<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 NO. 0-23934
DEEPTECH INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0289338
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7500
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
AS OF NOVEMBER 10, 1997, THERE WERE OUTSTANDING 20,574,103 SHARES OF
COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
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<PAGE> 2
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION........................................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1997 (unaudited) and June 30, 1997.................................3
Unaudited Consolidated Statement of Operations for the Three Months
Ended September 30, 1997 and 1996, respectively................................................................4
Unaudited Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1997 and 1996..............................................................................5
Consolidated Statement of Stockholders' Equity for the Three Months
Ended September 30, 1997 (unaudited)...........................................................................6
Notes to Consolidated Financial Statements........................................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................13
PART II. OTHER INFORMATION..........................................................................................24
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES...........................................................................................................25
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,801 $ 12,522
Accounts receivable 15,587 13,189
Accounts receivable from affiliates 900 344
Notes receivable from affiliates 400 400
Other current assets 607 989
--------- ---------
Total current assets 31,295 27,444
--------- ---------
Property and equipment 129,423 127,665
Less: Accumulated depreciation 3,528 2,159
--------- ---------
Property and equipment, net 125,895 125,506
--------- ---------
Construction fund collateral account -- 554
Equity investment 33,927 --
Receivable from affiliate -- 60,000
Deferred income taxes 8,623 9,214
Debt issue costs, net and other 5,699 5,500
--------- ---------
Total assets $ 205,439 $ 228,218
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,295 $ 6,686
Accounts payable to affiliates 7,828 9,657
Deferred revenue 1,073 --
Notes payable 76,000 7,893
Interest payable 2,925 465
--------- ---------
Total current liabilities 89,121 24,701
Long-term debt 96,272 164,561
Accumulated losses and/or cash distributions of equity investees
in excess of investment and accumulated equity earnings 8,686 32,679
Other noncurrent liabilities 370 394
--------- ---------
Total liabilities 194,449 222,335
--------- ---------
Minority interests in consolidated subsidiaries 349 344
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity :
Preferred stock, $.01 par, 10,000,000 shares authorized -- --
Common stock, $.01 par, 100,000,000 shares authorized
as of September 30, 1997 and June 30, 1997, 20,105,353
and 19,471,228 shares issued and outstanding as of
September 30, 1997 and June 30, 1997, respectively 201 195
Additional paid-in capital 33,377 30,646
Accumulated deficit (22,937) (25,302)
--------- ---------
10,641 5,539
--------- ---------
Total liabilities and stockholders' equity $ 205,439 $ 228,218
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
------------------------
1997 1996
<S> <C> <C>
Revenue:
Oil and gas sales $ 23,888 $ 23,100
Drilling services 17,912 --
Equity in earnings 1,225 3,097
-------- --------
43,025 26,197
-------- --------
Costs and expenses:
Oil and gas purchases 23,675 22,865
Operating expenses 8,952 --
Losses of equity investees 792 296
Depreciation and amortization 1,307 37
General and administrative expenses 835 485
-------- --------
35,561 23,683
-------- --------
Operating income 7,464 2,514
Interest and other income 2,001 3,085
Interest and other financing costs (5,658) (4,173)
-------- --------
Income before minority interests and income taxes 3,807 1,426
Minority interests in consolidated subsidiaries (142) (325)
-------- --------
Income before income taxes 3,665 1,101
Income tax expense 1,300 458
-------- --------
Net income $ 2,365 $ 643
======== ========
Net income per share $ 0.10 $ 0.03
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
------------------------
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,365 $ 643
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Minority interests in consolidated subsidiaries 142 325
Depreciation and amortization 1,307 37
Amortization of debt issue costs 835 801
Equity in earnings (1,225) (3,097)
Losses of equity investees 792 296
Distributions from equity investments 4,223 2,471
Deferred revenue 1,073 --
Noncash interest income related to option agreement (1,709) --
Deferred income taxes and other 667 755
Changes in operating working capital:
Increase in accounts receivable (2,398) (1,441)
Increase in accounts receivable from affiliates (556) (372)
Decrease in other current assets 382 2
Decrease in accounts payable and accrued liabilities (5,391) (5,702)
(Decrease) increase in accounts payable to affiliates (1,829) 1,423
Increase in interest payable 2,460 2,379
-------- --------
Net cash provided by (used in) operating activities 1,138 (1,480)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (1,696) (5,036)
Repayment of advances to affiliates -- 1,751
Advances to affiliates -- (1,317)
Other -- (15)
-------- --------
Net cash used in investing activities (1,696) (4,617)
-------- --------
Cash flows from financing activities:
Restricted cash 554 (32,256)
Proceeds from notes payable -- 65,992
Repayments of notes payable (250) (30,250)
Debt issue costs (25) (3,621)
Proceeds from issuance of common stock 2,637 2,365
Dividends on subsidiary common stock (1,079) (321)
-------- --------
Net cash provided by financing activities 1,837 1,909
-------- --------
Net increase (decrease) in cash and cash equivalents 1,279 (4,188)
Cash and cash equivalents at beginning of year 12,522 10,102
-------- --------
Cash and cash equivalents at end of period $ 13,801 $ 5,914
======== ========
Cash paid for interest, net of amounts capitalized $ 2,363 $ 994
Cash paid for income taxes $ -- $ 1,000
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Number of Par paid - in Accumulated
shares value capital deficit Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 19,471 $ 195 $ 30,646 $(25,302) $ 5,539
Issuance of common stock (unaudited) 634 6 2,731 -- 2,737
Net income for the three months
ended September 30, 1997 (unaudited) -- -- -- 2,365 2,365
-------- -------- -------- -------- --------
Balance, September 30, 1997
(unaudited) 20,105 $ 201 $ 33,377 $(22,937) $ 10,641
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION:
DeepTech International Inc. ("DeepTech") is a diversified energy company
engaged, through its operating subsidiaries, Tatham Offshore, Inc. ("Tatham
Offshore") and certain joint ventures, in offshore contract drilling services
and the acquisition, development, production, processing, gathering,
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.
Contract Drilling Services
RIGCO North America, L.L.C. ("RIGCO"), a wholly-owned indirect subsidiary of
DeepTech, focuses on the acquisition and deployment of semisubmersible drilling
rigs for contract drilling services. On September 30, 1996, RIGCO acquired two
second generation semisubmersible drilling rigs, the FPS Laffit Pincay and the
FPS Bill Shoemaker.
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, through its subsidiaries and certain
joint ventures, owns 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. Leviathan owned an
effective 27.3% interest in the Partnership as of September 30, 1997 giving
DeepTech an effective 23.2% interest therein.
Exploration, Development and Production
DeepTech 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 oil and gas reserves located primarily in the Gulf, focusing 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.
Marketing
Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of
DeepTech, markets oil and gas production from the Partnership, Tatham Offshore
and third-party producers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
DeepTech and those 50% or more owned subsidiaries controlled by DeepTech
(collectively referred to as the "Company"). The Company uses the equity method
to account for its investments in unconsolidated entities in which the Company
owns more than 20% of the voting interests. Losses of equity investees in
excess of DeepTech's investment are recognized to the extent indebtedness of
the equity investee is outstanding to DeepTech 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.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring
7
<PAGE> 8
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations for the periods covered by such
statements. These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K/A for the fiscal
year ended June 30, 1997.
Earnings per share
Earnings per share is computed by dividing common equity in net income by the
weighted average number of common shares and common stock equivalents
outstanding during the period. The weighted average number of common shares and
common stock equivalents outstanding for the three months ended September 30,
1997 and 1996 was 24,681,227 shares and 20,345,747 shares, respectively.
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share", was issued in February 1997. SFAS No. 128 establishes new guidelines
for computing and presenting earnings per share and is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Pro forma basic net income per share is $0.12 per share and $0.04 per share,
respectively, for the three months ended September 30, 1997 and 1996. Pro forma
dilutive earnings per share is $0.10 per share and $0.03 per share,
respectively, for the three months ended September 30, 1997 and 1996.
NOTE 3 - EQUITY INVESTMENTS:
The summarized financial information for the Company's investments which are
accounted for using the equity method is as follows:
SUMMARIZED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
Leviathan Gas
Pipeline Partners, L.P. Tatham Offshore, Inc.
------------------------------ -----------------------------
September 30, June 30, September 30, June 30,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Current assets $ 14,392 $ 18,621 $ 9,450 $ 9,438
Noncurrent assets 381,346 383,259 34,400 32,069
Current liabilities 9,258 11,260 4,352 1,540
Long-term debt 220,000 217,000 -- 60,000
Obligation under option
agreement -- -- 61,709 --
Other noncurrent liabilities 11,825 9,915 7,750 7,663
</TABLE>
8
<PAGE> 9
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months
ended September 30, 1997 For the Three Months ended September 30, 1996
-------------------------- ---------------------------------------------------
Tatham DeepFlex Tatham
Partnership Offshore Partnership Partners (a) Total Offshore
<S> <C> <C> <C> <C> <C>
Operating revenue $ 25,474 $ 3,785 $ 24,214 $ 4,448 $ 4,500
Other income 159 102 486 478 154
Operating expenses (6,996) (3,126) (4,752) (2,639) (3,275)
Depreciation (11,535) (1,485) (8,692) (504) (956)
Other expenses (3,828) (1,710) (1,250) (1,195) (2,117)
---------- ----------- --------- --------- ---------
Net income (loss) 3,274 (2,434) 10,006 588 (1,694)
Preferred stock dividends -- (984) -- -- (997)
---------- ----------- --------- --------- ---------
Net income (loss) available
to common shareholders 3,274 (3,418) 10,006 588 (2,691)
Effective ownership
percentage 27.3% 36.16% 27.3% 50% 38.1%
---------- ----------- --------- --------- ---------
894 (1,236) 2,732 294 (1,025)
Intercompany profit (b) -- 102 -- -- 168
Preferred stock dividends(c) -- -- -- -- 210
Other equity investees 8 -- 36 -- --
Other 323(d) 342(e) 35 -- 351(e)
---------- ----------- --------- --------- --------- ---------
Equity in earnings (losses) $ 1,225 $ (792) $ 2,803 $ 294 $ 3,097 $ (296)
========== =========== ========= ========= ========= =========
Distributions/dividends $ 4,223 $ -- $ 2,471 $ -- $ 2,471 $ --
========== =========== ========= ========= ========= =========
</TABLE>
- ---------------------
(a) Effective September 30, 1996, RIGCO acquired the FPS Laffit Pincay
from DeepFlex Production Partners, L.P. ("DeepFlex Partners"), which
is owned 50% by DeepFlex Production Services, Inc. ("DeepFlex
Services"), a wholly-owned subsidiary of DeepTech, for the assumption
of the then outstanding payment-in-kind indebtedness ("PIK Notes").
(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 the Partnership in 1995, both of which are equity
investees of DeepTech. The profit is recognized as the oil and gas
reserves are produced.
(c) The Company's share of Tatham Offshore's Series A and Series C
cumulative preferred stock dividends.
(d) Represents additional income allocated by the Partnership to Leviathan
as a result of the Partnership achieving certain target levels of cash
distributions to its unitholders. See discussion of incentive
distributions to Leviathan below.
(e) Includes the effect of a change during the period in DeepTech's
ownership percentage of Tatham Offshore's common equity.
The Partnership and its subsidiaries distribute 100% of available cash, as
defined, on a quarterly basis to the holders of the Preference Units and to
Leviathan, as general partner and holder of the Common Units. These
distributions are effectively made 98% to unitholders and 2% to Leviathan,
subject to the payment of incentive distributions to Leviathan if certain
target levels of cash distributions to Unitholders are achieved (the "Incentive
Distributions"). As an incentive, the general partner's interest in the portion
of quarterly cash distributions in excess of $0.325 per Unit and less than or
equal to $0.375 per Unit is increased to 15%. For quarterly cash distributions
over $0.375 per Unit but less than or equal to $0.425 per Unit, the general
partner receives 25% of such incremental amount and for all quarterly cash
distributions in excess of $0.425 per Unit, the general partner receives 50% of
the incremental amount. In August 1997, the Partnership paid a cash
distribution of $0.45 per Preference and Common Unit for the period from April
1, 1997 through June 30, 1997 and an Incentive Distribution of $1.2 million to
Leviathan. On October 20, 1997, the Partnership declared a cash distribution of
$0.475 per Preference and Common Unit for the period from July 1, 1997 through
September 30, 1997 which will be paid on November 14, 1997 to unitholders of
record as of October 31, 1997. Leviathan will receive an Incentive Distribution
of $1.8 million for the quarter ended September 30, 1997.
9
<PAGE> 10
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - INDEBTEDNESS:
Outstanding indebtedness is comprised of the following:
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
--------------------- -----------------
Current Long-term Current Long-term
<S> <C> <C> <C> <C>
(in thousands)
Notes payable:
RIGCO Credit Facility $ 76,000 $ -- $ 7,893 $ 68,357
Senior Notes -- 80,922 -- 80,854
Senior Subordinated Notes -- 15,350 -- 15,350
</TABLE>
RIGCO Credit Facility
The RIGCO Credit Facility, as amended, is a senior secured credit facility with
a syndicate of lenders providing for $77 million. The RIGCO Credit Facility (i)
matures on September 30, 1998, (ii) bears interest at the prime rate plus 3%
per annum, payable quarterly, (iii) is secured by all tangible and intangible
assets of RIGCO including 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. Interest incurred and amortization of debt issue costs related to
the RIGCO Credit Facility totaled $2.8 million for the three months ended
September 30, 1997.
Senior Notes
In 1994, DeepTech completed a public offering of $82 million of 12% senior
secured notes (the "Senior Notes") due December 15, 2000. Interest on the
Senior Notes is payable semi-annually in arrears on June 15 and December 15 of
each year at a rate of 12% per annum. See Note 6. Interest and amortization of
debt issue costs and bond discounts related to the Senior Notes totaled $2.7
million for the three months ended September 30, 1997.
Senior Subordinated Notes
In January 1997, DeepTech issued $15,350,000 aggregate principal amount of
Senior Subordinated Notes (the "Senior Subordinated Notes") to an investment
banking firm in exchange for an aggregate of $15,350,000 principal amount of
Company indebtedness. 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 DeepTech, are not
redeemable before June 15, 1999 and thereafter may be redeemed at 101% of the
principal amount thereof, plus accrued interest. See Note 6. Interest and
amortization of debt issue costs related to this debt totaled $0.4 million for
the three months ended September 30, 1997.
NOTE 5 - STOCKHOLDERS' EQUITY:
Under various agreements and arrangements, DeepTech has authorized the issuance
of stock warrants and options to noteholders, financial institutions, employees
and directors. During the three months ended September 30, 1997, DeepTech
issued 634,125 shares of common stock pursuant to the exercise of outstanding
warrants and options at prices ranging from $4.00 per share to $4.50 per share
resulting in $2.6 million in proceeds to DeepTech. At September 30, 1997,
DeepTech had outstanding warrants and options to acquire 8,767,492 shares of
common stock.
NOTE 6 - RELATED PARTY TRANSACTIONS:
Management Agreements
DeepTech has entered into management agreements with certain of its affiliates,
including Leviathan and Tatham Offshore, pursuant to which each affiliate is
charged an annual management fee in exchange for operational, financial,
accounting and administrative services. Leviathan, as general partner of the
Partnership, is entitled to reimbursement of all reasonable expenses incurred
by it or its affiliates for or on behalf of the Partnership including
10
<PAGE> 11
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
amounts payable by Leviathan to DeepTech under a management agreement.
Effective July 1, 1997, the management agreements with Leviathan and Tatham
Offshore were amended to provide for an annual management fee of 52% and 26%,
respectively, of DeepTech's overhead expenses. During the three months ended
September 30, 1997, the Partnership and Tatham Offshore were charged $2.1
million and $1.1 million, respectively, under their respective agreements. In
addition, DeepTech's management agreement with Leviathan requires a payment by
Leviathan to compensate DeepTech for certain tax liabilities resulting from,
among other things, additional taxable income allocated to Leviathan due to (i)
the issuance of additional Preference Units (including the sale of the
Preference Units by the Partnership pursuant to the public offering of
additional Preference Units) and (ii) the investment of such proceeds in
additional acquisitions or construction projects. During the three months ended
September 30, 1997, Leviathan charged the Partnership $0.2 million to
compensate DeepTech for additional taxable income allocated to Leviathan.
Subordinated Notes Receivable from Tatham Offshore
As of June 30, 1997, DeepTech holds an aggregate principal amount of $60.0
million of Tatham Offshore Subordinated Convertible Promissory Notes (the
"Subordinated Notes").
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 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 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, collectively, 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. In addition, if DeepTech 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.
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 and the Senior Subordinated Notes or
obtain adequate financing to satisfy these obligations.
11
<PAGE> 12
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
As a result of the terms of the Restructuring Option Agreement, the
Subordinated Notes and the related interest receivable of $1.7 million
accumulated from July 1, 1997 through September 18, 1997, the date on which the
DeepTech Board of Directors approved the Restructuring Option Agreement, are
included in equity investment on the accompanying consolidated balance sheet at
September 30, 1997.
Other
During the three months ended September 30, 1997, Leviathan Holdings paid
dividends of $7.2 million to its common stockholders, which included DeepTech
as a result of its 85% ownership interest in Leviathan Holdings.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
DeepTech anticipates that it will need significant additional funds from
outside sources to fund its financial obligations which mature in 1998 and
beyond. There can be no assurances, however, that DeepTech or 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.
Tatham Offshore has substantial future capital expenditures associated with the
full development of its oil and gas properties. Realization of the full
potential of Tatham Offshore's properties is dependent upon its ability to
obtain sufficient additional capital or project financing.
In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or the results of
operations of the Company. Various legal actions which have arisen in the
ordinary course of business are pending with respect to the assets of the
Company. Management believes that the ultimate disposition of these actions,
either individually or in the aggregate, will not have a material adverse
effect on the consolidated financial position or operations of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in the
quarterly report and is intended to assist in the understanding of the
Company's financial condition and results of operations for the three months
ended September 30, 1997. Unless the context otherwise requires, references to
the "Company" shall mean the assets and operations of DeepTech and its
consolidated subsidiaries.
DeepTech is a diversified energy company engaged, through its operating
subsidiaries, Tatham Offshore and certain joint ventures, in offshore contract
drilling services and the acquisition, development, production, processing,
gathering, 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. Leviathan serves as the general
partner of the Partnership and owns a 27.3% effective interest in the
Partnership (23.2% effective interest net to DeepTech's interest). The
Partnership's operations also consist of the development and production of oil
and gas reserves located principally in the flextrend and deepwater areas of
the Gulf.
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 (i) 10.0 million shares of Tatham Offshore common stock
representing approximately 36% of the issued and outstanding common stock of
Tatham Offshore and (ii) Subordinated Notes of Tatham Offshore with an
outstanding principal balance of $60 million (See Item 1. "Consolidated
Financial Statements -- Note 6 -- Related Party Transactions"). DeepFlex
Services owns 4.7 million shares of Tatham Offshore's Series A 12% Convertible
Exchangeable Preferred Stock, 1.0 million shares of Tatham Offshore's Series C
4% Convertible Exchangeable Preferred Stock and 4.3 million shares of Tatham
Offshore's Mandatory Redeemable Preferred Stock. The Partnership owns 7,500
shares of 9% Senior Convertible Preferred Stock of Tatham Offshore which is
convertible into Series A 12% Convertible Exchangeable Preferred Stock under
certain circumstances.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
Oil and gas sales from the Company's marketing operations totaled $23.9 million
for the three months ended September 30, 1997 as compared with $23.1 million
for the three months ended September 30, 1996. During the three months ended
September 30, 1997 and 1996, the Company derived its oil and gas revenue by
marketing the oil and gas production of the Partnership, Tatham Offshore and
third-party producers. During the three months ended September 30, 1997, the
Company sold 8,701 million cubic feet ("MMcf") of gas and 239,070 barrels of
oil at average prices of $2.26 per thousand cubic feet ("Mcf") and $17.57 per
barrel, respectively. During the same period in 1996, the Company sold 7,733
MMcf of gas and 307,200 barrels of oil at average prices of $2.12 per Mcf and
$21.95 per barrel, respectively.
Drilling services totaled $17.9 million for the three months ended September
30, 1997 representing revenue from contract drilling services provided by the
FPS Laffit Pincay and FPS Bill Shoemaker. For the three months ended September
30, 1996, the Company conducted its contract drilling services related to the
FPS Laffit Pincay through DeepFlex Partners which activity is included in
equity earnings for the period from July 1, 1996 through September 30, 1996, as
discussed below.
Equity in earnings totaled $1.2 million for the three months ended September
30, 1997 as compared with $3.1 million for the same period in 1996. Equity in
earnings for the three months ended September 30, 1997 primarily included
equity earnings of the Partnership whereas equity in earnings for the three
months ended September 30, 1996 included equity earnings of the Partnership and
DeepFlex Partners of $2.8 million and $0.3 million, respectively. During the
three months ended September 30, 1997, the Partnership had total operating
revenue of $25.5 million as compared with $24.2 million for the three months
ended September 30, 1996. For the three months ended September 30, 1997, total
gathering and transportation throughput, net to the Partnership, was 244
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billion cubic feet ("Bcf") of gas as compared with 251 Bcf of gas for the three
months ended September 30, 1996. Oil volumes from Poseidon Oil Pipeline totaled
5.3 million barrels and 3.7 million barrels for the three months ended
September 30, 1997 and 1996, respectively. In addition, the Partnership
produced and sold 4,703 MMcf of gas and 197,080 barrels of oil at average
prices of $2.25 per Mcf and $20.46 per barrel, respectively, during the three
months ended September 30, 1997. During the same period in 1996, the
Partnership produced and sold 4,166 MMcf of gas and 168,770 barrels of oil at
average prices of $1.93 per Mcf and $22.25 per barrel, respectively. DeepFlex
Partners had operating revenue of $4.4 million and nonoperating revenue of $0.5
million for the three months ended September 30, 1996. DeepFlex Partners'
depreciation and operating expenses totaled $3.1 million and other expenses
totaled $1.2 million for the three months ended September 30, 1996.
Oil and gas purchases by the Company's marketing operations for the three
months ended September 30, 1997 totaled $23.7 million as compared with $22.9
million for the same period in 1996. The activity for both periods represented
the cost of oil and gas purchased from the Partnership, Tatham Offshore and
third parties for resale. During the three months ended September 30, 1997, the
Company purchased 8,701 MMcf of gas and 239,070 barrels of oil at average
prices of $2.25 per Mcf and $17.22 per barrel, respectively. During the three
months ended September 30, 1996, the Company purchased 7,739 MMcf of gas and
307,200 barrels of oil at average prices of $2.10 per Mcf and $21.51 per
barrel, respectively.
Operating expenses for the three months ended September 30, 1997 totaled $9.0
million and included costs to operate the FPS Laffit Pincay and FPS Bill
Shoemaker. For the three months ended September 30, 1996, the Company conducted
its contract drilling services related to the FPS Laffit Pincay through
DeepFlex Partners which activity is included in equity earnings for the period
from July 1, 1996 through September 30, 1996, as discussed above.
Losses of equity investees for the three months ended September 30, 1997
totaled $0.8 million as compared with $0.3 million for the three months ended
September 30, 1996 and was primarily related to equity losses of Tatham
Offshore. During the three months ended September 30, 1997, Tatham Offshore had
total operating revenue of $3.8 million and interest income of $0.1 million.
During the three months ended September 30, 1997, Tatham Offshore sold 1,539
MMcf of gas and 8,855 barrels of oil at average prices of $2.36 per Mcf and
$17.54 per barrel, respectively. Tatham Offshore's depreciation and operating
expenses totaled $4.6 million and other expenses totaled $1.7 million for the
three months ended September 30, 1997. In addition, Tatham Offshore's net loss
was increased by $1.0 million in preferred stock dividends in arrears for the
three months ended September 30, 1997. During the three months ended September
30, 1996, Tatham Offshore had total operating revenue of $4.5 million and
interest income of $0.2 million. During the three months ended September 30,
1996, Tatham Offshore sold 1,475 MMcf of gas and 60,640 barrels of oil at
average prices of $2.15 per Mcf and $21.87 per barrel, respectively. Tatham
Offshore's depreciation and operating expenses totaled $4.2 million and other
expenses totaled $2.1 million for the three months ended September 30, 1996. In
addition, Tatham Offshore's net loss was increased by $1.0 million in preferred
stock dividends in arrears for the three months ended September 30, 1996.
Depreciation and amortization totaled $1.3 million for the three months ended
September 30, 1997 as compared with $37,000 for the same period in 1996. The
increase is related to depreciation of the FPS Laffit Pincay which was acquired
on September 30, 1996 and the FPS Bill Shoemaker which was placed in service in
August 1997.
General and administrative expenses for the three months ended September 30,
1997 totaled $0.8 million as compared with $0.5 million for the same period in
1996.
Operating income for the three months ended September 30, 1997 totaled $7.5
million as compared with an operating income of $2.5 million for the same
period in 1996. The change in operating income primarily represented the net
effect of the items discussed above.
Interest and other income for the three months ended September 30, 1997 totaled
$2.0 million as compared with $3.1 million for the same period in 1996.
Interest and other income for the three months ended September 30, 1997
included interest income derived from (i) the Subordinated Notes of $1.7
million and (ii) available cash of $0.3 million. Interest and other income for
the three months ended September 30, 1996 included interest income derived from
(i) the Subordinated Notes of $1.8 million, (ii) the PIK Notes payable from
DeepFlex Partners of $1.2 million and (iii) other of $0.1 million.
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Interest and other financing costs for the three months ended September 30,
1997 totaled $5.7 million as compared with $4.2 million for the same period in
1996. Interest and other financing costs for the three months ended September
30, 1997 included (i) interest and amortization of debt issue costs and
discounts related to the Senior Notes of $2.7 million, (ii) interest and
amortization of debt issue costs related to the Senior Subordinated Notes of
$0.4 million and (iii) interest and amortization of debt issue costs related to
the RIGCO Credit Facility of $2.6 million, net of $0.3 million in interest
capitalized related to the FPS Bill Shoemaker. Interest and other financing
costs for the three months ended September 30, 1996 included (i) interest and
amortization of debt issue costs and discounts related to the Senior Notes of
$2.7 million, (ii) interest and amortization of debt issue costs related to
$41.5 million of other indebtedness of the Company of $1.2 million and (iv)
other interest expense of $0.3 million.
During the three months ended September 30, 1997, the Company recorded income
tax expense of $1.3 million as compared with $0.5 million for the three months
ended September 30, 1996.
After taking into account a $0.1 million loss resulting from minority interests
in consolidated subsidiaries, the Company's net income for the three months
ended September 30, 1997 totaled $2.4 million, or $0.10 per share. For the
three months ended September 30, 1996, the Company reported net income of $0.6
million, or $0.03 per share, after taking into account a $0.3 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 and options to
purchase shares of DeepTech common stock.
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.
Effective July 1, 1997, DeepTech began charging Leviathan, Tatham Offshore,
DeepFlex Services and Offshore Marketing a management fee equal to 52%, 26%,
18% and 4%, respectively, of DeepTech's overhead expenses. For the three months
ended September 30, 1997, Leviathan, Tatham Offshore and Offshore Marketing
made their required cash 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 cash payments of
management fees to DeepTech during such period.
DeepTech receives, through dividends from Leviathan Holdings, 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 achieved
("Incentive Distributions"). As a result, DeepTech's proportionate share of the
aggregate distributions paid to Leviathan for the three months ended September
30, 1997 was $3.6 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.
During the three months ended September 30, 1997, RIGCO generated $8.3 million
of net operating cash flow, $2.2 million of which was used to pay interest due
under the RIGCO Credit Facility and $3.3 million of which will be used to
reduce the principal balance outstanding under the RIGCO Credit Facility.
DeepTech has effected and is presently maintaining a continuous shelf
registration statement (the "Registration Statement") which registers
substantially all of the common stock underlying outstanding warrants and
options issued by DeepTech and certain other stock held by stockholders and
warrantholders of DeepTech. Although DeepTech will not directly receive any
proceeds from the sale of any securities covered by the Registration
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Statement because such securities are held by DeepTech stockholders and
warrantholders, DeepTech has received, and expects to continue to receive,
proceeds from the exercise of warrants and options covered by the Registration
Statement. During the three months ended September 30, 1997, warrants and
options totaling 634,125 were exercised at prices ranging from $4.00 per share
to $4.50 per share resulting in $2.6 million in proceeds to DeepTech. In
October 1997, an additional 468,750 warrants were exercised resulting in $2.1
million of proceeds to DeepTech. Management believes that, based on the
difference between the exercise price under such warrants and options (ranging
from $4.00 to $10.00 per share) and the closing price of DeepTech common stock
on October 31, 1997 ($10.625 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 (approximately $3.1 million for the
three months ended September 30, 1997) with a minimum principal amortization of
$250,000 per quarter and scheduled interest payments on the remaining principal
balance, (iii) scheduled interest payments on the Senior Subordinated Notes of
$422,000 per quarter, or $1.7 million on an annual basis and (iv) amounts
necessary to pay general and administrative and other operational expenses.
In addition, 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 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.
DeepTech did not repurchase any shares of common stock under this program.
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 September 30, 1997, the Company had $13.8 million of funds available.
In September 1997, DeepTech and Tatham Offshore entered into the Restructuring
Option Agreement. Under the Restructuring Option Agreement, DeepTech 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 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
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 listing on The Nasdaq National
Market.
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 for the
use of a semisubmersible drilling rig in the Gulf. Tatham Offshore agreed not
to sell less than 100% of its interest in Tatham Offshore Development pending
the exercise by DeepTech of one of its options.
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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. In addition, if DeepTech 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.
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 and the Senior Subordinated Notes or
obtain adequate financing to satisfy these obligations.
As a result of the Restructuring Option Agreement, DeepTech no longer has $60
million of Subordinated Notes receivable from Tatham Offshore or a $26 million
accumulated loss of Tatham Offshore in excess of its investment recorded on its
consolidated balance sheet. Instead, as of September 30, 1997, the net of these
amounts, $34 million, is reflected on the consolidated balance sheet as an
"equity investment" pending the selection by DeepTech of one of the above
listed options.
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 in September 1998, the
repayment of DeepTech's Senior Subordinated Note which is due in May 2000 and
the principal balance of $82.0 million under DeepTech's Senior Notes which are
due in December 2000. The Company contemplates raising such funds through (i)
the issuance of additional debt or debt refinancing, (ii) the sale of equity
securities at the subsidiary level, (iii) a repayment of amounts due DeepTech
from DeepFlex Services and/or (iv) the exercise of additional outstanding
warrants to acquire DeepTech common stock. However, there can be no assurance
that capital will be made available to the Company 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 and FPS Bill Shoemaker during the three
months ended September 30, 1997 generated $8.3 million of operating net cash
flows, all of which service obligations under the RIGCO Credit Facility and
other outstanding accounts payable. The employment of both drilling rigs for
the remainder of fiscal year ending June 30, 1998 is expected to generate
approximately $21.2 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 its 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.
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 nine
months ended September 30, 1997 totaled $49.4 million. At September 30, 1997,
the Partnership had cash and cash equivalents of $2.3 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 the Partnership's equity
investees which include Stingray Pipeline Company ("Stingray"), High Island
Offshore System ("HIOS"), U-T Offshore System ("UTOS"), Viosca Knoll Gathering
System ("Viosca Knoll"), Poseidon Oil Pipeline Company, L.L.C. ("POPCO"), West
Cameron Dehydration Company ("West Cameron Dehy"), Manta Ray Offshore Gathering
Company, L.L.C. ("Manta Ray Offshore") and Nautilus Pipeline Company, L.L.C.
("Nautilus") (collectively, the "Equity Investees") and (iv) the sale of oil
and gas attributable to the Partnership's interest in three producing
properties.
The Partnership's cash flows from operations will be affected by the ability of
each Equity Investee to make distributions. Distributions from such entities
are also subject to the discretion of their respective management
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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 nine months ended September 30, 1997 totaled $19.3
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 September 30, 1997, the Partnership had $220.0 million
outstanding under its credit facility bearing interest at an average floating
rate of 6.3% per annum. Currently, approximately $74 million of additional
funds are available under the Partnership Credit Facility.
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 and
matures on December 31, 2000. As of September 30, 1997, Stingray had $18.9
million outstanding under its term loan agreement bearing interest at an
average floating rate of 6.3% per annum.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a group of commercial banks to provide up to $150
million for the construction and expansion of the Poseidon Oil Pipeline and for
other working capital needs of POPCO. POPCO's ability to borrow money under the
facility is subject to certain customary terms and conditions, including
borrowing base limitations. The POPCO Credit Facility is secured by a
substantial portion of POPCO's assets and matures on April 30, 2001. As of
September 30, 1997, POPCO had $117.5 million outstanding under its term loan
agreement bearing interest at an average floating rate of 6.9% per annum.
Currently, approximately $27.8 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 September 30, 1997, Viosca Knoll had $42.5
million outstanding under its credit facility bearing interest at an average
floating rate of 6.4% per annum. Currently, approximately $34.6 million of
additional funds are available under the Viosca Knoll Credit Facility.
The Partnership owns an interest in and is operator of three producing oil and
gas leases in the Gulf. The properties, which are subject to certain
reversionary rights held by Tatham Offshore, include 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 Partnership has determined
that given the current estimates of commodity prices and proved reserves, the
possibility that Tatham Offshore's reversionary rights will be exercised is
remote. The Viosca Knoll Block 817 is currently producing an aggregate of
approximately 70 MMcf of gas and 170 barrels of oil per day. Garden Banks Block
72, which began producing in May 1996, is currently producing an average of
approximately 2,035 barrels of oil, 9.1 MMcf of gas and 1,100 barrels of water
per day. The Garden Banks Block 117 wells, which began producing in July 1996
and May 1997, are currently producing an average of approximate 3,490 barrels
of oil, 6.0 MMcf of gas and 3,390 barrels of water per day.
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
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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 $0.475 per Unit, the quarterly Partnership distributions
total $13.6 million in respect of the Preference Units, Common Units and
general partner interest ($54.3 million on an annual basis, including $20.0
million to Leviathan). The Partnership believes that it will be able to
continue to pay at least the current quarterly distribution of $0.475 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. 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 nine months
ended September 30, 1997, the Partnership paid Leviathan Incentive
Distributions totaling $2.1 million and will pay Leviathan an Incentive
Distribution of $1.8 million in November 1997.
In January 1997, the Partnership and affiliates of Marathon Oil Company
("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 $240 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,
and to certain facilities downstream of the Exxon plant to effect deliveries
into multiple interstate pipelines. Upstream of the Ship Shoal Block 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 1008 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 $11.0 million of funding in the form of a newly
constructed compressor in addition to its contribution of the Manta Ray
Offshore system.
The Partnership anticipates that its capital expenditures and equity
investments for the remaining portion of 1997 will relate to continuing
acquisition and construction activities including the construction and
installation of a new platform and processing facilities at East Cameron Block
373. This platform, which the Partnership anticipates will be placed in service
during April 1998 at a projected cost of approximately $32 million, 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.
In March 1997, POPCO began construction of an expansion 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 cash
capital expenditures and equity investments for the nine months ended September
30, 1997 were $23.5 million, including $11.0 million related to
19
<PAGE> 20
the Nautilus/Manta Ray Offshore project discussed above. The Partnership
contributed existing assets to the Nautilus/Manta Ray Offshore joint ventures
as partial consideration for its ownership interest therein and may continue to
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 $11.8 million for the nine months ended September 30, 1997.
The Partnership capitalized $1.5 million of such costs in connection with
construction projects and drilling activities during the period.
TATHAM OFFSHORE
Sources of Cash. Tatham Offshore intends to satisfy its immediate capital
requirements and other working capital needs primarily from cash on hand and
cash generated from continuing operations. At September 30, 1997, Tatham
Offshore had $8.0 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 70 MMcf of gas and 170 barrels of oil per
day. Tatham Offshore's current 25% working interest in the 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 three months ended September 30, 1997,
Tatham Offshore's net revenue from this property was reduced by $0.6 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 West Delta Block 35 which is currently producing at a rate
of approximately 6 MMcf of gas and 70 barrels of oil per day.
Tatham Offshore anticipates that declining revenue from currently producing
properties will need to be replaced by revenue from production from the Sunday
Silence Project, the North Atlantic pipeline project (discussed below) or from
other sources.
Uses of Cash. Tatham Offshore's primary uses of cash consist of (i) expenses
associated with operating its producing properties, including its leasehold
abandonment liabilities, (ii) capital expenditures necessary to fund its
portion of the development costs attributable to its working interests
including its obligations under the Drilling Arrangement discussed below, (iii)
platform access fees and processing and commodity charges payable to the
Partnership, (iv) payments due under the management agreement with DeepTech and
(v) expenditures related to the North Atlantic pipeline project currently being
proposed.
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.
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, 1997, the management
agreement was amended to provide for an annual management fee of 26% of
DeepTech's overhead expenses. For the three months ended September 30, 1997,
Tatham Offshore was charged $1.1 million in management fees pursuant to this
agreement.
North Atlantic Pipeline Partners, L.P. ("North Atlantic") is the sponsor of a
proposal to build a major pipeline from offshore Newfoundland and Nova Scotia
to Seabrook, New Hampshire. As of September 30, 1997, Tatham Offshore Canada
Limited, the Canadian representative of North Atlantic, has incurred $4.7
million of 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 by
the spring of 1998 and the ultimate capital costs of the project, if approved,
could reach $3.0 billion to $3.5 billion. During
20
<PAGE> 21
October 1997, North Atlantic filed applications with the Federal Energy
Regulatory Commission and its Canadian counterpart, the National Energy Board,
for approval of its proposed subsea pipeline. Action by the Canadian and United
States regulatory authorities on North Atlantic's pipeline proposal is expected
to occur by mid 1998.
Liquidity Outlook. In order to improve liquidity and partially address its
capital requirements, Tatham Offshore entered the Restructuring Option
Agreement with DeepTech in September 1997.
Under the Restructuring Option Agreement, DeepTech 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 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. As a result of entering into the Restructuring Option
Agreement with DeepTech, Tatham Offshore reclassified its $60 million of
Subordinated Notes and the related interest payable of $1.7 million to
"obligation under option agreement" on its consolidated balance sheet at
September 30, 1997 pending DeepTech's exercise of one of its options described
above. Additionally, Tatham Offshore believes that by consummating one of the
above restructuring transactions that it will be able to continue to maintain
its listing on The Nasdaq National Market.
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 agreed not to sell less than 100% of its interest in Tatham Offshore
Development pending the exercise by DeepTech of one of its options.
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 Division of
Schlumberger Technology Corporation ("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
21
<PAGE> 22
(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 $22 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 cash requirements with
cash on hand and cash from continuing operations. Tatham Offshore generated
approximately $0.7 million in positive operating cash flow for the three months
ended September 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. In addition, Tatham Offshore
believes that since the royalty abatement has been granted, the resulting
improved economics for the Sunday Silence Project should be sufficient to
obtain development financing or an industry farmout arrangement. There can be
no assurance, however, that Tatham Offshore will be able to obtain regulatory
approval, joint venture partners or adequate financing for these projects.
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.
On October 7, 1997, Tatham Offshore received notification from The Nasdaq Stock
Market, Inc. ("Nasdaq") that because Tatham Offshore had reported losses from
operations and/or net losses in three of the past four fiscal years and had a
net tangible asset value of less than $4.0 million as of June 30, 1997, Tatham
Offshore no longer met the listing requirements for continued inclusion on The
Nasdaq National Market. On October 20, 1997, Tatham Offshore responded to
Nasdaq's notification by detailing the pro forma effect of each of the three
options under the Restructuring Option Agreement with DeepTech. Under each
option, Tatham Offshore's pro forma net tangible asset value is in excess of
$4.0 million as of December 31, 1997, the date on which DeepTech must exercise
one of the three options. However, on November 6, 1997, Tatham Offshore
received notification from Nasdaq that its securities were scheduled to be
removed from The Nasdaq National Market effective with the opening of business
on November 13, 1997. On November 10, 1997, Tatham Offshore filed a request for
an oral hearing with Nasdaq which allows Tatham Offshore to maintain its
listing on The Nasdaq National Market pending the outcome of the hearing. In
the event Nasdaq delists Tatham Offshore's common stock, the holders thereof
could suffer a decrease in marketability of their shares and the liquidity of
their investment in Tatham Offshore's common stock and its preferred stocks
which are convertible into common stock, which may have a material adverse
effect on the market value of Tatham Offshore's common stock.
On October 22, 1997, Tatham Offshore received a notification from Nasdaq that
because Tatham Offshore failed to maintain a closing bid price greater than or
equal to $1.00 per share of its common stock for the last ten consecutive trade
dates, Tatham Offshore no longer met the listing requirements for continued
inclusion on The Nasdaq National Market. On November 13, 1997, the shareholders
of Tatham Offshore approved the Board of Directors to effect a reverse stock
split of up to ten-for-one which, when and if effected, should allow the bid
price of Tatham Offshore's common stock to be in excess of the Nasdaq minimum
price requirement.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may,"
22
<PAGE> 23
"management believes," and words or phrases of similar import. Although
management believes that such statements and expressions are reasonable and
made in good faith, it can give no assurance that such expectations will prove
to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Among the key factors that may have a direct bearing on the Company
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.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment to First Amended and Restated
Management Agreement Between DeepTech International
Inc. and Leviathan Gas Pipeline Company.
10.2 Fifth Amendment to First Amended and Restated
Management Agreement Between DeepTech International
Inc. and Tatham Offshore, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on July 21, 1997.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEEPTECH INTERNATIONAL INC.
Date: November 14, 1997 /s/ JANET E. SIKES
------------------
Janet E. Sikes
Treasurer and Secretary
(Principal Accounting Officer)
Date: November 14, 1997 /s/ DENNIS A. KUNETKA
---------------------
Dennis A. Kunetka
Senior Vice President - Corporate Finance
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Fifth Amendment to First Amended and Restated Management
Agreement Between DeepTech International Inc. and Leviathan
Gas Pipeline Company.
10.2 Fifth Amendment to First Amended and Restated Management
Agreement Between DeepTech International Inc. and Tatham
Offshore, Inc.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIFTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND LEVIATHAN GAS PIPELINE COMPANY
This Fifth Amendment dated as of July 1, 1997 (this "Amendment") has been
executed and delivered by the undersigned for the purpose of amending 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
certain compensation and other provisions included in the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Subsection 3.1. Section 3.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing
it with the following:
3.1 Fee. Prior to July 1, 1994, the annual compensation
due DII from LGPC for services provided pursuant to
this Agreement shall accrue in accordance with the
original terms and conditions of the Agreement prior
to any amendments. On and as of July 1, 1994 through
and including October 31, 1995, the annual
compensation (prorated for any portion of a year)
due DII from LGPC for services provided pursuant to
this Agreement shall be (i) a base fee of
$2,000,000.00 plus (ii) 40% of DII's Unreimbursed
Overhead, if any. On and as of November 1, 1995
through and including June 30, 1996, the annual
compensation (prorated for any portion of a year)
due DII from LGPC for services provided pursuant to
this Agreement shall be 45.3% of DII's Overhead. On
and as of July 1, 1996 through and including June
30, 1997, the annual compensation due DII from LGPC
for services provided pursuant to this Agreement
shall be 54% of DII's Overhead. On and as of July 1,
1997 through the term of this Agreement, the annual
compensation (prorated for any portion of a year)
due DII from LGPC for services provided pursuant to
this Agreement shall be 52% of DII's Overhead.
<PAGE> 2
LGPC shall also promptly reimburse DII with respect to amounts incurred for
the direct benefit of LGPC.
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
By: /s/ Donald V. Weir By: /s/ Grant E. Sims
----------------------------- ------------------------------
Donald V. Weir Grant E. Sims
Chief Financial Officer Chief Executive Officer
<PAGE> 1
EXHIBIT 10.2
FIFTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND TATHAM OFFSHORE, INC.
This Fifth Amendment dated as of July 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending 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 certain compensation and other provisions included in the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Subsection 3.1. Section 3.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing
it with the following:
3.1 Fee. Prior to July 1, 1993, the annual compensation
due DII from TOI for services provided pursuant to
this Agreement shall accrue in accordance with the
original terms and conditions of the Agreement prior
to any amendments. On and as of July 1, 1993 through
and including October 31, 1995, the annual
compensation (prorated for any portion of a year)
due DII from TOI for services provided pursuant to
this Agreement shall be (i) a base fee of
$2,000,000.00 plus (ii) 40% of DII's Unreimbursed
Overhead, if any. On and as of November 1, 1995
through and including June 30, 1996, the annual
compensation (prorated for any portion of a year)
due DII from TOI for services provided pursuant to
this Agreement shall be 27.4% of DII's Overhead. On
and as of July 1, 1996 through and including June
30, 1997, the annual compensation due DII from TOI
for services provided pursuant to this Agreement
shall be 24% of DII's Overhead. On and as of July 1,
1997 through the term of this Agreement, the annual
compensation (prorated for any portion of a year)
due DII from TOI for services provided pursuant to
this Agreement shall be 26% of DII's Overhead.
TOI shall also promptly reimburse DII with respect to amounts incurred
for the direct benefit of TOI.
<PAGE> 2
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: /s/ Donald V. Weir By: /s/ Eric Lynn Hill
---------------------------- --------------------------
Donald V. Weir Eric Lynn Hill
Chief Financial Officer Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEEPTECH
INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS OF
SEPTEMBER 30, 1997 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,801
<SECURITIES> 0
<RECEIVABLES> 16,887
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,295
<PP&E> 129,423
<DEPRECIATION> 3,528
<TOTAL-ASSETS> 205,439
<CURRENT-LIABILITIES> 89,121
<BONDS> 96,272
0
0
<COMMON> 201
<OTHER-SE> 10,440
<TOTAL-LIABILITY-AND-EQUITY> 205,439
<SALES> 41,800
<TOTAL-REVENUES> 43,025
<CGS> 32,627
<TOTAL-COSTS> 33,419
<OTHER-EXPENSES> 1,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,658
<INCOME-PRETAX> 3,665
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 2,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,365
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
