<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, 1997
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 9, 1997, THERE WERE OUTSTANDING 18,598,311 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, 1997 (unaudited) and June 30, 1996.....................................3
Unaudited Consolidated Statement of Operations for the Three and Nine Months
Ended March 31, 1997 and 1996, respectively....................................................................4
Unaudited Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996..................................................................................5
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended March 31, 1997 (unaudited)...............................................................................6
Notes to Consolidated Financial Statements........................................................................7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................14
PART II. OTHER INFORMATION..........................................................................................26
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
</TABLE>
<PAGE> 3
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 5,143 $ 10,102
Accounts receivable 10,476 7,014
Accounts receivable from affiliates 268 155
Notes receivable from affiliates 1,267 2,134
Other current assets 217 28
--------- ---------
Total current assets 17,371 19,433
--------- ---------
Property and equipment 111,432 26,572
Less: Accumulated depreciation and amortization 1,620 705
--------- ---------
Property and equipment, net 109,812 25,867
--------- ---------
Equity investments 5,422 4,586
Receivables from affiliates 60,000 100,490
Deferred income taxes -- 2,451
Debt issue costs, net and other 5,735 3,606
--------- ---------
Total assets $ 198,340 $ 156,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,413 $ 7,347
Accounts payable to affiliates 8,807 6,782
Notes payable 5,180 23,327
Notes payable to affiliates -- 6,640
Interest payable 2,944 546
Accrued liabilities -- 1,233
--------- ---------
Total current liabilities 18,344 45,875
Deferred income taxes 485 --
Long-term debt 155,460 97,534
Accumulated losses of equity investee in excess of investment -- 196
Other noncurrent liabilities 364 360
--------- ---------
Total liabilities 174,653 143,965
--------- ---------
Minority interests in consolidated subsidiaries 483 186
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par, 10,000,000 shares authorized -- --
Common stock, $.01 par, 100,000,000 shares authorized
as of March 31, 1997 and June 30, 1996, 18,598,311
and 17,016,510 shares issued and outstanding as of
March 31, 1997 and June 30, 1996, respectively 186 171
Additional paid-in capital 25,189 17,579
Accumulated deficit (2,171) (5,468)
--------- ---------
23,204 12,282
--------- ---------
Total liabilities and stockholders' equity $ 198,340 $ 156,433
========= =========
</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,
---------------------- ----------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 34,068 $ 18,195 $ 89,698 $ 26,968
Drilling services 4,495 -- 9,083 --
Equity in earnings 3,004 5,850 8,560 10,033
Other 11 -- 43 459
--------- --------- --------- ---------
41,578 24,045 107,384 37,460
--------- --------- --------- ---------
Costs and expenses:
Oil and gas purchases 33,455 18,026 88,389 26,309
Operating expenses 2,486 -- 5,007 477
Losses of equity investees 81 167 244 --
Depreciation and amortization 438 43 914 172
General and administrative expenses 584 370 1,698 2,956
--------- --------- --------- ---------
37,044 18,606 96,252 29,914
--------- --------- --------- ---------
Operating income 4,534 5,439 11,132 7,546
Gain on sale of asset -- 155 -- 902
Interest and other income 1,890 3,463 6,953 11,104
Interest and other financing costs (3,331) (3,888) (11,556) (9,612)
--------- --------- --------- ---------
Income before minority interests and
income taxes 3,093 5,169 6,529 9,940
Minority interests in consolidated
subsidiaries (371) (357) (996) (667)
--------- --------- --------- ---------
Income before income taxes 2,722 4,812 5,533 9,273
Income tax expense 1,057 1,752 2,236 3,395
--------- --------- --------- ---------
Net income $ 1,665 $ 3,060 $ 3,297 $ 5,878
========= ========= ========= =========
Net income per share $ 0.08 $ 0.17 $ 0.16 $ 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,
--------------------
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,297 $ 5,878
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Minority interests in consolidated subsidiaries 996 667
Depreciation and amortization 914 172
Amortization of debt issue costs 2,314 839
Equity in earnings (8,560) (10,033)
Losses of equity investees 244 --
Distributions from equity investments 8,304 6,260
Gain on sale of assets -- (902)
Deferred income taxes and other 3,737 6,776
Changes in operating working capital:
Increase in accounts receivable (3,406) (4,492)
Increase in accounts receivable from affiliates (113) (4,271)
Increase in other current assets (189) (100)
Decrease in accounts payable and accrued liabilities (7,167) (4,989)
Increase in accounts payable to affiliates 2,025 5,466
Increase in interest payable 2,398 1,842
Decrease in interest payable to affiliates -- (4,383)
-------- --------
Net cash provided by (used in) operating activities 4,794 (1,270)
-------- --------
Cash flows from investing activities:
Repayment of advances to affiliates 2,618 25,799
Advances to affiliates (1,317) (28,571)
Additions to property and equipment (45,218) (152)
Investment in equity investee (1,017) (5,697)
Other (15) 53
-------- --------
Net cash used in investing activities (44,949) (8,568)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 65,992 19,627
Repayments of notes payable (33,040) (2,927)
Repayment of note payable to affiliate -- (332)
Debt issue costs (4,006) (843)
Proceeds from issuance of common stock 7,185 --
Dividends on subsidiary common stock (935) (906)
-------- --------
Net cash provided by financing activities 35,196 14,619
-------- --------
Net (decrease) increase in cash and cash equivalents (4,959) 4,781
Cash and cash equivalents at beginning of year 10,102 6,787
-------- --------
Cash and cash equivalents at end of period $ 5,143 $ 11,568
======== ========
Cash paid for interest, net of amounts capitalized $ 6,997 $ 11,315
Cash paid for income taxes $ -- $ 1,700
</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, 1996 17,017 $ 171 $ 17,579 $ (5,468) $ 12,282
Issuance of common stock (unaudited) 1,581 15 7,610 -- 7,625
Net income for the nine months
ended March 31, 1997 (unaudited) -- -- -- 3,297 3,297
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997
(unaudited) 18,598 $ 186 $ 25,189 $ (2,171) $ 23,204
========== ========== ========== ========== ==========
</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") and offshore
eastern Canada. DeepTech's activities are concentrated primarily in the
flextrend and deepwater areas of the Gulf.
Transportation Services
Leviathan Gas Pipeline Partners, L.P. (the "Partnership") is a publicly held
Delaware limited partnership primarily engaged in the gathering and
transportation of natural gas and crude oil through its pipeline systems
located in the Gulf. The Partnership commenced operations in February 1993. The
Partnership's assets include interests in (i) eight natural gas pipeline
systems, (ii) a crude oil pipeline system, (iii) five strategically located
multi-purpose platforms, (iv) three producing oil and gas properties, (v) an
overriding royalty interest and (vi) a dehydration facility. Leviathan Gas
Pipeline Company ("Leviathan"), a wholly-owned subsidiary of Leviathan Holdings
Company ("Leviathan Holdings"), an 85%-owned subsidiary of DeepTech, is the
general partner and performs all management and operating functions of the
Partnership and its subsidiaries. Leviathan owned an effective 27.3% interest
in the Partnership as of March 31, 1997 giving DeepTech an effective 23.2%
interest therein.
Exploration, Development and Production
Tatham Offshore, Inc. ("Tatham Offshore"), an approximately 37%-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 and offshore eastern Canada.
Flextrend Development Company, L.L.C. ("Flextrend Development"), a subsidiary
of the Partnership, acquired Tatham Offshore's working interests, subject to
certain reversionary rights, in three oil and gas properties on June 30, 1995
and is currently engaged in the development and production of the oil and gas
reserves underlying these properties.
Marine Services
DeepFlex Production Services, Inc. ("DeepFlex"), a wholly-owned subsidiary of
DeepTech, through its subsidiaries and equity interests, focuses on the
acquisition and deployment of semisubmersible drilling rigs for contract
drilling services. In March 1995, 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, effectively owned 50% by DeepFlex and 50% by Coflexip, operated
the FPS Laffit Pincay, a second generation semisubmersible drilling rig,
through September 30, 1996.
In December 1995, DeepFlex entered into an agreement with Highwood Partners,
L.P. ("Highwood Partners") to form Deepwater Drillers, L.L.C. ("Deepwater
Drillers") to exercise an option assigned from an indirect subsidiary of
DeepTech to acquire the FPS Bill Shoemaker, a second generation semisubmersible
drilling rig. At inception, Deepwater Drillers was owned 50% by a wholly-owned
subsidiary of DeepFlex and 50% by Highwood Partners. Effective June 30, 1996,
FPS V, Inc. ("FPS V"), a wholly-owned subsidiary of DeepTech, acquired Highwood
Partners' 50% interest.
On September 30, 1996, Deepwater Drillers was merged with and into RIGCO North
America, L.L.C. ("RIGCO"), a wholly-owned indirect subsidiary of DeepFlex.
RIGCO also acquired the FPS Laffit Pincay from DeepFlex Partners in exchange
for payment-in-kind indebtedness ("PIK Notes") (See Note 4).
Marketing
Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of
DeepTech, markets oil and gas production from the Partnership, Tatham Offshore
and third-party producers.
7
<PAGE> 8
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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"). 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. Losses of equity investees 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. 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, 1996.
Earnings per share
Earnings per share is computed by dividing common equity in net income 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, 1997
and 1996 was 21,052,613 shares and 17,733,196 shares, respectively. The
weighted average number of common shares and common stock equivalents
outstanding for the nine months ended March 31, 1997 and 1996 was 20,652,622
shares and 16,670,138 shares, respectively.
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share", was issued in February 1997. SFAS No. 128 establishes new guidelines
for computing and presenting earnings per share and is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application of SFAS No. 128 is not permitted; however, pro forma
earnings per share may be disclosed in the notes to the consolidated financial
statements in periods prior to adoption. Pro forma basic net income per share
is $0.09 per share and $0.19 per share, respectively, for the three and nine
months ended March 31, 1997. Pro forma dilutive earnings per share is $0.08 per
share and $0.16 per share, respectively, for the three and nine months ended
March 31, 1997.
Other
The Company adopted SFAS No. 123 "Accounting for Stock Based Compensation"
effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the
fair value method of accounting for their stock-based compensation plans, the
Company has elected to continue to utilize the intrinsic value method under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Thus, the adoption of SFAS No. 123 did not have a material adverse
effect on the Company's financial position or results of operations. During the
nine months ended March 31, 1997, the Company issued 150,000 options and
750,000 stock appreciation rights, respectively, pursuant to DeepTech's
Non-Employee Director Stock Option Plan and Second Amended Equity Incentive
Plan.
8
<PAGE> 9
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - 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
Pipeline Partners, L.P. Tatham Offshore, Inc. Partners, L.P.
------------------------ ------------------------ -----------------------
March 31, June 30, March 31, June 30, March 31, June 30,
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 19,907 $ 25,867 $ 14,625 $ 20,636 $ 1 $ 659
Noncurrent assets 411,625 399,373 74,547 76,494 2,645 42,403 (a)
Current liabilities 12,362 35,961 2,882 9,489 -- 57
Long-term debt 219,000 182,412 60,000 60,000 -- 40,490 (a)
Other noncurrent
liabilities 9,314 15,242 9,261 8,779 -- --
</TABLE>
- ------------------
(a) Effective September 30, 1996, RIGCO acquired the FPS Laffit Pincay from
DeepFlex Partners for the assumption of all PIK Notes then outstanding of
$40.1 million. Accordingly, at March 31, 1997, the FPS Laffit Pincay is
included in property and equipment on the Company's consolidated balance
sheet.
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended March 31, 1997 For the Nine Months Ended March 31, 1996
------------------------------------------------------- -----------------------------------------------------
DeepFlex Tatham DeepFlex Tatham
Partnership Partners (a) Other Total Offshore Partnership Partners Offshore Other Total
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 84,337 $ 4,448 $ 16,508 $ 42,354 $ 1,592 $ 11,109
Other income 1,670 185 422 659 5,113 22,716
Operating expenses (16,038) (2,804) (10,362) (8,716) (1,265) (16,857)
Depreciation (34,449) (504) (3,500) (9,712) (252) (840)
Other expenses (7,937) (1,195) (6,314) (523) (1,306) (6,288)
-------- -------- -------- -------- -------- --------
Net earnings (loss) 27,583 130 (3,246) 24,062 3,882 9,840
Preferred stock
dividends -- -- (2,944) -- -- (112)
-------- -------- -------- -------- -------- --------
Net earnings (loss)
available to
common
shareholders 27,583 130 (6,190) 24,062 3,882 9,728
Effective ownership
percentage 27.3% 50% 36.72% 27.3% 50% 39.8%
-------- -------- -------- -------- -------- --------
7,530 65 (2,273) 6,569 1,941 3,872
Intercompany
profit(b) -- -- 640 -- -- (2,029)
Preferred stock
dividends (c) -- -- 636 -- -- --
Other equity
investees -- -- 63 (155) -- -- -- 36
Other 902 (d) -- -- 908 (e) 29 -- (385) (e) --
-------- -------- ------ ------- -------- -------- -------- -------- ------ --------
Equity in earnings
(losses) $ 8,432 $ 65 $ 63 $ 8,560 $ (244) $ 6,598 $ 1,941 $ 1,458 $ 36 $ 10,033
========= ======== ====== ======= ======= ======== ======== ======== ====== ========
Distributions from
equity
investments $ 8,304 $ -- $ -- $ 8,304 $ -- $ 6,110 $ -- $ -- $ 150 $ 6,260
========= ======== ====== ======= ======= ======== ======== ======== ====== ========
</TABLE>
- ------------------
(a) Effective September 30, 1996, RIGCO acquired the FPS Laffit Pincay from
DeepFlex Partners. Accordingly, activity related to the operations of the
FPS Laffit Pincay for the period from October 1, 1996 through March 31,
1997 is included in the Company's consolidated statement of operations.
(b) Represents the effect of the elimination of a portion of profit generated
from the sale of three oil and gas properties by Tatham Offshore to
Flextrend Development in June 1995, both of which are equity investees of
DeepTech. The profit is recognized as the oil and gas reserves are
produced.
(c) The Company's share of Tatham Offshore's Series A and Series C cumulative
preferred stock dividends.
(d) Represents additional income allocated by the Partnership to Leviathan as
a result of the Partnership achieving certain target levels of cash
distributions to its unitholders. See discussion of incentive
distributions to Leviathan below.
(e) Includes the effect of a change during the period in DeepTech's ownership
percentage of Tatham Offshore's common equity.
9
<PAGE> 10
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Partnership and its subsidiaries 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. These
distributions are effectively made 98% to unitholders and 2% to Leviathan,
subject to the payment of incentive distributions to Leviathan if certain
target levels of cash distributions to Unitholders are achieved (the "Incentive
Distributions"). As an incentive, the general partner's interest in the portion
of quarterly cash distributions in excess of $0.325 per Unit and less than or
equal to $0.375 per Unit is increased to 15%. For quarterly cash distributions
over $0.375 per Unit but less than or equal to $0.425 per Unit, the general
partner receives 25% of such incremental amount and for all quarterly cash
distributions in excess of $0.425 per Unit, the general partner receives 50% of
the incremental amount. In February 1997, the Partnership paid a cash
distribution of $0.40 per Preference and Common Unit for the period from
October 1, 1996 through December 31, 1996 and an Incentive Distribution of $0.4
million to Leviathan, as general partner. In April 1997, the Partnership
declared a cash distribution of $0.425 per Preference and Common Unit for the
period from January 1, 1997 through March 31, 1997 which will be paid on May
15, 1997 to unitholders of record as of April 30, 1997. Leviathan, as general
partner, will receive an incentive distribution of $0.6 million for the quarter
ended March 31, 1997.
NOTE 4 - INDEBTEDNESS:
Outstanding indebtedness is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
----------------------- ----------------------
Current Long-term Current Long-term
<S> <C> <C> <C> <C>
Notes payable:
Highwood Notes $ -- $ -- $ 17,258 $ --
Term Loan -- -- 6,069 5,931
RIGCO Credit Facility 5,180 59,320 -- --
Senior Notes -- 80,790 -- 80,603
Wilrig AS promissory notes -- -- -- 11,000
Senior Subordinated Notes -- 15,350 -- --
Notes payable to affiliates:
Subordinated Promissory Notes, bearing interest at
15% per annum, payable quarterly -- -- 6,640 --
</TABLE>
Highwood Notes
In December 1995 and June 1996, the Company issued promissory notes to Highwood
Partners (the "Highwood Notes") for an aggregate principal amount of $17.3
million for the purchase of 100% interest in the FPS Bill Shoemaker. In July
1996, the Company borrowed an additional $1.0 million for refurbishment costs
bringing the total amount of outstanding Highwood Notes to $18.3 million. The
Company retired the Highwood Notes in connection with obtaining the RIGCO
Credit Facility discussed below. The Company capitalized interest related to
the Highwood Notes of $0.6 million for the nine months ended March 31, 1997.
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 Company
retired the Term Loan in connection with obtaining the RIGCO Credit Facility
discussed below. For the nine months ended March 31, 1997, interest expense
related to the Term Loan totaled $0.4 million and debt issue costs amortized in
connection with the repayment of the Term Loan totaled $0.5 million.
RIGCO Credit Facility
On September 30, 1996, RIGCO entered into a $65.0 million senior secured credit
facility with a syndicate of lenders (the "RIGCO Credit Facility"). Proceeds
from the credit facility were used to acquire the FPS Bill Shoemaker, to fund
significant upgrades to the FPS Bill Shoemaker and to retire the Highwood Notes
and the Term Loan. RIGCO also acquired the FPS Laffit Pincay from DeepFlex
Partners for the assumption of all of the then outstanding PIK Notes. The RIGCO
Credit Facility (i) matures on September 30, 1998, (ii) bears interest at the
prime rate plus 3% per annum, payable quarterly, (iii) is secured by all
tangible and intangible assets of RIGCO including the two semisubmersible
drilling rigs and (iv) requires a quarterly
10
<PAGE> 11
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
principal payment of excess cash flow as defined in the credit agreement with a
minimum principal amortization of $250,000 per quarter beginning on December
31, 1996. Debt issue costs related to the RIGCO Credit Facility of $3.9 million
were capitalized and are being amortized over the two-year life of the credit
facility. Interest incurred and amortization of debt issue costs related to the
RIGCO Credit Facility totaled $4.6 million for the nine months ended March 31,
1997. The Company capitalized $3.8 million of such interest costs during the
period in connection with the make-ready project on the FPS Bill Shoemaker. In
connection with providing the RIGCO Credit Facility, lending syndicate members
were issued warrants to purchase an aggregate of 5% of RIGCO's outstanding
equity.
In April 1997, the RIGCO Credit Facility was amended to provide for an
additional $12.0 million to fund the remaining upgrades to the FPS Bill
Shoemaker.
Senior Notes
In 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 $8.1 million for
the nine months ended March 31, 1997.
Wilrig AS promissory notes
In November 1994, the Company issued to Wilrig AS (i) promissory notes in the
aggregate principal amount of $11.0 million due December 1997 and (ii) warrants
which grant Wilrig the right to exchange the principal and interest outstanding
under the promissory notes for common stock of DeepTech at the rate of $10.00
per share up to a maximum of 1,100,000 shares. Interest expense related to this
debt is payable quarterly at 10% per annum and totaled $0.6 million for the
nine months ended March 31, 1997. See "Senior Subordinated Notes" below.
Senior Subordinated Notes
On January 15, 1997, the Company issued $6.0 million of renewal subordinated
promissory notes (the "Renewal Notes") to Mr. Tatham and paid $640,000 to other
affiliates in settlement of $6,640,000 of Subordinated Promissory Notes which
matured on that date. On January 23, 1997, DeepTech paid $1,650,000 principal
amount of the Wilrig Notes and issued $15,350,000 aggregate principal amount of
Senior Subordinated Notes (the "Senior Subordinated Notes") to an investment
banking firm in exchange for $9.35 million principal amount of the Wilrig
Notes, 1,100,000 warrants to purchase common stock of DeepTech at $10.00 per
share (the "Wilrig Warrants") and $6.0 million of Renewal Notes, all of which
were concurrently purchased by the investment banking firm from the respective
holders thereof. The Senior Subordinated Notes are unsecured, bear interest at
11%, payable quarterly and are due on May 31, 2000. The Senior Subordinated
Notes, which are subordinated to the existing Senior Notes and will rank senior
to all subordinated indebtedness of the Company, are not redeemable before June
15, 1999 and thereafter may be redeemed at 101% of the principal amount
thereof, plus accrued interest. The Company is obligated to make an offer to
repurchase the Senior Subordinated Notes at 101% of the principal amount
thereof, plus accrued interest to the date of repurchase, in the event of a
change of control as defined. In addition, if the Company is required to make a
repurchase offer with respect to the Senior Notes, it will be obligated to make
an offer to purchase the Senior Subordinated Notes at a repurchase price of
100% of the principal amount thereof, plus accrued interest, to the extent
permitted by the indenture covering the Senior Notes. The Company has also
agreed to file a registration statement with respect to the Senior Subordinated
Notes upon request from at least 75% of the holders thereof. The Company
reimbursed the investment banking firm for legal fees and expenses of $60,000
and paid an underwriting fee of $307,000 in connection with such transaction.
Interest and amortization of debt issue costs related to this debt totaled $0.3
million for the nine months ended March 31, 1997.
In addition, in conjunction with Mr. Tatham's agreement to sell the Renewal
Notes to the investment banking firm, DeepTech agreed to assign the Wilrig
Warrants to Mr. Tatham and further agreed to provide Mr. Tatham and members of
his immediate family the right, until June 1, 1997, to accept an offer
previously made to certain warrantholders to exercise 25%, 37.5% or 50% of
their warrants in exchange for an extension of one, two or three years,
respectively, in the expiration date of the remaining warrants. In addition,
Mr. Tatham agreed to waive certain prepayment provisions in the Renewal Notes.
11
<PAGE> 12
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY:
Under various agreements and arrangements, DeepTech has authorized the issuance
of stock warrants to noteholders, employees, directors and financial
institutions. On September 30, 1996, Westgate International, L.P. ("Westgate")
exercised warrants to acquire 472,973 shares of DeepTech common stock at $5.00
per share. Highwood Partners acquired these warrants in December 1995 in
connection with DeepTech's financing of the acquisition of the FPS Bill
Shoemaker and subsequently assigned such warrants to Westgate. DeepTech has
agreed to register the shares of common stock acquired by Westgate pursuant to
the warrant agreement. A registration statement was filed on April 7, 1997 to
register the common stock acquired by Westgate and certain other common stock.
In December 1996, the Company extended an offer to certain of its
warrantholders whereby the exercise period for certain vested warrants could be
extended for one, two or three years in consideration for the immediate
exercise of 25%, 37.5% or 50%, respectively, of the warrants so designated by
each warrantholder. As a result of this offer, on December 31, 1996, DeepTech
issued 1,080,701 shares of common stock pursuant to the exercise of warrants at
prices ranging from $4.00 to $4.50 per share and extended the exercise period
on 1,894,446 warrants. In addition, during the nine months ended March 31,
1997, DeepTech issued 28,127 shares of common stock pursuant to the exercise of
other outstanding warrants and options. At March 31, 1997, DeepTech had
outstanding warrants and options to acquire 9,643,284 shares of common stock as
well as 750,000 stock appreciation rights outstanding.
NOTE 6 - RELATED PARTY TRANSACTIONS:
DeepTech has entered into management agreements with certain of its affiliates,
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. 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. Effective July
1, 1996, the management agreements with Leviathan and Tatham Offshore were
amended to provide for an annual management fee of 54% and 24%, respectively,
of DeepTech's overhead expenses. During the nine months ended March 31, 1997,
the Partnership and Tatham Offshore were charged $5.2 million and $2.3 million,
respectively, under their respective agreements. In addition, DeepTech's
management agreement with Leviathan 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 public offering of additional
Preference Units) and (ii) the investment of such proceeds in additional
acquisitions or construction projects. During the nine months ended March 31,
1997, Leviathan charged the Partnership $0.4 million to compensate DeepTech for
additional taxable income allocated to Leviathan.
During the nine months ended March 31, 1997, Leviathan Holdings paid dividends
of $6.2 million to its common stockholders, which included DeepTech as a result
of its 85% ownership interest in Leviathan Holdings.
As of March 31, 1997, DeepTech holds an aggregate principal amount of $60.0
million of Tatham Offshore subordinated convertible promissory notes (the
"Subordinated Notes"). Interest income related to these notes totaled $5.3
million for the nine months ended March 31, 1997.
On November 1, 1995, DeepTech agreed to assume $1.7 million of an affiliate's
accounts receivable from Tatham Offshore in exchange for reducing the
affiliates' 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, payable quarterly. The principal is due and
payable in six monthly installments which began on January 31, 1997.
Effective December 10, 1996, Flextrend Development exercised its option to
permanently retain 50% of the assigned working interest in all three of the
Assigned Properties in exchange for forgiving 50% of the then-existing Payout
Amount exclusive of the $7.5 million plus interest added to the Payout Amount
in connection with the restructuring of certain transportation agreements with
the Partnership. Accordingly, Tatham Offshore is entitled to receive a
reassignment of one-half interest in the Assigned Properties (37 1/2% working
interest in Viosca Knoll Block 817, 25% working interest in Garden Banks Block
72 and a 25% working interest in Garden Banks Block 117) after Flextrend
Development has received net revenues equal to the Payout Amount. Flextrend
Development remains 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. Flextrend Development's election to retain
50% of the assigned working interest in all three Assigned Properties reduced
the Payout Amount from $94.0 million
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<PAGE> 13
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
to $50.8 million. Subsequent to December 10, 1996, only 50% of the development
and operating costs attributable to the Assigned Properties are added to the
Payout Amount and 50% of the net revenue from the assigned working interests in
the Assigned Properties will reduce the Payout Amount. As of March 31, 1997,
the Payout Amount was $48.1 million comprised of (a) the sum of (i) initial
acquisition and transaction costs of $32.1 million, (ii) development and
operating costs of $90.4 million, (iii) prepaid demand charges of $7.5 million
and (iv) interest of $14.7 million reduced by (b) the sum of (i) net revenue of
$53.4 million and (ii) forgiveness of $43.2 million of the Payout Amount as a
result of Flextrend Development's decision to retain 50% of the acquired
working interest in the Assigned Properties. 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.
During the nine months ended March 31, 1997, substantially all of Offshore
Marketing's oil and gas purchases were derived from purchases from Tatham
Offshore and the Partnership.
In December 1996, DeepFlex exercised 1,016,957 Tatham Offshore warrants to
acquire shares of Tatham Offshore's Series C 4% Convertible Exchangeable
Preferred Stock at $1.00 per share. The remaining 4,312,086 Tatham Offshore
warrants held by DeepFlex were automatically converted into 4,312,086 shares of
Tatham Offshore's Mandatory Redeemable Preferred Stock on January 1, 1997.
In February 1996, DeepFlex Partners' FPS Laffit Pincay began providing contract
drilling services to Flextrend Development, which will extend until Flextrend
Development concludes the drilling and completion of the Garden Banks Block 117
#2 well. During the nine months ended March 31, 1997, DeepFlex Partners and
RIGCO reported operating revenue totaling $4.4 million and $9.1 million,
respectively, related to these services. Net proceeds from the contract
drilling services paid to DeepFlex Partners were used to pay interest and
principal to DeepFlex on the PIK Notes.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
DeepTech anticipates that it will need significant additional funds from
outside sources to fund its financial obligations which mature in 1998 and
beyond. 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, the Company's debt agreements contain covenants that among other
things, require the Company to meet certain collateral coverage tests and
restrict the ability of the Company to incur additional indebtedness, effect
certain asset sales and engage in certain mergers or similar transactions.
Tatham Offshore has substantial future capital expenditures 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 capital or project financing.
In the ordinary course of business, the Company is 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. Management believes that the ultimate disposition of these actions,
either individually or in the aggregate, will not have a material adverse
effect on the consolidated financial position or operations of the Company.
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<PAGE> 14
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 and 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, 1997. Unless the context otherwise requires, references
to the "Company" shall mean the assets and operations of DeepTech and its
consolidated subsidiaries.
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 located primarily offshore
the United States in the Gulf, with principal focus in the flextrend and
deepwater areas, and offshore eastern Canada. 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.
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 and the development and production of oil and gas reserves from three
proved properties.
Tatham Offshore is an independent energy company engaged in the development and
production of, and the exploration for, offshore oil and gas reserves, with
activities concentrated in the flextrend and deepwater areas of the Gulf and
offshore eastern Canada. DeepTech currently owns approximately 37% of Tatham
Offshore's outstanding common stock. In addition, DeepTech owns, through
DeepFlex, 4.7 million shares of Tatham Offshore's Series A 12% Convertible
Exchangeable Preferred Stock, 1.0 million shares of Tatham Offshore's Series C
4% Convertible Exchangeable Preferred Stock and 4.3 million shares of Tatham
Offshore's Mandatory Redeemable Preferred Stock. The Partnership owns 7,500
shares of Senior Preferred Stock of Tatham Offshore which is convertible into
Series A 12% Convertible Exchangeable Preferred Stock under certain
circumstances.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Oil and gas sales from the Company's marketing operations totaled $34.1 million
for the three months ended March 31, 1997 as compared with $18.2 million for
the three months ended March 31, 1996. During the three months ended March 31,
1997 and 1996, the Company derived its oil and gas revenue by marketing the oil
and gas production of the Partnership, Tatham Offshore and third-party
producers. The increase in oil and gas sales is a result of the initiation of
production from three oil and gas properties owned by the Partnership and
Tatham Offshore during 1996. During the three months ended March 31, 1997, the
Company sold 11,147 million cubic feet ("MMcf") of gas and 315,000 barrels of
oil at average prices of $2.44 per thousand cubic feet ("Mcf") and $21.93 per
barrel, respectively. During the same period in 1996, the Company sold 5,488
MMcf of gas and 125,000 barrels of oil at average prices of $2.86 per Mcf and
$19.99 per barrel, respectively.
Drilling services totaled $4.5 million for the three months ended March 31,
1997 and included revenue from contract drilling services provided by the
Company's FPS Laffit Pincay.
Equity in earnings totaled $3.0 million for the three months ended March 31,
1997 as compared with $5.9 million for the same period in 1996. Equity in
earnings for the three months ended March 31, 1997 primarily included equity
earnings of the Partnership whereas 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. During the three
months ended March 31, 1997, the Partnership had total operating revenue of
$31.0 million as compared with $19.6 million for the three months ended March
31, 1996. For the three months ended March 31, 1997, the total gathering and
transportation throughput, net to the Partnership, was 248 billion cubic feet
("Bcf") of gas and 3.7 million barrels of oil as compared with 242 Bcf of gas
for the three months ended March 31, 1996. In addition, the Partnership
produced and sold 6,191 MMcf of gas and 203,000 barrels of oil at average
prices of $2.15 per Mcf and $22.53 per barrel, respectively, during the three
months ended March 31, 1997. During the same period in 1996, the Partnership
produced and sold 2,998 MMcf of gas at an average price of $3.00 per Mcf.
During the three months ended March 31, 1996, Tatham Offshore had total
operating revenue of $5.9 million and net nonoperating revenue of $9.1 million
which was primarily related to the sale of the Assigned Properties to Flextrend
Development. During
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<PAGE> 15
the three months ended March 31, 1996, Tatham Offshore sold 1,285 MMcf of gas
and 110,000 barrels of oil at $2.92 per Mcf and $19.57 per barrel,
respectively. Tatham Offshore's depreciation and operating expenses totaled
$4.4 million for the three months ended March 31, 1996. In addition, Tatham
Offshore's net income was reduced by $0.1 million in preferred stock dividends
in arrears for the three months ended March 31, 1996.
Oil and gas purchases by the Company's marketing operations for the three
months ended March 31, 1997 totaled $33.5 million as compared with $18.0
million for the same period in 1996. The activity for both periods represented
the cost of oil and gas purchased from the Partnership, Tatham Offshore and
third parties for resale. During the three months ended March 31, 1997, the
Company purchased 11,147 MMcf of gas and 295,000 barrels of oil at average
prices of $2.42 per Mcf and $21.75 per barrel, respectively. During the three
months ended March 31, 1996, the Company purchased 5,485 MMcf of gas and
125,000 barrels of oil at average prices of $2.84 per Mcf and $19.59 per
barrel, respectively.
Operating expenses for the three months ended March 31, 1997 totaled $2.5
million and included costs to operate the Company's FPS Laffit Pincay.
Losses of equity investees for the three months ended March 31, 1997 totaled
$0.1 million which was primarily equity losses of Tatham Offshore and DeepFlex
Partners as compared with $0.2 million for the three months ended March 31,
1996 which was equity losses of DeepFlex Partners. During the three months
ended March 31, 1997, Tatham Offshore had total operating revenue of $6.2
million and nonoperating income of $0.2 million. During the three months ended
March 31, 1997, Tatham Offshore sold 2,075 MMcf of gas and 45,000 barrels of
oil at average prices of $2.51 per Mcf and $22.39 per barrel, respectively.
Tatham Offshore's depreciation and operating expenses totaled $5.4 million and
other expenses totaled $2.1 million for the three months ended March 31, 1997.
In addition, Tatham Offshore's net income was reduced by $1.0 million in
preferred stock dividends in arrears for the three months ended March 31, 1997.
During the three months ended March 31, 1997 and 1996, DeepFlex Partners
recorded a net loss of $0.4 million and $4,000, respectively.
Depreciation and amortization totaled $0.4 million for the three months ended
March 31, 1997 as compared with $43,000 for the same period in 1996. The
increase in depreciation and amortization related to depreciation of the
Company's FPS Laffit Pincay which was acquired by RIGCO on September 30, 1996.
General and administrative expenses for the three months ended March 31, 1997
totaled $0.6 million as compared with $0.4 million for the same period in 1996.
Operating income for the three months ended March 31, 1997 totaled $4.5 million
as compared with an operating income of $5.4 million for the same period in
1996. The change in operating income primarily represented the net effect of
the items discussed above.
Interest and other income for the three months ended March 31, 1997 totaled
$1.9 million as compared with $3.5 million for the same period in 1996.
Interest and other income for the three months ended March 31, 1997 included
interest income derived from (i) the Subordinated Notes of $1.7 million and
(ii) other affiliate debt and available cash of $0.2 million. 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
payable from DeepFlex Partners of $1.1 million and (iii) other of $0.6 million.
Interest and other financing costs for the three months ended March 31, 1997
totaled $3.3 million as compared with $3.9 million for the same period in 1996.
Interest and other financing costs for the three months ended March 31, 1997
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 Senior Subordinated Notes of $0.3 million,
(iii) interest and amortization of debt issue costs related to the RIGCO Credit
Facility of $0.1 million, (iv) interest related to the Wilrig AS promissory
notes of $0.1 million and (v) other interest of $0.1 million. In addition, the
Company capitalized $2.2 million of interest costs related to the RIGCO Credit
Facility during the three months ended March 31, 1997 in connection with the
FPS Bill Shoemaker make-ready project. 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
affiliate debt 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.
During the three months ended March 31, 1997, the Company recorded income tax
expense of $1.1 million as compared with $1.8 million for the three months
ended March 31, 1996.
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<PAGE> 16
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, 1997 totaled $1.7 million. For the three months ended March 31,
1996, the Company reported net income of $3.1 million after taking into account
a $0.4 million loss resulting from minority interests in consolidated
subsidiaries.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1996
Oil and gas sales from the Company's marketing operations sales totaled $89.7
million for the nine months ended March 31, 1997 as compared with $27.0 million
for the nine months ended March 31, 1996. During the nine months ended March
31, 1997 and 1996, the Company derived its oil and gas revenue by marketing the
oil and gas production of the Partnership, Tatham Offshore and third-party
producers. The increase in oil and gas sales is a result of the initiation of
production from three oil and gas properties owned by the Partnership and
Tatham Offshore during 1996. During the nine months ended March 31, 1997, the
Company sold 29,252 MMcf of gas and 893,000 barrels of oil at average prices of
$2.38 per Mcf and $22.54 per barrel, respectively. During the same period in
1996, the Company sold 7,300 MMcf of gas and 409,000 barrels of oil at average
prices of $2.64 per Mcf and $18.85 per barrel, respectively.
Drilling services totaled $9.1 million for the nine months ended March 31, 1997
and included revenue from contract drilling services provided by the Company's
FPS Laffit Pincay from October 1, 1996 through March 31, 1997. Prior to October
1, 1996, the Company conducted its contract drilling services related to the
FPS Laffit Pincay through DeepFlex Partners which activity is included in
equity earnings for the period from July 1, 1996 through September 30, 1996, as
discussed below.
Equity in earnings totaled $8.6 million for the nine months ended March 31,
1997 as compared with $10.0 million for the same period in 1996. Equity in
earnings for the nine months ended March 31, 1997 primarily included equity
earnings of the Partnership and DeepFlex Partners of $8.4 million and $0.2
million, respectively, whereas 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. During the nine months ended March 31, 1997, the Partnership had
total operating revenue of $84.3 million as compared with $42.4 million for the
nine months ended March 31, 1996. For the nine months ended March 31, 1997, the
total gathering and transportation throughput, net to the Partnership, was 765
Bcf of gas and 4.0 million barrels of oil as compared with 668 Bcf of gas for
the nine months ended March 31, 1996. In addition, the Partnership produced and
sold 15,546 MMcf of gas and 571,000 barrels of oil at average prices of $2.17
per Mcf and $22.04 per barrel, respectively, during the nine months ended March
31, 1997. During the same period in 1996, the Partnership produced and sold
3,390 MMcf of gas at an average price of $2.93 per Mcf. DeepFlex Partners
recorded net income of $0.1 million and $3.9 million for the nine months ended
March 31, 1997 and 1996, respectively. Net income for the nine months ended
March 31, 1996 included a gain of $5.1 million related to the sale of the FPS
Eddie Delahoussaye. 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 three
properties to Flextrend Development. For the nine months ended March 31, 1996,
Tatham Offshore sold 1,999 MMcf of gas and 332,000 barrels of oil at average
prices of $2.58 per Mcf and $17.97 per barrel, respectively. Tatham Offshore's
depreciation and operating expenses totaled $17.7 million and other expenses
totaled $4.0 million for the nine months ended March 31, 1996. In addition,
Tatham Offshore's net income was reduced by $0.1 million in preferred stock
dividends in arrears for the nine months ended March 31, 1996.
Oil and gas purchases by the Company's marketing operations for the nine months
ended March 31, 1997 totaled $88.4 million as compared with $26.3 million for
the nine months ended March 31, 1996. The activity for both periods represented
the cost of oil and gas purchased from the Partnership, Tatham Offshore and
third parties for resale. During the nine months ended March 31, 1997, the
Company purchased 29,231 MMcf of gas and 873,000 barrels of oil at average
prices of $2.36 per Mcf and $22.19 per barrel, respectively. During the nine
months ended March 31, 1996, the Company purchased 7,309 MMcf of gas and
409,000 barrels of oil at average prices of $2.59 per Mcf and $17.90 per
barrel, respectively.
Operating expenses for the nine months ended March 31, 1997 totaled $5.0
million and included costs to operate the Company's FPS Laffit Pincay
subsequent to its acquisition by RIGCO on September 30, 1996. Operating costs
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.
Depreciation and amortization totaled $0.9 million for the nine months ended
March 31, 1997 as compared with $0.2 million for the nine months ended March
31, 1996. The increase in depreciation and amortization related to depreciation
of the Company's FPS Laffit Pincay, which was acquired by RIGCO on September
30, 1996, for the period from October 1, 1996 through March 31, 1997. Prior to
October 1, 1996, the Company conducted its contract drilling services related
to the FPS
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Laffit Pincay through DeepFlex Partners which activity is included in equity
earnings for the period from July 1, 1996 through September 30, 1996, as
discussed above.
Losses of equity investees for the nine months ended March 31, 1997 totaled
$0.2 million and was comprised of equity losses of Tatham Offshore. During the
nine months ended March 31, 1997, Tatham Offshore had total operating revenue
of $16.5 million and nonoperating income of $0.4 million. During the nine
months ended March 31, 1997, Tatham Offshore sold 5,354 MMcf of gas and 153,000
barrels of oil at average prices of $2.43 per Mcf and $22.86 per barrel,
respectively. Tatham Offshore's depreciation and operating expenses totaled
$13.9 million and other expenses totaled $6.3 million for the nine months ended
March 31, 1997. In addition, Tatham Offshore's net income was reduced by $3.0
million in preferred stock dividends in arrears for the nine months ended March
31, 1997.
General and administrative expenses for the nine months ended March 31, 1997
totaled $1.7 million as compared with $3.0 million for the nine months ended
March 31, 1996. The decrease in general and administrative expenses was
primarily attributable to decreases in salary and related expenses due to a
reduction in personnel and the restructuring of certain compensation
arrangements.
Operating income for the nine months ended March 31, 1997 totaled $11.1 million
as compared with operating income of $7.5 million for the nine months ended
March 31, 1996. The change in operating income primarily represented the net
effect of the items discussed above.
Interest and other income for the nine months ended March 31, 1997 totaled $7.0
million as compared with $11.1 million for the nine months ended March 31,
1996. Interest and other income for the nine months ended March 31, 1997
included interest income derived from (i) the Subordinated Notes of $5.3
million, (ii) the PIK Notes payable from DeepFlex Partners of $1.2 million and
(iii) other affiliate debt and available cash of $0.5 million. 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
payable from DeepFlex Partners of $4.7 million, (iii) interest earned on
available cash of $0.2 million and (iv) other of $0.9 million.
Interest and other financing costs for the nine months ended March 31, 1997
totaled $11.6 million as compared with $9.6 million for the nine months ended
March 31, 1996. Interest and other financing costs for the nine months ended
March 31, 1997 included (i) interest and amortization of debt issue costs and
discounts related to the Senior Notes of $8.1 million, (ii) interest and
amortization of debt issue costs related to the RIGCO Credit Facility of $0.8
million, (iii) interest and amortization of debt issue costs related to the
Senior Subordinated Notes of $0.3 million, (iv) interest related to the Wilrig
AS promissory notes of $0.6 million, (v) interest and amortization of debt
issue costs related to the Term Loan of $0.9 million and (vi) interest related
to other debt of $0.9 million. In addition, the Company capitalized $3.8
million of interest costs related to the RIGCO Credit Facility during the nine
months ended March 31, 1997 in connection with the FPS Bill Shoemaker
make-ready project. 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
related to the Highwood Notes and Wilrig Notes of $1.1 million and (iii)
interest and amortization of debt issue costs related to the Term Loan and
affiliate debt of $0.5 million.
During the nine months ended March 31, 1997, the Company recorded income tax
expense of $2.2 million as compared with $3.4 million for the nine months ended
March 31, 1996.
After taking into account a $1.0 million loss resulting from minority interests
in consolidated subsidiaries, the Company's net income for the nine months
ended March 31, 1997 totaled $3.3 million. For the nine months ended March 31,
1996, the Company reported net income of $5.9 million after taking into account
a $0.7 million loss resulting from minority interests in consolidated
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
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) to
pay its operating expenses, service its debt and satisfy its other obligations.
In addition, DeepTech may receive proceeds from the exercise of outstanding
warrants to purchase shares of DeepTech common stock.
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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 for
operational, financial, accounting and administrative services. Effective July
1, 1996, DeepTech amended its management agreements with each Subsidiary and
began charging Leviathan, Tatham Offshore, DeepFlex and Offshore Marketing a
management fee equal to 54%, 24%, 18% and 4%, respectively, of DeepTech's
overhead expenses. For the nine months ended March 31, 1997, Leviathan, Tatham
Offshore 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.
DeepFlex, which is currently charged 18% of DeepTech's general and
administrative overhead costs, did not make payments of management fees to
DeepTech during such period.
In addition to 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.
Leviathan, as general partner, is also entitled to the payment of incentive
distributions if certain target levels of distributions are met. As a result,
DeepTech's proportionate share of the aggregate distributions paid to Leviathan
for the nine months ended March 31, 1997 was $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 issued by Tatham Offshore with an
aggregate principal amount of $60.0 million. The Subordinated Notes bear
interest at a rate of 11 3/4% per annum, payable quarterly in arrears (an
aggregate of approximately $7.1 million per year); provided, however, effective
July 1, 1997, interest shall accrue at a rate of 13% per annum. For the nine
months ended March 31, 1997, interest income under the Subordinated Notes
totaled $5.3 million. The principal amount of the Subordinated Notes is payable
in seven equal annual installments commencing August 1, 1999. See "-- Tatham
Offshore -- Liquidity Outlook."
In connection with the issuance of the Highwood Notes, DeepTech granted
Highwood Partners warrants to acquire 472,973 shares of DeepTech common stock
at $5.00 per share which warrants were subsequently assigned to Westgate. On
September 30, 1996, Westgate exercised these warrants resulting in $2.4 million
of proceeds to DeepTech. DeepTech has agreed to register the shares of common
stock acquired by Westgate pursuant to the warrant agreement. A registration
statement was filed on April 7, 1997 to register the common stock acquired by
Westgate and certain other common stock.
In December 1996 and January 1997, the Company extended an offer to certain of
its warrantholders whereby the exercise period for certain vested warrants
could be extended for one, two or three years in consideration for the
immediate exercise of 25%, 37.5% or 50%, respectively, of the warrants so
designated by each warrantholder. To date, DeepTech has received $4.8 million
in proceeds, has issued 1,080,701 shares of DeepTech common stock pursuant to
the exercise of warrants and has extended the exercise period on 1,894,446
warrants as a result of this offer.
On November 1, 1995, DeepTech agreed to assume $1.7 million of an affiliate's
accounts receivable from Tatham Offshore in exchange for reducing the
affiliates' payable to DeepTech under a line of credit arrangement for a like
amount. DeepTech then converted the $1.7 million of accounts receivable from
Tahtam Offshore into the Affiliate Note which bears interest at 14.5% per
annum, payable quarterly. The principal is due and payable in six monthly
installments which began on January 31, 1997.
On September 30, 1996, RIGCO entered into the RIGCO Credit Facility for $65.0
million. Proceeds from the credit facility were used to acquire the FPS Bill
Shoemaker and to perform significant upgrades to the rig as well as to retire
the Highwood Notes and the Term Loan. RIGCO also acquired the FPS Laffit Pincay
from DeepFlex Partners for the assumption of all of the then outstanding PIK
Notes. The credit facility (i) is secured by the FPS Laffit Pincay and the FPS
Bill Shoemaker, (ii) bears interest at the prime rate plus 3% per annum,
payable quarterly, (iii) matures September 30, 1998 and (iv) requires a
quarterly principal payment of excess cash flow as defined in the credit
agreement with a minimum principal amortization of $250,000 per quarter
beginning December 31, 1996. RIGCO incurred and capitalized debt issue costs
related to the RIGCO Credit Facility of $3.9 million which are being amortized
over the two-year life of the credit facility. Interest incurred and
amortization of debt issue costs related to the RIGCO Credit Facility totaled
$4.6 million for the nine months ended March 31, 1997. The Company capitalized
$3.8 million of such interest costs during the period in connection with the
make-ready project on the FPS Bill Shoemaker. In connection with providing the
RIGCO Credit Facility, syndicate members were issued warrants to purchase an
aggregate of 5% of RIGCO's outstanding equity. In April 1997, the RIGCO Credit
Facility was amended to provide for an additional $12.0 million to fund the
remaining upgrades to the FPS Bill Shoemaker.
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From February 1996 until May 1997, DeepFlex Partners' FPS Laffit Pincay
provided contract drilling services to Flextrend Development. During the nine
months ended March 31, 1997, DeepFlex Partners and RIGCO provided services
totaling $4.4 million and $9.1 million, respectively, under this agreement. Net
proceeds from the contract drilling services paid to DeepFlex Partners through
September 30, 1996 were used to pay interest and principal to DeepFlex on the
PIK Notes. The RIGCO Credit Facility does not permit payments on the PIK Notes
until the credit facility has been repaid.
In May 1997, the FPS Laffit Pincay was contracted to a major oil company to
drill one well in the Garden Banks area of the Gulf. This drilling contract
includes three one well options at market prices.
Upon completion of an extensive drilling make-ready upgrade, the FPS Bill
Shoemaker will be mobilized to Canada for a drilling contract with a major oil
company to drill two wells. The drilling make-ready is anticipated to be
completed by the middle of May 1997.
Uses of Cash. The Company's capital requirements primarily consist of (i)
scheduled payments of interest on the Senior Notes of $4.9 million on June 15
and December 15 of each year, or $9.8 million on an annual basis, (ii)
scheduled interest payments on the RIGCO Credit Facility of $2.2 million per
quarter or $8.8 million on an annual basis and scheduled principal payments
equal to excess cash flow as defined in the credit agreement with a minimum
principal amortization of $250,000 per quarter, (iii) scheduled interest
payments on the Senior Subordinated Notes of $422,000 per quarter, or $1.7
million on an annual basis and (iv) amounts necessary to pay general and
administrative and other operational expenses.
In addition, the Company anticipates that its immediate capital expenditure
requirements will include additional investments in its contract drilling
services business, consisting of the remaining capital expenditures necessary
to complete an extensive upgrade, repair and refurbishment program on the FPS
Bill Shoemaker to enable it to perform contract drilling services. As of April
30, 1997, the Company has incurred $43.6 million related to the upgrade, repair
and refurbishment program on the FPS Bill Shoemaker. The Company anticipates
that the remaining capital requirements necessary to complete the upgrades on
the FPS Bill Shoemaker will be funded with proceeds from the RIGCO Credit
Facility, as amended.
In December 1996, DeepFlex exercised 1,016,957 Tatham Offshore warrants to
acquire shares of Tatham Offshore's Series C 4% Convertible Exchangeable
Preferred stock at $1.00 per share. The remaining 4,312,086 Tatham Offshore
warrants were automatically converted into 4,312,086 shares of Tatham
Offshore's Mandatory Redeemable Preferred stock on January 1, 1997. See
"--Tatham Offshore."
On January 15, 1997, DeepTech issued $6.0 million of Renewal Notes and paid
$640,000 in principal in settlement of $6,640,000 of Subordinated Promissory
Notes payable to affiliates which matured on that date. On January 23, 1997,
DeepTech paid $1,650,000 principal amount of the Wilrig Notes and issued
$15,350,000 of Senior Subordinated Notes to an investment banking firm in
exchange for $9.35 million principal amount of the Wilrig Notes, $6.0 million
of the Renewal Notes and the Wilrig Warrants which had been concurrently
purchased by the investment banking firm. The Senior Subordinated Notes are
unsecured, bear interest at 11% per annum, payable quarterly, and are due on
May 31, 2000. The Company reimbursed such firm for legal fees and expenses of
$60,000 and paid an underwriting fee of $307,000 in connection with such
transaction. In addition, in conjunction with Mr. Tatham's agreement to sell
the Renewal Notes to such firm, DeepTech agreed to assign the Wilrig Warrants
to Mr. Tatham and further agreed to provide Mr. Tatham and members of his
immediate family the right, until June 1, 1997, to accept an offer previously
made to certain warrantholders to exercise 25%, 37.5% or 50% of their warrants
in exchange for an extension of one, two or three years, respectively, in the
expiration date of the remaining warrants. In addition, Mr. Tatham agreed to
waive certain prepayment provisions in the Renewal Notes.
Liquidity Outlook. The Company intends to satisfy its 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,
interest on the Subordinated Notes and funds provided from the RIGCO Credit
Facility. As of March 31, 1997, the Company had $5.1 million of funds
available.
The Company anticipates that it will need significant additional funds from
outside sources to fund its financial obligations which mature in 1998 and
beyond. These obligations include the repayment by RIGCO of the remaining
balance of the RIGCO Credit Facility which is due in September 1998, the
repayment of DeepTech's Senior Subordinated Note which is due in May 2000 and
the principal balance of $82.0 million under DeepTech's Senior Notes which are
due in December 2000. The Company contemplates raising such funds through (i)
the issuance of additional debt or debt refinancing, (ii) the sale of equity
securities at the subsidiary level, (iii) a repayment of amounts due DeepTech
from Tatham Offshore and/or DeepFlex and/or
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(iv) the exercise of additional outstanding warrants to acquire DeepTech common
stock. However, there can be no assurance that the Company will be able to
raise capital on terms it deems acceptable on a timely basis. 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.
In April 1997, the Board of Directors of DeepTech authorized the repurchase of
up to 1,000,000 shares of DeepTech common stock through September 30, 1997. The
number of shares actually acquired by DeepTech will depend on subsequent
developments and corporate needs. This repurchase program has been designed to
enhance and improve shareholder value and liquidity and may be interrupted or
discontinued at any time. DeepTech anticipates funding the cash requirements
for the stock repurchase program with cash on hand and/or cash provided through
the exercise of outstanding warrants to acquire common stock. As of May 9,
1997, DeepTech has approximately 9.6 million shares issuable upon the exercise
of outstanding warrants, 3.3 million shares of which are exercisable at prices
ranging from $4.00 per share to $10.00 per share and which expire during the
period from July 1997 to December 1997.
The Company has never declared or paid dividends on its common stock and
expects to retain all available earnings generated by its operations for the
growth and development of the business.
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
(discussed below). Net cash provided by operating activities for the three
months ended March 31, 1997 totaled $12.9 million. At March 31, 1997, the
Partnership had cash and cash equivalents of $3.0 million.
Cash from continuing operations is derived from (i) payments for gathering and
transporting gas through the Partnership's 100% owned pipelines, (ii) platform
access and processing fees, (iii) cash distributions from the Partnership's
equity investees which include Stingray Pipeline Company ("Stingray"), High
Island Offshore System ("HIOS"), U-T Offshore System ("UTOS"), Viosca Knoll
Gathering System ("Viosca Knoll"), Poseidon Oil Pipeline Company, L.L.C.
("POPCO"), West Cameron Dehydration Company ("West Cameron Dehy"), Manta Ray
Offshore Gathering Company, L.L.C. ("Manta Ray Offshore") and Nautilus Pipeline
Company, L.L.C. ("Nautilus") (collectively, the "Equity Investees") and (iv)
the sale of oil and gas attributable to the Partnership's interest in three
producing properties.
The Partnership's cash flows from operations will be affected by the ability of
each Equity Investee to make distributions. Distributions from such entities
are also subject to the discretion of their respective management committees.
Further, each of Stingray, POPCO and Viosca Knoll is party to a credit
agreement under which it has outstanding obligations that may restrict the
payments of distributions to its owners. Distributions from Equity Investees
during the three months ended March 31, 1997 totaled $5.3 million.
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, 1997, Stingray had $21.75 million
outstanding under its term loan agreement, which is principally secured by
current and future gas transportation contracts between Stingray and its
customers.
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
million for the construction of the second and third phases of the Poseidon Oil
Pipeline and for other working capital needs of POPCO. POPCO's ability to
borrow money under the facility is subject to certain customary terms and
conditions, including borrowing base limitations. As of March 31, 1997, POPCO
had $101.5 million outstanding under the POPCO Credit Facility which is secured
by a substantial portion of POPCO's assets and matures on April 30, 2001.
Currently, approximately $14.0 million of additional funds are available under
the POPCO Credit Facility.
In December 1996, Viosca Knoll entered into a revolving credit facility (the
"Viosca Knoll Credit Facility") with a syndicate of commercial banks to provide
up to $100 million for the addition of compression to the Viosca Knoll system
and for other working capital needs of Viosca Knoll, including funds for a
one-time distribution of $25 million to its partners. As of March 31, 1997,
Viosca Knoll had $34.4 million outstanding under the Viosca Knoll Credit
Facility which is secured by a substantial
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portion of Viosca Knoll's assets and matures on December 20, 2001. Viosca
Knoll's ability to borrow money under the facility is subject to certain
customary terms and conditions, including borrowing base limitations.
The Partnership owns an interest in and is operator of three producing oil and
gas properties. The Viosca Knoll Block 817 project is currently producing a
total of approximately 106.0 MMcf of gas and 313 barrels of oil per day.
Flextrend Development owns a 75% working interest in this property, one-half of
which is subject to certain reversionary rights held by Tatham Offshore. The
Garden Banks Block 72 lease, which began producing in May 1996, is currently
producing an average of 3,250 barrels of oil, 12.5 MMcf of gas and 130 barrels
of water per day. The Garden Banks Block 117 #1 well, which began producing in
July 1996, is currently producing an average of approximately 1,500 barrels of
oil, 3.3 MMcf of gas and 4,000 barrels of water per day. Flextrend Development
has drilled a second successful well at Garden Banks Block 117 which should be
placed on production during May 1997. Flextrend Development owns a 50% working
interest in each of these two Garden Banks properties, one-half of which is
subject to certain reversionary rights held by Tatham Offshore.
The Partnership Credit Facility is a revolving credit facility providing for up
to $300 million of available credit subject to customary terms and conditions,
including certain incurrence limitations. Proceeds from the Partnership 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 distributions to the Unitholders. The
Partnership Credit Facility can also be utilized to issue letters of credit as
may be required from time to time; however, no letters of credit are currently
outstanding. As of March 31, 1997, borrowings totaled $219.0 million under the
Partnership Credit Facility bearing interest at an average floating rate of
6.5% per annum. The Partnership Credit Facility matures in December 1999; is
guaranteed by Leviathan and each of the Partnership's subsidiaries; and is
secured by the management agreement with Leviathan, substantially all of the
assets of the Partnership and Leviathan's 1% general partner interest in the
Partnership and approximate 1% interest in certain subsidiaries of the
Partnership.
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, including incentive distributions, as applicable,
(ii) expenditures for the maintenance of the pipelines and related
infrastructure and the acquisition and construction of additional pipelines and
related facilities for the gathering, transportation and processing of oil and
gas in the Gulf, (iii) expenditures related to its producing oil and gas
properties, (iv) management fees and other operating expenses, (v)
contributions to Equity Investees and (vi) debt service on its outstanding
indebtedness.
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 an amount equal to or exceeding the Minimum Quarterly Distribution per
Unit per quarter. At the current distribution rate of $0.425 per Unit, the
quarterly Partnership distributions total $11.1 million in respect of the
Preference Units, Common Units and general partner interest ($44.6 million on
an annual basis, including $13.8 million to Leviathan). The Partnership
believes that it will be able to continue to pay at least the current quarterly
distribution of $0.425 per Preference and Common Unit for the foreseeable
future.
Distributions by the Partnership of its Available Cash are effectively made 98%
to Unitholders and 2% to Leviathan, as general partner, subject to the payment
of Incentive Distributions to Leviathan if certain target levels of cash
distributions to Unitholders are achieved. As an incentive, the general
partner's interest in the portion of quarterly cash distributions in excess of
$0.325 per Unit and less than or equal to $0.375 per Unit is increased to 15%.
For quarterly cash distributions over $0.375 per Unit but less than or equal to
$0.425 per Unit, the general partner receives 25% of such incremental amount
and for all quarterly cash distributions in excess of $0.425 per Unit, the
general partner receives 50% of the incremental amount. In February 1997, the
general partner received an Incentive Distribution of $0.4 million and in May
1997 will receive an Incentive Distribution of $0.6 million.
In January 1997, the Partnership and affiliates of Marathon Oil Company
("Marathon") and Shell Oil Company ("Shell") formed Nautilus to build and
operate an interstate natural gas pipeline system, and Manta Ray Offshore to
acquire, operate and extend an existing gathering system that will be connected
to the Nautilus system, once the Nautilus system is constructed. Each of the
two new companies was formed to serve growing production areas in the Green
Canyon area of the Gulf and are indirectly owned 50% by Shell, 24.3% by
Marathon and 25.7% by the Partnership. The total cost of the two systems,
including substantially all of the Manta Ray Offshore system which was
contributed to Manta Ray Offshore by the Partnership, is estimated to be
approximately $270.0 million. The Nautilus system, a new jurisdictional
interstate pipeline, will consist of a 30-inch line downstream from Ship Shoal
Block 207 connecting to the Exxon Company USA operated Garden City gas
processing plant, onshore Louisiana. Upstream of the Ship Shoal 207 terminal,
the existing Manta Ray Offshore gathering system will be extended into a
broader gathering system that will serve shelf and deepwater production areas
around Ewing
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Bank Block 873 to the east and Green Canyon Block 65 to the west. Affiliates of
Marathon and Shell have committed to each of the Nautilus and Manta Ray
Offshore systems significant deep water acreage positions in the area,
including the recently announced Troika field (Green Canyon Block 244), and
will provide the majority of the capital funding for the new construction. The
Partnership will provide some funding in addition to its contribution of the
Manta Ray Offshore system.
The Partnership anticipates that its capital expenditures and equity
investments for the remaining portion of 1997 will relate to continuing
acquisition and construction activities as well as the remaining expenditures
associated with the initiation of production from the second well at Garden
Banks Block 117. The Partnership anticipates funding such cash requirements
primarily with available cash flow and borrowings under the Partnership Credit
Facility. The Partnership may contribute existing assets to new joint ventures
as partial consideration for its ownership interest therein. POPCO began
construction of phase III of the Poseidon Oil Pipeline, a 24-inch diameter
pipeline from Calliou Island to Houma, Louisiana, which is expected to be
operational in late 1997. The majority of these capital expenditures by POPCO
as well as capital expenditures by Viosca Knoll are anticipated to be funded by
borrowings under their respective credit facilities. In addition, the majority
of the capital requirements of Nautilus and Manta Ray Offshore are anticipated
to be funded by the equity contributions of affiliates of Shell and Marathon.
The Partnership's capital expenditures and equity investments for the three
months ended March 31, 1997 were $8.6 million.
Interest costs incurred by the Partnership related to the Partnership Credit
Facility totaled $3.9 million for the three months ended March 31, 1997. The
Partnership capitalized $0.8 million of such costs in connection with
construction projects and drilling activities during the period.
TATHAM OFFSHORE
Sources of Cash. Tatham Offshore intends to satisfy its immediate capital
requirements and other working capital needs primarily from cash on hand and
cash generated from continuing operations. At March 31, 1997, Tatham Offshore
had $10.7 million of cash and cash equivalents.
Cash from continuing operations is derived primarily from production from
Tatham Offshore's Viosca Knoll Block 817 project which is currently producing a
total of approximately 106.0 MMcf of gas and 313 barrels of oil per day. Tatham
Offshore currently owns a 25% working interest in the Viosca Knoll Block 817
project which interest is subject to a production payment equal to 25% of the
net operating cash flow from such working interest.
Tatham Offshore also has producing wells at Ewing Bank Block 914 and at its
Silent Beauty project at West Delta Block 35 which contribute to cash from
continuing operations. Tatham Offshore owns a 100% working interest in the Ewing
Bank 914 #2 well and a 38% working interest in the Silent Beauty project. During
the three months ended March 31, 1997, the Ewing Bank 914 #2 well produced an
average of approximately 370 barrels of oil and 0.8 MMcf of gas per day. In
April 1997, the Ewing Bank 914 #2 well was shut-in due to mechanical problems
with the well. Tatham Offshore is currently evaluating the alternatives
available to restore production on the Ewing Bank 914 #2 well. The Silent Beauty
project is currently producing at a rate of approximately 6.1 MMcf of gas and 80
barrels of oil per day.
As a result of a rights offering in February 1996, Tatham Offshore received
$12.6 million in gross proceeds ($11.3 million in net proceeds) pursuant to the
exercise of Rights to purchase 25,120,948 Warrants at $.50 per warrant. A total
of 20,129,571 Warrants were exercised to purchase 18,717,030 shares, 74,379
shares and 1,338,162 shares of Series A, B and C Preferred Stock, respectively,
at $1.00 per share which generated an additional $20.1 million in proceeds to
Tatham Offshore.
On January 1, 1997, the remaining 4,991,377 Warrants outstanding were
automatically converted, without any action on the part of the holder thereof,
into an equal number of shares of Mandatory Redeemable Preferred Stock with a
liquidation preference of $0.50 per share. At any time until December 31, 1998,
each share of Series A, B or C 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 $0.653 per share. The Exchange
Warrants will expire July 1, 1999. Alternatively, at any time, the holder of
any shares of Series A, B or C 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 $0.653 per
share. On and after July 1, 1997, the Convertible Exchangeable Preferred Stock
will be redeemable at the option of Tatham Offshore. Through April 30, 1997, a
total of 745,029 shares of Series A Preferred Stock had been converted into
1,756,539 shares of Tatham Offshore common stock.
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Uses of Cash. Tatham Offshore's primary uses of cash consist of (i) amounts due
under the Subordinated Notes, (ii) expenses associated with operating its
producing properties, including its production payment and leasehold
abandonment liabilities, (iii) capital expenditures necessary to fund its
portion of the development costs attributable to its working interests
including its obligations under the Drilling Arrangement discussed below, (iv)
platform access fees and processing and commodity charges payable to the
Partnership, (v) payments due under the management agreement with DeepTech and
(vi) amounts due under the Affiliate Note.
As of March 31, 1997, Tatham Offshore had $60.0 million aggregate principal
amount of Subordinated Notes outstanding, the maximum principal amount of
Subordinated Notes issuable, all of which were held by DeepTech. The
Subordinated Notes bear interest at a rate of 11 3/4% per annum, payable in
arrears (approximately $1.8 million per quarter); 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, 1997, Tatham Offshore paid DeepTech $5.3
million in interest on the Subordinated Notes.
During the nine months ended March 31, 1997, Tatham Offshore completed its
abandonment of its West Cameron 436 property, in which it owns a 47% working
interest, at a net cost to Tatham Offshore of $1.0 million. For the nine months
ended March 31, 1997, Tatham Offshore's production payment obligations totaled
$2.0 million.
Tatham Offshore is obligated to pay to the Partnership commodity charges, based
on the volume of oil and gas transported or processed, under certain
transportation agreements. Also, Tatham Offshore is obligated to pay to the
Partnership $1.6 million in platform access fees annually relative to its 25%
working interest in its Viosca Knoll Block 817 property.
The management fee agreement between Tatham Offshore and DeepTech provides for
an annual management fee which is intended to reimburse DeepTech for the
estimated costs of its operational, financial, accounting and administrative
services provided to Tatham Offshore. Effective July 1, 1996, the management
agreement was amended to provide for an annual management fee of 24% of
DeepTech's overhead expenses. For the nine months ended March 31, 1997, Tatham
Offshore was charged $2.3 million in management fees pursuant to this
agreement.
On November 1, 1995, Tatham Offshore converted $1.7 million of its accounts
payable to an affiliate into the Affiliate Note. The principal is payable to
DeepTech in six monthly installments which began on January 31, 1997. Tatham
Offshore has made $1.2 million of principal payments to DeepTech through April
30, 1997.
Liquidity Outlook. In order to improve liquidity and partially address its
capital requirements in recent years, Tatham Offshore (i) sold, subject to
certain reversionary rights, all of its then-existing working interests in its
Viosca Knoll Block 817, Garden Banks Block 72 and Garden Bank Block 117
properties (the "Assigned Properties") to Flextrend Development for $30
million, (ii) raised additional equity through the sale of Warrants and Series
A, B and C Preferred Stock, (iii) prepaid certain of its demand charge
obligations through the assignment of certain assets pursuant to an agreement
with the Partnership and (iv) reduced its overhead by lowering the levels of
services required under its management agreement with DeepTech.
Flextrend Development has initiated production from each of the Assigned
Properties. As discussed above, the Viosca Knoll Block 817 (Phar Lap) is
currently producing approximately 106.0 MMcf of gas and 313 barrels of oil per
day. In addition, five producing wells on Garden Banks Block 72 (Spectacular
Bid) are currently producing approximately 3,250 barrels of oil, 12.5 MMcf of
gas and 130 barrels of water per day. The Garden Banks Block 117 (Spend A Buck)
property is currently producing approximately 1,500 barrels of oil, 3.3 MMcf of
gas and 4,000 barrels of water per day from one well. Flextrend Development has
drilled a second successful well at Garden Banks Block 117 which should be
placed on production during May 1997.
Effective December 10, 1996, Flextrend Development exercised its option to
permanently retain 50% of the assigned working interest in all three of the
Assigned Properties in exchange for forgiving 50% of the then-existing Payout
Amount exclusive of the $7.5 million plus interest added to the Payout Amount
in connection with the restructuring of certain transportation agreements with
the Partnership. Accordingly, Tatham Offshore is entitled to receive a
reassignment of one-half interest in the Assigned Properties (37 1/2% working
interest in Viosca Knoll Block 817, 25% working interest in Garden Banks Block
72 and a 25% working interest in Garden Banks Block 117) after Flextrend
Development has received net revenues equal to the Payout Amount. Flextrend
Development remains 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. Flextrend Development's election to retain
50% of the assigned working interest in all three Assigned Properties reduced
the Payout Amount from $94.0 million to $50.8 million. Subsequent to December
10, 1996, only 50% of the development and operating costs attributable to the
23
<PAGE> 24
Assigned Properties are added to the Payout Amount and 50% of the net revenue
from the assigned working interests in the Assigned Properties will reduce the
Payout Amount. As of March 31, 1997, the Payout Amount was $48.1 million
comprised of (a) the sum of (i) initial acquisition and transaction costs of
$32.1 million, (ii) development and operating costs of $90.4 million, (iii)
prepaid demand charges of $7.5 million and (iv) interest of $14.7 million
reduced by (b) the sum of (i) net revenue of $53.4 million and (ii) forgiveness
of $43.2 million of the Payout Amount as a result of Flextrend Development's
decision to retain 50% of the acquired working interest in the Assigned
Properties. 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.
In September 1996, Tatham Offshore entered into a drilling arrangement (the
"Drilling Arrangement") with Sedco Forex Division of Schlumberger Technology
Corporation ("Sedco Forex"). The Drilling Arrangement includes the use of
either the semisubmersible drilling rig, the FPS Bill Shoemaker, or a
substitute rig capable of drilling in up to 1,500 feet of water. The Drilling
Arrangement will become effective upon the mobilization of a rig to Tatham
Offshore's initial location. The initial contract term of the Drilling
Arrangement is for 90 days or, if sooner, the completion of Tatham Offshore's
initial drilling operation and the mobilization of the rig to another location.
Tatham Offshore may, at its option, extend the initial contract term through
(i) three successive one well options or (ii) two successive one year terms.
Under the terms of the Drilling Arrangement, Tatham Offshore has committed to
pay Sedco Forex a drilling rate of $70,000 per day with a standby rate of
$66,700 per day. As security for its obligations under the Drilling
Arrangement, Tatham Offshore is required to post an irrevocable letter of
credit or cash collateral of $6.3 million, which amount is equal to the
aggregate operating day rate for the contract term. In the event that Tatham
Offshore exercises it option to extend the Drilling Arrangement, Tatham
Offshore and Sedco Forex must agree upon additional security for the extension
period. During the term of the Drilling Arrangement, Tatham Offshore has the
right to sub-contract the rig to other operators. If the rig is sub-contracted
to another operator, Tatham Offshore will receive the difference between the
sub-contract rate and the above agreed upon rates, if any. The FPS Bill
Shoemaker is owned by an affiliate of DeepTech and is operated by Sedco Forex
under a charter agreement. Sedco Forex has the right to substitute a similar
drilling rig for the FPS Bill Shoemaker in the event the FPS Bill Shoemaker is
unavailable due to a prior contract commitment for work offshore Canada. In the
event Sedco Forex mobilizes the rig to Canada, Tatham Offshore has (i) an
option to use the FPS Bill Shoemaker in the Newfoundland Grand Banks Area
rather than the substitute rig to complete the initial contract term prior to
the use by the third party, subject to availability, and subject to higher
contract rates to account for the additional costs incurred by Sedco Forex as a
result of operations offshore Canada and (ii) an additional option, upon
completion of the third party work and subject to the use of the rig for one
other project, to contract to use the rig for the drilling of one well at the
then prevailing contract price.
Tatham Offshore has recently begun evaluating opportunities to acquire certain
license interests offshore eastern Canada. Emphasis is being placed on license
interests that could be acquired in exchange for (i) new securities to be issued
by Tatham Offshore, (ii) convertible notes to be issued by Tatham Offshore,
(iii) a portion of Tatham Offshore's existing leasehold interests, particularly
its Sunday Silence field, or (iv) in connection with Tatham Offshore's rights to
utilize the FPS Bill Shoemaker.
Tatham Offshore currently intends to fund its operations with cash on hand and
cash from continuing operations. The restructuring of Tatham Offshore's
existing demand charge obligations with the Partnership, the reduction of its
overhead, the initiation of full production from the Viosca Knoll Block 817
(Phar Lap) project and improved commodity prices enabled Tatham Offshore to
generate approximately $0.7 million in positive cash flow for the three months
ended March 31, 1997. Tatham Offshore does not anticipate generating
significant positive cash flow prior to the first to occur of (i) obtaining a
refinancing commitment which could allow 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 one-half of the
Assigned Properties or (iii) the initial production from Tatham Offshore's
Sunday Silence field. In order to initiate production from the Sunday Silence
field, Tatham Offshore will require substantial additional capital to install a
production facility and drill additional development wells. There can be no
assurance, however, that Tatham Offshore will be able to obtain additional
financing on terms that are acceptable to Tatham Offshore.
To meet 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 Tatham Offshore's Sunday
Silence field under a farmout or financing arrangement with an industry partner
or financial institution, (ii) monitoring production from the Assigned
Properties in an effort to maximize the value of its reversionary interest and
attempting to obtain a financing commitment to reacquire the properties or, at
a minimum, to cause a reduction in the interest rate utilized in the
calculation of
24
<PAGE> 25
the Payout Amount, (iii) attempting to sell or farmout interests in its
other properties, including Genuine Risk (Ship Shoal Block 331) and (iv)
maximizing the value of its rights under the Drilling Arrangement with Sedco
Forex regarding the FPS Bill Shoemaker.
The ability of Tatham Offshore to satisfy its future capital needs 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 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. For federal leases acquired prior to November 20, 1995, 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. Under the new legislation, a minimum of 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
submitted an application relative to its Sunday Silence field which was deemed
complete by the Minerals Management Service ("MMS") effective November 13,
1996. Under federal law, the MMS has up to 180 days to evaluate the application
once the application is deemed complete. In February 1997, the MMS requested
additional information and clarification of the submitted data which tolled the
review period until this information was supplied by Tatham Offshore. Tatham
Offshore submitted the additional information requested by the MMS in March
1997, and the MMS resumed its review of Tatham Offshore's application. The
180-day review period now extends through June 8, 1997. 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. However, 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,
successfully develop the Sunday Silence field or initiate production therefrom
on a timely basis, if at all.
Tatham Offshore has never declared or 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.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance
that such expectations will prove to have been correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. Among the key factors that may have a direct bearing on
the Company's and its affiliates results of operations and financial condition
are: (i) competitive practices in the industry in which the Company and its
affiliates compete, (ii) the impact of current and future laws and government
regulations affecting the industry in general and the Company's and its
affiliates' operations in particular, (iii) environmental liabilities to which
the Company and its affiliates may become subject in the future that are not
covered by an indemnity or insurance, (iv) significant changes from
expectations of capital expenditures and operating expenses and unanticipated
project delays and (v) the impact of oil and natural gas price fluctuations.
The Company disclaims any obligation to update any forward-looking statements
to reflect events or circumstances after the date hereof.
25
<PAGE> 26
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
EX-27 Financial Data Schedule
(b) Reports on Form 8-K
None.
26
<PAGE> 27
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, 1997 /s/ JANET E. SIKES
------------------
Janet E. Sikes
Treasurer and Secretary
(Principal Accounting Officer)
Date: May 14, 1997 /s/ DENNIS A. KUNETKA
---------------------
Dennis A. Kunetka
Senior Vice President -
Corporate Finance
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEEPTECH
INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT MARCH
31, 1997 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 5,143
<SECURITIES> 0
<RECEIVABLES> 12,011
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,371
<PP&E> 111,432
<DEPRECIATION> 1,620
<TOTAL-ASSETS> 198,340
<CURRENT-LIABILITIES> 18,344
<BONDS> 155,460
0
0
<COMMON> 186
<OTHER-SE> 23,018
<TOTAL-LIABILITY-AND-EQUITY> 198,340
<SALES> 98,781
<TOTAL-REVENUES> 107,384
<CGS> 93,396
<TOTAL-COSTS> 93,640
<OTHER-EXPENSES> 914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,556
<INCOME-PRETAX> 5,533
<INCOME-TAX> 2,236
<INCOME-CONTINUING> 3,297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,297
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
