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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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
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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 U No ___
There were 1,000 shares of Common Stock, $.10 par value, of the registrant
outstanding as of May 1, 1999.
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<PAGE>
DUAL HOLDING COMPANY
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PAGE
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
March 31, 1999 and December 31, 1998 ............ 3
Consolidated Statement of Income
Three months ended March 31, 1999 and 1998 ..... 4
Consolidated Statement of Cash Flows
Three months ended March 31, 1999 and 1998 ..... 5
Notes to Consolidated Financial Statements .......... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ....... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ......................................... 9
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................... 10
SIGNATURES .................................................... 11
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 INCORPORAT
CONSOLIDATED BALANCE SHEET
(In thousands, except for par value and share amounts)
March 31, December 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................... $ 9,947 $ 10,790
Receivable from ENSCO ............................. 1,820 -
Accounts receivable, net .......................... 5,794 9,147
Other current assets .............................. 9,465 9,519
-------- --------
Total current assets ............................ 27,026 29,456
-------- --------
PROPERTY AND EQUIPMENT, AT COST ....................... 454,003 448,756
Less accumulated depreciation ..................... (60,128) (53,204)
-------- --------
Property and equipment, net ..................... 393,875 395,552
-------- --------
OTHER ASSETS, NET...................................... 106,783 108,261
-------- --------
$527,684 $533,269
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Payable to ENSCO .................................. $ - $ 2,083
Accounts payable .................................. 255 558
Accrued liabilities and other ..................... 10,306 16,542
-------- --------
Total current liabilities ....................... 10,561 19,183
-------- --------
LONG-TERM DEBT ........................................ 97,981 98,137
NOTES PAYABLE TO ENSCO, INCLUDING ACCRUED INTEREST .... 82,814 81,827
DEFERRED INCOME TAXES ................................. 24,585 23,840
OTHER LIABILITIES ..................................... 10,721 10,722
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 ................................. 36,198 34,736
-------- --------
Total stockholder's equity ...................... 301,022 299,560
-------- --------
$527,684 $533,269
======== ========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED STATEMENT OF INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------
1999 1998
------- -------
OPERATING REVENUES
Contract Drilling ...................... $ 4,738 $11,952
ENSCO charter fees ..................... 13,702 8,422
------- -------
18,440 20,374
------- -------
OPERATING EXPENSES
Contract Drilling ...................... 4,231 5,115
Depreciation and amortization .......... 7,773 4,967
ENSCO administrative charge ............ 1,200 1,200
------- -------
13,204 11,282
------- -------
OPERATING INCOME ........................... 5,236 9,092
OTHER INCOME (EXPENSE)
Interest income ........................ 256 201
Interest expense, net .................. (3,306) (2,345)
Other, net ............................. 53 (33)
------- -------
(2,997) (2,177)
------- -------
INCOME BEFORE INCOME TAXES ................. 2,239 6,915
PROVISION FOR INCOME TAXES
Current income taxes ................... 32 1,349
Deferred income taxes .................. 745 1,296
------- -------
777 2,645
------- -------
NET INCOME ................................. $ 1,462 $ 4,270
======= =======
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DUAL HOLDING COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF ENSCO INTERNATIONAL INCORPORATED)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
------- --------
OPERATING ACTIVITIES
Net income ............................................. $ 1,462 $ 4,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 7,773 4,967
Deferred income taxes .............................. 745 1,296
Other .............................................. (166) (104)
Changes in operating assets and liabilities:
Decrease in accounts receivable .................. 1,533 2,551
(Increase) decrease in other assets .............. 814 (118)
Increase (decrease) in accounts payable .......... (5,279) 5,122
Decrease in accrued and other liabilities ........ (2,289) (3,484)
------- --------
Net cash provided by operating activities ...... $ 4,593 $ 14,500
------- --------
INVESTING ACTIVITIES
Additions to property and equipment .................... (6,496) (40,872)
Proceeds from sale of assets ........................... 73 27
------- --------
Net cash used by investing activities .......... (6,423) (40,845)
------- --------
FINANCING ACTIVITIES
Long-term borrowings from ENSCO,
including accrued interest ........................... 987 25,000
------- --------
Net cash provided by financing activities ...... 987 25,000
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.................... (843) (1,345)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......... 10,790 10,071
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................ $ 9,947 $ 8,726
======= ========
The accompanying notes are an integral part of these financial statements.
5
<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 presentation of the financial
position, results of operations, and of cash flows for the interim periods
presented. The Company is a wholly-owned subsidiary of ENSCO International
Incorporated ("ENSCO").
Results of operations for the three month period ended March 31, 1999
are not necessarily indicative of results of operations which will be realized
for the year ending December 31, 1999. It is recommended that these financial
statements be read in conjunction with the Company's consolidated financial
statements and notes thereto for the year ended December 31, 1998 included in
the Company's Annual Report on Form 10-K.
Note 2 - Related Party Transactions
At March 31, 1999, the Company's three jackup rigs and seven platform rigs
in the Gulf of Mexico, and one jackup rig in the Asia Pacific region, were under
bareboat charter to wholly-owned subsidiaries 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.
The fixed daily rates of the ten rigs chartered in the Gulf of Mexico are
reduced by 50% if a rig is idle for more than 30 consecutive days. The fixed
daily rate of the rig chartered in the Asia Pacific region is reduced to $1,500
when the rig is idle. The bareboat charter agreements may be terminated with one
month's prior notice given by either party.
The Company has a Master Services Agreement with ENSCO. Under the terms
of the Master Services Agreement, ENSCO provides certain shorebase and corporate
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.
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. Interest expense on the outstanding debt totaled approximately
$987,000 and $0 for the three months ended March 31, 1999 and 1998,
respectively. The Company made no payments of principal or interest during the
three months ended March 31, 1999 and 1998.
The Company is a guarantor of ENSCO's $185.0 million revolving credit
agreement established in May 1998. As of March 31, 1999, there were no
borrowings outstanding under this credit agreement.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BUSINESS ENVIRONMENT
The Company currently has five jackup rigs located in the Asia Pacific
region. The Company also operated, but did not own, one platform rig in the Asia
Pacific region under a management contract which expired in April 1999. The
Company's remaining three jackup rigs and seven platform rigs are located in the
Gulf of Mexico. All of the Company's jackup rigs and platform rigs located in
the Gulf of Mexico, and one of the jackup rigs located in the Asia Pacific
region, are contracted to ENSCO under bareboat charter agreements.
RESULTS OF OPERATIONS
Revenues
Contract Drilling
First quarter 1999 contract drilling revenues decreased by $7.2
million, or $60.4%, as compared to the prior year quarter. The decrease results
from reduced utilization, as one additional jackup rig was idle in the first
quarter of 1999 as compared to the prior year quarter. In addition, one jackup
rig that operated under a drilling contract during the first quarter of 1998 is
now chartered to ENSCO, thereby generating charter fees instead of contract
drilling revenue during the first quarter of 1999.
ENSCO Charter Fees
ENSCO charter fees for the first quarter of 1999 increased by $5.3
million, or 62.7%, as compared to the prior year quarter. The increase is due in
part to the additional charter of one jackup rig in the Asia Pacific region,
bringing the total number of jackup rigs under charter to four. Also, the
increase reflects higher charter fees for the jackup rigs and platform rigs in
the Gulf of Mexico resulting from increased rig values.
Contract Drilling Expense
First quarter 1999 contract drilling expenses decreased $884,000, or
17.3%, as compared to the prior year quarter. The decrease is primarily
attributable to lower utilization and the associated cost savings resulting from
one additional idle jackup rig and one additional jackup rig chartered to ENSCO
during the first quarter of 1999 as compared to the prior year quarter.
Depreciation and Amortization
Depreciation and amortization expense for the first quarter of 1999
increased by $2.8 million, or 56.5%, as compared to the prior year quarter. The
increase is due primarily to enhancement projects that were completed subsequent
to the first quarter of 1998.
Interest Expense, Net
Interest expense, net increased by $1.0 million in the first quarter
of 1999 as compared to the prior year quarter due primarily to borrowings from
ENSCO during 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Capital Expenditures
The Company's cash flow from operations and capital expenditures for
the three months ended March 31, 1999 and 1998 are as follows (in thousands):
1999 1998
------ ------
Cash flow from operations ............ $4,593 $14,500
====== =======
Capital expenditures................... $6,496 $40,872
====== =======
7
<PAGE>
Cash flow from operations decreased by $9.9 million for the first
quarter of 1999 as compared to the prior year quarter. The decrease in cash flow
from operations is primarily attributable to reduced cash flow from working
capital changes.
Capital expenditures for the three months ended March 31, 1999
decreased by $34.4 million as compared to the prior year period. The decrease in
capital expenditures is primarily attributable to a higher level of enhancements
to the Company's jackup rigs and platform rigs during the first quarter of 1998.
Financing and Capital Resources
The Company's liquidity position at March 31, 1999 and December 31,
1998 is summarized in the table below (in thousands, except ratios):
March 31, December 31,
1999 1998
--------- ------------
Cash and cash equivalents.............. $ 9,947 $10,790
Working Capital ....................... $16,465 10,273
Current ratio ......................... 2.6 1.5
Management believes that the Company may need to supplement its cash
flow from operations in the remaining quarters of 1999 with additional
borrowings from ENSCO in order to meet its capital expenditure requirements. The
Company anticipates that capital expenditures for rig upgrades and sustaining
operations will approximate $20.0 million during the remaining quarters of 1999.
MARKET RISK
The Company uses derivative 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. The Company will, however,
from time to time, hedge its known liabilities or projected payments in foreign
currencies to reduce the impact of foreign currency gains and losses in its
financial results. At March 31, 1999, the Company had no foreign currency
exchange contracts outstanding. 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.
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-Q for the quarterly period ended March 31, 1999, 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.
8
<PAGE>
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 $440,000 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 during the third quarter of 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.
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, 1998.
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. The Company will adopt this accounting standard as
required by January 1, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required under Item 3. has been incorporated into
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed with this Report
Exhibit No.
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
10
<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, 1999 /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)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1999 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000907245
<NAME> DUAL HOLDING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,947
<SECURITIES> 0
<RECEIVABLES> 7,614
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,026
<PP&E> 454,003
<DEPRECIATION> 60,128
<TOTAL-ASSETS> 527,684
<CURRENT-LIABILITIES> 10,561
<BONDS> 180,795
0
0
<COMMON> 0
<OTHER-SE> 301,022
<TOTAL-LIABILITY-AND-EQUITY> 527,684
<SALES> 0
<TOTAL-REVENUES> 18,440
<CGS> 0
<TOTAL-COSTS> 4,231
<OTHER-EXPENSES> 8,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,306
<INCOME-PRETAX> 2,239
<INCOME-TAX> 777
<INCOME-CONTINUING> 1,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,462
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
