessary
to replace or modify some existing equipment, which should be completed by
mid-1999.
The total cost to make all systems and equipment Year 2000 compliant is
currently estimated at $550,000, including software and systems that are being
replaced in the Company's normal upgrade cycle. Approximately $400,000 has been
spent in modifying and upgrading systems and equipment to date. These estimates
do not include internal labor costs for employees who spend part of their time
working on the Company's Year 2000 project.
The Company has initiated or received communication from most significant
suppliers, customers and financial service providers on the Year 2000 issue.
This communication has been used to determine the extent to which the Company is
vulnerable to these third parties' failure to remedy their own Year 2000 issues.
Although there is currently no indication that these business partners will not
achieve their Year 2000 compliance plans, there can be no guarantee that the
systems of other companies on which the Company relies will be timely converted.
Additionally, there can be no guarantee that the Company will not experience
Year 2000 problems. If the Company or its business partners experience Year 2000
compliance problems, material adverse business consequences could result. The
Company believes that the most likely negative effects, if any, could include
delays in payments to the Company from customers or payments by the Company to
suppliers and disruptions in shipments of equipment and materials required to
operate the Company's drilling rigs and marine vessels.
The Company has begun contingency planning for its Year 2000 issues and is
expected to have such plans completed by mid-1999. The Company's contingency
planning will primarily focus on precautionary measures related to the shipment
of equipment to foreign countries and rig crew changes on or around January 1,
2000.
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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) 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 which are 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, and (viii) the
risks described elsewhere, herein and from time to time in the Company's reports
to the Securities and Exchange Commission.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains
and losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This statement is not expected to have a material impact
on the Company's consolidated financial statements. This statement is effective
for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Reports of Independent Accountants...................................... 8
Consolidated Balance Sheet at December 31, 1998 and 1997................ 9
Consolidated Statement of Operations for the years ended December 31,
1998 and 1997, and the periods June 13, 1996 to December 31, 1996
and January 1, 1996 to June 12, 1996................................. 10
Consolidated Statement of Cash Flows for the years ended December 31,
1998 and 1997, and the periods June 13, 1996 to December 31, 1996
and January 1, 1996 to June 12, 1996................................. 11
Notes to Consolidated Financial Statements.............................. 12
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of Dual Holding Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Dual
Holding Company and its subsidiaries (Successor entity) at December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended and for the period June 13, 1996 to December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Successor entity's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
January 25, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of Dual Holding Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the results of operations and
cash flows of Dual Holding Company and its subsidiaries (Predecessor entity) for
the period January 1, 1996 to June 12, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Predecessor entity's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
January 28, 1997
8
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED BALANCE SHEET
(in thousands, except for par value and share amounts)
December 31,
-----------------
1998 1997
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 10,790 $ 10,071
Accounts receivable, net................................ 9,147 12,108
Other current assets.................................... 9,519 9,009
-------- --------
Total current assets................................. 29,456 31,188
-------- --------
PROPERTY AND EQUIPMENT, AT COST............................. 448,756 326,670
Less accumulated depreciation........................... (53,204) (32,923)
-------- --------
Property and equipment, net.......................... 395,552 293,747
-------- --------
OTHER ASSETS, NET........................................... 108,261 110,524
-------- --------
$533,269 $435,459
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Payable to ENSCO........................................ $ 2,083 $ 5,633
Accounts payable........................................ 558 661
Accrued liabilities and other........................... 16,542 22,471
-------- --------
Total current liabilities............................ 19,183 28,765
-------- --------
LONG-TERM DEBT ............................................ 98,137 98,762
NOTES PAYABLE TO ENSCO, INCLUDING ACCRUED INTEREST.......... 81,827 -
DEFERRED INCOME TAXES....................................... 23,840 14,545
OTHER LIABILITIES........................................... 10,722 14,490
COMMITMENTS AND CONTINGENCIES...............................
STOCKHOLDER'S EQUITY
Common stock ($.10 par value, 10,000 shares authorized,
1,000 shares issued and outstanding).................. - -
Additional paid in capital.............................. 264,824 264,824
Retained earnings....................................... 34,736 14,073
-------- --------
Total stockholder's equity............................ 299,560 278,897
-------- --------
$533,269 $435,459
======== ========
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
June 13, January 1,
Year Ended Year Ended 1996 to 1996 to
December 31, December 31, December 31, June 12,
1998 1997 1996 1996
--------- --------- --------- -----------
Successor Successor Successor Predecessor
<S> <C> <C> <C> <C>
REVENUES
Contract drilling.................. $ 45,780 $ 61,362 $ 33,085 $ 53,542
ENSCO charter fees................. 41,838 29,492 10,540 -
-------- -------- -------- --------
87,618 90,854 43,625 53,542
-------- -------- -------- --------
OPERATING EXPENSES
Contract drilling.................. 23,148 35,411 18,565 37,346
Depreciation and amortization...... 23,253 27,882 13,351 8,768
Change in control.................. - - - 22,005
General and administrative......... - - - 3,757
ENSCO administrative charge........ 4,800 4,800 2,640 -
-------- -------- -------- --------
51,201 68,093 34,556 71,876
-------- -------- -------- --------
OPERATING INCOME (LOSS)............... 36,417 22,761 9,069 (18,334)
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income.................... 1,002 1,152 757 846
Interest expense, net.............. (9,069) (11,911) (6,864) (6,484)
Other, net......................... (167) (52) (42) 268
-------- -------- -------- --------
(8,234) (10,811) (6,149) (5,370)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES..... 28,183 11,950 2,920 (23,704)
PROVISION (BENEFIT) FOR INCOME TAXES.. 7,520 1,941 (1,144) 628
-------- -------- -------- --------
NET INCOME (LOSS)..................... $ 20,663 $ 10,009 $ 4,064 $(24,332)
======== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
June 13, January 1,
Year Ended Year Ended 1996 to 1996 to
December 31, December 31, December 31, June 12,
1998 1997 1996 1996
--------- --------- --------- -----------
Successor Successor Successor Predecessor
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................. $ 20,663 $ 10,009 $ 4,064 $(24,332)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization............................. 23,253 27,882 13,351 8,768
Deferred income tax provision (benefit)................... 9,057 (2,910) (2,725) (645)
Gain on disposition of assets............................. (90) - - (167)
Recognition of deferred income............................ - - - (2,941)
Recognition of deferred expense........................... - - 29 1,357
Non-cash compensation expense............................. - - - 9,667
Other..................................................... (467) (453) (352) 58
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............... 2,961 (400) 9,943 (3,985)
(Increase) decrease in other assets...................... (879) 972 (654) 5,584
Increase (decrease) in accounts payable.................. (3,811) 4,855 (699) (4,777)
Increase (decrease) in accrued and other liabilities..... (11,662) (4,980) (9,372) 11,770
-------- -------- -------- --------
Net cash provided by operating activities.............. 39,025 34,975 13,585 357
-------- -------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment........................... (120,297) (76,345) (8,609) (23,149)
Proceeds from sale of assets.................................. 164 35,812 1,622 208
Other......................................................... - - - (1,688)
-------- -------- -------- --------
Net cash used by investing activities.................. (120,133) (40,533) (6,987) (24,629)
-------- -------- -------- --------
FINANCING ACTIVITIES
Long-term borrowings from ENSCO, including accrued interest... 81,827 - - -
Long-term borrowings.......................................... - 15,000 45,000 -
Reduction of long-term borrowings............................. - (50,250) (57,097) (2,586)
Proceeds in excess of net book value of assets sold to ENSCO.. - 40,407 - -
Cash received (pledged) for letters of credit................. - 1,075 6,367 (7,443)
-------- -------- -------- --------
Net cash provided (used) by financing activities....... 81,827 6,232 (5,730) (10,029)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 719 674 868 (34,301)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 10,071 9,397 8,529 42,830
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 10,790 $ 10,071 $ 9,397 $ 8,529
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
- --------------------------------------
Dual Holding Company was acquired by ENSCO on June 12, 1996, at which time the
Company became a wholly-owned subsidiary of ENSCO. See Note 2 "Merger." The
Company engages in the offshore contract drilling business and currently owns
15 offshore drilling rigs.
Business levels for the Company and for the offshore contract drilling industry,
in general, are significantly affected by worldwide expenditures for oil and gas
drilling. Expenditures for oil and gas drilling activity fluctuate based upon
many factors, including world economic conditions, the legislative environment
in the U.S. and other major countries, production levels and other activities of
OPEC and other oil and gas producers, and the impact that these and other events
have on the current and expected future pricing of oil and natural gas.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated. The consolidated financial statements included herein present
the results of the Company for periods prior to the Merger ("Predecessor"
entity) as well for periods subsequent to the Merger ("Successor" entity). The
financial statements of the Predecessor and Successor entities are not
comparable in certain respects because of differences between the cost bases of
the assets and liabilities held by the Predecessor compared to that of the
Successor as well as the effect on the Successor's operations for adjustments to
depreciation and amortization, interest income, interest expense, and income
taxes. The following significant accounting policies apply to both the
Predecessor entity and the Successor entity unless otherwise noted.
Pervasiveness of Estimates
- --------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues and
expenses, and disclosure of gain and loss contingencies at the date of the
financial statements. Actual results could differ from those estimates.
Cash Equivalents
- ----------------
The Company considers all highly liquid investments to be cash equivalents if
they have maturities of three months or less at the date of purchase.
Foreign Currency Translation
- ----------------------------
The U.S. dollar is the functional currency for all of the Company's foreign
operations. Exchange gains and losses were not significant in any period
presented.
Property and Equipment
- ----------------------
Under the Successor entity, depreciation on drilling rigs and related equipment
is computed using the straight line method over estimated useful lives ranging
from 4 to 17 years. Depreciation of other equipment is computed using the
straight line method over estimated useful lives ranging from 2 to 6 years.
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 year ended December 31, 1998 was to reduce
depreciation expense by approximately $5.1 million.
Maintenance and repair costs are charged to expense as incurred. Major renewals
and improvements are capitalized. Upon retirement or replacement of assets, the
related cost and accumulated depreciation are removed from the accounts and the
resulting gain or loss is included in income.
12
<PAGE>
Goodwill
- --------
Goodwill arising from the acquisition by ENSCO is amortized on the straight-line
basis over a period of 40 years. See Note 2 "Merger." Prior to the Merger, the
Company had goodwill resulting from the acquisition by Dual Invest in June 1990
that was written-off in 1996 as a result of purchase accounting. Amortization of
goodwill was $2.9 million in 1998, $2.7 million in 1997, $1.2 million for the
period June 13, 1996 to December 31, 1996 and $770,000 for the period January 1,
1996 to June 12, 1996. Goodwill, net of accumulated amortization, was $107.5
million and $110.4 million at December 31, 1998 and 1997, respectively, and is
included in Other Assets, Net in the Consolidated Balance Sheet. Accumulated
amortization of goodwill at December 31, 1998 and 1997 was $6.8 million and $3.9
million, respectively.
Impairment of Assets
- --------------------
The Company evaluates the carrying value of its long-lived assets, including
property and equipment and goodwill, when events or changes in circumstances
indicate that the carrying value of such assets may be impaired. The
determination of impairment is based upon expectations of undiscounted cash
flows, before interest, of the related asset.
Revenue Recognition
- -------------------
The Company's drilling contracts generally provide for payment on a day rate
basis, and revenues are recognized as the work is performed.
Income Taxes
- ------------
Deferred tax assets and liabilities are recognized for the anticipated future
tax effects of temporary differences between the financial statement basis and
the tax basis of the Company's assets and liabilities using the enacted tax
rates in effect at year end. A valuation allowance for deferred tax assets is
recorded when it is more likely than not that the benefit from the deferred tax
asset will not be realized. The Company is included in the ENSCO U.S.
consolidated tax return. Current and deferred taxes are calculated as if the
Company was a separate taxpayer.
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The adoption of
this Statement had no effect on the Company's financial statements.
Reclassifications
- -----------------
Certain previously reported amounts have been reclassified to conform to the
1998 presentation.
2. MERGER
On June 12, 1996, the Company was acquired by ENSCO in a purchase acquisition.
The Merger was approved on that date by the stockholders of the Company who
received 0.625 shares of ENSCO common stock (1.25 shares adjusted for the
two-for-one split of ENSCO's common stock on September 15, 1997) for each share
of the Company's common stock. The Company's stockholders of record as of June
12, 1996 received, in the aggregate, approximately 10.1 million shares of ENSCO
common stock (20.1 million shares post split) valued at approximately $218.4
million.
In conjunction with the Merger, the Company charged $22.0 million against
operating results for certain items. These items include compensation paid in
the ordinary course of business as well as other costs directly related to the
Merger process. The primary items composing the $22.0 million of operating
charges were as follows (in thousands):
Cashless exercise of stock options.... $ 9,667
Compensation and severance
payments to employees.............. 8,773
Fee paid to investment advisor........ 3,000
Other ............................... 565
-------
Total............................. $22,005
=======
13
<PAGE>
The Company used the purchase method of accounting to record the Merger. The
excess of the purchase price over the net assets acquired (goodwill)
approximated $114.3 million and is being amortized over 40 years. The Company
completed its final purchase price allocation and determination of goodwill,
deferred taxes and other accounts in the second quarter of 1997.
In connection with the Merger, the name of the Company was changed from DUAL
DRILLING COMPANY to Dual Holding Company and the capital structure of the
Company was changed. Prior to the Merger, the Company was authorized to issue
50.0 million shares of its $.01 par value common stock, of which 16.1 million
shares were outstanding as of June 12, 1996, and 10.0 million shares of its
preferred stock, of which none were outstanding as of June 12, 1996. Under the
terms of the Company's restated certificate of incorporation filed June 12,
1996, the Company is authorized to issue 10,000 shares of its $.10 par value
common stock. As of December 31, 1998 and 1997, the Company had issued 1,000
shares of its $.10 par value common stock, all of which were held by ENSCO.
The following unaudited pro forma information shows the consolidated results of
operations for the year ended December 31, 1996 based upon adjustments to the
historical financial statements of the Company to give effect to the Merger as
if such Merger had occurred on January 1, 1996 (in thousands):
1996
-------
Operating revenues.................. $97,167
Operating income.................... 9,966
Net income.......................... 145
The pro forma consolidated results of operations are not necessarily indicative
of the actual results that would have occurred had the acquisition occurred on
January 1, 1996, or of results that may occur in the future.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consists of the following
(in thousands):
1998 1997
-------- --------
Drilling rigs and equipment......... $445,873 $298,893
Other............................... 257 200
Work in progress.................... 2,626 27,577
-------- --------
$448,756 $326,670
======== ========
In June 1997, the Company sold its 49% interest in a jointly-owned jackup rig to
ENSCO for $20.8 million. The sales price of the rig was based on a fair market
appraisal by a third party and representative of the 51% of the jackup rig
purchased by ENSCO from an unrelated party in May 1997. The proceeds from the
sale to ENSCO exceeded the Company's net book value of the rig by approximately
$9.2 million which has been recorded to additional paid in capital.
In December 1997, the Company sold a jackup rig to ENSCO for $55.0 million. The
sales price of the rig was based on an independent appraisal of fair market
value. The proceeds from the sale exceeded the Company's net book value of the
rig by approximately $31.2 million which has been recorded to additional paid in
capital.
4. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following (in
thousands):
1998 1997
-------- --------
Senior Subordinated Notes due 2004.... $ 98,137 $ 98,762
Notes Payable to ENSCO,
including accrued interest......... 81 827 -
-------- --------
$179,964 $ 98,762
======== ========
14
<PAGE>
In January 1994, the Company completed an offering of 9.875% Senior Subordinated
Notes (the "Notes") with an aggregate principal amount of $100.0 million. The
Notes are due January 2004 and interest is payable semiannually. The Notes are
unsecured obligations of the Company, and are guaranteed by substantially all of
the Company's principal subsidiaries. The Notes' indenture contains certain
covenants, including limitation on restricted payments, indebtedness,
disposition of proceeds of asset sales, transactions with affiliates, payments
of dividends and other payment restrictions, limitations on sale/leaseback
transactions and restrictions on mergers, consolidations and transfer of assets.
The Notes are redeemable at the option of the Company, in whole or in part, at
any time on or after January 15, 1999. The Notes are redeemable at prices
decreasing annually from 104.94% of the face amount on January 15, 1999, to par
on January 15, 2002 and thereafter.
In July 1996, the Company redeemed $5.0 million (face amount) of the Notes
pursuant to an offer required to be made under the terms of the Notes following
the Merger. Additionally, as of December 31, 1996, ENSCO had purchased $23.2
million (face amount) of the Notes on the open market. The full $95.0 million
(face amount) of the Company's Notes and related premium are shown as
outstanding in the Company's consolidated balance sheet as of December 31, 1998
and 1997.
On March 31, 1998 and June 30, 1998, the Company executed promissory notes with
ENSCO and borrowed $25.0 million on each of these dates. On September 30, 1998,
the Company executed a third promissory note and borrowed an additional $20.0
million from ENSCO. On December 31, 1998, the Company executed a fourth
promissory note and borrowed another $10.0 million from ENSCO. The purpose of
the loans was to provide additional cash to the Company for capital upgrades
made to the Company's drilling rigs. The terms of the promissory notes provide
for payment of the principal amount and interest on or before the maturity date.
The maturity date of each promissory note is two years from its inception. The
promissory notes bear interest at 5% per annum and at December 31, 1998, accrued
interest on the promissory notes was $1.8 million.
5. STOCKHOLDER'S EQUITY (in thousands, except for share amounts)
<TABLE>
<CAPTION>
$.10 par $.10 par $.01 par $.01 par
Common Common Common Common Additional Retained
Stock Stock Stock Stock Paid-In Earnings Treasury
Shares Amount Shares Amount Capital (Deficit) Stock
------ ------ ------ ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.......... - $ - 15,766 $ 158 $173,793 $(33,386) $ (419)
Cashless exercise of stock
options.......................... - - 1,048 10 20,166 - -
Purchase of treasury stock.......... - - (710) - - - (13,583)
Net loss through June 12, 1996...... - - - - - (24,332) -
Change of control................... 1,000 - (16,104) (168) 24,472 57,718 14,002
Net income June 13, 1996 to
December 31, 1996................ - - - - - 4,064 -
------ ------ ------ ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1996.......... 1,000 - - - 218,431 4,064 -
Net income.......................... - - - - - 10,009 -
Proceeds in excess of net book
value of assets sold to ENSCO,
including tax effects............ - - - - 46,393 - -
------ ------ ------ ------ -------- -------- --------
BALANCE AT DECEMBER 31, 1997.......... 1,000 - - - 264,824 14,073 -
Net income.......................... - - - - - 20,663 -
------ ------ ------ ------ -------- -------- --------
BALANCE AT DECEMBER 31, 1998.......... 1,000 $ - - $ - $264,824 $ 34,736 $ -
====== ====== ====== ====== ======== ======== ========
</TABLE>
6. EMPLOYEE BENEFIT PLANS
Incentive Stock Plans
- ---------------------
Prior to the Merger, the Company's 1993 Long-Term Incentive Plan (the "1993
Plan") provided for the granting of any or all of the following types of awards:
(i) stock options, including incentive stock options and non-qualified stock
options, (ii) stock appreciation rights ("SARs"), in tandem with stock options
or freestanding, (iii) restricted stock, (iv) performance share awards, and (v)
stock value equivalent awards. In conjunction with the Merger, the 1993 Plan was
terminated and all outstanding shares granted pursuant to the 1993 Plan were
exchanged for ENSCO common stock.
15
<PAGE>
Stock Options - The table below summarizes the transactions relating to stock
options for the year ended December 31, 1996 (in thousands):
1996
----------------------
Weighted
Average
Exercise
Shares Price
------ ------
Outstanding, beginning of year.................. 1,059 $ 10.04
Exercised....................................... (1,048) 10.04
Exchanged for ENSCO common stock in Merger...... (11) 9.83
------ -------
Outstanding, end of year........................ - $ -
====== =======
In connection with the Merger, the 1993 Plan was amended to allow for the
cashless exercise of outstanding stock options prior to the Merger date or the
exchange of options for shares of ENSCO common stock on the Merger date. As a
result of this change, the Company recorded a charge of approximately $9.7
million which is included in Change in Control expense in the consolidated
statement of operations.
Under SFAS No. 123, the Company is required to disclose information related to
net income and earnings per share as if it had accounted for its employee stock
options under the fair value provisions of that statement. As discussed above,
the Company amended the 1993 Plan in connection with the Merger which resulted
in a charge recorded by the Company in accordance with the provisions of Opinion
25 and related authoritative interpretations. The Company determined that the
expense recognized under SFAS No. 123 in 1996 would not have been materially
different than that recognized under Opinion 25.
Defined Contribution Plan
- -------------------------
Effective June 30, 1996, the DUAL DRILLING COMPANY Thrift and 401(k) Retirement
and Savings Plan (the "Retirement Plan") was frozen. All participants who
remained employees of the Company after the Merger were allowed to become
participants in the ENSCO Savings Plan. As soon as regulatory approvals are
obtained, the Retirement Plan will be merged into the ENSCO Savings Plan. Costs
incurred by the Company for matching contributions under the Retirement Plan
were approximately $300,000 for the year ended December 31, 1996.
Supplemental Executive Retirement Plan
- --------------------------------------
In June 1993, the Company implemented the Supplemental Executive Retirement Plan
(the "Plan"), a defined benefit pension plan covering certain of its executive
officers. In conjunction with the Merger, the Company, ENSCO and the Plan
participants agreed to terminate the Plan and distribute an aggregate $2.3
million to the participants. As such, the Company recorded pension cost related
to the Plan of approximately $1.7 million in 1996, of which $1.2 million is
recorded in Change in Control expenses in the consolidated statement of
operations. The $2.3 million termination liability was paid to the participants
in January 1997.
7. INCOME TAXES
The Company had losses of $3.9 million, $3.7 million, $13.8 million and $33.6
million from its operations before income taxes in the United States and income
of $32.1 million, $15.7 million, $16.7 million and $9.9 million from its
operations before income taxes in foreign countries for the years ended December
31, 1998 and 1997 and the periods June 13, 1996 to December 31, 1996 and January
1, 1996 to June 12, 1996, respectively.
16
<PAGE>
The provisions for income taxes for the years ended December 31, 1998, 1997 and
1996 are summarized as follows (in thousands):
1998 1997 1996
-------- -------- ----------------------
Successor Predecessor
--------- -----------
CURRENT:
Federal................... $ - $ - $ - $ -
State..................... - - - -
Foreign................... (1,537) 4,851 1,581 1,273
------- ------- ------- -------
Total Current.......... (1,537) 4,851 1,581 1,273
------- ------- ------- -------
DEFERRED:
Federal................... 9,658 (3,066) (4,113) (645)
Foreign................... (601) 156 1,388 -
------- ------- ------- -------
Total Deferred......... 9,057 (2,910) (2,725) (645)
------- ------- ------- -------
Total .......................... $ 7,520 $ 1,941 $(1,144) $ 628
======= ======= ======= ========
Deferred income tax assets and liabilities as of December 31, 1998 and 1997 are
summarized as follows (in thousands):
1998 1997
-------- --------
Deferred tax assets:
Domestic:
Foreign tax credit carryforward............ $ 4,887 $ 5,108
Net operating loss carryforward............ 28,222 22,407
Liabilities not deductible for tax purposes 1,457 3,217
Other...................................... 2,125 2,614
------- -------
Total deferred tax assets...................... 36,691 33,346
------- -------
Deferred tax liabilities:
Domestic:
Excess of net book basis over tax basis.... 44,495 31,492
Deferred installment gain.................. 3,186 3,186
Undistributed foreign earnings............. 771 771
Foreign:
Excess of net book basis over tax basis.... 4,752 5,353
------- -------
Total deferred tax liability................... 53,204 40,802
Less: Total deferred tax assets............... (36,691) (33,346)
------- -------
Net deferred tax liability..................... 16,513 7,456
Add: Current deferred tax asset............... 7,327 7,089
------- -------
Long term deferred tax liability............... $23,840 $14,545
======= =======
17
<PAGE>
The following is a reconciliation of the provision for income taxes
calculated at the U.S. federal income tax rate to the income taxes reflected in
the consolidated statement of operations:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -------------------------
Successor Predecessor
--------- -----------
<S> <C> <C> <C> <C>
Income tax expense (benefit)
at U.S. federal tax rate.................. $ 9,864 $ 4,182 $ 1,022 $(8,296)
Increase (decrease) in tax resulting from:
Effects of foreign taxes.................. (1,994) 1,190 (2,804) 1,845
Adjustment of prior year accruals......... (2,694) - - -
Goodwill amortization..................... 1,005 942 434 272
Change in valuation allowance............. - - - 6,807
Utilization of NOLs....................... 76 (3,078) - -
Items not related to current
year operations......................... - (670) - -
Other..................................... 1,263 (625) 204 -
------- ------- ------- --------
Income tax expense (benefit)............ $ 7,520 $ 1,941 $(1,144) $ 628
======= ======= ======= ========
</TABLE>
At December 31, 1998, the Company had regular and alternative minimum tax net
operating loss carryforwards of approximately $81.0 million and $54.0 million,
respectively, and foreign tax credit carryforwards of $4.9 million. If not
utilized, the regular and alternative minimum tax net operating loss
carryforwards expire from 2009 through 2013. The foreign tax credit carryforward
expires from 2001 through 2003.
As a result of the Merger, the Company is now included in the ENSCO U.S.
consolidated tax return. The Merger also results in the utilization of the
Company's net operating loss carryforwards being subject to limitations imposed
by the Internal Revenue Code of 1986. However, the Company does not expect such
limitations to have an effect upon its ability to utilize its net operating loss
carryforwards.
It is the policy of the Company to consider that income generated in foreign
subsidiaries is permanently invested. A significant portion of the Company's
undistributed foreign earnings at December 31, 1998 were generated by controlled
foreign corporations. A portion of the undistributed foreign earnings were
taxed, for U.S. tax purposes, in the year that such earnings arose. Upon
distribution of foreign earnings in the form of dividends or otherwise, the
Company may be subject to additional U.S. income taxes. However, deferred taxes
related to the future remittance of these funds are not expected to be
significant to the financial statements of the Company.
8. COMMITMENTS AND CONTINGENCIES
Leases and Contracts
- --------------------
The Company is obligated under leases for certain of its offices and equipment.
Rental expense relating to operating leases was $345,000 in 1998, $865,000 in
1997, $532,000 for the period June 13, 1996 through December 31, 1996 and
$407,000 for the period January 1, 1996 through June 12, 1996. Future minimum
rental payments under the Company's noncancellable operating lease obligations
having initial or remaining lease terms in excess of one year are as follows:
$162,000 in 1999, $46,000 in 2000 and none thereafter.
The Company makes payments to ENSCO under a Master Services Agreement for
support services for the Company's operations. See Note 10 "Related Party
Transactions."
Insurance
- ---------
Prior to the Merger, the Company was self-insured for its maritime claims
exposure that provided for self-insured limits of up to $500,000 for each claim.
Effective June 12, 1996, the Company's insurance coverage was increased to
levels consistent with ENSCO's policies which, among other things, limits the
exposure to maritime claims to $25,000 for each claim. Based on current
information, the Company has provided adequate reserves for such claims.
18
<PAGE>
Letters of Credit
- -----------------
The Company, from time to time, maintains legally restricted cash balances as
collateral for letters of credit issued by banks for providing bid bonds and
performance bonds required on drilling contracts in which the Company may bid or
be awarded. There were no letters of credit outstanding at December 31, 1998 and
1997.
Other
- -----
At December 31, 1998, there were no other contingencies, claims, or lawsuits
against the Company, which, in the opinion of management, would have a material
effect on its financial condition or results of operations.
9. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company is engaged in the offshore contract drilling business and owns 15
offshore drilling rigs located in North America and the Asia Pacific region. In
addition, the Company operates one platform rig off the coast of China, which is
not owned but managed by the Company. The Company is a wholly-owned subsidiary
of ENSCO and is managed as part of ENSCO's offshore drilling segment. The
Company attributes revenues and assets to geographic locations based upon the
location of a drilling rig.
Revenues and long-lived asset information by country for those countries that
account for more than 10% of total revenues or 10% of the Company's long-lived
assets is as follows (in thousands):
<TABLE>
<CAPTION>
Revenues Long-lived Assets
------------------------------------------------------- ----------------------------------
June 13, 1996 - January 1, 1996 -
December 31, 1996 June 12, 1996
1998 1997 (Successor) (Predecessor) 1998 1997 1996
------ ------ ----------------- ----------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
United States............ $39,948 $29,493 $10,539 $25,870 $193,415 $142,656 $111,375
Qatar.................... 23,207 26,761 4,895 4,747 27,659 58,639 22,750
Malaysia................. 21,101 10,032 - - 37,236 39,758 -
India.................... - 18,300 9,843 7,174 - 52,692 49,937
Mexico................... - 784 8,554 6,554 - - 50,688
Indonesia................ - - 9,045 8,845 - - 38,729
Singapore................ - - - - 109,078 - -
Other foreign countries.. 3,362 5,484 749 352 28,164 2 4
------- ------- ------- ------- -------- -------- --------
Total................ $87,618 $90,854 $43,625 $53,542 $395,552 $293,747 $273,483
======= ======= ======= ======= ======== ======== ========
</TABLE>
For the year ended December 31, 1998, revenues from ENSCO were 48% of the
Company's total revenues and revenues from two other customers were 24% and 20%
of the Company's total revenues.
For the year ended December 31, 1997, revenues from ENSCO were 32% of the
Company's total revenues, revenues from two other customers were each 20% of
total revenues and revenues from one customer was 11% of the Company's total
revenues.
For the period June 13, 1996 to December 31, 1996, revenues from ENSCO were 24%
of the Company's total revenues and revenues from three other customers were
23%, 15% and 13% of the Company's total revenues.
For the period January 1, 1996 to June 12, 1996, revenues from one customer was
15% of the Company's total revenues and revenues from two customers were each
13% of the Company's total revenues.
10. RELATED PARTY TRANSACTIONS
Certain of the Company's drilling rigs are bareboat chartered to a wholly-owned
subsidiary of ENSCO to achieve operating and marketing efficiencies. As of
December 31, 1998, four jackup rigs and seven platform rigs were under bareboat
charter to ENSCO. The terms of the bareboat charter agreements provide for fixed
daily rates to be paid to the Company. The bareboat charter rates are
reviewed at least annually and adjusted in accordance with the charter
agreements. The charter is reduced to 50% of the normal rate if a rig is idle
for more than 30 consecutive days. Revenues relating to the bareboat charter
agreements were $41.8 million in 1998, $29.5 million in 1997 and $10.5 million
for the period from June 13, 1996 to December 31, 1996.
19
<PAGE>
The Company has a Master Services Agreement with ENSCO whereby ENSCO provides
certain shorebase and corporate support services for the Company's domestic and
foreign operations. The Company pays ENSCO a monthly fee for these services
under the Master Services Agreement, which the Company believes is reasonable
for the services provided. The administrative expense related to the Master
Services Agreement was $4.8 million for each of the years ended December 31,
1998 and 1997 and $2.6 million for the period from June 13, 1996 to December 31,
1996.
During 1998, the Company borrowed $80.0 million from ENSCO to meet cash flow
requirements for capital upgrades and enhancements to the Company's drilling
rigs. See Note 4 "Long Term Debt."
ENSCO holds a portion of the Company's Notes as of December 31, 1998. See Note 4
"Long-Term Debt." Interest expense relating to the Notes held by ENSCO was $2.3
million in 1998 and 1997 and $1.2 million in 1996.
The Company is a guarantor of ENSCO's $185.0 million revolving credit agreement
established in May 1998. As of December 31, 1998, there were no borrowings
outstanding under this credit agreement.
11. SUPPLEMENTAL FINANCIAL INFORMATION
Consolidated Balance Sheet Information. Accounts receivable, net at December 31,
1998 and 1997 consists of the following (in thousands):
1998 1997
------ ------
Trade............................... $6,317 $12,406
Other............................... 3,301 109
----- -------
9,618 12,515
Allowance for doubtful accounts..... (471) (407)
------ -------
$9,147 $12,108
====== =======
Other current assets at December 31, 1998 and 1997 consists of the following (in
thousands):
1998 1997
------ ------
Current deferred tax asset...... $ 7,327 $ 7,089
Prepaid taxes................... 1,024 1,146
Prepaid expenses ............... 34 114
Inventory....................... 1,079 440
Deposits........................ 55 109
Other........................... - 111
------- -------
$ 9,519 $ 9,009
======= =======
Accrued liabilities at December 31, 1998 and 1997 consists of the following (in
thousands):
1998 1997
------ ------
Operating expenses................ $ 1,744 $ 1,671
Taxes............................. 3,217 8,201
Insurance......................... 250 2,500
Accrued interest.................. 4,298 4,326
Accrued work in progress.......... 6,917 4,952
Deferred revenue.................. 50 755
Other............................. 66 66
------- -------
$16,542 $22,471
======= =======
20
<PAGE>
Consolidated Statement of Operations Information. Maintenance and repairs
expense for the years ended December 31, 1998, 1997 and 1996
are as follows (in thousands):
1998 1997 1996
---- ---- ---------------------
Successor Predecessor
--------- -----------
Maintenance and repairs.......... $2,930 $3,497 $3,029 $5,911
Consolidated Statement of Cash Flows Information. The 1996 consolidated
statement of cash flows excludes the non-cash issuance of common stock in the
merger of the Company with ENSCO as described in Note 2 "Merger."
Cash paid for interest and income taxes for the years ended December 31, 1998,
1997 and 1996 are as follows (in thousands):
1998 1997 1996
---- ---- ---------------------
Successor Predecessor
--------- -----------
Interest, net of amount
capitalized ................... $7,280 $12,450 $6,326 $6,915
Income taxes .................... 2,142 2,884 1,317 1,696
The Company capitalized interest of $2.1 million in 1998, $180,000 in 1997 and
none in 1996.
Fair Value of Financial Instruments. The following disclosure of the estimated
fair value of financial instruments is made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. However, considerable judgement is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of financial instruments at
December 31, 1998 and 1997 are as follows (in thousands):
December 31, 1998 December 31, 1997
------------------ ------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ------- ------ -------
Senior Subordinated Notes
due 2004.................... $98,137 $99,988 $98,762 $102,876
Notes Payable to ENSCO,
including accrued interest.. 81,827 80,724 - -
The estimated fair values were determined as follows:
Quoted market price for the Senior Subordinated Notes, and interest rates that
are currently available to the Company for issuance of debt with similar terms
and remaining maturities for the Notes Payable to ENSCO.
The estimated fair value of the Company's cash and cash equivalents,
receivables, trade payables and other liabilities approximated their carrying
values at December 31, 1998 and 1997.
Concentration of Credit Risk. Financial instruments which subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company's trade receivables are predominantly from
major international oil companies and government-owned oil companies. The
Company's cash and cash equivalents are maintained in major banks and high grade
investments. As a result, the Company believes the credit risk in such
instruments is minimal.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Not required under the reduced disclosure format.
ITEM 11. EXECUTIVE COMPENSATION
Not required under the reduced disclosure format.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not required under the reduced disclosure format.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not required under the reduced disclosure format.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements, financial statement schedules and exhibits filed as
part of this report:
Page
----
(1) Financial Statements of Dual Holding Company
Reports of Independent Accountants 8
Consolidated Balance Sheet 9
Consolidated Statement of Operations 10
Consolidated Statement of Cash Flows 11
Notes to the Consolidated Financial Statements 12
(2) Exhibits
The following instruments are included as exhibits to this
report. Exhibits incorporated by reference are so indicated by
parenthetical information.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 - Agreement and Plan of Merger among ENSCO International Incorporated, DDC
Acquisition Company and DUAL DRILLING COMPANY dated March 21, 1996
(incorporated by reference to exhibit (C)(1) to the Company's Form 8-K
as filed with the Securities and Exchange Commission on April 1, 1996).
2.1 - Principal Stockholders Agreement between ENSCO International
Incorporated and Dual Invest AS dated March 21, 1996 (incorporated by
reference to Appendix D to the ENSCO (File No. 1-8097) Registration
Statement on Form S-4, as amended, filed with the Securities and
Exchange Commission on May 10, 1996).
2.2 - Amendment No. 1 to Agreement and Plan of Merger dated May 7, 1996,
between ENSCO International Incorporated, DDC Acquisition Company
and DUAL DRILLING COMPANY (incorporated by reference to exhibit 2.2 of
Amendment No. 1 to the ENSCO International Incorporated Registration
Statement on Form S-4 filed May 10, 1996, Registration No. 333-3411).
3 - Certificate of Merger of DDC Acquisition Company merging into DUAL
DRILLING COMPANY (incorporated by reference to exhibit No. 3 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996).
3.1 - Certificate of Incorporation of DDC Acquisition Company, as amended
(incorporated by reference to exhibit No. 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1996).
4.0 - Promissory Note for $25.0 million, with ENSCO International
Incorporated, dated March 31, 1998 (filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998).
4.1 - Promissory Note for $25.0 million, with ENSCO International
Incorporated, dated June 30, 1998 (filed as exhibit 4.1 in
the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998).
4.2 - Promissory Note for $20.0 million, with ENSCO International
Incorporated, dated September 30, 1998 (filed as exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998).
*4.3 - Promissory Note for $10.0 million, with ENSCO International
Incorporated, dated December 31, 1998.
10 - Form of Standard Bareboat Charter between ENSCO Offshore Company and
the Company (incorporated by reference to exhibit No. 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996).
10.1 - Form of Amendment No. 1 to the Standard Bareboat Charter between ENSCO
Offshore Company and the Company (filed as exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998).
23
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2 - Form of Standard Platform Charter between ENSCO Offshore Company and
the Company (incorporated by reference to exhibit No. 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996).
10.3 - Master Services Agreement between ENSCO International Incorporated
and the Company (incorporated by reference to exhibit No. 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996).
10.4 - DUAL DRILLING COMPANY Employees Tax Deferred/Thrift Savings Plan and
Trust (filed as exhibit 10.2 to the Company's Registration Statement on
Form S-1 (No. 33-64550) and incorporated herein by reference).
10.5 - Office Lease, dated as of October 21, 1988, between Sherry Lane
Associates and DUAL DRILLING COMPANY (filed as exhibit 10.14 to the
Company's Registration Statement on Form S-1 (No. 33-64550) and
incorporated herein by reference).
10.6 - Indenture dated January 15, 1994, between DUAL DRILLING COMPANY and
Merrill Lynch & Co., with respect to the issuance of Senior Subordinated
Notes due 2004.
*27.1 - Financial Data Schedule (EDGAR version only).
- ---------------
* Filed herewith
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of the year ended December 31, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 23, 1999.
Dual Holding Company
(Registrant)
By: /s/ C. CHRISTOPHER GAUT
-----------------------
C. Christopher Gaut
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ C. CHRISTOPHER GAUT President and Director March 23, 1999
-------------------------------------
C. Christopher Gaut
/s/ WILLIAM S. CHADWICK, JR. Vice President and March 23, 1999
------------------------------------- Director
William S. Chadwick, Jr.
/s/ H. E. MALONE Secretary and Director March 23, 1999
--------------------------------- (Principal Accounting
H. E. Malone Officer)
25
PROMISSORY NOTE
December 31, 1998
Dallas, Texas
$10,000,000.00
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 Ten Million Dollars ($10,000,000.00), 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 December 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 term 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
/s/ C. Christopher Gaut
------------------------------
C. Christopher Gaut, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> $10,790
<SECURITIES> 0
<RECEIVABLES> 9,618
<ALLOWANCES> 471
<INVENTORY> 1,079
<CURRENT-ASSETS> 29,456
<PP&E> 448,756
<DEPRECIATION> 53,204
<TOTAL-ASSETS> 533,269
<CURRENT-LIABILITIES> 19,183
<BONDS> 179,964
0
0
<COMMON> 0
<OTHER-SE> 299,560
<TOTAL-LIABILITY-AND-EQUITY> 533,269
<SALES> 0
<TOTAL-REVENUES> 87,618
<CGS> 0
<TOTAL-COSTS> 23,148
<OTHER-EXPENSES> 28,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,069
<INCOME-PRETAX> 28,183
<INCOME-TAX> 7,520
<INCOME-CONTINUING> 20,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,663
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
