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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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 Number 0-23934
DEEPTECH INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0289338
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Travis Street
Suite 7500
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 224-7400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
12% Senior Secured Notes due 2000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
As of September 2, 1997, there were outstanding 19,927,228 shares of
common stock of the Registrant. The aggregate market value on such date of the
voting stock of the Registrant held by non-affiliates was an estimated $82.8
million.
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DEEPTECH INTERNATIONAL INC.
FIRST AMENDMENT TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1997
INDEX
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PAGE
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<S> <C> <C>
PART I
Items 1 & 2. Business and Properties..................................................................1
Item 3. Legal Proceedings.......................................................................27
Item 4. Submission of Matters to a Vote of Security Holders.....................................27
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................28
Item 6. Selected Financial Data.................................................................32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................33
Item 8. Financial Statements and Supplementary Data.............................................46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................46
PART III
Item 10. Directors and Executive Officers of the Registrant......................................47
Item 11. Executive Compensation..................................................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................47
Item 13. Certain Relationships and Related Transactions..........................................47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................64
</TABLE>
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The following text is qualified in its entirety by reference to the
more detailed information and consolidated financial statements (including the
notes thereto) appearing elsewhere in this First Amendment to the Annual Report
on Form 10-K ("Annual Report"). Unless the context otherwise requires,
references in this Annual Report to "DeepTech" shall mean DeepTech International
Inc., a Delaware corporation, and references to the "Company" or its operations
shall mean DeepTech and its consolidated subsidiaries, including Leviathan Gas
Pipeline Company, a Delaware corporation, (indirectly 85%-owned) ("Leviathan"),
DeepFlex Production Services, Inc., a Delaware corporation, (100%-owned)
("DeepFlex Services"), Offshore Gas Marketing, Inc., a Texas corporation,
(80%-owned) ("Offshore Marketing") and Offshore Gas Processors, Inc., a Texas
corporation, (85%-owned) ("Offshore Processors") (each an "Operating
Subsidiary," collectively, the "Operating Subsidiaries"), and their respective
consolidated subsidiaries and operations and Tatham Offshore, Inc. and its
consolidated subsidiaries and operations. Leviathan is the general partner of
Leviathan Gas Pipeline Partners, L.P., a Delaware limited partnership (together
with its consolidated subsidiaries, the "Partnership"), in which DeepTech owns
an indirect 23.2% effective interest. Tatham Offshore, Inc., a Delaware
Corporation, (including its consolidated subsidiaries, "Tatham Offshore"), a
36.6 % owned affiliate 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 of Mexico (the "Gulf") and in
the development of offshore pipeline infrastructure offshore eastern Canada. For
a description of certain terms used herein relating to the oil and gas industry,
see Items 1 & 2. "Business and Properties -- Certain Definitions."
PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
OVERVIEW
The Company is a diversified energy company engaged, through the
Operating Subsidiaries and Tatham Offshore, 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 and offshore eastern Canada.
DeepTech was formed in 1989 and, through the Operating Subsidiaries, Tatham
Offshore and certain joint ventures, owns interests in (i) two second
generation semisubmersible drilling rigs, (ii) nine natural gas pipelines (the
"Gas Pipelines"), (iii) a crude oil pipeline, (iv) five strategically located
multi-purpose platforms and (v) oil and gas leases which currently cover 94,720
gross (82,580 net) acres in the Gulf.
The following chart depicts the ownership structure of DeepTech, the
Operating Subsidiaries and certain related entities. The ownership percentages
indicated below reflect the ownership of the outstanding common stock of each
of the indicated Operating Subsidiaries and Tatham Offshore and the general and
limited partner interests in the Partnership.
[GRAPH]
(a) Owned by two 100% owned subsidiaries of DeepFlex Services.
(b) The entity's activities are included in the consolidated results of the
Company.
(c) The entity's activities are included in the results of the Company as
equity earnings (losses).
o Public entity
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The following discussion provides certain information regarding the
Company's operations as of September 2, 1997, unless otherwise indicated.
CONTRACT DRILLING SERVICES
GENERAL
The Company conducts its contract drilling services through an
indirect wholly-owned subsidiary, RIGCO North America, L.L.C. ("RIGCO"), which
was formed in September 1996. RIGCO is engaged in the contract drilling of
offshore oil and gas wells located primarily in the Gulf and offshore eastern
Canada. RIGCO owns two second generation semisubmersible rigs, the FPS Laffit
Pincay and the FPS Bill Shoemaker. RIGCO acquired the FPS Laffit Pincay from
DeepFlex Production Partners, L.P. ("DeepFlex Partners"), which is effectively
owned 50% by DeepFlex Services and 50% by an affiliate of Coflexip Stena
Offshore, Inc., by assuming $40.1 million of payment-in-kind indebtedness ("PIK
Notes") issued by DeepFlex Partners payable to DeepFlex Services. RIGCO
acquired the FPS Bill Shoemaker through a merger of Deepwater Drillers, L.L.C.
("Deepwater Drillers") with and into RIGCO. At formation, Deepwater Drillers
was owned 50% by a wholly-owned subsidiary of DeepFlex Services and 50% by
Highwood Partners, L.P. ("Highwood Partners"). In June 1996, the Company
acquired the remaining 50% of Deepwater Drillers from Highwood Partners in
exchange for an aggregate of $14.5 million in cash and notes.
Extensive repair, refurbishment, improvement and upgrade programs were
completed on the FPS Laffit Pincay in February 1996 and the FPS Bill Shoemaker
in July 1997 to enable them to conduct contract drilling services. Pursuant to
management and charter agreements ("Charter Agreements") with RIGCO, Sedco
Forex Division of Schlumberger Technology Corporation ("Sedco Forex") markets,
mans and operates both rigs.
DESCRIPTION OF PROPERTIES
Semisubmersible rigs consist of an upper working and living deck
resting on vertical columns connected to lower hull members. Such rigs operate
in a "semisubmerged" position, remaining afloat, off bottom, in a position in
which the lower hull is from about 55 to 90 feet below the water line and the
upper deck protrudes well above the surface. The rig is typically positioned by
anchors or thrusters (dynamic positioning) and remains stable for drilling in
the semi-submerged floating position due in part to its wave transparency
characteristics at the water line.
FPS Laffit Pincay. The FPS Laffit Pincay is a second generation
semisubmersible drilling rig of Penrod/Reineke design. It is capable of
drilling to depths of 25,000 feet, in water depths of up to 1,200 feet and has
a drilling variable load of approximately 2,000 short tons, a 10,000 psi
blow-out prevention system, 1,600 barrel mud pits and six 80,000 pound Shaffer
riser tensioners. This rig was constructed in 1976 and was completely
refurbished, upgraded and renovated in 1996. Such upgrades included the
installation of a VARCO TDS-3S top-drive system and a new SCR system.
Currently, the FPS Laffit Pincay is operating in the deepwater area of the
Gulf.
FPS Bill Shoemaker. The FPS Bill Shoemaker is a self-propelled, twin
pontoon, eight column, second generation semisubmersible drilling rig of Aker
H-3 design. It is capable of drilling to depths of 25,000 feet, in water depths
of up to 1,500 feet and has a drilling variable load of approximately 3,500
metric tons, a VARCO TDS-4S top-drive drilling system, a 10,000 psi blow-out
prevention system, 2,000 barrel mud pits and eight 80,000 pound riser
tensioners. This rig was constructed in 1976 and has been extensively
refurbished, repaired, renovated and upgraded within the last year at a cost of
approximately $55 million. The upgrades included the installation of a new
heliport, mud booster line, third mud pump, a third level of accommodations for
personnel and a new SCR system. In addition, the rig underwent a complete
winterization program and is able to operate in harsh environments in areas such
as offshore eastern Canada where it is currently located.
MANAGEMENT OF RIGS
In 1995 and 1996, RIGCO entered into the Charter Agreements with Sedco
Forex for the management and operation of the FPS Laffit Pincay and the FPS
Bill Shoemaker. Under these agreements, Sedco Forex is responsible not only for
the management, maintenance and operation of the rigs, but also for the
marketing of such rigs worldwide and for increasing their utilization rates.
Although Sedco Forex has the right to negotiate drilling
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contracts with respect to each rig; RIGCO has the right to accept or reject any
drilling contracts and to approve certain other matters.
Pursuant to the Charter Agreements, Sedco Forex is paid a monthly fee which
is comprised of a fixed amount and a variable amount based on performance. The
estimated total amount to be paid to Sedco Forex under each of these agreements
is dependent on the drilling rates received for the rigs, the costs of
operating and maintaining the rigs, the utilization rates of the rigs and the
term of the Charter Agreements, among other things. The term of each of the
Charter Agreements is for a period of 5 years. If either of these agreements
are not renewed or extended by mutual agreement, then management believes that
it can find an alternative company to manage and operate the rigs for a
reasonable fee and within a reasonable period of time.
DRILLING CONTRACTS
Most drilling contracts are structured on a dayrate, footage or turnkey
basis. They usually extend over a period of time covering either the drilling
of a single well, a group of wells (a "well-to-well contract") or a stated term
(a "term contract") and may be terminated by the customer in the event that the
drilling unit is destroyed or lost, drilling operations are suspended for a
specified period of time as a result of a breakdown of major equipment or other
events occur which are beyond the control of either party. In many instances,
the contract term may be extended by the customer exercising options for the
drilling of additional wells at fixed or mutually agreed upon terms. RIGCO's
contracts, through Sedco Forex, to provide offshore drilling services vary in
their terms and provisions. Most of RIGCO's drilling contracts are obtained
through competitive bids or through negotiations with customers. To date,
RIGCO has entered only into dayrate contracts, although RIGCO may enter into
non-dayrate contracts in the future, depending on market conditions, profit
potential and risk exposure, among other things.
A dayrate drilling contract generally provides for a basic drilling rate
based on a fixed rate per day. Under such a contract, the customer usually
bears a major portion of out-of-pocket costs of drilling and assumes most of
the risk associated with drilling operations such as risk of blowout, loss of
hole, stuck drill stem, machinery breakdowns, abnormal drilling conditions and
risks associated with subcontractors' services, supplies and personnel. In
contrast, the risks to the contractor on non-dayrate contracts could be
substantially greater than on a dayrate drilling contract because the
contractor may, and often does, assume more of the risks associated with
drilling operations generally assumed by the operator in a dayrate contract.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that give contractors the
flexibility to profit from increasing dayrates. In contrast, during these
periods, customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain dayrate prices at the lowest level possible.
FPS Laffit Pincay. During the past fiscal year, RIGCO received revenue
under two dayrate drilling contracts with respect to the FPS Laffit Pincay,
with combined revenue of approximately $19.1 million. The first contract was
with the Partnership for the completion of a previously drilled well and the
drilling of a new well in Garden Banks Block 117. Under the second contract,
the FPS Laffit Pincay is committed to Phillips Petroleum Company ("Phillips")
for the drilling of one well at Garden Banks Block 70 in the Gulf with options
to drill and/or complete three additional wells at various Gulf locations.
Management believes that work under the Phillips contract will be completed by
late September 1997. Pennzoil Producing Company ("Pennzoil") has agreed to
drill up to two new wells following the completion of the two wells drilled by
Phillips. Management anticipates that work under the Pennzoil contract will be
completed by February 1998. Currently, Sedco Forex is involved in discussions
with other producers regarding future commitment of the FPS Laffit Pincay. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Tatham Offshore --
Liquidity Outlook" for a description of Tatham Offshore's options with respect
to the FPS Laffit Pincay and the FPS Bill Shoemaker.
FPS Bill Shoemaker. In July 1997, the upgrade program for the FPS Bill
Shoemaker was completed and the rig was mobilized to offshore eastern Canada
under contract to Amoco Canada Petroleum Company Ltd. ("Amoco Canada"). The
FPS Bill Shoemaker is committed to Amoco Canada for a two well program which is
expected to be completed by February 1998. Tatham Offshore has the option to
either utilize the FPS Bill Shoemaker to drill one well offshore eastern Canada
or outsource the rig to another customer. After completing the existing
drilling
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commitments offshore eastern Canada, the FPS Bill Shoemaker is committed to
Shell Offshore Inc. for a one year period. Shell Offshore Inc. has an option
to extend the one-year contract for an additional six month period at mutually
agreed rates.
CUSTOMERS
RIGCO provides offshore drilling services to a market that is comprised of
major and independent oil and gas companies. Due to RIGCO's recent entry into
the drilling services market, it is not yet well-known in such market and,
therefore, has not established a stable client base. However, RIGCO is hopeful
that it will develop such a client base through its arrangement with Sedco
Forex and through the establishment of an operating history with its customers,
although no assurance can be given with respect to if or when such client base
or operating history might materialize.
RIGCO operated only one rig, the FPS Laffit Pincay during the year ended
June 30, 1997. The FPS Laffit Pincay worked continuously, from February 1996
(its in-service date) through the fiscal year end, for two customers. See " -
Drilling Contracts." The inability of RIGCO to attract customers for the rigs
would, and the loss of any customer could, have a material adverse impact on
the Company's operations for such period of time as may be required to find
other users for the rigs.
COMPETITION
The contract drilling industry is an intensely competitive industry where no
one competitor is dominant. During the last three years, there have been
several business consolidations which have reduced the fragmented nature of the
drilling industry. Although this has decreased the total number of
competitors, RIGCO believes that competition for drilling contracts will remain
intense in the foreseeable future. Companies generally compete on the basis of
price, workforce experience, equipment suitability and availability,
reputation, expertise, technology and financial capability. While competition
is primarily on a regional basis, rigs can be moved from one region to another,
as well as between water depths, in response to changes in levels of drilling
activity, subject to crew availability and mobilization expenses.
Moreover, the recent improvement in the current results of operations and
prospects for the offshore contract drilling industry as a whole has led to
increased rig activation, enhancement and construction programs by RIGCO's
competitors and, if present trends continue for an extended period, may lead to
new entrants into the market. A significant increase in the supply of
technologically-advanced rigs capable of drilling in deepwater, including
drillships, may have an adverse effect on the average operating rates for
RIGCO's rigs and on the overall utilization level of RIGCO's rigs. In addition,
there is a general shortage in the industry of used drill pipe and other
equipment, and, therefore, the cost and time required to obtain replacement
drill pipe and other equipment is substantially greater than in prior periods
and is currently escalating.
RIGCO's ability to continue to generate business in the future is dependent
primarily on the level of domestic oil and gas exploration and development
activity and, in part, on its ability to adapt to new technology and drilling
techniques as they become available. RIGCO competes with numerous other
drilling contractors, some of whom are substantially larger than RIGCO and
possess appreciably greater financial and other resources.
INDUSTRY CONDITIONS
The Company's contract drilling services business and operations depend
principally upon the condition of the oil and gas industry and, specifically,
the exploration and production expenditures of oil and gas companies.
Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of low demand, excess rig supply and low
dayrates followed by periods of high demand, short rig supply and high
dayrates. In the late 1980's and early 1990's, the offshore drilling market,
particularly with respect to the Gulf, was adversely affected by depressed oil
and natural gas prices and an overabundance of offshore drilling rigs. The
prolonged weakness and uncertainty in the demand for and price of oil and
natural gas resulted in a significant decline in exploration and production
activities.
Over the last two years, activity in the contract drilling industry and
related oil service businesses has improved due to increased worldwide demand
for oil and natural gas. In addition, the market for semisubmersible rigs
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capable of drilling in deepwater and harsh environments experienced a surge in
demand and higher rates as a result, in part, of the increasing impact of
technological advances that have broadened opportunities for offshore
exploration and development. The semisubmersible rig markets have experienced
increased utilization and significantly higher rates since 1995. However, the
contract drilling industry is characterized by high capital and maintenance
costs. See " - Maintenance." In order to remain competitive in such an
industry, the Company will need to make additional investments in its contract
drilling services business. Yet there can be no assurances that the Company
will be able to raise capital on terms it deems acceptable, if at all, to fund
any such investments. Furthermore, the Company cannot predict whether improved
conditions will continue. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - The Company - Liquidity Outlook."
MAINTENANCE
The FPS Laffit Pincay and the FPS Bill Shoemaker require continuous and
significant maintenance to remain operational, competitive and economically
efficient. In addition to daily repairs and maintenance and planned monthly or
annual maintenance, which may constitute as much as 20% to 25% of the aggregate
operating expenditures of a properly maintained rig, semisubmersible rigs
require periodic major maintenance, reworking and refurbishment, and
replacement, if necessary, of major drilling equipment, power generation
equipment, mooring systems and drill pipe. Because such major maintenance
results in significant expenditures as well as the loss of revenue associated
with the required downtime, it usually is scheduled over a rolling five year
period and coordinated with other necessary operations and, where possible,
business cycles. Both rigs have recently completed a total maintenance and
refurbishment program. See " -- Description of Properties."
If the FPS Laffit Pincay is used by Tatham Offshore under the Drilling
Arrangement, it will need to be significantly upgraded to drill in water depths
of 1,500 feet. Such upgrades would cost approximately $19 million and require
at least five months of downtime. See Item 7. "Management's Discussion and
Analysis -- Liquidity and Capital Resources -- Tatham Offshore -- Liquidity
Outlook."
Notwithstanding the age of its rigs, RIGCO believes that it will be feasible
to continue to upgrade its rigs. However, there can be no assurance as to if,
when or to what extent upgrades will continue to be made to such rigs,
particularly in view of current rates that would be foregone by removing a rig
from service for upgrade. If such upgrades are undertaken, there can be no
assurance that the upgrades can be completed in a cost-effective manner or that
there will be adequate demand for the rigs' services.
NATURAL GAS AND OIL PIPELINES
GENERAL
The Company, through the Partnership and certain of its joint ventures, owns
interests in (i) the Gas Pipelines, (ii) a crude oil pipeline, (iii) five
strategically located multi-purpose platforms, (iv) three producing oil and gas
properties and (v) a dehydration facility.
The Partnership conducts a significant portion of its business activities
through operating joint ventures (the "Equity Investees"), organized as general
partnerships or limited liability companies, with other major oil and gas
companies. The Equity Investees include Stingray Pipeline Company ("Stingray"),
High Island Offshore System ("HIOS"), U-T Offshore System ("UTOS") and Viosca
Knoll Gathering Company ("Viosca Knoll"), which are partnerships, and Poseidon
Oil Pipeline Company, L.L.C. ("POPCO"), Manta Ray Offshore Gathering Company,
L.L.C. ("Manta Ray Offshore"), Nautilus Pipeline Company, L.L.C. ("Nautilus")
and West Cameron Dehydration Company, L.L.C. ("West Cameron Dehy"), which are
limited liability companies.
Through its 100%-owned operating subsidiaries and the Equity Investees, the
Partnership owns interests in the Gas Pipelines, which are strategically
located offshore Louisiana and eastern Texas, that gather and transport natural
gas for producers, marketers, pipelines and end-users for a fee. The Gas
Pipelines include 977 miles of pipeline with a throughput capacity of
approximately 5.9 Bcf of gas per day. During the years ended December 31,
1996, 1995 and 1994, the Gas Pipelines transported an average of approximately
2.8 Bcf, 2.4 Bcf and 2.3 Bcf, respectively, of gas per day. Each of the Gas
Pipelines interconnects with one or more long line transmission pipelines that
provide access to multiple markets in the eastern half of the United States.
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None of the Gas Pipelines functions as a merchant to purchase and resell
gas, thus avoiding the commodity risk associated with the purchase and resale
of gas. Each of Nautilus, Stingray, HIOS and UTOS (together, the "Regulated
Pipelines") is currently classified as a "natural gas company" under the
Natural Gas Act of 1938, as amended (the "NGA"), and is therefore subject to
regulation by the Federal Energy Regulatory Commission ("FERC"), including
regulation of rates. None of Manta Ray Offshore, Green Canyon Pipe Line
Company, L.L.C. ("Green Canyon"), Ewing Bank Gathering Company, L.L.C. ("Ewing
Bank") or Viosca Knoll is currently considered a "natural gas company" under
the NGA. By order dated March 13, 1997, the FERC declared that Tarpon
Transmission Company ("Tarpon") would no longer be subject to NGA jurisdiction
as a "natural gas company." See "--Regulation."
The Partnership also owns a 36% interest in POPCO, which was formed to
construct and operate the Poseidon Oil Pipeline ("Poseidon" and, collectively
with the Gas Pipelines, the "Pipelines"). Poseidon is a major new sour crude
oil pipeline system which was built in response to an increased demand for
additional sour crude oil pipeline capacity in the central Gulf. Poseidon was
placed in service in two phases, in April and December 1996. During 1996,
Poseidon throughput averaged approximately 30,000 barrels of oil per day.
The following table sets forth certain information with respect to the
Pipelines. The throughput information represents the average throughput net to
the Partnership's interest.
<TABLE>
<CAPTION>
MANTA
GREEN RAY VIOSCA
CANYON TARPON OFFSHORE(1) KNOLL STINGRAY HIOS UTOS NAUTILUS(6) POSEIDON
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ownership interest 100% 100% 25.67% 50% 50% 40% 33.3% 25.67% 36%
Unregulated (U)/regulated (R)(2) U U U U R R R R U
In-service date 1990 1978 1987/88 1994 1975 1977 1978 N/A 1996
Approximate capacity (MMcf/MBbl per 220 80 755 (3) 700(7) 1,120 1,800 1,200 600 400
day)
Aggregate miles of pipeline 68 40 161 (1) 100 361 203 30 101 (6) 292
Average net throughput (MMcf/MBbl per
day) for calendar year ended:
December 31, 1996 142 33 217 (5) 144 373 398 109 --(6) 11(8)
December 31, 1995 71 42 226 (5) 83 352 327 118 --(6) --(8)
December 31, 1994 76 59 233 (5) 57(4) 366 326 114 --(6) --(8)
</TABLE>
_________________
(1) In January 1997, the Partnership contributed substantially all of the Manta
Ray Gathering System and the Louisiana Offshore Gathering System to Manta
Ray Offshore. The Partnership continues to own 100% of two offshore
platforms, 19 miles of oil pipeline and 14 miles of gas pipeline which were
formerly a part of the Manta Ray Gathering System.
(2) Regulated Pipelines are subject to extensive rate regulation by the FERC.
See "-- Regulation."
(3) Represents the approximate aggregate capacity of the five pipelines
comprising the Manta Ray Offshore system, including approximately 52 miles
of pipeline with a capacity of 275 MMcf of gas per day which is under
construction and estimated to be placed in service in December 1997.
(4) The Viosca Knoll system was placed in service in November 1994.
(5) Represents 100% ownership interest during this period.
(6) Nautilus construction commenced in April 1997 and currently is expected to
be completed in December 1997.
(7) Viosca Knoll's original maximum design capacity was 400 MMcf of gas per
day. In 1997, Viosca Knoll effected an increase in its capacity to 700
MMcf of gas per day.
(8) Poseidon was placed in service in two phases, in April and December 1996.
Management decisions related to the Equity Investees are made by management
committees comprised of representatives of each partner or member, as
applicable, with authority appointed in direct relationship to ownership
interests. The Partnership operates all of its 100% owned pipelines, the
Viosca Knoll system and, currently, a portion of the Manta Ray Offshore system.
The remaining Equity Investees' pipelines are operated by unaffiliated pipeline
companies.
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RECENT DEVELOPMENTS
Strategic New Pipeline Joint Ventures
Poseidon. POPCO is currently owned by the Partnership (36%), a subsidiary of
Texaco, Inc. ("Texaco") (36%) and a subsidiary of Marathon Oil Company
("Marathon") (28%). Initially, the Partnership and Texaco formed Poseidon as a
50/50 joint venture in February 1996. Marathon acquired its interest in POPCO
in July 1996. As consideration for their interest in POPCO, each of the
Partnership, Texaco and Marathon contributed certain assets (including
pipelines, contract rights and cash) and made certain commitments to POPCO
(including significant dedications of oil reserves by subsidiaries of Texaco
and Marathon). A subsidiary of Texaco operates and performs the administrative
functions related to Poseidon and POPCO.
Upon completion of an expansion currently in progress, Poseidon will consist
of 292 miles of 16" to 24" pipeline with a capacity of approximately 400,000
barrels of oil per day. Poseidon is currently comprised of 117 miles of 16" to
20" pipeline extending in an easterly direction from the Partnership's
50%-owned platform in Garden Banks Block 72 to a platform in Ship Shoal Block
332, 75 miles of 24" pipeline extending in a northerly direction from the Ship
Shoal Block 332 platform to Calliou island, Louisiana and 58 miles of 16"
pipeline extending northwesterly from Ewing Bank Block 873 to the Texaco
operated Eugene Island Pipeline System at Ship Shoal Block 141, which was
acquired in connection with Marathon's admission to POPCO. Initial deliveries
into Poseidon occurred in April 1996. An additional 42 miles of 24" pipeline
extending in a northerly direction from Calliou Island to Houma, Louisiana is
expected to be placed in service in the fourth calendar quarter of 1997. Until
the expansion is completed, the Partnership expects Poseidon to continue to use
existing Texaco pipelines to move oil from Calliou Island to Houma. In
connection with its formation, POPCO entered into an agreement pursuant to
which Texaco Pipelines Inc. agreed to accept oil from Poseidon at Larose and
Houma, Louisiana and redeliver it to St. James, Louisiana, a significant market
hub for batching, processing and transportation of oil. Construction of another
17 miles of 16" pipeline in connection with a new significant commitments of
reserves from Amerada Hess Corporation ("Amerada Hess"), Oryx Crude Trading &
Transportation Limited Partnership ("Oryx") and Sun Operating Limited
Partnership ("Sun") is planned for early 1998. The current expansion and any
additional construction and installation costs of Poseidon will be funded
pursuant to the POPCO Credit Facility as discussed in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- The Partnership."
In addition to the production commitments from Texaco and Marathon, POPCO
has been successful in obtaining long-term commitments of production from
several properties containing significant reserves. POPCO has contracted with
Phillips, Amoco Petroleum Company, Anadarko Petroleum Company, Newfield
Exploration, Mobil Oil, Amerada Hess, Oryx, Sun, MidCon Corp. and the
Partnership. In addition, discussions are currently pending with a number of
other producers regarding possible commitments of reserves to Poseidon, although
no assurances can be made regarding if or when any such commitments would be
made.
Nautilus and Manta Ray Offshore. In January 1997, the Partnership and
affiliates of Marathon and Shell Oil Company ("Shell") formed Nautilus to
construct and operate a new interstate natural gas pipeline system. In
addition, the same parties formed Manta Ray Offshore to acquire an existing
gathering system from the Partnership. Such existing gathering system will be
extended and will deliver gas gathered by it to the system being constructed by
Nautilus. Nautilus and Manta Ray Offshore are located 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. Total cost for
the construction of the Nautilus interstate pipeline system and the expansion of
the Manta Ray Offshore gathering system is estimated to be approximately $220
million. The Nautilus system will consist of a 30-inch line downstream from
Ship Shoal Block 207 connecting to a gas processing plant, onshore Louisiana,
operated by Exxon Company USA ("Exxon"), plus certain facilities downstream of
the Exxon plant to effect deliveries into multiple interstate pipelines.
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 Bank Block 873 to the
east and Green Canyon Block 65 to the west. The pipeline lay for the Nautilus
system was completed during the second calendar quarter of 1997. Construction of
the onshore facilities and platform connections are currently being completed
with an in service date targeted for the end of 1997. The pipeline lay has also
been completed on Manta Ray Offshore's 47-mile expansion. After the completion
of the platform connections, the Manta Ray Offshore expansion should also be
ready for service by the end of 1997. Affiliates of Marathon and Shell have
dedicated for transportation and gathering to each of the Nautilus and Manta Ray
Offshore
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systems significant deepwater acreage positions in the area, and are providing
substantially all of the capital funding for the new construction. Discussions
are currently pending with a number of other producers regarding commitments of
reserves to the Manta Ray Offshore and Nautilus systems. The Partnership has
provided approximately $10.4 million of funding in addition to the contribution
of the Manta Ray Offshore system.
Additional Capacity for the Viosca Knoll Gathering System
The 100-mile Viosca Knoll system redelivers gas into two downstream
pipelines and was designed to transport 400 Mcf of gas per day without
compression. During 1996, Viosca Knoll installed a 6,000 horsepower compressor
on the Partnership's Viosca Knoll 817 platform. The pipeline compressor was
required to allow it to effect deliveries at the operating pressures on
downstream interstate pipelines with which it is interconnected, resulting in
an increase in the throughput capacity of the Viosca Knoll system to
approximately 700 Mcf of gas per day. The additional capacity also allowed
Viosca Knoll to transport new gas volumes during 1997 from the Shell-operated
Southeast Tahoe and Ram-Powell fields as well as other new deepwater projects
in the area.
Viosca Knoll is currently expanding its system to add approximately 25 miles
of 20-inch pipe in order to be able to transport additional anticipated
production from producing areas near the eastern end of the system. Discussions
are also now pending with certain other producers regarding commitments of
reserves in connection with such expansion.
Construction of Multi-Purpose Platform
The Partnership is constructing a multi-purpose platform which will be
located in East Cameron Block 373. The platform, estimated to cost
approximately $32 million, is a four pile production platform with processing
facilities and is strategically located to function as a landing site for
potential deeper water discoveries in the Garden Banks area of the Gulf. In
May 1997, the Partnership and Kerr McGee Corporation entered into agreements
pursuant to which Kerr McGee Corporation committed its production from multiple
blocks in the East Cameron and Garden Banks areas to be processed on the
platform and transported through the Stingray system.
North Atlantic Pipeline Project
In June 1997, Tatham Offshore Canada, Ltd. ("Tatham Offshore Canada"), a
wholly-owned subsidiary of Tatham Offshore, and certain other parties began
reviewing and discussing various potential arrangements relating to the
construction of a substantial natural gas pipeline from offshore Newfoundland
and Nova Scotia to the eastern seaboard of the United States. Tatham Offshore
Canada is the Canadian representative of North Atlantic Pipeline Partners, L.P.
("North Atlantic"), which is the sponsor of a proposal to build the
approximately 2,500 kilometers offshore pipeline. As of June 30, 1997, Tatham
Offshore Canada has incurred $1.3 million in pre-developmental costs in
connection with such project. Tatham Offshore Canada anticipates that the
pre-developmental costs could ultimately reach approximately $10 million and
that the ultimate capital costs of the project would be approximately $3.0
billion to $3.5 billion. North Atlantic has not yet filed an application
seeking approval of the appropriate Canadian and United States regulatory
authorities, and there can be no assurance that, if filed, such authorities
will approve such project or if or when such project will be constructed. Two
competing projects have been filed by integrated energy companies with far
greater financial and other resources than are available to Tatham Offshore.
Tatham Offshore Canada, as the Canadian representative of North Atlantic,
has entered into a non-binding agreement with the Partnership regarding
participation in the North Atlantic pipeline project. Under such agreement,
Tatham Offshore Canada is responsible for pre-development costs of up to $10
million. Such agreement is subject to the negotiation and completion of formal
definitive agreements and contemplates that the Partnership will hold a pro
rata partnership interest of up to 20% in North Atlantic. The Partnership has
no financial commitment to the project until and unless an application is filed
with and approved by the appropriate Canadian and United States regulatory
authorities. Tatham Offshore Canada is seeking additional participants on the
same basis as that offered to the Partnership.
OIL AND GAS SUPPLY
The reserves that are currently available for gathering and transportation
on the Pipelines are depleting assets and, as such, will be produced over a
finite period. Each of the Pipelines must access additional reserves to offset
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the natural decline in production from existing wells connected thereto or the
loss of any such production to a competitor. Management believes that there
will be sufficient reserves available to the Gas Pipelines for transportation
to maintain throughput at or near current levels for at least the next five
years. Management believes that there will be significant increases in
reserves attached to Poseidon over the next several years. As more fully
discussed below, the Green Canyon, Viosca Knoll, HIOS and Stingray systems
experienced an increase in throughput volumes in 1996 as compared with the
previous year. Conversely, each of the Tarpon, Ewing Bank and UTOS systems and
the Manta Ray Gathering System experienced decreases in volumes transported in
1996 as compared with 1995.
The Green Canyon system's average daily throughput increased 101% for 1996
as compared with 1995. This increase was due to additional connections to the
Green Canyon system during 1996 at Green Canyon Block 136 and South Marsh
Island Block 192. The Viosca Knoll system experienced a 77% increase in
throughput during 1996 primarily as a result of the initiation of production
from Viosca Knoll Block 817. See "-- Oil and Gas Properties -- The
Partnership's Oil and Gas Properties -- Viosca Knoll Block 817". HIOS
experienced a 22% increase in transportation volume for the year ended December
31, 1996 as compared with the previous year. HIOS accesses the East Breaks and
Garden Banks areas of the flextrend and deepwater areas of the Gulf. Management
believes that development in these and other areas served by HIOS is likely to
occur in future years, resulting in additional throughput on HIOS, and
partially offsetting the continuing decline in reservoir deliverability from
existing wells connected to HIOS. For the year ended December 31, 1996,
Stingray experienced a 6% increase in throughput as compared with the previous
year. This increase was primarily attributable to an increase in production
from existing connected fields.
The Tarpon system experienced a 20% decrease in throughput for the year
ended December 31, 1996 as compared with the previous year. This decrease was
primarily attributable to the normal decline of production from existing
connected fields. The Ewing Bank system experienced a 31% decrease in
throughput for the year ended December 31, 1996 as compared with the previous
year. The Ewing Bank system connects the Ewing Bank 914 #2 well of Tatham
Offshore to a shallow water platform located at Ewing Bank Block 826. The only
production which is dedicated to the Ewing Bank system is from Tatham
Offshore's Ewing Bank 914 #2 well; however, no further production is expected
from such well. See "-- Oil and Gas Properties -- Tatham Offshore's Oil and
Gas Properties -- Ewing Bank Blocks 914 and 915." All of the production from
Tatham Offshore's eight block Ewing Bank project area is dedicated to the
Partnership for transportation. See the Company's "Notes to Consolidated
Financial Statements -- Note 10 -- Related Party Transactions" located elsewhere
in this Annual Report. UTOS experienced a 7% decrease in transportation volume
for the year ended December 31, 1996 as compared with the previous year. The
reduction in volumes transported on UTOS is a result of competition from another
interstate pipeline connected at UTOS' source of supply. For the year ended
December 31, 1996, the Manta Ray Gathering System experienced a throughput
decline of 4% from the previous year. This decrease in throughput was primarily
the result of lower production from a low margin field connected to the system.
Poseidon commenced operations in April 1996 and is currently transporting an
average of 52,000 barrels of oil per day. During 1996, Poseidon added
commitments from six new fields (several of which are not expected to initiate
production until 1997 or later) and anticipates adding more commitments as new
subsalt and deepwater fields are developed in the area which it serves,
although there can be no assurance regarding if or when any such commitment
would be made or when the production from such commitment would be made or when
the production from such commitment would be initiated. See "-- Recent
Developments -- Strategic New Pipeline Joint Ventures."
OFFSHORE PLATFORMS AND OTHER FACILITIES
Offshore platforms play a key role in the development of oil and gas
reserves and, thus, in the offshore pipeline network. Platforms are used to
interconnect the offshore pipeline grid and to provide an efficient means to
perform pipeline maintenance operations and operate compression facilities,
separation, processing and other facilities. The Partnership, through its
100%-owned operating subsidiaries and the Equity Investees, owns an interest in
five strategically located platforms in the Gulf.
Viosca Knoll Block 817. The Partnership constructed a multi-purpose
platform located in Viosca Knoll Block 817 (the "VK 817 Platform") in 1995.
The VK 817 Platform was used by the Partnership as a base for conducting
drilling operations for oil and gas reserves located on the Viosca Knoll Block
817 lease. In addition, the platform
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serves as a base for landing other deepwater production in the area thereby
generating platform access and processing fees for the Partnership. The
Partnership also leases platform space to Viosca Knoll for the location of
compression equipment for the Viosca Knoll system.
Garden Banks Block 72. The Partnership owns a 50% interest in a
multi-purpose platform located in Garden Banks Block 72 (the "GB 72 Platform").
The GB 72 Platform is located at the south end of the Stingray system and
serves as the westernmost terminus of Poseidon. The GB 72 Platform was also
used as a drilling and production platform and as the landing site for
production from the Partnership's Garden Banks Block 117 lease located in an
adjacent lease block.
Ship Shoal Block 332. The Partnership owns a 100% interest in a platform
located in Ship Shoal Block 332 (the "SS 332 Platform"). The SS 332 Platform
serves as a junction platform for gas pipelines in Manta Ray Offshore's system
as well as an eastern junction for Poseidon.
Ship Shoal Block 207. The Ship Shoal Block 207 platform (the "SS 207
Platform") was contributed to Manta Ray Offshore by the Partnership as part of
its original capital contribution to the joint venture. The SS 207 Platform
serves as the northern junction platform for the Manta Ray Offshore system as
well as the offshore terminus of the Nautilus system.
South Timbalier Block 292. The South Timbalier Block 292 platform (the "ST
292 Platform") is a 100% owned facility located at the easternmost terminus of
Manta Ray Offshore's system. The ST 292 Platform serves as a landing site for
gas production in the area.
Other Facilities. Through its 50% ownership interest in West Cameron Dehy,
the Partnership owns an interest in certain dehydration facilities located at
the northern terminus of the Stingray system, onshore Louisiana.
MAINTENANCE
Each of the Pipelines requires regular and thorough maintenance. The
interior of the pipelines are maintained through the regular "pigging" of the
lines. Pigging involves propelling a large spherical object through the line
which collects, or pushes, any condensate and other liquids on the walls or at
the bottom of the pipeline through the line out the far end. More
sophisticated pigging devices include those with scrapers, brushes and x-ray
devices; however, such pigging devices are usually deployed only on an as
needed basis. Corrosion inhibitors are also injected into all of the systems
through the flow stream on a continuous basis. To prevent external corrosion
of the pipe, sacrificial anodes are fastened to the pipeline itself at
prescribed intervals, providing exterior corrosion protection from sea water.
The platforms are painted to the waterline every three to five years to prevent
atmospheric corrosion. Sacrificial anodes are also fastened to the platform
legs below the waterline to prevent corrosion. A sacrificial anode is a zinc
aluminum alloy fixture that is attached to the exterior of a steel object to
attract the corrosive reaction that occurs between steel and saltwater to the
fixture itself, thus protecting the steel object from corrosion. Remote
operated vehicles or divers inspect the platforms below the waterline usually
every five years.
The Stingray, HIOS, Viosca Knoll, Manta Ray Offshore and Poseidon systems
include platforms that are manned on a continuous basis. The personnel onboard
the platforms are responsible for site maintenance, operations of the
facilities on the platform, measurement of the gas stream at the source of
production and corrosion control (pig launching and inhibitor injection).
COMPETITION
Each of the Gas Pipelines is located in or near natural gas production areas
that are served by other pipelines. As a result, each of the Partnership's
systems face competition from both regulated pipelines and gathering systems
with respect to its transportation services. Certain of these pipelines are
not subject to the same level of rate and service regulation as, and may have a
lower cost structure than, the Gas Pipelines, and other pipelines, such as
long- haul transporters, have rate design alternatives unavailable to the Gas
Pipelines. Consequently, such pipelines may be able to provide service on more
flexible terms and at rates significantly below the rates offered by the Gas
Pipelines. The Gas Pipelines' principal interstate pipeline competitors are
Shell Offshore, Inc., Texaco Natural Gas, Inc., ANR Pipeline Company, Transco
Energy Company, Trunkline Gas Co., El Paso Energy Corporation, Texas
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Eastern Transmission Corporation, Sea Robin Pipeline Company, Columbia Gas
Transmission Corporation and their affiliates. Poseidon was built as a result
of the Partnership's belief that additional sour crude oil capacity was
required to transport new subsalt and deepwater oil production to shore.
Poseidon's principal competitors for additional crude oil production are the
Texaco operated Eugene Island Pipeline System and the Shell operated Amberjack
System. The Pipelines compete for new production with these and other
competitors on the basis of geographic proximity to the production, cost of
connection, available capacity, transportation rates and access to onshore
markets. In addition, the ability of the Pipelines to access future reserves
will be subject to the ability of the Pipelines or the producers to fund the
anticipated significant capital expenditures required to connect the new
production. Several of the Partnership's competitors are significantly larger
and have more capital resources available to them than do the Partnership.
CUSTOMERS AND CONTRACTS
Principal Customers. The Partnership's major customers for the year ended
December 31, 1996 include: ANR Pipeline Company, Chevron U.S.A., Coral Energy
Resources, L.P., Delmar Operating, Inc., Flextrend Development, Inc., a
subsidiary of the Partnership, Marathon, Occidental Crude Sales, Inc.,
Producers Energy Marketing, L.L.C., Shell Gas Trading Company, Shell Offshore,
Inc., Tatham Offshore, Texaco Trading and Transportation, Inc., Texas Gas
Transmission Corporation and Union Oil Company of California.
The Gas Pipelines gather and transport gas under both firm and interruptible
service agreements. Under firm service agreements, a pipeline is obligated to
receive and deliver up to a specified maximum quantity of gas without
interruption, except upon occurrence of a force majeure event. Firm customers
generally pay a two part rate, a demand charge and a commodity charge. The
demand charge is payable monthly based on the maximum contract quantity the
pipeline is obligated to transport, without regard to the quantity actually
transported during such month. The commodity charge is payable monthly based on
the actual quantity of gas transported during such month. Under interruptible
contracts, a pipeline is usually obligated to receive and deliver up to a
specified maximum quantity of gas, subject to availability of capacity, on a
first-come, first-served basis. Interruptible customers pay only a one-part
commodity rate that includes both the demand and commodity elements of the firm
rate. Poseidon receives crude oil from the leases connected to the pipeline
under long-term buy/sell agreements.
OIL AND GAS PROPERTIES
GENERAL
The Company conducts exploration and production activities primarily through
a subsidiary of the Partnership and Tatham Offshore, each of which are
independent energy companies. The Partnership is engaged in the development
and production of reserves located principally in the flextrend and deepwater
areas of the Gulf, and Tatham Offshore is engaged in the development,
exploration and production of reserves located primarily in the Gulf, focusing
principally on the flextrend and deepwater areas. In addition, Tatham Offshore
is pursuing exploration and development opportunities in offshore eastern
Canada, either directly or through its subsidiaries. As of June 30, 1997, the
Partnership and Tatham Offshore owned, in the aggregate, interests in 17 lease
blocks in the Gulf comprising 94,720 gross (82,580 net) acres. See "-- Oil and
Gas Reserves" for an estimate of the Partnership's and Tatham Offshore's total
proved developed and proved undeveloped reserves of oil and gas and a
discussion of the assumptions used in, and inherent difficulties relating to,
estimating reserves.
In 1995, the Partnership acquired from Tatham Offshore a 75% working
interest in Viosca Knoll Block 817, a 50% working interest in Garden Banks
Block 72 and a 50% working interest in Garden Banks Block 117 (the "Assigned
Properties") subject to certain reversionary rights. The Partnership is
entitled to retain all of the revenue attributable to the Assigned Properties
until it has received net revenue equal to the Payout Amount (as defined
herein). Prior to December 10, 1996, "Payout Amount" was defined as an amount
equal to all costs incurred by the Partnership with respect to the Assigned
Properties (including the $30 million acquisition cost paid to Tatham Offshore
and platform leasing and processing fees payable to subsidiaries of the
Partnership) plus interest thereon at a rate of 15% per annum. Effective
December 10, 1996, the Partnership exercised its option to permanently retain
50% of the acquired working interest in all Assigned Properties in exchange for
forgiving 50% of the then-existing Payout Amount. 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 Properties reduce the Payout Amount. As of June 30, 1997,
the Payout Amount totaled $45.9 million.
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As a result of the Partnership's election to retain 50% of the Assigned
Properties, Tatham Offshore could receive an assignment of a 50% interest in
the Assigned Properties upon the satisfaction of the Payout Amount. When and
if the Payout Amount will be satisfied depends upon a multitude of variables.
See "-- Competition" and "-- Regulation." The Payout Amount has been adversely
affected by significant cost overruns, including those incurred in the drilling
of the Garden Banks 117 #2 well, as well as significant delays in placing the
Assigned Properties on production. The Company has determined that given the
current estimates of commodity prices and proved reserves, the possibility that
the designated revenue from the Assigned Properties will be sufficient to
satisfy the Payout Amount is remote.
THE PARTNERSHIP'S OIL AND GAS PROPERTIES
Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property that
is comprised of 5,760 gross (4,320 net) acres located 40 miles off the coast of
Louisiana in approximately 650 feet of water. The Partnership acquired from
Tatham Offshore a 75% working interest in Viosca Knoll Block 817 from the
sea-floor through the stratigraphic equivalent of the base of the Tex X-6 Sand,
subject to certain reversionary rights described above. Tatham Offshore owns
the remaining 25% working interest in Viosca Knoll Block 817.
The Partnership, as operator, concluded a drilling program and placed eight
wells on production at Viosca Knoll Block 817. The Partnership does not
anticipate drilling any more wells or having any other major expenditures with
respect to this property except for the possible recompletion of certain
existing wells. The Viosca Knoll Block 817 project is currently producing an
aggregate of approximately 79 MMcf of gas, 310 barrels of oil and 800 barrels
of water per day. From the inception of production in December 1995 through
June 30, 1997, the Viosca Knoll project has produced 25,827 MMcf of gas and
35,979 barrels of oil, net to the Partnership's interest. Gas production from
the Viosca Knoll Block 817 is dedicated to the Partnership for gathering
through the Viosca Knoll system.
Garden Banks Block 72. Garden Banks Block 72 covers 5,760 gross (2,880 net)
acres and is located 120 miles off the coast of Louisiana in approximately 550
feet of water. Tatham Offshore and Midcon Exploration Company ("MidCon
Exploration") jointly bought the Garden Banks Block 72 lease in 1991. On June
30, 1995, the Partnership acquired from Tatham Offshore its 50% working
interest (approximately 40.2% net revenue interest) in Garden Banks Block 72,
subject to certain reversionary rights described above. MidCon Exploration
owns the remaining 50% working interest in Garden Banks Block 72.
Since May 1996, the Partnership has placed five wells on production at
Garden Banks Block 72. The Partnership does not anticipate drilling any more
wells or having any other major expenditures with respect to this property
except for the possible recompletion of certain existing wells. From the
inception of production in May 1996 through June 30, 1997, Garden Banks Block
72 produced 1,496 MMcf of gas and 477,036 barrels of oil, net to the
Partnership's interest. The five wells are currently producing a total of
approximately 2,390 barrels of oil, 10 MMcf of gas and 890 barrels of water per
day from seven completions. Gas production from Garden Banks Block 72 is being
transported through the Stingray system and the oil production is being
delivered to Poseidon.
Garden Banks Block 117. Garden Banks Block 117 covers 5,760 gross (2,880
net) acres adjacent to Garden Banks Block 72 and is located in approximately
1,000 feet of water. Tatham Offshore and MidCon Exploration jointly acquired
the Garden Banks Block 117 lease from Shell Offshore, Inc. under a farm-in
arrangement. The farm-in agreement provides that Shell Offshore, Inc. retains
a 1/12 overriding royalty interest in Garden Banks Block 117 with an option to
convert the overriding royalty interest into a 30% working interest after the
property has produced 25 million net equivalent barrels of oil. In November
1994, Tatham Offshore completed the drilling of a new field discovery at Garden
Banks Block 117 with its Garden Banks 117 #1 well. On June 30, 1995, the
Partnership acquired from Tatham Offshore its 50% working interest
(approximately 37.5% net revenue interest) in Garden Banks Block 117, subject
to certain reversionary rights described above. MidCon Exploration owns the
remaining 50% working interest in Garden Banks Block 117.
In July 1996 and May 1997, the Partnership completed and initiated
production from the Garden Banks 117 #1 and #2 wells, respectively, which are
currently producing a total of approximately 2,915 barrels of oil, 6 MMcf of
gas and 1,870 barrels of water per day. Since the inception of production
through June 30, 1997, Garden Banks Block 117 produced 506 MMcf of gas and
289,154 barrels of oil, net to the Partnership's interest. The Partnership
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is considering the drilling of another well on the property; however, such
drilling is not expected to occur within the next twelve months. Gas
production from Garden Banks Block 117 is transported on the Stingray system
and oil production is delivered to Poseidon.
Overriding Royalty Interests and Minority Interests. The Partnership owns
an overriding royalty interest in Ewing Bank Blocks 871, 914, 915, 916, 958 and
959 (the "Ewing Bank Unit") operated by Tatham Offshore. This override
entitles the Partnership to receive from approximately 3.56% to 5.34%
(depending on the water depth of the specific lease block) of the future gross
revenue from production from the Ewing Bank Unit, except for the Ewing Bank 914
#2 well, in which the Partnership is entitled to receive 7.13% of the gross
revenue from production. Only one well, the Ewing Bank 914 #2 well, has been
completed in the Ewing Bank Unit, and that well is no longer producing. In
addition to its royalty interest in the Ewing Bank Unit, the Partnership owns
certain other minority interests in oil and gas leases which are not material
to the business of the Partnership. DeepTech also owns overriding royalty
interests in the six lease block Ewing Bank Unit. See "-- Tatham Offshore's Oil
and Gas Properties -- Ewing Bank Block 958, 959, 1002 and 1003" and "Other
Assets of DeepTech/The Partnership."
TATHAM OFFSHORE'S OIL AND GAS PROPERTIES
Viosca Knoll Block 817. Tatham Offshore owns a 25% working interest (the
"Subject Interest") in the Viosca Knoll Block 817 acreage, which interest is
burdened by a convertible production payment. Under the convertible production
payment, the holders are entitled in the aggregate to 25% of the proceeds from
production attributable to the Subject Interests (after deducting all leasehold
operating expenses, including platform access and processing fees) until the
holders have received the aggregate sum of $16 million. At the option of the
holders, the unrecovered portion of the convertible production payment may be
converted into common stock of Tatham Offshore at a price of $8.00 per share.
Under certain conditions, such holders have the right to require DeepTech to
purchase the convertible production payment for an amount equal to 50% of the
unrecovered portion thereof. At June 30, 1997, the unpaid portion of the
production payment obligation totaled $12.5 million. From the inception of
production through June 30, 1997, the Viosca Knoll 817 project has produced 8.6
Bcf of gas and 11,995 barrels of oil, net to Tatham Offshore's 25% working
interest. See "-- Reversionary Interests".
West Delta Block 35. West Delta Block 35, a producing field located 10
miles off the coast of Louisiana in approximately 60 feet of water, was
acquired by Tatham Offshore in 1992 to drill for and produce remaining reserves
in a fault block of an abandoned field. In late 1992, Tatham Offshore
farmed-out the property and retained a 38% working interest in West Delta Block
35. The West Delta Block 35 field commenced production in July 1993. Two
wells are currently producing in the aggregate approximately 71 barrels of oil,
5.7 MMcf of gas and 90 barrels of water per day. From the inception of
production through June 30, 1997, the West Delta field has produced 2.7 Bcf of
gas and 31,500 barrels of oil, net to Tatham Offshore's interest. The gas
production from the West Delta 35 field is transported onshore through an
interstate pipeline system, and the oil production is currently transported
onshore by barge.
Ewing Bank Blocks 958, 959, 1002 and 1003. Tatham Offshore owns a 100%
working interest in Ewing Bank Blocks 958, 959, 1002 and 1003 (the "Sunday
Silence Project"), a recently discovered and currently undeveloped field that
is comprised of 20,160 gross acres located approximately six miles south of
Ewing Bank Blocks 914 and 915 (discussed below) in water depths ranging from
1,400 to 1,600 feet. In July 1994, Tatham Offshore completed the drilling of an
exploratory well, the Ewing Bank 958 #1. Logs and sidewall cores indicate that
the Ewing Bank 958 #1 well contains approximately 380 feet of oil and gas pay.
The Ewing Bank 958 #1 well, which was drilled to a total measured depth of
17,600 feet, identified pay zones in the Pliocene aged formations lying
primarily at measured depths between 10,000 and 15,000 feet.
Tatham Offshore completed drilling a second well at Ewing Bank Block 1003 in
September 1994 to delineate the field. During October 1994, the Ewing Bank
1003 #1 delineation well was flow-tested at a rate of approximately 8,700
barrels of oil and 5.4 MMcf of gas per day.
Subject to obtaining financing or an appropriate industry participant,
Tatham Offshore anticipates that the initial two wells and any subsequent
delineation wells will be reentered and completed for production after the
installation of a SPAR buoy production facility. Production from the Sunday
Silence Project is dedicated to the Partnership under the Ewing Bank Gathering
Agreement, as discussed in the Company's "Notes to Consolidated Financial
Statements -- Note 10 -- Related Party Transactions."
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On June 5, 1997, Tatham Offshore received notification from the Mineral
Management Service that its application for deepwater royalty relief for the
Sunday Silence Project had been approved under a federal law that was enacted
in November 1995. The royalty relief provides for the abatement of federal
royalty on the first 52.5 million equivalent barrels of oil production from the
Sunday Silence Project. Tatham Offshore believes that the improved economics
for the project under royalty relief will be sufficient to obtain development
financing or an industry farmout arrangement. However, there can be no
assurance that Tatham Offshore will enter into a farmout or financing
arrangement on favorable terms, successfully develop this field or initiate
production therefrom on a timely basis, if at all. The granting of the royalty
relief to Tatham Offshore is subject to certain requirements, including the
installation of the SPAR buoy platform and the restriction that actual
development costs incurred be at least 80% of the estimated development costs.
The total estimated development cost is approximately $250 million. In
addition, construction of the SPAR buoy production facility must commence
within two years of the date of the granting of the royalty relief. Such
royalty relief will continue until the end of the month in which the field's
cumulative production reaches 52.5 million equivalent barrels of oil. See "--
Other Assets of DeepTech/The Partnership -- Subordinated Notes."
Ewing Bank Blocks 914 and 915. The Company owns a 100% working interest in
each of Ewing Bank Blocks 914 and 915, which are both located in a water depth
of approximately 1,000 feet. From the inception of production through June 30,
1997, the Ewing Bank 914 #2 well has produced a total of 1.2 million barrels of
oil and condensate and 3.4 Bcf of gas. In May 1997, the Ewing Bank 914 #2 well
was shut-in as a result of a downhole mechanical problem. Although Tatham
Offshore is currently evaluating potential workover or recompletion
alternatives for this well, it reserved its remaining investment in the Ewing
Bank 914 #2 well and adjacent leases of $2.4 million at June 30, 1997. In
addition, as of June 30, 1997, Tatham Offshore accrued $3.3 million of
additional costs associated with the abandonment of this well and the Ewing
Bank 915 #4 well.
Any future production from this field is dedicated to the Partnership for
transportation under the Ewing Bank Gathering Agreement. Under the Ewing Bank
Gathering Agreement, the Partnership's obligation to construct facilities to
transport production from new wells is subject to the mutual agreement of the
parties and the Partnership's determination that such facilities will be
economic.
Ship Shoal Block 331. Ship Shoal Block 331 is located 75 miles off the coast
of Louisiana in approximately 370 feet of water. Tatham Offshore holds a 100%
working interest in the 5,278 gross acre lease. Production problems associated
with the completions of three wellbores on the project have resulted in minimal
production from the property, and Tatham Offshore has decided not to pursue
further operations at this time. In connection with Tatham Offshore's
assessment of its Ship Shoal Block 331 property and its decision not to pursue
further operations, Tatham Offshore reserved its remaining investment in this
property of $30.0 million as of June 30, 1997. In addition, as of June 30,
1997, Tatham Offshore accrued $3.3 million associated with the abandonment of
the platform and wells. Prior to the production problems, the Ship Shoal Block
331 project produced 88 MMcf of gas and 41,875 barrels of oil.
Reversionary Interests. Tatham Offshore has reversionary working interests
of 37.5% in Viosca Knoll Block 817, 25% in Garden Banks Block 72 and 25% in
Garden Banks Block 117 if the Payout Amount is satisfied. Tatham Offshore has
determined that given the current estimates of commodity prices and proved
reserves, the possibility that the designated revenue from the Assigned
Properties will be sufficient to satisfy the Payout Amount is remote. See "--
General."
COMPETITION
The exploration and production of oil and gas is highly competitive and
cyclical. Competition in the industry has increased significantly during the
last several years due to an increase in worldwide demand for oil and gas,
which has stabilized and periodically increased the prices of those
commodities. However, from the mid 1980's through the early 1990's, increases
in worldwide energy production capability, decreases in energy consumption as a
result of conservation efforts, and the continued development of alternate
energy sources have brought about substantial surpluses in oil and gas
supplies, resulting in substantial competition for the marketing of oil and
gas. As a result, there were precipitous declines in oil and gas prices and
delays in producing and marketing natural gas after it is discovered. Changes
in government regulations relating to the production, transportation and
marketing of gas have also resulted in the abandonment by many pipelines of
long-term contracts for the purchase of gas, the development by gas producers
and other entities of marketing programs to take advantage of new regulations
14
<PAGE> 17
requiring pipelines to transport natural gas for regulated fees and an
increasing tendency to rely on short-term sales contracts priced at spot market
prices. See "-- Regulation."
Many of the Partnership's and Tatham Offshore's competitors have financial
and other resources substantially in excess of those available to the
Partnership and Tatham Offshore and may, accordingly, be better positioned to
acquire and exploit prospects, hire personnel and market production. In
addition, many of the Partnership's and Tatham Offshore's larger competitors
may be better able to withstand the effect of changes in factors such as
worldwide oil and natural gas prices and levels of production, the cost and
availability of alternative fuels and the application of government
regulations, which affect demand for oil and natural gas production and are
beyond the control of the Partnership and Tatham Offshore.
OIL AND GAS RESERVES
The following estimates of the Partnership's and Tatham Offshore's
respective total proved developed and proved undeveloped reserves of oil and
gas as of June 30, 1997 have been made by Netherland, Sewell & Associates, Inc.
("Netherland, Sewell"), an independent petroleum engineering consulting firm,
with respect to the Partnership's proved reserves, and Ryder Scott Company
Petroleum Engineers ("Ryder Scott"), also an independent petroleum engineering
consulting firm, with respect to Tatham Offshore's proved reserves.
<TABLE>
<CAPTION>
June 30, 1997
Oil (barrels) Gas (1) (MMcf)
------------------------------------------------------
Proved Proved Proved
Developed Developed Undeveloped
------------------------------------------------------
<S> <C> <C> <C>
THE PARTNERSHIP
Viosca Knoll Block 817 179,210 29,322 1,839
Garden Banks Block 72 1,168,543 5,291 --
Garden Banks Block 117 1,482,134 3,125 --
--------- ------ -----
Total 2,829,887 37,738 1,839
========= ====== =====
TATHAM OFFSHORE
Viosca Knoll Block 98,480 10,910 --
West Delta Block 35 26,542 1,382 --
------- ------ -------
Total 125,022 12,292 --
======= ====== =======
</TABLE>
- --------------------------
(1) Gas volumes are stated at the legal pressure base of the state or area in
which the reserves are located and at 60 degrees Fahrenheit.
(2) As of June 30, 1997, Tatham Offshore's 25% working interest is subject to a
$12.5 million convertible production payment payable from 25% of the net
proceeds from such interest. See "-- Oil and Gas Properties -- Tatham
Offshore's Oil and Gas Properties -- Viosca Knoll Block 817."
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the
subject properties, the assumed effects of regulation by governmental agencies
and assumptions concerning future oil and gas prices, future operating costs
and future plugging and abandonment costs, all of which may vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group
of properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Furthermore, production from Garden Banks Block 117, Garden Banks Block 72
and Viosca Knoll Block 817 was initiated in July 1996, May 1996 and December
1995, respectively, and, accordingly, estimates of future production are based
on this limited history. Estimates with respect to proved undeveloped reserves
that may be developed and produced in the future are often based upon
volumetric calculations and upon analogy to similar types of reserves rather
than upon actual production history. Estimates based on these methods are
generally less
15
<PAGE> 18
reliable than those based on actual production history. Subsequent evaluation
of the same reserves based upon production history will result in variations,
which may be substantial, in the estimated reserves. A significant portion of
the Partnership's and Tatham Offshore's reserves is based upon volumetric
calculations.
For the year ended June 30, 1996, Tatham Offshore reported proved
undeveloped reserves for its Sunday Silence Project of 6.2 million barrels of
oil and 7,279 MMcf of gas using a development scenario which involved subsea
completions of the two existing wells on Ewing Bank Blocks 958 and 1003.
Tatham Offshore's current development scenario involves the use of a SPAR buoy
production facility and the drilling of additional wells to maximize the
ultimate recovery from the field. Under the current development scenario,
additional wells will need to be drilled to establish commercial quantities of
proved reserves.
The following table sets forth, as of June 30, 1997, the estimated future
net cash flows and the present value of estimated future net cash flows,
discounted at 10% per annum, from the production and sale of the proved
developed and undeveloped reserves attributable to the Partnership's and Tatham
Offshore's respective interests in oil and gas properties as of such date, as
determined by Netherland, Sewell and Ryder Scott in accordance with the
requirements of applicable accounting standards, before income taxes.
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------
Proved Proved Total
Developed Undeveloped Proved
(in thousands)
<S> <C> <C> <C>
THE PARTNERSHIP
Estimated future net cash flows from
proved reserves before income $105,040 $ 2,102 $107,142
taxes(1).......................................
Present value of estimated future net cash flows
from proved reserves before income taxes
(discounted at 10%)............................. $88,973 $ 1,562 $90,535
TATHAM OFFSHORE
Estimated future net cash flows from
proved reserves before income taxes(2).......... $12,666 $ -- $12,666
Present value of estimated future net cash flows
from proved reserves before income taxes
(discounted at 10%)............................. $11,043 $ -- $11,043
</TABLE>
- -------------------------
(1) The average oil and gas prices, as adjusted by lease for gravity and Btu
content, transportation and marketing fees, regional posted price
differences and gas and oil price hedges in place and weighted by
production over the life of the proved reserves, used in the calculation of
estimated future net cash flows as of June 30, 1997 are $17.91 per barrel
of oil and $2.21 per Mcf of gas.
(2) In preparing such estimates, Ryder Scott used prices of $17.20 per barrel
of oil and $2.39 per Mcf of gas as of June 30, 1997, the weighted average
prices that Tatham Offshore received from its properties.
In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the estimated discounted future net revenue from
estimated proved reserves are based on prices and costs at fiscal year end
unless future prices or costs are contractually determined at such date.
Actual future prices and costs may be materially higher or lower. Actual
future net revenue also will be affected by factors such as actual production,
supply and demand for oil and gas, curtailments or increases in consumption by
natural gas purchasers, changes in governmental regulations or taxation and the
impact of inflation on costs.
In accordance with the methodology approved by the Commission, specific
assumptions were applied in the computation of the reserve evaluation
estimates. Under this methodology, future net cash flows are determined by
reducing estimated future gross cash flows to the Partnership and Tatham
Offshore for oil and gas sales by the estimated costs to develop and produce
the underlying reserves, including future capital expenditures, operating
costs, transportation costs, royalty and overriding royalty burdens, production
payments and net profits interest expense on certain of the Partnership's and
Tatham Offshore's properties.
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is
16
<PAGE> 19
materially affected by assumptions as to timing of future oil and gas prices
and production, which may prove to be inaccurate. In addition, the calculations
of estimated net revenue do not take into account the effect of certain cash
outlays, including, among other things, general and administrative costs,
interest expense and dividends. The present value of future net cash flows
shown above should not be construed as the current market value as of June 30,
1997, or any prior date, of the estimated oil and gas reserves attributable to
the Partnership's or Tatham Offshore's properties.
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth certain information regarding the production
volumes of, average unit prices received for and average production costs for
the Partnership's and Tatham Offshore's sale of oil and natural gas for the
periods indicated:
<TABLE>
<CAPTION>
Oil
-----------------------------
The Partnership Tatham Offshore
------------------------------ ----------------------------------
Twelve Months
Ended June 30, Year Ended June 30,
------------------------------- -----------------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net oil production (barrels) ............ 777,000 25,000 -- 170,000 418,000 333,000
Average oil sales price (per barrel) .... $ 21.66 $ 21.57 $ -- $ 22.35 $ 18.83 $ 16.67
Average production costs (1) (per barrel) $ 1.71 $ 1.48 $ -- $ 6.19 $ 19.86 $ 28.02(2)
</TABLE>
<TABLE>
<CAPTION>
Natural Gas
-----------------------------
The Partnership Tatham Offshore
------------------------------------ ------------------------------------
Twelve Months
Ended June 30, Year Ended June 30,
------------------------------------ -------------------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net gas production (MMcf) ............. 21,062 6,767 -- 7,180 3,274 1,505
Average gas sales price (per Mcf) ..... $ 2.17 $ 2.64 $ -- $ 2.36 $ 2.51 $ 1.67
Average production costs (1) (per Mcf) $ 0.28 $ 0.25 $ -- $ 1.03 $ 1.50 $ 2.33(2)
</TABLE>
_____________________
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include third party transportation expenses, maintenance and
repair, labor and utilities costs.
(2) Average production costs exceeded average sales prices for Tatham Offshore
in 1995 due primarily to production problems experienced by the Ewing Bank
914 #2 well and three wells at Ship Shoal Block 331.
The relationship between average sales prices and average production costs
depicted by the table above is not necessarily indicative of future results of
operations expected by the Partnership or Tatham Offshore.
17
<PAGE> 20
ACREAGE
The following table sets forth the Partnership's and Tatham Offshore's
respective developed and undeveloped oil and gas acreage as of June 30, 1997.
Undeveloped acreage is considered to be those lease acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of gas and oil, regardless of whether or not such acreage
contains proved reserves. Gross acres in the following table refer to the
combined number of acres in which a working interest is owned directly by the
Partnership or Tatham Offshore. The number of net acres is the Partnership's
or Tatham Offshore's respective fractional ownership of working interests in
the gross acres.
<TABLE>
<CAPTION>
Gross Net
<S> <C> <C>
THE PARTNERSHIP
Developed acreage ............... 4,072 2,654
Undeveloped acreage ............. 13,208 7,426
------ ------
Total acreage ................. 17,280 10,080
====== ======
TATHAM OFFSHORE
Developed acreage ............... 6,472 4,042
Undeveloped acreage ............. 76,695 68,474
------ ------
Total acreage ................. 83,167 72,516
====== ======
</TABLE>
OIL AND GAS DRILLING ACTIVITY
The following table sets forth the gross and net number of productive, dry
and total exploratory wells and development wells that the Partnership and
Tatham Offshore have drilled in each of the years ended June 30, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
The Partnership
Exploratory ......... Gross Net Gross Net Gross Net
Productive ....... 1.00 .50 -- -- -- --
Dry .............. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total .......... 1.00 .50 -- -- -- --
==== ==== ==== ==== ==== ====
Development
Productive ....... 7.00 4.50 6.00 4.00 -- --
Dry .............. 1.00 .50 2.00 1.25 -- --
---- ---- ---- ---- ---- ----
Total .......... 8.00 5.00 8.00 5.25 -- --
==== ==== ==== ==== ==== ====
Tatham Offshore
Exploratory
Productive ....... -- -- -- -- 2.00 1.50
Dry .............. -- -- -- -- 2.00 2.00
---- ---- ---- ---- ---- ----
Total .......... -- -- -- -- 4.00 3.50
==== ==== ==== ==== ==== ====
Development
Productive ....... 4.00 1.00 4.00 1.00 1.00 1.00
Dry .............. -- -- 1.00 .25 -- --
---- ---- ---- ---- ---- ----
Total .......... 4.00 1.00 5.00 1.25 1.00 1.00
==== ==== ==== ==== ==== ====
</TABLE>
As of June 30, 1997 and September 2, 1997, the Partnership owned 15 gross
(9.5 net) producing wells and Tatham Offshore owned 10 gross (2.76 net)
producing wells.
MARKETING AND GAS PROCESSING
Offshore Marketing, an 80%-owned subsidiary of DeepTech, was formed to
market the oil and gas production of the Partnership, Tatham Offshore and
third-party producers.
18
<PAGE> 21
The Partnership and Tatham Offshore have agreed to sell all of their oil and
gas production to Offshore Marketing on a month to month basis. Offshore
Marketing has agreed to purchase such production at the platforms to which it
is delivered. The agreements with the Partnership and Tatham Offshore
currently provide Offshore Marketing fees equal to 2% of the sales value of
crude oil and condensate and $0.015 per dekatherm of natural gas. During the
year ended June 30, 1997, Offshore Marketing earned fees of $1.2 million from
the Partnership and Tatham Offshore. See the Company's "Notes to Consolidated
Financial Statements - Note 14 - Oil and Gas Properties" for certain
information regarding Offshore Marketing's principal customers.
Offshore Processors, an 85%-owned subsidiary of DeepTech, was formed to
allow the Company to take advantage of gas processing opportunities resulting
from its other activities and interests. Offshore Processors and an affiliate
of Natural Gas Pipeline Company of America formed a partnership which currently
has processing arrangements with major gas processors to process gas available
to such partnership. The volume of gas for which such partnership and Offshore
Processors arranges processing varies monthly depending on the relationship
between the price for unprocessed gas and the price for the constituent
products resulting from processing.
MANAGEMENT SERVICES PROVIDED TO THE SUBSIDIARIES
DeepTech provides management, operational, financial, accounting and
administrative services to each of its subsidiaries pursuant to management
agreements. The management fees charged to each of its subsidiaries are
intended to approximate the cost of resources allocated by DeepTech to each
subsidiary. DeepTech's general and administrative overhead costs are charged
to the subsidiaries through these management fees. 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
by Leviathan, including amounts payable to DeepTech under its management
agreement. Each of the management agreements has a term expiring on June 30,
2002, and may be terminated upon 90 days' notice by either party thereto.
For the year ended June 30, 1997, DeepTech determined the level of services
it provided to Leviathan, Tatham Offshore, DeepFlex Services and Offshore
Marketing and charged each of the subsidiaries an annual management fee of 54%,
24%, 18% and 4%, respectively, of DeepTech's overhead. During the year ended
June 30, 1997, Leviathan charged the Partnership $7.4 million of fees payable
to DeepTech pursuant to the terms of the management agreement. In addition, the
management agreement also requires Leviathan to compensate DeepTech for certain
tax liabilities resulting from additional taxable income allocated to Leviathan
as a result of the Partnership's offering of additional Preference Units and
the investment of the offering proceeds into construction projects. For the
year ended June 30, 1997, Leviathan charged the Partnership $0.6 million to
compensate DeepTech for this additional allocated taxable income. During the
year ended June 30, 1997, Tatham Offshore, DeepFlex Services and Offshore
Marketing were charged $3.3 million, $2.5 million and $0.5 million,
respectively, under their respective management agreements. Leviathan, Tatham
Offshore and Offshore Marketing paid their management fees for the year ended
June 30, 1997. DeepFlex Services did not make payments of management fees to
DeepTech during the year ended June 30, 1997 and has an intercompany note
payable to DeepTech for such amounts.
OTHER ASSETS OF DEEPTECH/THE PARTNERSHIP
Subordinated Notes. As of June 30, 1997, Tatham Offshore had issued to
DeepTech $60 million aggregate principal amount of Subordinated Convertible
Promissory Notes (the "Subordinated Notes"). The Subordinated Notes bore
interest at a rate of 11 3/4% per annum. Effective July 1, 1997, the interest
rate increased to 13% per annum. Under the terms of the Subordinated Notes,
the principal amount of the notes was payable in seven equal annual
installments beginning August 1, 1999.
In September 1997, DeepTech and Tatham Offshore entered into an option
agreement to restructure the Subordinated Notes (the "Restructuring Option
Agreement"). Under the Restructuring Option Agreement, DeepTech has agreed to
forgive the next two scheduled interest payments under the Subordinated Notes,
a total of $3.9 million. In exchange, DeepTech received several options from
Tatham Offshore and has agreed to restructure the Subordinated Notes by
consummating one of the following transactions: (i) to convert all of the
principal amount outstanding under the Subordinated Notes into shares of Tatham
Offshore common stock at the market price at the time the option is exercised;
(ii) to purchase shares of 6% Senior Preferred Stock of Tatham Offshore with a
19
<PAGE> 22
liquidation preference value of $60 million, the proceeds from which would be
used to prepay the outstanding balance of the Subordinated Notes; or (iii) to
purchase all of the outstanding capital stock of Tatham Offshore Development
Company, Inc. ("Tatham Offshore Development"), a wholly-owned subsidiary of
Tatham Offshore, for $60 million, the proceeds from which would be used to
prepay the outstanding balance of the Subordinated Notes. DeepTech is required
to select one of the above restructuring transactions on or before December 31,
1997. As a result, Tatham Offshore will no longer be obligated to make interest
or principal payments under the Subordinated Notes. Additionally, the Company
believes that by consummating one of the above restructuring transactions that
it will be able to continue to maintain its listing on The Nasdaq Stock Market
("Nasdaq").
Tatham Offshore Development holds the leasehold interests in the Sunday
Silence Project. Under the Restructuring Option Agreement, Tatham Offshore has
the right to pursue the sale, farmout or other disposition of the Sunday
Silence Project during the option period. In the event that Tatham Offshore
enters into a sales agreement for 100% of Tatham Offshore Development or the
Sunday Silence Project prior to the expiration of the option period, DeepTech
has the further option to receive 50% of the cash proceeds from such
transaction as prepayment of the Subordinated Notes. If DeepTech elects this
option, DeepTech has agreed to convert the remaining principal amount of the
Subordinated Notes into Tatham Offshore common stock at the market price. For
purposes of determining the market price of Tatham Offshore's common stock
under this agreement, the parties have agreed that the market price shall be
the average of the closing prices for the ten trading days immediately
preceding the exercise of the option. DeepTech's option to acquire Tatham
Offshore Development also includes all of Tatham Offshore's interest in a
drilling arrangement with Sedco Forex for the use of a semisubmersible drilling
rig in the Gulf. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Tatham Offshore -- Liquidity Outlook". Tatham Offshore has agreed not to sell
less than 100% of its interest in Tatham Offshore Development pending the
exercise by DeepTech of one of its options.
Ewing Bank Overriding Royalty Interest. DeepTech owns an overriding royalty
interest in the Ewing Bank Unit operated by Tatham Offshore. The overrides
entitle DeepTech to receive from approximately 3.03% to 4.54% (depending on the
water depth of the specific lease block) of the future gross revenue from
production from the Ewing Bank Unit, except for production from the Ewing Bank
914 #2 well. Neither DeepTech nor the Partnership will receive any material
revenues attributable to such overriding royalty interest unless and until the
Ewing Bank Unit is developed, which development is currently expected to cost
approximately $250 million. See "The Partnership's Oil and Gas Properties -
Overriding Royalty Interests and Minority Interests."
Tatham Offshore 9% Senior Convertible Preferred Stock. The Partnership owns
7,500 shares of 9% Senior Convertible Preferred Stock of Tatham Offshore which
is convertible into Tatham Offshore Series A 12% Convertible Exchangeable
Preferred Stock in certain circumstances.
MAJOR ENCUMBRANCES
Encumbrances Relating to the Senior Notes. In 1994, DeepTech issued 12%
Senior Secured Notes (the "Senior Notes") pursuant to an Indenture (the "Senior
Note Indenture") dated as of March 21, 1994, between DeepTech and The Bank of
New York (as successor-in-interest to First Interstate Bank of Texas, N.A.), as
trustee (the "Trustee"). Interest on the Senior Notes is payable semi-annually
in arrears on June 15 and December 15 of each year beginning on December 15,
1994 at a rate of 12% per annum. The Senior Notes mature on December 15, 2000
and are secured by a security interest in and pledge of, among other things,
(i) all of the outstanding capital stock currently held or hereafter acquired
by DeepTech of and each of its direct subsidiaries, including: (a) Leviathan
Holdings Company ("Leviathan Holdings") (85%), (b) Tatham Offshore (37%), (c)
Deepwater Production Systems, Inc. (100%), (d) Dover Technology, Inc. (50%),
(e) Offshore Marketing (80%), (f) Offshore Processors (85%) and (g) DeepFlex
Services (100%); (ii) all Tatham Offshore Subordinated Notes currently held or
hereafter acquired by DeepTech and any securities into which such notes are
converted or for which such notes may be exchanged pursuant to their terms;
(iii) all notes issued to DeepTech by any subsidiary to evidence intercompany
advances by DeepTech to such subsidiary; and (iv) all dividends, distributions,
interest and principal payments, cash, instruments and other property and
proceeds made upon or with respect to or of the Collateral (as defined
therein); provided, however, that if no Event of Default (as defined therein)
shall have occurred and be continuing, all dividends, distributions, interest
and principal payments, cash instruments and other property and proceeds made
upon or with respect to or of the Collateral shall not constitute Collateral
and may be used by DeepTech subject to the other terms and conditions of the
Senior Note Indenture. See Item 7. "Management's Discussion and Analysis of
Financial
20
<PAGE> 23
Condition and Results of Operations -- Liquidity and Capital Resources -- The
Company" and the Company's "Notes to Consolidated Financial Statements -- Note 6
- -- Indebtedness -- Senior Notes."
Encumbrances Relating to the Partnership Credit Facility. The Partnership
credit agreement is a revolving credit facility providing for up to $300
million of available credit subject to customary terms and conditions,
including certain incurrence limitations (the "Partnership Credit Facility").
The Partnership Credit Facility matures in 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. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- The Partnership."
In addition, certain of the Equity Investees of the Partnership currently
have, and others are expected to have, credit facilities pursuant to which
substantially all of such Equity Investees' assets are or would be pledged.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- The Partnership."
Encumbrances Relating to the RIGCO Credit Facility. On September 30, 1996,
RIGCO entered into a $65 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 $30.3 million of other
indebtedness of the Company. In April 1997, the RIGCO Credit Facility was
amended to provide for an additional $12 million to fund the remaining
refurbishments and upgrades to the FPS Bill Shoemaker. The RIGCO Credit
Facility (i) matures on September 30, 1998, (ii) bears interest at the prime
rate plus 3% per annum (11.5% at June 30, 1997), payable quarterly, (iii) is
secured by all tangible and intangible assets of RIGCO, including the two
semisubmersible drilling rigs, (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 on December 31, 1996, and (v) is
subject to customary conditions and covenants, including the maintenance of a
minimum level of working capital. As of June 30, 1997, amounts outstanding
under the RIGCO Credit Facility totaled $76.5 million. 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. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- The Company."
REGULATION
The oil and gas industry is extensively regulated by federal and state
authorities in the United States. Numerous departments and agencies, both
federal and state, have issued rules and regulations binding on the oil and gas
industry and its individual members, some of which carry substantial penalties
for the failure to comply. Legislation affecting the oil and gas industry is
under constant review and statutes are constantly being adopted, expanded or
amended. The regulatory burden on the oil and gas industry increases its cost
of doing business.
CONTRACT DRILLING SERVICES
The drilling industry is dependent on the demand for services from the oil
and gas exploration industry and, accordingly, is affected by changing tax
laws, price controls and other laws relating to the energy business. The
Company's business is affected generally by political developments and by
federal, state, local and foreign laws, rules and regulations which may relate
directly to the oil and gas industry. The adoption of laws, rules and
regulations, both domestic and foreign, which curtail exploration and
development drilling for oil and gas for economic, environmental or other
policy reasons may adversely affect the Company's operations by limiting
available drilling and production opportunities. The Company's foreign
operations are subject to political, economic, environmental and other
uncertainties associated with foreign operations generally, as well as the
additional risks of fluctuating currency values and exchange controls.
Governments may from time to time suspend or curtail drilling operations or
leasing activities when such operations are considered to be detrimental to the
environment or to jeopardize public safety.
21
<PAGE> 24
OIL AND GAS PIPELINES
General. The design, construction, operation and maintenance of the Gas
Pipelines of certain of their gas transmission facilities are subject to
regulation by the Department of Transportation under the Natural Gas Pipeline
Safety Act of 1968 as amended ("NGPSA"). Operations in offshore federal waters
are regulated by the Department of Interior and the FERC. Under the Outer
Continental Shelf Lands Act ("OCSLA") as implemented by the FERC, pipelines
that transport natural gas across the OCS must offer nondiscriminatory
transportation of natural gas. Substantially all of the pipeline network owned
by the Pipelines is located in federal waters in the Gulf, and the related
rights-of-way were granted by the federal government, the agencies of which
oversee such pipeline operations. Federal rights-of-way require compliance
with detailed federal regulations and orders which regulate such operations.
Poseidon is subject to regulation under the Hazardous Liquid Pipeline Safety
Act ("HLPSA"). Operations in offshore federal waters are regulated by the
Department of the Interior. In addition, under OCSLA, as implemented by the
FERC, pipelines that transport crude oil across the OCS must offer
nondiscriminatory access to other potential shippers of crude. Poseidon is
located in federal waters in the Gulf, and its right-of-way was granted by the
federal government. Therefore, the FERC may assert that it has jurisdiction to
compel Poseidon to grant access under OCSLA to other shippers of crude oil and
to apportion the capacity of the line among owner and non-owner shippers.
Rates. Each of the Regulated Pipelines (Stingray, HIOS and UTOS) is
classified as a "natural gas company" by the NGA. Consequently, the FERC has
jurisdiction over the Regulated Pipelines with respect to transportation of
gas, rates and charges, construction of new facilities, extension or
abandonment of service and facilities, accounts and records, depreciation and
amortization policies and certain other matters. In addition, the Regulated
Pipelines, where required, hold certificates of public convenience and
necessity issued by the FERC covering their facilities, activities and
services.
Under the NGA and the Natural Gas Policy Act of 1978, as amended (the
"NGPA"), and the applicable FERC regulations, the Regulated Pipelines may not
charge or collect more than the maximum rates on file with the FERC. FERC
regulations permit natural gas pipelines to charge maximum rates that generally
allow pipelines the opportunity to (i) recover operating expenses, (ii) recover
the pipeline's undepreciated investment in property, plant and equipment ("rate
base") and (iii) receive an overall allowed rate of return on the pipeline's
rate base. The Partnership believes that even after the rate base of any
Regulated Pipeline is substantially depleted, the FERC will allow such
Regulated Pipeline to recover a reasonable return, whether through a management
fee or otherwise.
Each of Stingray, HIOS and UTOS are currently operating under agreements
with their respective customers that provide for rates that have been approved
by the FERC and which should remain in effect through at least the fourth
quarter of 1998. Stingray, HIOS and UTOS have each agreed to file new rate
cases in the fourth quarter of 1998.
On March 13, 1997, the FERC issued an order declaring Tarpon's facilities
exempt from NGA regulation under the gathering exception. Tarpon has agreed,
however, to continue service for its shippers on the terms and conditions, and
at the rate reflected in, its current tariff for at least two years from the
date of the order. None of the Green Canyon, Ewing Bank, Manta Ray Offshore or
Viosca Knoll systems is currently considered a "natural gas company" under the
NGA. Consequently, these companies are also not subject to extensive FERC
regulation under the NGA or the NGPA and are thus allowed to negotiate the
rates and terms of service with their respective shippers, subject to the
"equal access" requirements of the OCSLA.
The FERC has asserted its NGA rate jurisdiction over services performed
through gathering facilities owned by a natural gas company (as defined in the
NGA) when such services were performed "in connection with" transportation
services provided by such natural gas company. Whether, and to what extent,
the FERC should exercise any NGA rate jurisdiction it may be found to have over
gathering facilities owned either by natural gas companies or affiliates
thereof is subject to case-by-case review by the FERC. Based on current FERC
policy and precedent, the Partnership does not anticipate that the FERC will
assert or exercise any NGA rate jurisdiction over the Green Canyon, Ewing Bank,
Manta Ray Offshore or Viosca Knoll systems, so long as the services provided
through such lines are not performed "in connection with" transportation
services performed through any of the Regulated Pipelines.
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The FERC has generally disclaimed jurisdiction to set rates for oil
pipelines in the OCS under the Interstate Commerce Act ("ICA"). Therefore,
unless the FERC's jurisdiction is successfully invoked under OCSLA to remedy a
denial of non-discriminatory access, or the FERC reverses its decision that the
ICA does not apply to OCS oil pipelines, Poseidon will not be subject to rate
regulation.
OIL AND GAS PROPERTIES
Exploration, Production and Development. The exploration, production and
development operations of the Company are subject to regulation at the federal
and state levels. Such regulation includes requiring permits for the drilling
of wells and maintaining bonds and insurance in order to drill or operate
wells, and regulating the location of wells, the method of drilling and casing
wells, the surface use and restoration of properties upon which wells are
drilled and the plugging and abandoning of wells. The Partnership's and Tatham
Offshore's exploration, production and development operations are also subject
to various conservation laws and regulations. These include the regulation of
the size of drilling and spacing units or proration units, the density of wells
that may be drilled, the levels of production, and the unitization or pooling
of oil and gas properties.
The Partnership and Tatham Offshore presently have interests in or rights to
offshore leases located in federal waters. Federal leases are administered by
the MMS. Individuals and entities must qualify with the MMS prior to owning and
operating any leasehold or right-of-way interest in federal waters. Such
qualification with the MMS generally involves filing certain documents with the
MMS and obtaining an area-wide performance bond and, in some cases,
supplemental bonds representing security deemed necessary by the MMS in excess
of the area-wide bond requirements for facility abandonment and site clearance
costs.
OPERATIONAL HAZARDS AND INSURANCE
The drilling and exploration, production and development operations of
DeepTech and its affiliates are subject to the usual hazards incident to the
drilling and production of natural gas and crude oil, such as blowouts,
cratering, explosions, uncontrollable flows of oil, natural gas or well fluids,
fires, pollution, releases of toxic gas and other environmental hazards and
risks. These hazards can cause personal injury and loss of life, severe damage
to and destruction of property and equipment, pollution or environmental
damages and suspension of operations. In addition, a rig or a pipeline may
experience damage as a result of an accident or other natural disaster. To
mitigate the impact of repair costs associated with such an accident or
disaster, the Company and its affiliates maintain insurance of various types
that they consider to be adequate to cover its operations. The Insurance
Package covers assets in amounts considered reasonable, other than for the
Partnership's 50% interest in the assets of Stingray, for which insurance is
carried at the Stingray partnership level. The Insurance Package is subject to
deductibles that the Company and its affiliates consider reasonable and not
excessive. The Company and its affiliates' insurance does not cover every
potential risk associated with operating drilling rigs or pipelines or the
drilling and production of oil and gas. Consistent with insurance coverage
generally available to the industry, the Company and its affiliates' insurance
policies do not provide coverage for losses or liabilities relating to
pollution, except for sudden and accidental occurrences.
The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Company or its affiliates' operations
and financial condition. The Company believes that it is adequately insured
for public liability and property damage to others with respect to its
operation. However, no assurance can be given that the Company or its
affiliates will be able to maintain adequate insurance in the future at rates
it considers reasonable.
INTERNATIONAL OPERATIONS AND RISKS
The Company conducts some of its operations outside of the United States.
Risks associated with operating in international markets include foreign
exchange restrictions and currency fluctuations, foreign taxation, changing
political conditions and foreign and domestic monetary policies, expropriation,
nationalization, nullification, modification or renegotiation of contracts, war
and civil disturbances or other risks that may limit or disrupt markets. The
ability of the Company to compete in the international markets may also be
adversely affected by foreign government regulations that favor or require the
awarding of such contracts to local contractors, or by regulations requiring
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. No predictions can be made as to what foreign
government regulations may be enacted in the future that could be applicable to
the Company's operations.
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Presently, the Company's only international operation is a drilling
contract, through RIGCO, with Amoco Canada Petroleum Company, Ltd. for a two
well program offshore Canada. Under such drilling contract, the Company is
compensated in U.S. currency.
ENVIRONMENTAL
General. The operations of the Company and its affiliates are subject to
extensive federal, state and local statutory and regulatory requirements
relating to environmental affairs, health and safety, waste management and
chemical products. In recent years, these requirements have become
increasingly stringent and in certain circumstances, they impose "strict
liability" on a company, rendering it liable for environmental damage without
regard to negligence or fault on the part of such company. To the Company's
knowledge, its operations are in substantial compliance, and are expected to
continue to comply in all material respects, with applicable environmental
laws, regulation and ordinances.
It is possible, however, that future developments, such as stricter
environmental laws, regulations or enforcement policies could affect the
handling, manufacture, use, emission or disposal of substances or wastes by the
Company and its affiliates. In addition, some risk of environmental costs and
liabilities is inherent in the Company and its affiliates' operations and
products as it is with other companies engaged in similar or related
businesses, and there can be no assurance that material costs and liabilities,
including substantial fines and criminal sanctions for violation of
environmental laws and regulations, will not be incurred by the Company and its
affiliates. Furthermore, the Company will likely be required to increase its
expenditures during the next several years to comply with higher industry and
regulatory safety standards. However, such expenditures cannot be accurately
estimated at this time.
Pipelines. In addition to the NGA, the NGPA and the OCSCA, several federal
and state statutes and regulations may pertain specifically to the operations
of the Pipelines. The Hazardous Materials Transportation Act, as amended,
regulates materials capable of posing an unreasonable risk to health, safety
and property when transported in commerce. The NGPSA and the HLPSA authorize
the development and enforcement of regulations governing pipeline
transportation of natural gas and hazardous liquids. While federal
jurisdiction is exclusive over regulated pipelines, the statutes allow states
to impose additional requirements for intrastate fines if compatible with
federal programs. Both Texas and Louisiana have developed regulatory programs
that parallel the federal program for the transportation of natural gas by
pipelines.
Solid Waste. The Company's operations may generate or transport both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the federal Resource Conservation and Recovery Act ("RCRA"), as amended, 42
U.S.C. Section 6901 et. seq., and its regulations, and comparable state
statutes and regulations. Further, it is possible that some wastes that are
currently classified as nonhazardous, via exemption or otherwise, perhaps
including wastes currently generated during pipeline operations, may, in the
future, be designated as "hazardous waste," which are subject to more rigorous
and costly treatment, storage, transportation and disposal requirements. Such
changes in the regulations may result in additional expenditures or operating
expenses by the Company and its affiliates.
Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et. seq.,
and comparable state statutes, also known as "Superfund" laws, impose
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons that cause or contribute to the release of a
"hazardous substance" into the environment. These persons include the current
owner or operator of a site, the past owner or operator of a site, and
companies that transport, dispose of, or arrange for the disposal of the
hazardous substances found at the site. CERCLA also authorizes the
Environmental Protection Agency (the "EPA") or state agency, and in some cases
third parties, to take actions in response to threats to the public health or
the environment and to seek to recover from the responsible classes of persons
the costs they incur. Despite the "petroleum exclusion" of Section 101 (14)
that currently encompasses natural gas, the Company and its affiliates may
nonetheless generate or transport "hazardous substances" within the meaning of
CERCLA, or comparable state statutes, in the course of its ordinary operations.
Thus, the Company and its affiliates may be responsible under CERCLA or the
state equivalents for all or part of the costs required to cleanup sites where
a release of a hazardous substance has occurred.
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<PAGE> 27
Air. The Company and its affiliates' operations may be subject to the Clean
Air Act ("CAA"), 42 U.S.C. Section 7401- 7642, and comparable state statutes.
The 1990 CAA amendments and accompanying regulations, state or federal, may
impose certain pollution control requirements with respect to air emissions
from operations, particularly in instances where a company constructs a new
facility or modifies an existing facility. The Company and its affiliates may
also be required to incur certain capital expenditures in the next several
years for air pollution control equipment in connection with maintaining or
obtaining operating permits and approvals addressing other air emission-related
issues. However, the Company and its affiliates do not believe their
operations will be materially adversely affected by any such requirements.
Water. The Federal Water Pollution Control Act ("FWPCA") and Clean Water
Act, 33 U.S.C. Section 1311 et. seq., impose strict controls against the
unauthorized discharge of produced waters and other oil and gas wastes into
navigable waters. The FWPCA provides for civil and criminal penalties for any
unauthorized discharges of oil and other hazardous substances in reportable
quantities and along with the Oil Pollution Act of 1990 (the "OPA"), imposes
substantial potential liability for the costs of removal, remediation and
damages. Similarly, the OPA imposes liability for the discharge of oil into or
upon navigable waters or adjoining shorelines. Among other things, the OPA
raises liability limits, narrows defenses to liability and provides more
instances in which a responsible party is subject to unlimited liability. One
provision of the OPA requires that offshore facilities establish and maintain
evidence of financial responsibility of $150 million. State laws for the
control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of an unauthorized discharge of petroleum or its
derivatives into state waters. Further, the Coastal Zone Management Act
authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore and
protect coastal waters.
Endangered Species. The Endangered Species Act ("ESA") seeks to ensure that
activities do not jeopardize endangered or threatened plant and animal species,
nor destroy or modify the critical habitat of such species. Under the ESA,
certain exploration and production operations, as well as actions by federal
agencies, may not significantly impair or jeopardize the species or its
habitat. The ESA provides for criminal penalties for willful violations of the
Act. Other statutes which provide protection to animal and plant species and
thus may apply to the Company and its affiliates' operations are the Marine
Mammal Protection Act, the Marine Protection and Sanctuaries Act, the Fish and
Wildlife Coordination Act, the Fishery Conservation and Management Act, and the
Migratory Bird Treaty Act. The National Historic Preservation Act may impose
similar requirements.
Communication of Hazards. The Occupational Safety and Health Act ("OSHA"),
as amended, 29 U.S.C. Section 651 et. seq., the Emergency Planning and
Community Right-To-Know Act ("EPCRA"), as amended, 42 U.S.C. Section 11001 et.
seq., and comparable state statutes require the Company to organize and
disseminate information to employees, state and local organizations, and the
public about the hazardous materials used in its operations and its emergency
planning.
EMPLOYEES
As of June 30, 1997, DeepTech had 56 employees. DeepTech has entered into
management agreements with each of the Operating Subsidiaries pursuant to which
DeepTech provides certain services, including operational, financial,
accounting and administrative services. The aggregate fees payable under these
agreements provide reimbursement for a substantial portion of DeepTech's
general and administrative expenses. See "--Management Services Provided to
the Subsidiaries" and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- The Company." A subsidiary of the Partnership has eleven full
time employees, based in Houma, Louisiana, to perform operational functions for
its gas pipeline and platform operations.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This Annual 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
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<PAGE> 28
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 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
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) the throughput levels
achieved by the Gas Pipelines, Poseidon and any future pipelines in which the
Company and its affiliates own an interest, (v) the ability to access
additional reserves to offset the natural decline in production from existing
wells connected to the Gas Pipelines and Poseidon, (vi) changes in gathering,
transportation, processing, handling and other rates due to changes in
governmental regulation and/or competitive factors, (vii) the impact of oil and
natural gas price fluctuations, (viii) the production rates and reserve
estimates associated with the Company's and its affiliates' producing oil and
gas properties, (ix) significant changes from expectations of capital
expenditures and operating expenses and unanticipated project delays and (x)
the ability of the subsidiaries and joint ventures (including the Equity
Investees) to make distributions to the Company and its affiliates. The Company
and its affiliates disclaim any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
CERTAIN DEFINITIONS
The following are abbreviations and words commonly used in the oil and gas
industry and in this Annual Report.
"3-D seismic" means seismic that is run, acquired and processed to yield a
three-dimensional picture of the subsurface.
"bbl" or "barrel" means barrels, a standard measure of volume for oil,
condensate and natural gas liquids which equals 42 U.S. gallons.
"Bcf" means billion cubic feet (or thousand MMcf).
"Btu" means British thermal unit, a unit of heat measure with one btu being
the amount of heat needed to raise the temperature of one pound of water one
degree Fahrenheit.
"development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"exploratory well" means a well drilled to find commercially productive
hydrocarbons in an unproved area or to extend significantly a known oil or
natural gas reservoir.
"farm-in" or "farm-out" refers to an agreement whereunder the owner of a
working interest in an oil and gas lease delivers the contractual right to earn
the working interest or a portion thereof to another party who desires to drill
on the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn a working interest in the acreage. The assignor usually
retains a royalty or a working interest after payout in the lease. The assignor
is said to have "farmed-out" the acreage. The assignee is said to have
"farmed-in" the acreage.
"gathering system" means a pipeline system connecting a number of wells,
batteries or platforms to an interconnection with an interstate pipeline.
"gross" oil and natural gas wells or "gross" acres are the total number of
wells or acres, respectively, in which the Company has an interest, without
regard to the size of that interest.
"Mcf" means thousand cubic feet, a standard measure of volume for gas.
"MMbtu" means million British thermal units.
"MMcf" means million cubic feet.
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"net" oil and natural gas wells or "net" acres or "net" production or
reserves are the total gross number of wells or acres respectively, in which
the Company has an interest multiplied times the Company's or other referenced
party's working interest in such wells or acres.
"OCS" means Outer Continental Shelf, an area offshore the United States over
which the federal government has jurisdiction, which extends from the end of
state territorial waters (three to twelve nautical miles offshore, depending on
the state) to 200 nautical miles from shore. The term OCS as used herein
includes not only those areas on the Shelf itself, but those areas in the
flextrend and the deepwater, to a limit of 200 nautical miles, as well.
"recompletion" means the completion of an existing well for production from
a formation that exists behind the casing of the well.
"royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually carved from the leasehold
interest pursuant to an assignment to a third party reserved by an owner of the
leasehold in connection with a transfer of the leasehold to a subsequent owner.
"working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
In this Annual Report, natural gas volumes are stated at the legal pressure
base of the state or area in which the reserves are located and at 60 degrees
Fahrenheit.
ITEM 3. LEGAL PROCEEDINGS
The Company and its affiliates are involved from time to time in various
claims, actions, lawsuits and regulatory matters that have arisen in the
ordinary course of business, including various rate cases and other proceedings
before the FERC. See Items 1 & 2. "Business and Properties -- Regulation."
In particular, the Partnership is a defendant in a lawsuit filed by
Transcontinental Gas Pipe Line Corporation ("Transco") in the 157th Judicial
District Court, Harris County, Texas on August 30, 1996. Transco alleges that,
pursuant to a platform lease agreement entered into on June 28, 1994, Transco
has the right to expand its facilities and operations on the offshore platform
by connecting additional pipeline receiving and appurtenant facilities. Transco
has requested a declaratory judgment and is seeking damages. Management has
denied Transco's request to expand its facilities and operations because the
lease agreement prohibits such expansion, and Transco's activities will
interfere with the Manta Ray Offshore system and the Partnership's existing and
planned activities on the platform. It is the opinion of management that
adequate defenses exist and that the final disposition of this suit
individually, and all of the Partnership's other pending legal proceedings in
the aggregate, will not have a material adverse effect on the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective February 1996, the shareholders approved the issuance, to Thomas
P. Tatham, of warrants to purchase 1,333,333 shares of DeepTech's common stock.
The Information Statement disclosing the shareholder approval of such action
was approved by the Commission in May 1997.
No matters were submitted to a vote of the security holders of DeepTech
during the quarter ended June 30, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
DeepTech's common stock is quoted on Nasdaq, which is the principal trading
market for these securities, under the symbol "DEEP." The closing price of
DeepTech's common stock on Nasdaq was $10.50 per share on September 2, 1997.
There were approximately 129 holders of record of DeepTech's common stock as of
September 2, 1997. The following table sets forth, for the periods indicated,
the high and low sales prices for the common stock as quoted on Nasdaq.
<TABLE>
<CAPTION>
Common Stock Price Range
------------------------
High Low
<S> <C> <C>
Year Ended June 30, 1996
First Quarter .......................... 5 3 1/2
Second Quarter ......................... 5 3/8 3 1/2
Third Quarter .......................... 6 5/8 4 1/8
Fourth Quarter ......................... 6 1/8 4 1/2
Year Ended June 30, 1997
First Quarter .......................... 8 5 3/8
Second Quarter ......................... 7 3/8 5 3/8
Third Quarter .......................... 7 5 3/4
Fourth Quarter ......................... 8 3/8 6
PERIOD FROM JULY 1, 1997 THROUGH SEPTEMBER 2, 1997 11 7/8 7 5/8
</TABLE>
DIVIDEND POLICY
DeepTech has never paid cash dividends on its common stock and does not
contemplate that it will pay any cash dividends on its common stock in the
foreseeable future. The payment of future dividends will be determined by
DeepTech's Board of Directors in light of conditions then existing, including
DeepTech's earnings, financial condition, capital requirements, restrictions in
financing agreements, business conditions and other factors. Furthermore, the
Senior Notes Indenture includes covenants that restrict the circumstances under
which DeepTech may pay dividends. Pursuant to such covenants, DeepTech is
currently prohibited from paying dividends in respect of its common stock.
RECENT SALES OF UNREGISTERED SECURITIES
The following information related to sales and other issuances by DeepTech
within the past three fiscal years of DeepTech securities, the sales or
issuances of which were not registered pursuant to the Securities Act of 1933
("Securities Act").
In July 1994, DeepTech issued 1,466 shares of its common stock to Glenn
Tatham upon exercise by Glenn Tatham of outstanding warrants issued to him in
May 1990. The exercise price for such warrants was $3.41 per share. Such
transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
In July 1994, DeepTech issued 200,000 shares of its common stock to Michael
Willis upon the exercise by Michael Willis of outstanding warrants issued to
him in July 1992. The exercise price for such warrants was $2.50 per share.
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
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In August 1994, DeepTech issued 304,558 shares of its common stock to Thomas
P. Tatham upon exercise by Thomas P. Tatham of outstanding warrants issued to
him in May 1990. The exercise price for such warrants was $3.41 per share.
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
In November 1994, DeepTech issued warrants to purchase 1,100,000 shares of
common stock to Wilrig AS (the "Wilrig Warrants") at an exercise price of
$10.00 per share as partial consideration for an agreement by Wilrig AS to loan
$11.0 million to the Company provided, however, that if DeepTech did not
exercise an option to acquire the Treasure Searcher, or a similar
semisubmersible drilling rig from Wilrig AS, the maximum number of shares of
common stock that may be obtained upon exercise of such warrants would be
reduced to 800,000 shares. Such transaction was completed without registration
under the Securities Act in reliance on the exemption provided by Section 4 (2)
of the Securities Act.
In June 1995, DeepTech granted stock options to purchase 300,000 shares of
its common stock to Grant Sims at an exercise price of $4.00 per share as an
incentive for continued employment. Such transaction was completed without
registration under the Securities Act in reliance on the exemption provided by
Section 4 (2) of the Securities Act.
In June 1995, DeepTech issued 300,000 shares of its common stock to Grant
Sims upon the exercise of outstanding warrants issued to Grant Sims in June
1995. The consideration for the exercise was a note payable to DeepTech in
the aggregate amount of $1,200,000, bearing interest at 8% per annum, principal
and interest due on June 12, 1998. This note will be canceled by DeepTech if
Mr. Sims continues to be employed by DeepTech until June 12, 1998. If Mr. Sims
voluntarily terminates employment with DeepTech prior to June 12, 1998, he must
repay the note by paying principal and interest or return the 300,000 shares of
common stock. Such transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4 (2) of the
Securities Act.
In September 1995, DeepTech issued options to purchase 300,000 shares of its
common stock at an exercise price of $5.00 per share to Thomas P. Tatham as
reimbursement to Mr. Tatham for costs he incurred in connection with agreements
Mr. Tatham made with each of two outside directors of DeepTech pursuant to
which Mr. Tatham had granted each director options to purchase 150,000 shares
of the common stock of DeepTech held by Mr. Tatham at his costs with respect
thereto. Such transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4 (2) of the
Securities Act.
In November 1995, DeepTech issued 100,000 shares of its common stock to
Alpha Marine Services in exchange for an agreement to terminate, as of October
1, 1995, a two year charter agreement for a multi-purpose service vessel
entered into as of May 1, 1995. The initial base day rate was $6,980 as a
charter fee for use of the vessel. Such transaction was completed without
registration under the Securities Act in reliance on the exemption provided by
Section 4 (2) of the Securities Act.
In December 1995 and June 1996, DeepTech issued warrants to purchase 372,973
and 100,000, respectively, shares of common stock to Highwood Partners at an
exercise price of $5.00 per share as partial consideration for an agreement by
Highwood Partners to loan $17.3 million to the Company. Such transaction was
completed without registration under the Securities Act in reliance on the
exemption provided by Section 4 (2) of the Securities Act.
In February 1996, DeepTech issued 125,000 shares of common stock to T-75
Rig Investment, L.L.P. in partial consideration for the release of the Company
from any obligations under a loan agreement relating to original acquisition
financing for the FPS Laffit Pincay. Such transaction was completed without
registration under the Securities Act in reliance on the exemption provided by
Section 4 (2) of the Securities Act.
In February 1996, DeepTech issued warrants to purchase an aggregate of up
to 2,666,667 shares of DeepTech common stock at $4.50 per share in connection
with an agreement by a syndicate of commercial lenders to loan the Company
$12.0 million. Such transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4 (2) of the
Securities Act.
29
<PAGE> 32
In February 1996, DeepTech issued warrants to purchase an aggregate of up
to 1,475,555 shares of DeepTech common stock at $4.50 per share in connection
with an agreement by the individuals listed below to refinance a total of $6.6
million until January 15, 1997.
<TABLE>
<S> <C>
Thomas P. Tatham 1,333,333 shares
Donald A. Sanders 106,667 shares
John Drury 35,555 shares
</TABLE>
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
In September 1996, DeepTech issued 472,973 shares of its common stock to
Westgate International, L.P. ("Westgate") upon exercise by Westgate
International, L.P. of warrants to acquire 372,973 and 100,000 shares of
DeepTech common stock issued to Highwood Partners in December 1995 and June
1996, respectively. Such transaction was completed without registration under
the Securities Act in reliance on the exemption provided by Section 4 (2) of
the Securities Act.
In December 1996, DeepTech issued shares of its common stock as indicated
below upon exercise of an equal number of warrants originally issued to a
syndicate of commercial lenders in February 1996.
<TABLE>
<S> <C>
Lehman Brothers Holdings, Inc. 666,667 shares
Citicorp North America, Inc. 206,250 shares
Donald A. Sanders 12,500 shares
</TABLE>
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
In December 1996, DeepTech issued shares of its common stock as indicated
below upon exercise of an equal number of warrants originally issued to the
individuals listed below in February 1996.
<TABLE>
<S> <C>
Donald A. Sanders 26,667 shares
John Drury 8,889 shares
</TABLE>
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
In December 1996, DeepTech issued shares of its common stock as indicated
below upon exercise of an equal number of warrants originally issued to BBU
Mezzanine Fund II as partial consideration for the agreement to loan $3.5
million to DeepTech in December 1992. The exercise price for such warrants was
$4.00 per share.
<TABLE>
<S> <C>
Susan K. Stickney 2,628 shares
Chris M. Sanders 1,250 shares
Roberto Marsella 1,500 shares
David King 1,500 shares
Alfred King III 1,500 shares
Albert Stickney III 791 shares
Delaware Charter Guarantee & Trust Company
Trustee for Roger B. Vincent, Sr. 8,371 shares
Donald A. Sanders 15,000 shares
Katherine U. Sanders 15,000 shares
Jansen Noyes, Jr. and Alfred King, Jr. Trustee U/W
Nancy Noyes King for Susan K. Stickney 750 shares
Jansen Noyes, Jr. and Alfred King, Jr. Trustee U/W
Nancy Noyes King for David N. King 750 shares
Jansen Noyes, Jr. and Alfred King, Jr. Trustee U/W
Nancy Noyes King for Alfred King, III 750 shares
Jansen Noyes, Jr. 563 shares
</TABLE>
30
<PAGE> 33
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4 (2) of the Securities Act.
In December 1996, DeepTech issued 109,375 shares of its common stock to
Citicorp North America, Inc. upon exercise of warrants originally issued to
Citicorp USA, Inc. as partial consideration for the agreement to loan $3.5
million to DeepTech in December 1992. The exercise price for such warrants was
$4.00 per share. Such transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4 (2) of the
Securities Act.
In May 1997, DeepTech issued 114,584 shares of its common stock to Thomas P.
Tatham upon exercise of an equal number of warrants originally issued to a
syndicate of commercial lenders in February 1996. Such transaction was
completed without registration under the Securities Act in reliance on the
exemption provided by Section 4 (2) of the Securities Act.
In May 1997, DeepTech issued 275,000 shares of its common stock to Thomas P.
Tatham upon exercise of the Wilrig Warrants originally issued to Wilrig AS in
November 1994. Such transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4 (2) of the
Securities Act.
In May 1997, DeepTech issued 333,333 shares of its common stock to Thomas P.
Tatham upon exercise of warrants originally issued to Thomas P. Tatham in
February 1996. Such transaction was completed without registration under the
Securities Act in reliance on the exemption provided by Section 4 (2) of the
Securities Act.
31
<PAGE> 34
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the Company
for each of the three fiscal years ended June 30, 1997, 1996 and 1995 and at
June 30, 1997 and 1996 have been derived from the consolidated financial
statements and notes thereto that are included elsewhere in this Annual Report.
The consolidated financial data at June 30, 1994 and 1993 and for the years
then ended and at June 30, 1995 have been derived from the historical
consolidated financial statements. As a result of the completion of Tatham
Offshore's initial public offering, the results of operations of Tatham
Offshore are not consolidated in the Company's financial statements after
February 14, 1994 as the Company accounts for its investment in Tatham Offshore
using the equity method.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
(except per share)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales .............................. $ 116,408 $ 44,491 $ 18,708 $ 23,592 $ 371
Drilling services .............................. 14,609 -- -- -- --
Transportation services ........................ -- -- -- -- 7,227
Equity in earnings ............................. 3,045 10,484 5,990 7,862 9,769
Other .......................................... 55 459 742 1,989 --
--------- -------- -------- -------- --------
Total revenue ................................ 134,117 55,434 25,440 33,443 17,367
--------- -------- -------- -------- --------
Oil and gas purchases .......................... 115,192 43,696 17,447 14,988 --
Operating and production expenses .............. 8,201 478 215 4,867 1,091
Losses of equity investees ..................... 17,736 1,859 13,909 2,355 --
Costs in excess of (under) revenue on
turnkey contract ............................. -- -- -- (818) 3,500
Exploration expenses ........................... -- -- -- 367 447
Depreciation, depletion, amortization and
impairment ................................... 1,453 215 326 481 1,062
General and administrative expenses ............ 2,413 3,807 3,495 5,308 7,782
--------- -------- -------- -------- --------
Total operating costs ........................ 144,995 50,055 35,392 27,548 13,882
--------- -------- -------- -------- --------
Operating (loss) income ........................ (10,878) 5,379 (9,952) 5,895 3,485
(Loss) gain on investments in subsidiaries ..... (12,049) -- -- 31,758 7,203
Interest income and other ...................... 9,692 14,654 8,212 2,050 170
Interest and other financing costs ............. (14,566) (13,112) (10,006) (8,421) (13,686)
--------- -------- -------- -------- --------
(Loss) income before preferred dividends of
subsidiaries, minority interests and
income taxes ................................. (27,801) 6,921 (11,746) 31,282 (2,828)
Preferred dividends of subsidiaries ............ -- -- -- (90) (825)
Minority interests in consolidated subsidiaries. (1,376) (905) (519) (925) (661)
--------- -------- -------- -------- --------
(Loss) income before cumulative effect of
accounting change and income taxes ........... (29,177) 6,016 (12,265) 30,267 (4,314)
Income tax (benefit) expense ................... (9,343) 2,374 (3,837) 3,267 (15)
--------- -------- -------- -------- --------
(Loss) income before cumulative effect of
accounting change ............................ (19,834) 3,642 (8,428) 27,000 (4,299)
Cumulative effect on prior years of changing
method of accounting for income taxes ........ -- -- -- 412 --
--------- -------- -------- -------- --------
Net (loss) income .............................. $ (19,834) $ 3,642 $ (8,428) $ 26,588 $ (4,299)
========= ======== ======== ======== ========
Net (loss) income attributable to
common stockholders .......................... $ (19,834) $ 3,642 $ (8,428) $ 25,988 $ (4,299)
========= ======== ======== ======== ========
Net (loss) income per share .................... $ (1.10) $ 0.21 $ (0.55) $ 1.56 $ (0.30)
========= ======== ======== ======== ========
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Property and equipment, net ........................ $125,506 $ 25,867 $ 16,480 $ 23,285 $ 14,060
Receivables from affiliates ........................ 60,000 100,490 89,361 60,000 --
Equity investments ................................. -- 4,586 2,369 10,426 4,294
Total assets ....................................... 228,218 156,433 127,693 119,229 35,125
Long-term debt ..................................... 164,561 97,534 91,381 87,656 15,122
Accumulated losses and/or cash distributions of
equity investees in excess of investment and
accumulated equity earnings ...................... 32,679 196 8,008 -- --
Minority interests in consolidated subsidiaries .... 344 186 639 422 5,791
Stockholders' equity (deficit) ..................... 5,539 12,282 2,382 8,911 (18,529)
</TABLE>
ITEM 7. 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 elsewhere in this
Annual Report and the information set forth under the heading "Selected
Financial Data" and is intended to assist in the understanding of the Company's
financial position and results of operations for each of the years ended June
30, 1997, 1996 and 1995.
GENERAL
DeepTech is a diversified energy company engaged, through the 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 primarily offshore the United States in
the Gulf and offshore eastern Canada.
The Company conducts natural gas and crude oil gathering, transportation and
similar services through the Partnership, a master limited partnership traded
on the New York Stock Exchange ("NYSE") under the symbol "LEV." Leviathan owns
a 27.3% effective interest in the Partnership (23.2% effective interest net to
DeepTech), consisting of a 1% general partner interest in the Partnership, a
25.6% limited partner interest evidenced by 6,291,894 common units in the
Partnership (the "Common Units") and a 1.0101% nonmanaging interest in certain
subsidiaries of the Partnership. The public owns 18,075,000 preference units
representing limited partner interests in the Partnership (the "Preference
Units"). The closing price of the Preference Units on the NYSE on September 2,
1997 was $26.125 per Preference Unit. The Partnership's operations also
consist of the development and production of oil and gas reserves from three
offshore leases.
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 in
the development of offshore pipeline infrastructure offshore eastern Canada.
DeepTech owns 10,000,000 shares of Tatham Offshore common stock representing
approximately 36.6% of the issued and outstanding common stock of Tatham
Offshore and Subordinated Notes of Tatham Offshore with an outstanding
principal balance of $60 million. DeepFlex Services owns (i) 4,670,957 shares
of Tatham Offshore's Series A 12% Convertible Exchangeable Preferred Stock,
(ii) 1,016,957 shares of Tatham Offshore's Series C 4% Convertible Exchangeable
Preferred Stock and (iii) 4,312,086 shares of Tatham Offshore's Mandatory
Redeemable Preferred Stock. The Partnership owns 7,500 shares of 9% Senior
Convertible Preferred Stock of Tatham Offshore. The common stock of Tatham
Offshore is quoted on the Nasdaq under the symbol "TOFF." The closing price of
Tatham Offshore's common stock on Nasdaq was $.50 per share on September 2,
1997. The Tatham Offshore Series A, Series C and Mandatory Redeemable
Preferred Stock are traded in the over-the-counter market under the symbols
"TOFFL", "TOFFN" and "TOFFM," respectively.
33
<PAGE> 36
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
Oil and gas sales from the Company's marketing operations totaled $116.4
million for the year ended June 30, 1997 as compared with $44.5 million for the
year ended June 30, 1996. During the years ended June 30, 1997 and 1996, the
Company derived its oil and gas revenue by marketing oil and gas production of
the Partnership, Tatham Offshore and third-party producers. The increase of
$71.9 million is a result of the initiation of production from three oil and
gas properties owned by the Partnership and Tatham Offshore during December
1995, May 1996 and May 1997. During the year ended June 30, 1997, the Company
sold 39,523 MMcf of gas and 1,221,070 barrels of oil at average prices of $2.29
per Mcf and $21.18 per barrel, respectively. During the year ended June 30,
1996, the Company sold 13,679 MMcf of gas and 543,730 barrels of oil at average
prices of $2.47 per Mcf and $19.58 per barrel, respectively.
Drilling services totaled $14.6 million for the year ended June 30, 1997 and
included revenue from contract drilling services provided by the Company's FPS
Laffit Pincay from October 1, 1996 through June 30, 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 losses of
equity investees for the period from July 1, 1996 through September 30, 1996,
as discussed below.
Equity in earnings totaled $3.0 million for the year ended June 30, 1997 as
compared with $10.5 million for the year ended June 30, 1996. The decrease of
$7.5 million resulted primarily from (i) RIGCO acquiring the FPS Laffit Pincay
from DeepFlex Partners on September 30, 1996 and as a result the operating
activity from the FPS Laffit Pincay is included in drilling services and
operating expenses after September 30, 1996 and (ii) a non-recurring charge of
$21.2 million recorded by the Partnership during June 1997. Equity in earnings
for the year ended June 30, 1997 primarily consisted of equity earnings of the
Partnership whereas equity in earnings for the year ended June 30, 1996
included equity earnings of the Partnership and DeepFlex Partners of $9.1
million and $1.3 million, respectively. During the year ended June 30, 1997,
the Partnership had total operating revenue of $112.6 million as compared with
$60.9 million for the year ended June 30, 1996. For the year ended June 30,
1997, total gathering and transportation throughput, net to the Partnership,
was 485.2 Bcf of gas as compared with 465.2 Bcf of gas for the year ended June
30, 1996. Oil volumes from Poseidon totaled 6.8 million barrels and 0.2
million barrels for the years ended June 30, 1997 and 1996, respectively.
During the year ended June 30, 1997, the Partnership produced and sold 21,062
MMcf of gas and 776,953 barrels of oil at average prices of $2.17 per Mcf and
$21.66 per barrel, respectively. During the year ended June 30, 1996, the
Partnership produced and sold 6,767 MMcf of gas and 25,216 barrels of oil at
average prices of $2.64 per Mcf and $21.57 per barrel, respectively. For the
year ended June 30, 1997, the Partnership's net income of $11.9 million
included a non-recurring charge of $21.2 million, $7.3 million net to the
Company, to reserve the Partnership's investment in certain gathering
facilities and other assets associated with Tatham Offshore's Ewing Bank 914 #2
well and Ship Shoal Block 331, to fully accrue the Partnership's abandonment
obligations associated with these gathering facilities, to reserve the
Partnership's noncurrent receivable related to the prepayment of demand charge
obligations and to accrue certain abandonment obligations associated with its
oil and gas properties. DeepFlex Partners recorded net income of $2.6 million
for the year ended June 30, 1996 which included a gain of $5.1 million related
to the sale of a semisubmersible drilling rig.
Oil and gas purchases by the Company's marketing operations for the year
ended June 30, 1997 totaled $115.2 million as compared with $43.7 million for
the year ended June 30, 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 year ended June 30, 1997, the Company purchased
39,523 MMcf of gas and 1,221,070 barrels of oil at average prices of $2.27 per
Mcf and $20.73 per barrel, respectively. During the year ended June 30, 1996,
the Company purchased 13,679 MMcf of gas and 543,730 barrels of oil at average
prices of $2.44 per Mcf and $18.76 per barrel, respectively.
Operating expenses for the year ended June 30, 1997 totaled $8.2 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 year ended
June 30, 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.
34
<PAGE> 37
Depreciation totaled $1.5 million for the year ended June 30, 1997 as
compared with $0.2 million for the year ended June 30, 1996. The increase of
$1.3 million was related to depreciation of the Company's FPS Laffit Pincay for
the period from October 1,1996 through June 30, 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 losses of equity
investees for the period from July 1, 1996 through September 30, 1996, as
discussed below.
Losses of equity investees for the year ended June 30, 1997 totaled $17.7
million as compared with $1.9 million for the year ended June 30, 1996. Losses
of equity investees for the year ended June 30, 1997 primarily included equity
losses of Tatham Offshore and DeepFlex Partners of $16.3 million and $1.3
million, respectively whereas losses of equity investees for the year ended
June 30, 1996 included equity losses of Tatham Offshore. During the year ended
June 30, 1997, Tatham Offshore had total operating revenue of $20.7 million and
nonoperating income of $0.6 million. During the year ended June 30, 1997,
Tatham Offshore produced and sold 7,180 MMcf of gas and 170,000 barrels of oil
and condensate at average prices of $2.36 per Mcf and $22.35 per barrel,
respectively. Tatham Offshore's depreciation and operating expenses totaled
$19.2 million and other expenses totaled $8.4 million for the year ended June
30, 1997. Tatham Offshore's net loss was increased by $3.9 million of preferred
stock dividends in arrears for the year ended June 30, 1997. In addition,
Tatham Offshore's net loss for the year ended June 30, 1997 of $51.9 million
included a non-recurring charge of $41.7 million, $15.2 million net to the
Company's interest, to reserve its investment in its Ewing Bank 914 #2 well,
certain adjacent leases and the Ship Shoal 331 property, to fully accrue the
Company's abandonment obligations associated with the Ewing Bank 914 #2 and 915
#4 wells and the Ship Shoal 331 property and to reverse the Company's
noncurrent payable to the Partnership related to the prepayment of demand
charge obligations under certain transportation agreements. During the year
ended June 30, 1996, Tatham Offshore had total operating revenue of $16.1
million and nonoperating income of $22.8 million which was primarily related to
the sale of the Assigned Properties to the Partnership. During the year ended
June 30, 1996, Tatham Offshore produced and sold 3,274 MMcf of gas and 418,000
barrels of oil at average prices of $2.51 per Mcf and $18.83 per barrel,
respectively. For the year ended June 30, 1996, Tatham Offshore's depreciation
and operating expenses totaled $29.9 million and nonoperating expenses totaled
$8.2 million. DeepFlex Partners recorded a net loss of $2.5 million for the
year ended June 30, 1997 which included as an expense certain engineering costs
that had previously been capitalized.
General and administrative expenses for the year ended June 30, 1997 totaled
$2.4 million as compared with $3.8 million for the year ended June 30, 1996.
The decrease of $1.4 million was primarily attributable to decreases in salary
and related expenses due to a reduction in personnel and the restructuring of
certain compensation arrangements during the year ended June 30, 1997.
Operating loss for the year ended June 30, 1997 totaled $10.9 million as
compared with operating income of $5.4 million for the year ended June 30,
1996. The operating loss is primarily the result of the net effect of the items
discussed above.
Loss on investments in subsidiaries for the year ended June 30, 1997 totaled
$12.0 million and primarily included a reserve for the Company's investment in
Tatham Offshore's Series A and Series C Convertible Exchangeable Preferred
Stock and Mandatory Redeemable Preferred Stock.
Interest and other income for the year ended June 30, 1997 totaled $9.7
million as compared with $14.7 million for the year ended June 30, 1996.
Interest and other income for the year ended June 30, 1997 included interest
income from (i) the Subordinated Notes of $7.1 million, (ii) the PIK Notes
payable from DeepFlex Partners of $1.2 million and (iii) interest earned on
other affiliate debt and available cash of $1.4 million. Interest and other
income for the year ended June 30, 1996 included interest income from (i) the
Subordinated Notes of $7.1 million, (ii) the PIK Notes payable from DeepFlex
Partners of $5.9 million, (iii) interest earned on other affiliate debt and
available cash of $0.6 million and (iv) other of $1.1 million.
Interest and other financing costs for the year ended June 30, 1997 totaled
$14.6 million as compared with $13.1 million for the year ended June 30, 1996.
Interest and other financing costs for the year ended June 30, 1997 included
(i) interest and amortization of debt issue costs and discounts related to the
Senior Notes of $10.8 million, (ii) interest and amortization of debt issue
costs related to the RIGCO Credit Facility of $0.7 million and (iii) interest
and amortization of debt issue costs of $3.1 million related to $38.4 million
of other indebtedness of the Company, $32.5 million of which was retired during
the year. In addition, the Company capitalized $6.6 million of interest costs
related to the RIGCO Credit Facility during the year ended June 30, 1997 in
connection with the FPS Bill
35
<PAGE> 38
Shoemaker refurbishment and upgrade project. Interest and other financing costs
for the year ended June 30, 1996 included (i) interest and amortization of debt
issue costs and discounts related to the Senior Notes of $10.7 million and (ii)
interest and amortization of debt issue costs of $2.4 million related to $30.0
million of other indebtedness of the Company. In addition, the Company
capitalized $1.0 million of interest during the year ended June 30, 1996.
During the year ended June 30, 1997, the Company recorded an income tax
benefit of $9.3 million as compared with an income tax expense of $2.4 million
for the year ended June 30, 1996.
After taking into account a $1.4 million loss resulting from minority
interests in consolidated subsidiaries, the Company's net loss for the year
ended June 30, 1997 totaled $19.8 million, or $1.10 per share. For the year
ended June 30, 1996, the Company reported net income of $3.6 million, or $0.21
per share, after taking into account a $0.9 million loss resulting from
minority interests in consolidated subsidiaries.
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
Oil and gas sales from the Company's marketing operations totaled $44.5
million for the year ended June 30, 1996 as compared with $18.7 million for the
year ended June 30, 1995. During the years ended June 30, 1996 and 1995, the
Company derived its oil and gas revenue by marketing oil and gas production of
the Partnership, Tatham Offshore and third-party producers. The increase of
$25.8 million is a result of the initiation of production from two oil and gas
properties owned by the Partnership and Tatham Offshore in December 1995 and
May 1996. During the year ended June 30, 1996, the Company sold 13,679 MMcf of
gas and 543,730 barrels of oil at average prices of $2.47 per Mcf and $19.58
per barrel, respectively. During the year ended June 30, 1995, the Company sold
6,026 MMcf of gas and 458,000 barrels of oil and condensate at average prices
of $1.70 per Mcf and $18.46 per barrel, respectively.
Equity in earnings totaled $10.5 million for the year ended June 30, 1996 as
compared with $6.0 million for the year ended June 30, 1995. Equity in earnings
for the year ended June 30, 1996 primarily included equity in earnings of the
Partnership and DeepFlex Partners of $9.1 million and $1.3 million,
respectively, whereas, equity in earnings for the year ended June 30, 1995
primarily included equity in earnings of the Partnership. During the year ended
June 30, 1996, the Partnership had total operating revenue of $60.9 million as
compared with $36.2 million for the year ended June 30, 1995. For the year
ended June 30, 1996, total gathering and transportation throughput, net to the
Partnership, was 465.2 Bcf as compared with 435.7 Bcf for the year ended June
30, 1995. Oil volumes from Poseidon totaled 0.2 million barrels for the year
ended June 30, 1996. During the year ended June 30, 1996, the Partnership
produced and sold 6,767 MMcf of gas and 25,216 barrels of oil at average prices
of $2.64 per Mcf and $21.57 per barrel, respectively. During the year ended
June 30, 1996, DeepFlex Partners recorded net income of $2.6 million which
included a gain on the sale of the FPS Eddie Delahoussaye of $5.1 million.
Oil and gas purchases by the Company's marketing operations for the year
ended June 30, 1996 totaled $43.7 million as compared with $17.4 million for
the year ended June 30, 1995. 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 year ended June 30, 1996, the Company purchased
13,679 MMcf of gas and 543,730 barrels of oil at average prices of $2.44 per
Mcf and $18.76 per barrel, respectively. During the year ended June 30, 1995,
the Company purchased 6.0 Bcf of gas and 458,000 barrels of oil at average
prices of $1.59 per Mcf and $16.93 per barrel, respectively.
Losses of equity investees for the year ended June 30, 1996 totaled $1.9
million as compared with $13.9 million for the year ended June 30, 1995 and
related to equity losses of Tatham Offshore. During the year ended June 30,
1996, Tatham Offshore had total operating revenue of $16.1 million and
nonoperating income of $22.8 million which was primarily related to the sale of
the Assigned Properties to the Partnership. During the year ended June 30,
1996, Tatham Offshore produced and sold 3,274 MMcf of gas and 418,000 barrels
of oil at average prices of $2.51 per Mcf and $18.83 per barrel, respectively.
For the year ended June 30, 1996, Tatham Offshore's depreciation and operating
expenses totaled $29.9 million and nonoperating expenses totaled $8.2 million.
During the year ended June 30, 1995, Tatham Offshore had total operating
revenue of $8.1 million and nonoperating income of $2.3 million. During the
year ended June 30, 1995, Tatham Offshore produced and sold 1,505 MMcf of gas
and 333,000 barrels of oil at average prices of $1.67 per Mcf and $16.67 per
barrel, respectively. During the year ended June 30, 1995, Tatham Offshore's
depreciation and operating expenses of $33.5 million and nonoperating expenses
totaled $11.6 million.
36
<PAGE> 39
General and administrative expenses for the year ended June 30, 1996 totaled
$3.8 million as compared with $3.5 million for the year ended June 30, 1995.
The increase of $0.3 million was attributable to increased operating activities
of DeepTech and its consolidated subsidiaries as well as expenses incurred
associated with DeepTech's deferred compensation arrangements and a bonus
awarded related to the sale of a semisubmersible drilling rig. This increase is
partially offset by a $1.0 million charge to the Partnership to compensate the
Company for additional taxable income allocated to Leviathan as a result of the
offering of additional Partnership Preference Units. Pursuant to management fee
agreements with each of Tatham Offshore and Leviathan, DeepTech is reimbursed
for a portion of its general and administrative expenses. Prior to November 1,
1995, Leviathan and Tatham Offshore were each charged 40% of DeepTech's
overhead expenses under their respective management agreements. The remaining
20% of DeepTech's overhead costs were allocated to consolidated subsidiaries.
Effective November 1, 1995, as a result of a reallocation of the level of
services DeepTech provided to its Operating Subsidiaries, DeepTech amended its
existing management agreements with these subsidiaries and began charging
Leviathan and Tatham Offshore 45.3% and 27.4%, respectively, of overhead costs.
The remaining 27.3% of DeepTech's overhead expenses was allocated to
consolidated subsidiaries. For the year ended June 30, 1996, Leviathan and
Tatham Offshore were charged $7.0 million and $4.4 million, respectively, by
DeepTech pursuant to their management agreements. For the year ended June 30,
1995, Leviathan and Tatham Offshore were each charged $5.0 million by DeepTech.
Operating income for the year ended June 30, 1996 totaled $5.4 million as
compared with an operating loss of $10.0 million for the year ended June 30,
1995. The operating income is a result of the net effect of the items discussed
above.
Interest and other income for the year ended June 30, 1996 totaled $14.7
million as compared with $8.2 million for the year ended June 30, 1995.
Interest and other income for the year ended June 30, 1996 included interest
income from (i) the Subordinated Notes of $7.1 million, (ii) the PIK Notes
payable from DeepFlex Partners of $5.9 million, (iii) interest earned on other
affiliate debt and available cash of $0.6 million and (vi) other of $1.1
million. Interest and other income for the year ended June 30, 1995 included
interest income derived from the Subordinated Notes of $7.1 million and
available cash of $0.4 million and other income of $0.7 million.
Interest and other financing costs for the year ended June 30, 1996 totaled
$13.1 million as compared with $10.0 million for the year ended June 30, 1995.
Interest and other financing costs for the year ended June 30, 1996 included
(i) interest and amortization of debt issue costs and discounts related to the
Senior Notes of $10.7 million and (ii) interest and amortization of debt issue
costs of $2.4 million related to $30.0 million of other indebtedness of the
Company. In addition, the Company capitalized $1.0 million of interest during
the year ended June 30, 1996. Interest and other financing costs for the year
ended June 30, 1995 included interest and amortization of debt issue costs and
discounts related to the Senior Notes of $10.7 million and $1.7 million of
interest expense related to other debt offset by capitalized interest on
construction and refurbishment activities related to the FPS Laffit Pincay of
$2.4 million.
During the year ended June 30, 1996, the Company recorded income tax expense
of $2.4 million, reflecting an effective tax rate of approximately 34%. During
the year ended June 30, 1995, the Company recorded an income tax benefit of
$3.8 million, reflecting an effective tax rate of approximately 33%. The
effective tax rate for such period reflected the federal statutory rate of 34%
as adjusted for certain expenses that are not deductible for tax purposes.
After taking into account a $0.9 million loss resulting from minority
interests in consolidated subsidiaries, the Company's net income for the year
ended June 30, 1996 totaled $3.6 million, or $0.21 per share. For the year
ended June 30, 1995, the Company reported a net loss of $8.4 million, or $0.55
per share, after taking into account a $0.5 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 and notes receivable from its 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 certain of its subsidiaries 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 its direct
subsidiaries. The management fees charged to such subsidiaries are intended to
approximate the amount of resources allocated by DeepTech to each such
subsidiary for operational, financial, accounting and administrative services.
See Items 1 & 2. "Business and Properties -- Management Services Provided to
the Subsidiaries". For the year ended June 30, 1997, Leviathan, Tatham Offshore
and Offshore Marketing made their required payments to DeepTech for their
management fees; however, DeepFlex Services, 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.
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 nonmanaging 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 year ended June 30,
1997 was $8.2 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. For the year ended June 30,
1997, Leviathan received $3.2 million from the Partnership as reimbursement for
these tax liabilities.
DeepTech currently holds Subordinated Notes with an aggregate principal
amount of $60.0 million. Through June 30, 1997, the Subordinated Notes bore
interest at a rate of 11 3/4% per annum, payable quarterly. During the year
ended June 30, 1997, DeepTech received $7.1 million in interest under these
notes. Effective July 1, 1997, the interest rate related to the Subordinated
Notes increased to 13% per annum. Under the terms of the Subordinated Notes,
the principal amount of the notes was payable in seven equal annual
installments commencing August 1, 1999.
In September 1997, DeepTech and Tatham Offshore entered into the
Restructuring Option Agreement. Under the Restructuring Option Agreement,
DeepTech has agreed to forgive the next two scheduled interest payments under
the Subordinated Notes, a total of $3.9 million. In exchange, DeepTech
received several options from Tatham Offshore and has agreed to restructure the
Subordinated Notes by consummating one of the following transactions: (i) to
convert all of the principal amount outstanding under the Subordinated Notes
into shares of Tatham Offshore common stock at the market price at the time the
option is exercised; (ii) to purchase shares of 6% Senior Preferred Stock of
Tatham Offshore with a liquidation preference value of $60 million, the
proceeds from which would be used to prepay the outstanding balance of the
Subordinated Notes; or (iii) to purchase all of the outstanding capital stock
of the Tatham Offshore Development for $60 million, the proceeds from which
would be used to prepay the outstanding balance of the Subordinated Notes.
DeepTech is required to select one of the above restructuring transactions on
or before December 31, 1997. As a result, Tatham Offshore will no longer be
obligated to make interest or principal payments under the Subordinated Notes.
Additionally, Tatham Offshore believes that by consummating one of the above
restructuring transactions that it will be able to continue to maintain its
Nasdaq listing.
Tatham Offshore Development holds the leasehold interests in the Sunday
Silence Project. Under the Restructuring Option Agreement, Tatham Offshore has
the right to pursue the sale, farmout or other disposition of the Sunday
Silence Project during the option period. In the event that Tatham Offshore
enters into a sales agreement for 100% of Tatham Offshore Development or the
Sunday Silence Project prior to the expiration of the option period, DeepTech
has the further option to receive 50% of the cash proceeds from such
transaction as a prepayment of the Subordinated Notes. If DeepTech elects this
option, DeepTech has agreed to convert the remaining principal amount of the
Subordinated Notes into Tatham Offshore common stock at the market price. For
purposes of determining the market price of Tatham Offshore's common stock
under this agreement, the parties have agreed the market price shall be the
average of the closing prices for the ten trading days immediately preceding
the exercise of the option. DeepTech's option to acquire Tatham Offshore
Development also includes all of Tatham Offshore's interest in a drilling
arrangement with Sedco Forex for the use of a semisubmersible drilling rig in
the Gulf. Tatham Offshore has agreed not to sell less than 100% of its
interest in Tatham Offshore Development pending the exercise by DeepTech of one
of its options.
If DeepTech elects to convert all or a portion of the Subordinated Notes
into Tatham Offshore common stock, DeepTech will be required to offer to
repurchase all of its Senior Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of repurchase. If the holders of
the Senior Notes require DeepTech to repurchase all or a portion of the Senior
Notes, management believes that the Company will be able to either refinance
the Senior Notes or obtain adequate financing to satisfy this obligation.
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During the year ended June 30, 1997, Tatham Offshore paid DeepTech $1.7
million under an unsecured promissory note which bore interest at 14.5% per
annum.
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, to fund significant upgrades to the FPS Bill Shoemaker and to
retire $30.3 million of other Company indebtedness. 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. See Items 1 & 2. "Business
and Properties -- Major Encumbrances -- Encumbrances Relating to the RIGCO
Credit Facility". RIGCO incurred debt issue costs related to the RIGCO Credit
Facility of $4.4 million. Interest incurred and amortization of debt issue
costs related to the RIGCO Credit Facility totaled $7.3 million for the year
ended June 30, 1997.
In connection with the issuance of indebtedness related to the acquisition
of the FPS Bill Shoemaker, 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. In June 1997, DeepTech registered the shares of common stock acquired
by Westgate pursuant to the warrant agreement as well as certain other common
stock.
In December 1996 and January 1997, DeepTech 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, DeepTech received
$9.5 million in proceeds, issued 1,803,618 shares of DeepTech common stock
pursuant to the exercise of warrants and extended the exercise period on
4,063,195 warrants. DeepTech also has effected and is presently maintaining a
continuous shelf registration statement in connection with certain registration
rights obligations of DeepTech and the early exercise program described above.
The registration statement registers substantially all of the warrants issued
by DeepTech as well as the underlying common stock (whether issued or unissued)
and certain other stock. Although DeepTech does not own any of the securities
covered by the registration statement, management believes that, based on the
difference between the exercise price under such warrants (ranging from $4.00
to $10.00 per share) and the closing price of DeepTech common stock on
September 2, 1997 ($10.50 per share), DeepTech may receive additional equity
capital as a result of warrantholders exercising their rights to acquire common
stock.
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 principal payments on the RIGCO Credit Facility equal to excess cash
flow as defined in the credit agreement with a minimum principal amortization
of $250,000 per quarter and scheduled interest payments on the remaining
principal balance, (iii) scheduled interest payments on DeepTech's Senior
Subordinated Notes, as defined below, 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, in September 1997, RIGCO issued $6.6 million in PIK Notes to
DeepFlex Services in exchange for funding the remaining capital costs
associated with the extensive upgrade, repair and refurbishment of the FPS Bill
Shoemaker. In total, RIGCO incurred $55.0 million related to this make-ready
program for the FPS Bill Shoemaker, funded primarily with borrowings under the
RIGCO Credit Facility.
In December 1996, DeepFlex Services 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 -- Sources of Cash."
On January 15, 1997, DeepTech issued $6.0 million of renewal subordinated
promissory notes ("Renewal Notes") to Mr. Tatham 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 outstanding indebtedness of the Company and
issued $15,350,000 of Senior Subordinated Notes to an investment banking firm
in exchange for $9,350,000 principal amount of outstanding indebtedness of the
Company, $6.0 million of the Renewal Notes and the Wilrig Warrants which had
been concurrently purchased by the investment banking firm from the respective
holders thereof. The Senior Subordinated Notes are unsecured, bear
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interest at 11% per annum, payable quarterly, and are due on May 31, 2000.
DeepTech 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, cash provided from
management fees, and dividends funded by distributions from the Partnership.
As of June 30, 1997, the Company had $12.5 million of funds available.
Although the Company expects to continue to generate cash flows from
operations in the future, the Company anticipates that it will need significant
additional funds from outside sources to fund its debt 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 is 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 DeepFlex Services and/or (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 employment of RIGCO's FPS Laffit Pincay during the
year ended June 30, 1997 generated $8.1 million of operating net cash flows,
all of which serviced obligations under the RIGCO Credit Facility. The
employment of both drilling rigs during the year ended June 30, 1998 is
expected to generate approximately $30 million of operating net cash flows,
substantially all of which is expected to be used to service obligations under
the RIGCO Credit Facility. Accordingly, unless the RIGCO Credit Facility is
refinanced, DeepTech and the Operating Subsidiaries other than RIGCO will
continue to be dependent on funds from sources other than RIGCO. 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 provided through the exercise of
outstanding warrants to acquire common stock. Between July 1, 1997 and
September 2, 1997, 456,000 warrants have been exercised at prices ranging from
$4.00 per share to $4.50 per share resulting in $1.9 million in proceeds to the
Company. As of September 2, 1997, DeepTech has approximately 9,214,367 million
shares issuable upon the exercise of outstanding warrants, which are
exercisable at prices ranging from $4.00 per share to $13.50 per share and
which expire during the period from October 1997 to November 2005. To date,
DeepTech has not repurchased any shares of common stock under this program and
does not have any current plans to implement the program.
DeepTech 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 six
months ended June 30, 1997 totaled $30.1 million. At June 30, 1997, the
Partnership had cash and cash equivalents of $1.4 million.
Cash from continuing operations is derived from (i) payments for gathering
gas through the Partnership's 100% owned pipelines, (ii) platform access and
processing fees, (iii) cash distributions from Equity Investees and (iv) the
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sale of oil and gas attributable to the Partnership's interest in three
producing properties. See Items 1 & 2. "Business and Properties -- Oil and
Gas Properties -- The Partnership's Oil and Gas Properties" for current
production rates from these 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 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 six months ended June 30, 1997 totaled $12.3 million.
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. 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. As of June 30, 1997, the Partnership had
$217.0 million outstanding under its credit facility bearing interest at an
average floating rate of 6.5% per annum.
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. This term loan agreement is principally secured
by current and future gas transportation contracts between Stingray and its
customers. As of June 30, 1997, Stingray had $20.3 million outstanding under
its term loan agreement bearing interest at an average floating rate of 6.4%
per annum.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a syndicate of commercial banks to provide up to $150
million for the construction of the second and third phases of Poseidon 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. The POPCO Credit Facility is secured by a
substantial portion of POPCO's assets and matures on April 30, 2001. As of
June 30, 1997, POPCO had $108.0 million outstanding under its credit facility
bearing interest at an average floating rate of 6.9% per annum. Currently,
approximately $37.3 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. Viosca Knoll's ability to
borrow money under the facility is subject to certain customary terms and
conditions, including borrowing base limitations. The Viosca Knoll Credit
Facility is secured by a substantial portion of Viosca Knoll's assets and
matures on December 20, 2001. As of June 30, 1997, Viosca Knoll had $34.4
million outstanding under its credit facility bearing interest at an average
floating interest rate of 6.4% per annum. Currently, approximately $32.5
million of additional funds are available under the Viosca Knoll Credit
Facility.
Uses of Cash. The Partnership's capital requirements consist primarily of
(i) quarterly distributions to holders of Preference Units and Common Units and
to Leviathan as general partner, including incentive distributions, as
applicable, (ii) expenditures for the maintenance of its 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 as required to fund capital expenditures for
new facilities 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 (as
described in the Partnership Agreement) per Unit per quarter. At the current
distribution rate of
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$0.45 per Unit, the quarterly Partnership distributions total $12.4 million in
respect of the Preference Units, Common Units and general partner interest
($49.4 million on an annual basis, including $16.9 million to Leviathan). The
Partnership believes that it will be able to continue to pay at least the
current quarterly distribution of $0.45 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 (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. For the six months ended June 30,
1997, the Partnership paid Leviathan Incentive Distributions totaling $1.0
million and an additional Incentive Distribution of $1.2 million in August
1997.
In January 1997, the Partnership and affiliates of Marathon and Shell formed
Nautilus to construct and operate a new interstate natural gas pipeline system.
In addition, the same parties formed Manta Ray Offshore to acquire an existing
gathering system from the Partnership. Such existing gathering system will be
extended and will deliver gas gathered by it to the system being constructed by
Nautilus. Nautilus and Manta Ray Offshore are located 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. Total cost for
the construction of the Nautilus interstate pipeline system and the expansion
of the Manta Ray Offshore gathering system is estimated to be approximately
$220 million. The Nautilus system will consist of a 30- inch line downstream
from Ship Shoal Block 207 connecting to a gas processing plant, onshore
Louisiana, operated by Exxon, plus certain facilities downstream of the Exxon
plant to effect deliveries into multiple interstate pipelines. 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 Bank Block 873 to the east and Green Canyon Block
65 to the west. The pipeline lay for the Nautilus system was completed during
the second calendar quarter of 1997. Construction of the onshore facilities and
platform connections are currently being completed with an in service date
targeted for the end of 1997. The pipeline lay has also been completed on
Manta Ray Offshore's 47-mile expansion. After the completion of the platform
connections, the Manta Ray Offshore expansion should also be ready for service
by the end of calendar 1997. Affiliates of Marathon and Shell have dedicated
for transportation and gathering to each of the Nautilus and Manta Ray Offshore
systems significant deepwater acreage positions in the area, and are providing
substantially all of the capital funding for the new construction. The
Partnership has provided $10.4 million of funding in addition to its
contribution of the Manta Ray Offshore system. Discussions are currently
pending with a number of other producers regarding commitments of reserves on
the Manta Ray Offshore and Nautilus systems.
The Partnership anticipates that its capital expenditures and equity
investments for the remaining portion of 1997 will relate to continuing
acquisition and construction activities including the construction and
installation of a new platform and processing facilities at East Cameron Block
373. The platform, estimated to cost approximately $32 million and which the
Partnership anticipates will be placed in service during April 1998, will be
strategically located to exploit reserves in the East Cameron and Garden Banks
area of the Gulf and will be the terminus for an extension of the Stingray
system. The Partnership anticipates funding such cash requirements primarily
with available cash flow and borrowings under the Partnership Credit Facility.
As previously discussed, POPCO, in March 1997, began construction of phase
III of Poseidon, which is expected to be operational in late 1997.
Substantially all of these capital expenditures by POPCO as well as capital
expenditures by Viosca Knoll and Stingray are anticipated to be funded by
borrowings under their respective credit facilities. In addition,
substantially all 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 six months ended June 30, 1997 were $14.5 million,
including $10.4 million related to the Nautilus/Manta Ray Offshore project
discussed above. The Partnership may also contribute existing assets to new
joint ventures as partial consideration for its ownership interest therein.
Interest costs incurred by the Partnership related to the Partnership Credit
Facility totaled $7.9 million for the six months ended June 30, 1997. The
Partnership capitalized $1.4 million of such interest costs in connection with
construction projects and drilling activities in progress during the period.
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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 June 30, 1997, Tatham Offshore
had $7.9 million of cash and cash equivalents. However, as described below,
Tatham Offshore will need to raise substantial capital (equity, debt or both)
or enter into other arrangements (such as drilling and development commitments)
to develop its current inventory of properties and prospects and allow Tatham
Offshore to generate operating cash flow to fund on-going activities and
operations.
Cash from continuing operations is derived primarily from production from
Tatham Offshore's working interest in Viosca Knoll Block 817 which is currently
producing a total of approximately 79 MMcf of gas and 310 barrels of oil per
day. Tatham Offshore's current 25% working interest in Viosca Knoll Block 817
is subject to a production payment equal to 25% of the net operating cash flow
from such working interest. For the year ended June 30, 1997, Tatham Offshore's
net revenue from this property was reduced by $3.5 million of production
payment obligations.
Tatham Offshore also has producing wells at its West Delta Block 35 which
contribute to cash from continuing operations. Tatham Offshore owns a 38%
working interest in the West Delta Block 35 project which is currently
producing at a rate of approximately 5.7 MMcf of gas and 71 barrels of oil per
day.
Tatham Offshore anticipates that declining revenue from properties on
production will need to be replaced by revenue from production from the Sunday
Silence Project, the North Atlantic pipeline project or from other sources.
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 Tatham Offshore rights to purchase 25,120,948 Tatham Offshore
warrants at $0.50 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, each of the 4,991,377 Warrants outstanding were
automatically converted, without any action on the part of the holder thereof,
into one share 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 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. After July 1, 1997, the
Convertible Exchangeable Preferred Stock are redeemable at the option of Tatham
Offshore. Through September 2, 1997, a total of 784,517 shares of Series A
Preferred Stock had been converted into 1,855,407 shares of Tatham Offshore
common stock.
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 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, (iv) platform access fees and processing and commodity
charges payable to the Partnership, (v) expenditures related to the North
Atlantic pipeline project currently under consideration, (vi) payments due
under the management agreement with DeepTech and (vii) amounts due under the
affiliate note discussed below.
DeepTech currently holds Subordinated Notes with an aggregate principal
amount of $60.0 million. Through June 30, 1997, the Subordinated Notes bore
interest at a rate of 11 3/4% per annum, payable quarterly. During the year
ended June 30, 1997, Tatham Offshore paid $7.1 million in interest to DeepTech
under these notes. Effective July 1, 1997, the interest rate under the Tatham
Offshore Subordinated Notes increased to 13% per annum. Under the terms of the
Tatham Offshore Subordinated Notes, the principal amount of the notes was
payable in seven equal annual installments beginning August 1, 1999.
In September 1997, DeepTech and Tatham Offshore entered the Restructuring
Option Agreement. Under the Restructuring Option Agreement, DeepTech has
agreed to forgive the next two scheduled interest payments under the
Subordinated Notes, a total of $3.9 million. In exchange, DeepTech received
several options from Tatham Offshore
43
<PAGE> 46
and has agreed to restructure the Subordinated Notes by consummating one of the
following transactions: (i) to convert all of the principal amount outstanding
under the Subordinated Notes into shares of Tatham Offshore common stock at the
market price at the time the option is exercised; (ii) to purchase shares of 6%
Senior Preferred Stock of Tatham Offshore with a liquidation preference value
of $60 million, the proceeds from which would be used to prepay the outstanding
balance of the Subordinated Notes; or (iii) to purchase all of the outstanding
capital stock of the Tatham Offshore Development for $60 million, the proceeds
from which would be used to prepay the outstanding balance of the Subordinated
Notes. DeepTech is required to select one of the above restructuring
transactions on or before December 31, 1997. As a result, Tatham Offshore will
no longer be obligated to make interest or principal payments under the
Subordinated Notes. Additionally, Tatham Offshore believes that by
consummating one of the above restructuring transactions that it will be able
to continue to maintain its Nasdaq listing.
Tatham Offshore Development holds the leasehold interests in the Sunday
Silence Project. Under the Restructuring Option Agreement, Tatham Offshore has
the right to pursue the sale, farmout or other disposition of the Sunday
Silence Project during the option period. In the event that Tatham Offshore
enters into a sales agreement for 100% of Tatham Offshore Development or the
Sunday Silence Project prior to the expiration of the option period, DeepTech
has the further option to receive 50% of the cash proceeds from such
transaction as a prepayment of the Subordinated Notes. If DeepTech elects this
option, DeepTech has agreed to convert the remaining principal amount of the
Subordinated Notes into Tatham Offshore common stock at the market price. For
purposes of determining the market price of Tatham Offshore's common stock
under this agreement, the parties have agreed the market price shall be the
average of the closing prices for the ten trading days immediately preceding
the exercise of the option. DeepTech's option to acquire Tatham Offshore
Development also includes all of Tatham Offshore's interest in a drilling
arrangement with Sedco Forex for the use of a semisubmersible drilling rig in
the Gulf. Tatham Offshore has agreed not to sell less than 100% of its
interest in Tatham Offshore Development pending the exercise by DeepTech of one
of its options.
During the year ended June 30, 1997, Tatham Offshore completed the
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. Unless production
is restored from the Ewing Bank 914 #2 well and the Ship Shoal Block 331 lease,
Tatham Offshore will be required to abandon its facilities on these properties
within the next 12 to 18 months. Tatham Offshore has estimated that the
abandonment liabilities for these properties will total approximately $7.1
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. Tatham Offshore is also 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.
North Atlantic is the sponsor of a proposal to build a major pipeline from
offshore Newfoundland and Nova Scotia to the eastern seaboard of the United
States. As of June 30, 1997, Tatham Offshore Canada has incurred $1.3 million
in pre-developmental costs in connection with such project. Tatham Offshore
anticipates that pre-developmental costs associated with the North Atlantic
pipeline project could ultimately reach approximately $10 million and the
ultimate capital costs of the project could reach $3.0 billion to $3.5 billion.
See Items 1 and 2. "Business and Properties -- Natural Gas and Oil Pipelines --
Recent Developments -- North Atlantic Pipeline Project."
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 year ended June 30, 1997, DeepTech
charged Tatham Offshore $3.3 million in management fees pursuant to this
agreement.
During the year ended June 30, 1997, Tatham Offshore paid DeepTech $1.7
million under an unsecured promissory note which bore interest at 14.5% per
annum.
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 the
Assigned Properties to the Partnership for $30 million and certain drilling
commitments, (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.
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<PAGE> 47
Although the Partnership has initiated production from each of the Assigned
Properties, management has determined that given the current estimates of
commodity prices and proved reserves, the possibility that the designated
revenue from the Assigned Properties will be sufficient to satisfy the Payout
Amount is remote. However, Tatham Offshore does own a 25% working interest
(subject to a production payment) in Viosca Knoll Block 817 which is currently
producing a total of approximately 79 MMcf of gas and 310 barrels of oil per
day.
In September 1996, in order to assure the availability of a drilling rig
for use on the Sunday Silence Project, Tatham Offshore entered into a drilling
arrangement (the "Drilling Arrangement") with Sedco Forex to provide Tatham
Offshore with the use of a semisubmersible drilling rig capable of drilling in
water depths of up to 1,500 feet. The Drilling Arrangement will become
effective upon the mobilization of the rig to Tatham Offshore's initial
drilling location. Once effective, the Drilling Arrangement will last for 90
days or, if sooner, the date on which Tatham Offshore completes its initial
drilling operations and the rig is mobilized to another location. After the
initial well, Tatham Offshore may, at its option, extend the Drilling
Arrangement through three successive one-well options or 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 for the initial well. As
security for its obligations under the Drilling Arrangement, Tatham Offshore
will be required to post an irrevocable letter of credit or cash collateral of
$6.3 million, which amount is equal to the aggregate operating dayrate for the
initial contract well. If Tatham Offshore elects to extend the Drilling
Arrangement, the dayrate for the three well extension option would be $75,000
per day. If Tatham Offshore elects to extend the Drilling Arrangement under
the one-year options, the dayrate for the initial year would be $75,000 per
day. The dayrate for the second year under this option would be based on
prevailing market rates. Under either of the extension options, 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 subcontract the rig to other operators and receive the difference
between the subcontract rate and the above agreed-upon rates, if any, subject
to a fee of 10% of the difference payable to Sedco Forex. In order to obtain
the dayrates outlined above, Tatham Offshore must exercise its option to drill
the initial well by the later of (i) 180 days after June 30, 1997 or (ii) 30
days after the completion of a well that Sedco Forex has committed to drill for
a third party. If Tatham Offshore initiates the Drilling Arrangement after the
end of the option period, all drilling dayrates will be at prevailing market
rates. Tatham Offshore has agreed to fund the capital requirements necessary
to upgrade and modify a drilling rig to drill in water depths of 1,500 feet if
it wishes to utilize the rig in water depths greater than its current water
depth rating. Tatham Offshore estimates that the capital costs required for
the upgrade would total approximately $19.0 million.
Tatham Offshore has a second option under the Drilling Arrangement to
utilize a rig offshore eastern Canada for the drilling of one well, at the
existing contract rate, following the completion of drilling activity for a
third party.
Tatham Offshore currently intends to fund its immediate operational needs
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 Viosca Knoll
Block 817 and improved commodity prices enabled Tatham Offshore to generate
approximately $0.7 million in positive operating cash flow for the three months
ended June 30, 1997. Tatham Offshore does not anticipate generating
significant positive operating cash flow prior to the first to occur of (i) the
completion of the initial phase of the pipeline proposed by North Atlantic or
(ii) the initial production from Tatham Offshore's Sunday Silence Project.
The ability of Tatham Offshore to satisfy its future capital needs will
depend upon its ability to raise additional capital and to successfully
implement its business strategy, particularly its ability to obtain regulatory
approval and financing for its North Atlantic pipeline project and initiate
production from the Sunday Silence Project. Tatham Offshore anticipates that
the new pipeline will be constructed and owned by a consortium of Canadian and
United States companies once regulatory approval is obtained. Through June 30,
1997, Tatham Offshore Canada has incurred $1.3 million with respect to this new
venture. Tatham Offshore anticipates that the ultimate pre-development costs
associated with the North Atlantic pipeline project could reach approximately
$10 million and that the ultimate capital costs of the project would be
approximately $3.0 billion to $3.5 billion. There can be no assurance,
however, that Tatham Offshore will be able to obtain regulatory approval, joint
venture partners or adequate financing for this project.
45
<PAGE> 48
In addition, Tatham Offshore believes that since the royalty abatement has
been granted, the resulting improved economics for the Sunday Silence Project
will be sufficient to obtain development financing or an industry farmout
arrangement. See Items 1 and 2. "Business and Properties -- Oil and Gas
Properties -- Tatham Offshore's Oil and Gas Properties -- Ewing Bank Blocks 958,
959, 1002 and 1003."
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report or incorporated by reference as set forth in
Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 49
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The following table sets forth certain information as of September 2, 1997
regarding the executive officers and directors of DeepTech and the principal
executive officers of certain of its subsidiaries. Each executive officer of
DeepTech named in the following table has been elected to serve until his or her
successor is duly appointed or elected or until his or her earlier removal or
resignation from office. Directors are elected annually by the stockholders of
DeepTech and hold office until their successors are elected and qualified.
There is no family relationship among any of the executive officers or
directors of DeepTech, and no arrangement or understanding exists between any
executive officer or director of DeepTech and any other person pursuant to which
he or she was or is to be selected as an officer or director.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Thomas P. Tatham . . . . . . . . . . 51 Chairman of the Board, Chief Executive Officer and
a Director of DeepTech
Charles M. Darling, IV . . . . . . . 49 Director, President and General Counsel of DeepTech
Donald V. Weir . . . . . . . . . . . 56 Director and Chief Financial Officer of DeepTech
Janet E. Sikes . . . . . . . . . . . 43 Director, Treasurer and Secretary of DeepTech
Grant E. Sims . . . . . . . . . . . 42 Director and Senior Vice President of DeepTech and
Chief Executive Officer of Leviathan
Edward L. Moses, Jr. . . . . . . . . 61 Senior Vice President -- Engineering and Production of
DeepTech
Dennis A. Kunetka . . . . . . . . . 48 Senior Vice President -- Corporate Finance and Investor
Relations of DeepTech
Conrad P. Albert . . . . . . . . . . 51 Director
Laney Chouest . . . . . . . . . . . 43 Director
Ralph Eads . . . . . . . . . . . . . 38 Director
Robert E. Fox . . . . . . . . . . . 68 Director
Steven L. Gerard . . . . . . . . . . 52 Director
Michael H. Lam . . . . . . . . . . . 51 Director
Ben T. Morris . . . . . . . . . . . 51 Director
Nancy K. Quinn . . . . . . . . . . . 44 Director
</TABLE>
Thomas P. Tatham has served as Chairman of the Board, Chief Executive
Officer and a Director of DeepTech since October 1989 and as Chairman of the
Board and a Director of Leviathan since February 1989. Mr. Tatham served as
Chief Executive Officer of Leviathan from February 1989 through June 1995 and
has served as Chairman of the Board and Director of Tatham Offshore since its
inception in 1988 and as Chief Executive Officer of Tatham Offshore since
November 1995. Mr. Tatham has over 27 years experience in the oil and gas
industry. He founded Mid American Oil Company in 1970 and served as Chairman
of the Board and Chief Executive Officer until he sold his interest therein to
Centex Corporation in 1979. In 1979, Mr. Tatham founded Tatham Corporation to
acquire Sugar Bowl Gas Corporation ("Sugar Bowl"), the second largest
intrastate pipeline system in Louisiana. He served as Chairman of the Board of
Tatham Corporation from 1979 to December 1983, at which time it sold the assets
of Sugar Bowl to a joint venture between MidCon Corp. and Texas Oil and Gas,
Inc. From 1984 to 1988, Mr. Tatham pursued personal investments in various
industries, including the oil and gas industry.
Charles M. Darling, IV has served as President and General Counsel of
DeepTech since May 1997 and as a Director of Leviathan and DeepTech since
October 1989 and February 1989, respectively. Prior to joining DeepTech, Mr.
Darling was a partner in the law firm of Baker & Botts, L.L.P. since 1980,
originally joining the firm in 1974. Mr. Darling represented companies in the
oil and gas industry for over 20 years and has been involved in vanguard
projects in the natural gas industry from a regulatory and business
perspective.
Donald V. Weir has served as Chief Financial Officer and a Director of
DeepTech since June 1991, Vice President of DeepTech since 1989 and Secretary
of DeepTech from 1989 to August 1993. In addition, Mr. Weir has served as a
Director of Leviathan since 1989, Secretary of Leviathan since March 1994,
Chief Operating Officer of Leviathan from 1989 to March 1994, Secretary and a
Director of Dover since 1989, Secretary and a Director of Tatham Offshore from
1988 to September 1995 and as Chief Financial Officer of Tatham Offshore from
1991 to September 1995. From 1988 until 1991, he served as a Vice President of
Tatham Offshore. Prior to joining the Company, Mr. Weir served in various
executive capacities with numerous entities owned and controlled by Mr. Tatham.
Prior to joining Mr. Tatham's organizations in 1980, Mr. Weir was with Price
Waterhouse LLP for 14 years.
47
<PAGE> 50
Janet E. Sikes has served as Secretary of DeepTech since August 1993, a
Director of DeepTech since July 1993, Treasurer of DeepTech since May 1991 and
as a Director and Treasurer of Leviathan since September 1991. Ms. Sikes has
managed accounting, treasury, cash management and financial reporting functions
for various entities owned and controlled by Mr. Tatham since 1981. Prior
thereto, Ms. Sikes worked in the audit division of Price Waterhouse LLP, and
for two years as the Assistant Controller of Ocean Marine Services, Inc. Ms.
Sikes holds a B.B.A. from Texas A&M University and is a certified public
accountant.
Grant E. Sims has served as Senior Vice President of DeepTech since July
1993, as a Director of DeepTech since July 1993 and as Chief Executive Officer
of Leviathan since July 1995. Mr. Sims has served as a Director of Leviathan
since July 1994. In addition, Mr. Sims served as President of Leviathan from
March 1994 through June 1995. Prior to his employment with the Company, Mr.
Sims spent ten years with Transco in various capacities, most recently
directing Transco's non-jurisdictional gas activities. Mr. Sims received a
B.A. and Ph.D. in Economics from Texas A&M University.
Edward L. Moses, Jr. has served as Senior Vice President -- Engineering and
Production of DeepTech since 1992 and Managing Director and a Director of
Deepwater Systems since August 1993. From 1991 to 1992, he served as Senior
Vice President and a Director of Tatham Offshore. From 1989 to 1991, Mr. Moses
served as Vice President--Engineering of Tatham Offshore. Mr. Moses has worked
for over 30 years in the oil and gas industry. Prior to joining the Company, he
worked for 12 years as an independent consultant in the oil and gas industry.
Prior thereto, he spent 18 years working for Superior Oil Company where he
served as Manager of International Drilling Operations. Mr. Moses has a B.S. in
Petroleum Engineering from Texas A&M University.
Dennis A. Kunetka has served as Senior Vice President -- Corporate Finance
and Investor Relations for DeepTech and Leviathan since August 1993 and as
Senior Vice President -- Corporate Finance for Tatham Offshore since October
1993. Prior to joining the Company, Mr. Kunetka served as Vice President and
Controller of United Gas Pipe Line Company and its parent company, United Gas
Holdings Corporation. Prior to joining United in 1984, Mr. Kunetka spent 11
years with Getty Oil Company in various tax, financial and regulatory
positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the University of
Houston and a J.D. degree from South Texas College of Law and is a certified
public accountant.
48
<PAGE> 51
Conrad P. Albert has served as a Director of DeepTech since February
1992. Since December 1991, he has pursued personal investments. From
1969 to 1991, Mr. Albert served in various positions with Manufacturers
Hanover Trust Company, most recently serving as Executive Vice President in
charge of worldwide energy lending and corporate finance. Mr. Albert is also
a Director of Anadarko Petroleum Corporation. Mr. Albert holds a B.A. from the
University of North Carolina at Chapel Hill.
Laney Chouest has served as a Director of DeepTech since October 1995.
Dr. Chouest is the Senior Vice President and one of the owners of Edison
Chouest Offshore and associated companies. Edison Chouest Offshore is a
fourteen hundred employee, family-owned business which builds and operates
specialized offshore vessels. Edison Chouest Offshore conducts operations
worldwide and is headquartered in Galliano, Louisiana. Dr. Chouest holds a
doctorate in medicine from Louisiana State University Medical School and
conducted a private medical practice from 1979 until joining the family
business in 1983. He currently serves as a Director of the Offshore Marine
Service Association, a group which he has previously served as Chairman. Dr.
Chouest is also a member of the United States Coast Guard's National Offshore
Safety Advisory Committee and is a former Director of the National Ocean
Industry Association. Dr. Chouest is a Director of Kaman Corporation.
Ralph Eads is a Managing Director and Co-Head of the Energy Investment
Banking Group at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
Prior to joining DLJ in 1996, Mr. Eads was a Managing Director and Head of
Equity Capital Markets at S.G. Warburg & Co., an investment banking firm, from
1993 to 1996. Prior thereto, Mr. Eads was a Vice-President of Lehman Brothers,
Inc. Mr. Eads is a graduate of Duke University.
Robert E. Fox has served as a Director of DeepTech since October
1995. Mr. Fox is President of TERM Energy Corporation, a family corporation
based in Harrisville, West Virginia which operates oil and gas wells. Mr. Fox
also serves as consultant to various companies in the oil and gas
industry. Mr. Fox is a Director of Century Offshore Management Corporation,
Lexington, Kentucky. Mr. Fox was Chairman of Richmond Oil and Gas PLC, a
London Stock Exchange listed oil and gas company, from October 1990 to
December 1993. Mr. Fox served as Managing Director and Chief Executive Officer
of Oil Exploration (Holdings) Ltd. from 1974 to 1979. He served on the Board
of Directors of LASMO Energy PLC from 1979 to 1989. He also served as Managing
Director and Chief Executive Officer in the Netherlands for Placid Oil Company
from 1964 to 1973. Mr. Fox holds a B.S. degree in geology from Marshall
University, a M.S. in geology from University of Illinois and an honorary
doctorate in science degree from Heriot Watt University, Edinburgh, Scotland.
He is a Registered Petroleum Engineer, a Trustee and Life Member of the
American Association of Petroleum Geologists, a Fellow of the Geological
Society of America and a Member of the Society of Petroleum Engineers.
Steven L. Gerard has served as a Director of DeepTech since August
1992. Since September 1992, Mr. Gerard has served as Chairman of the Board
of Directors and Chief Executive Officer of Triangle Wire & Cable, Inc. From
April 1992 to May 1992, he served as Chief Executive Officer of Mountleigh
Group, plc, a London based property management company ("Mountleigh"), during
its restructuring. Mountleigh was placed in receivership under United Kingdom
law on May 25, 1992. From July 1990 until April 1992, Mr. Gerard was a Senior
Managing Director of Citibank, N.A. ("Citibank") responsible for credit,
portfolio and risk management for Citibank's corporate and investment banking
activities in the United States, Japan, Europe and Australia. From August 1987
to July 1990, he was Division Executive for the National Corporate Finance
Division of Citibank. Prior thereto, Mr. Gerard was the Senior Corporate
Workout Officer in the Institutional Recovery Management Division of Citibank.
Mr. Gerard is also a Director of Banner Aerospace, Inc. and U.S. Home
Corporation.
Michael H. Lam served as an Advisory Director of DeepTech from March
1995 until October 1995 and as a Director of DeepTech since October 1995. Mr.
Lam is President of Marine Construction Services, J. Ray McDermott, S.A. and
is a Director of J. Ray McDermott, S.A. and was Vice Chairman and Chief
Operating Officer of Offshore Pipelines, Inc. ("OPI") until its merger with J.
Ray McDermott, S.A. in February 1995. Mr. Lam joined OPI in 1990 and served as
Executive Vice President of worldwide operations until 1992, when he became
Vice Chairman and Chief Operating Officer. Mr. Lam has 23 years of experience
in the offshore oil and gas industry and holds a B.S. degree in civil
engineering from Texas A&M University.
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<PAGE> 52
Ben T. Morris served as a Director of DeepTech from 1989 until
September 30, 1997. Mr. Morris is President, Chief Executive Officer and a
Director in the investment banking firm of Sanders Morris Mundy Inc. ("SMM")
and has been employed by the firm since 1987. Mr. Morris is a Director of C
entrax, Inc., Fresh America Corporation, Intersport Limited, Hydra Fluids,
Inc., L-D Communications, Inc. and USA Company, Inc. Mr. Morris served as
Chief Operating Officer of Tatham Corporation from 1980 until 1984. Prior
thereto, he worked for Mid American Oil Company from 1973 until 1980, serving
as President in 1979 and 1980. Mr. Morris has a B.B.A. from the University of
North Texas and is a certified public accountant.
Nancy K. Quinn has served as a Director of DeepTech since October
1995. Ms. Quinn has served as a Director of the Beacon Group Capital
Services, L.L.C. since August 1996. Ms. Quinn was a Managing Director and
co-head of the Energy and Natural Resources Group at PaineWebber
Incorporated from December 1994 through November 1995. Ms. Quinn was employed
by Kidder, Peabody & Co. Incorporated from 1982 until December 1994, serving
as a Managing Director and co-head of the Natural Resources Group from 1990
through 1994. Ms. Quinn holds a B.F.A. degree from Louisiana State University
and an M.B.A. degree from the University of Arkansas.
DIRECTORS' MEETINGS AND COMMITTEES OF THE BOARD
Board Meetings. The Board of Directors held four meetings during the
fiscal year ended June 30, 1997. During the fiscal year ended June 30,
1997, each director attended at least 75% of the total number of meetings of
the Board of Directors and the committees on which each such director served
except for Mr. Lam. Mr. Lam attended 25% of the meetings of the Board of
Directors.
Committees of the Board of Directors. DeepTech had the following
committees of the Board of Directors during the fiscal year ended June 30,1997:
Compensation Committee. The Compensation Committee of the Board of
Directors, which is comprised of Messrs. Gerard (Chairman), Albert and Ben T.
Morris, met three times during the fiscal year ended June 30, 1997. The
Compensation Committee is responsible for reviewing and recommending to the
Board of Directors the compensation to be paid to the executive officers of
DeepTech.
Executive Committee. The Executive Committee did not meet during the
fiscal year ended June 30, 1997. The Executive Committee may exercise
all of the power of the Board of Directors, except where restricted by
DeepTech's By-laws or by applicable law. Approval of any matter before the
Executive Committee is subject to approval by an outside Director. The
Executive Committee is currently comprised of Messrs. Tatham (Chairman), Weir
and Sims.
Conflicts and Audit Committee. The Conflicts and Audit Committee
provides two primary services. First, it advises the Board of Directors in
matters regarding the system of internal controls and the annual independent
audit, and reviews policies and practices of DeepTech, including changes in
accounting practices and significant estimates made by management affecting the
financial statements. Second, the Conflicts and Audit Committee, at the
request of the Board of Directors, reviews specific matters as to which the
Board of Directors believes there may be a conflict of interest in order to
determine if the resolution of such potential conflict proposed by the Board
of Directors is fair and reasonable to DeepTech. The Conflicts and Audit
Committee also reviews other matters that it deems appropriate. Any such
matters approved by a majority vote of the Conflicts and Audit Committee will
be deemed conclusively to be fair and reasonable to DeepTech. The Conflicts
and Audit Committee, which through September 30, 1997 was comprised of Messrs.
Morris (Chairman), Gerard and Albert, met one time during the fiscal year ended
June 30, 1997.
COMPENSATION OF DIRECTORS
Directors of DeepTech are entitled to reimbursement for their
reasonable out-of-pocket expenses in connection with their travel to and from,
and attendance at, meetings of the Board of Directors or committees thereof.
Directors of DeepTech who are not officers or affiliates of DeepTech are paid
an annual fee of $30,000 plus $2,000 per meeting attended.
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<PAGE> 53
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Ralph Eads, is a Managing Director of DLJ and an officer of certain
of DLJ's affiliates that have made loans to DeepTech and certain of its
affiliates. DLJ and certain of its affiliates have provided investment banking
and related services to DeepTech, Leviathan, Tatham Offshore and the
Partnership in the past for which they have received customary compensation.
DLJ and its affiliates also own interests in DeepTech and overriding royalty
interests in certain other oil and gas leases held by Tatham Offshore. See
"-- Voting Securities and Principal Stockholders."
Mr. Morris is an officer and shareholder of SMM. During the past
several years, SMM has provided investment banking services to DeepTech and
its affiliates, including acting as an underwriter in connection with Tatham
Offshore's initial public offering of its common stock and a public offering
by the Partnership of its preference units, for which it has received
customary compensation. In addition, Mr. Morris receives quarterly cash
dividends from Leviathan Holdings Company ("Leviathan Holdings") common
stock held by him. Leviathan Holdings, an 85%-owned subsidiary of DeepTech,
owns 100% of Leviathan.
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<PAGE> 54
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned by DeepTech's
Chief Executive Officer and each of its four other most highly compensated
executive officers for the fiscal year ended June 30, 1997 (collectively, the
"Named Officers") in salary and bonus for services rendered in all capacities
to DeepTech and its subsidiaries for the fiscal years ended June 30, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------------------------------- COMPENSATION
MARKET VALUE OTHER ANNUAL AWARDS ALL OTHER
NAME/PRINCIPAL FISCAL SALARY BONUS OF STOCK COMPENSATION(1) OPTIONS COMPENSATION
POSITION YEAR ($) ($) ISSUED(2) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas P. Tatham......... 1997 $1,000,000 -- -- $1,400,000(3) -- --
Chief Executive Officer 1996 --(4) --(4) $3,331,750(4) $39,178(5) 300,000(6)(9) --
DeepTech 1995 $600,000 --(7) $600,000(7) $107,714(8) 100,000(9) --
James H. Lytal........... 1997 $200,000 $113,166 -- -- 175,000(10) --
President 1996 $120,000(11) -- $66,100(11) -- 90,000(12) --
Leviathan 1995 $125,301 $32,067(13) -- -- 50,000(14) --
John H. Gray............. 1997 $225,000 -- -- -- 125,000(12) --
Chief Operating Officer 1996 $175,000 -- -- -- 190,000(15) --
Leviathan 1995 $165,700 -- -- -- -- --
Grant E. Sims............ 1997 $350,000 $239,499 -- -- 125,000(12) --
Chief Executive Officer 1996 $315,000 -- -- -- 190,000(15) --
Leviathan 1995 $193,750 $54,547(16) -- $25,722(17) 350,000(18) --
Donald V. Weir........... 1997 $250,000 -- -- -- -- --
Chief Financial Officer 1996 $200,000 -- -- -- 125,000(9) --
DeepTech 1995 $179,162 -- -- $86,899(19) 50,000(9) --
</TABLE>
- --------------
(1) Other Annual Compensation excludes the aggregate value of
perquisites when such value is less than the lesser of $50,000 or
10% of total annual Salary and Bonus for each Named Officer.
(2) Consists of the aggregate market value of Common Stock and Tatham
Offshore common stock issued as a result of the exercise of options
granted pursuant to the Deferred Compensation Arrangement (as
defined herein) for salary and bonuses. The aggregate market value
is calculated based on the last reported sales prices of the common
stock on the dates of exercise of the options.
(3) Effective July 1, 1996, the Compensation Committee of DeepTech's
Board of Directors established a compensation plan for Mr. Tatham
for the years ended June 30, 1997 and 1998. Under this compensation
plan, Mr. Tatham is to receive a base salary of $1,000,000 per annum
plus $1,400,000 per annum to be credited against incentive bonuses
as they are earned. The base salary and bonus are payable at the
rate of $200,000 per month. The Compensation Committee detailed
certain performance goals for the Company and Mr. Tatham which would
allow him to earn the incentive bonus payments over the two year
period. The performance goals are structured to reward Mr. Tatham
for enhancing shareholder value through increased earnings per share
and the financing of key projects.
(4) Mr. Tatham's salary and bonus for the year ended June 30, 1996 was
settled through the issuance of options pursuant to DeepTech's
Deferred Compensation Arrangement. Under the Deferred Compensation
Arrangement, for each $1 of salary deferred, Mr. Tatham was entitled
to apply $3 in the exercise of options to acquire Common Stock or
Tatham Offshore common stock under DeepTech's Amended Equity
Incentive Plan or Tatham Offshore's Equity Incentive Plan,
respectively. Through June 30, 1996, Mr. Tatham had exercised
options to acquire 600,125 shares of Common Stock in full settlement
of his salary for the fiscal year ended June 30, 1996. In addition,
Mr. Tatham was awarded a bonus during the year ended June 30, 1996
related to the sale of the FPS Eddie Delahoussaye. This bonus was
settled pursuant to the Deferred Compensation Arrangement in
September 1995 when Mr. Tatham exercised options to purchase 150,000
shares of Common Stock. The aggregate market value of the 750,125
shares of Common Stock issued, calculated based on the last reported
sales price on the dates of exercise, was $3,331,750. See "-- Option
Exercises and Year-End Value Table."
(5) Represents dues for club memberships.
(6) Excludes options to acquire 1,666,666 shares of Common Stock that
were granted by DeepTech to Mr. Tatham during the fiscal year ended
June 30, 1996 related to matters other than for executive
compensation.
(7) Mr. Tatham's bonus was earned during the year ended June 30, 1995
but was deferred under the Deferred Compensation Arrangement with
DeepTech. In August 1995, Mr. Tatham exercised options to purchase
150,000
52
<PAGE> 55
shares of Common Stock in settlement of this bonus obligation. The
market value of the 150,000 shares of Common Stock issued,
calculated based on the last reported sales price on the date of
exercise, was $600,000. See "-- Option Exercises and Year-End Value
Table."
(8) Includes $85,400 to pay the initial membership fees at two country
clubs.
(9) Options granted pursuant to the Amended Equity Incentive Plan.
(10) Includes 125,000 stock appreciation rights ("SARs") granted pursuant
to the Partnership's Unit Appreciation Rights Plan and 50,000 shares
of restricted Common Stock.
(11) A portion of Mr. Lytal's salary for the year ended June 30, 1996 was
settled through the issuance of options pursuant to DeepTech's
Deferred Compensation Arrangement. Under the Deferred Compensation
Arrangement, for each $1 of bonus deferred, Mr. Lytal was entitled
to apply $1.50 in the exercise of options to acquire Common Stock
under DeepTech's Amended Equity Incentive Plan or $2.00 in the
exercise of options to acquire Tatham Offshore common stock under
Tatham Offshore's Equity Incentive Plan. Through June 30, 1996, Mr.
Lytal had exercised options to acquire 10,000 shares of Common Stock
and 21,979 shares of Tatham Offshore common stock in full settlement
of the portion of salary deferred. The aggregate market value of the
10,000 shares of Common Stock and the 21,979 shares of Tatham
Offshore common stock issued, calculated based on the last reported
sales prices on the dates of exercise, was $66,100.
(12) SARs granted pursuant to the Partnership's Unit Appreciation Rights
Plan.
(13) Includes $22,067 of bonus payable pursuant to Mr. Lytal's employment
agreement. See "-- Employment Agreements."
(14) Options were issued pursuant to Mr. Lytal's employment agreement.
See "-- Employment Agreements" and "-- Ten Year Options Repricings."
(15) Includes 100,000 options granted pursuant to the Amended Equity
Incentive Plan and 90,000 SARs granted pursuant to the Partnership's
Unit Appreciation Rights Plan.
(16) Bonuses payable pursuant to Mr. Sims' employment agreement. See "--
Employment Agreements."
(17) Includes $20,400 to pay the initial membership fee at a country
club.
(18) Includes options to purchase 50,000 shares of Common Stock granted
pursuant to the Amended Equity Incentive Plan which were canceled
during the fiscal year ended June 30, 1996 in connection with the
grant of 100,000 options pursuant to the Amended Equity Incentive
Plan and options to purchase 300,000 shares of Common Stock issued
in connection with Mr. Sims' continued employment. See "--
Employment Agreements."
(19) Includes $8,136 related to the use of an automobile provided by
DeepTech and $74,025 to pay the initial membership fees at two
country clubs.
53
<PAGE> 56
OPTION GRANTS
The following table sets forth certain information with respect to
option grants made to the Named Officers under the Amended Equity Incentive Plan
and otherwise during the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SHARES OF GRANTED
COMMON STOCK TO EXERCISE POTENTIAL REALIZABLE VALUE AT
UNDERLYING EMPLOYEES OR ASSUMED ANNUAL RATES OF
OPTIONS IN FISCAL BASE PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED YEAR ($/SH) DATE OPTION TERM
5%($) 10%($)
<S> <C> <C> <C> <C> <C>
James H. Lytal 250,000 33.3% $5.75 3/19/2007 $1,021,000 $2,664,000
125,000(1) 15.6% $21.50 2/17/2003 $1,094,000 $2,312,000
Grant E. Sims 125,000(1) 15.6% $21.50 2/17/2003 $1,094,000 $2,312,000
John H. Gray 125,000(1) 15.6% $21.50 2/17/2003 $1,094,000 $2,312,000
</TABLE>
- -----------
(1) Issued under the Partnership's Unit Rights Appreciation Plan.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth certain information regarding the
outstanding options and warrants to purchase Common Stock held by the
Named Officers at June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) FISCAL YEAR-END
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE(3) EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Tatham..... 722,917(1) --(2) 2,568,749(4) / -- $5,603,121(4) / $ --
James H. Lytal....... -- -- 12,500 / 287,500 $50,000 / $712,500
John H. Gray......... -- -- 75,000 / 75,000 $100,000 / $300,000
Grant E. Sims........ -- -- 300,000 / 75,000 $943,750 / $300,000
Donald V. Weir....... -- -- 81,250 / 93,750 $125,000 / $375,000
</TABLE>
- -----------
(1) Options exercised to purchase Common Stock were acquired by Mr.
Tatham related to matters other than executive compensation and
unrelated to the operations of DeepTech.
(2) On May 21, 1997, Mr. Tatham exercised 447,917 warrants to purchase a
like amount of shares of Common Stock at $4.50 per share. In addition,
Mr. Tatham exercised 275,000 warrants to purchase a like amount of
shares of Common Stock at $10.00 per share. On May 21, 1997, the
Common Stock closed at $6.44 per share on The Nasdaq National Market.
(3) All unexercisable options in this column relate to options which were
issued pursuant to DeepTech's Amended Equity Incentive Plan.
(4) Excludes options to acquire 125,000 shares of Common Stock at $4.50
per share purchased by Mr. Tatham in August 1996.
54
<PAGE> 57
REPORT FROM THE COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
The duty of members of the Compensation Committee is to administer the
executive compensation program for DeepTech. The Compensation Committee is
responsible for establishing appropriate compensation goals for the executive
officers of DeepTech and evaluating the performance of such executive officers
in meeting such goals and making recommendations to the Board of Directors with
regard to executive compensation.
The goals of the Compensation Committee in establishing DeepTech's
executive compensation program are as follows:
(1) To fairly compensate the executive officers of DeepTech and its
subsidiaries for their contributions to DeepTech's short-term and long-term
performance. The elements of DeepTech's executive compensation program are (a)
annual base salaries, (b) annual bonuses and (c) equity incentives.
(2) To allow DeepTech to attract, motivate and retain the management
personnel necessary to DeepTech's success by providing an executive compensation
program comparable to that offered by companies with which DeepTech competes for
such management personnel.
The elements of the executive compensation program described above are
implemented and periodically reviewed and adjusted by the Compensation
Committee. The annual base salaries of the Chief Executive Officer of DeepTech
and the other executive officers are determined based on individual performance,
experience and comparison with salaries paid by DeepTech's industry peers and
other companies in similar industries with comparable revenue while linking the
payment of compensation to DeepTech's achievement of certain financial goals.
In developing salary recommendations, the Compensation Committee reviewed
salaries of similar positions in similarly sized companies which engage in
DeepTech's business. The Compensation Committee confirmed that the overall
compensation packages over the last several years, including the executive
officers' equity ownership in DeepTech and/or its subsidiaries, were consistent
with the Compensation Committee's stated objective.
TEN YEAR OPTION REPRICINGS
The following table sets forth certain information with respect to stock
options canceled and new options granted at the new exercise price during the
last ten years to Named Officers of DeepTech.
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
OPTIONS MARKET PRICE OF EXERCISE PRICE ORIGINAL OPTION
REPRICED STOCK AT TIME OF AT TIME OF TERM REMAINING
OR AMENDED REPRICING OR REPRICING OR NEW EXERCISE AT REPRICING OF
NAME DATE (#) AMENDMENT AMENDMENT PRICE AMENDMENT
<S> <C> <C> <C> <C> <C> <C>
James H. Lytal 11/14/95 50,000 $4.00 $10.50 $4.00 105 months
Donald V. Weir 11/14/95 75,000 $4.00 $13.50 $4.00 102 months
</TABLE>
In October 1995, the Compensation Committee of the Board of Directors
authorized the exchange and repricing of certain outstanding stock options (the
"Old Options") held by employees of DeepTech whereby these employees could
voluntarily surrender certain existing stock options and receive new stock
options (the "New Options") on the terms described below. The Board of
Directors noted that the overall purpose of DeepTech's Amended Equity Incentive
Plan is to attract and retain the services of DeepTech's employees and to
provide incentives to such person to exert maximum efforts for DeepTech's
success. The Board of Directors concluded that the decline in the market value
of Common Stock had frustrated these purposes and diminished the value of
DeepTech's stock option program as an element of DeepTech's compensation
arrangements. Accordingly, the Board of Directors adopted a repricing program.
At the time of the repricing, the exercise price of the Old Options ranged from
$10.50 to $13.50 per share. The exercise price of all New Options is $4.00 per
share. In connection with the repricing, Mr. Lytal exchanged an aggregate of
50,000 shares subject to Old
55
<PAGE> 58
Options for 50,000 shares of New Options. In connection with the repricing, Mr.
Weir exchanged an aggregate of 75,000 shares subject to Old Options for 75,000
shares subject to New Options. Mr. Weir also received options to purchase an
additional 50,000 shares at $4.00 per share at the time of the repricing.
COMPENSATION COMMITTEE
Steven L. Gerard (Chairman)
Conrad P. Albert
EQUITY INCENTIVE PLAN
General. In 1993, the Board of Directors adopted, and the stockholders
of DeepTech approved, the 1993 Employee Stock Option Plan. The 1993 Employee
Stock Option Plan was amended and restated in 1995 and renamed the Amended
Equity Incentive Plan (as so amended and restated, the "Plan"). The amendment
and restatement of the Plan was effected to provide DeepTech with additional
flexibility in making a variety of awards pursuant to the Plan including stock
options, restricted stock, and stock value equivalent awards. In addition,
during DeepTech's fiscal year ending June 30, 1996, DeepTech issued stock
options under the Plan to certain employees of DeepTech who agreed to defer
certain cash salary and bonus otherwise due.
Summary of Plan. Under the Plan, DeepTech may grant to employees,
consultants or agents of DeepTech or any of its subsidiaries one or more options
(each, a "Stock Option") to purchase shares of Common Stock as hereinafter set
forth. Stock Options granted under the Plan may be either incentive stock
options ("Incentive Stock Options") within the meaning of Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), or options that do not
qualify as Incentive Stock Options ("Non-Qualified Stock Options"). Pursuant to
the Plan, DeepTech may grant awards of Common Stock subject to restrictions on
sale or other disposition of such shares ("Restricted Stock Grant"), and such
other requirements as the Compensation Committee deems appropriate including the
requirement that such shares be forfeited upon termination of employment for
certain reasons within a specified period of time. Pursuant to the Plan,
DeepTech may also grant rights to receive an amount equal to the fair market
value of shares of Common Stock or rights to receive an amount equal to any
appreciation or increase in the fair market value of Common Stock over a
specified period of time ("Stock Value Equivalent Awards"). Stock Options,
Restricted Stock Grants and Stock Value Equivalent Awards are referred to
collectively herein as "Awards."
Except with respect to outstanding Awards, and unless sooner terminated
by action of DeepTech's Board of Directors (the "Board"), or the committee
thereof charged with administration of the Plan, the Plan will terminate on
December 31, 2005. The maximum number of shares of Common Stock with respect to
which Awards may be granted under the Plan is 4,000,000, subject to adjustments
for stock splits, stock dividends and certain other changes in capitalization.
The Board may terminate or suspend the Plan (or any portion thereof) at
any time with respect to any shares for which Awards have not previously been
granted and remain outstanding. The Board has the right to alter or amend the
Plan or any part thereof from time to time; provided, however, that no change in
any Award theretofore granted may be made which would materially adversely
affect the rights and obligations of the holder of any such Award without the
written consent of such Plan participant; and provided, further, that the Board
may not, without stockholder approval as required under the Plan, (i) materially
increase the number of shares of Common Stock which may be issued under the Plan
(other than in connection with adjustments permitted by the Plan), (ii)
materially modify the requirements as to eligibility for participation in the
Plan, (iii) materially increase the benefits accruing to participants under the
Plan, or (iv) extend the termination date of the Plan. In addition, no
amendment, suspension or termination can be adopted which would disqualify the
Plan from (i) the exemption provided by Rule 16b- 3, promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor rule or regulation to such Rule 16b-3, as such rule is applicable from
time to time, or (ii) the benefits provided under Section 422 of the Code, or
any successor thereto.
The Plan is not subject to any provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), nor the qualification
requirements of Section 401 of the Code.
The Plan is administered by the Compensation Committee, a committee
appointed by the Board composed of two or more directors of DeepTech. Each
member of the Compensation Committee is a disinterested person within the
meaning of Rule 16b-3 of the Exchange Act and qualifies as an "outside
56
<PAGE> 59
director," as such term is used for the purposes of Section 162(m) of the Code
and any rules and regulations promulgated thereunder.
Subject to the provisions of the Plan, the Compensation Committee has
sole authority to select the individuals who are to be granted Awards from among
those persons who are eligible and to determine the restrictions, terms and
conditions of each Award granted under the Plan (subject to the terms of the
Plan). The Compensation Committee is authorized to interpret the Plan and may,
from time to time, adopt, amend, or rescind rules and regulations relating to
the implementation, administration and maintenance of the Plan.
As of June 30, 1997, there were 2,625,625 Nonqualified Stock Options and
150,000 shares of restricted common stock of DeepTech outstanding that were
issued pursuant to the Plan.
EMPLOYMENT AGREEMENTS
In December 1992, DeepTech entered into an employment agreement with Mr.
Sims, Senior Vice President and a Director of DeepTech and Chief Executive
Officer of Leviathan, the terms of which provide for: (i) a $150,000 minimum
annual salary, (ii) annual bonuses based on the earnings performance of Offshore
Marketing, (iii) the transfer to Mr. Sims of 5% of the then outstanding common
stock of Offshore Marketing, (iv) a 15% interest in Offshore Marketing's net
profits after taxes, (v) the conditional right to exchange such 15% net profits
interest for shares of Offshore Marketing common stock representing 15% of its
then outstanding common stock and (vi) the grant of a series of options to
purchase a total of 375,000 shares of Common Stock at an exercise price of $4.25
per share (the estimated fair market value on date of grant). Such options vest
in increments of 75,000 per year beginning January 31, 1993. Mr. Sims exercised
options to purchase 75,000 shares of Common Stock in each of January 1994 and
June 1994 and sold 5,000 shares of such Common Stock in January 1994. As of
June 30, 1997, Mr. Sims held 145,000 shares of Common Stock purchased pursuant
to such options. DeepTech determined that the Offshore Marketing common stock
transferred to Mr. Sims pursuant to his employment agreement had only de minimis
value given the financial position of Offshore Marketing on the date of such
transfer. Pursuant to his employment agreement, Mr. Sims received no bonuses
for the fiscal years ended June 30, 1993 and 1996 because Offshore Marketing
recorded net losses for such fiscal years, and received bonuses of $15,256,
$54,547 and $39,499 for the fiscal years ended June 30, 1994, 1995 and 1997,
respectively.
Additionally, in June 1995, DeepTech granted stock options to purchase
300,000 shares of Common Stock to Mr. Sims at an exercise price of $4.00 per
share. The options were exercised on June 12, 1995 in exchange for a note
payable to DeepTech in the aggregate amount of $1.2 million. The note accrues
interest at 8% per annum and providing that if Mr. Sims continues to be employed
by DeepTech for three years from the date of grant, DeepTech will forgive the
note. If Mr. Sims does not continue to be employed by DeepTech for three years
from the date of grant, he must repay the note by either (i) paying principal
and interest or (ii) returning the Common Stock to DeepTech to satisfy repayment
of principal and interest.
In July 1994, DeepTech entered into an employment agreement with Mr.
Lytal, President of Leviathan, the terms of which provide for: (i) a $145,000
minimum annual salary, (ii) annual bonuses based on the earnings performance of
Offshore Marketing, (iii) a 5% interest in Offshore Marketing's net profits
after taxes, (iv) the conditional right to exchange such 5% net profits interest
for shares of Offshore Marketing common stock representing 5% of its then
outstanding common stock and (v) the grant of options to purchase a total of
50,000 shares of Common Stock at an exercise price of $10.50 per share (the
estimated fair market value on date of grant). Such options vested 30,000 on
the first anniversary and 10,000 per year thereafter. During the year ended
June 30, 1996, Mr. Lytal's options were repriced. See "-- Ten Year Option
Repricings." Pursuant to his employment agreement, Mr. Lytal received no bonus
for the fiscal year ended June 30, 1996 because Offshore Marketing recorded a
net loss for such fiscal year and received bonuses of $22,067 and $13,166 for
the fiscal years ended June 30, 1995 and 1997.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted at the 1995 Annual Meeting of Stockholders in October 1995. The purpose
of the Director Plan is to allow DeepTech to attract the best available
individuals to serve as outside directors of DeepTech.
57
<PAGE> 60
All non-employee directors of DeepTech are eligible to participate in
the Director Plan. The Director Plan provides for both automatic one time
grants of Stock Options to DeepTech's non-employee directors and for the
issuance and exercise of Stock Options in lieu of standard cash director
compensation upon the election of non-employee directors. All Stock Options
granted under the Director Plan are Non-Qualified Stock Options.
Except with respect to outstanding Stock Options, and unless sooner
terminated by action of DeepTech's Board, the Director Plan will terminate on
December 31, 2005. The maximum number of shares of Common Stock with respect to
which Stock Options may be granted under the Director Plan is 2,000,000, subject
to adjustments for stock splits, stock dividends and certain other changes in
capitalization.
Under the Director Plan, grants of Stock Options to purchase 150,000
shares of Common Stock will be automatically made to all non-employee directors
of DeepTech provided that such non- employee directors have not already received
stock options to purchase 150,000 shares of Common Stock in connection with
their service as a director of DeepTech. In addition, after the effective date
of the Director Plan, any newly elected non- employee director will
automatically receive Stock Options to purchase 150,000 shares of Common Stock.
The exercise price for the Stock Options to purchase 150,000 shares of Common
Stock will be 100% of the fair market value of the Common Stock on the later to
occur of (i) the effectiveness of the Director Plan, or (ii) the election of the
participant as a director of DeepTech. The Stock Options issued pursuant to
these provisions will be immediately exercisable and, unless terminated sooner
in accordance with the Director Plan, shall expire on a date which is ten (10)
years after the date of the grant.
The Board may terminate or suspend the Director Plan (or any portion
thereof) at any time with respect to any shares for which Stock Options have not
previously been granted and remain outstanding. The Board has the right to
alter or amend the Director Plan or any part thereof from time to time;
provided, however, that no change in any Stock Option theretofore granted may be
made which would materially adversely affect the rights and obligations of the
holder of any such Stock Option without the written consent of such Director
Plan participant; and provided, further, that the Board may not, without
stockholder approval as required under the Director Plan, (i) materially
increase the number of shares of Common Stock which may be issued under the
Director Plan (other than in connection with adjustments permitted by the
Director Plan), (ii) materially modify the requirements as to eligibility for
participation in the Director Plan, (iii) materially increase the benefits
accruing to participants under the Director Plan, or (iv) extend the termination
date of the Director Plan. In addition, no amendment, suspension or termination
can be adopted which would disqualify the Director Plan from (i) the exemption
provided by Rule 16b-3, promulgated under the Exchange Act, or any successor
rule or regulation to such Rule 16b-3, as such rule is applicable from time to
time, or (ii) the benefits provided under Section 422 of the Code, or any
successor thereto.
The Director Plan is not subject to any provisions of ERISA, nor the
qualification requirements of Section 401 of the Code.
The Director Plan Committee is authorized to interpret the Director Plan
and may, from time to time, adopt, amend, or rescind rules and regulations
relating to the implementation, administration and maintenance of the Director
Plan.
Included in the warrants outstanding at June 30, 1997 are 1,230,000
Nonqualified Stock Options issued pursuant to the Director Plan.
UNIT RIGHTS APPRECIATION PLAN
In 1995, the Partnership adopted the Unit Rights Appreciation Plan (the
"Unit Rights Plan") to provide the Partnership with the ability of making awards
of Unit Rights, as hereinafter defined, to certain officers and key employees of
the Partnership or its affiliates as an incentive for these individuals to
continue in the service of the Partnership or its affiliates.
Under the Unit Rights Plan, the Partnership may grant to senior officers
of the Partnership or its affiliates, excluding the Chairman of the Board of
Leviathan, currently Mr. Tatham, the right to purchase, or realize the
appreciation in, a Preference Unit (a "Unit Right"), pursuant to the provisions
of the Unit Rights Plan.
58
<PAGE> 61
The Unit Rights Plan is administered by a committee of the Board of
Directors of the General Partner (the "Leviathan Board") comprised of two or
more non-employee directors as defined by Rule 16 b-3 of the Exchange Act (the
"Committee") provided that during the periods in which no such committee is
appointed and empowered under the Unit Rights Plan, the Leviathan Board shall be
the Committee for all purposes under the Unit Rights Plan.
The aggregate number of Preference Units as to which Unit Rights may be
issued pursuant to the Unit Rights Plan shall not exceed 400,000 Preference
Units per calendar year and 4,000,000 Preference Units over the term of the Unit
Rights Plan, subject to adjustment as to both limitations under certain
circumstances. No participant may be granted more than 400,000 Unit Rights in
any calendar year. The exercise price of the Preference Units covered by the
Unit Rights granted pursuant to the Unit Rights Plan shall be the closing price
of the Preference Units as reported on the NYSE or, if the Preference Units are
not traded on such exchange, as reported on any other national securities
exchange on which the Preference Units are traded, on the date on which Unit
Rights are granted pursuant to the Unit Rights Plan.
As of September 2, 1997, a total of 1,200,000 Unit Rights have been
granted under the Unit Rights Plan representing 400,000 Unit Rights for each of
the calendar years 1995, 1996 and 1997.
59
<PAGE> 62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 15, 1997, the beneficial
ownership of the outstanding Common Stock of DeepTech by (i) each person who is
known to DeepTech to beneficially own more than 5% of the outstanding Common
Stock, (ii) each director of DeepTech, (iii) each of the Named Officers and (iv)
all executive officers and directors of DeepTech as a group. The following
table and the footnotes thereto also set forth, as of August 15, 1997, the
beneficial ownership of the common stock of certain subsidiaries of DeepTech by
(i) each director of DeepTech, (ii) each of the Named Officers and (iii)
executive officers and directors of DeepTech as a group.
<TABLE>
<CAPTION>
Shares of Class Beneficially Owned(1)
-----------------------------------------------------------------------------------
DeepTech Tatham Offshore Leviathan Holdings
Common Stock Common Stock(2)(3) Common Stock(4)
------------ ------------ ------------
Number Percent Number Percent Number Percent
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C>
Conrad P. Albert.................... 150,000 (5) * -- -- -- --
Harry J. Brisco(6)(7)............... 1,047,524 (8) 5.3% 1,048,227 3.9% -- --
Laney Chouest....................... 155,000 (9) * 35,727 (10) * -- --
Phillip G. Clarke................... 172,260 (11) * 63,786 * -- --
Charles M. Darling,IV(12)........... 525,981 (13) 2.6% 70,018 (14) * 50.0 5.0%
Donaldson, Lufkin & Jenrette
Securities Corporation............ 1,830,706 (15) 8.6% -- -- -- --
Ralph Eads.......................... 150,000 (9) * -- -- -- --
The Equitable Companies
Incorporated....................... 2,156,450 (16) 10.0% -- -- -- --
Robert E. Fox....................... 151,688 (11) * 35,727 (17) * -- --
Steven L. Gerard(18)................ 164,260 (19) * 10,718 (20) * -- --
John H. Gray........................ 85,290 (45) * -- -- 50.0 5.0%
Michael H. Lam...................... 173,508 (11) * 15,363 (21) * -- --
Lehman Commercial
Paper Inc......................... 1,333,333 (22) 6.5% -- -- -- --
James H. Lytal(23).................. 22,721 (46) * -- -- -- --
Ben T. Morris....................... 632,970 (24) 3.2% 8,407 (25) * 2.5 *
Edward L. Moses, Jr.(26)............ 98,116 (27) * 920,307 (28) 3.3% -- --
Nancy Quin(29)...................... 159,756 (11) * 17,864 (30) * -- --
Janet E. Sikes...................... 276,069 (31) 1.4% 5,359 (32) * -- --
Grant E. Sim(33).................... 745,000 (34) 3.7% -- -- -- --
Thomas P. Tatham(35)................ 9,926,431 (36) 44.1% 5,755,848 (37) 18.4% 30.0 3.0%
Donald V. Wei(38)................... 309,090 (39) 1.5% -- -- 12.5 1.25%
Robert H. Williams(6)(40)........... 1,011,524 (8) 5.2% 1,026,771 (41) 3.7% -- --
Executive officers and directors 13,910,861 (43) 57.0% 6,951,625 (44) 21.7% 95.0 9.5%
as a group (18 persons)(42).......
</TABLE>
- -----------------
* Less than 1%.
(1) Shares of Common Stock that are not outstanding but that may be
acquired by a person upon exercise of options or warrants within 60
days of the above date are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by
such person. However, such shares are not deemed to be outstanding
for the purpose of computing the percentage of shares beneficially
owned by any other person.
(2) Shares of Tatham Offshore's Series A 12% Convertible Exchangeable
Preferred Stock ("Series A Preferred Stock"), Series B 8%
Convertible Exchangeable Preferred Stock ("Series B Preferred Stock")
and Series C 4% Convertible Exchangeable Preferred Stock ("Series C
Preferred Stock") held by each named person are assumed converted
into shares of Tatham Offshore common stock for the purpose of
computing the number of shares of Tatham Offshore common stock
beneficially owned by such person. Alternatively, each share of
Series A, B and C Preferred Stock may be exchanged for four exchange
warrants which are each exercisable to purchase one share of Tatham
Offshore common stock at $0.653 per share. See "-- Certain
Relationships and Related Transactions."
60
<PAGE> 63
(3) Excludes each named person's indirect ownership interest, if any, in
the 28,811,214 shares of Tatham Offshore beneficially owned by
DeepTech.
(4) Excludes each named person's indirect ownership interest, if any, in
the 850 shares (85% of the outstanding shares) of Leviathan Holdings
Company owned by DeepTech.
(5) Consists of shares which may be acquired pursuant to an option
agreement among Mr. Albert, Mr. Tatham and DeepTech.
(6) In addition to the share ownership set forth in the table, each of
Mr. Briscoe and Dr. Williams may be deemed to be the beneficial owner
of 1,000 shares of common stock of Dover (representing 50% of Dover's
outstanding common stock) that is owned by Dover Energy, Inc., a
corporation in which each of such persons serves as an officer and
director.
(7) Mr. Briscoe's address is 2703 Rocky Woods, Kingwood, Texas 77339.
(8) Includes 689,086 shares held of record by Dover Energy, Inc. Each of
Mr. Briscoe and Dr. Williams is a Director and officer of Dover
Energy, Inc. and disclaims beneficial ownership of 459,391 shares
held by Dover Energy, Inc.
(9) Includes options to purchase 150,000 shares of Common Stock.
(10) Includes 25,727 shares assumed acquired as a result of
conversion of 10,000 shares of Tatham Offshore's Series A Preferred
Stock into Tatham Offshore common stock.
(11) Includes options to purchase 150,000 shares of Common Stock.
(12) In addition to the share ownership set forth in the table, Mr.
Darling owns 50 shares of the common stock of Offshore Processors,
representing 5.0% of such subsidiary's outstanding common stock, and
50 shares of the common stock of Offshore Marketing, representing
5.0% of such subsidiary's outstanding common stock. In addition, Mr.
Darling may be deemed to be the beneficial owner of 2,000 Preference
Units of the Partnership owned by his wife and 2,000 Preference Units
of the Partnership owned by a trust of which he is Trustee.
(13) Includes 40,731 shares held of record by a corporation of which Mr.
Darling is a Director and officer. Excludes 100,000 shares held in
trust for Mr. Darling's children.
(14) Includes 18,009 shares assumed acquired as a result of conversion of
7,000 shares of Tatham Offshore Series A Preferred Stock owned by his
wife and/or children into Tatham Offshore common stock. Mr. Darling
may be deemed to be the beneficial owner of 3,000 shares of each of
Tatham Offshore's common stock and Series A Preferred Stock owned by
his wife; 2,000 shares of each of Tatham Offshore's common stock and
Series A Preferred Stock owned by each of his two children; and
20,000 shares of Tatham Offshore's common stock owned by a trust of
which he is Trustee. Excludes 20,000 shares of Tatham Offshore
common stock held in trust for Mr. Darling's children.
(15) Consists of 385,209 shares and warrants to purchase 1,445,497 shares.
DLJ's address is 277 Park Avenue, New York, New York 10172.
(16) Includes 270,103 shares and warrants to purchase 55,641 shares. Also
includes 385,209 shares and warrants to purchase 1,445,497 shares
held by The Equitable Companies Incorporated's subsidiary, DLJ. The
address of Equitable is 1290 Avenue of the Americas, New York, New
York, 10104.
(17) Includes 25,727 shares assumed acquired as a result of conversion of
10,000 shares of Tatham Offshore Series A Preferred Stock into Tatham
Offshore common stock.
(18) In addition to the share ownership set forth in the table, Mr. Gerard
owns 1,200 Preference Units of the Partnership, representing less
than 1% of the outstanding Preference Units.
(19) Includes 150,000 shares which may be acquired pursuant to an option
agreement among Mr. Gerard, Mr. Tatham and DeepTech.
(20) Includes 7,718 shares assumed acquired as a result of conversion of
3,000 shares of Tatham Offshore Series A Preferred Stock into Tatham
Offshore common stock.
(21) Includes 11,603 shares assumed acquired as a result of conversion of
4,300 shares of Tatham Offshore Series A Preferred Stock into Tatham
Offshore common stock.
(22) Includes warrants to purchase 666,667 shares. Lehman Commercial Paper
Inc.'s address is 3 World Financial Center, 9th Floor, New York, New
York 10285.
(23) In addition to the share ownership set forth in the table, Mr. Lytal
also owns 1,016 Preference Units of the Partnership, representing
less than 1% of the outstanding Preference Units.
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<PAGE> 64
(24) Includes 384,168 shares of Common Stock owned by trusts for Mr.
Tatham's children for which Mr. Morris serves as the trustee. Also
includes options to purchase 150,000 shares of Common Stock. These
trusts also own 33,000 Preference Units in the Partnership,
representing less than 1% of the outstanding Preference Units. In
addition, Mr. Morris owns 1,400 Preference Units in the Partnership,
representing less than 1% of the outstanding Preference Units.
(25) Includes 6,054 shares assumed acquired as a result of conversion of
2,353 shares of Tatham Offshore Series A Preferred Stock into Tatham
Offshore common stock.
(26) In addition to the ownership set forth in the table, Mr. Moses owns
36,164 Preference Units in the Partnership, representing less than 1%
of the outstanding Preference Units.
(27) Includes options to purchase 18,750 shares.
(28) Includes 656,306 shares assumed acquired as a result of conversion
of 255,100 shares of Tatham Offshore Series A Preferred Stock into
Tatham Offshore common stock.
(29) In addition to the share ownership set forth in the table, Ms. Quinn
owns 2,000 Preference Units in the Partnership, representing less
than 1% of the outstanding Preference Units.
(30) Includes 12,864 shares assumed acquired as a result of conversion of
5,000 shares of Tatham Offshore Series A Preferred Stock into Tatham
Offshore common stock.
(31) Includes options to purchase 18,750 shares. In addition to the
ownership set forth in the table, Ms. Sikes owns 1,269 Preference
Units in the Partnership, representing less than 1% of the
outstanding Preference Units.
(32) Includes 3,859 shares assumed acquired as a result of conversion
of 1,500 shares of Tatham Offshore Series A Preferred Stock into
Tatham Offshore common stock.
(33) In addition to the share ownership set forth in the table, Mr. Sims
owns 50 shares of the common stock of Offshore Marketing,
representing 5.0% of such subsidiary's outstanding common stock, and
24,000 Preference Units in the Partnership, representing less than 1%
of the outstanding Preference Units.
(34) Includes options to purchase 300,000 shares of Common Stock.
(35) In addition to the share ownership set forth in the table,
Mr. Tatham owns 35 shares of Offshore Processors common stock,
representing 3.5% of such subsidiary's outstanding common stock, and
35 shares of Offshore Marketing common stock, representing 3.5% of
such subsidiary's outstanding common stock. Mr. Tatham's address is
7500 Texas Commerce Tower, Houston, Texas 77002.
(36) Includes options to purchase 2,568,749 shares of Common Stock.
(37) Includes 3,972,248 shares assumed acquired as a result of
conversion of 1,537,600 shares of Tatham Offshore Series A Preferred
Stock and 21,000 shares of Tatham Offshore Series C Preferred Stock
into Tatham Offshore common stock.
(38) In addition to the share ownership set forth in the table, Mr. Weir
also owns 20,000 Preference Units in the Partnership, representing
less than 1% of the outstanding Preference Units.
(39) Includes options to purchase 81,250 shares of Common Stock.
(40) Dr. William's address is 14511 Westway Lane, Houston, Texas 77077.
(41) Includes 12,864 shares assumed acquired as a result of conversion of
5,000 shares of Tatham Offshore Series A Preferred Stock into Tatham
Offshore common stock.
(42) In addition to the share ownership set forth in the table, the
executive officers and Directors of DeepTech as a group beneficially
own (i) 85 shares of the common stock of Offshore Processors,
representing 8.5% of such subsidiary's outstanding common stock, (ii)
135 shares of the common stock of Offshore Marketing, representing
13.5% of such subsidiary's outstanding common stock, and (iii)
125,049 Preference Units in the Partnership, representing less than
1% of the outstanding Preference Units.
(43) Includes options to purchase 4,432,499 shares of Common Stock.
(44) Includes 4,757,585 shares assumed acquired as a result of conversion
of 1,863,853 shares of Tatham Offshore Series A and Series C
Preferred Stock into Tatham Offshore common stock.
(45) Includes options to purchase 75,000 shares of Common Stock.
(46) Includes options to purchase 12,500 shares of Common Stock.
62
<PAGE> 65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between or
among the Company, the Partnership, Tatham Offshore and certain other related
parties is summarized in the Company's "Notes to Consolidated Financial
Statements -- Note 6 -- Indebtedness", " -- Note 8 -- Stockholder's Equity" and
" -- Note 10 -- Related Party Transactions --" located elsewhere in this Annual
Report.
Section 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires DeepTech's officers and
directors, and persons who beneficially own more than 10% of Common Stock ("10%
Stockholders"), to file reports of ownership and changes in ownership with the
Commission.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto,
and certain written representations furnished to DeepTech, DeepTech believes
that during the fiscal year ended June 30, 1997 its executive officers,
directors and greater than 10% beneficial owners complied with all applicable
filing requirements, except that Messrs. Fox, Clarke, Eads, Lam and Weir and Ms.
Sikes, detected certain possible deficiencies in their reporting to the
Commission. In order to correct such possible deficiencies, each of the above
named persons filed a Statement of Changes in Beneficial Ownership of
Securities on Form 4 covering a single transaction.
COMPARATIVE STOCK PERFORMANCE
As Required by applicable rules of the Commission, the performance graph
was prepared based upon the following assumptions:
1. $100 was invested in Common Stock, the Standard & Poor'S 500
Stock Index (the "S&P 500 Index") and the Dow Jones Oil -
Secondary Index (the "Peer Group") on May 16, 1994 (the date
the Common Stock commenced trading on The Nasdaq National
Market).
2. Dividends are reinvested on the ex-dividend dates.
COMPARATIVE TOTAL RETURNS
DEEPTECH INTERNATIONAL INC., S&P 500 INDEX, PEER GROUP (PERFORMANCE
RESULTS MAY 16, 1994 TO JUNE 30, 1997)
[GRAPH]
<TABLE>
<CAPTION>
--------------------------------------------------------
16-May-94 30-Jun-94 30-Jun-95 30-Jun-96 30-Jun-97
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DeepTech 100.00 140.00 40.00 50.00 80.00
--------------------------------------------------------
S&P 500 Index 100.00 100.18 126.30 159.14 214.36
--------------------------------------------------------
Peer Group 100.00 98.43 101.28 117.40 126.79
--------------------------------------------------------
</TABLE>
63
<PAGE> 66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements
As to financial statements and supplementary information of
DeepTech and Leviathan, reference is made to "Index to Consolidated
Financial Statements" on page F-1 of this Annual Report.
As to financial statements and supplementary information of the
Partnership, reference is made to the financial statements and
supplementary information contained in the Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, which
financial statements and supplementary information were filed on March
26, 1997 under Commission File No. 1-11680 and are hereby incorporated
herein by reference for all purposes.
As to financial statements and supplementary information of Tatham
Offshore, reference is made to the financial statements and
supplementary information contained in Tatham Offshore's Annual Report
on Form 10-K for the fiscal year ended June 30, 1997, which financial
statements and supplementary information were filed on September 26,
1997 under Commission File No. 0-22892 and are hereby incorporated
herein by reference for all purposes.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report.
3.(a) Exhibits
<TABLE>
<CAPTION>
Item
Number Description
------ -----------
<S> <C> <C>
3.1 -- First Amended and Restated Certificate of Incorporation
of DeepTech (filed as Exhibit 3(i)(1) to Amendment No. 1
to DeepTech's Registration Statement on Form S-1, File
No. 33-76999, and incorporated herein by reference).
3.2 -- First Amended and Restated Bylaws of DeepTech (filed as
Exhibit 3(ii)(1) to Amendment No. 1 to DeepTech's
Registration Statement on Form S-1, File No. 33-76999,
and incorporated herein by reference).
4.1 -- Warrant Agreement, dated as of February 19, 1993,
between DeepTech and DLJ, as Initial Holder (filed as
Exhibit 4.1 to DeepTech's Registration Statement on
Form S-1, File No. 33-76999, and incorporated herein by
reference).
4.2 -- Conditional Warrant Agreement, dated as of February 19,
1993, between DeepTech and DLJ, as Initial Holder
(filed as Exhibit 4.2 to DeepTech's Registration
Statement on Form S-1, File No. 33-76999, and
incorporated herein by reference).
4.3 -- Warrant Agreement, dated as of December 14, 1993,
between DeepTech and DTI (filed as Exhibit 4.3 to
DeepTech's Registration Statement on Form S-1, File
No. 33-76999, and incorporated herein by reference).
4.4 -- Conditional Warrant Agreement, dated as of December 14,
1993, between DeepTech and DTI (filed as Exhibit 4.4 to
DeepTech's Registration Statement on Form S-1, File
No. 33-76999, and incorporated herein by reference).
</TABLE>
64
<PAGE> 67
4.5 -- Common Stock Purchase Warrant, dated December 15, 1992,
registered in the name of Citicorp USA, Inc. (filed as
Exhibit 4.5 to DeepTech's Registration Statement on Form
S-1, File No. 33-76999, and incorporated herein by
reference).
4.6 -- Common Stock Purchase Warrant, dated December 15, 1992,
registered in the name of BBU Mezzanine Fund II (filed
as Exhibit 4.6 to DeepTech's Registration Statement on
Form S-1, File No. 33-76999, and incorporated herein by
reference).
4.7 -- Form of Stock Subscription Warrant entered into by
DeepTech and each party set forth in Schedule I attached
thereto (filed as Exhibit 4.9 to Amendment No. 1 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
4.8 -- Warrant Agreement dated as of November 8, 1994 between
DeepTech and Wilrig AS (filed as Exhibit 4.11 to
DeepTech's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 and incorporated herein by
reference).
10.1 -- First Amended and Restated Management Agreement,
effective as of July 1, 1992, between DeepTech and
Leviathan (filed as Exhibit 10.1 to DeepTech's Annual
Report on Form 10-K for the fiscal year ended June 30,
1994, Commission File Number 0-23934 and incorporated
herein by reference).
10.2 -- First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Leviathan (filed as Exhibit 10.76
to DeepTech's Registration Statement on Form S-1, File
No. 33-88688, and incorporated herein by reference).
10.3 -- Amended and Restated Management Agreement,
effective as of July 1, 1992, between DeepTech and
Tatham Offshore (filed as Exhibit 10.1 to Amendment No.
4 to Tatham Offshore's Registration Statement on Form
S-1, File No. 33-70120, and incorporated herein by
reference).
10.4 -- First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Tatham Offshore (filed as Exhibit
10.71 to DeepTech's Registration Statement on Form S-1,
File No. 33-88688, and incorporated herein by
reference).
10.5 -- Amended and Restated Management Agreement,
effective as of July 1, 1992, between DeepTech and
Offshore Marketing (filed as Exhibit 10.5 to Amendment
No. 2 to DeepTech's Registration Statement on Form S-1,
File No. 33-73538, and incorporated herein by
reference).
10.6 -- First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Offshore Marketing (filed as
Exhibit 10.74 to DeepTech's Registration Statement on
Form S-1, File No. 33-88688, and incorporated herein by
reference).
10.7 -- Form of Management Agreement dated as of January
19, 1995 between DeepTech and DeepFlex Production
Services, L.P. (filed as Exhibit 10.13 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 and incorporated herein by reference).
10.8 -- Indenture, dated March 21, 1994, between DeepTech
and First Interstate Bank of Texas, N.A., as Trustee,
relating to the Senior Notes (filed as Exhibit 10.7 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
65
<PAGE> 68
10.9 -- Stock Pledge Agreement, dated March 21, 1994,
between DeepTech and First Interstate Bank of Texas,
N.A., as Collateral Agent (filed as Exhibit 10.8 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
10.10 -- Note Pledge Agreement, dated March 21, 1994,
between DeepTech and First Interstate Bank of Texas,
N.A. as Collateral Agent (filed as Exhibit 10.9 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
10.11 -- Amended and Restated Promissory Note, dated March
21, 1994, by Deepwater Systems payable to DeepTech
(filed as Exhibit 10.10 to DeepTech's Registration
Statement on Form S-1, File No. 33- 76999, and
incorporated herein by reference).
10.12 -- Subordinated Convertible Note Purchase Agreement,
dated February 14, 1994, between Tatham Offshore and
DeepTech (filed as Exhibit 10.63 to Amendment No. 2 to
DeepTech's Registration Statement on Form S-1, File No.
33-73538, and incorporated herein by reference).
10.13 -- Employee Stock Option Plan of DeepTech (filed as Exhibit
10.12 to DeepTech's Registration Statement on Form S-1,
File No. 33-73538, and incorporated herein by reference).
10.14 -- Employment Agreement, dated December 1, 1992, between
DeepTech and Grant E. Sims, together with amendment
thereto dated December 30, 1993 (filed as Exhibit 10.13
to DeepTech's Registration Statement on Form S-1, File
No. 33-73538, and incorporated herein by reference).
10.15 -- Letter agreement, dated December 11, 1991, among Conrad
P. Albert, Thomas P. Tatham and DeepTech (filed as
Exhibit 10.14 to DeepTech's Registration Statement on
Form S-1, File No. 33-73538, and incorporated herein by
reference).
10.16 -- Letter agreement, dated February 21, 1994, among Steven
L. Gerard, Thomas P. Tatham and DeepTech (filed as
Exhibit 10.15 to Amendment No. 2 to DeepTech's
Registration Statement on Form S-1, File No. 33-73538,
and incorporated herein by reference).
10.17 -- Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank of
Texas, N.A., as Trustee (filed as Exhibit 10.17 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
10.18 -- Form of Indemnification Agreement, dated as of January
1, 1994, entered into between DeepTech and each director
of DeepTech (filed as Exhibit 10.18 to DeepTech's
Registration Statement on Form S- 1, File No. 33-76999,
and incorporated herein by reference).
10.19 -- Letter Agreement dated March 22, 1995 between Tatham
Offshore and Ewing Bank Gathering Company, L.L.C.
amending the Gathering Agreement dated July 1, 1992
(filed as Exhibit 10.44 to DeepTech's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.20 -- Gas Purchase Agreement, dated July 26, 1993, between
Offshore Marketing and Tatham Offshore (filed as Exhibit
10.17 to Tatham Offshore's Registration Statement on
Form S-1, File No. 33-70120, and incorporated herein by
reference).
10.21 -- Condensate Purchase Agreement, dated July 26, 1993,
between Offshore Marketing and Tatham Offshore (filed as
Exhibit 10.18 to Tatham Offshore's Registration
Statement on Form S-1, File No. 33- 70120, and
incorporated herein by reference).
66
<PAGE> 69
10.22 -- Farmout Agreement, dated October 1, 1994, between Tatham
Offshore, F-W Oil Interests, Inc., O.P.I.
International, Inc., and J. Ray McDermott Properties,
Inc. (filed as Exhibit 10.48 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.23 -- Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Ewing Bank
Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area,
Offshore Louisiana, dated May 13, 1988, by and among
Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal
Limited Partnership I-1981 (filed as Exhibit 10.22 to
Tatham Offshore's Registration Statement on Form S-1,
File No. 33-70120, and incorporated herein by
reference).
10.24 -- Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Viosca
Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca
Knoll Area Offshore Louisiana, dated July 7, 1993, by
and among Tatham Offshore, Petrofina Delaware,
Incorporated and Fina Oil and Chemical Company (filed as
Exhibit 10.23 to Tatham Offshore's Registration
Statement on Form S-1, File No. 33-70120, and
incorporated herein by reference).
10.25 -- Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).
10.26 -- DeepTech International Inc. Employee Equity Incentive
Plan (filed as Exhibit 10.90 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.27 -- Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of F-W Oil Interests,
Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.28 -- Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.92 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 and incorporated herein by reference).
10.29 -- Master Agreement, dated as of November 29, 1995, by and
among Highwood Partners, L.P., DeepTech International
Inc., DeepFlex Production Services, Inc., FPS III, Inc.
and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.30 -- Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).
10.31 -- Credit Agreement, dated as of February 16, 1996, among
DeepFlex Production Services, Inc., Citicorp USA, Inc.,
as administrative agent, and the several lenders from
time to time parties thereto (filed as Exhibit 10.3 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.32 -- First Amended and Restated Drilling Make-Ready Agreement
dated November 29, 1996 between RIGCO North America,
L.L.C. and Schlumberger Technology Corporation (Sedco
Forex Division) (filed as Exhibit 10.1 to the DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).
67
<PAGE> 70
10.33 -- Note Purchase and Exchange Agreement dated January 17,
1997 between DeepTech International Inc. and BT
Securities Corporation (filed as Exhibit 10.2 to the
DeepTech's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, Commission File Number 0-23934
and incorporated herein by reference).
10.34 -- Credit Agreement dated September 30, 1996 among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
advisor, syndication agent, arranger, collateral and
documentation agent and administrative agent, and the
banks and other financial institutions from time to time
party thereto (filed as Exhibit 10.3 to the DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).
10.35* -- Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International Inc.
and Leviathan Gas Pipeline Company dated as of May 1,
1997.
10.36* -- Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International Inc.
and Tatham Offshore, Inc. dated as of May 1, 1997.
10.37* -- Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International Inc.
and Offshore Gas Marketing, Inc. dated as of May 1,
1997.
10.38* -- Fourth Amendment to Management Agreement Between
DeepTech International Inc. and DeepFlex Production
Services, Inc. dated as of May 1, 1997.
10.39* -- First Amendment to Management Agreement Between DeepFlex
Production Services, Inc. and RIGCO North America,
L.L.C. dated as of May 1, 1997.
10.40* -- Second Amendment dated as of April 23, 1997 to the
Credit Agreement among RIGCO North America, L.L.C.,
Lehman Commercial Paper, Inc., as Advisor, Syndication
Agent and Arranger, Hibernia National Bank, as
Collateral and Documentation Agent and BHF- Bank
Aktiengesellschaft, as Administrative Agent.
21.1* -- List of subsidiaries of DeepTech International Inc.
23.1* -- Consent of Independent Accountants, Price Waterhouse
LLP.
23.2* -- Consent of Ryder Scott Company Petroleum Engineers,
Independent Petroleum Engineers.
23.3* -- Consent of Netherland, Sewell & Associates, Inc.
Independent Petroleum Engineers.
24.1 -- Power of Attorney (included on the signatures hereof).
27* -- Financial Data Schedule
99.1 -- Audited Financial Statements and Supplementary
Information of Leviathan Gas Pipeline Partners, L.P. for
the fiscal year ended December 31, 1996 (as filed on
March 26, 1997 under Commission File No. 1-11680 and
incorporated herein by reference).
99.2 -- Audited Financial Statements and Supplementary
Information of Tatham Offshore, Inc. for fiscal year
ended June 30, 1997 (as filed on September 26, 1997
under Commission File No. 0-22892 and incorporated
herein by reference).
* Filed herewith.
(b) Reports on Form 8-K
None.
68
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this First Amendment to the
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DEEPTECH INTERNATIONAL INC.
(Registrant)
By: /s/ Donald V. Weir
----------------------------------
Donald V. Weir
Director and Chief
Financial Officer
October 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE:
<S> <C>
* /s/ Donald V. Weir
- ---------------------------------------- --------------------------------------------
Thomas P. Tatham Donald V. Weir
Chairman of the Board and Director and Chief Financial Officer
Chief Executive Officer (Principal Financial Officer and Principal
October 28, 1997 Accounting Officer)
October 28, 1997
* *
- ---------------------------------------- --------------------------------------------
Charles M. Darling, IV Grant E. Sims
President, General Counsel and Director Director
October 28, 1997 October 28, 1997
*
- ----------------------------------------
Janet E. Sikes
Director, Treasurer and Secretary
October 28, 1997
</TABLE>
69
<PAGE> 72
<TABLE>
<CAPTION>
SIGNATURE:
<S> <C>
* *
- ---------------------------------------- -------------------------------------------
Robert E. Fox Laney Chouest, M.D.
Director Director
October 28, 1997 October 28, 1997
* *
- ---------------------------------------- -------------------------------------------
Michael H. Lam Steven L. Gerard
Director Director
October 28, 1997 October 28, 1997
* *
- ---------------------------------------- -------------------------------------------
Nancy K. Quinn Ralph Eads
Director Director
October 28, 1997 October 28, 1997
*
- ----------------------------------------
Conrad P. Albert
Director
October 28, 1997
* By: /s/ Donald V. Weir
-----------------------------------
Donald V. Weir
Attorney-in-fact
</TABLE>
70
<PAGE> 73
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES:
Report of Independent Accountants................................................F-2
Consolidated Balance Sheet as of June 30, 1997 and 1996..........................F-3
Consolidated Statement of Operations for the Years Ended June 30, 1997,
1996 and 1995..................................................................F-4
Consolidated Statement of Cash Flows for the Years Ended June 30, 1997,
1996 and 1995..................................................................F-5
Consolidated Statement of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995...................................................F-6
Notes to Consolidated Financial Statements.......................................F-7
LEVIATHAN GAS PIPELINE COMPANY:
Report of Independent Accountants................................................F-29
Balance Sheet as of June 30, 1997 and 1996.......................................F-30
Statement of Operations for the Years Ended June 30, 1997, 1996 and 1995.........F-31
Statement of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995.........F-32
Statement of Stockholder's Equity for the Years Ended June 30, 1997,
1996 and 1995..................................................................F-33
Notes to Financial Statements....................................................F-34
</TABLE>
F-1
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DeepTech International Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders'
equity present fairly, in all material respects, the financial position of
DeepTech International Inc. and its subsidiaries at June 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
September 19, 1997
F-2
<PAGE> 75
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,522 $ 10,102
Accounts receivable 13,189 7,014
Accounts receivable from affiliates 344 155
Notes receivable from affiliates 400 2,134
Other current assets 989 28
--------- ---------
Total current assets 27,444 19,433
--------- ---------
Property and equipment 127,665 26,572
Less: Accumulated depreciation 2,159 705
--------- ---------
Property and equipment, net 125,506 25,867
--------- ---------
Construction fund collateral account 554 --
Equity investments -- 4,586
Receivables from affiliates 60,000 100,490
Deferred income taxes 9,214 2,451
Debt issue costs, net 5,500 3,606
--------- ---------
Total assets $ 228,218 $ 156,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,686 $ 7,347
Accounts payable to affiliates 9,657 6,782
Notes payable 7,893 23,327
Notes payable to affiliates -- 6,640
Interest payable 465 546
Accrued liabilities -- 1,233
--------- ---------
Total current liabilities 24,701 45,875
Long-term debt 164,561 97,534
Accumulated losses and/or cash distributions of
equity investees in excess of investment and
accumulated equity earnings 32,679 196
Other noncurrent liabilities 394 360
--------- ---------
Total liabilities 222,335 143,965
--------- ---------
Minority interests in consolidated subsidiaries 344 186
--------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
19,471,228 and 17,016,510 shares issued and outstanding as of
June 30, 1997 and 1996, respectively 195 171
Additional paid-in capital 30,646 17,579
Accumulated deficit (25,302) (5,468)
--------- ---------
5,539 12,282
--------- ---------
Total liabilities and stockholders' equity $ 228,218 $ 156,433
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 76
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Oil and gas sales $ 116,408 $ 44,491 $ 18,708
Drilling services 14,609 -- --
Equity in earnings 3,045 10,484 5,990
Other 55 459 742
--------- --------- ---------
134,117 55,434 25,440
--------- --------- ---------
Costs and expenses:
Oil and gas purchases 115,192 43,696 17,447
Operating expenses 8,201 478 215
Losses of equity investees 17,736 1,859 13,909
Depreciation and amortization 1,453 215 326
General and administrative expenses 2,413 3,807 3,495
--------- --------- ---------
144,995 50,055 35,392
--------- --------- ---------
Operating (loss) income (10,878) 5,379 (9,952)
Loss on investments (12,049) -- --
Interest and other income 9,692 14,654 8,212
Interest and other financing costs (14,566) (13,112) (10,006)
--------- --------- ---------
(Loss) income before minority interests and income taxes (27,801) 6,921 (11,746)
Minority interests in consolidated subsidiaries (1,376) (905) (519)
--------- --------- ---------
(Loss) income before income taxes (29,177) 6,016 (12,265)
Income tax (benefit) expense (9,343) 2,374 (3,837)
--------- --------- ---------
Net (loss) income $ (19,834) $ 3,642 $ (8,428)
========= ========= =========
Net (loss) income per share $ (1.10) $ 0.21 $ (0.55)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 77
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(19,834) $ 3,642 $ (8,428)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Minority interests in consolidated subsidiaries 1,376 905 519
Depreciation and amortization 1,453 215 326
Amortization of debt issue costs 3,145 1,266 865
Equity in earnings (3,045) (10,484) (5,990)
Losses of equity investees 17,736 1,859 13,909
Distributions from equity investments 11,860 8,467 8,147
Loss on investments 12,049 -- --
Costs and expenses settled by issuance of stock 1,141 6,257 --
Deferred income taxes and other (6,732) 261 (6,135)
Changes in operating working capital:
Increase in accounts receivable (6,120) (5,298) (243)
(Increase) decrease in accounts receivable from
affiliates (189) (3,136) 4,082
(Increase) decrease in other current assets (962) 135 12
(Decrease) increase in accounts payable and accrued
liabilities (1,895) 743 (2,525)
Increase in accounts payable to affiliates 2,875 5,274 1,409
Decrease in interest payable (81) (615) (2,360)
(Decrease) increase in interest payable to affiliates -- (4,383) 710
-------- -------- --------
Net cash provided by operating activities 12,777 5,108 4,298
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (61,616) (24,633) (11,504)
Proceeds from sale of semisubmersible drilling rig -- -- 2,927
Advances to affiliates (1,317) (22,283) (3,021)
Repayment of advances to affiliates 3,485 26,274 --
Investment in equity investees (1,017) (5,000) --
-------- -------- --------
Net cash used in investing activities (60,465) (25,642) (11,598)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable 77,992 29,258 2,927
Repayments of notes payable (32,650) (2,927) (1,590)
Repayment of notes payable to affiliates (640) (332) --
Increase in restricted cash (554) -- --
Debt issue costs (4,538) (994) --
Proceeds from issuance of common stock 11,951 -- 1,043
Dividends on subsidiary common stock (1,453) (1,156) (301)
-------- -------- --------
Net cash provided by financing activities 50,108 23,849 2,079
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,420 3,315 (5,221)
Cash and cash equivalents at beginning of year 10,102 6,787 12,008
-------- -------- --------
Cash and cash equivalents at end of year $ 12,522 $ 10,102 $ 6,787
======== ======== ========
</TABLE>
Supplemental disclosures to the statement of cash flows - see Note 12.
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 78
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, 1994 14,859 $ 149 $ 9,444 $ (682) $ 8,911
Issuance of common stock 806 8 2,734 -- 2,742
Note receivable related to the issuance
of 300,000 shares of common stock
to an officer/director of DeepTech -- -- (1,200) -- (1,200)
Tax benefit related to exercise of
employee stock options -- -- 357 -- 357
Net loss for the year ended
June 30, 1995 -- -- -- (8,428) (8,428)
------ -------- -------- -------- --------
Balance, June 30, 1995 15,665 157 11,335 (9,110) 2,382
Issuance of common stock 1,352 14 6,244 -- 6,258
Net income for the year ended
June 30, 1996 -- -- -- 3,642 3,642
------ -------- -------- -------- --------
Balance, June 30, 1996 17,017 171 17,579 (5,468) 12,282
Issuance of common stock 2,454 24 13,067 -- 13,091
Net loss for the year ended
June 30, 1997 -- -- -- (19,834) (19,834)
------ -------- -------- -------- --------
Balance, June 30, 1997 19,471 $ 195 $ 30,646 $(25,302) $ 5,539
====== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral pat of this financial statement.
F-6
<PAGE> 79
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Contract Drilling Services
DeepFlex Production Services, Inc. ("DeepFlex Services"), 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 December 1995, DeepFlex Services 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 Services and 50% by Highwood Partners. On
June 30, 1996, FPS V, Inc., a wholly-owned subsidiary of DeepFlex Services,
acquired Highwood Partners' 50% interest.
In March 1995, DeepFlex Services 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 Services and 50% by Coflexip, operated the FPS Laffit
Pincay, a second generation semisubmersible drilling rig, through September 30,
1996.
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
Services. RIGCO also acquired the FPS Laffit Pincay from DeepFlex Partners in
exchange for payment-in-kind indebtedness ("PIK Notes") (See Notes 3, 4 and 5).
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's assets include interests in (i) nine
natural gas pipeline systems, (ii) a crude oil pipeline system, (iii) five
strategically located multi-purpose platforms, (iv) three producing oil and gas
properties and (v) 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.
As of June 30, 1997 and 1996, all the Preference Units of the Partnership were
owned by the public, representing a 72.7% effective limited partner interest in
the Partnership. Leviathan, through its ownership of all of the Common Units of
the Partnership, its 1% general partner interest in the Partnership and its
approximate 1% nonmanaging interest in certain subsidiaries of the Partnership,
owned a 27.3% effective interest in the Partnership as of June 30, 1997 and
1996.
Exploration, Development and Production
Tatham Offshore, Inc. ("Tatham Offshore"), an approximately 36.6%-owned
affiliate of DeepTech at June 30, 1997, (39% at June 30, 1996) 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 in the development of offshore pipeline infrastructure 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 (Note 10) and is currently engaged in the
development and production of the oil and gas reserves underlying these
properties.
F-7
<PAGE> 80
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Marketing
Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of
DeepTech, markets oil and gas production purchased from the Partnership, Tatham
Offshore and third-party producers.
NOTE 2 - 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"), including Dover Technology, Inc.
("Dover"), a 50%-owned subsidiary of DeepTech, through October 31, 1995. In
November 1995, Dover began functioning as an independent business unit and is
no longer controlled by DeepTech. Mr. Thomas P. Tatham (the Chief Executive
Officer, Chairman of the Board of Directors and principal stockholder of
DeepTech), key associates and management personnel of DeepTech individually own
the minority interests in consolidated subsidiaries at June 30, 1997 and 1996.
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 or in instances which the Company is reasonably assured that the
equity investees future net income will exceed cash distributions in excess of
previously accumulated earnings.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified to conform to the current
year's presentation.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.
Property and equipment
The cost of the semisubmersible drilling rigs is capitalized and depreciated
using the straight-line method over the drilling rigs' estimated useful lives
of 25 years. Repair and maintenance costs are charged to expense as incurred;
additions, improvements and replacements are capitalized.
The cost of property and equipment other than drilling rigs and oil and gas
properties is capitalized and depreciated using the double declining balance
method over the estimated useful lives of the assets of three to seven years.
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires recognition
of impairment losses on long-lived assets (including semisubmersible drilling
rigs) if the carrying amount of such assets, grouped at the lowest level for
which there are identifiable cash flows that are largely independent of the
cash flows from other assets, exceeds the estimated undiscounted future cash
flows of such assets. Measurement of any impairment loss is based on the fair
value of the assets. Implementation of SFAS No. 121 did not have a material
adverse effect on the Company's financial condition or results of operations.
Capitalization of interest
Interest and other financing costs are capitalized in connection with
construction projects as part of the cost of the asset and amortized over the
related asset's estimated useful life.
F-8
<PAGE> 81
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenue recognition
Revenue from oil and gas sales is recognized upon passage of title at the point
of delivery. Revenue from drilling rig services is recognized in the period the
services are provided.
The Company treats management fees from its unconsolidated subsidiaries as a
reduction of the related expenses. Interest earned on advances to
unconsolidated subsidiaries is recorded as interest income.
Income taxes
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities.
Earnings per share
Earnings (loss) per share is computed by dividing common equity in net income
(loss) by the weighted average number of common shares and common stock
equivalents outstanding during the period. The weighted average number of
common shares and common stock equivalents outstanding for the years ended June
30, 1997, 1996 and 1995 was 18,026,983 shares, 17,168,571 shares and 15,314,646
shares, respectively.
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. Pro forma basic net loss per share for the
Company is equal to the primary loss per share for the year ended June 30, 1997
as presented on the accompanying consolidated statement of operations. Pro
forma basic net income per share and pro forma dilutive earnings per share is
$0.22 per share and $0.21 per share, respectively, for the year ended June 30,
1996.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the related reported amounts of
revenue and expenses during the reporting period. Such estimates and
assumptions include those made regarding: (i) estimated useful lives of
depreciable assets, (ii) oil and gas reserve disclosure and (iii) valuation of
long-term receivables. Actual results could differ from those estimates.
Management believes that its estimates are reasonable.
Other
The fair values of the financial instruments included in the Company's assets
and liabilities approximate their carrying values.
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 based 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 ("APB") 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 June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the method public entities report information
about operating segments in both interim and annual financial statements issued
to shareholders and requires related disclosures about products and services,
geographic areas and major customers. This statement is effective for fiscal
years beginning after December 15, 1997. The Company is currently evaluating
the disclosure requirements of this statement but does not anticipate that
adoption will have a significant impact on its consolidated financial
statements.
F-9
<PAGE> 82
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - PROPERTY AND EQUIPMENT:
The Company's property and equipment, net of accumulated depreciation, is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
<S> <C> <C>
Semisubmersible drilling rigs $ 126,287 $ 24,684
Office furniture and equipment 856 856
Oil and gas properties, at cost,
using successful efforts method 255 255
Other 267 777
--------- ---------
127,665 26,572
Accumulated depreciation (2,159) (705)
--------- ---------
$ 125,506 $ 25,867
========= =========
</TABLE>
Additions to property and equipment during the year ended June 30, 1997 related
to the acquisition of the FPS Laffit Pincay from DeepFlex Partners for the
assumption of all of the then outstanding PIK Notes of $40,056,000 and the
acquisition, refurbishment and upgrade of the FPS Bill Shoemaker. During the
years ended June 30, 1997, 1996 and 1995, the Company capitalized $7,140,000,
$1,021,000 and $2,417,000, respectively, of interest costs related to the
refurbishment and upgrade of the semisubmersible drilling rigs.
Both the FPS Laffit Pincay and the FPS Bill Shoemaker are currently operated
under management and charter agreements with Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex"). Sedco Forex is responsible
for all aspects of operating and marketing of the drilling rigs, subject to
agreed budgets and certain authorizations for new contracts. The agreements
with Sedco Forex provide them with a management fee and the recoupment of their
actual operating costs. During July 1997, Sedco Forex completed the
refurbishment and upgrade on the FPS Bill Shoemaker and mobilized the rig to
offshore eastern Canada where it is conducting drilling operations.
All of the Company's oil and gas properties are located in the Gulf and all of
the Company's oil and gas development, production and exploration activities
are conducted by the Partnership and Tatham Offshore. See Note 14. The
Company's investments in oil and gas properties at June 30, 1997 and 1996 were
comprised primarily of unproved properties.
NOTE 4 - EQUITY INVESTMENTS:
At June 30, 1997, accumulated equity losses and/or cash distributions of equity
investees exceeded the Company's investments and accumulated equity earnings by
$32,679,000 and was primarily comprised of $26,991,000 and $5,681,000 related
to the Company's investments in Tatham Offshore and the Partnership,
respectively. As of June 30, 1997, the Company owned approximately 37% of
Tatham Offshore's common stock, 26% of Tatham Offshore's Series A 12%
Convertible Exchangeable Preferred Stock ("Series A Preferred Stock"), 76% of
Tatham Offshore's Series C 4% Convertible Exchangeable Preferred Stock ("Series
C Preferred Stock") and 86% of Tatham Offshore's Mandatory Redeemable Preferred
Stock. Loss on investments on the accompanying consolidated statement of
operations includes $11,539,000 related to the Company's investment in Tatham
Offshore's Series A, Series C and Mandatory Redeemable Preferred Stocks. The
Company's investment in the Partnership and DeepFlex Partners totaled
$3,118,000 and $1,258,000 at June 30, 1996, respectively. As of June 30, 1996,
accumulated losses of Tatham Offshore in excess of the Company's investment
totaled $196,000.
F-10
<PAGE> 83
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
------------------------------ ----------------------------- -------------------------------
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 18,621 $ 25,867 $ 9,438 $ 20,636 $ -- $ 659
Noncurrent assets 383,259 399,373 32,069 76,494 -- 42,403(a)
Current liabilities 11,260 35,961 1,540 9,489 -- 57
Long-term debt 217,000 182,412 60,000 60,000 -- 40,490(a)
Other noncurrent liabilities 9,915 15,242 7,663 8,779 -- --
</TABLE>
- ----------------
(a) Effective September 30, 1996, RIGCO acquired the FPS Laffit Pincay for the
assumption of all PIK Notes then outstanding of $40,056,000. Accordingly, at
June 30, 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>
Equity in earnings
---------------------------------------------------------------------
Year ended June 30, 1996
Year ended -------------------------------------- Year ended
June 30, 1997 DeepFlex June 30, 1995
Partnership Partnership Partners Total Partnership
<S> <C> <C> <C> <C> <C>
Operating revenue $ 112,563 $ 60,915 $ 4,668 $ 36,218
Other income 2,139 1,056 5,130 3,158
Operating expenses (22,359) (12,651) (3,927) (10,306)
Depreciation (48,443) (15,614) (760) (6,728)
Impairment, abandonment and
other (21,222) -- -- --
Other expenses (10,821) (386) (2,491) (414)
--------- --------- --------- ---------
Net income 11,857 33,320 2,620 21,928
Effective ownership percentage 27.3% 27.3% 50% 27.3%
--------- --------- --------- ---------
3,237 9,096 1,310 5,986
Other (276)(a) 35 -- (50)
Other equity investees 84 43 -- 54
--------- --------- --------- ---------
Equity in earnings $ 3,045 $ 9,174 $ 1,310 $ 10,484 5,990
========= ========= ========= ========= =========
Distributions $ 11,861 $ 8,467 $ -- $ 8,467 8,147
========= ========= ========= ========= =========
</TABLE>
- ---------------
(a) Represents additional income (loss) 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.
F-11
<PAGE> 84
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
Equity losses of Tatham Offshore
------------------------------------- Equity losses of
Year ended June 30, DeepFlex Partners (a)
------------------------------------- ------------------------
1997 1996 1995 Year ended June 30, 1997
------------------------
<S> <C> <C> <C> <C>
Operating revenue $ 20,723 $ 16,070 $ 8,054 $ 4,448
Other income 571 22,754 2,332 185
Operating expenses (13,853) (20,115) (32,316) (2,805)
Depreciation (5,364) (1,758) (1,210) (504)
Impairment, abandonment and other (41,674) (8,000) -- (2,645)
Other expenses (8,374) (8,161) (11,631) (1,195)
-------- -------- -------- --------
Net (loss) income (47,971) 790 (34,771) (2,516)
Preferred stock dividends (3,920) (281) -- --
-------- -------- -------- --------
Net (loss) income available to common
shareholders/partners (51,891) 509 (34,771) (2,516)
Effective ownership percentage 37% 39% 40% 50%
-------- -------- -------- --------
(19,200) 200 (13,909) (1,258)
Intercompany profit (b) 877 (1,947) -- --
Preferred stock dividends (c) 851 -- -- --
Other equity investees (205) -- -- --
Other (d) 1,199 (112) -- --
-------- -------- -------- --------
Equity in losses $(16,478) $ (1,859) $(13,909) $ (1,258)
======== ======== ======== ========
Dividends/distributions $ -- $ -- $ -- $ --
======== ======== ======== ========
</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 June 30,
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 (Note 10), both of which are equity
investees of DeepTech. The profit is recognized as the oil and gas
reserves are produced.
(c) Represents the Company's share of Tatham Offshore's Series A and Series C
Preferred Stock dividends.
(d) Includes the effect of a change during the period in DeepTech's ownership
percentage of Tatham Offshore's common equity.
The Partnership and its subsidiaries distribute 100% of available cash, as
defined in the Partnership Agreement, 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.
F-12
<PAGE> 85
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summarizes the Incentive Distributions made by the Partnership to
Leviathan:
<TABLE>
<CAPTION>
Incentive
Distribution Paid Distribution
For the Month Per Preference and Paid
Quarter Ended Paid Common Unit to Leviathan
------------------ ------------- ----------------- -------------
<S> <C> <C> <C>
June 30, 1996 August 1996 $ 0.35 $ 95,000
September 30, 1996 November 1996 0.375 190,000
December 31, 1996 February 1997 0.40 381,000
March 31, 1997 May 1997 0.425 571,000
June 30, 1997 August 1997 0.45 1,168,000
</TABLE>
NOTE 5 - RECEIVABLES FROM AFFILIATES:
Subordinated Convertible Promissory Notes Receivable
As of June 30, 1997, Tatham Offshore had issued to DeepTech $60,000,000
aggregate principal amount of Subordinated Convertible Promissory Notes (the
"Subordinated Notes") for funds received. The Subordinated Notes bore interest
at a rate of 11 3/4% per annum, payable quarterly. Effective July 1, 1997, the
interest rate increased to 13% per annum. Interest income related to these
notes totaled $7,040,000, $7,060,000 and $7,050,000 for the years ended June
30, 1997, 1996 and 1995, respectively. Under the terms of the Subordinated
Notes, the principal amount of the notes was payable in seven equal annual
installments of approximately $8,571,000 commencing August 1, 1999. See Note
13.
PIK Notes
As of June 30, 1996, DeepFlex Partners owed DeepFlex Services $40,490,000
aggregate principal amount of PIK Notes which is included in receivables from
affiliates on the accompanying consolidated balance sheet. Any additional
advances from DeepFlex Services to DeepFlex Partners were evidenced by PIK
Notes. The PIK Notes from DeepFlex Partners bore interest at 12% per annum,
payable quarterly, and were due on March 31, 2002. Interest was paid under
certain circumstances by the issuance of additional PIK Notes. The PIK Notes
were subordinate to all indebtedness incurred by DeepFlex Partners and were
secured by a first mortgage on the FPS Laffit Pincay. On September 30, 1996,
RIGCO acquired the FPS Laffit Pincay from DeepFlex Partners for the assumption
of the then outstanding PIK Notes payable to DeepFlex Services of $40,056,000.
Interest income related to the PIK Notes totaled $1,195,000 and $5,884,000 for
the years ended June 30, 1997 and 1996, respectively.
NOTE 6 - INDEBTEDNESS:
Outstanding indebtedness is comprised of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996
------------------- ---------------------
Current Long-term Current Long-term
Notes payable: (in thousands)
<S> <C> <C> <C> <C>
Highwood Notes $ -- $ -- $17,258 $ --
Term Loan -- -- 6,069 5,931
RIGCO Credit Facility 7,893 68,357 -- --
Senior Notes -- 80,854 -- 80,603
Wilrig AS promissory notes -- -- -- 11,000
Senior Subordinated Notes -- 15,350 -- --
Notes payable to affiliates:
DeepTech Subordinated Notes (a) -- -- 6,640 --
</TABLE>
- ---------------
(a) Includes notes payable to Mr. Tatham and other minority interest
stockholders of $6,000,000 and $640,000, respectively.
F-13
<PAGE> 86
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Highwood Notes
Prior to June 30, 1996, the Company issued promissory notes to Highwood
Partners (the "Highwood Notes") for an aggregate principal amount of
$17,258,000 for the purchase of 100% interest in the FPS Bill Shoemaker. In
July 1996, the Company borrowed an additional $992,000 for refurbishment costs
bringing the total amount of outstanding Highwood Notes to $18,250,000. The
Company retired the Highwood Notes in connection with obtaining the RIGCO
Credit Facility discussed below. The Highwood Notes were secured by a mortgage
on the FPS Bill Shoemaker and a portion of the PIK Notes, bore interest at 12%
per annum, payable quarterly and were due March 31, 1997. Interest related to
the Highwood Notes totaled $522,000 and $1,021,000 for the years ended June 30,
1997 and 1996, respectively.
Term Loan
In February 1996, DeepFlex Services entered into a term loan agreement to
borrow $12 million (the "Term Loan") from a syndicate of commercial lenders.
The Term Loan bore interest at 12% per annum, payable monthly, was due on July
15, 1997 and was secured by substantially all tangible and intangible assets
owned by DeepFlex Services. In addition, the lenders required an assignment by
DeepFlex Services of the first preferred ship mortgage on the FPS Laffit
Pincay. In connection with the Term Loan, DeepTech issued to the lenders
warrants to purchase an aggregate of up to 2,666,667 shares of DeepTech common
stock at $4.50 per share. One of the lenders, Citibank, N.A., required that Mr.
Tatham guarantee $6,000,000 of the Term Loan. In exchange for Mr. Tatham
agreeing to guarantee a portion of the Term Loan, Mr. Tatham received from
Citibank, N.A. warrants to purchase 333,333 shares of DeepTech common stock,
twenty-five percent of the loan fees payable by the Company to Citibank, N.A.
and a quarterly fee equal to 50 basis points per annum for the period the
guaranty was outstanding. Proceeds from the Term Loan were utilized to repay
$3,492,000 of the Short-Term Notes, discussed below, for expenses incurred in
connection with the Term Loan and for working capital and general corporate
requirements. DeepFlex Services incurred debt issue costs of $728,000 in
connection with the Term Loan which were amortized over the life of the
indebtedness. The Company retired the Term Loan in connection with obtaining
the RIGCO Credit Facility discussed below. Interest expense and amortization of
debt issue costs related to the Term Loan for the years ended June 30, 1997 and
1996 totaled $850,000 and $783,000, respectively.
RIGCO Credit Facility
On September 30, 1996, RIGCO entered into a $65 million senior secured credit
facility with a syndicate of lenders (the "RIGCO Credit Facility"). Proceeds
from the RIGCO 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. In April 1997, the RIGCO Credit Facility was amended
to provide for an additional $12,000,000 to fund the remaining refurbishments
and upgrades to the FPS Bill Shoemaker. The RIGCO Credit Facility was amended
in July 1997. The RIGCO Credit Facility (i) matures on September 30, 1998, (ii)
bears interest at the prime rate plus 3% per annum (11.5% at June 30, 1997),
payable quarterly, (iii) is secured by all tangible and intangible assets of
RIGCO including the two semisubmersible drilling rigs, (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 on December 31, 1996 and (v) is subject to customary conditions and
covenants, including the maintenance of a minimum level of working capital. As
of June 30, 1997, amounts outstanding under the RIGCO Credit Facility totaled
$76,250,000. Debt issue costs related to the RIGCO Credit Facility of
$4,400,000 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 $7,282,000 for the year ended June
30, 1997. The construction fund collateral account on the accompanying balance
sheet represents remaining funds available from the RIGCO Credit Facility which
are restricted for use related to the refurbishment and upgrade of 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.
As required by the RIGCO Credit Facility, RIGCO purchased an interest rate cap
from a financial institution which established a maximum rate of 11.74% per
annum on $36.5 million of outstanding principal for the remaining term of the
credit facility.
F-14
<PAGE> 87
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Senior Notes
In March 1994, DeepTech completed a public offering of $82,000,000 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. The Senior Notes are secured by a
security interest in and pledge of substantially all of DeepTech's material
assets including all of the outstanding capital stock held or acquired by
DeepTech in each of its subsidiaries as well as all of the Subordinated Notes
held or acquired by DeepTech and any securities into which or for which such
Subordinated Notes may be converted or exchanged pursuant to their terms. The
Senior Notes may be redeemed at the option of DeepTech, in whole or in part, at
any time on or after June 15, 1999 at 106% of their principal amount, plus
accrued interest, and at 100% of such principal amount, plus accrued and unpaid
interest, to the date of redemption from and after June 15, 2000. Interest
expense and amortization of debt issue costs related to the Senior Notes
totaled $10,759,000, $10,731,000 and $10,705,000 for the years ended June 30,
1997, 1996 and 1995, respectively. DeepTech issued the Senior Notes at a 2.278%
discount of $1,868,000 and this discount is being amortized to interest expense
over the life of the debt. For the years ended June 30, 1997, 1996 and 1995,
interest expense includes $250,000, $222,000 and $197,000, respectively, of
amortization of this bond discount. The effective interest rate for the years
ended June 30, 1997, 1996 and 1995 was 12.5%.
The Indenture governing the Senior Notes limits the ability of DeepTech to
incur additional indebtedness, subject to certain exceptions, and provides that
upon a Change of Control, Partnership Leverage Event or Tatham Conversion Event
(each defined therein), DeepTech is required to offer to purchase the Senior
Notes at 101%, 100% and 101%, respectively, of the principal amount thereof,
plus accrued and unpaid interest to the date of purchase. See Note 13. In
addition, the Indenture provides that if DeepTech's Asset Coverage Ratio
(defined therein) falls below 2.0 to 1.0, DeepTech is required to offer to
repurchase at 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, an amount of Senior Notes sufficient to increase the Asset
Coverage Ratio to not less than specified levels. At June 30, 1997, the
Company's Asset Coverage Ratio was 3.4 to 1.0.
Wilrig AS promissory notes
In November 1994, the Company acquired from Wilrig AS ("Wilrig") a
semisubmersible drilling rig, the FPS Eddie Delahoussaye. In connection with
this acquisition, the Company obtained an option to acquire the FPS Bill
Shoemaker (Note 1) from Wilrig. As consideration, the Company issued to Wilrig
(i) promissory notes in the aggregate principal amount of $11,000,000 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
(the "Wilrig Warrants"). Interest expense related to this debt was payable
quarterly at 10% per annum and totaled $617,000, $1,100,000 and $712,000 for
the years ended June 30, 1997, 1996 and 1995, respectively. See "Senior
Subordinated Notes" below.
Senior Subordinated Notes
On January 15, 1997, DeepTech issued $6,000,000 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 DeepTech Subordinated Notes, as
defined below, 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 $9,350,000
principal amount of the Wilrig Notes, 1,100,000 Wilrig Warrants and $6,000,000
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% per annum, 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
F-15
<PAGE> 88
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 $784,000 for the year ended June 30, 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 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. See Note 8. In addition, Mr. Tatham
agreed to waive certain prepayment provisions in the Renewal Notes.
Notes payable to affiliates
In December 1995 and January 1996, DeepTech paid $300,000 in principal of the
notes payable to affiliates due on January 1, 1996. In January 1996, the
Company issued $10,087,000 in unsecured notes payable (the "Short-Term Notes")
bearing interest at 18% per annum and due on February 15, 1996 to affiliates in
settlement of the remaining $6,672,000 of principal and $3,415,000 of interest
which was due on January 1, 1996.
In February 1996, DeepTech refinanced $6,640,000 of Short-Term Notes in the
form of subordinated unsecured notes issued by DeepTech to affiliates (the
"DeepTech Subordinated Notes") and guaranteed by DeepFlex Services on a
subordinated basis to the Term Loan. The DeepTech Subordinated Notes were due
January 15, 1997 and bore interest at 15% per annum, payable quarterly. In
connection with this refinancing, these affiliates received a 4% refinancing
fee of $266,000 and warrants to purchase 1,475,555 shares of DeepTech common
stock at $4.50 per share. See "Senior Subordinated Notes" above. Interest
expense and amortization of debt issue costs related to the DeepTech
Subordinated Notes totaled $691,000 and $503,000 for the years ended June 30,
1997 and 1996, respectively.
Other
Future minimum principal payments of long-term indebtedness are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
1998 $ --
1999 68,357
2000 15,350
2001 82,000
</TABLE>
NOTE 7 - MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES:
During the years ended June 30, 1997, 1996 and 1995, Leviathan Holdings paid
$9,687,000, $7,707,000 and $2,009,000, respectively, in dividends to its common
stockholders. DeepTech owns an 85% interest in Leviathan Holdings.
F-16
<PAGE> 89
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 - STOCKHOLDERS' EQUITY:
Under various agreements and arrangements, DeepTech has authorized the issuance
of stock warrants to noteholders, employees, directors and financial
institutions. The stock warrants are exercisable at various dates through
November 2005 at varying prices which were not less than the fair market value
of the stock on the date of grant. The following table summarizes these
warrants:
<TABLE>
<CAPTION>
Exercise Expiration
Warrants price date
<S> <C> <C> <C>
Outstanding at June 30, 1994 3,050,948 $3.41 - $13.50 July 1994 - December 1998
Granted 1,100,000 $10.00 November 1997
Exercised (306,024) $3.41
----------
Outstanding at June 30, 1995 3,844,924
Granted 4,615,195 $4.50 - $5.00 July 1997 - November 2005
Expired unexercised (337,938) $3.41 - $4.00
----------
Outstanding at June 30, 1996 8,122,181
Expired unexercised (30,847) $4.25 - $13.50
Exercised (2,276,592) $4.00 - $10.00
----------
Outstanding and exercisable at
June 30, 1997 5,814,742
==========
</TABLE>
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
the Company's financing of the acquisition of the FPS Bill Shoemaker (Note 6)
and subsequently assigned such warrants to Westgate. In June 1997, DeepTech
registered the shares of common stock acquired by Westgate pursuant to the
warrant agreement as well as certain other common stock.
In December 1996 and January 1997, DeepTech 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. In December 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.
Additionally, in May 1997, DeepTech issued 722,917 shares of DeepTech common
stock to Mr. Tatham pursuant to the exercise of warrants under this offer. Mr.
Tatham exercised 447,917 warrants at $4.50 per share and 275,000 warrants at
$10.00 per share. As a result, the expiration date on 2,168,749 warrants
currently held by Mr. Tatham was extended by one year.
In July and August 1997, DeepTech issued 456,000 shares of common stock
pursuant to the exercise of outstanding warrants at prices ranging from $4.00
to $4.50 per share.
In connection with the original acquisition financing for the FPS Laffit
Pincay, the Company had granted a 25% net profits interest in the economic
profits from the sale, lease, charter or other operation of the semisubmersible
rig to the noteholder. In late 1995, the parties agreed to the full, final and
complete resolution of all claims arising out of the loan agreement. In
exchange for releasing and forever discharging the Company from any obligations
under the loan agreement, the noteholder received $300,000 and 125,000 shares
of DeepTech common stock valued as of November 30, 1995. Final closing,
settlement and payment was completed on February 5, 1996. DeepFlex Partners
issued additional PIK Notes to DeepFlex Services to reimburse its settlement
costs.
In December 1994, the Company agreed to charter a multi-purpose service vessel
for use in the Gulf from Alpha Marine Services (the "Edison Chouest Agreement")
for a two-year period commencing in May 1995 with an option to extend the
charter for up to an additional 13 years. In return, the Company agreed to pay
an initial base day rate of $6,980 as a charter fee for use of the vessel. The
Company executed an agreement with Alpha Marine Services effective October 1,
1995 to terminate the Edison Chouest Agreement in exchange for the issuance by
DeepTech of 100,000 shares of its common stock to Alpha Marine Services.
F-17
<PAGE> 90
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with an extension of the initial maturity date of DeepTech
indebtedness in May 1990, certain noteholders received warrants to purchase
502,419 shares of DeepTech common stock. In July and September 1994,
respectively, a noteholder and Mr. Tatham exercised options to purchase 1,466
and 304,558 shares, respectively, of DeepTech common stock at the exercise
price of $3.41 per share.
Additionally, in connection with a borrowing during the year ended June 30,
1994, two noteholders were issued 875,000 warrants to purchase DeepTech common
stock at $4.00 per share exercisable until December 15, 1998, unless the
noteholders elected, on or before December 15, 1995, to surrender the warrants
and receive an additional 10% per annum of interest on the notes for the period
the notes were outstanding. In December 1995, as the warrants were not
surrendered, interest expense was reduced by $626,000.
Stock Compensation Plans
DeepTech has two fixed option plans, the Amended Equity Incentive Plan (the
"Incentive Plan") and the Non-Employee Director Stock Option Plan (the
"Director Option Plan" and collectively with the Incentive Plan, the "Option
Plans"). Options to purchase a maximum of 4,000,000 shares and 2,000,000 shares
of DeepTech common stock may be issued pursuant to the Incentive Plan and the
Director Option Plan, respectively. The Incentive Plan, as amended, provides
the Company the ability to issue a variety of awards pursuant to the plan
including stock options, restricted stock, stock appreciation rights and stock
value equivalent awards.
DeepTech applies APB Opinion No. 25 and related interpretations in accounting
for its option plans, under which no compensation cost has been recognized. Had
compensation costs for the Option Plans been determined consistent with the
methodology prescribed under SFAS No. 123, the Company's net income (loss) and
earnings (losses) per share would have been adjusted to the pro forma amounts
presented below:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1997 1996
(In thousands)
<S> <C> <C>
Net (loss) income As presented $ (19,834) $ 3,642
Pro forma (20,331) 2,786
(Losses) earnings per share As presented $ (1.10) $ 0.21
Pro forma (1.13) 0.16
</TABLE>
The following table summarizes the Option Plans:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,153,752 $ 4.89 1,780,000 $ 10.05 690,000 $ 10.48
Granted 900,000 5.88 3,771,425 4.08 1,390,000 8.53
Exercised (28,127) 4.00 (1,126,712) 4.09 (300,000) 4.00
Expired unexercised (170,000) 9.99 (125,961) 4.00 -- --
Canceled -- -- (1,145,000) 11.12 -- --
--------- -------- ---------- -------- --------- -------
Outstanding at end of year 3,855,625 $ 4.90 3,153,752 $ 4.89 1,780,000 $ 10.05
========= ======== ========== ======== ========= =======
Options exercisable at June 30, 2,516,250 $ 4.96 1,958,752 $ 5.48 168,000 $ 9.37
========= ======== ========== ======== ========= =======
</TABLE>
F-18
<PAGE> 91
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The weighted average fair value of options granted during the years ended June
30, 1997 and 1996 was $4.34 and $3.23, respectively. The fair value of the
stock options granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1997 1996
<S> <C> <C>
Volatility 79% 81%
Risk-free interest rate 6.6% 6.2%
Dividend yield 0% 0%
Expected life 8 years 10 years
</TABLE>
In June 1996, DeepTech issued 99,066 shares of common stock to outside
directors pursuant to the exercise of options granted under the Director Option
Plan in settlement of directors' fees and meeting attendance fees for the year
ended June 30, 1996. In addition, DeepTech issued 150,000 shares of restricted
DeepTech common stock to employees pursuant to the Incentive Plan during the
year ended June 30, 1997. These shares of restricted stock fully vest to the
employees in November 2000.
NOTE 9 - INCOME TAXES:
For income tax purposes, DeepTech files a consolidated income tax return with
its 80% or more owned subsidiaries.
The provision for income taxes for the years ended June 30, 1997, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
U.S. federal:
Current $(1,879) $ 1,261 $ 1,764
Deferred (7,464) 1,113 (5,601)
------- ------- -------
Total provision $(9,343) $ 2,374 $(3,837)
======= ======= =======
</TABLE>
The deferred tax liabilities (assets) at June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
(in thousands)
<S> <C> <C>
Investment in Partnership $ 5,223 $ 2,424
Depreciable/amortizable assets 6,236 1,892
-------- --------
Gross deferred liability 11,459 4,316
-------- --------
Investment in Tatham Offshore (13,739) (3,695)
Other (1,581) (152)
Net operating loss ("NOL") and alternative
minimum tax credit carryforwards (5,353) (2,920)
-------- --------
Gross deferred asset (20,673) (6,767)
-------- --------
Deferred tax asset $ (9,214) $ (2,451)
======== ========
</TABLE>
At June 30, 1997, DeepTech has approximately $1,560,000 of minimum tax credit
carryforwards which may be utilized in future years to offset regular tax
liabilities.
F-19
<PAGE> 92
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of DeepTech's income tax provision computed by applying the
statutory federal income tax rate of 34% to pretax income from continuing
operations for the years ended June 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Federal income tax at statutory rate $(9,920) $ 2,045 $(4,170)
Nondeductible and other 577 329 333
------- ------- -------
Total $(9,343) $ 2,374 $(3,837)
======= ======= =======
</TABLE>
NOTE 10 - RELATED PARTY TRANSACTIONS:
Management agreements
DeepTech has entered into management agreements with certain of its
subsidiaries, including Leviathan and Tatham Offshore, pursuant to which each
affiliate is charged an annual management fee in exchange for operational,
financial, accounting and administrative services. The management fee is
intended to reimburse DeepTech for the estimated costs of the services provided
to each affiliate. Leviathan, as general partner of the Partnership, is
entitled to reimbursement of all reasonable expenses incurred by it or its
affiliates for or on behalf of the Partnership including amounts payable by
Leviathan to DeepTech under its management agreement. The Partnership and
Tatham Offshore were each charged an annual management fee equal to 40% of
DeepTech's unreimbursed overhead through October 31, 1995. Effective November
1, 1995, DeepTech redetermined the level of services provided to each of its
subsidiaries and amended the management agreements with Leviathan and Tatham
Offshore to provide for an annual management fee of 45.3% and 27.4%,
respectively, of DeepTech's overhead. In addition, in November 1995, Dover
began functioning as a stand-alone business unit with its own management and
employees and therefore terminated its management agreement with DeepTech.
Effective July 1, 1996, DeepTech amended the management agreements with
Leviathan and Tatham Offshore to provide for an annual management fee of 54%
and 24%, respectively, of DeepTech's overhead. The management agreements expire
on June 30, 2002, and may thereafter be terminated on 90 days' notice by either
of the parties.
During the years ended June 30, 1997, 1996 and 1995, Leviathan charged the
Partnership $7,377,000, $6,068,000 and $4,967,000, respectively, of fees
payable to DeepTech pursuant to the terms of its management agreement. In
addition, the management agreement also 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 years ended June 30, 1997 and
1996, Leviathan charged the Partnership $554,000 and $964,000, respectively, to
compensate DeepTech for additional taxable income allocated to Leviathan.
During the years ended June 30, 1997, 1996 and 1995, Tatham Offshore was
charged $3,279,000, $4,436,000 and $4,967,000, respectively, under its
management agreement. On June 30, 1996, DeepFlex Services exercised 4,670,957
Tatham Offshore warrants to purchase an equal number of shares of Series A
Preferred Stock at $1.00 per share by offsetting the then outstanding
receivable from Tatham Offshore for costs allocated under the management
agreement by $4,670,957.
Property Acquisition
On June 30, 1995, Flextrend Development entered into a purchase and sale
agreement (the "Purchase and Sale Agreement"), with Tatham Offshore. Pursuant
to the Purchase and Sale Agreement, Flextrend Development acquired, subject to
certain reversionary interests, a 75% working interest in its Viosca Knoll
Block 817, a 50% working interest in Garden Banks Block 72 and a 50% working
interest in Garden Banks Block 117 properties (the "Assigned Properties") for
$30,000,000. Flextrend Development is entitled to retain all of the revenue
attributable to the Assigned Properties until it has received net revenue equal
to the Payout Amount (as defined below), whereupon Tatham Offshore is entitled
to receive a reassignment of its working interests, subject to reduction and
conditions as discussed below. "Payout Amount" is defined as an amount equal to
all costs incurred by Flextrend Development
F-20
<PAGE> 93
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
with respect to the Assigned Properties (including the $30,000,000 acquisition
cost paid to Tatham Offshore) plus interest thereon at a rate of 15% per annum.
Effective February 1, 1996, the Partnership entered into an agreement with
Tatham Offshore regarding certain transportation agreements that increased the
amount recoverable from the Payout Amount by $7,500,000 plus interest as
discussed below.
Effective December 10, 1996, Flextrend Development exercised its option to
permanently retain 50% of the assigned working interest in all three Assigned
Properties in exchange for forgiving 50% of the then-existing Payout Amount
exclusive of the $7,500,000 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, with 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 $94,020,000 to $50,760,000. 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
Properties will reduce the Payout Amount. As of June 30, 1997, the Payout
Amount totaled $45,918,000. The Partnership and Tatham Offshore have determined
that given the current estimates of commodity prices and proved reserves, the
possibility that the designated revenue from the Assigned Properties will be
sufficient to satisfy the Payout Amount is remote. Unless the Payout Amount is
reduced to zero, the Partnership will retain 100% of the revenue from its
working interest in the Assigned Properties.
Marketing, Transportation, Processing and Platform Access Agreements
Marketing Agreements. Offshore Marketing purchases substantially all oil and
gas production of the Partnership and Tatham Offshore. Through October 1995,
Offshore Marketing's agreement with Tatham Offshore provided for a sales price
that was based on contractually agreed-upon posted prices. In November 1995,
Offshore Marketing's agreement with Tatham Offshore was renegotiated to provide
Offshore Marketing fees equal to 2% of the sales value of crude oil and
condensate and $0.015 per dekatherm of natural gas. In July 1994, Offshore
Marketing began purchasing substantially all of the oil and gas production of
the Partnership on the same terms as the renegotiated Tatham Offshore contract.
Offshore Marketing's oil and gas purchases from affiliates are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------
1997 1996 1995
<S> <C> <C> <C>
The Partnership:
Oil $ 20,757 $ 974 $ 207
Gas 66,517 23,410 434
Tatham Offshore:
Oil and condensate 4,211 9,224 7,519
Gas 21,927 9,989 3,279
-------- -------- --------
$113,412 $ 43,597 $ 11,439
======== ======== ========
</TABLE>
Transportation, Processing and Platform Access Agreements. Tatham Offshore
entered into transportation, processing and platform access agreements with the
Partnership pursuant to a Master Gas Dedication Agreement in which Tatham
Offshore dedicated all production from its Garden Banks, Viosca Knoll, Ewing
Bank and Ship Shoal properties as well as certain adjoining areas of mutual
interest to the Partnership for transportation. In exchange, the Partnership
agreed to install the pipeline facilities necessary to transport production
from the areas and certain related facilities and to provide transportation
services with respect to such production. Tatham Offshore (i) is obligated to
pay commodity charges, based on the volume of oil and gas transported or
processed, (ii) is obligated to pay platform access fees and (iii) was
obligated to pay demand charge payments for such services under these
agreements. For the years ended June 30, 1997, 1996 and 1995, the Partnership
charged Tatham Offshore $4,126,000, $8,097,000 and $8,314,000, respectively,
for transportation, processing and platform access services.
F-21
<PAGE> 94
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective February 1, 1996, the Partnership agreed to release Tatham Offshore
from all remaining demand charge payments under the transportation agreements
covering Tatham Offshore's Ewing Bank and Ship Shoal properties, a total of
$17,800,000. Tatham Offshore remains obligated to pay the commodity charges
under these agreements as well as all platform access and processing fees
associated with the Viosca Knoll Block 817 lease. In exchange, Tatham Offshore
(i) issued to the Partnership 7,500 shares of its 9% Senior Preferred Stock
with a liquidation preference of $1,000 per share, (ii) added the sum of
$7,500,000 to the Payout Amount under the Purchase and Sale Agreement and (iii)
granted to the Partnership certain rights to acquire the Ship Shoal Block 331
platform. Each share of the 9% Senior Preferred Stock is senior in liquidation
preference to all other classes of Tatham Offshore stock and has a 9%
cumulative dividend, which is payable quarterly, and shall accrue to the extent
not paid. The Partnership has made an irrevocable offer to Tatham Offshore to
sell all or any portion of the 9% Senior Preferred Stock to Tatham Offshore or
its designee at a price equal to $1,000 per share, plus interest thereon at 9%
per annum less the sum of any dividends paid thereon. In the event Tatham
Offshore does not purchase the 9% Senior Preferred Stock on or before September
30, 1998, then for a period of 90 days thereafter it shall be convertible into
Series A Preferred Stock. The conversion ratio shall be equal to (i) the
liquidation preference plus accumulated but unpaid dividends divided by (ii)
the arithmetic average of closing prices for the 20 trading days following
October 1, 1998 of Series A Preferred Stock. The Partnership has the right to
utilize the Ship Shoal Block 331 platform and related facilities at a rental
rate of $1.00 per annum for such period as the platform is owned by Tatham
Offshore and located on the Ship Shoal Block 331, provided such use does not
interfere with lease operations or other activities of Tatham Offshore. In
addition, the Partnership has a right of first refusal relative to a sale of
the platform.
Compensation arrangements
Effective July 1, 1996, the Compensation Committee of DeepTech's Board of
Directors established a compensation plan for Mr. Tatham for the years ended
June 30, 1997 and 1998. Under this compensation plan, Mr. Tatham is to receive
a base salary of $1,000,000 per annum plus $1,400,000 per annum to be credited
against incentive bonuses as they are earned. The base salary and bonus are
payable at the rate of $200,000 per month. The Compensation Committee detailed
certain performance goals for the Company and Mr. Tatham which would allow him
to earn the incentive bonus payments over the two year period. The performance
goals are structured to reward Mr. Tatham for enhancing shareholder value
through increased earnings per share and the financing of key projects.
Effective July 1, 1995, DeepTech established three deferred compensation
arrangements: (i) a mandatory arrangement for Mr. Tatham, (ii) a mandatory
arrangement for certain senior executives of DeepTech and (iii) an optional
arrangement for all other employees of DeepTech. Pursuant to the terms of each
arrangement, participants deferred all or a portion of their cash salary until
no later than July 1, 1996. During each month in the deferral period, each
participant was entitled to receive options to purchase a number of shares of
either DeepTech or Tatham Offshore or Preference Units of the Partnership equal
to a percentage (ranging from 100% to 300% of their cash salary) divided by the
lesser of the closing price on June 30, 1995 (DeepTech - $4.00, Tatham Offshore
- - $3.50 and the Partnership - $11.875) or the average closing price for the
applicable month. Options were exercisable only by cancellation of the
participant's cash salary. Each participant earned credits equal to a multiple,
based on the option elected, of their deferred cash salary. Any participant
except Mr. Tatham could have received all or a portion of their salary in cash
if they did not elect to exercise any options. In November 1995, DeepTech
terminated the deferred compensation arrangement for all but three employees of
DeepTech. Mr. Tatham exercised options to purchase 600,125 shares of DeepTech
common stock in payment of salary due for the year ended June 30, 1996. In
addition, other senior executives and employees exercised options to purchase
127,521 shares of DeepTech common stock and 245,182 shares of Tatham Offshore
common stock through June 30, 1996 in connection with the deferred compensation
arrangements. As of June 30, 1996, 18,752 options remained outstanding under
the deferred compensation arrangements which were exercised in July 1996 to
purchase an equal number of shares of DeepTech common stock and 125,961 options
had expired unexercised. As a result of issuing its common stock, Tatham
Offshore received a $360,000 credit against its management fees payable to
DeepTech.
In June 1995, Mr. Tatham was awarded a $200,000 bonus, which the Company
allowed him to defer pursuant to the terms of the mandatory deferred
compensation arrangement discussed above. Accordingly, the Company accrued
$600,000 of compensation expense payable to Mr. Tatham representing 300% of the
bonus amount for use in the exercise of these options. In August 1995, Mr.
Tatham exercised options and received 150,000 shares of DeepTech common stock
in payment of this bonus.
F-22
<PAGE> 95
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with the sale of the semisubmersible drilling rig, the FPS Eddie
Delahoussaye, Mr. Tatham was awarded a $200,000 bonus which he also deferred
pursuant to the terms of the mandatory deferred compensation arrangement. In
September 1995, Mr. Tatham exercised options to purchase 150,000 shares of
DeepTech common stock in settlement of this bonus.
In June 1995, DeepTech granted stock options to purchase 300,000 shares of its
common stock to an officer/director of DeepTech at an exercise price of $4.00
per share. The options were exercised on June 12, 1995 in exchange for a note
payable to DeepTech in the aggregate amount of $1,200,000, bearing interest at
8% per annum, principal and interest due on June 12, 1998. This note will be
canceled by DeepTech if the officer/director continues to be employed by
DeepTech for three years from the date of grant. If the officer/director
voluntarily terminates employment with DeepTech prior to the end of the
three-year period from the date of grant, the officer/director must repay the
note by either (i) paying principal and interest or (ii) returning the stock to
DeepTech to satisfy repayment of principal and interest. The note receivable is
reflected as a reduction of stockholders' equity as of June 30, 1997, 1996 and
1995. General and administrative expenses for each of the years ended June 30,
1997 and 1996 includes $400,000 of compensation expense related to this note
receivable.
In November 1994, the Board authorized DeepTech to reimburse Mr. Tatham for
costs he incurred in connection with agreements he made with each of two
outside directors pursuant to which Mr. Tatham had granted each director
options to purchase 150,000 shares of the common stock of DeepTech held by Mr.
Tatham at his cost with respect thereto. These options were granted to the two
outside directors in connection with their appointment to the Board. In
September 1995, the Compensation Committee of the Board authorized DeepTech to
grant Mr. Tatham options to purchase 300,000 shares of DeepTech's common stock
at $5.00 per share, the estimated fair market value at the date of grant, and
to pay Mr. Tatham $705,000 which was settled in part by canceling Mr. Tatham's
obligation under an unsecured demand note in the original principal amount of
$600,000.
In December 1992, as an incentive for employment, DeepTech transferred 5% of
its equity interest in Offshore Marketing to an officer and director of
DeepTech who was then an officer of Offshore Marketing and granted the officer
375,000 warrants, one-fifth of which vest annually through January 31, 1999, to
purchase shares of DeepTech common stock at $4.25 per share. As of June 30,
1997, the officer had exercised 150,000 of these warrants.
Affiliate receivables/payables
Dover charged Tatham Offshore $160,000, $601,000 and $747,000 for the years
ended June 30, 1997, 1996 and 1995, respectively, for services related to the
acquisition, development, exploration or evaluation of oil and gas properties.
On November 1, 1995, DeepTech agreed to assume $1,734,000 of Dover's accounts
receivable from Tatham Offshore in exchange for reducing Dover's payable to
DeepTech under a line of credit arrangement for a like amount. DeepTech then
converted the $1,734,000 of accounts receivable from Tatham Offshore into an
unsecured promissory note (the "Affiliate Note") which bore interest at 14.5%
per annum. Interest on the Affiliate Note was payable quarterly and the
principal was due and payable in six monthly installments which began on
January 31, 1997. Tatham Offshore has repaid the Affiliate Note as of June 30,
1997. Interest income related to the Affiliate Note totaled $202,000 and
$170,000 for the years ended June 30, 1997 and 1996, respectively.
In October 1995, DeepFlex Services entered into a bridge loan agreement (the
"Bridge Loan") with Tatham Offshore whereby DeepFlex Services agreed to make
$12,500,000 of interim bridge financing available to fund a portion of Tatham
Offshore's working capital and capital requirements. DeepFlex Services advanced
Tatham Offshore $8,000,000 under the Bridge Loan. All indebtedness outstanding
under the Bridge Loan accrued interest at a rate of 15% per annum. Interest
income related to outstanding advances under the Bridge Loan totaled $210,000
for the year ended June 30, 1996. The terms of the Bridge Loan required Tatham
Offshore to undertake an equity offering or to implement another refinancing or
asset disposition sufficient to repay the outstanding indebtedness under the
Bridge Loan. On January 31, 1996, DeepFlex Services subscribed for the purchase
of 10,000,000 Tatham Offshore warrants, pursuant to the exercise of Rights
which had been assigned from DeepTech, at a cost of $5,000,000, which was paid
through the forgiveness of $5,000,000 of principal and interest due under the
Bridge Loan. In February 1996, Tatham Offshore used offering proceeds to repay
the remaining principal and accrued interest outstanding under the Bridge Loan.
F-23
<PAGE> 96
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In January and April 1995, an officer/director of DeepTech executed unsecured,
non-interest bearing demand notes in favor of DeepTech for $100,000 and
$300,000, respectively.
On August 22, 1994, Mr. Tatham executed an unsecured demand note in favor of
DeepTech for $1,000,000 bearing interest at 15% per annum. This demand note was
paid in full in October 1994. As of June 30, 1995, Mr. Tatham had executed an
unsecured demand note in favor of DeepTech for $600,000 bearing interest at 15%
per annum. In settlement of an obligation to Mr. Tatham, DeepTech canceled this
demand note in September 1995 as discussed above. In October 1995, Mr. Tatham
executed an unsecured demand note in favor of DeepTech for $250,000 bearing
interest at 15% per annum. This demand note was paid in full in January 1996.
A substantial portion of DeepTech's affiliated indebtedness was due to Mr.
Tatham. Interest expense for the years ended June 30, 1997, 1996 and 1995 was
$507,000, $840,000 and $605,000, respectively, related to the indebtedness due
to Mr. Tatham.
Other
In December 1996, DeepFlex Services exercised 1,016,957 Tatham Offshore
warrants to acquire shares of Tatham Offshore's Series C Preferred Stock at
$1.00 per share. The remaining 4,312,086 Tatham Offshore warrants held by
DeepFlex Services were automatically converted into 4,312,086 shares of Tatham
Offshore's Mandatory Redeemable Preferred Stock on January 1, 1997.
See Note 4.
As of June 30, 1997, Westgate, Elliott Associates, L.P. and Martley
International, Inc., which are entities under common control with Highwood
Partners, owned a total of 472,973 shares of DeepTech common stock and
6,037,784 shares of Tatham Offshore Series A Preferred Stock. During the years
ended June 30, 1997 and 1996, in connection with its acquisition and financing
of the FPS Bill Shoemaker, the Company entered into certain transactions with
Highwood Partners. See Notes 1, 6 and 8.
From February 1996 through May 1997, the FPS Laffit Pincay provided contract
drilling services to Flextrend Development. During this period, DeepFlex
Partners and RIGCO reported operating revenue totaling $9,116,000 and
$10,779,000, 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 Services on the PIK Notes. The RIGCO Credit Facility
does not permit payments on the PIK Notes until the credit facility has been
repaid.
In September 1995, Tatham Offshore reacquired an aggregate 25% working interest
in Viosca Knoll Block 817 and an approximate 12.5% working interest in the
remainder of Viosca Knoll Blocks 772/773, 774, 818 and 861 (collectively, the
"Viosca Knoll Properties") from two industry partners for a total of
$16,000,000 in convertible production payments payable from 25% of the net cash
flow from the Viosca Knoll Properties so acquired. The unpaid portion of the
production payments ($12,535,000 at June 30, 1997) is convertible into Tatham
Offshore common stock at any time during the first five years at $8.00 per
share. Under certain circumstances, the industry partners may require DeepTech
to purchase the convertible production payments for an amount equal to 50% of
the unrecovered portion thereof.
During the period from November 1994 through April 1995, the Company
periodically leased, on an hourly basis, an aircraft from Tatham Aviation
Services, Inc. ("Tatham Aviation") for business purposes. During November 1994
through May 1995, Tatham Aviation charged the Company $482,000 for the use of
the aircraft. Mr. Tatham is the sole shareholder, Chairman of the Board and
Chief Executive Officer of Tatham Aviation.
NOTE 11 - 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 its 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.
F-24
<PAGE> 97
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
The Company leases certain office space. Rental expense for the years ended
June 30, 1997, 1996 and 1995 totaled $717,000, $861,000 and $830,000,
respectively. Minimum net lease commitments under significant operating leases
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C> <C>
1998 $ 504
1999 504
2000 539
2001 545
2002 45
------------
$ 2,137
============
</TABLE>
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.
NOTE 12 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized, during each of the periods presented
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Interest $ 12,339 $ 16,843 $ 10,581
Taxes $ 1,000 $ 1,700 $ 1,171
</TABLE>
Supplemental disclosures of noncash investing and financing activities
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Additions to property and equipment $ (40,000) $ -- $ (11,000)
Acquisition of accounts receivable (56) -- --
Assumption of PIK Notes 40,056 -- --
Warrants issued in connection with the
RIGCO Credit Facility 250 -- --
Issuance of notes payable -- -- 11,000
Sale of the FPS Laffit Pincay -- -- 26,340
Sale of the FPS Eddie Delahoussaye -- 14,763 --
Increase in receivables from affiliates -- (14,763) (26,340)
Purchase of Series A Preferred Stock -- (4,671) --
Reduction of receivable from Tatham Offshore -- 4,671 --
------------ ------------ -----------
$ 250 $ -- $ --
============ ============ ===========
</TABLE>
F-25
<PAGE> 98
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED):
In September 1997, DeepTech and Tatham Offshore entered into an option
agreement to restructure the Subordinated Notes (the "Restructuring Option
Agreement"). Under the Restructuring Option Agreement, DeepTech has agreed to
forgive the next two scheduled interest payments under the Subordinated Notes,
a total of $3,900,000. In exchange, DeepTech received several options from
Tatham Offshore and has agreed to restructure the Subordinated Notes by
consummating one of the following transactions: (i) to convert all of the
principal amount outstanding under the Subordinated Notes into shares of Tatham
Offshore common stock at the market price at the time the option is exercised;
(ii) to purchase shares of 6% Senior Preferred Stock of Tatham Offshore with a
liquidation preference value of $60 million, the proceeds from which would be
used to prepay the outstanding balance of the Subordinated Notes; or (iii) to
purchase all of the outstanding capital stock of Tatham Offshore Development
Company, Inc. ("Tatham Offshore Development"), a wholly-owned subsidiary of
Tatham Offshore, for $60 million, the proceeds from which would be used to
prepay the outstanding balance of the Subordinated Notes. DeepTech is required
to select one of the above restructuring transactions on or before December 31,
1997.
Tatham Offshore Development holds the leasehold interests in the Ewing Bank
Blocks 958, 959, 1002 and 1003, the Sunday Silence Project. Under the
Restructuring Option Agreement, Tatham Offshore has the right to pursue the
sale, farmout or other disposition of the Sunday Silence Project during the
option period. In the event that Tatham Offshore enters into a sales agreement
for 100% of Tatham Offshore Development or the Sunday Silence Project prior to
the expiration of the option period, DeepTech has the further option to receive
50% of the cash proceeds from such transaction as prepayment of the
Subordinated Notes. If DeepTech elects this option, DeepTech has agreed to
convert the remaining principal amount of the Subordinated Notes into Tatham
Offshore common stock at the market price. For purposes of determining the
market price of Tatham Offshore's common stock under this agreement, the
parties have agreed that the market price shall be the average of the closing
prices for the ten trading days immediately preceding the exercise of the
option. DeepTech's option to acquire Tatham Offshore Development also includes
all of Tatham Offshore's interest in a drilling arrangement for the use of a
semisubmersible drilling rig in the Gulf. Tatham Offshore has agreed not to
sell less than 100% of its interest in Tatham Offshore Development pending the
exercise by DeepTech of one of its options.
If DeepTech elects to convert all or a portion of the Subordinated Notes into
Tatham Offshore common stock, DeepTech will be required to offer to repurchase
all of its Senior Notes at 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase. If the holders of the Senior
Notes require DeepTech to repurchase all or a portion of the Senior Notes,
management believes that the Company will be able to either refinance the
Senior Notes or obtain adequate financing to satisfy this obligation.
NOTE 14 - OIL AND GAS PROPERTIES:
The Company has incurred immaterial costs for oil and gas property acquisition,
exploration and development activities, whether capitalized or expensed at the
time these costs were incurred, during each of the years ended June 30, 1997,
1996 and 1995. The Company's share of its equity investees' costs incurred in
oil and gas property acquisition, exploration and development activities,
whether capitalized or expensed at the time these costs were incurred, totaled
$12,255,000, $17,365,000 and $21,124,000 for the years ended June 30, 1997,
1996 and 1995, respectively. The Company's share of its equity investees' net
capitalized costs at June 30, 1997 and 1996 were $33,029,000 and $45,809,000,
respectively. The Company's share of equity method investees' results of
operations for oil and gas activities totaled ($11,633,000), ($677,000) and
($7,293,000) for the years ended June 30, 1997, 1996 and 1995, respectively.
F-26
<PAGE> 99
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Oil and gas sales to major customers expressed as a percentage of oil and gas
sales for each period was as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------
1997 1996 1995
<S> <C> <C> <C>
Chevron U.S.A., Inc. 10% 20% --
Conoco, Inc. -- 13% --
Coral Energy Resources, L.P. -- 28% --
Natural Gas Clearinghouse 45% -- --
NGC Oil Trading and Transportation, Inc. 16% -- 37%
Public Service Electric and Gas, Inc. -- -- 28%
</TABLE>
At June 30, 1997, amounts due from Natural Gas Clearinghouse and NGC Oil
Trading and Transportation, Inc. represent approximately 65% and 8%,
respectively, of the Company's $9,596,000 accounts receivable related to its
oil and gas sales. At June 30, 1996, amounts due from Coral Energy Resources,
L.P., Chevron U.S.A., Inc. and NGC Oil Trading and Transportation, Inc.
represent approximately 51%, 23% and 18%, respectively, of the Company's
$6,985,000 accounts receivable related to its oil and gas sales.
Supplemental Oil and Gas Information (unaudited):
At June 30, 1997, 1996 and 1995, substantially all of the Company's oil and gas
reserves are owned by Tatham Offshore and the Partnership through Flextrend
Development. DeepTech's interest in proved reserves and standardized measure of
discounted future net cash flows as of June 30, 1997, 1996 and 1995 is shown
net to its effective interests in Tatham Offshore and the Partnership as of the
respective dates.
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Proved reserves
Oil/Condensate - barrels 702 5,556 5,788
Natural gas - MCF 13,676 36,940 30,698
</TABLE>
Estimates of Tatham Offshore's and the Partnership's reserves at June 30, 1997
have been made by the independent engineering consulting firms, Ryder Scott
Company Petroleum Engineers and Netherland & Sewell Associates, Inc. and the
Partnership's reservoir engineers, respectively. Net proved reserves are the
estimated quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Estimates of reserve quantities are based on sound geological and
engineering principles but, by their very nature, are still estimates that are
subject to substantial upward or downward revision as additional information
regarding producing and nonproducing fields and technology becomes available.
<TABLE>
<CAPTION>
June 30,
--------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Standardized measure of discounted
future net cash flows $ 22,271 $ 65,243 $ 30,812
</TABLE>
The standardized measure of discounted future net cash flows relating to the
Company's interest in Tatham Offshore and the Partnership's proved oil and gas
reserves is calculated and presented in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities". Accordingly, future cash
inflows were determined by applying year-end oil and gas prices to the
Company's interest in Tatham Offshore and the Partnership's estimated share of
future production from proved oil and gas reserves. Future production and
development costs were computed by applying year-end costs to future years.
Future income taxes were derived by applying year-end statutory tax rates to
the estimated net future cash flows from reserves taking into consideration NOL
carryforwards, where applicable. A prescribed 10% discount factor was applied
to the future net cash flows.
F-27
<PAGE> 100
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
values. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
F-28
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Leviathan Gas Pipeline Company (an indirect
subsidiary of DeepTech International Inc.)
In our opinion, the accompanying balance sheets and the related statements of
operations, of cash flows and of stockholder's equity present fairly, in all
material respects, the financial position of Leviathan Gas Pipeline Company at
June 30, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As more fully described in Note 1, the Company, an indirect subsidiary of
DeepTech International Inc., and its affiliates have significant transactions
with DeepTech International Inc. and its affiliates. Accordingly, the financial
statements of the Company should be read in conjunction with the consolidated
financial statements of DeepTech International Inc.
PRICE WATERHOUSE LLP
Houston, Texas
September 19, 1997
F-29
<PAGE> 102
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash $ 99 $ 99
Accounts receivable from parent 3,258 --
Account receivable from Partnership -- 155
------- -------
Total current assets 3,357 254
Equity investment -- 3,118
------- -------
Total assets $ 3,357 $ 3,372
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable to Partnership $ 199 $ --
Payable to parent -- 674
------- -------
Total current liabilities 199 674
Deferred tax liability-intercompany 3,665 1,530
Accumulated distributions of the Partnership
in excess of investment
and accumulated equity earnings 5,681 --
------- -------
Total liabilities 9,545 2,204
------- -------
Commitments and contingencies (Note 7)
Stockholder's equity (deficit):
Common stock, $.10 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 101 101
Accumulated earnings (6,290) 1,066
------- -------
(6,188) 1,168
------- -------
Total liabilities and stockholder's equity (deficit) $ 3,357 $ 3,372
======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-30
<PAGE> 103
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Equity in earnings of Partnership $ 2,961 $ 9,131 $ 5,936
-------- -------- --------
Costs and expenses:
General and administrative expenses (574) (1,016) 134
-------- -------- --------
Operating income 3,535 10,147 5,802
Interest income -- 1 13
-------- -------- --------
Income before intercompany charge for
income taxes 3,535 10,148 5,815
Intercompany charge for income taxes 1,204 3,450 1,977
-------- -------- --------
Net income $ 2,331 $ 6,698 $ 3,838
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-31
<PAGE> 104
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,331 $ 6,698 $ 3,838
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Equity in earnings of Partnership (2,961) (9,131) (5,936)
Distributions from Partnership 11,760 8,317 8,147
Deferred taxes - intercompany 2,135 1,715 (2,182)
Changes in operating working capital:
Decrease (increase) in accounts receivable from
Partnership 155 (81) (39)
Increase in accounts receivable from parent (3,258) -- --
Decrease in accounts payable -- -- (45)
Increase in accounts payable to Partnership 199 -- --
Decrease in accounts payable to affiliate -- (198) --
(Decrease) increase in payable to parent (674) 399 (4,074)
-------- -------- --------
Net cash provided by (used in) operating
activities 9,687 7,719 (291)
-------- -------- --------
Cash flows from financing activities:
Dividends paid on common stock (9,687) (7,707) (2,009)
-------- -------- --------
Net cash used in financing activities (9,687) (7,707) (2,009)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents -- 12 (2,300)
Cash and cash equivalents at beginning of year 99 87 2,387
-------- -------- --------
Cash and cash equivalents at end of year $ 99 $ 99 $ 87
======== ======== ========
Cash paid for taxes $ 2,668 $ 1,220 $ 8,443
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-32
<PAGE> 105
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Number of shares
---------------- Additional
Common Common paid-in Accumulated
stock stock capital earnings (deficit) Total
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 1 $ 1 $ 101 $ 246 $ 348
Dividends on common stock -- -- -- (2,009) (2,009)
Net income for the year ended
June 30, 1995 -- -- -- 3,838 3,838
------------ ------------ ----------- ------------ ------------
Balance, June 30, 1995 1 1 101 2,075 2,177
Dividends on common stock -- -- -- (7,707) (7,707)
Net income for the year ended
June 30, 1996 -- -- -- 6,698 6,698
------------ ------------ ----------- ------------ ------------
Balance, June 30, 1996 1 1 101 1,066 1,168
Dividends on common stock -- -- -- (9,687) (9,687)
Net income for the year ended
June 30, 1997 -- -- -- 2,331 2,331
------------ ------------ ----------- ------------ ------------
Balance, June 30, 1997 1 $ 1 $ 101 $ (6,290) $ (6,188)
============ ============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE> 106
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
Leviathan Gas Pipeline Company ("Leviathan"), a Delaware corporation and
wholly-owned subsidiary of Leviathan Holdings Company ("Leviathan Holdings"),
an 85%-owned subsidiary of DeepTech International Inc. ("DeepTech"), was formed
in 1989 to purchase, operate and expand offshore pipeline systems. The
remaining 15% of Leviathan Holdings is principally owned by members of the
management of DeepTech. DeepTech also owns and controls several other
subsidiaries which are engaged in various oil and gas related activities.
In 1993, Leviathan contributed substantially all of its pipeline operations to
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), a master limited
partnership, in connection with the initial public offering of Preference Units
representing limited partner interests in the Partnership. In June 1994, the
Partnership completed a public offering of additional Preference Units. The
Partnership's assets include interests in (i) nine natural gas pipelines, (ii)
a crude oil pipeline system, (iii) five strategically located multi-purpose
platforms, (iv) three producing oil and gas properties and (v) a dehydration
facility. Leviathan, as general partner, performs all management and operating
functions of the Partnership and its subsidiaries.
As of June 30, 1997 and 1996, all the Preference Units were owned by the
public, representing a 72.7% effective limited partner interest in the
Partnership. Leviathan, through its ownership of all of the Common Units of the
Partnership, its 1% general partner interest in the Partnership and its
approximate 1% nonmanaging interest in certain subsidiaries of the Partnership,
owned a 27.3% effective interest in the Partnership as of June 30, 1997 and
1996.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Management fees
Leviathan treats management fees from the Partnership as a reduction of the
related expenses.
Income taxes
Leviathan's results are included with its parent, DeepTech, in a consolidated
federal income tax return. DeepTech and its subsidiaries that are part of the
consolidated tax group, including Leviathan, are parties to intercompany tax
sharing agreements which describe the method of determining the intercompany
charge for income taxes. Under its tax sharing agreement, Leviathan is to
calculate a provision for income taxes equal to that which would be calculated
if Leviathan filed a separate income tax return. Tax loss and other tax benefit
carryforwards, except those subject to certain limitations, are similarly
calculated for Leviathan on a separate return basis. Federal income taxes
currently payable are remitted to DeepTech and state income taxes are remitted
to the applicable state taxing authorities.
Leviathan utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the related reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates used are reasonable.
F-34
<PAGE> 107
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Other
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 129, "Disclosure of Information About
Capital Structure". This statement, which establishes standards for disclosing
information about an entity's capital structure previously not required by
nonpublic entities, is effective for fiscal years beginning after December 15,
1997 and will not affect Leviathan.
NOTE 3 - EQUITY INVESTMENT:
Leviathan uses the equity method to account for its investment in the
Partnership. Cumulative cash distributions of the Partnership exceeded
Leviathan's investment and accumulated equity earnings by $5,681,000 at June
30, 1997. Leviathan is reasonably assured that the Partnership's future net
income will exceed cash distributions in excess of previously accumulated
earnings. Additional income is 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 below.
Leviathan's investment in the Partnership totaled $3,118,000 at June 30, 1996.
The summarized financial information for Leviathan's investment in the
Partnership is as follows:
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
SUMMARIZED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
<S> <C> <C>
Current assets $ 18,621 $ 25,867
Noncurrent assets 383,259 399,373
Current liabilities 11,260 35,961
Long-term debt 217,000 182,412
Other noncurrent liabilities 9,915 15,242
</TABLE>
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Operating revenue $ 112,563 $ 60,915 $ 36,218
Other income 2,139 1,056 3,158
Operating expenses (22,359) (12,651) (10,306)
Depreciation (48,443) (15,614) (6,728)
Impairment, abandonment and other (21,222) -- --
Other expenses (10,821) (386) (414)
--------- --------- ---------
Net income $ 11,857 $ 33,320 $ 21,928
========= ========= =========
Equity in earnings $ 2,961 $ 9,131 $ 5,936
========= ========= =========
Distributions $ 11,760 $ 8,317 $ 8,147
========= ========= =========
</TABLE>
The Partnership and its subsidiaries distribute 100% of available cash, as
defined in the Partnership Agreement, 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
F-35
<PAGE> 108
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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. The following summarizes the Incentive Distributions
made by the Partnership to Leviathan:
<TABLE>
<CAPTION>
Incentive
Distribution Paid Distribution
For the Month Per Preference and Paid
Quarter Ended Paid Common Unit to Leviathan
-------------------- ---------------- ----------------- -------------
<S> <C> <C> <C>
June 30, 1996 August 1996 $ 0.35 $ 95,000
September 30, 1996 November 1996 0.375 190,000
December 31, 1996 February 1997 0.40 381,000
March 31, 1997 May 1997 0.425 571,000
June 30, 1997 August 1997 0.45 1,168,000
</TABLE>
NOTE 4 - STOCKHOLDERS' EQUITY:
During the years ended June 30, 1997, 1996 and 1995, Leviathan paid $9,687,000,
$7,707,000 and $2,009,000, respectively, in dividends to its common
stockholder. DeepTech, through Leviathan Holdings, owns an effective 85%
interest in Leviathan.
NOTE 5 - INCOME TAXES:
Leviathan has been and will be included in the consolidated federal income tax
returns filed by DeepTech. Leviathan and DeepTech have entered into a tax
sharing agreement providing for the manner of determining payments with respect
to federal income tax liabilities (Note 2).
Deferred federal income taxes are primarily attributable to the differences in
depreciation rates and in the timing of recognizing income from the Partnership
for financial and tax reporting purposes.
The intercompany charges for federal income taxes are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
U.S. federal:
Current $ (931) $ 1,735 $ 4,159
Deferred 2,135 1,715 (2,182)
------------- -------------- --------------
Total provision $ 1,204 $ 3,450 $ 1,977
============= ============== ==============
</TABLE>
Amounts due to/(from) DeepTech for the intercompany charge for federal income
taxes are as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------
1997 1996
(In thousands)
<S> <C> <C>
Current portion $ (3,140) $ 459
Deferred portion 3,665 1,530
------------- --------------
Total $ 525 $ 1,989
============= ==============
</TABLE>
During the years ended June 30, 1997, 1996 and 1995, Leviathan paid DeepTech
$2,668,000, $1,220,000 and $8,443,000, respectively, pursuant to the tax
sharing agreement.
F-36
<PAGE> 109
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - RELATED PARTY TRANSACTIONS:
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 whereby DeepTech provides operational, financial,
accounting and administrative services to Leviathan. The management agreement
is intended to reimburse DeepTech for the estimated costs of its services
provided to Leviathan and the Partnership. During the years ended June 30,
1997, 1996 and 1995, Leviathan charged the Partnership $7,377,000, $6,068,000
and $4,967,000, respectively, for fees payable to DeepTech pursuant to the
terms of the management agreement. From July 1, 1994 through October 31, 1995,
the management agreement, as amended, provided for a management fee of 40% of
DeepTech's unreimbursed overhead. Effective November 1, 1995 and July 1, 1996,
the management agreement was amended to reflect the increased management
services associated with the Partnership's oil and gas drilling activities and
production and facilities expansion projects and provided for a management fee
equal to 45.3% and 54%, respectively, of DeepTech's unreimbursed overhead.
In addition, the management agreement also 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 years ended June 30, 1997 and
1996, Leviathan charged the Partnership $554,000 and $964,000, respectively,
which is included as an offset to general and administrative expenses, to
compensate DeepTech for additional taxable income allocated to Leviathan. The
management agreement expires on June 30, 2002, and may thereafter be terminated
on 90 days' notice by either party.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, Leviathan is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially effect the financial position of Leviathan.
Various legal actions which have arisen in the ordinary course of business are
pending with respect to the assets of Leviathan. Management believes that the
ultimate disposition of these actions, either individually or in the aggregate,
will not have a material adverse effect on the financial position or operations
of Leviathan.
NOTE 8 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
Leviathan's share of the Partnership's costs incurred in oil and gas property
development activities, whether capitalized or expensed at the time these costs
were incurred, totaled $10,988,000, $12,734,000 and $8,317,000 for the years
ended June 30, 1997, 1996 and 1995, respectively. Leviathan's share of the
Partnership's net capitalized costs at June 30, 1997 and 1996 totaled
$21,786,000 and $20,355,000, respectively. Leviathan's share of the
Partnership's results of operations for oil and gas activities totaled
$1,280,000, $2,276,000 and $51,000 for the years ended June 30, 1997, 1996 and
1995, respectively.
At June 30, 1997 and 1996, all of Leviathan's oil and gas reserves are owned by
the Partnership. Leviathan's interest in proved reserves and standardized
measure of discounted future net cash flows as of June 30, 1997 and 1996 is
shown net to its effective interest in the Partnership of 27.3%.
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
<S> <C> <C>
(In thousands)
Proved reserves
Oil/Condensate - barrels 773 1,064
Natural gas - MCF 10,804 14,749
</TABLE>
Estimates of the Partnership's reserves at June 30, 1997 have been made by the
independent engineering consulting firm, Netherland, Sewell & Associates, Inc.
and the Partnership's reservoir engineers. Net proved reserves are the
estimated quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable
F-37
<PAGE> 110
LEVIATHAN GAS PIPELINE COMPANY
(AN INDIRECT SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Estimates of reserve quantities
are based on sound geological and engineering principles but, by their very
nature, are still estimates that are subject to substantial upward or downward
revision as additional information regarding producing and nonproducing fields
and technology becomes available.
<TABLE>
<CAPTION>
June 30,
-----------------------------
1997 1996
(In thousands)
<S> <C> <C>
Standardized measure of discounted
future net cash flows $ 21,456 $ 28,947
</TABLE>
The standardized measure of discounted future net cash flows relating to
Leviathan's interest in the Partnership's proved oil and gas reserves is
calculated and presented in accordance with SFAS No. 69, "Disclosures About Oil
and Gas Producing Activities". Accordingly, future cash inflows were determined
by applying year-end oil and gas prices to Leviathan's interest in the
Partnership's estimated share of future production from proved oil and gas
reserves. Future production and development costs were computed by applying
year-end costs to future years. Future income taxes were derived by applying
year-end statutory tax rates to the estimated net future cash flows from the
Partnership's reserves. A prescribed 10% discount factor was applied to the
future net cash flows.
In Leviathan's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for
Leviathan's proved oil and gas reserves is not representative of the reserve
values. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
F-38
<PAGE> 111
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Item
Number Description
------ -----------
<S> <C> <C>
3.1 -- First Amended and Restated Certificate of Incorporation
of DeepTech (filed as Exhibit 3(i)(1) to Amendment No. 1
to DeepTech's Registration Statement on Form S-1, File
No. 33-76999, and incorporated herein by reference).
3.2 -- First Amended and Restated Bylaws of DeepTech (filed as
Exhibit 3(ii)(1) to Amendment No. 1 to DeepTech's
Registration Statement on Form S-1, File No. 33-76999,
and incorporated herein by reference).
4.1 -- Warrant Agreement, dated as of February 19, 1993,
between DeepTech and DLJ, as Initial Holder (filed as
Exhibit 4.1 to DeepTech's Registration Statement on
Form S-1, File No. 33-76999, and incorporated herein by
reference).
4.2 -- Conditional Warrant Agreement, dated as of February 19,
1993, between DeepTech and DLJ, as Initial Holder
(filed as Exhibit 4.2 to DeepTech's Registration
Statement on Form S-1, File No. 33-76999, and
incorporated herein by reference).
4.3 -- Warrant Agreement, dated as of December 14, 1993,
between DeepTech and DTI (filed as Exhibit 4.3 to
DeepTech's Registration Statement on Form S-1, File
No. 33-76999, and incorporated herein by reference).
4.4 -- Conditional Warrant Agreement, dated as of December 14,
1993, between DeepTech and DTI (filed as Exhibit 4.4 to
DeepTech's Registration Statement on Form S-1, File
No. 33-76999, and incorporated herein by reference).
</TABLE>
<PAGE> 112
4.5 -- Common Stock Purchase Warrant, dated December 15, 1992,
registered in the name of Citicorp USA, Inc. (filed as
Exhibit 4.5 to DeepTech's Registration Statement on Form
S-1, File No. 33-76999, and incorporated herein by
reference).
4.6 -- Common Stock Purchase Warrant, dated December 15, 1992,
registered in the name of BBU Mezzanine Fund II (filed
as Exhibit 4.6 to DeepTech's Registration Statement on
Form S-1, File No. 33-76999, and incorporated herein by
reference).
4.7 -- Form of Stock Subscription Warrant entered into by
DeepTech and each party set forth in Schedule I attached
thereto (filed as Exhibit 4.9 to Amendment No. 1 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
4.8 -- Warrant Agreement dated as of November 8, 1994 between
DeepTech and Wilrig AS (filed as Exhibit 4.11 to
DeepTech's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995 and incorporated herein by
reference).
10.1 -- First Amended and Restated Management Agreement,
effective as of July 1, 1992, between DeepTech and
Leviathan (filed as Exhibit 10.1 to DeepTech's Annual
Report on Form 10-K for the fiscal year ended June 30,
1994, Commission File Number 0-23934 and incorporated
herein by reference).
10.2 -- First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Leviathan (filed as Exhibit 10.76
to DeepTech's Registration Statement on Form S-1, File
No. 33-88688, and incorporated herein by reference).
10.3 -- Amended and Restated Management Agreement,
effective as of July 1, 1992, between DeepTech and
Tatham Offshore (filed as Exhibit 10.1 to Amendment No.
4 to Tatham Offshore's Registration Statement on Form
S-1, File No. 33-70120, and incorporated herein by
reference).
10.4 -- First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Tatham Offshore (filed as Exhibit
10.71 to DeepTech's Registration Statement on Form S-1,
File No. 33-88688, and incorporated herein by
reference).
10.5 -- Amended and Restated Management Agreement,
effective as of July 1, 1992, between DeepTech and
Offshore Marketing (filed as Exhibit 10.5 to Amendment
No. 2 to DeepTech's Registration Statement on Form S-1,
File No. 33-73538, and incorporated herein by
reference).
10.6 -- First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Offshore Marketing (filed as
Exhibit 10.74 to DeepTech's Registration Statement on
Form S-1, File No. 33-88688, and incorporated herein by
reference).
10.7 -- Form of Management Agreement dated as of January
19, 1995 between DeepTech and DeepFlex Production
Services, L.P. (filed as Exhibit 10.13 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 and incorporated herein by reference).
10.8 -- Indenture, dated March 21, 1994, between DeepTech
and First Interstate Bank of Texas, N.A., as Trustee,
relating to the Senior Notes (filed as Exhibit 10.7 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
<PAGE> 113
10.9 -- Stock Pledge Agreement, dated March 21, 1994,
between DeepTech and First Interstate Bank of Texas,
N.A., as Collateral Agent (filed as Exhibit 10.8 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
10.10 -- Note Pledge Agreement, dated March 21, 1994,
between DeepTech and First Interstate Bank of Texas,
N.A. as Collateral Agent (filed as Exhibit 10.9 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
10.11 -- Amended and Restated Promissory Note, dated March
21, 1994, by Deepwater Systems payable to DeepTech
(filed as Exhibit 10.10 to DeepTech's Registration
Statement on Form S-1, File No. 33-76999, and
incorporated herein by reference).
10.12 -- Subordinated Convertible Note Purchase Agreement,
dated February 14, 1994, between Tatham Offshore and
DeepTech (filed as Exhibit 10.63 to Amendment No. 2 to
DeepTech's Registration Statement on Form S-1, File No.
33-73538, and incorporated herein by reference).
10.13 -- Employee Stock Option Plan of DeepTech (filed as Exhibit
10.12 to DeepTech's Registration Statement on Form S-1,
File No. 33-73538, and incorporated herein by reference).
10.14 -- Employment Agreement, dated December 1, 1992, between
DeepTech and Grant E. Sims, together with amendment
thereto dated December 30, 1993 (filed as Exhibit 10.13
to DeepTech's Registration Statement on Form S-1, File
No. 33-73538, and incorporated herein by reference).
10.15 -- Letter agreement, dated December 11, 1991, among Conrad
P. Albert, Thomas P. Tatham and DeepTech (filed as
Exhibit 10.14 to DeepTech's Registration Statement on
Form S-1, File No. 33-73538, and incorporated herein by
reference).
10.16 -- Letter agreement, dated February 21, 1994, among Steven
L. Gerard, Thomas P. Tatham and DeepTech (filed as
Exhibit 10.15 to Amendment No. 2 to DeepTech's
Registration Statement on Form S-1, File No. 33-73538,
and incorporated herein by reference).
10.17 -- Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank of
Texas, N.A., as Trustee (filed as Exhibit 10.17 to
DeepTech's Registration Statement on Form S-1, File No.
33-76999, and incorporated herein by reference).
10.18 -- Form of Indemnification Agreement, dated as of January
1, 1994, entered into between DeepTech and each director
of DeepTech (filed as Exhibit 10.18 to DeepTech's
Registration Statement on Form S- 1, File No. 33-76999,
and incorporated herein by reference).
10.19 -- Letter Agreement dated March 22, 1995 between Tatham
Offshore and Ewing Bank Gathering Company, L.L.C.
amending the Gathering Agreement dated July 1, 1992
(filed as Exhibit 10.44 to DeepTech's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.20 -- Gas Purchase Agreement, dated July 26, 1993, between
Offshore Marketing and Tatham Offshore (filed as Exhibit
10.17 to Tatham Offshore's Registration Statement on
Form S-1, File No. 33-70120, and incorporated herein by
reference).
10.21 -- Condensate Purchase Agreement, dated July 26, 1993,
between Offshore Marketing and Tatham Offshore (filed as
Exhibit 10.18 to Tatham Offshore's Registration
Statement on Form S-1, File No. 33-70120, and
incorporated herein by reference).
<PAGE> 114
10.22 -- Farmout Agreement, dated October 1, 1994, between Tatham
Offshore, F-W Oil Interests, Inc., O.P.I.
International, Inc., and J. Ray McDermott Properties,
Inc. (filed as Exhibit 10.48 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.23 -- Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Ewing Bank
Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area,
Offshore Louisiana, dated May 13, 1988, by and among
Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal
Limited Partnership I-1981 (filed as Exhibit 10.22 to
Tatham Offshore's Registration Statement on Form S-1,
File No. 33-70120, and incorporated herein by
reference).
10.24 -- Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Viosca
Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca
Knoll Area Offshore Louisiana, dated July 7, 1993, by
and among Tatham Offshore, Petrofina Delaware,
Incorporated and Fina Oil and Chemical Company (filed as
Exhibit 10.23 to Tatham Offshore's Registration
Statement on Form S-1, File No. 33-70120, and
incorporated herein by reference).
10.25 -- Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).
10.26 -- DeepTech International Inc. Employee Equity Incentive
Plan (filed as Exhibit 10.90 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.27 -- Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of F-W Oil Interests,
Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995 and
incorporated herein by reference).
10.28 -- Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.92 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 and incorporated herein by reference).
10.29 -- Master Agreement, dated as of November 29, 1995, by and
among Highwood Partners, L.P., DeepTech International
Inc., DeepFlex Production Services, Inc., FPS III, Inc.
and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.30 -- Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).
10.31 -- Credit Agreement, dated as of February 16, 1996, among
DeepFlex Production Services, Inc., Citicorp USA, Inc.,
as administrative agent, and the several lenders from
time to time parties thereto (filed as Exhibit 10.3 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.32 -- First Amended and Restated Drilling Make-Ready Agreement
dated November 29, 1996 between RIGCO North America,
L.L.C. and Schlumberger Technology Corporation (Sedco
Forex Division) (filed as Exhibit 10.1 to the DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).
<PAGE> 115
10.33 -- Note Purchase and Exchange Agreement dated January 17,
1997 between DeepTech International Inc. and BT
Securities Corporation (filed as Exhibit 10.2 to the
DeepTech's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, Commission File Number 0-23934
and incorporated herein by reference).
10.34 -- Credit Agreement dated September 30, 1996 among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
advisor, syndication agent, arranger, collateral and
documentation agent and administrative agent, and the
banks and other financial institutions from time to time
party thereto (filed as Exhibit 10.3 to the DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).
10.35* -- Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International Inc.
and Leviathan Gas Pipeline Company dated as of May 1,
1997.
10.36* -- Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International Inc.
and Tatham Offshore, Inc. dated as of May 1, 1997.
10.37* -- Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International Inc.
and Offshore Gas Marketing, Inc. dated as of May 1,
1997.
10.38* -- Fourth Amendment to Management Agreement Between
DeepTech International Inc. and DeepFlex Production
Services, Inc. dated as of May 1, 1997.
10.39* -- First Amendment to Management Agreement Between DeepFlex
Production Services, Inc. and RIGCO North America,
L.L.C. dated as of May 1, 1997.
10.40* -- Second Amendment dated as of April 23, 1997 to the
Credit Agreement among RIGCO North America, L.L.C.,
Lehman Commercial Paper, Inc., as Advisor, Syndication
Agent and Arranger, Hibernia National Bank, as
Collateral and Documentation Agent and BHF- Bank
Aktiengesellschaft, as Administrative Agent.
21.1* -- List of subsidiaries of DeepTech International Inc.
23.1* -- Consent of Independent Accountants, Price Waterhouse
LLP.
23.2* -- Consent of Ryder Scott Company Petroleum Engineers,
Independent Petroleum Engineers.
23.3* -- Consent of Netherland, Sewell & Associates, Inc.
Independent Petroleum Engineers.
24.1 -- Power of Attorney (included on the signatures hereof).
27* -- Financial Data Schedule.
99.1 -- Audited Financial Statements and Supplementary
Information of Leviathan Gas Pipeline Partners, L.P. for
the fiscal year ended December 31, 1996 (as filed on
March 26, 1997 under Commission File No. 1-11680 and
incorporated herein by reference).
99.2 -- Audited Financial Statements and Supplementary
Information of Tatham Offshore, Inc. for fiscal year
ended June 30, 1997 (as filed on September 26, 1997
under Commission File No. 0-22892 and incorporated
herein by reference).
* Filed herewith.
<PAGE> 1
EXHIBIT 10.35
FOURTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND LEVIATHAN GAS PIPELINE COMPANY
This Fourth Amendment dated as of May 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending and
extending the First Amended and Restated Management Agreement dated as of June
27, 1994 (the "Agreement", as amended) between DeepTech International Inc. and
Leviathan Gas Pipeline Company. Unless otherwise defined in the Amendment, all
capitalized terms herein shall have the meanings ascribed to them in the
Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend and extend the term of the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Article 1. Article 1 of the Agreement is hereby
amended by:
a. Adding the defined term "Extended Term".
"Extended Term" means the five (5) year period from
the end of the Initial Term.
2. Amendment of Subsection 5.1. Section 5.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing it
with the following:
5.1 Initial and Extended Term. This Agreement shall be
effective from the Effective Date and shall continue
for five (5) years thereafter (the "Initial Term");
subject, however, to the terms of Section 5.2 hereof.
At the end of the Initial Term, this Agreement shall
continue in force and effect for the Extended Term;
subject, however to the terms of Section 5.2 hereof.
At the end of the Extended Term, this Agreement shall
continue in force and effect for subsequent one (1)
year periods unless terminated by either party
pursuant to Section 5.2.
3. Amendment of Subsection 5.2 (b). Section 5.2 (b) of the
Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
<PAGE> 2
5.2 (b) Optional Termination After the Extended Term, either
party may, ninety days prior to any anniversary of
the Effective Date, provide to the other Party written
notice of its intent to terminate this Agreement on
such anniversary date, whereupon this Agreement shall
terminate on the anniversary date specified in such
notice.
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
DEEPTECH INTERNATIONAL INC. LEVIATHAN GAS PIPELINE COMPANY, INC.
By: By:
----------------------------------- -----------------------------------
Donald V. Weir Grant E. Sims
Chief Financial Officer Chief Executive Officer
<PAGE> 1
EXHIBIT 10.36
FOURTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND TATHAM OFFSHORE, INC.
This Fourth Amendment dated as of May 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending and
extending the First Amended and Restated Management Agreement dated as of
November 10, 1993 (the "Agreement", as amended) between DeepTech International
Inc. and Tatham Offshore, Inc. Unless otherwise defined in the Amendment, all
capitalized terms herein shall have the meanings ascribed to them in the
Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend and extend the term of the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Article 1. Article 1 of the Agreement is hereby
amended by:
a. Adding the defined term "Extended Term".
"Extended Term" means the five (5) year period from
the end of the Initial Term.
2. Amendment of Subsection 5.1. Section 5.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing it
with the following:
5.1 Initial and Extended Term. This Agreement shall be
effective from the Effective Date and shall continue
for five (5) years thereafter (the "Initial Term");
subject, however, to the terms of Section 5.2 hereof.
At the end of the Initial Term, this Agreement shall
continue in force and effect for the Extended Term;
subject, however to the terms of Section 5.2 hereof.
At the end of the Extended Term, this Agreement shall
continue in force and effect for subsequent one (1)
year periods unless terminated by either party
pursuant to Section 5.2.
3. Amendment of Subsection 5.2 (b). Section 5.2 (b) of the
Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
<PAGE> 2
5.2 (b) Optional Termination After the Extended Term, either
party may, ninety days prior to any anniversary of
the Effective Date, provide to the other Party written
notice of its intent to terminate this Agreement on
such anniversary date, whereupon this Agreement shall
terminate on the anniversary date specified in such
notice.
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
DEEPTECH INTERNATIONAL INC. TATHAM OFFSHORE, INC.
By: By:
---------------------------------- -------------------------------------
Donald V. Weir Eric Lynn Hill
Chief Financial Officer Chief Financial Officer
<PAGE> 1
EXHIBIT 10.37
FOURTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND OFFSHORE GAS MARKETING, INC.
This Fourth Amendment dated as of May 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending and
extending the First Amended and Restated Management Agreement dated as of
November 10, 1993 (the "Agreement", as amended) between DeepTech International
Inc. and Offshore Gas Marketing, Inc. Unless otherwise defined in the
Amendment, all capitalized terms herein shall have the meanings ascribed to
them in the Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend and extend the term of the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Article 1. Article 1 of the Agreement is hereby
amended by:
a. Adding the defined term "Extended Term".
"Extended Term" means the five (5) year period from
the end of the Initial Term.
2. Amendment of Subsection 5.1. Section 5.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing it
with the following:
5.1 Initial and Extended Term. This Agreement shall be
effective from the Effective Date and shall continue
for five (5) years thereafter (the "Initial Term") ;
subject, however, to the terms of Section 5.2 hereof.
At the end of the Initial Term, this Agreement shall
continue in force and effect for the Extended Term;
subject, however to the terms of Section 5.2 hereof.
At the end of the Extended Term, this Agreement shall
continue in force and effect for subsequent one (1)
year periods unless terminated by either party
pursuant to Section 5.2.
3. Amendment of Subsection 5.2 (b). Section 5.2 (b) of the
Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
<PAGE> 2
5.2 (b) Optional Termination After the Extended Term, either
party may, ninety days prior to any anniversary of
the Effective Date, provide to the other Party written
notice of its intent to terminate this Agreement on
such anniversary date, whereupon this Agreement shall
terminate on the anniversary date specified in such
notice.
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
DEEPTECH INTERNATIONAL INC. OFFSHORE GAS MARKETING, INC.
By: By:
-------------------------------- ----------------------------------
Donald V. Weir Janet E. Sikes
Chief Financial Officer Chief Financial Officer
<PAGE> 1
EXHIBIT 10.38
FOURTH AMENDMENT TO
MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND DEEPFLEX PRODUCTION SERVICES, INC.
This Fourth Amendment dated as of May 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending and
extending the Management Agreement dated as of January 19, 1995 (the
"Agreement", as amended) between DeepTech International Inc. and DeepFlex
Production Services, Inc. Unless otherwise defined in the Amendment, all
capitalized terms herein shall have the meanings ascribed to them in the
Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend and extend the term of the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Article 1. Article 1 of the Agreement is hereby
amended by:
a. Adding the defined term "Extended Term".
"Extended Term" means the five (5) year period from
the end of the Initial Term.
2. Amendment of Subsection 5.1. Section 5.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing it
with the following:
5.1 Initial and Extended Term. This Agreement shall be
effective from the Effective Date and shall continue
for five (5) years thereafter (the "Initial Term");
subject, however , to the terms of Section 5.2 hereof.
At the end of the Initial Term, this Agreement shall
continue in force and effect for the Extended Term;
subject, however to the terms of Section 5.2 hereof.
At the end of the Extended Term, this Agreement shall
continue in force and effect for subsequent one (1)
year periods unless terminated by either party
pursuant to Section 5.2.
3. Amendment of Subsection 5.2 (b). Section 5.2 (b) of the
Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
<PAGE> 2
5.2 (b) Optional Termination. After the Extended Term, either
party may, ninety days prior to any anniversary of the
Effective Date, provide to the other Party written
notice of its intent to terminate this Agreement on
such anniversary date, whereupon this Agreement shall
terminate on the anniversary date specified in such
notice.
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
DEEPTECH INTERNATIONAL INC. DEEPFLEX PRODUCTION SERVICES, INC.
By: By:
--------------------------------- -----------------------------------
Donald V. Weir Harvey O. Fleisher
Chief Financial Officer Vice President
<PAGE> 1
EXHIBIT 10.39
FIRST AMENDMENT TO
MANAGEMENT AGREEMENT
BETWEEN DEEPFLEX PRODUCTION SERVICES, INC.
AND RIGCO NORTH AMERICA, L.L.C.
This First Amendment dated as of May 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending and
extending the Management Agreement dated as of September 25, 1996 (the
"Agreement", as amended) between DeepFlex Production Services, Inc. and RIGCO
North America, L.L.C.. Unless otherwise defined in the Amendment, all
capitalized terms herein shall have the meanings ascribed to them in the
Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend and extend the term of the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Article 1. Article 1 of the Agreement is hereby
amended by:
a. Adding the defined term "Extended Term".
"Extended Term" means the five (5) year period from
the end of the Initial Term.
2. Amendment of Subsection 5.1. Section 5.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing it
with the following:
5.1 Initial and Extended Term. This Agreement shall be
effective from the Effective Date and shall continue
for five (5) years thereafter (the "Initial Term") ;
subject, however , to the terms of Section 5.2 hereof.
At the end of the Initial Term, this Agreement shall
continue in force and effect for the Extended Term;
subject, however to the terms of Section 5.2 hereof.
At the end of the Extended Term, this Agreement shall
continue in force and effect for subsequent one (1)
year periods unless terminated by either party
pursuant to Section 5.2.
3. Amendment of Subsection 5.2 (b). Section 5.2 (b) of the
Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:
<PAGE> 2
5.2 (b) Optional Termination After the Extended Term, either
party may, ninety days prior to any anniversary of
the Effective Date, provide to the other Party written
notice of its intent to terminate this Agreement on
such anniversary date, whereupon this Agreement shall
terminate on the anniversary date specified in such
notice.
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
RIGCO NORTH AMERICA, L.L.C.. DEEPFLEX PRODUCTION SERVICES, INC.
By: By:
---------------------------------- ----------------------------------
Dennis A. Kunetka Janet E. Sikes
Senior Vice President Treasurer
<PAGE> 1
EXHIBIT 10.40
SECOND AMENDMENT
SECOND AMENDMENT, dated as of April 23, 1997 (this "Amendment"), to
the Credit Agreement, dated as of September 30, 1996" (as amended by the Global
Amendment and Assignment and Acceptance, dated as of October 9, 1996 and as may
be further amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among RIGCO NORTH AMERICA, L.L.C., a Delaware limited
liability company (the "Borrower"), the several banks and other financial
institutions from time to time parties thereto (the "Lenders"), LEHMAN
COMMERCIAL PAPER INC. ("LCPI"), as Advisor, Syndication Agent and Arranger,
HIBERNIA NATIONAL BANK, as Collateral and Documentation Agent and BHF-BANK
AKTIENGESELLSCHAFT, as Administrative Agent.
W I T N E S S E T H
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain Loans to the Borrower; and
WHEREAS, the Borrower has requested that the Lenders amend, and the
Lenders have agreed to amend, certain of the provisions of the Credit
Agreement, upon the terms and subject to the conditions set forth below;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. (a) As used herein, terms defined in this Amendment
or in the Credit Agreement are used herein as so defined.
(b) There shall be added to subsection 1.1 of the Credit Agreement in
the appropriate alphabetical order the following new defined terms:
"Second Amendment": the Second Amendment, dated as of April 23, 1997,
to this Agreement.
"Second Amendment Effective Date": the date of effectiveness of the
Second Amendment.
"Additional Term Loan": the term loan made by Lehman Commercial Paper
Inc. to the Borrower on the Second Amendment Effective Date in the amount
of $12,000,000 pursuant to the Second Amendment."
2. Amendment to Section 2.1. Subsection 2.1 of the Credit Agreement
is hereby amended to read in its entirety as follows:
"2.1 Loans. Subject to the terms and conditions hereof, each
Lender severally agrees to make a term loan to the Borrower on the Closing
Date in an amount not to exceed the amount of the Commitment of such
Lender then in effect, and subject to the terms and conditions set forth
in the Second Amendment, LCPI agrees to make a term loan to the Borrower
on the Second Amendment Effective Date in the principal amount of
$12,000,000 (each such term loan, a "Loan")."
<PAGE> 2
2
3. Additional Term Loan. Subject to the terms and conditions of the
Credit Agreement and this Second Amendment, LCPI agrees to make a term loan
(the "Additional Term Loan") to the Borrower on the Effective Date (as defined
below) in an amount equal to $12,000,000. Schedule I to the Credit Agreement is
hereby amended by adding to the number set forth opposite the name of LCPI, the
amount of $12,000,000. No later than 11:00 A.M., New York City time, on the
Effective Date, LCPI shall make available to the Administrative Agent in
immediately available funds at its office specified in subsection 9.2 of the
Credit Agreement the full amount of the Additional Term Loan. The
Administrative Agent shall, upon receipt of such sums, (i) credit the
Additional Term Loan Collateral Account with $3,846,000 of the proceeds of the
Additional Term Loan and (ii) disburse the remaining $8,154,000 of the
Additional Term Loan in immediately available funds to the account of DeepTech
specified by the Borrower to the Administrative Agent to reimburse DeepTech for
the portion of the Expanded Upgrade Costs (as defined below) advanced by it to
the Borrower prior to the date hereof. Prior to the Second Amendment Effective
Date the Collateral and Documentation Agent shall establish a cash collateral
account (the "Additional Term Loan Collateral Account") over which the
Collateral and Documentation Agent shall have sole dominion and control and
from which the Borrower shall have no right of withdrawal. As provided in the
immediately preceding sentence, on the Second Amendment Effective Date
$3,846,000 of the proceeds of the Additional Term Loan will be deposited in the
Additional Term Loan Collateral Account. Upon presentation to the Collateral
and Documentation Agent of (i) a copy of notices issued in good faith by the
Charterer to the Borrower to the effect that it is undertaking commitments to
obtain goods and services (and providing reasonable detail of such goods and
services) in accordance with the Shoemaker Upgrade Agreement and (ii) the
Borrower's written request to the Collateral and Documentation Agent to release
funds from the Additional Term Loan Collateral Account in the amount specified
in such notices and so long as no Default or Event of Default shall have
occurred and be continuing, the Collateral and Documentation Agent will release
such funds and transfer the same as directed by the Charterer for safekeeping,
pending payment of invoices for such goods and services; provided that no funds
shall be withdrawn from the Additional Term Loan Collateral Account until all
amounts in the Construction Fund Collateral Account and the Restricted Funds
Collateral Subaccount shall have been exhausted in accordance with the terms of
subsection 2.2(b) of the Credit Agreement; and provided, further, upon
completion of the upgrade contemplated by the Shoemaker Upgrade Agreement, the
Collateral and Documentation Agent shall, upon request of the Borrower, release
to the Borrower the sum then on deposit in the Additional Term Loan Collateral
Account and such sum may be used by the Borrower for general working capital
purposes in accordance with the terms of the Credit Agreement.
4. Amendment to Subsection 2.3. Subsection 2.3 of the Credit
Agreement is hereby amended by deleting the number "$63,250,000" in the
penultimate line thereof and substituting in lieu thereof the number
"$75,250,000".
5. Amendment to Subsection 2.5(a). Subsection 2.5(a) of the Credit
Agreement is hereby amended by inserting in the third line thereof immediately
after the words "other than" the words "the Additional Term Loan and other
than".
6. Addition of new Subsection 2.5(d). (a) Subsection 2.5(d) and
subsection 2.5(e) of the Credit Agreement shall be renumbered, "2.5(e)" and
"2.5(f)", respectively, (b) Each reference in the Credit Agreement to
subsection 2.5(d) or subsection 2.5(e) shall be changed to "subsection 2.5(e)"
and "subsection 2.5(f)" respectively and (c) there shall be added to the Credit
Agreement the following new subsection 2.5(d):
<PAGE> 3
3
"(d) Upon receipt by the Borrower of the Mobilization Fees from
Amoco with respect to the Shoemaker, in the approximate amount of
$4,180,000 and which are expected to be received in July 1997, 100% of the
amount thereof shall be applied toward prepayment of the Loans as set
forth in subsection 2.5(e)."
7. Amendment to Subsection 5.13. Subsection 5.13 of the Credit
Agreement is hereby amended by deleting the number "$40,000,000" in the last
line thereof and substituting in lieu thereof the number "$48,000,000".
8. Amendment to Subsection 6.1(a). Subsection 6.1(a) of the Credit
Agreement is hereby amended by inserting immediately after the word "ended" in
the sixth line thereof but immediately prior to the closed parenthetical the
phrase: "and provided, further, to the extent deducted in computing Net Worth
in accordance with GAAP during the fiscal quarter then ended or in any previous
fiscal quarter, Net Worth shall include the amount of any deferred corporate
income taxes of the Borrower (less any reductions in deferred corporate income
taxes of the Borrower during any of such periods) resulting from an election by
the Borrower to be treated as a corporation for U.S. federal income tax
purposes".
9. Amendment to Subsection 6.1(b). Subsection 6.1(b) of the Credit
Agreement is hereby amended by (i) deleting the ratio "2.00 to 1.00" set forth
opposite September 30, 1997 and substituting in lieu thereof the ratio "1.75 to
1.00" and (ii) deleting the ratio "2.75 to 1.00" set forth opposite December
31, 1997 and substituting in lieu thereof the ratio "2.50 to 1.00".
10. Waiver. The Lenders hereby waive any Default or Event of Default
which may have occurred prior to the date hereof resulting solely from the
incurrence of a portion of the Expanded Upgrade Costs and the advance of funds
by DeepTech to the Borrower to fund such portion of the Expanded Upgrade Costs.
11. Fees. In consideration for its agreement to this Amendment, the
Borrower agrees to pay to each Lender which is a signatory hereto, a fee in the
amount of 0.25% of such Lender's Commitment, payable on the date hereof in
immediately available funds.
12. Effectiveness. The amendments provided for herein shall become
effective on the date (the "Effective Date") of satisfaction of the following
condition precedent:
(a) The Administrative Agent shall have received counterparts of this
Second Amendment, duly executed and delivered by the Borrower and each of
the other parties hereto.
(b) LCPI shall have received a new promissory note in exchange for
its existing Note, which includes the amount of the Additional Term Loan.
(c) The Administrative Agent shall have received, with a counterpart
for each Lender, a copy of the resolutions, in form and substance
satisfactory to the Arranger and the Administrative Agent, of the
Management Committee of the Borrower authorizing (i) the execution,
delivery and performance of this Second Amendment, (ii) the borrowings
contemplated hereunder, certified by the Management Committee of the
Borrower as of the date hereof, which certificate shall be in form and
substance satisfactory to the Administrative Agent and the Arranger and
shall state that the resolutions thereby certified have not been amended,
modified, revoked or rescinded.
<PAGE> 4
4
(d) The Administrative Agent shall have received, with a counterpart
for each Lender, a certificate of the Management Committee of the
Borrower, dated the date hereof, as to the incumbency and signature of the
members or managers of the Borrower executing this Second Amendment
satisfactory in form and substance to the Administrative Agent and the
Arranger.
(e) The reasonable costs and expenses of the Administrative Agent,
the Collateral and Documentation Agent and the Arranger in connection with
this Amendment, including without limitation, legal fees and expenses, and
the fees set forth in paragraph 11 shall have been paid by the Borrower.
(f) All governmental and third party approvals (including landlords'
and other consents) necessary or advisable in connection with this Second
Amendment and the making of the Additional Term Loan shall have been
obtained and be in full force and effect, and all applicable waiting
periods shall have expired without any action being taken or threatened by
any competent authority which would restrain, prevent or otherwise impose
materially adverse conditions on the Credit Agreement as amended by this
Second Amendment or the making of the Additional Term Loan.
(g) The Administrative Agent shall have received the executed legal
opinions of (i) Akin, Gump, Strauss, Hauer & Feld, counsel to the Borrower
and (ii) Graham, Thompson & Co., Nassau, special Bahamian counsel to the
Lenders, each dated the date hereof and in form and substance satisfactory
to the Administrative Agent.
(h) The Administrative Agent and LCPI shall have received such
information with respect to the upgrade and make-ready of the Shoemaker
which is to be funded by the Additional Term Loan (such increased upgrade
and make-ready costs, the "Expanded Upgrade Costs") as it shall reasonably
request.
(i) The Administrative Agent shall have received evidence in form and
substance satisfactory to it that all filings, recordings, registrations
and other actions, including, without limitation, any filings with respect
to the Mortgages, necessary or, in the opinion of the Administrative
Agent, desirable to maintain the perfection of the Liens created by the
Security Documents after giving effect to this Second Amendment shall have
been completed.
(j) The Arranger shall have received the results of a recent search
of the Uniform Commercial Code, judgement and tax lien filings which may
have been filed with respect to personal property of the Borrower in each
of the jurisdictions and offices where assets of the Borrower or its
Subsidiaries are located or recorded, and such search shall reveal no
material liens on any of the assets of the Borrower or its Subsidiaries
except for liens permitted by the Loan Documents.
(k) All limited liability company and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by this Second Amendment shall be satisfactory
in form and substance to the Arranger and the Administrative Agent.
13. Representations and Warranties. After giving effect to the
amendments contained herein, on the Effective Date, the Borrower hereby
confirms, reaffirms and restates the representations
<PAGE> 5
5
and warranties set forth in Section 3 of the Credit Agreement; provided that
each reference in such Section 3 to "this Agreement" shall be deemed to be a
reference both to this Second Amendment and to the Credit Agreement as amended
by this Second Amendment.
14. Continuing Effect; No Other Amendments. Except as expressly
amended or waived hereby, all of the terms and provisions of the Credit
Agreement and the other Loan Documents are and shall remain in full force and
effect. The amendments contained herein shall not constitute an amendment or
waiver of any other provision of the Credit Agreement or the other Loan
Documents or for any purpose except as expressly set forth herein.
15. No Default. Other than as contemplated by paragraph 10 above, no
Default or Event of Default shall have occurred and be continuing as of the
Effective Date after giving effect to this Second Amendment.
16. Counterparts. This Second Amendment may be executed in any number
of counterparts by the parties hereto, each of which counterparts when so
executed shall be an original, but all the counterparts shall together
constitute one and the same instrument.
17. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
<PAGE> 6
6
IN WITNESS WHEREOF, the parties have caused this Second Amendment to
be duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
RIGCO NORTH AMERICA, L.L.C.
By:
Title:
BHF-BANK AKTIENGESELLSCHAFT, as
Administrative Agent and as a Lender
By:
Title:
By:
Title:
HIBERNIA NATIONAL BANK, as
Collateral and Documentation
Agent and as a Lender
By:
Title:
LEHMAN COMMERCIAL PAPER INC., as
Syndication Agent and as a Lender
By:
Title:
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By:
Title:
<PAGE> 7
7
PROTECTIVE LIFE INSURANCE COMPANY
By:
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: MERRILL LYNCH ASSET MANAGEMENT
L.P., as Investment Adviser
By:
Title:
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
Title:
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: MERRILL LYNCH ASSET MANAGEMENT
L.P., as Investment Adviser
By:
Title:
ML CBO IV (CAYMAN) LTD.
By: Protective Asset Management,
L.L.C.,
as Collateral Manager
By:
Title:
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF DEEPTECH INTERNATIONAL INC.
DeepFlex Production Services, Inc., a Delaware corporation
FPS II, Inc., a Delaware corporation
FPS III, Inc., a Delaware corporation
RIGCO North America, L.L.C. a Delaware limited liability company
FPS V, Inc., a Delaware corporation
RIGCO North America, L.L.C. a Delaware limited liability company
FPS IV, Inc., a Delaware corporation
DeepFlex Holdings, L.L.C., a Delaware limited liability company (50%)
DeepFlex Production Partners, L.P., a Delaware limited partnership (50%)
DeepTech Offshore (Cayman) Ltd., a company organized under the laws of Cayman
Deepwater Production Systems, Inc., a Texas corporation
FPS I, Inc., a Delaware corporation
Dover Technology, Inc., a Texas corporation (50%)
Key Ocean Services, Inc., a Texas corporation
Offshore Gas Processors, Inc., a Texas corporation
Gulf Processing Partners, a Texas partnership (50%)
Offshore Gas Marketing, Inc., a Texas corporation
Tatham Offshore, Inc., a Delaware corporation
Tatham Offshore Development, Inc., a Delaware corporation
Tatham Offshore Canada Limited, a Nova Scotia company
Tatham Offshore (Jersey) Ltd., a company organized under the laws of Jersey
North Atlantic Pipeline Company, L.L.C., a Delaware limited liability company
North Atlantic Pipeline (Nova Scotia) Company, U.L.C., a Nova Scotia
unlimited liability company
North Atlantic Pipeline Partners, L.P., a Delaware limited partnership
North Atlantic Pipeline Partners, L.P., a Newfoundland limited partnership
Leviathan Holdings Company, a Delaware corporation
Leviathan Gas Pipeline Company, a Delaware corporation
Leviathan Gas Pipeline Partners, L.P., a Delaware limited partnership
Delos Offshore Company, L.L.C., a Delaware limited liability company
Ewing Bank Gathering Company, L.L.C., a Delaware limited liability
company
Flextrend Development Company, L.L.C., a Delaware limited liability
company
Green Canyon Pipe Line Company, L.L.C., a Delaware limited liability
company
West Cameron Dehydration Company, L.L.C., a Delaware limited
liability company (50%)
<PAGE> 2
Leviathan Oil Transport Systems, L.L.C., a Delaware limited liability
company
Manta Ray Gathering Company, L.L.C., a Delaware limited liability
company
Poseidon Pipeline Company, L.L.C., a Delaware limited liability company
Poseidon Oil Pipeline Company, L.L.C., a Delaware limited
liability company (36%)
Sailfish Pipeline Company, L.L.C., a Delaware limited liability company
Neptune Pipeline Company, L.L.C., a Delaware limited liability
company
Ocean Breeze Pipeline Company, L.L.C., a Delaware limited
liability company
Manta Ray Offshore Gathering Company, L.L.C., a Delaware limited
liability company (25.7%)
Nautilus Pipeline Company, L.L.C., a Delaware limited liability
company (25.7%)
Stingray Holding, L.L.C., a Delaware limited liability company
Stingray Pipeline Company, a Louisiana partnership (50%)
Tarpon Transmission Company, a Texas corporation
Texam Offshore Gas Transmission, L.L.C., a Delaware limited liability
company
High Island Offshore System, a Delaware partnership (20%)
Transco Hydrocarbons Company, L.L.C., a Delaware limited liability
company
U-T Offshore System, a Delaware partnership (33 1/3%)
Transco Offshore Pipeline Company, a Delaware limited liability company
High Island Offshore System, a Delaware partnership (20%)
VK Deepwater Gathering Company, L.L.C., a Delaware limited liability
company
Viosca Knoll Gathering Company, a Delaware partnership (50%)
VK-Main Pass Gathering Company, L.L.C., a Delaware limited liability
company
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (33-96242, 333-4658 and 33-90624) and on Form S-3
(333-24691) of our report dated September 19, 1997 relating to the financial
statements of DeepTech International Inc. for the year ended June 30, 1997
appearing on page F-2 of this Form 10-K/A.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, Texas
October 28, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF RYDER SCOTT COMPANY PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference into the Registration
Statement on Form S-8 (File Numbers 33-96242, 333-4658, and 33-90624) and on
Form S-3 (File Number 333-24691) of DeepTech International Inc. of the use of
our report, Estimated Net Reserves and Income Data Attributable to Certain
Leasehold and Royalty Interests of Tatham Offshore, Inc., dated as of June 30,
1997, and all references to our firm appearing in this First Amendment to the
Annual Report on Form 10-K/A of DeepTech International Inc. for the fiscal year
ended June 30, 1997.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
October 28, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference into the
Registration Statements on Form S-8 (File Numbers 33-96242, 333-4658, and
33-90624) and on Form S-3 (File Number 333-24691) of DeepTech International Inc.
("DeepTech") of our reserve report dated as of June 30, 1997, and to all
references to our firm appearing in this First Amendment to the Annual Report on
Form 10-K/A of DeepTech for the fiscal year ended June 30, 1997.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
----------------------------------
Frederic D. Sewell
President
Dallas, Texas
October 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEEPTECH
INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT JUNE
30, 1997 INCLUDED IN ITS FORM 10-K/A FOR THE YEAR ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K/A.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 12,522
<SECURITIES> 0
<RECEIVABLES> 13,933
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,444
<PP&E> 127,665
<DEPRECIATION> 2,159
<TOTAL-ASSETS> 228,218
<CURRENT-LIABILITIES> 24,701
<BONDS> 164,561
0
0
<COMMON> 195
<OTHER-SE> 5,344
<TOTAL-LIABILITY-AND-EQUITY> 228,218
<SALES> 131,017
<TOTAL-REVENUES> 134,117
<CGS> 123,393
<TOTAL-COSTS> 141,129
<OTHER-EXPENSES> 1,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,566
<INCOME-PRETAX> (29,177)
<INCOME-TAX> (9,343)
<INCOME-CONTINUING> (19,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,834)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
