<PAGE> 1
================================================================================
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 DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____TO____
COMMISSION FILE NO. 0-23934
DEEPTECH INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0289338
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7500
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF FEBRUARY 13, 1998, THERE WERE OUTSTANDING 20,856,012 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 December 31, 1997 (unaudited) and June 30, 1997..................................3
Unaudited Consolidated Statement of Operations for the Three and Six Months
Ended December 31, 1997 and 1996, respectively.................................................................4
Unaudited Consolidated Statement of Cash Flows for the Six Months
Ended December 31, 1997 and 1996...............................................................................5
Consolidated Statement of Stockholders' Equity for the Six Months
Ended December 31, 1997 (unaudited)............................................................................6
Notes to Consolidated Financial Statements........................................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................14
PART II. OTHER INFORMATION..........................................................................................25
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...........................................................................................................26
</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>
December 31, June 30,
1997 1997
--------- ---------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,982 $ 12,522
Accounts receivable 11,932 13,189
Accounts receivable from affiliates 377 344
Notes receivable from affiliates 400 400
Other current assets 517 989
--------- ---------
Total current assets 27,208 27,444
--------- ---------
Property and equipment 131,751 127,665
Less: Accumulated depreciation 5,079 2,159
--------- ---------
Property and equipment, net 126,672 125,506
--------- ---------
Construction fund collateral account -- 554
Equity investment 33,710 --
Receivable from affiliate -- 60,000
Deferred income taxes 8,179 9,214
Debt issue costs, net and other 5,544 5,500
--------- ---------
Total assets $ 201,313 $ 228,218
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,503 $ 6,686
Accounts payable to affiliates 4,867 9,657
Notes payable 68,876 7,893
Interest payable 465 465
--------- ---------
Total current liabilities 76,711 24,701
Long-term debt 96,341 164,561
Accumulated losses and/or cash distributions of equity investees
in excess of investment and accumulated equity earnings 12,702 32,679
Other noncurrent liabilities 346 394
--------- ---------
Total liabilities 186,100 222,335
--------- ---------
Minority interests in consolidated subsidiaries 353 344
--------- ---------
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 December 31, 1997 and June 30, 1997, 20,853,512
and 19,471,228 shares issued and outstanding as of
December 31, 1997 and June 30, 1997, respectively 209 195
Additional paid-in capital 36,671 30,646
Accumulated deficit (22,020) (25,302)
--------- ---------
14,860 5,539
--------- ---------
Total liabilities and stockholders' equity $ 201,313 $ 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 Six Months
Ended December 31, Ended December 31,
------------------------------ -------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 22,213 $ 32,530 $ 46,101 $ 55,630
Drilling services 16,860 4,588 34,772 4,588
Equity in earnings 977 2,773 2,202 5,557
------------- ------------- ------------- --------------
40,050 39,891 83,075 65,775
------------- ------------- ------------- --------------
Costs and expenses:
Oil and gas purchases 22,022 32,069 45,697 54,934
Operating expenses 8,456 2,521 17,409 2,521
Losses of equity investees 220 277 1,011 164
Depreciation and amortization 1,506 439 2,813 476
General and administrative expenses 772 628 1,608 1,114
------------- ------------- ------------- --------------
32,976 35,934 68,538 59,209
------------- ------------- ------------- --------------
Operating income 7,074 3,957 14,537 6,566
Interest and other income 296 2,105 2,298 5,095
Interest and other financing costs (5,797) (4,052) (11,455) (8,225)
------------- ------------- ------------- --------------
Income before minority interests
and income taxes 1,573 2,010 5,380 3,436
Minority interests in consolidated subsidiaries (116) (300) (258) (625)
------------- ------------- ------------- --------------
Income before income taxes 1,457 1,710 5,122 2,811
Income tax expense 540 720 1,840 1,178
------------- ------------- ------------- --------------
Net income $ 917 $ 990 $ 3,282 $ 1,633
============= ============= ============= ==============
Basic net income per common share
(Note 2) $ 0.05 $ 0.06 $ 0.16 $ 0.09
============= ============= ============= ==============
Diluted net income per common share
(Note 2) $ 0.04 $ 0.05 $ 0.14 $ 0.08
============= ============= ============= ==============
</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>
Six Months
Ended December 31,
-------------------------------
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,282 $ 1,633
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Minority interests in consolidated subsidiaries 258 625
Depreciation and amortization 2,813 476
Amortization of debt issue costs 1,677 1,578
Equity in earnings (2,202) (5,557)
Losses of equity investees 1,011 164
Distributions from equity investments 9,213 5,207
Noncash interest income related to option agreement (1,709) --
Deferred income taxes and other 1,187 1,538
Changes in operating working capital:
Increase in stock subscriptions receivable -- (1,405)
Decrease (increase) in accounts receivable 1,257 (6,700)
Increase in accounts receivable from affiliates (33) (1,224)
Decrease in other current assets 472 2
Decrease in accounts payable and accrued liabilities (4,183) (6,410)
(Decrease) increase in accounts payable to affiliates (4,790) 5,795
Decrease in interest payable -- (61)
------------- --------------
Net cash provided by (used in) operating activities 8,253 (4,339)
------------- --------------
Cash flows from investing activities:
Additions to property and equipment (3,979) (25,313)
Repayment of advances to affiliates -- 1,751
Advances to affiliates -- (1,317)
Investment in equity investee -- (1,017)
Other -- (15)
------------- --------------
Net cash used in investing activities (3,979) (25,911)
------------- --------------
Cash flows from financing activities:
Restricted cash 554 (12,054)
Proceeds from notes payable -- 65,992
Repayments of notes payable (7,374) (30,500)
Debt issue costs (25) (3,634)
Proceeds from issuance of common stock 5,839 7,185
Dividends on subsidiary common stock (1,808) (605)
------------- --------------
Net cash (used in) provided by financing activities (2,814) 26,384
------------- --------------
Net increase (decrease) in cash and cash equivalents 1,460 (3,866)
Cash and cash equivalents at beginning of year 12,522 10,102
------------- --------------
Cash and cash equivalents at end of period $ 13,982 $ 6,236
============= ==============
Supplemental disclosures to the statement of cash flows - see Note 8.
</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) 1,382 14 6,025 -- 6,039
Net income for the six months
ended December 31, 1997 (unaudited) -- -- -- 3,282 3,282
---------- --------- -------- ---------- ---------
Balance, December 31, 1997
(unaudited) 20,853 $ 209 $ 36,671 $ (22,020) $ 14,860
========== ========= ======== ========== =========
</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) eight natural gas pipeline systems, (ii) a crude
oil pipeline system, (iii) five strategically located multi-purpose platforms,
(iv) three producing oil and gas properties 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 December 31, 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 currently
pursuing energy related opportunities in eastern Canada, including the
development of offshore pipeline infrastructure.
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 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.
7
<PAGE> 8
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Earnings per share
During the three months ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share". SFAS
No. 128 establishes new guidelines for computing earnings per share ("EPS") and
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Dilutive EPS reflects potential dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during the
period increased by the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. All prior
period EPS data has been restated to conform with the provisions of SFAS No.
128.
The following is a reconciliation of the numerators and the denominators of the
basic and diluted per share computations for the periods presented.
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended December 31, 1997 Ended December 31, 1996
------------------------------------------ ------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income $ 917,000 20,568,670 $ 0.05 $ 990,000 17,521,306 $ 0.06
============ ============
EFFECT OF DILUTIVE SECURITIES
Warrants -- 2,448,541 -- 2,025,611
Options -- 1,374,600 -- 772,876
------------ ------------ ------------ ------------
DILUTED EPS
Net income $ 917,000 24,391,811 $ 0.04 $ 990,000 20,319,793 $ 0.05
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months For the Six Months
Ended December 31, 1997 Ended December 31, 1996
------------------------------------------ ------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income $ 3,282,000 20,136,171 $ 0.16 $ 1,633,000 17,279,428 $ 0.09
============ ============
EFFECT OF DILUTIVE SECURITIES
Warrants -- 2,608,551 -- 2,123,266
Options -- 1,340,603 -- 794,476
------------ ------------ ------------ ------------
DILUTED EPS
Net income $ 3,282,000 24,085,325 $ 0.14 $ 1,633,000 20,197,170 $ 0.08
============ ============ ============ ============ ============ ============
</TABLE>
Warrants to purchase 167,092 shares of common stock at $13.50 per share were
outstanding during the three and six months ended December 31, 1997 but were not
included in the computation of diluted EPS because the warrants' exercise price
was greater than the average market price of the common shares. The warrants,
which expire on December 14, 1998, remain outstanding. Warrants and options to
purchase 1,521,092 shares of common stock at an average of $10.42 per share were
outstanding during the three and six months ended December 31, 1996 but were
excluded in the computation of diluted EPS because the warrants' exercise price
was greater than the average market price of the common shares.
8
<PAGE> 9
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3 - EQUITY INVESTMENTS:
The summarized financial information for the Company's investments which are
accounted for using the equity method is as follows:
SUMMARIZED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
Leviathan Gas
Pipeline Partners, L.P. Tatham Offshore, Inc.
------------------------------ -----------------------------
December 31, June 30, December 31, June 30,
1997 1997 1997 1997
<S> <C> <C> <C> <C>
Current assets $ 15,644 $ 18,621 $ 3,998 $ 9,438
Noncurrent assets 394,198 383,259 37,503 32,069
Current liabilities 13,554 11,260 2,584 1,540
Long-term debt 238,000 217,000 -- 60,000
Other noncurrent liabilities 14,703 9,915 7,150 7,663
</TABLE>
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
For the Six Months
ended December 31, 1997 For the Six Months ended December 31, 1996
-------------------------- ---------------------------------------------------
Tatham DeepFlex Tatham
Partnership Offshore Partnership Partners (a) Total Offshore
<S> <C> <C> <C> <C> <C> <C>
---------- ----------- --------- --------- ---------- ---------
Operating revenue $ 45,507 $ 7,159 $ 53,309 $ 4,448 $ 10,302
Other income 313 178 977 185 246
Operating expenses (14,116) (6,088) (10,462) (2,800) (6,296)
Depreciation (18,350) (2,039) (20,505) (504) (2,140)
Other expenses (7,601) (1,720) (4,700) (1,195) (4,238)
---------- ----------- --------- --------- ---------
Net income (loss) 5,753 (2,510) 18,619 134 (2,126)
Preferred stock dividends -- (1,965) -- -- (1,974)
---------- ----------- --------- --------- ---------
Net income (loss) available
to common shareholders 5,753 (4,475) 18,619 134 (4,100)
Effective ownership
percentage 27.3% 35.7% (e) 27.3% 50% 37.34%
---------- ----------- --------- --------- ---------
1,571 (1,598) 5,083 67 (1,531)
Intercompany profit (b) -- 260 -- -- 367
Preferred stock dividends (c) -- -- -- -- 420
Other equity investees 10 -- 55 -- (105)
Other 621 (d) 327 (f) 352 -- 685 (f)
---------- ----------- --------- --------- ---------
Equity in earnings (losses) $ 2,202 $ (1,011) $ 5,490 $ 67 $ 5,557 $ (164)
========== =========== ========= ========= ========= =========
Distributions/dividends $ 9,213 $ -- $ 5,207 $ -- $ 5,207 $ --
========== =========== ========= ========= ========= =========
</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) On December 17, 1997, DeepTech converted $60.0 million of promissory
notes due from Tatham Offshore into shares of Tatham Offshore common
stock increasing DeepTech's ownership interest in Tatham Offshore to
approximately 94%. See Note 6.
(f) Includes the effect of the change during the period in DeepTech's
ownership percentage of Tatham Offshore's common equity.
9
<PAGE> 10
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Partnership and its subsidiaries distribute 100% of available cash, as
defined, on a quarterly basis to the holders of the Preference Units and to
Leviathan, as general partner and holder of the Common Units. These
distributions are effectively made 98% to unitholders and 2% to Leviathan,
subject to the payment of incentive distributions to Leviathan if certain target
levels of cash distributions to Unitholders are achieved (the "Incentive
Distributions"). As an incentive, the general partner's interest in the portion
of quarterly cash distributions in excess of $0.325 per Unit and less than or
equal to $0.375 per Unit is increased to 15%. For quarterly cash distributions
over $0.375 per Unit but less than or equal to $0.425 per Unit, the general
partner receives 25% of such incremental amount and for all quarterly cash
distributions in excess of $0.425 per Unit, the general partner receives 50% of
the incremental amount. In 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. In October 1997, the Partnership paid a cash distribution of $0.475
per Preference and Common Unit for the period from July 1, 1997 through
September 30, 1997 and an Incentive Distribution of $1.8 million to Leviathan.
On January 20, 1998, the Partnership declared a cash distribution of $0.50 per
Preference and Common Unit for the period from October 1, 1997 through December
31, 1997 which was paid on February 13, 1998 to unitholders of record as of
January 30, 1998. Leviathan received an Incentive Distribution of $2.4 million
for the quarter ended December 31, 1997.
NOTE 4 - INDEBTEDNESS:
Outstanding indebtedness is comprised of the following:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
----------------------- ----------------------
Current Long-term Current Long-term
(in thousands)
<S> <C> <C> <C> <C>
Notes payable:
RIGCO Credit Facility $ 68,876 $ -- $ 7,893 $ 68,357
Senior Notes -- 80,991 -- 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 $5.4 million for the six months ended December 31, 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 $5.4 million
for the six months ended December 31, 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 $0.9 million for the six months
ended December 31, 1997.
10
<PAGE> 11
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY:
Under various agreements and arrangements, DeepTech has authorized the issuance
of stock warrants and options to noteholders, financial institutions, employees
and directors. During the six months ended December 31, 1997, DeepTech issued
1,382,284 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 $5.8 million in proceeds to DeepTech. At December 31, 1997,
DeepTech had outstanding warrants and options to acquire 8,288,083 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 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 six months ended December 31, 1997, the
Partnership and Tatham Offshore were charged $4.2 million and $2.1 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 six months ended December 31, 1997, Leviathan
charged the Partnership $0.4 million to compensate DeepTech for additional
taxable income allocated to Leviathan.
Subordinated Notes Receivable from Tatham Offshore
As of June 30, 1997, DeepTech held an aggregate principal amount of $60.0
million of Tatham Offshore Subordinated Convertible Promissory Notes (the
"Subordinated Notes"). Interest income related to the Subordinated Notes totaled
$1.7 million from July 1, 1997 through September 18, 1997, the date on which the
DeepTech Board of Directors approved the Restructuring Agreement discussed
below.
In September 1997, DeepTech and Tatham Offshore entered into an option agreement
to restructure the Subordinated Notes (the "Restructuring Agreement"). Under the
Restructuring Agreement, DeepTech agreed to forgive the next two scheduled
interest payments under the Subordinated Notes. In exchange, DeepTech received
three restructuring 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 was required to select one of the above restructuring transactions on
or before December 31, 1997.
On December 17, 1997, DeepTech's Board of Directors elected to exercise the
common stock option under the Restructuring Agreement. Under this option,
DeepTech converted the Subordinated Notes into 26,666,667 shares of Tatham
Offshore common stock at a conversion rate of $2.25 per share, the average of
the closing price of Tatham Offshore common stock for the ten trading days
immediately preceding the exercise of the option. As a result of the conversion
of the Subordinated Notes, Tatham Offshore eliminated all of its outstanding
debt to DeepTech.
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<PAGE> 12
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In February 1998, DeepTech offered to repurchase all of its Senior Notes and
Senior Subordinated Notes at 101% of the principal amounts thereof, plus accrued
and unpaid interest to the date of repurchase. Under the terms of the Senior
Note Indenture and the Senior Subordinated Note Agreement, DeepTech was
obligated to make this repurchase offer since it had converted all of the
Subordinated Notes into Tatham Offshore common stock. The holders of the Senior
Notes and the Senior Subordinated Notes must respond by March 31, 1998 if they
will require DeepTech to repurchase all or a portion of the debt outstanding. If
the holders require DeepTech to repurchase all or a portion of this debt,
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
any repurchase obligation.
Other
During the six months ended December 31, 1997, Leviathan Holdings paid
dividends of $12.1 million to its common stockholders, which included DeepTech,
as a result of its 85% ownership interest in Leviathan Holdings.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
Tatham Offshore
On October 7, 1997, Tatham Offshore received notification from The Nasdaq Stock
Market, Inc. ("Nasdaq") that because the Company 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 Agreement with DeepTech. Under each option, the
Company's pro forma net tangible asset value was in excess of $4.0 million as of
December 31, 1997, the date on which DeepTech was required to exercise one of
the three options. On January 14, 1998, Nasdaq granted Tatham Offshore an
exception to the net tangible assets requirement as a result of DeepTech's
election under the Restructuring Agreement thus allowing Tatham Offshore to
remain listed on The Nasdaq National Market.
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. On November 13, 1997, the Board of Directors of
Tatham Offshore approved a ten-for-one reverse stock split of Tatham Offshore's
common stock for the shareholders of record at the close of business on November
24, 1997 which allowed the bid price of Tatham Offshore's common stock to be in
excess of the Nasdaq minimum price requirement.
The Nasdaq listing criteria also requires a company listed on The Nasdaq
National Market to have a minimum dollar value associated with the public float
of its listed stock. The current public float requirement is $1.0 million,
however, on February 23, 1998, the Nasdaq minimum public float requirement will
increase to $5.0 million. Based upon recent closing prices of Tatham Offshore's
common stock, Tatham Offshore believes that the dollar value of its public float
is approximately $4.5 million to $5.5 million. If Tatham Offshore's public float
does not exceed $5.0 million on February 23, 1998, Tatham Offshore will have
until May 26, 1998 to meet the minimum public float requirement. In the event
Tatham Offshore is unable to comply with the new public float requirement by May
26, 1998, Tatham Offshore's common stock will immediately be delisted from The
Nasdaq National Market. In the event that The Nasdaq National Market 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. Tatham Offshore is currently reviewing options
which, if implemented, could allow it to continue to meet the Nasdaq minimum
public float requirement.
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.
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<PAGE> 13
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Company
DeepTech anticipates that it will need significant additional funds from outside
sources to fund its financial obligations which mature in 1998 and beyond.
Management believes that the Company will be able to obtain funds from outside
sources to satisfy these obligations, however, there can be no assurances 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.
In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or the results of
operations of the Company. Various legal actions which have arisen in the
ordinary course of business are pending with respect to the assets of the
Company. Management believes that the ultimate disposition of these actions,
either individually or in the aggregate, will not have a material adverse effect
on the consolidated financial position or operations of the Company.
NOTE 8 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
<TABLE>
<CAPTION>
Six Months Ended December 31,
---------------------------------
1997 1996
(in thousands)
<S> <C> <C>
Interest $ 9,778 $ 6,708
Taxes $ -- $ 1,000
</TABLE>
Supplemental disclosures of noncash investing and financing activities
<TABLE>
<CAPTION>
Six Months Ended December 31,
---------------------------------
1997 1996
(in thousands)
<S> <C> <C>
Conversion of receivable from affiliate into
equity investment $ 60,000 $ --
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS:
In February 1998, DeepFlex Services exchanged its 1,016,957 shares of Tatham
Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately
converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per
share for a total of $2.7 million in proceeds to Tatham Offshore. Tatham
Offshore used $2.5 million of proceeds to redeem all of the 4,991,377 shares of
Mandatory Redeemable Preferred Stock outstanding at $0.50 per share as required
under the terms of the Mandatory Redeemable Preferred Stock issue.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included 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 and six months ended
December 31, 1997. Unless the context otherwise requires, references to the
"Company" shall mean the assets and operations of DeepTech and its consolidated
subsidiaries.
DeepTech is a diversified energy company engaged, through its operating
subsidiaries, 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. 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. 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).
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. In
addition, Tatham Offshore is currently pursuing energy related opportunities in
eastern Canada, including the development of offshore pipeline infrastructure.
DeepTech owns approximately 27.7 million shares of Tatham Offshore common stock
representing approximately 94% of the issued and outstanding common stock of
Tatham Offshore. DeepFlex Services owns approximately 4.7 million shares of
Tatham Offshore's Series A 12% Convertible Exchangeable Preferred Stock and
406,783 shares of Tatham Offshore common 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 DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1996
Oil and gas sales from the Company's marketing operations totaled $22.2 million
for the three months ended December 31, 1997 as compared with $32.5 million for
the three months ended December 31, 1996. During the three months ended December
31, 1997 and 1996, the Company derived its oil and gas revenue by marketing the
oil and gas production of the Partnership, Tatham Offshore and third-party
producers. During the three months ended December 31, 1997, the Company sold
6,536 million cubic feet ("MMcf") of gas and 264,165 barrels of oil at average
prices of $2.67 per thousand cubic feet ("Mcf") and $17.94 per barrel,
respectively. During the same period in 1996, the Company sold 10,373 MMcf of
gas and 271,000 barrels of oil at average prices of $2.51 per Mcf and $23.92 per
barrel, respectively.
Drilling services totaled $16.9 million for the three months ended December 31,
1997 as compared with $4.6 million for the three months ended December 31, 1996.
Drilling services for the three months ended December 31, 1997 represented
revenue from contract drilling services provided by the FPS Laffit Pincay and
FPS Bill Shoemaker whereas revenue for the same period in 1996 represented
contract drilling services provided by the FPS Laffit Pincay.
Equity in earnings totaled $1.0 million for the three months ended December 31,
1997 as compared with $2.8 million for the same period in 1996. Equity in
earnings for the three months ended December 31, 1997 primarily included equity
earnings of the Partnership of $1.0 million whereas equity in earnings for the
three months ended December 31, 1996 included equity earnings of the Partnership
and Tatham Offshore of $2.6 million and $0.2 million, respectively. During the
three months ended December 31, 1997, the Partnership had total operating
revenue of $20.0 million as compared with $29.1 million for the three months
ended December 31, 1996. For the three months ended December 31, 1997, total
gathering and transportation throughput, net to the Partnership, was 252.3
billion cubic feet ("Bcf") of gas as compared with 249.8 Bcf of gas for the
three months ended December 31, 1996. Oil volumes from Poseidon Oil Pipeline,
net to the Partnership, totaled 2.1 million barrels and 1.3 million barrels for
the three months ended December
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<PAGE> 15
31, 1997 and 1996, respectively. In addition, the Partnership produced and sold
3,382 MMcf of gas and 194,725 barrels of oil at average prices of $1.56 per Mcf
and $18.74 per barrel, respectively, during the three months ended December 31,
1997. During the same period in 1996, the Partnership produced and sold 5,189
MMcf of gas and 199,000 barrels of oil at average prices of $2.41 per Mcf and
$21.37 per barrel, respectively. During the three months ended December 31,
1996, Tatham Offshore had total operating revenue of $5.8 million and interest
income of $0.1 million. During the three months ended December 31, 1996, Tatham
Offshore sold 1,803 MMcf of gas and 47,000 barrels of oil at average prices of
$2.57 per Mcf and $24.57 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 December 31, 1996. In addition,
Tatham Offshore's net income was decreased by $1.0 million in preferred stock
dividends in arrears for the three months ended December 31, 1996.
Oil and gas purchases by the Company's marketing operations for the three months
ended December 31, 1997 totaled $22.0 million as compared with $32.1 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 December 31, 1997, the Company
purchased 6,536 MMcf of gas and 264,165 barrels of oil at average prices of
$2.66 per Mcf and $17.58 per barrel, respectively. During the three months ended
December 31, 1996, the Company purchased 10,373 MMcf of gas and 271,000 barrels
of oil at average prices of $2.48 per Mcf and $23.44 per barrel, respectively.
Operating expenses for the three months ended December 31, 1997 totaled $8.5
million and included costs to operate the FPS Laffit Pincay and FPS Bill
Shoemaker. Operating expenses for the three months ended December 31, 1996
totaled $2.5 million and included costs to operate the FPS Laffit Pincay.
Losses of equity investees for the three months ended December 31, 1997 totaled
$0.2 million and was related to equity losses of Tatham Offshore. Losses of
equity investees totaled $0.3 million for the three months ended December 31,
1996 and was primarily related to equity losses of DeepFlex Partners. During the
three months ended December 31, 1997, Tatham Offshore had total operating
revenue of $3.4 million and interest income of $0.1 million. During the three
months ended December 31, 1997, Tatham Offshore sold 1,184 MMcf of gas and 4,164
barrels of oil at average prices of $2.79 per Mcf and $17.10 per barrel,
respectively. Tatham Offshore's depreciation and operating expenses totaled $3.5
million for the three months ended December 31, 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 December 31, 1997. During the three months
ended December 31, 1996, DeepFlex Partners recorded a net loss of $0.5 million.
Depreciation and amortization totaled $1.5 million for the three months ended
December 31, 1997 as compared with $0.4 million for the same period in 1996. The
increase is primarily related to depreciation of the FPS Bill Shoemaker which
was placed in service in August 1997.
General and administrative expenses for the three months ended December 31, 1997
totaled $0.8 million as compared with $0.6 million for the same period in 1996.
Operating income for the three months ended December 31, 1997 totaled $7.1
million as compared with operating income of $4.0 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 December 31, 1997 totaled
$0.3 million as compared with $2.1 million for the same period in 1996. Interest
and other income for the three months ended December 31, 1997 included interest
income derived from available cash. Interest and other income for the three
months ended December 31, 1996 included interest income derived from (i) the
Subordinated Notes of $1.8 million and (ii) other affiliate debt and available
cash of $0.3 million. See Item 1. "Consolidated Financial Statements -- Note 6
- -- Related Party Transactions -- Subordinated Notes Receivable from Tatham
Offshore."
Interest and other financing costs for the three months ended December 31, 1997
totaled $5.8 million as compared with $4.1 million for the same period in 1996.
Interest and other financing costs for the three months ended December 31, 1997
included (i) interest and amortization of debt issue costs and discounts related
to the Senior Notes of $2.7 million, (ii) interest and amortization of debt
issue costs related to the Senior Subordinated Notes of $0.4 million and (iii)
interest and amortization of debt issue costs related to the RIGCO Credit
Facility of $2.7 million. Interest and other
15
<PAGE> 16
financing costs for the three months ended December 31, 1996 included (i)
interest and amortization of debt issue costs and discounts related to the
Senior Notes of $2.7 million, (ii) interest and amortization of debt issue costs
related to the RIGCO Credit Facility of $0.8 million, (iii) interest costs
related to $11.0 million of third-party indebtedness of the Company of $0.3
million and (iv) other interest expense of $0.3 million.
During the three months ended December 31, 1997, the Company recorded income tax
expense of $0.5 million as compared with $0.7 million for the three months ended
December 31, 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 December 31, 1997 totaled $0.9 million, or $0.05 per share. For the three
months ended December 31, 1996, the Company reported net income of $1.0 million,
or $0.06 per share, after taking into account a $0.3 million loss resulting from
minority interests in consolidated subsidiaries. See Item 1. "Consolidated
Financial Statements -- Note 2 -- Summary of Significant Accounting Policies."
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH SIX MONTHS ENDED DECEMBER 31,
1996
Oil and gas sales from the Company's marketing operations totaled $46.1 million
for the six months ended December 31, 1997 as compared with $55.6 million for
the six months ended December 31, 1996. During the six months ended December 31,
1997 and 1996, the Company derived its oil and gas revenue by marketing the oil
and gas production of the Partnership, Tatham Offshore and third-party
producers. During the six months ended December 31, 1997, the Company sold
15,237 MMcf of gas and 503,240 barrels of oil at average prices of $2.44 per Mcf
and $17.77 per barrel, respectively. During the same period in 1996, the Company
sold 18,106 MMcf of gas and 578,000 barrels of oil at average prices of $2.34
per Mcf and $22.87 per barrel, respectively.
Drilling services totaled $34.8 million for the six months ended December 31,
1997 representing revenue from contract drilling services provided by the FPS
Laffit Pincay and the FPS Bill Shoemaker. Drilling services totaled $4.6 million
for the six months ended December 31, 1996 and represented revenue from contract
drilling services provided by the FPS Laffit Pincay from October 1, 1996 through
December 31, 1996. Prior to October 1, 1996, the Company conducted its contract
drilling services related to the FPS Laffit Pincay through DeepFlex Partners
which activity is included in equity earnings for the period from July 1, 1996
through September 30, 1996.
Equity in earnings totaled $2.2 million for the six months ended December 31,
1997 as compared with $5.6 million for the same period in 1996. Equity in
earnings for the six months ended December 31, 1997 primarily included equity
earnings of the Partnership of $2.2 million whereas equity in earnings for the
six months ended December 31, 1996 primarily included equity earnings of the
Partnership and DeepFlex Partners of $5.4 million and $0.1 million,
respectively. During the six months ended December 31, 1997, the Partnership had
total operating revenue of $45.5 million as compared with $53.8 million for the
six months ended December 31, 1996. For the six months ended December 31, 1997,
total gathering and transportation throughput, net to the Partnership, was 496.0
Bcf of gas as compared with 500.4 Bcf of gas for the six months ended December
31, 1996. Oil volumes from Poseidon Oil Pipeline, net to the Partnership,
totaled 4.0 million barrels and 2.6 million barrels for the six months ended
December 31, 1997 and 1996, respectively. In addition, the Partnership produced
and sold 8,085 MMcf of gas and 391,805 barrels of oil at average prices of $1.96
per Mcf and $19.61 per barrel, respectively, during the six months ended
December 31, 1997. During the same period in 1996, the Partnership produced and
sold 9,355 MMcf of gas and 368,000 barrels of oil at average prices of $2.19 per
Mcf and $21.78 per barrel, respectively. DeepFlex Partners had operating revenue
of $4.4 million and nonoperating revenue of $0.2 million for the six months
ended December 31, 1996. DeepFlex Partners' depreciation and operating expenses
totaled $3.3 million and other expenses totaled $1.2 million for the six months
ended December 31, 1996.
Oil and gas purchases by the Company's marketing operations for the six months
ended December 31, 1997 totaled $45.7 million as compared with $54.9 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 six months ended December 31, 1997, the Company purchased
15,237 MMcf of gas and 503,240 barrels of oil at average prices of $2.42 per Mcf
and $17.41 per barrel, respectively. During the six months ended December 31,
1996, the Company purchased 18,112 MMcf of gas and 578,000 barrels of oil at
average prices of $2.32 per Mcf and $22.41 per barrel, respectively.
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<PAGE> 17
Operating expenses for the six months ended December 31, 1997 totaled $17.4
million and included costs to operate the FPS Laffit Pincay and FPS Bill
Shoemaker. Operating expenses for the six months ended December 31, 1996 totaled
$2.5 million and included costs to operate the FPS Laffit Pincay subsequent to
its acquisition by RIGCO on September 30, 1996. Prior to October 1, 1996, the
Company conducted its contract drilling services related to the FPS Laffit
Pincay through DeepFlex Partners which activity is included in equity earnings
for the period from July 1, 1996 through September 30, 1996, as discussed above.
Losses of equity investees for the six months ended December 31, 1997 totaled
$1.0 million as compared with $0.2 million for the six months ended December 31,
1996 and was primarily related to equity losses of Tatham Offshore. During the
six months ended December 31, 1997, Tatham Offshore had total operating revenue
of $7.2 million and interest income of $0.2 million. During the six months ended
December 31, 1997, Tatham Offshore sold 2,723 MMcf of gas and 13,019 barrels of
oil at average prices of $2.55 per Mcf and $17.40 per barrel, respectively.
Tatham Offshore's depreciation and operating expenses totaled $8.1 million and
other expenses totaled $1.7 million for the six months ended December 31, 1997.
In addition, Tatham Offshore's net loss was increased by $2.0 million in
preferred stock dividends in arrears for the six months ended December 31, 1997.
During the six months ended December 31, 1996, Tatham Offshore had total
operating revenue of $10.3 million and interest income of $0.2 million. During
the six months ended December 31, 1996, Tatham Offshore sold 3,279 MMcf of gas
and 108,000 barrels of oil at average prices of $2.38 per Mcf and $23.05 per
barrel, respectively. Tatham Offshore's depreciation and operating expenses
totaled $8.4 million and other expenses totaled $4.2 million for the six months
ended December 31, 1996. In addition, Tatham Offshore's net income was decreased
by $2.0 million in preferred stock dividends in arrears for the six months ended
December 31, 1996.
Depreciation and amortization totaled $2.8 million for the six months ended
December 31, 1997 as compared with $0.5 million for the same period in 1996. The
increase is primarily 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 six months ended December 31, 1997
totaled $1.6 million as compared with $1.1 million for the same period in 1996.
Operating income for the six months ended December 31, 1997 totaled $14.5
million as compared with operating income of $6.6 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 six months ended December 31, 1997 totaled
$2.3 million as compared with $5.1 million for the same period in 1996. Interest
and other income for the six months ended December 31, 1997 included interest
income derived from (i) the Subordinated Notes of $1.7 million and (ii)
available cash of $0.6 million. Interest and other income for the six months
ended December 31, 1996 included interest income derived from (i) the
Subordinated Notes of $3.5 million and (ii) the PIK Notes payable from DeepFlex
Partners of $1.2 million and (iii) other of $0.4 million. See Item 1.
"Consolidated Financial Statements -- Note 6 -- Related Party Transactions --
Subordinated Notes Receivable from Tatham Offshore."
Interest and other financing costs for the six months ended December 31, 1997
totaled $11.5 million as compared with $8.2 million for the same period in 1996.
Interest and other financing costs for the six months ended December 31, 1997
included (i) interest and amortization of debt issue costs and discounts related
to the Senior Notes of $5.4 million, (ii) interest and amortization of debt
issue costs related to the Senior Subordinated Notes of $0.9 million and (iii)
interest and amortization of debt issue costs related to the RIGCO Credit
Facility of $5.2 million, net of $0.3 million in interest capitalized related to
the FPS Bill Shoemaker. Interest and other financing costs for the six months
ended December 31, 1996 included (i) interest and amortization of debt issue
costs and discounts related to the Senior Notes of $5.4 million, (ii) interest
and amortization of debt issue costs related to the RIGCO Credit Facility of
$0.8 million, (iii) interest and amortization of debt issue costs related to
$41.5 million of other indebtedness of the Company of $1.5 million and (iv)
other interest expense of $0.5 million.
During the six months ended December 31, 1997, the Company recorded income tax
expense of $1.8 million as compared with $1.2 million for the six months ended
December 31, 1996.
After taking into account a $0.3 million loss resulting from minority interests
in consolidated subsidiaries, the Company's net income for the six months ended
December 31, 1997 totaled $3.3 million, or $0.16 per share. For the
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<PAGE> 18
six months ended December 31, 1996, the Company reported net income of $1.6
million, or $0.09 per share, after taking into account a $0.6 million loss
resulting from minority interests in consolidated subsidiaries. See Item 1.
"Consolidated Financial Statements -- Note 2 -- Summary of Significant
Accounting Policies."
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 and dividends funded by
distributions from the Partnership 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 six months ended
December 31, 1997, Leviathan, Tatham Offshore and Offshore Marketing made their
required cash payments to DeepTech for their management fees; however, DeepFlex
Services 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 six months ended December 31,
1997 was $7.8 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 six months ended December 31, 1997, RIGCO generated $16.0 million of
net operating cash flow, $11.7 million of which was used to pay interest and
principal due under the RIGCO Credit Facility and $3.8 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 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 six months ended December 31, 1997, warrants and options totaling 1,382,284
were exercised at prices ranging from $4.00 per share to $4.50 per share
resulting in $5.8 million in 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 February 13, 1998 ($13 1/8 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 $11.2 million for the six months
ended December 31, 1997) plus 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, (iv) amounts necessary to fund
RIGCO's capital expenditures in excess of amounts allowed under the RIGCO Credit
Facility and (v) amounts necessary to pay general and administrative and other
operational expenses.
18
<PAGE> 19
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 $56.3 million related to this make-ready program for
the FPS Bill Shoemaker, funded primarily with borrowings under the RIGCO Credit
Facility.
In February 1998, DeepFlex Services exchanged its 1,016,957 shares of Tatham
Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately
converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per
share for a total of $2.7 million in proceeds to Tatham Offshore. Tatham
Offshore used $2.5 million of proceeds to redeem all of the 4,991,377 shares of
Mandatory Redeemable Preferred Stock outstanding at $0.50 per share as required
under the terms of the Mandatory Redeemable Preferred Stock issue.
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 December 31, 1997, the Company had $14.0 million of funds available.
In September 1997, DeepTech and Tatham Offshore entered into the Restructuring
Agreement. Under the Restructuring Agreement, DeepTech agreed to forgive the
next two scheduled interest payments under the Subordinated Notes. In exchange,
DeepTech received three restructuring 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 was required to select one of the above restructuring transactions on
or before December 31, 1997. On December 17, 1997, DeepTech's Board of Directors
elected to exercise the common stock option under the Restructuring Agreement.
Under this option, DeepTech converted the Subordinated Notes into 26,666,667
shares of Tatham Offshore common stock at a conversion rate of $2.25 per share,
the average closing price of Tatham Offshore common stock for the ten trading
days immediately preceding the exercise of the option. As a result of the
conversion of the Subordinated Notes, Tatham Offshore eliminated all of its
outstanding debt to DeepTech and will not make interest payments to DeepTech of
$7.1 million as it had in prior years.
In February 1998, DeepTech offered to repurchase all of its Senior Notes and
Senior Subordinated Notes at 101% of the principal amounts thereof, plus accrued
and unpaid interest to the date of repurchase. Under the terms of the Senior
Note Indenture and the Senior Subordinated Note Agreement, DeepTech was
obligated to make this repurchase offer since it had converted all of the
Subordinated Notes into Tatham Offshore common stock. The holders of the Senior
Notes and the Senior Subordinated Notes must respond by March 31, 1998 if they
will require DeepTech to repurchase all or a portion of the debt outstanding. If
the holders require DeepTech to repurchase all or a portion of this debt,
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
any repurchase obligation.
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, each of the Senior Note Indenture and the Senior
Subordinated Note Agreement contain 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 six months ended December 31, 1997
generated $16.0 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
19
<PAGE> 20
drilling rigs for the remainder of fiscal year ending June 30, 1998 is expected
to generate approximately $14.3 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 year ended December
31, 1997 totaled $67.5 million. At December 31, 1997, the Partnership had cash
and cash equivalents of $6.4 million.
Cash from continuing operations is derived from (i) payments for gathering gas
through the Partnership's 100% owned pipelines, (ii) platform access and
processing fees, (iii) cash distributions from 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
subject to the discretion of their respective management committees. Further,
each of Stingray, POPCO and Viosca Knoll is party to a credit agreement under
which it has outstanding obligations that may restrict the payments of
distributions to its owners. Distributions to the Partnership from Equity
Investees during the year ended December 31, 1997 totaled $27.1 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 debt 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 December 31, 1997, the Partnership had $238.0 million
outstanding under its credit facility bearing interest at an average floating
rate of 6.61% per annum. As of December 31, 1997, approximately $56.0 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 December 31, 1997, Stingray had $17.4 million
outstanding under its term loan agreement bearing interest at an average
floating rate of 6.5% 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
December 31, 1997, POPCO had
20
<PAGE> 21
$120.5 million outstanding under its loan agreement bearing interest at an
average floating rate of 7.2% per annum. As of December 31, 1997, approximately
$27.9 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 December 31, 1997, Viosca Knoll had $52.2
million outstanding under its credit facility bearing interest at an average
floating rate of 6.7% per annum. As of December 31, 1997, approximately $24.8
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 55 MMcf of gas per day. Garden Banks Block 72, which began
producing in May 1996, is currently producing an average of approximately 2,100
barrels of oil, 9 MMcf of gas and 1,030 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 2,725 barrels of oil, 5 MMcf of
gas and 3,960 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
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 $0.50 per Unit, the quarterly Partnership distributions
total $14.8 million in respect of the Preference Units, Common Units and general
partner interest ($59.2 million on an annual basis, including $23.0 million to
Leviathan). The Partnership believes that it will be able to continue to pay at
least the current quarterly distribution of $0.50 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 year ended December 31,
1997, the Partnership paid Leviathan Incentive Distributions totaling $3.9
million and paid Leviathan an Incentive Distribution of $2.4 million in February
1998.
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 was extended and is currently
delivering gas gathered by it to several downstream pipelines including the
Nautilus system. 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. The capital costs
associated with the construction of the Nautilus interstate pipeline system and
the expansion of the
21
<PAGE> 22
Manta Ray Offshore gathering system, including the value of existing assets
contributed by the partners, totaled approximately $250 million. The Nautilus
system consists 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 platform,
the existing Manta Ray Offshore gathering system was extended into a broader
gathering system that serves shelf and deepwater production areas around Ewing
Bank Block 1008 to the east and Green Canyon Block 65 to the west. The Manta Ray
Offshore 47-mile expansion was completed and placed in service in November 1997.
The Nautilus system, including the related onshore facilities and platform
connections, was completed and placed in service in December 1997. Affiliates of
Marathon and Shell dedicated for transportation and gathering to each of the
Nautilus and Manta Ray Offshore systems significant deepwater acreage positions
in the area, and provided substantially all of the capital funding for the new
construction. The Partnership provided $11.1 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 near future 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 was
placed in service in December 1997. Substantially all of these capital
expenditures by POPCO as well as capital expenditures by Viosca Knoll and
Stingray were funded by borrowings under their respective credit facilities. In
addition, substantially all of the capital requirements of Nautilus and Manta
Ray Offshore were funded by the equity contributions of affiliates of Shell and
Marathon. The Partnership's cash capital expenditures and equity investments for
the year ended December 31, 1997 were $42.0 million, including $11.1 million
related to 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 in
the future 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 $15.9 million for the year ended December 31, 1997. The
Partnership capitalized $1.7 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 December 31, 1997, Tatham Offshore
had $2.9 million of cash and cash equivalents. However, as described below,
Tatham Offshore will need to raise substantial capital (equity, debt or both) or
enter into other arrangements (such as drilling and development commitments) to
develop its current inventory of properties and prospects and allow Tatham
Offshore to generate operating cash flow to fund on-going activities and
operations.
Cash from continuing operations is derived primarily from production from Tatham
Offshore's working interest in Viosca Knoll Block 817 which is currently
producing a total of approximately 55 MMcf of gas 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 six months ended December 31, 1997, Tatham Offshore's net
revenue from this property was reduced by $1.0 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 7 MMcf of gas and 44 barrels of oil per day.
In February 1998, DeepFlex Services exchanged its 1,016,957 shares of Tatham
Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately
converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per
share for a total of $2.7 million in proceeds to Tatham Offshore. Tatham
Offshore used $2.5
22
<PAGE> 23
million of proceeds to redeem all of the 4,991,377 shares of Mandatory
Redeemable Preferred Stock outstanding at $0.50 per share as required under the
terms of the Mandatory Redeemable Preferred Stock issue.
Tatham Offshore anticipates that declining revenue from currently producing
properties will need to be replaced by revenue 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, (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.
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 six months ended December 31, 1997, Tatham
Offshore was charged $2.1 million in management fees pursuant to this agreement.
North Atlantic Pipeline Partners, L.P. ("North Atlantic"), an indirect
wholly-owned subsidiary of Tatham Offshore, is the sponsor of a proposal to
construct a natural gas pipeline from offshore Newfoundland and Nova Scotia to
Seabrook, New Hampshire. As of December 31, 1997, Tatham Offshore Canada
Limited, the Canadian representative of North Atlantic, has incurred $9.0
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 $10.0 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 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 Agreement with
DeepTech in September 1997.
Under the Restructuring Agreement, DeepTech agreed to forgive the next two
scheduled interest payments under the Subordinated Notes. In exchange, DeepTech
received three restructuring 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. On December 17, 1997, DeepTech's Board of Directors
elected to exercise the common stock option under the Restructuring Agreement.
Under this option, DeepTech converted the Subordinated Notes into 26,666,667
shares of Tatham Offshore common stock at a conversion rate of $2.25 per share,
the average closing price of Tatham Offshore common stock for the ten trading
days immediately preceding the exercise of the option. As a result of the
conversion of the Subordinated Notes, Tatham Offshore eliminated all of its
outstanding debt.
Tatham Offshore currently intends to fund its immediate cash requirements with
cash on hand and cash from continuing operations. Tatham Offshore generated
approximately $1.1 million in positive operating cash flow for the six months
ended December 31, 1997.
23
<PAGE> 24
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. 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 Ewing Bank Blocks 958, 959, 1002 and 1003 (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.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company 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.
24
<PAGE> 25
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
DeepTech held its Annual Meeting of Stockholders on December 19, 1997.
At the Annual Meeting, the stockholders (i) elected ten directors to
hold office until the next annual meeting of stockholders and until
their respective successors are duly elected and qualified, (ii)
ratified the Board of Directors' appointment of Price Waterhouse LLP as
the Company's independent accountants for the fiscal year ending June
30, 1998 and (iii) ratify the Board of Directors' approval of the
Restructuring Agreement with Tatham Offshore. The votes were cast as
follows:
(i) Elect Directors
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Thomas P. Tatham 16,276,529 22,700
Conrad P. Albert 16,276,529 22,700
Laney Chouest 16,278,029 21,200
Charles M. Darling, IV 16,278,029 21,200
Robert E. Fox 16,277,829 21,400
Steven L. Gerard 16,276,529 22,700
Nancy K. Quinn 16,278,029 21,200
Janet E. Sikes 16,278,029 21,200
Grant E. Sims 16,276,529 22,700
Donald V. Weir 16,276,529 22,700
</TABLE>
(ii) Ratify Selection of Independent Accountants
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
16,304,929 14,800 0
</TABLE>
(iii) Ratify Restructuring Agreement with Tatham Offshore
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
13,551,035 111,694 7,370
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on December 31, 1997.
25
<PAGE> 26
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: February 17, 1998 /s/ LARI PARADEE
------------------------------------------
Lari Paradee
Vice President - Controller
(Principal Accounting Officer)
Date: February 17, 1998 /s/ DENNIS A. KUNETKA
------------------------------------------
Dennis A. Kunetka
Senior Vice President - Corporate Finance
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEEPTECH
INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT
DECEMBER 31, 1997 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,982
<SECURITIES> 0
<RECEIVABLES> 12,709
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,208
<PP&E> 131,751
<DEPRECIATION> 5,079
<TOTAL-ASSETS> 201,313
<CURRENT-LIABILITIES> 76,711
<BONDS> 96,341
0
0
<COMMON> 209
<OTHER-SE> 14,651
<TOTAL-LIABILITY-AND-EQUITY> 201,313
<SALES> 80,873
<TOTAL-REVENUES> 83,075
<CGS> 63,106
<TOTAL-COSTS> 64,117
<OTHER-EXPENSES> 2,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,455
<INCOME-PRETAX> 5,122
<INCOME-TAX> 1,840
<INCOME-CONTINUING> 3,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,282
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.14
</TABLE>
