-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CVPjMS4mXo2dfEbXbQari4MjM17RxrdXjfLH4Y6KaHXRDmqEe5ldaN6w9UoO+3lX z9d+AD1Lx4zBLDxGRjMx4w== 0000907245-97-000002.txt : 19970329 0000907245-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000907245-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUAL DRILLING CO /DE/ CENTRAL INDEX KEY: 0000907245 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 510327704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-64550 FILM NUMBER: 97565936 BUSINESS ADDRESS: STREET 1: 5956 SHERRY LANE STREET 2: STE 1500 CITY: DALLAS STATE: TX ZIP: 75225 BUSINESS PHONE: 2143736200 MAIL ADDRESS: STREET 1: 5956 SHERRY LANE SUITE 1500 STREET 2: 5956 SHERRY LANE SUITE 1500 CITY: DALLAS STATE: TX ZIP: 75225 10-K405 1 =========================================================================== 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . . to . . . . . . . . . . Commission File Number 0-22078 Dual Holding Company (formerly DUAL DRILLING COMPANY) (Exact name of registrant as specified in its charter) DELAWARE 51-0327704 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2700 Fountain Place 1445 Ross Avenue Dallas, Texas 75202-2792 (Address of principal executive offices) 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 J(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 19, 1997: Common Stock: 1,000 =========================================================================== TABLE OF CONTENTS PAGE ---- PART ITEMS 1. AND 2. BUSINESS AND PROPERTIES . . . . . . . . . . 1 I General . . . . . . . . . . . . . . . . . . . . . 1 Merger with ENSCO . . . . . . . . . . . . . . . . 1 Contract Drilling Operations . . . . . . . . . . 1 Jackup Rigs . . . . . . . . . . . . . . . . . . . 2 Platform Rigs . . . . . . . . . . . . . . . . . . 2 Contracts . . . . . . . . . . . . . . . . . . . . 2 Major Customers . . . . . . . . . . . . . . . . . 3 Industry Conditions and Competition . . . . . . . 3 Governmental Regulation . . . . . . . . . . . . . 3 Environmental Matters . . . . . . . . . . . . . . 3 Operational Risks and Insurance . . . . . . . . . 4 International Operations . . . . . . . . . . . . 4 Other Properties . . . . . . . . . . . . . . . . 5 Employees . . . . . . . . . . . . . . . . . . . . 5 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . 5 ________________________________________________________________________ PART ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND II RELATED STOCKHOLDER MATTERS . . . . . . . . . . . 6 ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATIONS DATA . . . . . . . . . . . . . . . 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . 7 General . . . . . . . . . . . . . . . . . . . . . 7 Merger . . . . . . . . . . . . . . . . . . . . . 7 Results of Operations . . . . . . . . . . . . . . 7 Liquidity and Capital Resources . . . . . . . . . 9 Private Securities Litigation Reform Act of 1995 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . 33 ________________________________________________________________________ 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 . . . . . 34 ________________________________________________________________________ PART ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND IV REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 35 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 39 - i - 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 currently owns or operates a fleet of 18 offshore drilling rigs, consisting of 10 jackup rigs and eight platform rigs. 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. 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. Merger with ENSCO The Merger was approved by the stockholders of the Company who received 0.625 shares of ENSCO common stock in exchange for each share of the Company's common stock. The Company's stockholders received, in the aggregate, approximately 10.1 million shares of ENSCO common stock in connection with the Merger, resulting in an acquisition price of approximately $218.4 million. The Company used the purchase method of accounting to record the Merger. The purchase price allocation has been based on preliminary estimates of fair value of the assets acquired and liabilities assumed and is subject to adjustment as additional information becomes available and is evaluated. The primary areas subject to further purchase price adjustment are reserves associated with insurance related matters and taxes. Contract Drilling Operations The Company's fleet of 18 offshore drilling rigs are located in North America and Asia. At December 31, 1996, the Company's North America drilling rigs consisted of five jackup rigs and seven platform rigs located in the Gulf of Mexico. The Company's Asia jackup rigs consisted of two jackup rigs located offshore India, one offshore Indonesia and one each in shipyards in Malaysia and Sharjah undergoing modifications and enhancements. The Company operates one platform rig off the coast of China, which is not owned but managed by the Company. In May 1996, the Company purchased one jackup rig, which the Company previously operated in the Gulf of Mexico under a charter agreement, for $21.3 million. In September 1996, the Company retired two platform rigs previously located off the coast of California. The rigs were dismantled 1 and their major components were sold to ENSCO at fair market value as spare capital assets. 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 contract basis. The Company generally provides services on a "daywork" 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. Effective June 13, 1996, the Company's domestic drilling rigs in the Gulf of Mexico were 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, which the Company believes are reasonable and representative of the environment in which the rigs operate. Each respective bareboat charter rate is increased for any capital expenditures made by the Company for a chartered rig and the rate is reduced to 50% of the normal rate if a rig is idle for more than 30 consecutive days. The initial term of each bareboat charter agreement is one year, with automatic one year extensions, unless either party gives at least one month's notice of termination. At December 2 31, 1996, the Company had two jackup rigs and seven platform rigs under bareboat charter to ENSCO. Major Customers The Company's customer base consists of major international oil and gas companies, independent oil and gas companies, government-owned oil and gas companies and ENSCO. In 1996, the Company's customers which individually accounted for more than 10% of the Company's consolidated revenues consisted of Oil & Natural Gas Corporation (18%), Sonat Inc. (14%), ARCO (12%), and ENSCO (11%). Industry Conditions and Competition After several years of depressed market conditions resulting from the supply of offshore drilling rigs exceeding demand, uncertainty over low oil and gas prices and reductions in expenditures by oil and gas companies, the offshore contract drilling market has shown distinct improvement over the last two years, but most significantly in 1996. Worldwide drilling activity increased significantly from 1995 to 1996 with current demand absorbing substantially all of the drilling rigs that are in working condition and being actively marketed in the major offshore drilling markets throughout the world. With projected capital expenditure increases for major and independent oil companies in 1997, the Company anticipates that the offshore drilling markets will remain strong through at least the end of 1997 unless there is a significant deterioration of oil and natural gas prices. 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. 3 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 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. The U.S. Minerals Management Service is required to promulgate regulations to implement the financial responsibility requirements of OPA '90. These regulations could increase the cost of doing business in U.S. waters and adversely affect the ability of some of the Company's customers to operate in U.S. waters. 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 4 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 63% of the Company's total revenues in 1996. 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. 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 for its offices in Houston, Texas; Bombay, India; Jakarta, Indonesia; Al Khobar, Saudi Arabia; Doha, Qatar; and Ciudad del Carmen, Mexico. In addition, the Company owns a facility in Broussard, Louisiana, which is for sale. Employees As of December 31, 1996, 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 contract labor for all of the Company's international drilling rigs at cost. 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. 5 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, and by certain provisions in the agreements related to the Company's bank financing. See Note 4 to the Consolidated Financial Statements. ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATIONS DATA Not required under the reduced disclosure format. 6 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 and financial position between 1996 and 1995. This reduced analysis is in accordance with the reduced disclosure format set forth in General Instruction J(1)(a) and (b). GENERAL The Company owns offshore drilling rigs which are contracted for use in the Gulf of Mexico and Asia. Worldwide drilling activity increased significantly in 1996 from 1995 with current demand absorbing substantially all of the rigs that are in working condition and being actively marketed in the major offshore drilling markets throughout the world. MERGER On June 12, 1996, the Company was acquired by ENSCO in the Merger. The Merger was approved on that date by the stockholders of the Company who received 0.625 shares of ENSCO common stock 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 in connection with the acquisition, resulting in an acquisition price of approximately $218.4 million. In conjunction with the Merger, the Company charged $22.0 million against operating results for certain items. These items included compensation paid in the ordinary course of business as well as other costs directly related to the Merger. These expenses are included as Change in Control expenses in the consolidated statement of operations for the period January 1, 1996 to June 12, 1996. See Note 2 to the Company's Consolidated Financial Statements. Effective June 13, 1996, each of the Company's domestic rigs in the Gulf of Mexico were bareboat chartered to a wholly owned subsidiary of ENSCO to achieve operating and marketing efficiencies. At December 31, 1996, the Company had two jackup rigs and seven platform rigs which were bareboat chartered to ENSCO. The terms of the bareboat charter agreements provide for fixed daily rates to be paid to the Company, which the Company believes are reasonable and representative of the environment in which the rigs operate. Each respective bareboat charter rate is increased for any capital expenditures made by the Company on a chartered rig and the rate is reduced to 50% of the normal rate if a rig is idle for more than 30 consecutive days. The initial term of the bareboat charter agreement is one year, with automatic one year extensions, unless either party gives at least one month's prior notice of termination. RESULTS OF OPERATIONS As a result of the Merger, the comparisons presented below of changes between periods reflect the results of the Company during the period (January 1, 1996 to June 12, 1996) prior to the Merger ("Predecessor" entity) as well as the period (June 13, 1996 to December 31, 1996) subsequent to the Merger ("Successor" entity). The financial statements of 7 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 entity compared to that of the Successor entity, as well as the effect on the Successor's operations for adjustments to depreciation and amortization, interest income, interest expense, and income taxes. For comparative analysis between years, the 1996 amounts presented below include the combined results of the Predecessor and Successor entities. The schedule below provides a summary of the Company's operating results for the years indicated (in thousands, except utilization data). Year Ended December 31, ----------------------- 1996 1995 Combined -------- -------- Revenues Jackup Rigs - North America $35,201 $30,907 Jackup Rigs - Asia 44,549 28,157 Platform Rigs 17,417 26,825 Total $97,167 $85,889 Operating Margin (1) Jackup Rigs - North America $20,267 $ 7,990 Jackup Rigs - Asia 16,121 6,989 Platform Rigs 4,868 10,681 Total $41,256 $25,660 Utilization 89% 70% (1) Defined as operating revenues less operating expenses, exclusive of depreciation and amortization, change in control, and general and administrative expenses. 1996 Compared to 1995: Combined consolidated revenues (combining the Predecessor and Successor entities for comparative purposes) were $97.2 million for 1996, an increase of 13% over 1995 revenue. Combined operating margin improved to $41.3 million in 1996, an increase of $15.6 million, or 61%, over the 1995 margin. The improved 1996 combined revenue and operating margin results from increased utilization of the Company's drilling rigs and a worldwide increase in operating day rates paid for rental of drilling rigs. Utilization of the Company's rig fleet improved to 89% for 1996 compared to 70% for 1995. Conversely, the Company's operating margin in 1996 was negatively impacted by the sale of a platform rig located off the coast of China in August 1995 that operated for the first half of 1995. The Company now operates this rig under a management contract that provides for a competitive day rate during the periods the rig is operating and a reduced day rate when the rig is idle. Also, in September 1996, the Company retired two platform rigs previously located off the coast of California that operated for all of 1995 and the first part of 1996. 8 Depreciation and amortization expense in 1996 increased by $2.5 million, or 13%, from 1995 due primarily to the increase in drilling rig values and goodwill recorded in the Merger. Change in Control expenses of $22.0 million recorded in the Predecessor entity's consolidated statement of operations for the period from January 1, 1996 to June 12, 1996 relates to compensation paid in the ordinary course of business as well as other costs incurred by the Company directly related to the Merger. See Note 2 "Merger" to the Company's Consolidated Financial Statements. General and administrative expenses in 1996 decreased $1.2 million, or 15%, from 1995 due primarily to efficiencies achieved in the Merger. In connection with the Merger, the Company entered into a Management 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 1995 the Company recorded a gain on the sale of assets of $5.1 million, net, from the sale of a jackup rig located in the Gulf of Mexico, a 51% interest in a jackup rig located in Asia and a platform rig also located in Asia. LIQUIDITY AND CAPITAL RESOURCES Cash Flow and Capital Expenditures The Company's cash provided by (used by) operations and capital expenditures for the years ended December 31, 1996 and 1995 were as follows (in thousands): 1996 1995 Combined -------- -------- Cash provided by (used by) operations $13,942 $(2,441) Capital expenditures 31,758 30,668 Combined cash flow from operations increased by $16.4 million in 1996 as compared to 1995. Approximately $12.0 million of the 1996 increase was a result of changes in working capital accounts and the remaining $4.4 million change was due to improved operating results in 1996, excluding change in control charges. Capital expenditures in 1996 primarily related to the purchase of a jackup rig located in the Gulf of Mexico for $21.3 million. The remaining 1996 capital expenditures were for ongoing capital improvements to the Company's drilling rigs. Capital expenditures of $22.5 million in 1995 related to the purchase of a jackup rig and an additional $8.2 million related to ongoing capital improvements to the Company's drilling rigs. Net cash used by investing activities was $31.6 million in 1996 as compared to net cash provided by investing activities of $29.8 million in 1995. In 1995, the Company received net proceeds of $38.8 million from the sale of property and equipment and invested $30.7 million in property and equipment 9 additions. Also included as cash provided by investing activities in the 1995 Statement of Cash Flows was $22.0 million previously restricted for rig purchases at December 31, 1994. Net cash used by financing activities was $15.8 million in 1996 as compared to $4.5 million in 1995, primarily representing reductions in long-term borrowings. Financing and Capital Resources The Company's long-term debt, total capital and debt to capital ratios are summarized below (in thousands, except percentages): 1996 1995 -------- -------- Long-term debt $134,387 $138,163 Total capital 356,882 278,309 Long-term debt to total capital 38% 50% The Company's long-term debt at December 31, 1996 consisted of $99.4 million ($95.0 million face amount) of the Company's 9 7/8% senior subordinated notes (the "Notes") due January 2004, and $35.0 million outstanding under the Company's revolving credit facility. In connection with the Merger, the Company refinanced its outstanding bank debt of $41.8 million with proceeds of $45.0 million from a new $50.0 million credit facility (the "Sub-Facility") established under the terms of ENSCO's amended and restated $150.0 million revolving credit facility with a group of international banks. In November 1996, the Company repaid $10.0 million of borrowings under the Sub-Facility and in December 1996 reduced the availability under the Sub-Facility to $35.0 million. Also in connection with the Merger, the Company assigned a $5.0 million premium to the Notes as a result of purchase accounting. 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 as a result of the Merger. Total capital increased in 1996 from 1995, due primarily to the recapitalization of the Company in connection with the Merger in which the $218.4 million purchase price was attributed to the net stockholder's equity of the Company. The Company's liquidity position is summarized below (in thousands, except ratios): 1996 1995 -------- -------- Cash and cash equivalents $ 9,397 $42,830 Working capital 14,219 55,612 Current ratio 1.8 3.6 Based on current industry conditions, management believes cash flow from operations, the Company's existing debt facility and the Company's working capital should be sufficient to fund the Company's short and long-term liquidity needs. 10 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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. 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 from time to time in the Company's reports to the Securities and Exchange Commission. Significant and unexpected deterioration in oil and natural gas prices could adversely affect the level of offshore drilling activity the Company believes is sustainable in 1997. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Financial Statements: Page Reports of Independent Accountants ................................ 13 Consolidated Balance Sheet at December 31, 1996 and 1995 .......... 14 Consolidated Statement of Operations for the periods June 13, 1996 to December 31, 1996, January 1, 1996 to June 12, 1996 and for the two years ended December 31, 1995 .... 15 Consolidated Statement of Cash Flows for the period June 13, 1996 to December 31, 1996, January 1, 1996 to June 12, 1996 and for the two years ended December 31, 1995 .... 16 Notes to Consolidated Financial Statements ........................ 17 The Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 12 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholder and Board of Directors of Dual Holding Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and of cash flows listed under Item 8 of this Form 10-K present fairly, in all material respects, the financial position of Dual Holding Company and its subsidiaries (Successor entity) at December 31, 1996, and the results of their operations and their cash flows 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 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/ Price Waterhouse LLP Dallas, Texas January 28, 1997, except as to Note 4, which is as of February 27, 1997 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholder and Board of Directors of Dual Holding Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and of cash flows listed under Item 8 of this Form 10-K present fairly, in all material respects, the financial position of Dual Holding Company and its subsidiaries (Predecessor entity) at December 31, 1995, and the results of their operations and their cash flows for the period January 1, 1996 to June 12, 1996 and for each of the two years in the period ended December 31, 1995, 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 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/ Price Waterhouse LLP Dallas, Texas January 28, 1997 13 DUAL HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands, except for share amounts) DECEMBER 31, ----------------------- 1996 | 1995 --------- | ----------- SUCCESSOR | PREDECESSOR ASSETS | CURRENT ASSETS | Cash and cash equivalents . . . . . . . . . $ 9,397 | $ 42,830 Accounts receivable, net . . . . . . . . . . 11,713 | 22,015 Other current assets . . . . . . . . . . . . 10,009 | 12,400 Total current assets . . . . . . . . . . 31,119 | 77,245 | PROPERTY AND EQUIPMENT, AT COST . . . . . . . . 285,536 | 282,310 Less accumulated depreciation . . . . . . . (12,053)| (85,881) Property and equipment, net . . . . . . . 273,483 | 196,429 | OTHER ASSETS, NET . . . . . . . . . . . . . . . 99,655 | 30,088 $404,257 | $303,762 | LIABILITIES AND STOCKHOLDERS' EQUITY | CURRENT LIABILITIES | Accounts payable . . . . . . . . . . . . . . $ 1,267 | $ 5,069 Accrued liabilities and other . . . . . . . 15,633 | 10,026 Current maturities of long term debt . . . . - | 6,538 Total current liabilities . . . . . . . . 16,900 | 21,633 | LONG TERM DEBT . . . . . . . . . . . . . . . . 134,387 | 138,163 DEFERRED INCOME TAXES . . . . . . . . . . . . . 19,485 | 1,796 OTHER LIABILITIES . . . . . . . . . . . . . . . 10,990 | 2,024 | COMMITMENTS AND CONTINGENCIES . . . . . . . . . | | STOCKHOLDERS' EQUITY | Common stock ($.10 par value, 10,000 shares | authorized and 1,000 shares issued and | outstanding at December 31, 1996 and $.01 | par value, 50 million shares authorized | and 15.8 million shares issued and | outstanding at December 31, 1995) . . . . - | 158 Additional paid in capital . . . . . . . . . 218,431 | 173,793 Retained earnings (deficit) . . . . . . . . 4,064 | (33,386) Treasury stock at cost . . . . . . . . . . . - | (419) Total stockholders' equity . . . . . . . 222,495 | 140,146 $404,257 | $303,762 The accompanying notes are an integral part of these financial statements. 14
DUAL HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) JUNE 13, | JANUARY 1, 1996 TO | 1996 TO YEAR ENDED YEAR ENDED DECEMBER 31, | JUNE 12, DECEMBER 31, DECEMBER 31, 1996 | 1996 1995 1994 SUCCESSOR | PREDECESSOR PREDECESSOR PREDECESSOR | OPERATING REVENUES....................... $ 43,625 | $ 53,542 $ 85,889 $104,265 | | OPERATING EXPENSES | Operating costs........................ 18,565 | 37,346 60,229 78,571 Depreciation and amortization.......... 13,351 | 8,768 19,608 24,943 Change in control...................... - | 22,005 - - General and administrative............. 2,640 | 3,757 7,563 8,979 34,556 | 71,876 87,400 112,493 | | OPERATING INCOME (LOSS).................. 9,069 | (18,334) (1,511) (8,228) | | OTHER INCOME (EXPENSE) | Interest income........................ 757 | 846 2,400 1,651 Interest expense....................... (6,864) | (6,484) (14,705) (12,734) Gain on sale of assets, net............ - | - 5,127 994 Other, net............................. (42) | 268 336 1,164 (6,149) | (5,370) (6,842) (8,925) | | INCOME (LOSS) BEFORE INCOME TAXES........ 2,920 | (23,704) (8,353) (17,153) | | PROVISION (BENEFIT) FOR INCOME TAXES..... (1,144) | 628 885 43 | | NET INCOME (LOSS)........................ $ 4,064 | $(24,332) $ (9,238) $(17,196) | | NET INCOME (LOSS) PER SHARE.............. $ 4,064 | $ (1.54) $ (.59) $ (1.09) | | WEIGHTED AVERAGE SHARES OUTSTANDING...... 1 | 15,810 15,766 15,780
The accompanying notes are an integral part of these financial statements. 15
DUAL HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) JUNE 13, | JANUARY 1, 1996 TO | 1996 TO YEAR ENDED YEAR ENDED DECEMBER 31, | JUNE 12, DECEMBER 31, DECEMBER 31, 1996 | 1996 1995 1994 SUCCESSOR | PREDECESSOR PREDECESSOR PREDECESSOR | OPERATING ACTIVITIES | Net income (loss)....................... $ 4,064 | $(24,332) $ (9,238) $(17,196) Adjustments to reconcile net income | (loss) to net cash provided (used) by | operating activities: | Depreciation and amortization....... 13,351 | 8,768 19,608 24,943 Deferred income tax benefit......... (2,725) | (645) (892) (2,281) Gain on disposition of assets....... - | (167) (5,127) (994) Recognition of deferred income...... - | (2,941) (4,191) (4,966) Recognition of deferred expense..... 29 | 1,357 1,597 2,545 Non-cash compensation expense....... - | 9,667 - 1,179 Other............................... (352) | 58 - - Changes in operating assets and | liabilities: | (Increase) decrease in accounts | receivable................... 9,943 | (3,985) (3,067) 9,022 (Increase) decrease in other | current assets................ (654) | 5,584 (424) 879 Increase (decrease) in accounts | payable....................... (699) | (4,777) 485 (8,373) Increase (decrease) in accrued | liabilities................... (9,372) | 11,770 (1,192) 782 Increase (decrease) in customer | prepayments................... - | - - 6,911 Net cash provided (used) by | operating activities...... 13,585 | 357 (2,441) 12,451 | INVESTING ACTIVITIES | Additions to property and equipment..... (8,609) | (23,149) (30,668) (67,543) Cash segregated for rig purchases....... - | - 22,000 (2,200) Proceeds from sale of assets............ 1,622 | 208 38,804 914 Other................................... - | (1,688) (288) - Net cash provided (used) by | investing activities................ (6,987) | (24,629) 29,848 (68,829) | FINANCING ACTIVITIES | Issuance of Senior Subordinated debt.... - | - - 100,000 Proceeds from long-term borrowings...... 45,000 | - - 49,000 Reduction of long-term borrowings....... (57,097) | (2,586) (4,299) (86,550) Cash (pledged) received for letters | of credit............................. 6,367 | (7,443) Debt issuance costs..................... - | - - (4,325) Purchase of treasury stock.............. - | - - (419) Other................................... - | - (203) 726 Net cash provided (used) by | financing activities................ (5,730) | (10,029) (4,502) 58,432 | INCREASE (DECREASE) IN CASH AND | CASH EQUIVALENTS........................ 868 | (34,301) 22,905 2,054 | CASH AND CASH EQUIVALENTS, BEGINNING OF | PERIOD.................................. 8,529 | 42,830 19,925 17,871 | CASH AND CASH EQUIVALENTS, END OF PERIOD.. $ 9,397 | $ 8,529 $ 42,830 $ 19,925
The accompanying notes are an integral part of these financial statements. 17 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." From 1990 to 1993, the Company was wholly-owned by 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 outstanding common stock. 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 during the period (January 1, 1996 to June 12, 1996) prior to the Merger ("Predecessor" entity) as well as the period (June 13, 1996 to December 31, 1996) 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 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 For purposes of the consolidated balance sheet and statement of cash flows, 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. 18 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 12 years. Depreciation of other equipment is computed using the straight line method over estimated useful lives ranging from 2 to 6 years. Under the Predecessor entity, certain assumptions were modified effective January 1, 1995 for the capitalization and depreciation of property and equipment to reflect a change in (i) the estimated useful lives of its rig fleet and betterments and major overhauls to such rigs and, (ii) the estimated salvage value of the rigs. The change in estimate provided for the depreciation of platform rigs on a straight-line basis for a period up to 12 years from the date the rig first entered service, or up to 10 years from the date of a major refurbishment to the rig. Jackup rigs were depreciated on a straight-line basis for a period up to 25 years from the date the rigs first entered service. An estimated salvage value of 10% and 15% was assumed for platform rigs and jackup rigs, respectively. The change in estimated useful lives of the Company's rig fleet decreased annual depreciation expense in 1995 by $5.9 million, or $.37 per share. 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. 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." Predecessor goodwill resulted from the acquisition by Dual Invest in June 1990 and was written-off in 1996 as a result of purchase accounting. Amortization of goodwill was $1.2 million for the period June 13, 1996 to December 31, 1996, $770,000 for the period January 1, 1996 to June 12, 1996, and $1.7 million for each of the years 1995 and 1994. Accumulated amortization of goodwill at December 31, 1996 and 1995 was $1.2 million and $9.5 million, respectively. On a periodic basis the Company estimates the undiscounted future cash flows to be generated by the Company's operations to ensure the carrying value of goodwill has not been impaired. Impairment of Assets In 1996, the Company adopted Statement of Financial Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of," which did not have an impact upon the Company. As required, the Company evaluates the realizability of its long- lived assets, including property and equipment and goodwill, based upon expectations of undiscounted cash flows before interest. 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. 19 Income Taxes Deferred tax liabilities and assets 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. Income Per Share Income per share has been computed based on the weighted average number of common shares outstanding during the applicable period. See Note 5 "Stockholders' Equity." Stock Based Employee Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes accounting and reporting standards for various stock based compensation plans. SFAS No. 123 encourages the adoption of a fair value based method of accounting for employee stock options, but permits continued application of the accounting method prescribed by Accounting Principles Board Opinion No. 25 ("Opinion 25"), "Accounting for Stock Issued to Employees." The Company has elected to continue to apply the provisions of Opinion 25. Under Opinion 25, if the exercise price of the Company's stock options equals the market value of the underlying stock on the date of grant, no compensation expense is recognized. SFAS No. 123 requires disclosure of pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method of the statement. Reclassifications Certain previously reported amounts have been reclassified to conform to the 1996 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 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 in connection with the acquisition, resulting in an acquisition price of $218.4 million. In conjunction with the Merger, the Company charged $22.0 million against operating results for certain items. These items included 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): 20 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 The Company used the purchase method to record the Merger. The purchase price allocation has been based on preliminary estimates of fair value of the assets acquired and liabilities assumed and is subject to adjustment as additional information becomes available and is evaluated. The primary areas subject to further purchase price adjustment are reserves associated with insurance related matters and taxes. The excess of purchase price over net assets acquired approximated $100.7 million and is being amortized over 40 years. 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 only authorized to issue 10,000 shares of its $.10 par value common stock. As of December 31, 1996, 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 years ended December 31, 1996 and 1995 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, 1995 (in thousands, except per share data): 1996 1995 -------- ---------- Operating revenues $97,167 $ 91,016 Operating income (loss) 9,966 (1,958) Net income (loss) 145 (12,363) Net income (loss) per share 145 (12,363) 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, 1995, or of results that may occur in the future. 21 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 Successor Predecessor --------- ----------- Drilling rigs and equipment $282,130 $279,946 Other 65 2,364 Work in progress 3,341 - $285,536 $282,310 In September 1996, the Company retired two platform rigs located off the coast of California. The rigs were dismantled and their major components were sold to ENSCO at fair market value as spare capital assets. In May 1996, the Company purchased a jackup rig located in the Gulf of Mexico, which the Company previously operated under a charter agreement, for $21.3 million. Proceeds from certain asset sales in 1995 that were previously disclosed as restricted for purchase of replacement assets or repurchase of indebtedness were used to purchase the rig. During May 1995, the Company sold a jackup rig to an unrelated third party for cash totaling $19.4 million. At the time of the sale, the jackup was operated by the Company in the Gulf of Mexico. The Company realized a gain of $4.1 million from the sale of the rig. In June 1995, the Company purchased a jackup rig for approximately $22.5 million from an unrelated third party. Proceeds of $22.0 million received from the Company's credit facilities, which were previously restricted for rig acquisitions, were applied to the purchase of the rig. Also in June 1995, the Company sold a 51% undivided interest in a jackup rig to a Malaysian company for cash of $13.8 million. The Company recorded a gain of $2.2 million from the sale of the interest in the rig. In August 1995, the Company sold a platform rig to an unrelated third party under a purchase option agreement entered into by the Company in May 1993. The rig was sold for cash of $6.8 million and the Company recognized a loss of $1.2 million on the sale. Concurrent with the sale, the Company entered into a 46-month contract to manage and operate the rig. During 1994, the Company recognized a deferred gain on the sale of assets of $1.0 million. The gain resulted from the earlier sale and charter-back by the Company of two jackup rigs, one each in 1991 and 1990. The sale and charter-back transactions generated a gain of $10.0 million and $8.8 million in 1991 and 1990, respectively. These amounts were deferred and recognized over the primary terms of the respective rig charter agreements. As of December 31, 1994, the deferred gains resulting from the two rig transactions had been fully recognized. 22 4. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995 consists of the following (in thousands): 1996 1995 Successor Predecessor --------- ----------- Revolving credit facility $ 35,000 $ - Secured term loans - 44,701 Senior subordinated notes due 2004 94,986 100,000 Premium on senior subordinated notes 4,401 - 134,387 144,701 Less current maturities - (6,538) Total long-term debt $134,387 $138,163 The Company's bank debt outstanding prior to the Merger was refinanced on June 13, 1996. The Company borrowed $45.0 million in accordance with the terms of a $50 million revolving credit facility (the "Sub-Facility") established under the terms of ENSCO's amended and restated $150.0 million revolving credit facility with a group of international banks (the "Facility"). Substantially all of the proceeds from the $45.0 million of borrowings were used to refinance $41.8 million of the Company's bank debt. In November 1996, the Company repaid $10.0 million of borrowings under the Sub-Facility and in December 1996 reduced the availability under the Sub- Facility to $35.0 million. The Facility provides the option to increase or decrease the availability under the Sub-Facility by transferring between sub-facilities available amounts up to $15.0 million at the discretion of ENSCO and the Company. The interest rate on the Sub-Facility is tied to London InterBank Offered Rates and at December 31, 1996 the interest rate on the $35.0 million outstanding under the Sub-Facility was 6.785%. The Sub-Facility is collateralized by certain of the Company's jackup rigs, which had a combined net book value of $100.2 million at December 31, 1996. The balance outstanding under the Facility, and Sub-Facility, is due in October 2001. On February 27, 1997, ENSCO further amended and restated its revolving credit facility which increased the overall availability under the Facility to $200.0 million and reduced the interest rate margin under the Facility. As a result of this amendment, the Company's availability under the Sub- Facility increased from $35.0 million to $50.0 million. In January 1994, the Company completed an offering of 9 7/8% 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, as such, are subordinated to the Company's obligations under its bank credit facilities. The Notes 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, 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. 23 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, 1996. Maturities of long-term debt, excluding the premium on the Notes, are as follows: $35.0 million in 2001 and $95.0 million in 2004. 5. STOCKHOLDERS' EQUITY (in thousands)
$.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 -------- -------- -------- -------- ---------- --------- -------- BALANCE AT DECEMBER 31, 1993.......... 15,807 $ 158 $172,485 $ (6,952) Net loss.......................... (17,196) Amortization of deferred compen- sation.......................... 1,179 Reclassification of IPO expense... 129 Purchase of treasury stock........ (41) $ (419) BALANCE AT DECEMBER 31, 1994.......... 15,766 158 173,793 (24,148) (419) Net loss.......................... (9,238) 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 $ -
See Note 2 "Merger." 6. EMPLOYEE BENEFIT PLANS Incentive Stock Plans Prior to the Merger, the 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. 24 Stock Options - The table below summarizes the transactions relating to stock options. (shares in thousands)
1996 1995 1994 -------------------- -------------------- ------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES ------- --------- ------ --------- ------ Outstanding, beginning of year . . . . . . . . . 1,059 $10.04 830 $12.75 300 Granted . . . . . . . . . . . . . . . . . . . . - 1,059 10.04 550 Exercised . . . . . . . . . . . . . . . . . . . (1,048) 10.04 - - - Exchanged for ENSCO common stock in Merger . . . (11) 9.83 - - - Canceled or forfeited . . . . . . . . . . . . . - - (830) 12.75 (20) Outstanding, end of year . . . . . . . . . . . . - - 1,059 $10.04 830
25 In August 1995, the Compensation Committee of the Company's Board of Directors (the "Committee") approved the cancellation of 806,000 then outstanding management options and the issuance of 951,000 options. The options cancelled had been granted by the Committee in August 1993 (270,000 options) and October 1994 (536,000 options) at exercise prices of $14.000 and $12.125, respectively. The options granted in August 1995 were issued at $10, the market price of the common stock on the date of the grant. 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. For the options granted by the Company in 1995, the Company determined that such grants accounted for under the provisions of the SFAS No. 123 did not have a material impact on net income or earnings per share in 1995. 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. Restricted Stock - The 1993 Plan provided that shares of common stock subject to certain restrictions may be awarded to eligible employees from time to time as determined by the Compensation Committee of the Board of Directors. In 1993, 55,210 shares of Restricted Stock were granted to key employees. As of December 31, 1995, all but 30,000 of the shares were fully vested. As a result of the Merger, all shares of Restricted Stock were immediately vested and were exchanged for ENSCO common stock. Non- cash compensation expense in the amount of approximately $600,000 was recognized during 1994 relating to these shares. As of December 31, 1994 all compensation expense related to the 55,210 share grant had been recognized. Dual Invest AS Stock Option Compensation Plan - Certain key employees were granted options in December 1991 to purchase Dual Invest AS shares pursuant to the Dual Invest AS Plan. In connection with the initial public offering of Dual equity securities in 1993, such employees relinquished their options under the Dual Invest Plan in exchange for direct grants by Dual Invest of shares of common stock of the Company owned by Dual Invest. Dual Invest granted an aggregate of 117,647 shares of common stock pursuant to this plan. All shares awarded under the Dual Invest Plan were fully vested as of December 31, 1994. Non-cash compensation expense recognized during 1994 for these awards was approximately $600,000. 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 26 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 1996 and $600,000 for each of the years 1995 and 1994. Health Care and Life Insurance Benefits Prior to the Merger, the Company provided certain health care and life insurance benefits for substantially all its active and retired employees. Health care benefits were self-insured up to specified limits per incident and were made available on a contributory basis. Effective June 30, 1996, all Company health care and life insurance benefit plans were terminated. Company employees who were retained by ENSCO subsequent to the Merger were provided health care and life insurance benefits through ENSCO's plans. ENSCO does not provide any contributory health care or life insurance benefits to its retired employees. Statement of Accounting Standards No. 106, "Employer's Accounting for Post- Retirement Benefits Other Than Pensions" requires that the estimated cost of such benefits be accrued during the employee's active service period. The Company had historically recognized the cost of certain post-retirement benefits on an accrual basis consistent with the requirements of SFAS No. 106. The net health care costs accrued in 1996 were immaterial and the recorded liability at June 12, 1996 was eliminated as a result of the Merger and related termination of the Company's health care and life insurance benefit plans. The components of net post-retirement health care costs for the years ended December 31, 1995 and 1994 are detailed below (in thousands): 1995 1994 ---- ---- Service cost - benefits earned during the period.. $ 65 $ 71 Interest cost on accumulated post-retirement benefit obligation.............................. 42 32 Net post-retirement health care cost.......... $107 $103 Benefits under the Company's post-retirement health care plan were not funded. The status of the plan as of December 31, 1995 was as follows (in thousands): 1995 Actuarial present value of accumulated post- ---- retirement benefit obligation: Retirees and dependents........................... $ 84 Active employees eligible for benefits............ 173 Active employees not yet eligible for benefits.... 317 Accrued post-retirement health care liability... $574 The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 13% for 1995, gradually declining to 5% by the year 2003 and remaining at that level thereafter. The effect of a one percentage point increase in the assumed health care cost trend rate for each future year on (i) the portion of the accumulated post-retirement benefit obligation applicable to health care benefits as of December 31, 1995 and (ii) the net post-retirement health care cost for the year then 27 ended would not be material. The assumed discount rate used in determining the accumulated post-retirement benefit obligation was 7.25% for 1995. 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 Plan termination liability of $2.3 million was recorded in Accrued Liabilities and Other at December 31, 1996 and was subsequently paid in January 1997. The components of net pension cost for the years ended December 31, 1995 and 1994 are detailed below (in thousands). 1995 1994 ---- ---- Service cost - benefits earned during the period.. $207 $212 Interest cost on projected benefit obligation..... 71 15 Net amortization and deferral..................... 30 4 Net pension cost............................... $308 $231 The following table outlines the funded status of the Plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1995 (in thousands). 1995 Actuarial present value of plan benefits -------- Vested...................................... $ 868 Non-vested.................................. 98 Accumulated benefit obligation.............. 966 Effect of projected salary increases........ 46 Projected benefit obligation (PBO)............ 1,012 Plan assets at fair value..................... 0 Projected benefit obligation in excess of plan assets................................. (1,012) Unrecognized net gain......................... (200) Prior service cost not yet recognized in net periodic pension cost....................... 543 Adjustment required to recognize minimum liability................................... (297) Pension liability included in Other Liabilities on the Consolidated Balance Sheet....................................... $ (966) The assumed rate of increase in future compensation was 3% for 1995. The discount rate used to calculate the actuarial present value of the projected benefit obligation was 7.5% for 1995. 28 7. INCOME TAXES The Company had income (loss) of $(13.7) million, $(33.6) million, $(6.7) million and $(4.1) million from its operations before income taxes in the United States and income (loss) of $16.7 million, $9.9 million, $(1.7) million and $(13.0) million from its operations before income taxes in foreign countries for the period June 13, 1996 to December 31, 1996, January 1, 1996 to June 12, 1996 and for the years ended December 31, 1995 and 1994, respectively. The provisions for income taxes for the years ended December 31, 1996, 1995 and 1994 are summarized as follows (in thousands): 1996 1996 Successor Predecessor 1995 1994 --------- ----------- ------ -------- Current: Federal............... $ - $ - $ - $ 171 State................. - - 24 - Foreign............... 1,581 1,273 1,753 2,157 Total current...... 1,581 1,273 1,777 2,328 Deferred: Federal............... (4,113) (645) - (2,341) Foreign............... 1,388 - (892) 56 Total deferred..... (2,725) (645) (892) (2,285) Total.................... $(1,144) $ 628 $ 885 $ 43 29 Deferred income tax assets and liabilities as of December 31, 1996 and 1995 are summarized as follows (in thousands): 1996 1995 Successor Predecessor Deferred tax assets: -------- ---------- Domestic: Deferred interest deduction............ $ - $ 250 Deferred compensation.................. 4,045 621 Net operating loss carryforward........ 17,153 13,454 Liabilities not deductible for tax purposes............................ 3,225 - Other.................................. 2,829 502 Foreign: Net operating loss carryforward........ 90 178 Gross deferred tax assets................. 27,342 15,005 Valuation allowance....................... - (5,757) Net deferred tax assets................... $ 27,342 $ 9,248 Deferred tax liabilities: Domestic: Excess of net book basis over tax basis $ 33,429 $ 5,113 Deferred installment gain.............. 3,186 3,186 Undistributed foreign earnings......... 771 771 Foreign: Excess of net book basis over tax basis 5,288 1,974 Total deferred tax liability.............. 42,674 11,044 Less: Net deferred tax assets............ (27,342) (9,248) Net deferred tax liability................ 15,332 1,796 Add: Current deferred tax asset.......... 4,153 Long term deferred tax liability.......... $ 19,485 $ 1,796 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: 1996 1996 Successor Predecessor 1995 1994 Current: --------- ----------- -------- -------- Income tax expense (benefit) at U.S. federal tax rate.... $ 1,022 $(8,296) $(2,924) $(5,878) Increase (decrease) in tax resulting from: Effects of foreign taxes.. (2,804) 1,845 1,868 2,909 Goodwill amortization..... 434 272 604 587 Change in valuation allowance............... - 6,807 2,082 3,675 Non-deductible expenditures............ - - - 879 Items not related to current year operations. - - (946) (2,052) Other..................... 204 - 201 (77) Income tax expense (benefit)............... $(1,144) $ 628 $ 885 $ 43 30 At December 31, 1996, the Company had regular and alternative minimum tax net operating loss carryforwards of approximately $49.0 million and $21.7 million, respectively, and foreign tax credit carryforwards of $1.0 million. If not utilized, the regular and alternative minimum tax net operating loss carryforwards expire in 2009 and 2010. The foreign tax credit carryforward expires in 2001. 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, 1996 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. 31 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 $532,000 for the period June 13 through December 31, 1996, $407,000 for the period January 1 through June 12, 1996, and $1.1 million and $1.2 million for the years ended December 31, 1995 and 1994, respectively. 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: $564,200 in 1997; $415,800 in 1998 and $53,400 in 1999. The Company's domestic rigs are bareboat chartered to ENSCO Offshore Company, a wholly owned subsidiary of ENSCO. Fixed daily rates are paid to the Company under one year bareboat charter agreements. See Note 10 "Related Party Transactions." One of the Company's rigs is owned 49% by the Company and 51% by a Malaysian company ("Malaysian Company"). Under terms of an operating agreement between the Company and the Malaysian Company, the Company makes a charter payment to the Malaysian Company when the rig is operating under a drilling contract. 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. Letters of Credit The Company maintains legally restricted cash balances with a bank as collateral for letters of credit issued by the bank for providing bid bonds and performance bonds required on drilling contracts in which the Company may bid or be awarded. These restricted cash balances aggregated $1.1 million at December 31, 1996 and are included in Other Current Assets. At December 31, 1996, 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. 32 9. GEOGRAPHIC REGION INFORMATION AND MAJOR CUSTOMERS The Company's 10 jackup rigs and eight platform rigs (including one which is managed but not owned) are located in the Gulf of Mexico and throughout Asia. 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 following shows geographic region information for the Successor period June 13, 1996 to December 31, 1996, the Predecessor period January 1, 1996 to June 12, 1996, and for the years ended December 31, 1995 and 1994 (in thousands):
GEOGRAPHIC REGION North South Corporate America Asia America & Other Total June 13,1996 - December 31, 1996 (Successor) Revenues . . . . . . . . . . . . . . . . . . . $ 19,093 $ 24,532 $ $ $ 43,625 Operating income (loss) . . . . . . . . . . . . 8,314 3,395 (2,640) 9,069 Identifiable assets . . . . . . . . . . . . . . 280,968 123,289 404,257 January 1, 1996 - June 12,1996 (Predecessor) Revenues . . . . . . . . . . . . . . . . . . . $ 32,424 $ 21,118 $ $ $ 53,542 Operating income (loss) . . . . . . . . . . . . 2,189 5,239 (25,762) (18,334) 1995 Revenues . . . . . . . . . . . . . . . . . . . $ 47,106 $ 38,783 $ $ $ 85,889 Operating income (loss) . . . . . . . . . . . . 358 5,694 (7,563) (1,511) Identifiable assets . . . . . . . . . . . . . . 180,069 123,500 191 2 303,762 1994 Revenues . . . . . . . . . . . . . . . . . . . $ 62,719 $ 39,348 $ 2,198 $ $104,265 Operating income (loss) . . . . . . . . . . . . 6,241 (5,886) 409 (8,992) (8,228) Identifiable assets . . . . . . . . . . . . . . 213,900 108,518 192 11 322,621
During the period June 13, to December 31, 1996, revenues from four customers accounted for 24%, 23%, 15% and 13% of total revenues. During the period January 1, to June 12, 1996, revenues from one customer accounted for 15% of total revenues and revenues from two customers each accounted for 13% of total revenues. During 1995, revenues from three customers accounted for 17%, 14% and 11% of total revenues. During 1994, revenues from two customers each approximated 12% of total revenues. 33 10. RELATED PARTY TRANSACTIONS Effective June 13, 1996, each of the Company's domestic rigs, currently consisting of two jackup rigs and seven platform rigs, were bareboat chartered to ENSCO Offshore Company ("ENSCO Offshore"), a wholly owned subsidiary of ENSCO, to achieve certain operating and marketing efficiencies. The terms of the bareboat charter agreements with ENSCO Offshore provide for fixed daily rates to be paid to the Company, which the Company believes are reasonable and representative of the environment in which the rigs operate. Each respective bareboat charter rate is increased for any capital expenditures made by the Company on a chartered rig and the rate is reduced to 50% of the normal rate if a rig is idle for more than 30 days. The initial term of the bareboat charter agreements is one year, with automatic one year extensions, unless either party gives at least one month's prior notice of termination. Revenues relating to the bareboat charter agreements were $10.5 million for the period June 13, 1996 to December 31, 1996. On June 13, 1996, the Company entered into a Master Services Agreement with ENSCO. Under the terms of the Master Services Agreement, ENSCO provides certain shorebase and corporate support services for the Company's domestic and foreign operations. The Company pays ENSCO a monthly fee for these services under the Master Services Agreement, which the Company believes is reasonable for the services provided. General and administrative expense relating to the Master Services Agreement was $2.6 million for the period from June 13, 1996 to December 31, 1996. ENSCO holds a portion of the Company's Notes as of December 31, 1996. See Note 4 "Long-Term Debt." Interest expense relating to the 9 7/8% Notes held by ENSCO was $1.2 million for the year ended December 31, 1996. At December 31, 1996, the Company had a net liability due to ENSCO of approximately $859,000 which is recorded in Accounts Payable. During 1994, the Company received assistance in securing insurance coverage from Mosvold Brokers AS, a Norwegian company that was associated with Dual Invest until late 1995. For its assistance, Mosvold Brokers AS received brokerage commissions from insurance underwriters totaling approximately $0.2 million. The Company has performed contract drilling services for Newfield Exploration Company ("Newfield"), from which revenues earned totaled approximately $3.0 million during the year ended December 31, 1994. A former director of the Company from August 1993 to May 1995, serves as Chairman and Chief Executive Officer of Newfield. 34 11. SUPPLEMENTAL FINANCIAL INFORMATION Consolidated Balance Sheet Information. Accounts receivable, net at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 Successor Predecessor --------- ----------- Trade . . . . . . . . . . . . . . . . . $11,518 $19,338 Other . . . . . . . . . . . . . . . . . 343 3,022 11,861 22,360 Allowance for doubtful accounts . . . . (148) (345) $11,713 $22,015 Other current assets at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 Successor Predecessor --------- ----------- Trust-Supplemental executive retirement plan . . . . . . . . . . . . . . . . . $ 2,292 $ - Refundable foreign withholding tax . . - 3,878 Deposits . . . . . . . . . . . . . . . 1,224 207 Prepaid taxes . . . . . . . . . . . . 1,416 472 Prepaid expenses . . . . . . . . . . . 509 1,623 Inventory . . . . . . . . . . . . . . . - 5,603 Current deferred tax asset . . . . . . 4,153 - Other . . . . . . . . . . . . . . . . . 415 617 $10,009 $12,400 Other assets at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 Successor Predecessor --------- ----------- Goodwill . . . . . . . . . . . . . . . $99,410 $25,032 Other . . . . . . . . . . . . . . . . . 245 5,056 $99,655 $30,088 Accrued liabilities at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 Successor Predecessor --------- ----------- Operating expenses . . . . . . . . . . $ 7,303 $ 5,033 Payroll . . . . . . . . . . . . . . . . 3,091 2,443 Taxes . . . . . . . . . . . . . . . . . 2,378 864 Insurance . . . . . . . . . . . . . . . 2,500 - Other . . . . . . . . . . . . . . . . . 361 1,686 $15,633 $10,026 35 Consolidated Statement of Operations Information. Maintenance and repairs expense for the years ended December 31, 1996, 1995 and 1994 are as follows (in thousands): 1996 1996 Successor Predecessor 1995 1994 --------- ----------- -------- -------- Maintenance and repairs . . . $ 3,029 $ 5,911 $10,295 $10,388 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, 1996, 1995 and 1994 are as follows (in thousands): 1996 1996 Successor Predecessor 1995 1994 --------- ----------- -------- -------- Interest. . . . . . . . . . . $ 6,326 $ 6,915 $14,147 $8,280 Income taxes. . . . . . . . . 1,317 1,696 2,011 2,962 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 at December 31, 1996 and 1995 are as follows (in thousands): December 31, 1996 December 31, 1995 Successor Predecessor ------------------- ------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value -------- --------- -------- --------- Liabilities - long-term debt, including current maturities $134,387 $137,867 $144,701 $139,201 The estimated fair values were determined as follows: Quoted market price for the Notes and interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for bank debt issues. The estimated fair value of the Company's cash and cash equivalents, short- term investments, receivables, trade payables and other liabilities 36 approximated their carrying values at December 31, 1996 and 1995. 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. At December 31, 1996, 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. 37 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. 38 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 13 Consolidated Balance Sheet 14 Consolidated Statement of Operations 15 Consolidated Statement of Cash Flows 16 Notes to the Consolidated Financial Statements 17 (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 Amend- ment 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). 39 EXHIBIT NO. DESCRIPTION 10 - Amendment No. 1 dated as of June 13, 1996 to the Amended and Restated Credit Facility Agreement dated as of September 27, 1995 by and among ENSCO Offshore Company and ENSCO Offshore U.K. Limited, as borrowers, and Christiania Bank OG Kreditkasse, New York Branch, and den Norske Bank AS, New York Branch, as the Banks (incorporated by reference to exhibit No. 10.25 to the ENSCO International Incorporated (File No. 1-8097) Form 10-Q for the quarterly period ended June 30, 1996). 10.1 - First Preferred Fleet Mortgage dated June 13, 1996 by ENSCO Offshore Company II and Bankers Trust Company, as trustee for the benefit of Christiania Bank OG Kreditkasse, New York Branch, and den Norske Bank AS, New York Branch (incorporated by reference to exhibit No. 10.27 to the ENSCO International Incorporated (File No. 1-8097) Form 10-Q for the quarterly period ended June 30, 1996). 10.2 - 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). 10.3 - 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). 10.4 - 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). 10.5 - 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). 10.6 - Long Term Team Incentive Program (filed as exhibit 10.3 to the Company's Registration Statement on Form S-1 (No. 33-64550) and incorporated herein by reference). 10.7 - MOSVOLD SHIPPING AS Stock Option Compensation Plan (filed as exhibit 10.4 to the Company's Registration Statement on Form S-1 (No. 33-64550) and incorporated herein by reference). 40 EXHIBIT NO. DESCRIPTION 10.8 - Benefit Restoration Plan (filed as exhibit 10.5 to the Company's Registration Statement on Form S-1 (No. 33-72744) and incorporated herein by reference). 10.9 - 1993 Long Term Incentive Plan (filed as exhibit 10.6 to the Company's Registration Statement on Form S-1 (No. 33-72744) and incorporated herein by reference). 10.10 - Supplemental Executive Retirement Plan (filed as exhibit 10.7 to the Company's Registration Statement on Form S-1 (No. 33-72744) and incorporated herein by reference). 10.11 - Office Lease, dated as of October 12, 1998, 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). 10.12 - Dual Drilling Company Non-Employee Director Compensation Plan (filed as exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (No. 33-87634) filed on December 24, 1994 and incorporated herein by reference). 10.13 - Indenture dated January 15, 1994, between DUAL DRILLING COMPANY and Merrill Lynch & Co., with respect to the issuance of Senior Subordinated Notes due 2004. 10.14 - Dual Drilling Company 1993 Long-Term Incentive Plan (filed as exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (No. 33-75528) filed on February 18, 1994 and incorporated herein by reference). 10.15 - Memorandum of Agreement, dated March 28, 1995, between SEADRILL 97, INC. and Egyptian Drilling Company for sale of DUAL RIG 97 (filed as exhibit 25.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by reference). 10.16 - Sale and Purchase Agreement, dated April 10, 1995, between DUAL DRILLING COMPANY and Global Marine Australia, Inc., for the purchase of DUAL RIG 88 (filed as exhibit 25.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated herein by reference). 10.17 - Severance Pay Plan dated August 21, 1995 for Office Employees (filed as exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.18 - Severance Pay Plan dated August 21, 1995 for Key Operating & Support Staff Employees (filed as exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.19 - Severance Pay Plan dated August 21, 1995 for Key Operating & Engineering Managers (filed as exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 41 EXHIBIT NO. DESCRIPTION 10.20 - Employment Agreement of Robert F. Chrone dated February 15, 1995 and as amended February 15, 1995 and August 21, 1995 (filed as exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). *27 - Financial Data Schedule _______________ * Filed herewith (b) No Current Reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1996. 42 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 25, 1997. Dual Holding Company (formerly DUAL DRILLING 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 25, 1997 ----------------------------- C. Christopher Gaut /s/ RICHARD A. WILSON Vice President and March 25, 1997 ----------------------------- Director Richard A. Wilson /s/ H. E. MALONE Secretary and Director March 25, 1997 ----------------------------- H. E. Malone 43 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-01-1996 DEC-31-1996 DEC-31-1996 $ 9,397 0 11,861 148 0 31,119 285,536 12,053 404,257 16,900 134,387 0 0 0 222,495 404,257 0 97,167 0 55,911 50,521 0 13,348 (20,784) (516) (20,268) 0 0 0 (20,268) 0 0 THE COMPANY WAS ACQUIRED BY ENSCO INTERNATIONAL INCORPORATED ON JUNE 12, 1996. THE RESULTS OF OPERATIONS INFORMATION REFLECTED ABOVE INCLUDES THE PERIOD PRIOR TO AND SUBSEQUENT TO THE ACQUISITION. AS THE CAPITAL STRUCTURE OF THE COMPANY WAS CHANGED IN THE ACQUISITION, EARNINGS PER SHARE INFORMATION FOR THE YEAR IS NOT RELEVANT. /FN
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