<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____TO____
COMMISSION FILE NO. 0-23934
DEEPTECH INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0289338
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7500
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
AS OF MAY 14, 1996, THERE WERE OUTSTANDING 16,724,929 SHARES OF COMMON
STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
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<PAGE> 2
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1996 (unaudited) and June 30, 1995 . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Operations for the Three and Nine Months
Ended March 31, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended March 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
Legal Proceedings
Changes in Securities
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Other Information
Exhibits and Reports on Form 8-K
2
<PAGE> 3
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
--------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
-------
Current assets:
Cash and cash equivalents $ 11,568 $ 6,787
Accounts receivable 6,208 1,715
Accounts receivable from affiliates 5,068 2,098
Notes receivable from affiliates 9,899 1,321
Other current assets 263 162
------------ ----------
Total current assets 33,006 12,083
------------ ----------
Property and equipment:
Oil and gas properties, at cost, using successful efforts method 255 655
Other property and equipment 1,784 2,021
------------ ----------
Property and equipment 2,039 2,676
Less: Accumulated depreciation and amortization 663 754
------------ ----------
Property and equipment, net 1,376 1,922
------------ ----------
Asset held for sale (Note 3) - 14,558
Equity investments 5,581 2,369
Receivables from affiliates 99,626 89,361
Debt issue costs, net and other 3,887 3,656
Deferred income taxes 1,600 3,744
------------ ----------
Total assets $ 145,076 $ 127,693
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,440 $ 5,172
Accounts payable to affiliates 6,875 1,409
Notes payable 9,931 2,927
Notes payable to affiliates 6,640 6,972
Interest payable 3,002 1,161
Interest payable to affiliates - 4,383
Accrued liabilities 1,403 3,000
------------ ----------
Total current liabilities 29,291 25,024
Deferred income taxes - 259
Long-term debt 101,242 91,381
Accumulated losses of equity investee in excess of investment 1,730 8,008
------------ ----------
Total liabilities 132,263 124,672
------------ ----------
Minority interests in consolidated subsidiaries 263 639
------------ ----------
Commitments and contingencies (Note 9)
Stockholders' equity :
Preferred stock, $.01 par, 10,000,000 shares authorized - -
Common stock, $.01 par, 100,000,000 shares authorized
as of March 31, 1996 and June 30, 1995, 16,714,923
and 15,664,798 shares issued and outstanding as of
March 31, 1996 and June 30, 1995, respectively 167 157
Additional paid-in capital 15,615 11,335
Accumulated deficit (3,232) (9,110)
------------ ----------
12,550 2,382
------------ ----------
Total liabilities and stockholders' equity $ 145,076 $ 127,693
============ ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------ -----------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 18,195 $ 6,926 $ 26,968 $ 13,875
Equity in earnings 5,850 1,127 10,033 4,051
Other - 202 459 581
----------- ----------- ---------- ----------
24,045 8,255 37,460 18,507
----------- ----------- ---------- ----------
Costs and expenses:
Oil and gas purchases 18,026 6,338 26,309 12,947
Operating expenses - - 477 -
Losses of equity investees 167 3,298 - 9,948
Exploration expenses - 67 14 89
Depreciation and amortization 43 62 172 262
General and administrative expenses 370 1,119 2,942 2,528
----------- ----------- ---------- ----------
18,606 10,884 29,914 25,774
----------- ----------- ---------- ----------
Operating income (loss) 5,439 (2,629) 7,546 (7,267)
Gain on sale of asset 155 - 902 -
Interest and other income 3,463 1,829 11,104 5,873
Interest and other financing costs (3,888) (2,297) (9,612) (6,692)
----------- ----------- ---------- ----------
Income (loss) before minority interests
and income taxes 5,169 (3,097) 9,940 (8,086)
Minority interests in consolidated subsidiaries (357) (87) (667) (326)
----------- ----------- ---------- ----------
Income (loss) before income taxes 4,812 (3,184) 9,273 (8,412)
Income tax expense (benefit) 1,752 (1,136) 3,395 (3,070)
----------- ----------- ----------- ----------
Net income (loss) $ 3,060 $ (2,048) $ 5,878 $ (5,342)
=========== ========== ========== ==========
Net income (loss) per share $ 0.17 $ (0.13) $ 0.35 $ (0.35)
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
March 31,
-------------------------------
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,878 $ (5,342)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Minority interests in consolidated subsidiaries 667 326
Depreciation and amortization 172 262
Amortization of debt issue costs 839 647
Equity in earnings (10,033) (4,051)
Losses of equity investees - 9,948
Distributions from equity investments 6,260 6,110
Gain on sale of assets (902) -
Deferred income taxes and other 6,776 (4,998)
Changes in operating working capital:
Increase in accounts receivable (4,492) (880)
(Increase) decrease in accounts receivable from affiliates (4,271) 2,723
Increase in other current assets (100) (252)
Decrease in accounts payable and accrued liabilities (4,989) (2,380)
Increase in accounts payable to affiliates 5,466 3,934
Increase in interest payable 1,842 106
(Decrease) increase in interest payable to affiliates (4,383) 532
------------ ----------
Net cash (used in) provided by operating activities (1,270) 6,685
------------ ----------
Cash flows from investing activities:
Investment in equity investees (5,697) -
Repayment of advances to affiliates 25,799 -
Advances to affiliates (28,571) -
Additions to property and equipment (152) (11,187)
Additions to oil and gas properties - (269)
Other 53 -
------------ ----------
Net cash used in investing activities (8,568) (11,456)
------------ ----------
Cash flows from financing activities:
Proceeds from notes payable 19,627 2,927
Repayments of notes payable (2,927) (1,590)
Repayment of note payable to affiliates (332) -
Debt issue costs (843) -
Proceeds from issuance of common stock - 1,044
Dividends on subsidiary common stock (906) (207)
------------ ---------
Net cash provided by financing activities 14,619 2,174
------------ ----------
Net increase (decrease) in cash and cash equivalents 4,781 (2,597)
Cash and cash equivalents at beginning of year 6,787 12,008
------------ ----------
Cash and cash equivalents at end of period $ 11,568 $ 9,411
============ ==========
Cash paid for interest, net of amounts capitalized $ 11,315 $ 5,293
Cash paid for income taxes $ 1,700 $ 1,171
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Number of Par paid-in Accumulated
shares value capital deficit Total
--------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 15,665 $ 157 $ 11,335 $ (9,110) $ 2,382
Issuance of common stock (unaudited) 1,050 10 4,280 - 4,290
Net income for the nine months
ended March 31, 1996 (unaudited) - - - 5,878 5,878
--------- --------- --------- ---------- --------
Balance, March 31, 1996
(unaudited) 16,715 $ 167 $ 15,615 $ (3,232) $ 12,550
========= ========= ========= ========== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION:
DeepTech International Inc. ("DeepTech") is a diversified energy company
engaged, through its operating subsidiaries, in offshore contract drilling
services and the acquisition, development, production, processing,
transportation and marketing of, and the exploration for, oil and gas located
offshore the United States in the Gulf of Mexico (the "Gulf"). DeepTech's
activities are concentrated primarily in the Flextrend (water depths of 600 to
1,500 feet) and Deepwater (water depths greater than 1,500 feet) areas of the
Gulf.
Transportation Services
Leviathan Gas Pipeline Company ("Leviathan"), a wholly-owned subsidiary of
Leviathan Holdings Company ("Leviathan Holdings"), an 85%-owned subsidiary of
DeepTech, was formed in February 1989 to purchase, operate and expand offshore
pipeline systems. Leviathan serves as the general partner of Leviathan Gas
Pipeline Partners, L.P. (the "Partnership"), a New York Stock Exchange listed
master limited partnership. The Partnership has interests in nine operating
natural gas pipeline systems located offshore Louisiana and Texas as well as an
interest in a sour crude oil system designed to serve new developments in the
sub-salt and deepwater areas of the Gulf. The Partnership's assets also
include five strategically located multi-purpose platforms and a dehydration
facility. At March 31, 1996 and June 30, 1995, Leviathan owned an effective
27.3% interest in the Partnership.
Exploration and Production
Tatham Offshore, Inc. ("Tatham Offshore"), an approximately 40%-owned
subsidiary of DeepTech, is an independent energy company engaged in the
development, exploration and production of oil and gas reserves located
primarily offshore the United States in the Gulf. Flextrend Development
Company, L.L.C. ("Flextrend Development"), an operating subsidiary of the
Partnership, acquired Tatham Offshore's working interests, subject to certain
reversionary rights, in three properties on June 30, 1995. Flextrend
Development is engaged in the development and production of the oil and gas
reserves underlying these properties. A wholly-owned subsidiary of Tatham
Offshore, Tatham Offshore (Jersey) Ltd. ("TOJ"), incorporated in the Island of
Jersey, has begun pursuing certain international opportunities in Nigeria.
Dover Technology, Inc. ("Dover"), a 50%-owned subsidiary of DeepTech, owns a
working interest in an oil and gas concession in the Gladden Basin offshore
Belize.
Deepwater Production Services
In March 1995, DeepTech, through its 100%-owned subsidiary, DeepFlex Production
Services, Inc. ("DeepFlex"), entered into a partnership agreement with an
affiliate of Coflexip Stena Offshore Inc. ("Coflexip") to form DeepFlex
Production Partners, L.P. ("DeepFlex Partners"). DeepFlex Partners is
effectively owned 50% by DeepFlex and 50% by Coflexip. In December 1995,
DeepFlex entered into an agreement with Highwood Partners, L.P. ("Highwood
Partners") to form Deepwater Drillers, L.L.C. ("Deepwater Drillers").
Deepwater Drillers is effectively owned 50% by a wholly-owned subsidiary of
DeepFlex and 50% by Highwood Partners. DeepFlex, through its subsidiaries and
equity interests, focuses on the acquisition and deployment of semisubmersible
drilling rigs for contract drilling services as well as the conversion of such
rigs into floating production systems to be leased to producers in the
Flextrend and Deepwater areas of the Gulf.
7
<PAGE> 8
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Marketing and Gas Processing
Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of
DeepTech, markets oil and gas production from Tatham Offshore, Flextrend
Development, Louisiana Offshore Gathering Systems, L.L.C. ("LOGS") and
third-party producers. LOGS is an operating subsidiary of the Partnership.
Offshore Gas Processors, Inc. ("Offshore Processors"), an 85%-owned subsidiary
of DeepTech, engages in various activities relating to natural gas processing.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
DeepTech and those 50% or more owned subsidiaries controlled by DeepTech
(collectively referred to as the "Company"). Mr. Thomas P. Tatham (the Chief
Executive Officer, Chairman of the Board of Directors and principal
stockholder of DeepTech), key associates and management personnel of DeepTech
individually own the minority interests in consolidated subsidiaries at March
31, 1996 and June 30, 1995. In November 1995, Dover began functioning as an
independent business unit and is no longer controlled by DeepTech. The Company
uses the equity method to account for its investments in unconsolidated
entities in which the Company owns more than 20% of the voting interests.
Equity in losses of an investee in excess of DeepTech's investment are
recognized to the extent indebtedness of the equity investee is outstanding to
DeepTech.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Accordingly, the statements reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair statement of the results of operations for the periods covered by such
statements. These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified to conform to the
current period's presentation.
Earnings per share
Earnings (losses) per share is computed by dividing common equity in net income
(loss) by the weighted average number of common shares and common stock
equivalents outstanding during the period. The weighted average number of
common shares and common stock equivalents outstanding for the three months
ended March 31, 1996 and 1995 was 17,733,196 shares and 15,364,798 shares,
respectively. The weighted average number of common shares and common stock
equivalents outstanding for the nine months ended March 31, 1996 and 1995 was
16,670,138 shares and 15,277,186 shares, respectively.
NOTE 3 - ASSET HELD FOR SALE:
Asset held for sale at June 30, 1995 was comprised of the FPS Eddie
Delahoussaye, a semisubmersible drilling rig, which the Company had transferred
to DeepFlex Partners for the issuance of subordinated payment in kind
indebtedness ("PIK Notes"). However, if certain conditions had not been
satisfied by July 1, 1996, the Company would have been obligated to repurchase
the rig for forgiveness of PIK Notes issued for the acquisition, maintenance
and conversion of the rig plus accrued and unpaid interest.
8
<PAGE> 9
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In September 1995, the Company sold the FPS Eddie Delahoussaye (on behalf of
DeepFlex Partners) to Reading & Bates (U.K.) Limited for $18.0 million which
was comprised of (i) $3.0 million, (ii) 1,232,057 shares of Reading & Bates
Corporation ("Reading & Bates") common stock and (iii) the forgiveness of $0.3
million of trade receivables due Reading & Bates from a wholly-owned subsidiary
of DeepTech. DeepFlex Partners transferred the net sales proceeds (including
the Reading & Bates common stock) to the Company as repayment of a portion of
the PIK Notes issued by DeepFlex Partners. The Reading & Bates common stock
was subsequently sold for $14.7 million.
NOTE 4 - EQUITY INVESTMENTS:
The summarized financial information for the Company's investments which are
accounted for using the equity method is as follows:
SUMMARIZED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
Leviathan Gas DeepFlex Production Deepwater
Pipeline Partners, L.P. Tatham Offshore, Inc. Partners, L.P. Drillers, L.L.C.
------------------------ ------------------------ ------------------- -------------
March 31, June 30, March 31, June 30, March 31, June 30, March 31,
1996 1995 1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 26,418 $ 23,612 $ 8,585 23,801 $ 683 $ - $ -
Noncurrent assets 385,250 270,881 83,811 70,919 42,779 29,973 17,217
Current liabilities 33,255 39,764 14,570 23,228 60 716 15,824
Long-term debt 171,206 65,413 60,000 60,000 39,686 29,361 -
Other noncurrent
liabilities 16,761 554 9,009 31,512 - - -
</TABLE>
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months
For the Nine Months Ended March 31, 1996 Ended March 31, 1995
------------------------------------------------------------- ------------------------
DeepFlex Tatham Tatham
Partnership Partners Offshore Other Total Partnership Offshore
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 42,354 $ 1,592 $ 11,109 $ 25,983 $ 4,909
Other income 659 5,113 22,716 1,229 2,286
Operating expenses (8,716) (1,265) (16,857) (7,387) (24,490)
Depreciation (9,712) (252) (840) (4,801) (802)
Other expenses (523) (1,306) (6,288) (443) (6,774)
--------- ---------- ---------- ---------- ---------
Net earnings (loss) 24,062 3,882 9,840 14,581 (24,871)
Effective ownership
percentage 27.3% 50% 39.8% 27.3% 40%
--------- ---------- ---------- ---------- ----------
6,569 1,941 3,916 3,965 (9,948)
Other 29 - (2,458)(a) 36 86 -
--------- ---------- ---------- --------- --------- ----------
Equity in earnings
(losses) $ 6,598 $ 1,941 $ 1,458 $ 36 $ 10,033 $ 4,051 $ (9,948)
========= ========== ========== ========= ========= ========= ==========
Distributions from
equity investments $ 6,110 $ - $ - $ 150 $ 6,260 $ 6,110 $ -
========= ========== ========== ========= ========= ======== ==========
</TABLE>
(a) Includes $2.0 million related to the elimination of a portion of
profit generated from the sale of the Assigned Properties (Note 8) by
Tatham Offshore to Flextrend Development, both of which are equity
investees of DeepTech.
9
<PAGE> 10
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Partnership and its operating subsidiaries will distribute 100% of
available cash, as defined, on a quarterly basis to the holders of the
Preference Units and to Leviathan, as general partner and holder of the Common
Units. On March 26, 1996, the Partnership declared a $0.65 per Unit cash
distribution payable to all holders of record of Preference Units and Common
Units as of April 30, 1996. On May 15, 1996, Leviathan will receive $2,206,000
as its pro rata share of the distribution for the quarter ended March 31, 1996.
NOTE 5 - RECEIVABLES FROM AFFILIATES:
CURRENT NOTES RECEIVABLE FROM AFFILIATES
Promissory Notes
In December 1995, a wholly-owned subsidiary of DeepFlex and Highwood Partners
formed Deepwater Drillers to acquire and operate the Treasure Searcher, a
second generation semisubmersible drilling unit, for $14.5 million pursuant to
the exercise of an option assigned from the Company (Note 6). As of March 31,
1996, DeepFlex had advanced $7.6 million to Deepwater Drillers in exchange for
promissory notes ("Promissory Notes") which amounts are included in notes
receivables from affiliates on the accompanying consolidated balance sheet.
DeepFlex is obligated to make additional advances of up to $1.1 million to
Deepwater Drillers for make ready and mobilization costs on the Treasure
Searcher which will also be evidenced by Promissory Notes. Promissory Notes
bear interest at 12% per annum, payable quarterly, and are due on December 5,
1996. The Promissory Notes are secured by a mortgage on the Treasure Searcher
and are pledged to secure certain related indebtedness (Note 6). Interest
income related to the Promissory Notes was $0.3 million for the nine months
ended March 31, 1996.
Bridge Loan
In October 1995, DeepFlex entered into a bridge loan agreement (the "Bridge
Loan") with Tatham Offshore. Pursuant to the terms of the Bridge Loan, DeepFlex
agreed to make $12.5 million of interim bridge financing available for
borrowing by Tatham Offshore to fund a portion of Tatham Offshore's working
capital and capital requirements. All indebtedness outstanding under the
Bridge Loan accrued interest at a rate of 15% per annum. Interest income
related to outstanding advances under the Bridge Loan totaled $0.2 million for
the nine months ended March 31, 1996. The terms of the Bridge Loan required
Tatham Offshore to undertake the Offering (discussed in Note 9) or to
implement another refinancing or asset disposition sufficient to repay the
outstanding indebtedness under the Bridge Loan. In connection with the Bridge
Loan (the "Bridge Commitment"), DeepTech agreed to defer until July 15, 1996
the payment of up to $4.0 million in management fees payable by Tatham Offshore
under its management agreement with DeepTech. In addition, Tatham Offshore
agreed to amend the Subordinated Notes to increase the interest rate from 11
3/4% to 13% per annum, effective July 1, 1997. DeepFlex advanced Tatham
Offshore a total of $8.0 million under the Bridge Loan. On January 31, 1996,
DeepFlex subscribed for the purchase of 10,000,000 Warrants in connection with
the Offering (Note 9) at a cost of $5.0 million, which was paid through the
forgiveness of $5.0 million of principal and interest due under the Bridge
Loan. In February 1996, Tatham Offshore used $3.1 million of Offering proceeds
to repay the remaining principal and accrued interest outstanding under the
Bridge Loan.
Other
On November 1, 1995, DeepTech agreed to assume $1.7 million of Dover's accounts
receivable from Tatham Offshore in exchange for reducing Dover's payable to
DeepTech under a line of credit arrangement for a like amount. DeepTech then
converted the $1.7 million of accounts receivable from Tatham Offshore into an
unsecured promissory note (the "Affiliate Note") which bears interest at 14.5%
per annum. Interest on the Affiliate Note is payable quarterly,
beginning March 31, 1996. The principal is due and payable in six monthly
installments,
10
<PAGE> 11
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
beginning on a date which is the earlier to occur of (i) November 1, 1997 or
(ii) the last day of the calendar month in which Tatham Offshore receives
proceeds from the issuance of any preferred stock described in the Offering
(Note 9) in a net total amount equal to or greater than $20.0 million. Interest
income related to the Affiliate Note totaled $0.1 million for the nine months
ended March 31, 1996.
LONG-TERM RECEIVABLES FROM AFFILIATES
Subordinated Convertible Promissory Notes Receivable
As of March 31, 1996, DeepTech holds an aggregate principal amount of $60.0
million of Tatham Offshore subordinated convertible promissory notes (the
"Subordinated Notes"). The Subordinated Notes bear interest from the date of
issuance at a rate of 11 3/4% per annum, payable quarterly in arrears;
provided, however, effective July 1, 1997, interest shall accrue at a rate of
13% per annum. Interest income related to these notes totaled $5.3 million for
the nine months ended March 31, 1996. The principal amount of the Subordinated
Notes is payable in seven equal annual installments of approximately $8.6
million commencing August 1, 1999. The Subordinated Notes are subordinate to
all senior indebtedness of Tatham Offshore, which would include any
indebtedness outstanding under the Affiliate Note. In addition, Tatham
Offshore has agreed not to incur additional subordinated indebtedness without
the consent of the holders of the Subordinated Notes. In October 1995,
DeepTech issued waivers which allowed Tatham Offshore to (i) defer payment of
interest due on its Subordinated Notes on October 1, 1995 until November 6,
1995 and (ii) incur indebtedness under the Bridge Loan.
PIK Notes
As of March 31, 1996, DeepFlex Partners owed DeepFlex $39.6 million, evidenced
by PIK Notes, which is included in receivables from affiliates on the
accompanying consolidated balance sheet. Any additional advances from DeepFlex
to DeepFlex Partners are to be evidenced by PIK Notes. PIK Notes bear interest
at 12% per annum, payable quarterly, and are due on March 31, 2002. Interest is
required to be paid under certain circumstances by the issuance of additional
PIK Notes. The PIK Notes are subordinate to all indebtedness incurred by
DeepFlex Partners for the acquisition, conversion or maintenance of any
floating production system and are secured by a first mortgage on the FPS
Laffit Pincay. Interest income related to the PIK Notes totaled $4.7 million
for the nine months ended March 31, 1996.
11
<PAGE> 12
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - INDEBTEDNESS:
Outstanding indebtedness is comprised of the following:
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
---------------------- -----------------------
Current Long-term Current Long-term
(in thousands)
<S> <C> <C> <C> <C>
Notes payable:
Promissory note, bearing interest at 11% per
annum, payable monthly, principal and accrued
interest due on October 1, 1995, repaid on
September 11, 1995 $ - $ - $ 2,927 $ -
Highwood Notes (hereinafter defined) 7,627 - - -
Term Loan (hereinafter defined) 2,304 9,696 - -
Senior Notes (hereinafter defined) - 80,546 - 80,381
Wilrig AS promissory notes - 11,000 - 11,000
Notes payable to affiliates:
Subordinated Promissory Notes, bearing interest at
15% per annum, payable quarterly, principal due
January 15, 1997 6,640 - - -
Advances under a Senior Subordinated Master Credit
Facility maturing January 1, 1996, in the aggregate
amount of $10,000,000, unsecured, bearing interest
on all outstanding balances at 12% per annum,
principal and interest due at maturity - - 3,350 -
Subordinated Promissory Notes, bearing interest at
7.06% to 10% per annum, principal and interest
due January 1, 1996 - - 3,568 -
Other - - 54 -
</TABLE>
Highwood Notes
In December 1995, the Company issued promissory notes to Highwood Partners (the
"Highwood Notes") for an aggregate principal amount of $6.8 million due
December 5, 1996 which funds were advanced to Deepwater Drillers in exchange
for Promissory Notes (Note 5). The Highwood Notes are secured by a mortgage on
the Treasure Searcher, the Promissory Notes issued to the Company by Deepwater
Drillers, and approximately $3.0 million of PIK Notes. The Highwood Notes bear
interest at 12%, payable quarterly. Interest expense on the Highwood Notes for
the nine months ended March 31, 1996 totaled $0.3 million. Highwood Partners
also committed to loan the Company up to $2.0 million to fund additional
advances to Deepwater Drillers. Through March 31, 1996, DeepFlex has borrowed
an additional $0.8 million from Highwood Partners pursuant to this commitment
which funds were advanced to Deepwater Drillers in exchange for Promissory
Notes.
In connection with the issuance of the Highwood Notes, the Company granted
Highwood Partners warrants to acquire 372,973 shares of DeepTech common stock
at $5.00 per share until December 5, 1997 and agreed that if the Highwood Notes
are outstanding for longer than six months, the Company will issue warrants to
purchase an additional 100,000 shares of DeepTech common stock on the same
terms.
12
<PAGE> 13
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Term Loan
In February 1996, DeepFlex entered into a term loan agreement to borrow $12.0
million (the "Term Loan") from a syndicate of commercial lenders. The Term
Loan bears interest at 12% per annum, payable monthly, is due on July 15, 1997
and is secured by substantially all tangible and intangible assets currently
owned by DeepFlex, including the 10,000,000 Warrants purchased in connection
with the Offering and all PIK Notes issued by DeepFlex Partners, except the
$3.0 million of PIK Notes pledged to Highwood Partners. In addition, the
lenders required an assignment by DeepFlex of the first preferred ship mortgage
on the FPS Laffit Pincay which is securing the PIK Notes. In connection with
the Term Loan, DeepTech issued to the lenders warrants to purchase an aggregate
of up to 2,666,667 shares of DeepTech common stock at $4.50 per share. One of
the lenders, Citibank, N.A., required that Mr. Tatham guarantee $6.0 million of
the Term Loan. In exchange for Mr. Tatham agreeing to guarantee a portion of
the Term Loan, Mr. Tatham received from Citibank, N.A. warrants to purchase
333,333 shares of DeepTech common stock, twenty-five percent of the loan fees
payable by the Company to Citibank, N.A. and a quarterly fee equal to 50 basis
points per annum for the period the guaranty is outstanding. Proceeds from the
Term Loan were utilized to repay $3.5 million of the Short-Term Notes, as
hereinafter defined, for expenses incurred in connection with the Term Loan and
for working capital and general corporate requirements. DeepFlex is required
to make monthly principal payments equal to its excess cash flow as defined in
the Term Loan agreement beginning in October 1996. In addition, in the event
that DeepFlex does not purchase $6.0 million of Tatham Offshore's Convertible
Exchangeable Preferred Stock (Note 9) or make $6.0 million of other permitted
investments, as defined in the Term Loan agreement, no later than September 1,
1996, DeepFlex must prepay the Term Loan by the lesser of $2.0 million and the
difference between $6.0 million and the total amount of Tatham Offshore's
Convertible Exchangeable Preferred Stock acquired or other permitted
investments made. Interest expense and amortization of debt issue costs
related to the Term Loan for the nine months ended March 31, 1996 totaled $0.3
million.
Senior Notes
On March 21, 1994, DeepTech completed a public offering of $82.0 million of 12%
senior secured notes (the "Senior Notes") due December 15, 2000. Interest on
the Senior Notes is payable semi-annually in arrears on June 15 and December 15
of each year at a rate of 12% per annum. Interest and amortization of debt
issue costs and bond discounts related to the Senior Notes totaled $8.0 million
for the nine months ended March 31, 1996.
Wilrig AS promissory notes
In November 1994, the Company issued promissory notes to Wilrig AS ("Wilrig")
in the aggregate principal amount of $11.0 million due December 1997 to acquire
the semisubmersible drilling rig, the FPS Eddie Delahoussaye. Interest expense
related to this debt is payable quarterly at 10% per annum and totaled $0.8
million for the nine months ended March 31, 1996. In addition to the
acquisition of the FPS Eddie Delahoussaye, DeepTech obtained an option to
acquire the semisubmersible rig, the Treasure Searcher, from Wilrig. In
December 1995, the Company assigned its option to acquire the Treasure Searcher
to Deepwater Drillers, which then exercised the option.
Notes payable to affiliates
In December 1995 and January 1996, DeepTech paid $0.3 million in principal of
the notes payable to affiliates due on January 1, 1996. In January 1996, the
Company issued $10.1 million in unsecured notes payable (the "Short-Term
Notes") bearing interest at 18% per annum and due on February 15, 1996 to
affiliates in settlement of the remaining $6.7 million of principal and $3.4
million of interest which was due on January 1, 1996.
13
<PAGE> 14
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In February 1996, DeepTech refinanced $6.6 million of Short-Term Notes in the
form of subordinated unsecured notes issued by DeepTech to affiliates (the
"DeepTech Subordinated Notes") and guaranteed by DeepFlex on a subordinated
basis to the Term Loan. The DeepTech Subordinated Notes are due January 15,
1997 and bear interest at 15% per annum, payable quarterly. In connection with
this refinancing, these affiliates received warrants to purchase 1,475,555
shares of DeepTech common stock at $4.50 per share. Interest expense and
amortization of debt issue costs related to the DeepTech Subordinated Notes
totaled $0.2 million for the nine months ended March 31, 1996.
NOTE 7 - STOCKHOLDERS' EQUITY:
Under various agreements and arrangements, DeepTech has authorized the issuance
of stock warrants to noteholders, employees and an investment banking firm.
During the nine months ended March 31, 1996, DeepTech issued 825,125 shares of
common stock pursuant to the exercise of outstanding warrants and options. At
March 31, 1996, DeepTech had outstanding warrants and options to acquire
11,409,196 shares of common stock.
In connection with the original acquisition financing for the FPS Laffit
Pincay, which was sold to DeepFlex Partners in March 1995, the Company had
granted a 25% net profits interest in the economic profits from the sale,
lease, charter or other operation of the semisubmersible rig to the noteholder.
The estimated net present value of such consideration was recorded as debt
issue costs at the time of the acquisition. In late 1995, the parties agreed
to the full, final and complete resolution of all claims arising out of the
loan agreement. In exchange for releasing and forever discharging the Company
from any obligations under the loan agreement, the noteholder received $300,000
and 125,000 shares of DeepTech common stock valued as of November 30, 1995.
Final closing, settlement and payment was completed on February 5, 1996.
DeepFlex Partners issued additional PIK Notes to DeepFlex to reimburse its
settlement costs.
In December 1994, the Company agreed to charter a multi-purpose service vessel
for use in the Gulf from Alpha Marine Services (the "Edison Chouest Agreement")
for a two-year period commencing in May 1995 with an option to extend the
charter for up to an additional 13 years. In return, the Company agreed to pay
an initial base day rate of $6,980 as a charter fee for use of the vessel. The
Company executed an agreement with Alpha Marine Services effective October 1,
1995 to terminate the Edison Chouest Agreement in exchange for the issuance by
DeepTech of 100,000 shares of its common stock to Alpha Marine Services.
NOTE 8 - RELATED PARTY TRANSACTIONS:
DeepTech has entered into management agreements with each of its subsidiaries,
including Leviathan and Tatham Offshore, pursuant to which each affiliate is
charged an annual management fee in exchange for operational, financial,
accounting and administrative services. The management fee is intended to
reimburse DeepTech for the estimated costs of the services provided to each
affiliate. Leviathan, as general partner of the Partnership, is entitled to
reimbursement of all reasonable expenses incurred by it or its affiliates for
or on behalf of the Partnership including amounts payable by Leviathan to
DeepTech under a management agreement. The Partnership and Tatham Offshore
were each charged an annual management fee equal to 40% of DeepTech's
unreimbursed overhead through October 31, 1995. Effective November 1, 1995,
DeepTech redetermined the level of services provided to each of its
subsidiaries and amended the management agreements with Leviathan and Tatham
Offshore to provide for an annual management fee of 45.3% and 27.4%,
respectively, of DeepTech's overhead. In addition, in November 1995, Dover
began functioning as a stand alone business unit with its own management and
employees and therefore has terminated its management agreement with DeepTech.
During the nine months ended March 31, 1996, the Partnership and Tatham
Offshore were charged $5.3 million and $3.5 million, respectively, under their
respective management agreements. At March 31, 1996, the Partnership and
Tatham Offshore owed the Company $1.0 million and $4.0 million, respectively,
for expenses and general and administrative costs allocated under their
14
<PAGE> 15
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
respective management agreements. Under the terms of the Bridge Commitment,
the payment by Tatham Offshore of expenses and general and administrative costs
allocated under their management agreement of up to $4.0 million has been
deferred until July 15, 1996.
On August 14, 1995, November 17, 1995, and February 14, 1996, Leviathan
Holdings paid dividends of $0.6 million, $0.8 million and $4.2 million,
respectively, to its common stockholders, which included DeepTech as a result
of its 85% ownership interest in Leviathan Holdings.
Dover charged Tatham Offshore and the Partnership $0.4 million and $0.1
million, respectively, during the nine months ended March 31, 1996 for services
related to the evaluation of oil and gas properties.
Tatham Offshore has entered into transportation, processing and platform access
agreements with the Partnership pursuant to a Master Gas Dedication Agreement
in which Tatham Offshore has dedicated all production from its Garden Banks,
Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain adjoining
areas of mutual interest to the Partnership for transportation. In exchange,
the Partnership has agreed to install the pipeline facilities necessary to
transport production from the areas and certain related facilities and to
provide transportation services with respect to such production. For the year
ending December 31, 1996, Tatham Offshore was obligated to pay $8.1 million in
demand charge payments. In addition to the demand charges, Tatham Offshore is
obligated to pay commodity charges, based on the volume of oil and gas
transported or processed, under these agreements. Also, for the year ended
June 30, 1996, Tatham Offshore is obligated to pay $1.6 million in platform
access fees. Production problems at Ship Shoal Block 331 and reduced oil
production from the Ewing Bank 914 #2 well have affected Tatham Offshore's
ability to pay demand charges under these agreements.
Effective February 1, 1996, Tatham Offshore agreed to prepay all remaining
demand charge payments under the transportation agreements with the Partnership
covering Tatham Offshore's Ewing Bank and Ship Shoal properties, a total of
$17.8 million. Under these agreements, the Partnership was entitled to receive
demand charges of $8.1 million in 1996, $6.0 million in 1997, $3.0 million in
1998 and $0.7 million in 1999. Tatham Offshore remains obligated to pay the
commodity charges under these agreements as well as all platform access and
processing fees associated with the Viosca Knoll Block 817 lease. In exchange,
the Partnership received 7,500 shares of Tatham Offshore preferred stock (the
"Senior Preferred Stock"). Each share of the Senior Preferred Stock has a
liquidation preference of $1,000 per share, is senior in liquidation preference
to all other classes of Tatham Offshore stock and has a 9% cumulative dividend,
payable quarterly. At any time on or after September 30, 1998, the
Partnership has the option to exchange the remaining liquidation preference
amount and accrued but unpaid dividends for shares of Tatham Offshore's Series
A Preferred Stock, as hereinafter defined, with an equivalent market value.
Further, the Partnership has made an irrevocable offer to Tatham Offshore to
sell all or any portion of the Senior Preferred Stock to Tatham Offshore or its
designee at a price equal to $1,000 per share, plus interest thereon at 9% per
annum less the sum of any dividends paid thereon. In addition, the Partnership
will be entitled to an additional $7.5 million plus interest at the rate of 15%
per annum from revenue attributable to the Assigned Properties, as hereinafter
defined, prior to reconveying any interest in the Assigned Properties to Tatham
Offshore. Tatham Offshore also granted the Partnership the right to utilize
the Ship Shoal Block 331 platform and related facilities at a rental rate of
$1.00 per annum for such period as the platform is owned by Tatham Offshore and
located on the Ship Shoal Block 331, provided such use, at the time proposed,
does not interfere with lease operations or other activities of Tatham
Offshore. In addition, Tatham Offshore granted the Partnership a right of
first refusal relative to a sale of the platform.
Effective July 1, 1995, DeepTech established three deferred compensation
arrangements: (i) a mandatory arrangement for Mr. Tatham, (ii) a mandatory
arrangement for certain senior executives of DeepTech and (iii) an optional
arrangement for all other employees of DeepTech. Pursuant to the terms of each
arrangement, participants will defer all or a portion of their cash salary
until no later than July 1, 1996. During each month in the deferral
15
<PAGE> 16
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
period, each participant is entitled to receive options to purchase a number of
shares of either DeepTech or Tatham Offshore or Preference Units of the
Partnership equal to a percentage (ranging from 100% to 300% times their cash
salary) divided by the lesser of the closing price on June 30, 1995 (DeepTech -
$4.00, Tatham Offshore - $3.50 and the Partnership - $23.75) or the average
closing price for the applicable month. Options are exercisable only by
cancellation of the participant's cash salary. Each participant will earn
credits equal to a multiple, based on the option elected, of their deferred
cash salary. Any participant except Mr. Tatham can receive all or a portion of
their salary in cash if they do not elect to exercise any options. As of May
14, 1996, Mr. Tatham had exercised options to purchase 450,125 shares of
DeepTech common stock at approximately $4.00 per share in payment of salary due
for the nine months ended March 31, 1996. In addition, other senior executives
and employees have exercised options to acquire 85,006 shares of DeepTech
common stock at approximately $4.00 per share and 120,948 shares of Tatham
Offshore common stock through May 14, 1996 in connection with the mandatory
arrangement for certain senior executives of DeepTech. As a result of issuing
its common stock, Tatham Offshore received a $0.2 million credit against its
management fees payable to DeepTech. In November 1995, DeepTech terminated the
deferred compensation arrangement for all but three employees of DeepTech.
In June 1995, Mr. Tatham was awarded a $200,000 bonus, which the Company
allowed him to defer pursuant to the terms of the mandatory deferred
compensation arrangement discussed above. In August 1995, Mr. Tatham exercised
options to purchase 150,000 shares of DeepTech common stock at $4.00 per share
in payment of this bonus.
In connection with the sale of the FPS Eddie Delahoussaye, Mr. Tatham was
awarded a $200,000 bonus which he also deferred pursuant to the terms of the
mandatory deferred compensation arrangement. On September 25, 1995, Mr. Tatham
exercised options to purchase 150,000 shares of DeepTech common stock at $4.00
per share in settlement of this bonus.
In November 1994, DeepTech's Board of Directors (the "Board") authorized
DeepTech to agree to reimburse Mr. Tatham for costs he incurred in connection
with agreements he made with each of two outside directors pursuant to which
Mr. Tatham had granted each director options to purchase 150,000 shares of the
common stock of DeepTech held by Mr. Tatham at his cost with respect thereto.
These options were granted to the two outside directors in connection with
their appointment to the Board. In September 1995, the Compensation Committee
of the Board authorized DeepTech to grant Mr. Tatham options to purchase
300,000 shares of DeepTech's common stock at $5.00 per share, the estimated
fair market value at the date of grant, and to pay Mr. Tatham $705,000 which
was settled in part by canceling Mr. Tatham's obligation under an unsecured
demand note in the original principal amount of $600,000.
Tatham Offshore assigned to Flextrend Development, subject to certain
reversionary interests, a 75% working interest in its Phar Lap (Shallow)
(Viosca Knoll Block 817), a 50% working interest in its Spectacular Bid (Garden
Banks Block 72) and a 50% working interest in its Spend A Buck (Garden Banks
Block 117) properties (the "Assigned Properties") pursuant to a purchase and
sale agreement dated June 30, 1995 (the "Purchase and Sale Agreement").
Pursuant to the terms of the Purchase and Sale Agreement, Tatham Offshore
received $15.0 million at closing and an additional $15.0 million on August 15,
1995. Additionally, Flextrend Development has committed, subject to obtaining
financing, to pay all of its working interest share of costs associated with
the drilling and, if successful, completion of a minimum of five new wells, two
on Phar Lap (Shallow), two on Spectacular Bid and one on Spend A Buck, and the
completion and tie-back of one existing well located on Spend A Buck.
Flextrend Development is entitled to retain all of the revenues attributable to
such working interests until it has received net revenues equal to the Payout
Amount (as defined below), whereupon Tatham Offshore is entitled to receive a
reassignment of its working interests, subject to reduction and conditions as
discussed below. "Payout Amount" is defined as an amount equal to all costs
incurred by Flextrend
16
<PAGE> 17
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Development with respect to the working interest (including the $30.0 million
paid to Tatham Offshore) plus interest thereon at a rate of 15% per annum.
Tatham Offshore and the Partnership have agreed that in the event Tatham
Offshore furnishes the Partnership with a financing commitment from a lender
with a credit rating of BBB- or better covering 100% of the then outstanding
Payout Amount, the interest rate utilized to compute the Payout Amount shall be
adjusted from and after the date of such commitment to the interest rate
specified in such commitment, whether utilized or not. After having an
opportunity to review the initial production history from the properties,
Flextrend Development may exercise either of the following options: (i) to
permanently retain 50% of the assigned working interest in either the Phar Lap
(Shallow) property or the Spectacular Bid/Spend A Buck properties in exchange
for forgiving 25% of the then existing Payout Amount, or (ii) to permanently
retain 50% of the assigned working interest in all three properties in exchange
for forgiving 50% of the then existing Payout Amount. In the event Flextrend
Development elects to reduce the Payout Amount, it will become obligated to
fund any further development costs attributable to Tatham Offshore's portion of
the working interests, such costs to be added to the Payout Amount. Otherwise,
any further development costs will be funded by Flextrend Development on a
discretionary basis, such costs to be added to the Payout Amount. Further, in
the event Flextrend Development forgoes its right to permanently retain a
working interest in all or a portion of the Assigned Properties, it will be
entitled to recover from working interest revenues all future demand charges
payable for platform access and processing, in their inverse order of maturity,
prior to any reassignment to Tatham Offshore.
In September 1995, Tatham Offshore acquired an aggregate 25% working interest
in Phar Lap (Shallow) (Viosca Knoll Block 817) and an approximate 12.5% working
interest in the remainder of the Phar Lap Unit (the "Phar Lap Working
Interest") from two industry partners for a total of $16.0 million in
convertible production payments payable from 25% of the net cash flow from the
Phar Lap Working Interest so acquired. The unpaid portion of the production
payments is convertible into Tatham Offshore common stock at any time during
the first five years at $8.00 per share. Under certain circumstances, the
industry partners may require DeepTech to purchase the convertible production
payments for an amount equal to 50% of the unrecovered portion thereof. In
December 1995, Flextrend Development completed drilling operations and placed
on production its initial well on the Viosca Knoll 817 project. The cost of
the Viosca Knoll 817 #A-1 well totaled $6.7 million. In January 1996,
Flextrend Development completed drilling operations and placed on production
its Viosca Knoll 817 #A-2 well at an estimated cost of $3.3 million. In
February 1996, Flextrend Development encountered difficulty in completing the
drilling operations with respect to the Viosca Knoll 817 #A-3 well. Flextrend
Development had substantially completed the drilling of the high angle
production well bore when the drill pipe became lodged. Remedial efforts to
remove the drill pipe were unsuccessful and Flextrend Development elected to
temporarily abandon the well while preserving the unobstructed portion of the
well bore for future completion in the 2,400 foot zone. Flextrend Development
drilled a replacement well, the Viosca Knoll 817 #A-5 well, to access the Text.
X-1 reservoir in which Flextrend Development had encountered approximately 108
feet of net gas pay in the Viosca Knoll 817 #A-3 well. In March 1996,
Flextrend Development completed drilling operations and placed on production
the Viosca Knoll 817 #A-5 well at an estimated cost of $2.7 million.
Approximately $4.4 million of costs were incurred in drilling the Viosca Knoll
817 #A-3 well. The Viosca Knoll 817 project is owned 75% by Flextrend
Development and 25% by Tatham Offshore.
Tatham Offshore and the Partnership have agreed to sell all of their oil and
gas production to Offshore Marketing on a month to month basis. The agreements
with Tatham Offshore and the Partnership provide Offshore Marketing marketing
fees equal to 2% of the sales value of crude oil and condensate and $0.015 per
dekatherm of natural gas. During the nine months ended March 31, 1996,
substantially all of Offshore Marketing oil and gas purchases were derived from
purchases from Tatham Offshore and the Partnership.
17
<PAGE> 18
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In February 1996, DeepFlex Partners' FPS Laffit Pincay began providing contract
drilling services to Flextrend Development, which will extend until Flextrend
Development completes its drilling program at Garden Banks Block 117. Net
proceeds from the contract drilling services will be used to pay interest and
principal to DeepFlex on the PIK Notes.
In October 1995, Mr. Tatham executed an unsecured demand note in favor of
DeepTech for $250,000 bearing interest at 15% per annum. This demand note was
paid in full in January 1996.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
Certain of DeepTech's subsidiaries will need substantial additional capital in
order to implement their business strategies and to meet their debt service
requirements and other long-term obligations. There can be no assurances,
however, that DeepTech or these subsidiaries will be able to raise capital on
terms it deems acceptable, if at all. Further, DeepTech's Senior Note Indenture
contains covenants that among other things, require DeepTech to meet certain
collateral coverage tests and restrict the ability of DeepTech to incur
additional indebtedness, effect certain asset sales and engage in certain
mergers or similar transactions.
Tatham Offshore also has substantial future capital requirements associated
with the full development of its oil and gas properties. Realization of the
full potential of Tatham Offshore's properties is dependent upon its ability to
obtain sufficient additional equity capital or project financing.
Tatham Offshore has experienced liquidity problems resulting primarily from
substantial negative cash flow from operations. A portion of proceeds from the
sale of Warrants (discussed below) was used to repay outstanding indebtedness
under the Bridge Loan. The remaining proceeds are being used to fund a portion
of Tatham Offshore's anticipated cash flow shortfall and estimated capital
requirements. Effective February 1, 1996, Tatham Offshore prepaid certain of
its remaining demand charge obligations through the assignment of certain
assets pursuant to an agreement with the Partnership (Note 8). Tatham Offshore
continues to pursue other financing alternatives including the sale or farmout
of a selected portion of its remaining principal properties.
On November 28, 1995, a federal law was enacted that offers deepwater royalty
relief for certain federal leases located in 200 meters or greater of water
depth in the Gulf. It is projected interim regulations addressing
implementation of the new law will be published by May 28, 1996 and Tatham
Offshore intends to promptly apply for relief once these regulations are
promulgated. Tatham Offshore believes that many of its properties will qualify
for royalty relief and that if the requested royalty abatement is granted, the
resulting improved economics will be sufficient to obtain development financing
or an industry farmout arrangement.
In an effort to address its near-term capital needs and to provide a mechanism
to repay any outstanding indebtedness under the Bridge Loan, Tatham Offshore
filed a registration statement with the Commission (the "Offering"), which was
declared effective on December 26, 1995, relating to the granting to all
holders of Tatham Offshore's common stock, on the record date, December 26,
1995, rights (the "Rights") to purchase up to 25,120,948 warrants (the
"Warrants"). Each Right entitled the holder to subscribe to purchase one
Warrant at the purchase price of $.50 per Warrant. Each Warrant entitles the
holder thereof to purchase one share of (i) Series A 12% Convertible
Exchangeable Preferred Stock, which has a liquidation preference of $1.50 per
share ("Series A Preferred Stock") at any time prior to 5:00 p.m., New York
time on July 1, 1996, (ii) Series B 8% Convertible Exchangeable Preferred
Stock, which has a liquidation of $1.00 per share ("Series B Preferred Stock")
at any time prior to 5:00 p.m., New York time on October 1, 1996 or (iii)
Series C 4% Convertible Exchangeable Preferred Stock, which has a liquidation
preference of $0.50 per share ("Series C Preferred Stock" and together with the
Series A Preferred Stock and Series B Preferred Stock, the "Convertible
Exchangeable Preferred Stock") at any time prior to 5:00 p.m., New York time on
January 1, 1997 at the purchase price of $1.00 per share. Each Warrant
remaining
18
<PAGE> 19
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
unexercised at 5:00 p.m., New York time on January 1, 1997 shall be
automatically converted, without any action on the part of the holder thereof,
into one share of Mandatory Redeemable Preferred Stock, which shall have a
liquidation preference of $0.50 per share and shall be mandatorily redeemable
by Tatham Offshore under certain circumstances. At any time from July 1, 1996
until December 31, 1998, each share of Convertible Exchangeable Preferred Stock
may be exchanged for four warrants (the "Exchange Warrants" and together with
the Rights, the Warrants, the Convertible Exchangeable Preferred Stock and the
Mandatory Redeemable Preferred Stock, the "Securities") entitling the holder
thereof to purchase one share of Tatham Offshore common stock at a price equal
to the lowest average closing price of Tatham Offshore's common stock on the
Nasdaq National Market for five consecutive days from and after the record
date, December 26, 1995, and through and including June 30, 1996 (the "Trading
Reference Price"). The Exchange Warrants will expire July 1, 1999.
Alternatively, at any time after July 1, 1996, the holder of any shares of
Convertible Exchangeable Preferred Stock will have the right, at the holder's
option, to convert the liquidation value of such stock and accrued and unpaid
dividends into shares of Tatham Offshore common stock at the Trading Reference
Price. On and after July 1, 1997, the Convertible Exchangeable Preferred Stock
will be redeemable at the option of Tatham Offshore. As of January 31, 1996
(the expiration date of the Rights), the Offering was over-subscribed. Tatham
Offshore issued 25,120,948 Warrants and received $12.6 million in gross
proceeds (approximately $11.3 million, net) pursuant to the exercise of Rights.
On October 16, 1995, Tatham Offshore received notification from the Nasdaq
National Market that because Tatham Offshore had reported losses in the past
three fiscal years and had a net tangible asset value of less than $4.0 million
as of June 30, 1995, Tatham Offshore no longer met the listing requirements for
continued inclusion on the Nasdaq National Market. On December 20, 1995 and
March 1, 1996, the Nasdaq National Market granted Tatham Offshore exceptions to
the net tangible assets requirement. The exceptions extended until March 31,
1996 and were conditioned upon, among other things, the completion of the
Offering on or before January 31, 1996 and Tatham Offshore's satisfaction of
all requirements necessary for continued listing, including the net tangible
assets requirement, on or before March 31, 1996. Tatham Offshore complied with
the net tangible assets requirement and other conditions which has allowed
Tatham Offshore to continue its listing on the Nasdaq National Market.
In February 1996, TOJ entered into agreements to acquire a minority equity
interest in Gas Participacges Ltda. ("GASPART"). GASPART in turn owns a
minority equity interest (approximately 41.5%) in seven local natural gas
distribution companies in Brazil. The remaining equity interest in each local
distribution company is owned by Petrobras, the Brazilian state-owned oil
company and the state government for the state in which its operations are
conducted. TOJ's interest in GASPART will be financed on a non-recourse basis
under an arrangement by which title to TOJ's shares in GASPART will be
transferred to the lender subject to an option to reacquire the shares at a
price equal to the original cost thereof plus interest thereon at the London
Interbank Offer Rate ("LIBOR"). The option will be exercisable at any time
until the expiration of 375 days from the closing date. All approvals and
consents for these transactions have been obtained and applicable rights of
first refusal have expired. The consummation of these transactions remains
subject to the negotiation, preparation and execution of final closing
documents with respect to TOJ's participation in the transaction.
Flextrend Development has committed, subject to obtaining financing, to pay all
of its working interest share of the costs associated with the drilling and, if
successful, completion of a minimum of five new wells on the Assigned
Properties and the completion and tie-back of one existing well. Flextrend
Development anticipates funding future development costs with borrowings under
the Partnership's credit facility and operating cash flow.
In the ordinary course of business, DeepTech and its operating subsidiaries are
subject to various laws and regulations. In the opinion of management,
compliance with existing laws and regulations will not materially affect the
financial position or the results of operations of the Company. Various legal
actions which have arisen in the ordinary course of business are pending with
respect to the assets of the Company. The Company is also involved
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DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
in certain legal and regulatory proceedings. It is the opinion of management
that the disposition of the Company's pending legal proceedings will not
individually, or in the aggregate, have a material adverse effect on the
Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Part I of the
quarterly report.
GENERAL
OVERVIEW. DeepTech is a diversified energy company engaged, through its
operating subsidiaries (the "Subsidiaries"), in offshore contract drilling
services and the acquisition, development, production, processing,
transportation and marketing of, and the exploration for, oil and gas primarily
located offshore the United States in the Gulf, with principal focus in the
Flextrend and Deepwater areas. As a holding company whose material assets
consist primarily of stock of the Subsidiaries, DeepTech is, and expects to
continue to be, dependent upon management fees, dividends funded by
distributions from the Partnership and interest on and repayment of principal
under borrowings by the Subsidiaries to pay its operating expenses, service its
debt and satisfy its other obligations.
The following discussion is intended to assist in the understanding of the
Company's financial position and results of operations for the three and nine
months ended March 31, 1996.
LEVIATHAN AND THE PARTNERSHIP. Leviathan serves as the general partner of the
Partnership and currently owns a 27.3% effective interest in the Partnership
(23.2% effective interest net to DeepTech's interest). The Partnership's
operations consist primarily of the gathering and transportation of natural gas
and crude oil through its pipeline systems located in the Gulf. The
Partnership's assets include interests in (i) nine operating natural gas
pipeline systems (the "Pipelines"), (ii) a crude oil pipeline system (the
"Poseidon Oil Pipeline"), (iii) five strategically located multi-purpose
platforms, (iv) three oil and gas properties, which contain proved reserves,
(v) an overriding royalty interest and (vi) a dehydration facility.
The Pipelines include 981 miles of natural gas pipelines with an approximate
capacity of 5.6 billion cubic feet ("Bcf") of gas per day, strategically
located to serve five distinct producing areas offshore Louisiana and eastern
Texas in the Gulf. The Partnership's interest in the Pipelines is owned
through a 100% interest in each of Ewing Bank Gathering Company, L.L.C., a
Delaware limited liability company ("Ewing Bank"), Louisiana Offshore Gathering
Systems, L.L.C., a Delaware limited liability company ("LOGS"), Green Canyon
Pipe Line Company, L.L.C., a Delaware limited liability company ("Green
Canyon"), Tarpon Transmission Company, a Texas corporation ("Tarpon") and,
indirectly through LOGS and Manta Ray Pipeline Holding Company, L.L.C. ("Manta
Ray"), the Manta Ray System; a 50% partnership interest in each of Stingray
Pipeline Company, a Louisiana general partnership ("Stingray") and Viosca Knoll
Gathering Company, a Delaware general partnership ("Viosca Knoll"); a 40%
partnership interest in High Island Offshore System, a Delaware general
partnership ("HIOS"); and a 33 1/3% partnership interest in U-T Offshore
System, a Delaware general partnership ("UTOS").
The Partnership also owns a 100% interest in Poseidon Pipeline Company, L.L.C.,
a Delaware limited liability company ("Poseidon LLC"), which owns a 50%
interest in Poseidon Oil Pipeline Company, L.L.C., a Delaware limited liability
company ("POPCO"). POPCO was formed to construct, own and operate the Poseidon
Oil Pipeline. As designed, the Poseidon Oil Pipeline will consist of
approximately 200 miles of pipeline with a maximum capacity of 400,000 barrels
per day of sour crude oil. Phase I of the system consists of approximately 117
miles of pipeline which extends from a platform in Garden Banks Block 72 in an
easterly direction to a platform in Ship Shoal Block 332. Phase I of the system
was placed in service in April 1996 with a maximum hydrolic capacity of 200,000
barrels of oil per day. Phase II of the pipeline, which is scheduled to be
constructed later this year, will consist of approximately 83 miles of pipeline
extending from the platform in Ship Shoal Block 332 in a northerly direction to
a terminus located in southern Louisiana.
The Partnership owns interests in five strategically located multi-purpose
platforms in the Gulf that have processing capabilities which complement the
Partnership's pipeline operations. The multi-purpose platforms serve as
junctions in the pipeline grid and enable the Partnership to perform
maintenance functions on its pipelines. In addition, the
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multi-purpose platforms serve as landing sites for deeper water production and
as sites for the location of gas compression facilities and drilling
operations.
On June 30, 1995, Flextrend Development acquired a 75% working interest in
Viosca Knoll Block 817, a 50% working interest in Garden Banks Block 72 and a
50% working interest in Garden Banks Block 117, subject to certain reversionary
rights, from Tatham Offshore. Each of the above leases is operated by
Flextrend Development. The Viosca Knoll Block 817 lease is currently producing
a total of approximately 90 million cubic feet ("MMcf") of gas per day from
three wells when platform drilling activities permit. The well deliverability
from the Viosca Knoll Block 817 project is in excess of 90 MMcf per day but is
limited to such amount by the production equipment currently located on the
production platform. The Viosca Knoll 817 project is owned 75% by Flextrend
Development and 25% by Tatham Offshore. In addition, the Partnership has
drilled and is in the process of placing on production two wells on the Garden
Banks Block 72 lease and is in the process of completing and placing on
production an existing well on Garden Banks Block 117.
The Partnership also owns a 50% interest in West Cameron Dehydration Company,
L.L.C., a Delaware limited liability company ("West Cameron Dehy"), which owns
a dehydration facility located at the terminus of the Stingray pipeline,
onshore Louisiana.
TATHAM OFFSHORE. Tatham Offshore's principal producing well, the Ewing Bank
914 #2 well, commenced production in late August 1993. Production from the
Ewing Bank 914 #2 well was either impaired or shut-in during the first two
quarters of fiscal 1995 as a result of a paraffin build-up problem in the flow
lines that connect the subsea wellhead to a shallow water platform. The flow
lines were replaced and production resumed in December 1994. During the nine
months ended March 31, 1996, Tatham Offshore conducted remedial operations to
dislodge a pigging device from the flow lines at its Ewing Bank 914 #2 well and
installed chemical injection lines at an aggregate estimated cost of $3.2
million. In the month of January 1996, the Ewing Bank 914 #2 well produced an
average of approximately 2,300 barrels of oil and 4.3 MMcf of gas per day. In
February 1996, the Ewing Bank 914 #2 well started to produce some water
(increasing to approximately 48% of total production by May 10, 1996) resulting
in a reduction of the hydrocarbon production. During the three months ended
March 31, 1996, the Ewing Bank 914 #2 well produced an average of approximately
1,600 barrels of oil and 3.3 MMcf of gas per day. The well was producing at a
rate of approximately 1,240 barrels of oil and 2.7 MMcf of gas per day on May
10, 1996. Tatham Offshore estimates that is has produced approximately 67% of
the proved reserves originally estimated for the current producing zone, the
PA-4 reservoir, by Ryder Scott & Company in their report as of June 30, 1995.
Given the current state of operations, it is difficult to predict future
production rates from the well. Tatham Offshore's current revenue is
dependent, in large part, on production from this well.
Tatham Offshore's Silent Beauty field at West Delta Block 35, in which Tatham
Offshore owns a 38% working interest, commenced production in July 1993 and
currently contains two producing wells. During the nine months ended March 31,
1996, Tatham Offshore's interest in production from these wells totaled 292
MMcf of gas and 7,745 barrels of oil.
In July 1994, Tatham Offshore commenced production from its Genuine Risk
project located at Ship Shoal Block 331. Although Tatham Offshore has
completed three wells at Genuine Risk, completion and production problems have
caused each of these wells to be shut-in.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
Oil and gas sales totaled $18.2 million for the three months ended March 31,
1996 as compared with $6.9 million for the three months ended March 31, 1995.
During the three months ended March 31, 1996 and 1995, the Company derived its
oil and gas revenue by marketing primarily Tatham Offshore, LOGS and
third-party producers' gas and oil production. In December 1995, the Company
began marketing Flextrend Development's gas production. During the three months
ended March 31, 1996, production purchased from affiliates provided Offshore
Marketing
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marketing fees equal to 2% of the sales value of crude oil and condensate and
$0.015 per dekatherm of natural gas. During the three months ended March 31,
1996, the Company sold 5,488 MMcf of gas and 124,815 barrels of oil at average
prices of $2.86 per thousand cubic feet ("Mcf") and $19.99 per barrel,
respectively. During the same period in 1995, the Company sold 2,070 MMcf of
gas and 182,000 barrels of oil at average prices of $1.76 per Mcf and $17.94
per barrel, respectively.
Equity in earnings totaled $5.9 million for the three months ended March 31,
1996 as compared with $1.1 million for the same period in 1995. Equity in
earnings for the three months ended March 31, 1996 included equity earnings of
the Partnership and Tatham Offshore of $3.0 million and $2.9 million,
respectively. Equity in earnings for the three months ended March 31, 1995
included $1.1 million of equity earnings from the Partnership. During the
three months ended March 31, 1996, the Partnership had total revenue of $19.6
million as compared with total Partnership revenue of $8.5 million for the
three months ended March 31, 1995. For the three months ended March 31, 1996,
the total throughput, net to the combined interest of Leviathan and the
Partnership in the Pipelines, was 247.3 Bcf as compared with 114.5 Bcf for the
three months ended March 31, 1995. During the three months ended March 31,
1996, Tatham Offshore had total operating revenue of $5.9 million and net
nonoperating income of $9.1 million which was primarily related to the sale of
the Assigned Properties to Flextrend Development. During the three months
ended March 31, 1996, Tatham Offshore sold 1,285 MMcf of gas and 110,116
barrels of oil at average prices of $2.92 per Mcf and $19.57 per barrel,
respectively. Tatham Offshore's depreciation and operating expenses for the
three months ended March 31, 1996 totaled $4.4 million.
Other revenue for the three months ended March 31, 1995 totaled $0.2 million
and was primarily attributable to revenue in respect of professional services
rendered by Dover to Tatham Offshore and the Partnership. Commencing November
1, 1995, DeepTech accounts for its investment in Dover using the equity method
of accounting.
Oil and gas purchases for the three months ended March 31, 1996 totaled $18.0
million as compared with $6.3 million for the three months ended March 31,
1995. The activity for both periods represented the cost of oil and gas
purchased from Tatham Offshore, LOGS and third parties for resale. The
activity for the three months ended March 31, 1996 also included the cost of
gas production purchased from Flextrend Development. During the three months
ended March 31, 1996, the Company purchased 5,485 MMcf of gas and 124,815
barrels of oil at average prices of $2.84 per Mcf and $19.59 per barrel,
respectively. During the three months ended March 31, 1995, the Company
purchased 2,070 MMcf of gas and 182,000 barrels of oil at average prices of
$1.60 per Mcf and $16.51 per barrel, respectively.
Losses of equity investees for the three months ended March 31, 1996 of $0.2
million related to equity losses of DeepFlex Partners whereas the losses of
equity investees for the three months ended March 31, 1995 related to equity
losses of Tatham Offshore and totaled $3.3 million. During the three months
ended March 31, 1996, DeepFlex Partners had total revenue of $1.6 million and
total operating, depreciation and other expenses of $2.0 million. The Company
owns an effective 50% interest in DeepFlex Partners. For the three months
ended March 31, 1995, Tatham Offshore had total revenue of $2.7 million and
sold 447 MMcf of gas and 123,815 barrels of oil at average prices of $1.57 per
Mcf and $16.48 per barrel, respectively. Tatham Offshore's depreciation,
operating and net interest expenses totaled $11.0 million for the three months
ended March 31, 1995.
Depreciation and amortization totaled $43,000 for the three months ended March
31, 1996 as compared with $62,000 for the three months ended March 31, 1995.
Depreciation for both periods related to the Company's vehicles and office
furniture and equipment.
General and administrative expenses for the three months ended March 31, 1996
totaled $0.4 million as compared with $1.1 million for the three months ended
March 31, 1995. The decrease in general and administrative expenses was
primarily attributable to a $0.8 million charge to the Partnership to
compensate the Company for additional taxable income allocated to Leviathan.
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Operating income for the three months ended March 31, 1996 totaled $5.4 million
as compared with an operating loss of $2.6 million for the three months ended
March 31, 1995. The change in operating income (loss) primarily represented
the net effect of the items discussed above.
Interest and other income for the three months ended March 31, 1996 totaled
$3.5 million as compared with $1.8 million for the three months ended March 31,
1995. Interest and other income for the three months ended March 31, 1996
included interest income derived from (i) the Subordinated Notes of $1.8
million, (ii) the PIK Notes of $1.1 million, (iii) the Promissory Notes of $0.2
million, (iv) the Bridge Loan of $0.1 million and (iv) other of $0.3 million.
Interest and other income for the three months ended March 31, 1995 included
interest income derived from the Subordinated Notes of $1.7 million and
interest earned on available cash of $0.1 million.
Interest and other financing costs for the three months ended March 31, 1996
totaled $3.9 million as compared with $2.3 million for the three months ended
March 31, 1995. Interest and other financing costs for the three months ended
March 31, 1996 included (i) interest and amortization of debt issue costs and
discounts related to the Senior Notes of $2.7 million, (ii) interest and
amortization of debt issue costs related to the Term Loan and the DeepTech
Subordinated Notes of $0.5 million, (iii) interest related to the Highwood
Notes and Wilrig Notes of $0.5 million and (iv) interest expense related to
other debt of $0.2 million. Interest and other financing costs for the three
months ended March 31, 1995 included interest and amortization of debt issue
costs and discounts related to the Senior Notes of $2.7 million and $0.6
million of interest expense related to other debt offset by capitalized
interest on construction and refurbishment activities related to the FPS Laffit
Pincay of $1.0 million.
During the three months ended March 31, 1996, the Company recorded income tax
expense of $1.8 million, reflecting an effective tax rate of approximately 34%.
During the three months ended March 31, 1995, the Company recorded an income
tax benefit of $1.1 million.
After taking into account a $0.4 million loss resulting from minority interests
in consolidated subsidiaries, the Company's net income for the three months
ended March 31, 1996 totaled $3.1 million. For the three months ended March
31, 1995, the Company reported a net loss of $2.0 million after taking into
account a $0.1 million loss resulting from minority interests in consolidated
subsidiaries.
Nine Months Ended March 31, 1996 Compared with Nine Months Ended March 31, 1995
Oil and gas sales totaled $27.0 million for the nine months ended March 31,
1996 as compared with $13.9 million for the nine months ended March 31, 1995.
During the nine months ended March 31, 1996 and 1995, the Company derived its
oil and gas revenue by marketing primarily Tatham Offshore, LOGS and
third-party producers' gas and oil production. In December 1995, the Company
began marketing Flextrend Development's gas production. Tatham Offshore sold
production from its producing leases to Offshore Marketing through October 31,
1995 at contractually agreed upon posted prices for resale to third party
purchasers. In November 1995, Tatham Offshore renegotiated its agreement with
Offshore Marketing to provide Offshore Marketing marketing fees equal to 2% of
the sales value of crude oil and condensate and $0.015 per dekatherm of natural
gas. During the nine months ended March 31, 1996, the Company sold 7,300 MMcf
of gas and 408,550 barrels of oil at average prices of $2.64 per Mcf and $18.85
per barrel, respectively. During the same period in 1995, the Company sold
5,348 MMcf of gas and 263,000 barrels of oil at average prices of $1.72 per Mcf
and $17.89 per barrel, respectively.
Equity in earnings totaled $10.0 million for the nine months ended March 31,
1996 as compared with $4.1 million for the same period in 1995. Equity in
earnings for the nine months ended March 31, 1996 included equity earnings of
the Partnership, DeepFlex Partners and Tatham Offshore of $6.6 million, $1.9
million and $1.5 million, respectively, whereas, equity in earnings for the
same period in 1995 included equity earnings of the Partnership of $4.1
million. During the nine months ended March 31, 1996, the Partnership had
total revenue of $42.4 million as compared with total Partnership revenue of
$26.0 million for the nine months ended March 31, 1995. For the nine months
ended March 31, 1996, the total throughput, net to the combined interest of
Leviathan and the Partnership in the Pipelines, was 673.3 Bcf as compared with
323.3 Bcf for the nine months ended March 31, 1995. During the
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nine months ended March 31, 1996, DeepFlex Partners, which was formed in March
1995, recorded net income of $3.9 million which included a gain on the sale of
the FPS Eddie Delahoussaye of $5.1 million. During the nine months ended March
31, 1996, Tatham Offshore had total operating revenue of $11.1 million and net
nonoperating income of $16.4 million which was primarily related to the sale of
the Assigned Properties to Flextrend Development. During the nine months ended
March 31, 1996, Tatham Offshore sold 1,999 MMcf of gas and 331,548 barrels of
oil at average prices of $2.58 per Mcf and $17.97 per barrel, respectively.
Tatham Offshore's depreciation and operating expenses for the nine months ended
March 31, 1996 totaled $17.7 million.
Other revenue for the nine months ended March 31, 1996 totaled $0.5 million as
compared with $0.6 million for the nine months ended March 31, 1995 and was
primarily attributable to revenue in respect of professional services rendered
by Dover to Tatham Offshore and the Partnership. Commencing November 1, 1995,
DeepTech accounts for its investment in Dover using the equity method of
accounting.
Oil and gas purchases for the nine months ended March 31, 1996 totaled $26.3
million as compared with $12.9 million for the nine months ended March 31,
1995. The activity for both periods represented the cost of oil and gas
purchased from Tatham Offshore, LOGS and third parties for resale. The
activity for the four months from December 1995 to March 1996 also included the
cost of gas production purchased from Flextrend Development. During the nine
months ended March 31, 1996, the Company purchased 7,309 MMcf of gas and
408,550 barrels of oil at average prices of $2.59 per Mcf and $17.90 per
barrel, respectively. During the nine months ended March 31, 1995, the Company
purchased 5,348 MMcf of gas and 263,000 barrels of oil at average prices of
$1.60 per Mcf and $16.53 per barrel, respectively.
Operating expenses for the nine months ended March 31, 1996 totaled $0.5
million and included costs to operate the Company's multi-purpose service
vessel and to terminate the related charter agreement effective October 1,
1995. The Company began chartering the vessel in May 1995 at an initial base
rate of $6,980 per day.
Losses of equity investees for the nine months ended March 31, 1995 totaled
$9.9 million and related to equity losses of Tatham Offshore. During the nine
months ended March 31, 1995, Tatham Offshore had total revenue of $4.9 million
and sold 1,128 MMcf of gas and 185,300 barrels of oil at average prices of
$1.64 per Mcf and $16.20 per barrel, respectively. During the nine months
ended March 31, 1995, Tatham Offshore had depreciation and operating expenses
of $25.3 million and other nonoperating expenses of $4.5 million.
Depreciation and amortization totaled $0.2 million for the nine months ended
March 31, 1996 as compared with $0.3 million for the nine months ended March
31, 1995. Depreciation for both periods related to the Company's vehicles and
office furniture and equipment.
General and administrative expenses for the nine months ended March 31, 1996
totaled $2.9 million as compared with $2.5 million for the nine months ended
March 31, 1995. The increase in general and administrative expenses was
attributable to increased operating activities of DeepTech and its consolidated
Subsidiaries as well as expenses incurred associated with DeepTech's deferred
compensation arrangements and a bonus awarded related to the sale of the FPS
Eddie Delahoussaye. This increase in general and administrative expenses is
partially offset by a $0.8 million charge to the Partnership to compensate the
Company for additional taxable income allocated to Leviathan as a result of the
secondary offering of Partnership Preference Units, as permitted by an
amendment to the management fee agreement effective July 1, 1994. Pursuant to
management fee agreements with each of Tatham Offshore and Leviathan, DeepTech
is reimbursed for a portion of its general and administrative expenses. Prior
to November 1, 1995, Leviathan and Tatham Offshore were each charged 40% of
DeepTech's overhead expenses under their respective management agreements. The
remaining 20% of DeepTech's overhead costs were allocated to consolidated
Subsidiaries. Effective November 1, 1995, as a result of a reallocation of the
level of services DeepTech provides to its Subsidiaries, DeepTech amended its
existing management agreements with its Subsidiaries and began charging
Leviathan and Tatham Offshore 45.3% and 27.4%, respectively, of overhead costs.
The remaining 27.3% of DeepTech's overhead expenses are now allocated to
consolidated Subsidiaries. For the nine months ended March 31, 1996, Leviathan
and Tatham Offshore were charged $5.3 million and $3.5 million,
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respectively, by DeepTech pursuant to their management agreements. For the
nine months ended March 31, 1995, Leviathan and Tatham Offshore were each
charged $3.5 million by DeepTech.
Operating income for the nine months ended March 31, 1996 totaled $7.5 million
as compared with an operating loss of $7.3 million for the nine months ended
March 31, 1995. The change in operating income represented the net effect of
the items discussed above.
During the nine months ended March 31, 1996, the Company recognized in
aggregate a $0.9 million gain in connection with the sale of the FPS Eddie
Delahoussaye and FPS Laffit Pincay to DeepFlex Partners.
Interest and other income for the nine months ended March 31, 1996 totaled
$11.1 million as compared with $5.9 million
for the nine months ended March 31, 1995. Interest and other income for the
nine months ended March 31, 1996 included interest income derived from (i) the
Subordinated Notes of $5.3 million, (ii) the PIK Notes of $4.7 million, (iii)
the Promissory Notes of $0.3 million, (iv) the Bridge Loan of $0.2 million, (v)
available cash of $0.2_million and (vi) other affiliate debt of $0.4 million.
Interest and other income for the nine months ended March 31, 1995 included
interest income derived from the Subordinated Notes of $5.3 million and
available cash of $0.3 million and other income of $0.3 million.
Interest and other financing costs for the nine months ended March 31, 1996
totaled $9.6 million as compared with $6.7 million for the nine months ended
March 31, 1995. Interest and other financing costs for the nine months ended
March 31, 1996 included (i) interest and amortization of debt issue costs and
discounts related to the Senior Notes of $8.0 million, (ii) interest and
amortization of debt issue costs related to the Term Loan and the DeepTech
Subordinated Notes of $0.5 million and (iii) interest related to the Highwood
Notes and Wilrig Notes of $1.1 million. Interest and other financing costs for
the nine months ended March 31, 1995 included interest and amortization of debt
issue costs and discounts related to the Senior Notes of $8.0 million and $1.0
million of interest expense related to other debt offset by capitalized
interest on construction and refurbishment activities related to the FPS Laffit
Pincay of $2.3 million.
During the nine months ended March 31, 1996, the Company recorded income tax
expense of $3.4 million, reflecting an effective tax rate of approximately 34%.
During the nine months ended March 31, 1995, the Company recorded an income tax
benefit of $3.1 million.
After taking into account a $0.7 million loss resulting from minority interests
in consolidated subsidiaries, the Company's net income for the nine months
ended March 31, 1996 totaled $5.9 million. For the nine months ended March 31,
1995, the Company reported a net loss of $5.3 million after taking into account
a $0.3 million loss resulting from minority interests in consolidated
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
DEEPTECH INTERNATIONAL INC.
Sources of cash. As a holding company whose material assets consist primarily
of stock of the Subsidiaries, DeepTech is, and expects to continue to be,
dependent upon management fees, dividends funded by distributions from the
Partnership and interest on and repayment of principal under borrowings by the
Subsidiaries (principally the Subordinated Notes issued by Tatham Offshore and
the PIK Notes issued by DeepFlex Partners) to pay its operating expenses,
service its debt and satisfy its other obligations.
DeepTech has entered into management agreements with each of the Subsidiaries.
The management fees charged to the Subsidiaries are intended to approximate the
amount of resources allocated by DeepTech to each such Subsidiary. Each of the
management agreements has an initial term expiring on June 30, 1997, and may be
terminated thereafter upon 90 days' notice by either party thereto.
Historically, management fees payable by each
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Subsidiary during its development stage have been funded through advances by
DeepTech to each such Subsidiary, thereby reducing cash available to DeepTech.
With respect to the management agreements with Leviathan, Tatham Offshore,
DeepFlex, Offshore Marketing and Dover, DeepTech charged each such Subsidiary,
prior to November 1, 1995, an annual management fee of $2.0 million, $2.0
million, $375,000, $375,000 and $250,000, respectively, plus 40%, 40%, 7.5%,
7.5% and 5%, respectively, of DeepTech's unreimbursed selling, general and
administrative expenses in exchange for operational, financial, accounting and
administrative services. As a result of a reallocation of the level of services
provided to each of DeepTech's Subsidiaries, DeepTech amended its existing
management agreements with each of its Subsidiaries, effective November 1,
1995, to reflect the revised level of management fees payable by each
Subsidiary. Effective November 1, 1995, DeepTech charges Leviathan, Tatham
Offshore, DeepFlex and Offshore Marketing 45.3%, 27.4%, 18.8% and 8.5%,
respectively, of DeepTech's overhead expenses. Also, effective November 1,
1995, Dover began functioning as a stand alone business unit with its own
management and employees and therefore has terminated its management agreement
with DeepTech. For the nine months ended March 31, 1996, Leviathan and
Offshore Marketing made their required cash payments to DeepTech for their
management fees. Leviathan was reimbursed by the Partnership for management
fees relating to the conduct and business of the Partnership. Under the Bridge
Commitment to Tatham Offshore, DeepTech has agreed to defer payment until July
15, 1996 of up to $4.0 million in management fees payable by Tatham Offshore.
DeepFlex, which is currently charged 18.8% of DeepTech's general and
administrative overhead costs, did not make payments of management fees to
DeepTech during such period.
In addition to the management fees, DeepTech receives, through dividends from
Leviathan Holdings, an 85%-owned subsidiary of DeepTech, its proportionate
share of distributions paid by the Partnership to Leviathan in respect of
Leviathan's general partner interest, limited partner interest evidenced by
Common Units and interest in certain subsidiaries of the Partnership.
Commencing in the third calendar quarter of 1993, the Partnership increased the
quarterly distribution to $0.60 per Preference Unit and Common Unit from $0.55
per Preference Unit and Common Unit. Beginning with the quarter ending March
31, 1996, the Partnership increased the quarterly distribution to $0.65 per
Unit. As a result, DeepTech's proportionate share of the aggregate
distributions paid to Leviathan for the fiscal year ended June 30, 1996 is
expected to be approximately $7.1 million. Leviathan is also required to
reimburse DeepTech for certain tax liabilities DeepTech incurs in connection
with certain matters relating to the operations of the Partnership.
DeepTech currently holds Subordinated Notes with an aggregate principal amount
of $60.0 million, representing all of Tatham Offshore's Subordinated Notes
outstanding. The Subordinated Notes bear interest from the date of issuance at
a rate of 11 3/4% per annum, payable quarterly in arrears (an aggregate of
approximately $7.1 million per year). For the nine months ended March 31,
1996, interest income under the Subordinated Notes totaled $5.3 million which
Tatham Offshore paid with funds advanced under the Bridge Loan and/or proceeds
from the sale of Warrants. Tatham Offshore is currently experiencing liquidity
problems which could have a material adverse effect on its ability to pay its
obligations to DeepTech. It is anticipated that future payments of interest on
the Subordinated Notes will be made from cash on hand and proceeds obtained
from the sale of the Convertible Exchangeable Preferred Stock. The principal
amount of the Subordinated Notes is payable in seven equal annual installments
commencing August 1, 1999. At any time after August 1, 1999, Tatham Offshore
may redeem in full, or may from time to time redeem in part, the Subordinated
Notes, without penalty or premium, upon 90 days' prior written notice to the
holders thereof. The holders of the Subordinated Notes have the option, at any
time and from time to time, to convert all or any portion of the principal and
accrued interest outstanding thereunder into common stock of Tatham Offshore at
$10.00 per share, subject to adjustment under certain circumstances. Effective
July 1, 1997, the interest rate on the Subordinated Notes will increase from 11
3/4% to 13% per annum pursuant to the terms of the Bridge Commitment.
In September 1995, the Company sold the FPS Eddie Delahoussaye (on behalf of
DeepFlex Partners) to Reading & Bates (U.K.) Limited for $18.0 million which
was comprised of (i) $3.0 million, (ii) 1,232,057 shares of Reading & Bates
common stock and (iii) the forgiveness of $0.3 million of trade receivables due
Reading & Bates from a
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wholly-owned subsidiary of DeepTech. DeepFlex Partners transferred
approximately $17.8 million net sales proceeds (including the Reading & Bates
common stock) to DeepFlex as repayment of a portion of the PIK Notes issued by
DeepFlex Partners. The Reading & Bates common stock was subsequently sold for
$14.7 million.
In February 1996, DeepFlex entered into the Term Loan agreement to borrow $12.0
million from a syndicate of commercial lenders. The Term Loan bears interest
at 12% per annum, payable monthly, is due on July 15, 1997 and is secured by
substantially all tangible and intangible assets currently owned by DeepFlex,
including the 10,000,000 Warrants purchased in connection with the Offering and
all PIK Notes issued by DeepFlex Partners, except the $3.0 million of PIK Notes
pledged to Highwood Partners. In addition, the lenders required an assignment
by DeepFlex of the first preferred ship mortgage on the FPS Laffit Pincay which
is securing the PIK Notes. In connection with the Term Loan, DeepTech issued
to the lenders warrants to purchase an aggregate of up to 2,666,667 shares of
DeepTech common stock at $4.50 per share. One of the lenders, Citibank, N.A.,
required that Mr. Tatham guarantee $6.0 million of the Term Loan. In exchange
for Mr. Tatham agreeing to guarantee a portion of the Term Loan, Mr. Tatham
received from Citibank, N.A. warrants to purchase 333,333 shares of DeepTech
common stock, twenty-five percent of the loan fees payable by the Company to
Citibank, N.A. and a quarterly fee equal to 50 basis points per annum for the
period the guaranty is outstanding. Proceeds from the Term Loan were utilized
to repay $3.5 million of the Short-Term Notes, for expenses incurred in
connection with the Term Loan and for working capital and general corporate
requirements. DeepFlex is required to make monthly principal payments equal to
its excess cash flow as defined in the Term Loan agreement beginning in October
1996. In addition, in the event that DeepFlex does not purchase $6.0 million
of Tatham Offshore's Convertible Exchangeable Preferred Stock or make $6.0
million of other permitted investments, as defined in the Term Loan agreement,
no later than September 1, 1996, DeepFlex must prepay the Term Loan by the
lesser of $2.0 million and the difference between $6.0 million and the total
amount of Tatham Offshore's Convertible Exchangeable Preferred Stock acquired
or other permitted investments made. Interest expense and amortization of debt
issue costs related to the Term Loan for the nine months ended March 31, 1996
totaled $0.3 million.
In February 1996, DeepFlex Partners' FPS Laffit Pincay began providing contract
drilling services to Flextrend Development, which will extend until Flextrend
Development completes its drilling program at Garden Banks Block 117. Net
proceeds from the contract drilling services will be used to pay interest and
principal to DeepFlex on the PIK Notes.
Uses of Cash. Management expects that the Company's nondiscretionary capital
requirements through December 31, 1996 will consist primarily of (i) scheduled
payments of interest on the Senior Notes of $4.9 million each on June 15 and
December 15 (ii) scheduled interest payments on the Term Loan of $120,000 per
month or $1.1 million and scheduled principal payments equal to DeepFlex's
excess cash flow as defined in the Term Loan agreement beginning October 1996,
(iii) scheduled interest payments on the Wilrig promissory notes of $275,000
per quarter, (iv) scheduled interest payments on the Highwood Notes of $210,000
per quarter and principal of $7.6 million due in December 1996 and (v) amounts
necessary to pay general and administrative and other operational expenses.
The Company anticipates that its discretionary capital outlays for the period
ending December 31, 1996 will include additional investments in its drilling
unit business, consisting of capital expenditures necessary to modify the
Treasure Searcher to enable it to perform contract drilling services in the
Gulf, and amounts necessary to exercise DeepFlex's Warrants to acquire
10,000,000 shares of Tatham Offshore Convertible Exchangeable Preferred Stock
at $1.00 per share.
The Company currently conducts its contract drilling services business
primarily through DeepFlex Partners and Deepwater Drillers. DeepFlex Partners'
second generation semisubmersible drilling unit, the FPS Laffit Pincay, was
placed in full service in the Gulf providing contract drilling services for
Flextrend Development in the second calendar quarter of 1996. DeepFlex
Partners intends to continue to deploy the FPS Laffit Pincay as a drilling
unit, the net cash flow from which will be used to make interest payments and
reduce the principal
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balance under the PIK Notes due to DeepFlex. DeepFlex's excess cash flow will
be used to make principal payments on the Term Loan beginning in October 1996.
In December 1995, DeepFlex entered into a partnership agreement with Highwood
Partners to form Deepwater Drillers. Deepwater Drillers is effectively owned
50% by a wholly-owned subsidiary of DeepFlex and 50% by Highwood Partners. In
December 1995, Deepwater Drillers acquired the Treasure Searcher, a second
generation semisubmersible drilling unit, for $14.5 million pursuant to the
exercise of an option assigned from the Company. In order to fund the
acquisition and related expenditures, the Company issued promissory notes to
Highwood Partners for an aggregate principal amount of $7.6 million which funds
were advanced to Deepwater Drillers in exchange for Promissory Notes. The
Treasure Searcher has recently been relocated from West Africa to the Gulf
where it is expected to undergo modifications and upgrades, currently estimated
at a total cost of $20.0 million to Deepwater Drillers, and is currently
anticipated to be ready to be placed in service by the fourth calendar quarter
of 1996. The Treasure Searcher is currently being operated and marketed by
Sedco Forex.
In January 1996, DeepFlex subscribed for the purchase of 10,000,000 Warrants in
connection with the Offering by Tatham Offshore at a total cost of $5.0 million
which was paid through the forgiveness of $5.0 million of principal and
interest due under the Bridge Loan. Each Warrant entitles DeepFlex to
purchase one share of Series A Preferred Stock at any time prior to July 1,
1996, Series B Preferred Stock at any time prior to October 1, 1996 or Series C
Preferred Stock at any time prior to January 1, 1997 at the purchase price of
$1.00 per share. In connection with the Bridge Loan, DeepTech agreed to defer
until July 15, 1996 the payment of up to $4.0 million in management fees
payable by Tatham Offshore under its management agreement with DeepTech. The
Company currently anticipates that it will exercise 4,000,000 of the Warrants
to acquire Series A Preferred Stock by forgiving the $4.0 million in deferred
management fees that would otherwise be due from Tatham Offshore in July 1996.
The Company has not yet determined when, or if, it will exercise its remaining
Warrants. Any Warrants remaining unexercised on January 1, 1997 will be
automatically converted into shares of Mandatory Redeemable Preferred Stock.
Liquidity Outlook. DeepTech intends to satisfy its short term capital
requirements and other working capital needs primarily from cash on hand and
cash provided from management fees, dividends funded by distributions from the
Partnership and interest on and repayment of principal under borrowings by the
Subsidiaries (principally the Subordinated Notes issued by Tatham Offshore and
the PIK Notes issued by DeepFlex Partners). As of March 31, 1996, the Company
had $11.6 million of cash and cash equivalents. DeepTech is and expects to
continue to be dependent upon payments from its Subsidiaries to service its
debt, pay its operating expenses and satisfy its other obligations. In
addition, DeepTech's ability to fund its capital requirements through December
31, 1996 will be dependent on its ability to refinance approximately $7.6
million of principal payments due in December 1996.
Based on current projections and assuming that approximately $7.6 million of
principal payments due in December 1996 is refinanced and the receipt of
interest when due on the Subordinated Notes, DeepTech believes that it will
have sufficient funds to meet its capital requirements, including scheduled
payments of interest on the Senior Notes, through at least December 1996. The
failure of Tatham Offshore to make interest payments on the Subordinated Notes
when due would adversely affect DeepTech's ability to meet its capital
requirements, including scheduled payments of interest on the Senior Notes.
There can be no assurance that Tatham Offshore will be able to make such
payments when due. See "Tatham Offshore - Liquidity Outlook" below. It is
also anticipated that DeepTech will require significant additional capital from
outside sources to fund its capital requirements beyond December 1996. The
Company contemplates raising such capital through (i) the issuance of
additional debt or debt refinancing at the subsidiary level, (ii) the sale of
equity securities at the subsidiary level, and/or (iii) a refinancing of
amounts due DeepFlex from its equity investees.
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However, there can be no assurance that the Company will be able to raise
capital on terms it deems acceptable, if at all. Further, the Senior Note
Indenture contains covenants that, among other things, require DeepTech to meet
certain collateral coverage tests and restrict the ability of DeepTech to incur
additional indebtedness, effect certain asset sales and engage in certain
mergers or similar transactions. The failure to obtain additional capital
would have a material adverse effect on DeepTech's financial condition and
results of operations.
LEVIATHAN/THE PARTNERSHIP
Sources of Cash. The Partnership intends to satisfy its capital requirements
and other working capital needs primarily from cash on hand, cash from
continuing operations and borrowings under the Partnership Credit Facility (as
defined below). At March 31, 1996, the Partnership had cash and cash
equivalents of $6.6 million.
Cash from continuing operations is derived from (i) payments for transporting
gas through the 100% owned pipelines, (ii) cash distributions from the
Stingray, HIOS, UTOS and Viosca Knoll partnerships and from POPCO and West
Cameron Dehy, (iii) platform access and processing fees and (iv) the sale of
oil and gas from producing wells.
Stingray, HIOS, UTOS and Viosca Knoll are partnerships and POPCO and West
Cameron Dehy are limited liability companies in which the Partnership owns an
interest. The Partnership's cash flows from operations will be affected by the
ability of such entities to make distributions. Distributions from such
entities are also subject to the discretion of their respective management
committees. Further, each of Stingray and POPCO is party to a credit agreement
under which it has outstanding obligations that may restrict the payments of
distributions to its owners. In December 1995, Stingray amended an existing
term loan agreement to provide for aggregate outstanding borrowings of up to
$29.0 million in principal amount. The agreement requires the payment of
principal by Stingray of $1.45 million per quarter. As of March 31, 1996,
interest accrued at the rate of approximately 6.4% per annum and is payable
quarterly. As of March 31, 1996, Stingray had $29.0 million outstanding under
its term loan agreement.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a group of commercial banks to provide up to $150.0
million for the construction of Phase II of the Poseidon Oil Pipeline and for
other working capital needs of POPCO. As of May 10, 1996, POPCO had $25.0
million outstanding under the POPCO Credit Facility bearing interest at 6.7%
per annum. POPCO's ability to borrow money under the facility is subject to
certain customary terms and conditions, including borrowing base limitations.
The POPCO Credit Facility is secured by a substantial portion of POPCO's assets
and matures on April 30, 2001.
In December 1995, Flextrend Development initiated production from the Viosca
Knoll Block 817 lease. The Viosca Knoll Block 817 lease currently has three
wells on production which are producing a total of approximately 90 MMcf of gas
per day when platform drilling activities permit. The well deliverability from
the Viosca Knoll Block 817 project is in excess of 90 MMcf per day but is
limited to such amount by the production equipment currently located on the
production platform. Flextrend Development owns a 75% working interest in
these wells, subject to certain reversionary interests.
Tatham Offshore was obligated to make demand charge payments to the Partnership
pursuant to certain transportation agreements. For the year ending December
31, 1996, Tatham Offshore was obligated to pay $8.1 million in aggregate demand
charges. In addition to the demand charges, Tatham Offshore is obligated to
pay commodity charges, based on the volume of oil and gas transported or
processed, under these agreements. Also, for the year ending December 31,
1996, Tatham Offshore is obligated to pay $1.6 million in platform access fees.
Production problems at Ship Shoal Block 331 and reduced oil production from the
Ewing Bank 914 #2 well have affected Tatham Offshore's ability to pay demand
charges under these agreements.
Effective February 1, 1996, the Partnership agreed to release Tatham Offshore
from all remaining demand charge payments under the transportation agreements,
a total of $17.8 million. Under these agreements, the Partnership was entitled
to receive demand charges of $8.1 million in 1996, $6.0 million in 1997, $3.0
million in 1998 and $0.7
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million in 1999. Tatham Offshore remains obligated to pay the commodity
charges under these agreements as well as all platform access and processing
fees associated with the Viosca Knoll Block 817 lease. In exchange, the
Partnership received 7,500 shares of Tatham Offshore Senior Preferred Stock.
Each share of the Senior Preferred Stock has a liquidation preference of $1,000
per share, is senior in liquidation preference to all other classes of Tatham
Offshore stock and has a 9% cumulative dividend, payable quarterly. At any
time on or after September 30, 1998, the Partnership has the option to exchange
the remaining liquidation preference amount and accrued but unpaid dividends
for shares of Tatham Offshore's Convertible Exchangeable Preferred Stock with
an equivalent market value. Further, the Partnership has made an irrevocable
offer to Tatham Offshore to sell all or any portion of the Senior Preferred
Stock to Tatham Offshore or its designee at a price equal to $1,000 per share,
plus interest thereon at 9% per annum less the sum of any dividends paid
thereon. The Convertible Exchangeable Preferred Stock is convertible into
Tatham Offshore common stock based on a fraction, the numerator of which is the
liquidation preference value plus all accrued but unpaid dividends and the
denominator of which is based on the lowest average of consecutive five day
closing prices for Tatham Offshore's common stock between December 26, 1995 and
July 1, 1996 (the "Trading Reference Price"). The current Trading Reference
Price is $0.65 per share. In addition, the sum of $7.5 million was added to
the Payout Amount under the Purchase and Sale Agreement. By adding $7.5 million
to the Payout Amount, the Partnership is entitled to an additional $7.5 million
plus interest at the rate of 15% per annum from revenue attributable to the
Assigned Properties prior to reconveying any interest in the Assigned
Properties to Tatham Offshore. Tatham Offshore waived its remaining option to
prepay the then existing Payout Amount and receive a reassignment of its
working interests. Tatham Offshore and the Partnership also agreed that in the
event Tatham Offshore furnishes the Partnership with a financing commitment
from a lender with a credit rating of BBB- or better covering 100% of the then
outstanding Payout Amount, the interest rate utilized to compute the Payout
Amount shall be adjusted from and after the date of such commitment to the
interest rate specified in such commitment, whether utilized or not. Tatham
Offshore also agreed to grant the Partnership the right to utilize the Ship
Shoal Block 331 platform and related facilities at a rental rate of $1.00 per
annum for such period as the platform is owned by Tatham Offshore and located
on the Ship Shoal Block 331, provided such use, at the time proposed, does not
interfere with lease operations or other activities of Tatham Offshore. In
addition, Tatham Offshore granted the Partnership a right of first refusal
relative to a sale of the platform.
On October 12, 1995, Flextrend Development and a syndicate of commercial
lenders entered into the Flextrend Credit Facility. The Flextrend Credit
Facility provided for borrowings of up to $32.0 million at any time prior to
March 31, 1996. As discussed below, all borrowings under the Flextrend Credit
Facility were repaid on March 26, 1996 from proceeds obtained under the
Partnership Credit Facility, as amended. For the three months ended March 31,
1996, interest and amortization of debt issue costs totaled $2.5 million, all
of which was capitalized in connection with drilling activities in progress
during the period.
In February 1996, in connection with the formation of POPCO, the Partnership
Credit Facility (discussed below) was amended to provide for issuance of a
$40.0 million letter of credit, to terminate $125.0 million previously
available under the Partnership Credit Facility as term loans related to the
Poseidon Oil Pipeline and to permit the Partnership to make capital
contributions to POPCO.
The Partnership Credit Facility, as amended and restated on March 26, 1996, is
a revolving and term credit facility providing for of up to $220.0 million of
available credit in the form of a $145.0 million revolving credit facility and
a $75.0 million term loan facility. The revolving credit facility has an
initial maturity of three years, which maturity can be extended in one-year
increments, but not beyond March 31, 2001. Proceeds from the revolving credit
facility are available to the Partnership for general partnership purposes,
including financing of capital expenditures, for working capital, and subject
to certain limitations, for paying the Minimum Quarterly Distribution, as
defined in the Partnership Agreement. The revolving credit facility can also
be utilized to issue letters of credit as may be required from time to time.
The $40.0 million letter of credit issued in February 1996 was outstanding
under the revolving credit facility until it was canceled in May 1996. The
$75.0 million term loan facility has a final maturity of March 31, 2001. The
first principal payment, in an amount of $2.0 million, is due on December 31,
1996. Subsequent payments are to be made quarterly in the amount of $4.3
million. The proceeds of the term loan were used to repay all of the
indebtedness incurred under the Flextrend Credit Facility and to repay a
portion of the debt outstanding under the former revolving credit facility.
All amounts advanced under the revolving credit facility and
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the term loan facility will accrue interest at a variable rate selected by the
Partnership and determined by reference to the reserve-adjusted LIBOR, the
average certificate of deposit rate or the prime rate. The current average
interest rate on both revolving credit and term loans is 7.2% per annum. A
commitment fee is charged on the unused and available to be borrowed portion of
the revolving credit facility. This fee varies between 0.25% and 0.375% per
annum and is currently 0.375% per annum. All amounts due under the Partnership
Credit Facility are guaranteed by Leviathan and each of the Operating Companies
and Tarpon, and are secured by Leviathan's 1% general partner interest in the
Partnership, all of Leviathan's and the Partnership's equity interests in the
Operating Companies and Tarpon and most of the equipment, negotiable
instruments and inventory and other personal property of the Operating
Companies and Tarpon. The Partnership incurred additional debt issue costs of
$1.5 million related to the amended and restated credit facility which have
been capitalized and are being amortized over the six-year remaining life of
the credit facility. As of March 31, 1996, borrowings totaled $75.0 million
under the term facility and $102.5 million under the revolving credit facility.
Interest expense related to the Partnership Credit Facility totaled $0.6
million for the three months ended March 31, 1996. Such amount included
commitment fees and amortization of debt issue costs of $0.2 million. During
the three months ended March 31, 1996, the Partnership capitalized $2.3 million
of interest costs in connection with construction projects in progress during
the period. As of May 10, 1996, borrowings totaled $75.0 million under the
term facility and $112.0 million under the revolving credit facility. There
are no letters of credit currently outstanding under the revolving credit
facility.
Uses of Cash. The Partnership's capital requirements consist primarily of (i)
quarterly distributions to holders of Preference Units and Common Units and to
Leviathan as general partner, (ii) expenditures for the maintenance of the
pipelines and the construction of additional pipelines and related facilities
for the transportation and processing of gas and oil in the Gulf, including
Phase II of the Poseidon Oil Pipeline, (iii) management fees and other
operating expenses and (iv) debt service on its outstanding debt. In addition,
Flextrend Development's future capital requirements will consist of
expenditures related to the development of the Viosca Knoll Block 817, Garden
Banks Block 72 and Garden Banks Block 117 leases.
For every full quarter since its inception, the Partnership has declared and
subsequently paid a cash distribution to holders of Preference Units and Common
Units in an amount equal to or exceeding the Minimum Quarterly Distribution of
$0.55 per Unit per quarter ($2.20 per Unit on an annualized basis). Commencing
in the third quarter of 1993, the Partnership increased the quarterly
distribution to $0.60 per Unit. Beginning with the quarter ending March 31,
1996, the Partnership increased the quarterly distribution to $0.65 per Unit.
At the current distribution rate of $0.65 per Unit, the Partnership anticipates
making quarterly partnership distributions of $8.1 million in respect of the
Preference Units, Common Units and general partner interest ($32.4 million on
an annual basis). On January 22, 1996, the Partnership declared a cash
distribution of $0.60 per Preference and Common Unit for the period from
October 1, 1995 through December 31, 1995. This distribution was paid on
February 14, 1996 to Unitholders of record as of January 31, 1996. On March
26, 1996, the Partnership declared a cash distribution of $0.65 per Preference
and Common Unit for the period from January 1, 1996 through March 31, 1996.
This distribution will be paid on May 15, 1996 to Unitholders of record as of
April 30, 1996.
After taking into account the reduction in cash flow from Tatham Offshore as a
result of the restructuring of certain agreements, as discussed above, the
Partnership believes that it will be able to continue to pay at least the
current quarterly distribution of $0.65 per Preference Unit for the foreseeable
future.
On June 30, 1995, Flextrend Development acquired the working interests owned by
Tatham Offshore in the Assigned Properties for $30.0 million, subject to
certain reversionary rights. Flextrend Development will need additional
capital to fund further development of its properties. Flextrend Development
anticipates funding future development costs through borrowings under the
Partnership Credit Facility, as amended, and operating cash flow.
In February 1996, Poseidon LLC and Texaco Trading formed POPCO to construct,
own and operate the Poseidon Oil Pipeline. Pursuant to the terms of the
organizational documents, Poseidon LLC initially contributed assets, at net
book value, related to the construction of the initial phase of the Poseidon
Oil Pipeline as well as certain dedication agreements and Texaco Trading
initially contributed an equivalent amount of cash as well as its rights
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under certain agreements. Poseidon LLC and Texaco Trading each also agreed to
contribute 50% of the additional construction and installation costs of the
Poseidon Oil Pipeline, currently estimated at $75.0 million in the aggregate.
The Partnership has fully funded its portion of the capital requirements of
POPCO for the construction of Phase I of the Poseidon Oil Pipeline. The
Partnership anticipates that POPCO's future capital requirements, including
estimated costs of approximately $55.0 million to complete Phase II of the
system, will be funded by borrowings under the POPCO Credit Facility.
The Partnership anticipates that capital expenditures in connection with the
maintenance and enhancement of the service capabilities of the Ewing Bank,
LOGS, Green Canyon and Manta Ray systems will aggregate approximately $0.5
million per year although the actual level of these capital expenditures may
change from time to time for many reasons, some of which may be beyond the
control of the Partnership. The Partnership anticipates that its capital
expenditures for 1996 will relate to continuing construction and drilling
activities on projects currently in progress and the Partnership anticipates
funding such costs primarily with available cash flow and borrowings under the
Partnership Credit Facility.
In connection with the closing of the second primary offering of Preference
Units in June 1994, Leviathan amended its management agreement with DeepTech
effective July 1, 1994 in consideration for the increase in management services
associated with the planned expansion of the Partnership's facilities and to
more accurately provide for the reimbursement of expenses incurred by DeepTech
in providing management services to Leviathan and the Partnership. As amended,
the management agreement required Leviathan to pay DeepTech a fee of $2.0
million per year, plus 40% of DeepTech's unreimbursed selling, general and
administrative expenses, payable monthly. In addition, effective July 1, 1994,
the management agreement requires a payment by Leviathan to compensate DeepTech
for certain tax liabilities resulting from, among other things, additional
taxable income allocated to Leviathan due to (i) the issuance of additional
Preference Units (including the sale of the Preference Units by the Partnership
pursuant to the secondary offering) and (ii) the investment of such proceeds in
additional acquisitions or construction projects. Effective November 1, 1995,
primarily as a result of the increased activities of Flextrend Development,
Leviathan again amended its management agreement with DeepTech to provide for
an annual management fee of 45.3% of DeepTech's overhead. Pursuant to the
Partnership Agreement, Leviathan, as general partner, is entitled to
reimbursement by the Partnership of expenses incurred by it while acting on
behalf of the Partnership, including payments made by Leviathan to DeepTech
pursuant to the management agreement. During the three months ended March 31,
1996, Leviathan charged the Partnership $1.5 million as reimbursement for
services rendered on the Partnership's behalf and $0.8 million to compensate
DeepTech for additional taxable income allocated to Leviathan. The management
agreement has an initial term expiring on June 30, 1997, and may thereafter be
terminated on 90 days' notice by either party.
TATHAM OFFSHORE
Sources of Cash. Tatham Offshore's current revenue is dependent, in large
part, on production from the Ewing Bank 914 #2 well, from its interest in the
Viosca Knoll Block 817 project and to a lesser extent, from its interest in the
West Delta Block 35 field. Tatham Offshore has experienced production problems
at its Ewing Bank 914 #2 well. These production problems have resulted in
significantly lower production and revenue levels than had originally been
anticipated. As a result of a paraffin build-up problem, the subsea flow lines
at the Ewing Bank 914 #2 well were replaced in December 1994. In an effort to
minimize the paraffin build-up in the new flow lines, Tatham Offshore has been
conducting periodic pigging and other remedial operations and is injecting
chemical inhibitors into the flow lines. In the third calendar quarter of
1995, Tatham Offshore conducted remedial operations to dislodge a pigging
device from the flow lines at its Ewing Bank 914 #2 well and installed chemical
injection lines at an aggregate estimated cost of $3.2 million. In the month
of January 1996, the Ewing Bank 914 #2 well produced an average of
approximately 2,300 barrels of oil and 4.3 MMcf of gas per day. In February
1996, the Ewing Bank 914 #2 well started to produce some water (increasing to
approximately 48% of total production by May 10, 1996) resulting in a reduction
of hydrocarbon production. During the three months ended March 31, 1996, the
Ewing Bank 914 # 2 well produced an average of approximately 1,600 barrels of
oil and 3.3 MMcf of gas per day. The well was producing at a rate of
approximately 1,240 barrels of oil and 2.7 MMcf of gas per day on May 10, 1996.
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In December 1995, January 1996 and March 1996, the Viosca Knoll 817 #A-1, #A-2
and #A-5 wells at the Phar Lap (Shallow) project were completed and placed on
production and are currently producing an aggregate of approximately 90 MMcf of
gas per day when platform drilling activities permit. The well deliverability
from the Viosca Knoll Block 817 project is in excess of 90 MMcf per day but is
limited to such amount by the production equipment currently located on the
production platform. Tatham Offshore owns a 25% working interest in these
wells which interest is subject to a production payment equal to 25% of the net
operating cash flow from this project.
In October 1995, DeepFlex entered into the Bridge Loan with Tatham Offshore.
Under the terms of the Bridge Loan, DeepFlex agreed to make $12.5 million of
interim bridge financing available for borrowing by Tatham Offshore to fund a
portion of Tatham Offshore's working capital and capital requirements. All
indebtedness outstanding under the Bridge Loan accrued interest at a rate of
15% per annum. The terms of the Bridge Loan required Tatham Offshore to
undertake the Offering or to implement another refinancing or asset disposition
sufficient to repay the outstanding indebtedness under the Bridge Loan. Under
the terms of the Bridge Commitment, DeepTech agreed to defer until July 15,
1996, the payment of up to $4.0 million in management fees payable by Tatham
Offshore under its management agreement with DeepTech. In addition, Tatham
Offshore agreed to amend the Subordinated Notes to increase the interest rate
from 11 3/4% to 13% per annum, effective July 1, 1997. Tatham Offshore
borrowed $8.0 million under the Bridge Loan. On January 31, 1996, DeepFlex
subscribed for the purchase of 10,000,000 Warrants in connection with the
Offering at a cost of $5.0 million, which was paid through the forgiveness of
$5.0 million of principal and interest due under the Bridge Loan. Tatham
Offshore used $3.1 million of Offering proceeds to repay the remaining
principal and accrued interest outstanding under the Bridge Loan.
Tatham Offshore filed a registration statement with the Commission, which was
declared effective on December 26, 1995, relating to the granting to all
holders of Tatham Offshore's common stock, on the record date, December 26,
1996, Rights to purchase up to 25,120,948 Warrants. Each Right entitled the
holder to subscribe to purchase one Warrant at the purchase price of $.50 per
Warrant. Each Warrant entitles the holder thereof to purchase one share of any
of (i) Series A Preferred Stock, which has a liquidation preference of $1.50
per share, at any time prior to 5:00 p.m., New York time on July 1, 1996, (ii)
Series B Preferred Stock, which has a liquidation preference of $1.00 per share
at any time prior to 5:00 p.m., New York time on October 1, 1996 or (iii)
Series C Preferred Stock, which has a liquidation preference of $0.50 per share
at any time prior to 5:00 p.m., New York time on January 1, 1997 at the
purchase price of $1.00 per share. Each Warrant remaining unexercised at 5:00
p.m., New York time on January 1, 1997 shall be automatically converted,
without any action on the part of the holder thereof, into one share of
Mandatory Redeemable Preferred Stock, which shall have a liquidation preference
of $0.50 per share and shall be mandatorily redeemable by the Company under
certain circumstances. At any time from July 1, 1996 until December 31, 1998,
each share of Convertible Exchangeable Preferred Stock may be exchanged for
four Exchange Warrants each of which shall entitle the holder thereof to
purchase one share of Tatham Offshore common stock at the Trading Reference
Price. The Exchange Warrants will expire July 1, 1999. Alternatively, at any
time after July 1, 1996, the holder of any shares of Convertible Exchangeable
Preferred Stock will have the right, at the holder's option, to convert the
liquidation value of such stock and accrued and unpaid dividends into shares of
Tatham Offshore common stock at the Trading Reference Price. On and after July
1, 1997, the Convertible Exchangeable Preferred Stock will be redeemable at the
option of Tatham Offshore. As of January 31, 1996, (the expiration date of the
Rights), the Offering was over-subscribed. Tatham Offshore issued 25,120,948
Warrants and received $12.6 million in gross proceeds (approximately $11.3
million, net) pursuant to the exercise of Rights.
Uses of Cash. Tatham Offshore's primary uses of cash consist of (i) platform
access fees and processing and commodity charges payable to the Partnership,
(ii) amounts due under the Subordinated Notes, (iii) other expenses associated
with operating its producing properties, including its production payment and
leasehold abandonment liabilities, (iv) capital expenditures necessary to fund
its portion of the development costs attributable to its working interest, (v)
interest and principal on the Affiliate Note and (vi) payments due under the
Dover technology services agreement and the management agreement with DeepTech.
34
<PAGE> 35
Tatham Offshore was obligated to make demand charge payments to the Partnership
under certain transportation agreements. These demand charges were payable
whether or not any production was actually transported. In addition to the
demand charges, Tatham Offshore is obligated to pay commodity charges, based on
the volume of oil and gas transported or processed, under these agreements.
Also, for the year ended June 30, 1996, Tatham Offshore is obligated to pay
$1.6 million in platform access fees. Production problems at Ship Shoal Block
331 and reduced oil production from the Ewing Bank 914 #2 well have affected
Tatham Offshore's ability to pay the demand charge obligations under these
agreements.
Effective February 1, 1996, Tatham Offshore entered into an agreement with the
Partnership to prepay its remaining demand charge payments under the
transportation agreements covering its Ewing Bank and Ship Shoal properties.
Under the agreement, Tatham Offshore's demand charge obligations relative to
the Ewing Bank Gathering System and the pipeline facilities constructed by the
Partnership for its Ship Shoal property have been prepaid in full. In
exchange, effective February 1, 1996, Tatham Offshore has (i) issued the
Partnership 7,500 shares of Senior Preferred Stock with a liquidation
preference of $1,000 per share, (ii) added the sum of $7.5 million to the
Payout Amount under the Purchase and Sale Agreement with Flextrend Development
and (iii) granted to the Partnership certain rights to use and acquire the Ship
Shoal Block 331 platform. The Partnership has made an irrevocable offer to
Tatham Offshore to sell all or any portion of the Senior Preferred Stock to
Tatham Offshore or its designee at a price equal to $1,000 per share, plus
interest thereon at 9% per annum less the sum of any dividends paid thereon.
If the Senior Preferred Stock is not purchased by Tatham Offshore on or before
September 30, 1998, it will be convertible into shares of Tatham Offshore's
Series A Preferred Stock based on the liquidation preference amount of the
Senior Preferred Stock and the equivalent market value of the Series A
Preferred Stock as of the date of conversion. The increase in the Payout
Amount will defer the reversion of Tatham Offshore's working interest in its
Viosca Knoll Block 817, Garden Banks Block 72 and Garden Banks Block 117
properties under the Purchase and Sale Agreement but will be excluded for
purposes of computing the amount of the Payout Amount to be extinguished if
Flextrend Development exercises its options to permanently retain a portion of
the working interests in the Assigned Properties. Tatham Offshore and the
Partnership have also agreed that in the event Tatham Offshore furnishes the
Partnership with a financing commitment from a lender with a credit rating of
BBB- or better covering 100% of the then outstanding Payout Amount, the
interest rate utilized to compute the Payout Amount shall be adjusted from and
after the date of such commitment to the interest rate specified in such
commitment, whether utilized or not. In addition, Tatham Offshore agreed to
grant the Partnership the right to utilize the Ship Shoal Block 331 platform
and related facilities at a rental rate of $1.00 per annum for such period as
the platform is owned by Tatham Offshore and located on the Ship Shoal Block
331, provided such use, at the time proposed, does not interfere with lease
operations or other activities of Tatham Offshore. Tatham Offshore has granted
the Partnership a right of first refusal relative to a sale of the platform.
The agreement with the Partnership will result in a reduction in demand charge
payments of approximately $4.1 million for the fiscal year ended June 30, 1996,
$7.8 million for the fiscal year ended June 30, 1997 and $5.9 million for
fiscal years thereafter. Tatham Offshore remains obligated to pay the
commodity charges under these agreements as well as all platform access and
processing fees associated with the Viosca Knoll Block 817 lease.
As of March 31, 1996, Tatham Offshore had $60.0 million aggregate principal
amount of Subordinated Notes outstanding, all of which was held by DeepTech.
The Subordinated Notes are subordinate to all senior indebtedness of Tatham
Offshore, which would include any indebtedness outstanding under the Affiliate
Note. Tatham Offshore does not have any outstanding indebtedness ranking senior
to the Subordinated Notes, except for outstanding indebtedness under the
Affiliate Note. The Subordinated Notes bear interest from the date of their
issuance at a rate of 11 3/4% per annum, payable quarterly in arrears
(approximately $1.8 million per quarter commencing September 30, 1994);
provided, however, that effective July 1, 1997, interest shall accrue at a rate
of 13% per annum. The principal amount of the Subordinated Notes is payable in
seven equal annual installments of approximately $8.6 million each commencing
August 1, 1999. For the nine months ended March 31, 1996, Tatham Offshore
incurred interest on the Subordinated Notes of $5.3 million.
35
<PAGE> 36
In March 1996, the Company began incurring abandonment costs related to its
West Cameron 436 property, in which it owns a 47% working interest. The West
Cameron 436 property ceased producing in 1994. The total estimated abandonment
obligation, net to the Company's working interest, of $1.2 million was fully
accrued as of June 30, 1995. Through May 10, 1996, the Company has paid
approximately $0.2 million of the estimated abandonment costs.
Effective as of July 1, 1993, the management agreement between Tatham Offshore
and DeepTech provided for an annual management fee equal to 40% of DeepTech's
overhead. The management fee is intended to reimburse DeepTech for the
estimated costs of its operational, financial, accounting and administrative
services provided to Tatham Offshore. In an effort to minimize Tatham
Offshore's projected operating cash shortfall, Tatham Offshore and DeepTech
agreed to decrease the amount of managerial and administrative services
provided by DeepTech to Tatham Offshore and amend the management agreement
effective November 1, 1995. The amended management agreement provides for an
annual management fee of 27.4% of DeepTech's overhead expenses. Tatham
Offshore anticipates that this amendment will result in a reduction of
approximately $2.5 million, on an annualized basis, in the management fee that
would have otherwise been paid to DeepTech. As of March 31, 1996, Tatham
Offshore owed DeepTech $4.0 million for costs allocated under the management
agreement; however, payment of up to $4.0 million of management fees has been
deferred until July 15, 1996 pursuant to the terms of the Bridge Commitment.
On November 1, 1995, Tatham Offshore converted $1.7 million of its accounts
payable to an affiliate into the Affiliate Note which bears interest at 14.5%
per annum. Interest on the Affiliate Note is payable quarterly, beginning
March 31, 1996. The principal is due and payable in six monthly installments,
beginning on a date which is the earlier to occur of (i) November 1, 1997 or
(ii) the last day of the calendar month in which Tatham Offshore receives
proceeds from the issuance of any preferred stock described in the Offering in
a net total amount equal to or greater than $20.0 million. Interest expense
related to the Affiliate Note totaled $0.1 million for the nine months ended
March 31, 1996.
In August 1995, Tatham Offshore formed a wholly-owned subsidiary, TOJ, to
pursue certain international opportunities. TOJ is in the process of
attempting to obtain offshore concessions from the government of Nigeria.
There are no assurances that TOJ will be granted a concession or the terms and
conditions that would apply to a concession if granted.
In February 1996, TOJ entered into agreements to acquire a minority equity
interest in Gas Participacoes Ltda. ("GASPART"). GASPART in turn owns a
minority equity interest (approximately 41.5%) in seven local natural gas
distribution companies in Brazil. The remaining equity interest in each local
distribution company is owned by Petrobras, the Brazilian state-owned oil
company and the state government for the state in which its operations are
conducted. TOJ's interest in GASPART will be financed on a non recourse basis
under an arrangement by which title to TOJ's shares in GASPART will be
transferred to the lender subject to an option to reacquire the shares at a
price equal to the original cost thereof plus interest thereon at LIBOR. The
option will be exercisable at any time until the expiration or 375 days from
the closing date. All approvals and consents for these transactions have been
obtained and applicable rights of first refusal have expired. The consummation
of these transactions remains subject to the negotiation, preparation and
execution of final closing documents with respect to TOJ's participation in the
transaction.
Liquidity Outlook. As described above, during calendar year 1995, Tatham
Offshore experienced production problems at its Ewing Bank 914 #2 well, which
caused this well to be shut-in periodically. In addition, production problems
at Tatham Offshore's Genuine Risk property at Ship Shoal Block 331 have caused
each of the three wells at Genuine Risk to be shut-in. As a consequence, Tatham
Offshore has experienced liquidity problems resulting primarily from substantial
negative cash flow from operations. A portion of the proceeds from the sale of
Warrants were used to repay outstanding indebtedness under the Bridge Loan. The
remaining proceeds are being used to fund a portion of Tatham Offshore's
anticipated cash flow shortfall and estimated capital requirements.
36
<PAGE> 37
The decline in production rates experienced at the Ewing Bank 914 #2 well since
February 1996, together with the delay and cost overrun with respect to the
drilling and completion of a third well at Viosca Knoll Block 817, have
adversely affected Tatham Offshore's cash flow. In an effort to offset the
effects of these events, Tatham Offshore renegotiated certain demand charge
obligations to the Partnership. Effective February 1, 1996, Tatham Offshore
prepaid certain of its demand charge obligations ($4.1 million for the fiscal
year ended June 30, 1996) through the assignment of certain assets pursuant to
an agreement with the Partnership. As a result, Tatham Offshore believes it
has sufficient capital to finance its operations through at least June 30,
1996.
Tatham Offshore currently intends to fund its operations for the period of July
1, 1996 through at least June 30, 1997 with the net proceeds from the sale of
Convertible Exchangeable Preferred Stock. The ability of Tatham Offshore to do
so, however, is dependent upon Warrant holders exercising their Warrants to
purchase Convertible Exchangeable Preferred Stock at such times and in such
amounts as is necessary to meet Tatham Offshore's capital needs. If Warrant
holders do not exercise their Warrants at the required times and in the
required amounts, Tatham Offshore will be required to fund its operations from
alternate sources. There can be no assurance, however, that any alternate
sources will be available.
The ability of Tatham Offshore to fund its capital requirements in the near
term and through June 30, 1997 will depend on the timing of such requirements,
the level of its operating cash flow and the receipt of additional capital from
the exercise of the Warrants. Unless such capital requirements are funded,
Tatham Offshore believes that it will be forced to seek protection from its
creditors under applicable bankruptcy laws. In such event, Tatham Offshore
believes that holders of its common stock and the Securities would realize
little, if any, of their investment in Tatham Offshore.
Even if the proceeds from the Offering are sufficient to fund Tatham Offshore's
operations through June 30, 1997, there can be no assurance that Tatham
Offshore will not need substantial additional capital thereafter to fund its
operations. Although the restructuring of the Tatham Offshore's demand charge
obligations with the Partnership and the initiation of production from the
Viosca Knoll 817 field has significantly reduced Tatham Offshore's cash flow
deficit, Tatham Offshore does not anticipate generating positive cash flow
prior to the first to occur of (i) a refinancing of the Payout Amount which
would enable Tatham Offshore to reacquire all or a portion of the Assigned
Properties from Flextrend Development, (ii) actual payout of the Payout Amount
and the resulting reversion of all or a portion of the Assigned Properties, or
(iii) the initial production from Tatham Offshore's Sunday Silence field.
In December 1995, Flextrend Development initiated production from the Viosca
Knoll Block 817 lease. In addition, Flextrend Development has drilled and is
in the process of placing on production two wells on the Garden Banks Block 72
lease and is in the process of completing and placing on production an existing
well at Garden Banks Block 117. As of March 31, 1996, the Payout Amount was
approximately $65.8 million, comprised of (i) initial acquisition and
transaction costs of $32.1 million, (ii) development and operating costs of
$31.4 million, (iii) prepaid demand charges of $7.5 million and (iv) interest
of $4.7 million, reduced by revenues of $9.9 million.
To meet these additional capital needs, Tatham Offshore will continue to pursue
the implementation of its business strategy which will focus primarily on (i)
attempting to develop and initiate production from its Sunday Silence field
(Ewing Bank Blocks 958, 959, 1002 and 1003) under a farmout arrangement or
development financing with an industry partner or financial institution, (ii)
analyzing the results of drilling operations on the Assigned Properties in an
effort to maximize the value of its reversionary interest, (iii) attempting to
sell or farmout interests in its other properties, (iv) attempting to reinitiate
production at Genuine Risk (Ship Shoal Block 331) under a farmout arrangement
with an industry partner or, alternatively, salvaging the platform and equipment
located at Genuine Risk for sale to a third party or redeployment on another
property, (v) seeking to acquire interests in producing properties on a carried
or financed basis and (vi) pursuing the possible merger of Tatham Offshore with
an industry partner with sufficient capital resources available to meet the
capital requirements for the development of the combined entity's properties.
37
<PAGE> 38
The ability of Tatham Offshore to satisfy its capital requirements beyond those
funded with the proceeds from the sale of the Warrants and any of the
Securities offered pursuant to the Offering will depend upon its success in
implementing its business strategy, particularly its ability to develop and
initiate production from the Sunday Silence field. Although Tatham Offshore
has pursued farmout and outside financing arrangements for its Sunday Silence
field project, as of this date, Tatham Offshore has not been able to obtain an
acceptable farmout arrangement with an industry partner or develop a financing
arrangement under the current economic conditions. On November 28, 1995, a
federal law was enacted that offers deepwater royalty relief for certain
federal leases located in 200 meters or greater of water depth in the Gulf.
The relief provided for in the new law is not automatic but must be applied for
with the Secretary of Interior (or his delegate). An applicant must
demonstrate that the proposed new production for which the royalty relief is
sought would not be economic to develop absent the royalty relief. Tatham
Offshore filed an initial application in December 1995 but was advised in late
January 1996 that applications could not be accepted in advance of publication
of proposed regulations. It is projected that an advance notice of proposed
regulations implementing the new law will be published by May 28, 1996 and
Tatham Offshore intends to promptly reapply for relief once implementing
regulations are promulgated. Under the new legislation, the first 52.5 million
equivalent barrels of oil production from the Sunday Silence project would be
exempt from federal royalties if such relief is granted. Tatham Offshore
believes that if the requested royalty abatement is granted, the resulting
improved economics for the project will be sufficient to obtain development
financing or an industry farmout arrangement. There can be no assurance that
Tatham Offshore will be able to obtain the requested royalty abatement, enter
into a farmout or financing arrangement on favorable terms, that the Sunday
Silence field will be successfully developed or that production will be
initiated therefrom on a timely basis, if at all.
Tatham Offshore has never paid dividends on its common or preferred stock.
Tatham Offshore expects to retain all available earnings generated by its
operations for the growth and development of its business.
38
<PAGE> 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated May 2, 1996,
containing exhibits under Item 7(c) of
Form 8-K, was filed on May 3, 1996.
39
<PAGE> 40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEEPTECH INTERNATIONAL INC.
Date: May 14, 1996 /s/ DONALD V. WEIR
-----------------------------------------------
Donald V. Weir
Chief Financial Officer and Assistant Secretary
(Principal Accounting Officer)
Date: May 14, 1996 /s/ DENNIS A. KUNETKA
-----------------------------------------------
Dennis A. Kunetka
Senior Vice President - Corporate Finance
40
<PAGE> 41
INDEX TO EXHIBITS
27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DEEPTECH
INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT MARCH
31, 1996 INCLUDED IN ITS FORM 10Q FOR THE PERIOD ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,568
<SECURITIES> 0
<RECEIVABLES> 21,175
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,006
<PP&E> 2,039
<DEPRECIATION> 663
<TOTAL-ASSETS> 145,076
<CURRENT-LIABILITIES> 29,291
<BONDS> 101,242
<COMMON> 167
0
0
<OTHER-SE> 12,383
<TOTAL-LIABILITY-AND-EQUITY> 145,076
<SALES> 26,968
<TOTAL-REVENUES> 37,460
<CGS> 26,309
<TOTAL-COSTS> 26,800
<OTHER-EXPENSES> 172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,612
<INCOME-PRETAX> 9,940
<INCOME-TAX> 3,395
<INCOME-CONTINUING> 5,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,878
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
