<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 MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NO. 0-23934
DEEPTECH INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0289338
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7500
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF MAY 11, 1998, THERE WERE OUTSTANDING 25,108,045 SHARES OF COMMON
STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
===============================================================================
<PAGE> 2
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION........................................................................................1
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1998 (unaudited) and June 30, 1997.....................................1
Unaudited Consolidated Statement of Operations for the Three and Nine Months
Ended March 31, 1998 and 1997, respectively....................................................................2
Unaudited Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1998 and 1997..................................................................................3
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended March 31, 1998 (unaudited)...............................................................................4
Notes to Consolidated Financial Statements........................................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................13
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>
i
<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>
March 31, June 30,
1998 1997
--------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 6) $ 39,911 $ 12,522
Accounts receivable 12,146 13,189
Accounts receivable from affiliates 1,587 344
Notes receivable from affiliates -- 400
Other current assets 501 989
--------- ---------
Total current assets 54,145 27,444
--------- ---------
Property and equipment 135,174 127,665
Less: Accumulated depreciation 6,476 2,159
--------- ---------
Property and equipment, net 128,698 125,506
--------- ---------
Construction fund collateral account -- 554
Equity investment (Note 7) 32,831 --
Receivable from affiliate (Note 7) -- 60,000
Deferred income taxes 13,023 9,214
Debt issue costs, net and other 5,768 5,500
--------- ---------
Total assets $ 234,465 $ 228,218
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 8,870 $ 6,686
Accounts payable to affiliates 4,326 9,657
Notes payable 64,841 7,893
Interest payable 2,925 465
--------- ---------
Total current liabilities 80,962 24,701
Long-term debt 96,414 164,561
Accumulated losses and/or cash distributions of equity investees
in excess of investment and accumulated equity earnings 19,042 32,679
Other noncurrent liabilities 322 394
--------- ---------
Total liabilities 196,740 222,335
--------- ---------
Minority interests in consolidated subsidiaries 347 344
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity :
Preferred stock, $.01 par, 10,000,000 shares authorized -- --
Common stock, $.01 par, 100,000,000 shares authorized
as of March 31, 1998 and June 30, 1997, 24,920,057
and 19,471,228 shares issued and outstanding as of
March 31, 1998 and June 30, 1997, respectively 249 195
Additional paid-in capital 60,850 30,646
Accumulated deficit (23,721) (25,302)
--------- ---------
37,378 5,539
--------- ---------
Total liabilities and stockholders' equity $ 234,465 $ 228,218
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
1
<PAGE> 4
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
------------------------ ------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 12,165 $ 34,079 $ 58,266 $ 89,741
Drilling services 16,485 4,495 51,257 9,083
Equity in earnings -- 3,004 1,638 8,560
--------- --------- --------- ---------
28,650 41,578 111,161 107,384
--------- --------- --------- ---------
Costs and expenses:
Oil and gas purchases 12,035 33,455 57,732 88,389
Operating expenses 7,815 2,486 25,224 5,007
Losses of equity investees 1,963 81 2,410 244
Depreciation and amortization 1,334 438 4,147 914
General and administrative expenses 2,900 584 4,508 1,698
--------- --------- --------- ---------
26,047 37,044 94,021 96,252
--------- --------- --------- ---------
Operating income 2,603 4,534 17,140 11,132
Interest and other income 373 1,890 2,671 6,953
Interest and other financing costs (5,625) (3,331) (17,080) (11,556)
--------- --------- --------- ---------
(Loss) income before minority interests and
income taxes (2,649) 3,093 2,731 6,529
Minority interests in consolidated subsidiaries 52 (371) (206) (996)
--------- --------- --------- ---------
(Loss) income before income taxes (2,597) 2,722 2,525 5,533
Income tax (benefit) expense (896) 1,057 944 2,236
--------- --------- --------- ---------
Net (loss) income $ (1,701) $ 1,665 $ 1,581 $ 3,297
========= ========= ========= =========
Basic net (loss) income per common share
(Note 3) $ (0.08) $ 0.09 $ 0.08 $ 0.19
========= ========= ========= =========
Diluted net (loss) income per common share
(Note 3) $ (0.08) $ 0.08 $ 0.06 $ 0.16
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 5
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
-------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,581 $ 3,297
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interests in consolidated subsidiaries 206 996
Depreciation and amortization 4,147 914
Amortization of debt issue costs 2,522 2,314
Equity in earnings (1,638) (8,560)
Losses of equity investees 2,410 244
Distributions from equity investments 14,969 8,304
Noncash interest income related to option agreement (1,709) --
Deferred income taxes and other (2,408) 3,737
Changes in operating working capital:
Decrease (increase) in accounts receivable 1,043 (3,406)
Increase in accounts receivable from affiliates (1,243) (113)
Decrease (increase) in other current assets 488 (189)
Increase (decrease) in accounts payable and accrued liabilities 2,184 (7,167)
(Decrease) increase in accounts payable to affiliates (5,331) 2,025
Increase in interest payable 2,460 2,398
-------- --------
Net cash provided by operating activities 19,681 4,794
-------- --------
Cash flows from investing activities:
Additions to property and equipment (7,339) (45,218)
Repayment of advances to affiliates -- 2,618
Advances to affiliates -- (1,317)
Investment in equity investee (2,656) (1,017)
Proceeds from equity investee's redemption of preferred stock 2,156 --
Other 15 (15)
-------- --------
Net cash used in investing activities (7,824) (44,949)
-------- --------
Cash flows from financing activities:
Restricted cash 554 --
Proceeds from notes payable -- 65,992
Repayments of notes payable (11,409) (33,040)
Debt issue costs (25) (4,006)
Proceeds from issuance of common stock 29,171 7,185
Dividends on subsidiary common stock (2,759) (935)
-------- --------
Net cash provided by financing activities 15,532 35,196
-------- --------
Net increase (decrease) in cash and cash equivalents 27,389 (4,959)
Cash and cash equivalents at beginning of year 12,522 10,102
-------- --------
Cash and cash equivalents at end of period $ 39,911 $ 5,143
======== ========
Supplemental disclosures to the statement of cash flows -- see Note 9.
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<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 (Note 6) (unaudited) 5,449 54 29,417 -- 29,471
Tax benefit related to exercise of stock options
(unaudited) -- -- 787 -- 787
Net income for the nine months
ended March 31, 1998 (unaudited) -- -- -- 1,581 1,581
-------- -------- -------- -------- --------
Balance, March 31, 1998
(unaudited) 24,920 $ 249 $ 60,850 $(23,721) $ 37,378
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 7
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION:
DeepTech International Inc. ("DeepTech") is currently 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, exploration, production, processing,
gathering, transportation and marketing of 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"), currently 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. See Note 2.
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 pipeline systems located in
the Gulf and in the development and production of oil and gas reserves. The
Partnership's assets include interests in (i) eight natural gas pipeline
systems, (ii) a crude oil pipeline system, (iii) five strategically located
multi-purpose platforms, (iv) three producing oil and gas properties 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 March 31,
1998 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. See Note 2 for
a discussion of an agreement which, if consummated, would result in Tatham
Offshore conveying its assets located in the Gulf to DeepTech and the
Partnership. Tatham Offshore is currently pursuing energy related opportunities
in Atlantic Canada, including offshore contract drilling services, substantial
natural gas gathering and transmission facilities and related energy
infrastructure.
Marketing
Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of
DeepTech, markets oil and gas production from the Partnership and Tatham
Offshore.
NOTE 2 - RECENT EVENTS:
On March 2, 1998, DeepTech announced that its Board of Directors and holders of
a majority of its outstanding stock had approved the execution of an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which DeepTech would
merge (the "Merger") with El Paso Natural Gas Company ("El Paso") or, under
certain circumstances, one of its subsidiaries.
As a result of the Merger, some of the assets of DeepTech and Tatham Offshore
will be restructured so that DeepFlex Production Services, Inc. ("DeepFlex"),
currently a wholly-owned subsidiary of DeepTech and the parent company of RIGCO,
will become a wholly-owned subsidiary of Tatham Offshore and Tatham Offshore
will transfer its interest in the Sunday Silence prospect (Ewing Bank Blocks
958, 959, 1002 and 1003) to DeepTech. Pursuant to the Redemption Agreement
(discussed below), Tatham Offshore has agreed to transfer all of its remaining
assets located in the Gulf to the Partnership. Further, DeepTech will divest
itself of its equity ownership interest in Tatham Offshore by offering all of
the shares of Tatham Offshore common stock and Series A 12% Convertible
Exchangeable Preferred Stock ("Series A Preferred Stock") currently held by
DeepTech to the stockholders of DeepTech in a Rights Offering (discussed below).
Both the Merger and the transactions
5
<PAGE> 8
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
contemplated by the Redemption Agreement are subject to customary regulatory
approvals, the satisfaction of certain conditions and the consummation of
certain related transactions and are anticipated to be completed in June or July
1998.
Following the asset restructuring and the Rights Offering, the Company's
business will primarily consist of its investment in the Partnership, Offshore
Marketing and the Sunday Silence prospect.
The material terms of the Merger and the transactions contemplated by the Merger
Agreement, Redemption Agreement (discussed below) and other related agreements
are as follows:
(a) In March 1998, DeepFlex conveyed to DeepTech all of its equity
ownership of Tatham Offshore (including 406,783 shares of common stock
(Note 7) and 4,670,957 shares of Series A Preferred Stock) as
satisfaction of $12.0 million of the amount DeepFlex owes DeepTech
under an intercompany line of credit. DeepTech will offer all of its
equity interest in Tatham Offshore to the DeepTech stockholders in a
Rights Offering (see (e) below).
(b) DeepTech will contribute to the capital of DeepFlex all of its
remaining amounts due from DeepFlex under an intercompany line of
credit, except for $8.0 million, prior to contributing all of the
outstanding shares of capital stock of DeepFlex to Tatham Offshore. As
a result of this contribution by DeepTech, Tatham Offshore, through
DeepFlex, will assume the intercompany indebtedness due to DeepTech and
approximately $60.0 million under the RIGCO Credit Facility (Note 5).
(c) Tatham Offshore will convey to DeepTech all of the outstanding shares
of capital stock of Tatham Offshore Development, Inc. ("Tatham
Development"), which owns the Sunday Silence prospect, and will cancel
its reversionary interests in certain oil and gas properties owned by
the Partnership in payment of the intercompany indebtedness discussed
above.
(d) Tatham Offshore will transfer its remaining assets located in the Gulf
to the Partnership in consideration of the redemption by Tatham
Offshore of its Series B 9% Senior Convertible Preferred Stock ("Senior
Preferred Stock") currently owned by the Partnership (the "Redemption
Agreement"). Specifically, under the terms of the Redemption Agreement
and subject to the satisfaction of certain conditions to closing, the
Partnership has agreed to exchange the 7,500 shares of Senior Preferred
Stock and all related accrued and unpaid dividends due to the
Partnership as of the date of the exchange for 100% of Tatham
Offshore's right, title and interest in and to Viosca Knoll Blocks 772,
773, 774, 817, 818 and 861 (subject to an existing production payment
obligation), West Delta Block 35, Ewing Bank Blocks 871, 914, 915 and
916 and the platform located on Ship Shoal Block 331. At the closing,
Tatham Offshore will pay to/receive from the Partnership an amount
equal to the net cash generated from/required by such properties from
January 1, 1998 through the closing date. In addition, the Partnership
agreed to assume all abandonment and restoration obligations associated
with the platform and leases. This transaction is expected to close on
the later of July 1, 1998 or one business day after the closing of the
Rights Offering discussed below. If the transactions contemplated by
the Redemption Agreement are consummated, the management fees charged
to Tatham Offshore by DeepTech (Note 7) will be reduced by 50%
effective retroactively to January 1, 1998 and the balance owed to
DeepTech will be paid at the closing of the Merger. See (h) below.
(e) On April 10, 1998, Tatham Offshore filed a Registration Statement on
Form S-1 with the Commission, which is currently under review, relating
to the offering of rights to the DeepTech stockholders to purchase
DeepTech's 28,073,450 shares of Tatham Offshore common stock and
4,670,957 shares of Tatham Offshore's Series A Preferred Stock (the
"Rights Offering"). Tatham Offshore will receive proceeds from the
Rights Offering if the total net proceeds exceed the total of (i) $75.0
million and (ii) the amount of certain estimated tax payments of Tatham
Offshore. An affiliate of Mr. Thomas P. Tatham, Chairman of the Board
and Chief Executive Officer of DeepTech and Tatham Offshore, has
committed to purchase a sufficient number of unsubscribed shares as to
result in DeepTech receiving net proceeds from the Rights Offering of
not less than $75.0 million. In exchange, the affiliate will receive a
fee of up to $7.5 million, which will be payable in cash or common
stock of Tatham Offshore at the election of Tatham Offshore. Such
purchase commitment is secured by a guarantee from Mr. Tatham and a
letter of credit issued by a
6
<PAGE> 9
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
bank. To the extent any shares remain unsubscribed, Tatham Offshore has
agreed to purchase such shares and DeepTech will contribute the
proceeds from such purchase to Tatham Offshore. Upon completion of this
offering, DeepTech will not own any of Tatham Offshore's capital stock.
(f) DeepTech and El Paso are currently soliciting consents from the holders
of the Senior Notes and Senior Subordinated Notes discussed in Note 5
relative to the release of (i) certain of the common stock of Tatham
Offshore held by DeepTech to be included in the Rights Offering and
(ii) the capital stock of DeepFlex which DeepTech will contribute to
Tatham Offshore prior to the Rights Offering.
(g) Tatham Offshore will enter into a tax sharing agreement (the "Tax
Sharing Agreement") with DeepTech and DeepFlex in which Tatham Offshore
will pay (i) all taxes attributable to Tatham Offshore and its
subsidiaries, including under certain circumstances, taxes arising from
the conveyance to Tatham Offshore by DeepTech of the two
semisubmersible drilling rigs, (ii) taxes of Tatham Development to
DeepTech pursuant to the Merger and related transactions, and (iii)
taxes of DeepTech attributable to the Merger and related transactions
and the Rights Offering (but not to the extent such taxes exceed the
sum of $7.0 million and any taxes attributable to the value of Tatham
Offshore being in excess of a notional amount to be determined
according to a formula set forth in the Tax Sharing Agreement).
(h) Upon completion of the Merger, DeepTech will no longer operate Tatham
Offshore and DeepFlex/RIGCO under its management agreements discussed
in Note 7. Tatham Offshore will hire a management team and support
personnel required to conduct its contract drilling services business
and implement its Atlantic Canada strategy.
(i) El Paso will acquire the minority interests of Leviathan Holdings,
Offshore Marketing and Offshore Gas Processors, Inc. primarily held by
DeepTech management for an aggregate of $55.0 million. As a result, El
Paso will own 100% of Leviathan's general partner interest in the
Partnership and an overall 27.3% effective interest in the Partnership.
(j) Pursuant to the Merger Agreement, employees of DeepTech or the
Partnership who are terminated upon the closing of the Merger or during
the six months thereafter, will receive certain severance payments from
DeepTech or El Paso.
NOTE 3 - 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.
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
7
<PAGE> 10
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 March 31, 1998 Ended March 31, 1997
----------------------------------------- ---------------------------------------
Per Share Per Share
Loss Shares Amount Income Shares Amount
---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net (loss) income $(1,701,000) 22,473,146 $ (0.08) $1,665,000 18,598,311 $ 0.09
========= =========
EFFECT OF DILUTIVE SECURITIES
Warrants -- -- -- 1,515,037
Options -- -- -- 602,825
----------- ---------- ---------- ---------
DILUTED EPS
Net (loss) income $(1,701,000) 22,473,146 $ (0.08) $1,665,000 20,716,173 $ 0.08
=========== ========== ========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months For the Nine Months
Ended March 31, 1998 Ended March 31, 1997
----------------------------------------- ---------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income $ 1,581,000 20,903,790 $ 0.08 $ 3,297,000 17,712,638 $ 0.19
========= ==========
EFFECT OF DILUTIVE SECURITIES
Warrants -- 2,367,343 -- 1,915,158
Options -- 1,193,081 -- 697,361
----------- ---------- ----------- ----------
DILUTED EPS
Net income $ 1,581,000 24,464,214 $ 0.06 $3,297,000 20,325,157 $ 0.16
=========== ========== ========= =========== ========== ==========
</TABLE>
Warrants to purchase 167,092 shares of common stock at $13.50 per share were
outstanding during the three and nine months ended March 31, 1998 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
remain outstanding. Warrants and options to purchase 1,821,092 shares of common
stock at an average of $10.07 per share were outstanding during the three and
nine months ended March 31, 1997 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.
NOTE 4 - EQUITY INVESTMENTS:
The summarized financial information for the Company's investments which are
accounted for using the equity method is as follows:
SUMMARIZED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
Leviathan Gas
Pipeline Partners, L.P. Tatham Offshore, Inc.
------------------------- --------------------------
March 31, June 30, March 31, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Current assets $ 8,635 $ 18,621 $ 3,341 $ 9,438
Noncurrent assets 402,165 383,259 37,973 32,069
Current liabilities 15,810 11,260 3,527 1,540
Long-term debt 251,000 217,000 -- 60,000
Other noncurrent liabilities 16,636 9,915 7,229 7,663
</TABLE>
8
<PAGE> 11
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended March 31, 1998 Nine Months Ended March 31, 1997
----------------------- ------------------------------------------------------
Tatham DeepFlex Tatham
Partnership Offshore Partnership Partners (a) Total Offshore
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $ 63,222 $ 9,276 $ 84,337 $ 4,448 $ 16,508
Other income 397 205 1,670 185 422
Operating expenses (21,904) (8,617) (16,038) (2,804) (10,362)
Depreciation (26,217) (3,125) (34,449) (504) (3,500)
Other expenses (11,170) (1,743) (7,937) (1,195) (6,314)
-------- -------- -------- -------- --------
Net income (loss) 4,328 (4,004) 27,583 130 (3,246)
Preferred stock dividends -- (2,829) -- -- (2,944)
-------- -------- -------- -------- --------
Net income (loss) available
to common shareholders 4,328 (6,833) 27,583 130 (6,190)
Effective ownership
percentage 27.3% 58.2%(e) 27.3% 50% 36.72%
-------- -------- -------- -------- --------
1,182 (3,977) 7,530 65 (2,273)
Intercompany profit (b) -- 1,069 -- -- 640
Preferred stock dividends(c) -- -- -- -- 636
Other equity investees 29 -- 63 -- (155)
Other 427 (d) 498 (f) 902 -- 908 (f)
-------- -------- -------- -------- -------- --------
Equity in earnings (losses) $ 1,638 $ (2,410) $ 8,495 $ 65 $ 8,560 $ (244)
======== ======== ======== ======== ======== ========
Distributions/dividends $ 14,969 $ -- $ 8,304 $ -- $ 8,304 $ --
======== ======== ======== ======== ======== ========
</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, 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) Represents the average ownership percentage as a result of DeepTech
converting $60.0 million of promissory notes due from Tatham Offshore
into shares of Tatham Offshore common stock in December 1997 increasing
DeepTech's ownership interest in Tatham Offshore from 35.7% to
approximately 94%. See Notes 2 and 7.
(f) Includes the effect of the change during the period in DeepTech's
ownership percentage of Tatham Offshore's common equity.
The Partnership and its subsidiaries distribute 100% of available cash, as
defined, on a quarterly basis to the holders of the Preference Units and to
Leviathan, as general partner and holder of the Common Units. These
distributions are effectively made 98% to unitholders and 2% to Leviathan,
subject to the payment of incentive distributions to Leviathan if certain target
levels of cash distributions to Unitholders are achieved (the "Incentive
Distributions"). As an incentive, the general partner's interest in the portion
of quarterly cash distributions in excess of $0.325 per Unit and less than or
equal to $0.375 per Unit is increased to 15%. For quarterly cash distributions
over $0.375 per Unit but less than or equal to $0.425 per Unit, the general
partner receives 25% of such incremental amount and for all quarterly cash
distributions in excess of $0.425 per Unit, the general partner receives 50% of
the incremental amount. In August 1997, the Partnership paid a cash distribution
of $0.45 per Preference and Common Unit for the period from April 1, 1997
through June 30, 1997 and an Incentive Distribution of $1.2 million to
Leviathan. 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.
In February 1998, the Partnership paid a cash distribution of $0.50 per
Preference and Common Unit for the period from October 1, 1997 through December
31, 1997 and an Incentive Distribution of $2.4 million to Leviathan. In April
1998, the Partnership declared a cash distribution of $0.525 per Preference and
Common Unit for the period from January 1, 1998 through March 31, 1998 which
will be paid on May 15, 1998 to unitholders of record as of April 30, 1998.
Leviathan will receive an Incentive Distribution of $3.0 million for the quarter
ended March 31, 1998.
9
<PAGE> 12
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - INDEBTEDNESS:
Outstanding indebtedness is comprised of the following:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
----------------------- ----------------------
Current Long-term Current Long-term
(in thousands)
<S> <C> <C> <C> <C>
Notes payable:
RIGCO Credit Facility $ 64,841 $ -- $ 7,893 $ 68,357
Senior Notes -- 81,064 -- 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 $7.9 million for the nine months ended March 31, 1998.
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 7. Interest and amortization of debt
issue costs and bond discounts related to the Senior Notes totaled $8.1 million
for the nine months ended March 31, 1998.
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 7. Interest and amortization of
debt issue costs related to this debt totaled $1.3 million for the nine months
ended March 31, 1998.
NOTE 6 - 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 nine months ended March 31, 1998, DeepTech issued
5,448,829 shares of common stock pursuant to the exercise of outstanding
warrants and options at prices ranging from $4.00 per share to $10.15 per share
resulting in $29.2 million in proceeds to DeepTech. At March 31, 1998, DeepTech
had outstanding warrants and options to acquire 4,371,538 shares of common
stock.
NOTE 7 - RELATED PARTY TRANSACTIONS:
Management Agreements
DeepTech has entered into management agreements with certain of its affiliates,
including Leviathan and Tatham Offshore, pursuant to which each affiliate is
charged an annual management fee in exchange for operational, financial,
accounting and administrative services. Leviathan, as general partner of the
Partnership, is entitled to reimbursement of all reasonable expenses incurred by
it or its affiliates for or on behalf of the Partnership including
10
<PAGE> 13
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
amounts payable by Leviathan to DeepTech under a management agreement. Effective
July 1, 1997, the management agreements with Leviathan and Tatham Offshore were
amended to provide for an annual management fee of 52% and 26%, respectively, of
DeepTech's overhead expenses. During the nine months ended March 31, 1998, the
Partnership and Tatham Offshore were charged $6.6 million and $3.3 million,
respectively, under their respective agreements. See Note 2 for a discussion of
the Redemption Agreement and the forgiveness of certain amounts charged to
Tatham Offshore.
In addition, DeepTech's management agreement with Leviathan requires a payment
by Leviathan to compensate DeepTech for certain tax liabilities resulting from,
among other things, additional taxable income allocated to Leviathan due to (i)
the issuance of additional Preference Units (including the sale of the
Preference Units by the Partnership pursuant to the public offering of
additional Preference Units) and (ii) the investment of such proceeds in
additional acquisitions or construction projects. During the nine months ended
March 31, 1998, Leviathan charged the Partnership $0.5 million to compensate
DeepTech for additional taxable income allocated to Leviathan.
The management agreements with Tatham Offshore and DeepFlex will terminate upon
the closing of the Merger.
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 entering into an option agreement with
Tatham Offshore to restructure the Subordinated Notes (the "Restructuring
Agreement"). Pursuant to the Restructuring Agreement, DeepTech forgave the
interest payments due in September and December 1997 under the Subordinated
Notes and, on December 17, 1997, 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, DeepTech no longer has the
$60.0 million of Subordinated Notes receivable from Tatham Offshore or the
approximate $27.0 million accumulated loss of Tatham Offshore in excess of
DeepTech's investment recorded on the consolidated balance sheet at June 30,
1997. Instead, the net of these amounts, approximately $33.0 million, is
reflected on the consolidated balance sheet as an equity investment at March 31,
1998.
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. None of the holders of the
Senior Notes and the Senior Subordinated Notes requested DeepTech to repurchase
any of the debt outstanding.
Other
In February 1998, DeepFlex exchanged its 1,016,957 shares of Tatham Offshore
Series C 4% Convertible Exchangeable Preferred Stock ("Series C Preferred
Stock") for 406,783 Tatham Offshore exchange warrants and immediately converted
these exchange warrants into 406,783 shares of Tatham Offshore common stock at
$6.53 per share for a total cost of $2.7 million. Tatham Offshore used the
proceeds to redeem all of its 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. DeepFlex received $2.1 million as a
result of this redemption by Tatham Offshore. In March 1998, DeepFlex conveyed
the 406,783 shares of Tatham Offshore common stock to DeepTech (Note 2).
During the nine months ended March 31, 1998, Leviathan Holdings paid dividends
of $18.4 million to its common stockholders, which included DeepTech, as a
result of its 85% ownership interest in Leviathan Holdings.
In January and April 1995, an officer/director of DeepTech and Leviathan
executed unsecured, non-interest bearing demand notes in favor of DeepTech for
$100,000 and $300,000, respectively. In January 1998, DeepTech forgave these
notes which are included as compensation costs in general and administrative
expenses for the nine months ended March 31, 1998.
11
<PAGE> 14
DEEPTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Tatham Offshore
The Nasdaq Stock Market, Inc. ("Nasdaq") listing criteria requires a company
listed on The Nasdaq National Market to have a minimum dollar value associated
with the public float of its listed stock. On February 23, 1998, the Nasdaq
minimum public float requirement increased from $1.0 million to $5.0 million.
Pursuant to an exception granted by Nasdaq, Tatham Offshore has until May 26,
1998 to meet the minimum public float requirement. Since the market value of
Tatham Offshore's public float (i) has exceeded $5 million from time to time
since February 23, 1998 and (ii) is expected to be well in excess of $5 million
when the Rights Offering is consummated, Tatham Offshore has requested that
Nasdaq either (i) agree that the public float requirement has been met or (ii)
agree to extend the exception period until the earlier to occur of September 30,
1998 or the date on which the Rights Offering is consummated. However, no
assurance can be given regarding Nasdaq's position, and in the event Tatham
Offshore is unable to comply with the new public float requirement, 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 and Tatham Offshore's ability to access equity markets in the
future.
The Company
The Company anticipates that the Merger with El Paso will occur in June or July
1998. However, if such Merger does not occur, the Company 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 9 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1998 1997
(in thousands)
<S> <C> <C>
Interest $ 12,098 $ 6,997
Taxes $ -- $ 1,000
</TABLE>
Supplemental disclosures of noncash investing and financing activities
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-------------------------------
1998 1997
(in thousands)
<S> <C> <C>
Conversion of receivable from affiliate into
equity investment $ 60,000 $ --
</TABLE>
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Item 1.
"Consolidated Financial Statements" and is intended to assist in the
understanding of the Company's financial condition and results of operations for
the three and nine months ended March 31, 1998. Unless the context otherwise
requires, references to the "Company" shall mean the assets and operations of
DeepTech and its consolidated subsidiaries.
DeepTech is currently a diversified energy company engaged, through its
operating subsidiaries, Tatham Offshore and certain joint ventures, in offshore
contract drilling services and the acquisition, development, exploration,
production, processing, gathering, transportation and marketing of 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 currently pursuing energy
related opportunities in Atlantic Canada, including offshore contract drilling
services, substantial natural gas gathering and transmission facilities, related
gas processing facilities, a facility for the generation of electricity and
other related investments. Historically, Tatham Offshore was engaged in the
development, exploration and production of offshore oil and gas reserves located
primarily in the flextrend and deepwater areas of the Gulf. DeepTech owns
approximately 28.1 million shares of Tatham Offshore common stock representing
approximately 94% of the issued and outstanding common stock of Tatham Offshore
and approximately 4.7 million shares of Tatham Offshore's Series A Preferred
Stock. The Partnership owns 7,500 shares of Senior Preferred Stock of Tatham
Offshore. Currently, Tatham Offshore has entered into contracts and other
agreements which, if consummated, will allow Tatham Offshore to (i) divest
itself of its oil and gas properties and related assets located in the Gulf,
(ii) operate independently of DeepTech, (iii) acquire two semisubmersible
drilling rigs and (iv) redeem its Senior Preferred Stock. See "-- Liquidity and
Capital Resources -- Tatham Offshore -- Liquidity Outlook" and Item 1.
"Consolidated Financial Statements -- Notes to Consolidated Financial Statements
- -- Note 2 -- Recent Events."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Oil and gas sales from the Company's marketing operations totaled $12.2 million
for the three months ended March 31, 1998 as compared with $34.1 million for the
three months ended March 31, 1997. During the three months ended March 31, 1998
and 1997, the Company derived its oil and gas revenue by marketing the oil and
gas production of the Partnership and Tatham Offshore. During the three months
ended March 31, 1998, the Company sold 4,387 million cubic feet ("MMcf") of gas
and 250,245 barrels of oil at average prices of $2.09 per thousand cubic feet
("Mcf") and $11.98 per barrel, respectively. During the same period in 1997, the
Company sold 10,381 MMcf of gas and 315,000 barrels of oil at average prices of
$2.62 per Mcf and $21.93 per barrel, respectively.
Drilling services totaled $16.5 million for the three months ended March 31,
1998 as compared with $4.5 million for the three months ended March 31, 1997.
Drilling services for the three months ended March 31, 1998 primarily
represented revenue from contract drilling services provided by the FPS Laffit
Pincay and FPS Bill Shoemaker whereas revenue for the same period in 1997
represented contract drilling services provided by the FPS Laffit Pincay.
Equity in earnings totaled $3.0 million for the three months ended March 31,
1997 and primarily included equity earnings of the Partnership. During the three
months ended March 31, 1997, the Partnership had total operating revenue of
$31.0 million and net income of $9.0 million. For the three months ended March
31, 1997, total gathering and transportation throughput, net to the Partnership,
was 241 billion cubic feet ("Bcf") of gas. Oil volumes from Poseidon Oil
Pipeline, net to the Partnership, totaled 1.4 million barrels for the three
months ended March 31, 1997. During the
13
<PAGE> 16
three months ended March 31, 1997, the Partnership produced and sold 6,191 MMcf
of gas and 203,000 barrels of oil at average prices of $2.15 per Mcf and $22.53
per barrel, respectively.
Oil and gas purchases by the Company's marketing operations for the three months
ended March 31, 1998 totaled $12.0 million as compared with $33.5 million for
the same period in 1997. The activity for both periods represented the cost of
oil and gas purchased from the Partnership and Tatham Offshore for resale.
During the three months ended March 31, 1998, the Company purchased 4,387 MMcf
of gas and 250,245 barrels of oil at average prices of $2.07 per Mcf and $11.74
per barrel, respectively. During the three months ended March 31, 1997, the
Company purchased 10,381 MMcf of gas and 295,000 barrels of oil at average
prices of $2.60 per Mcf and $21.75 per barrel, respectively.
Operating expenses for the three months ended March 31, 1998 totaled $7.8
million and included costs to operate the FPS Laffit Pincay and FPS Bill
Shoemaker. Operating expenses for the three months ended March 31, 1997 totaled
$2.5 million and included costs to operate the FPS Laffit Pincay.
Losses of equity investees for the three months ended March 31, 1998 totaled
$2.0 million and was primarily related to equity losses of the Partnership and
Tatham Offshore. Losses of equity investees totaled $0.1 million for the three
months ended March 31, 1997 and was primarily related to equity losses of Tatham
Offshore and DeepFlex Partners. During the three months ended March 31, 1998,
the Partnership had total operating revenue of $17.7 million and a net loss of
$1.4 million. For the three months ended March 31, 1998, total gathering and
transportation throughput, net to the Partnership was 267 Bcf of gas. In
addition, the Partnership produced and sold 2,789 MMcf of gas and 170,095
barrels of oil at average prices of $2.20 per Mcf and $17.26 per barrel,
respectively, during the three months ended March 31, 1998. Oil volumes from
Poseidon Oil Pipeline, net to the Partnership, totaled 2.4 million barrels for
the three months ended March 31, 1998. During the three months ended March 31,
1998, Tatham Offshore had total operating revenue of $2.1 million and produced
and sold 1,016 MMcf of gas and 1,775 barrels of oil at average prices of $2.06
per Mcf and $14.28 per barrel, respectively. Tatham Offshore's depreciation and
operating expenses totaled $2.5 million for the three months ended March 31,
1998. In addition, Tatham Offshore's net loss was increased by $0.9 million in
preferred stock dividends in arrears for the three months ended March 31, 1998.
During the three months ended March 31, 1997, Tatham Offshore had total
operating revenue of $6.2 million and interest income of $0.2 million. During
the three months ended March 31, 1997, Tatham Offshore produced and sold 2,075
MMcf of gas and 45,000 barrels of oil at average prices of $2.51 per Mcf and
$22.39 per barrel, respectively. Tatham Offshore's depreciation and operating
expenses totaled $5.4 million and other expenses totaled $2.1 million for the
three months ended March 31, 1997. In addition, Tatham Offshore's net loss was
increased by $1.0 million in preferred stock dividends in arrears for the three
months ended March 31, 1997. During the three months ended March 31, 1997,
DeepFlex Partners recorded a net loss of $0.4 million.
Depreciation and amortization totaled $1.3 million for the three months ended
March 31, 1998 as compared with $0.4 million for the same period in 1997. 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 March 31, 1998
totaled $2.9 million as compared with $0.6 million for the same period in 1997.
The increase of $2.3 million was primarily due to legal fees and other expenses
associated with the impending Merger with El Paso.
Operating income for the three months ended March 31, 1998 totaled $2.6 million
as compared with operating income of $4.5 million for the same period in 1997.
The change in operating income primarily represented the net effect of the items
discussed above.
Interest and other income for the three months ended March 31, 1998 totaled $0.4
million as compared with $1.9 million for the same period in 1997. Interest and
other income for the three months ended March 31, 1998 included interest income
derived from available cash. Interest and other income for the three months
ended March 31, 1997 included interest income derived from (i) the Subordinated
Notes of $1.7 million and (ii) other affiliate debt and available cash of $0.2
million. See Item 1. "Consolidated Financial Statements -- Notes to Consolidated
Financial Statements -- Note 7 -- Related Party Transactions -- Subordinated
Notes Receivable from Tatham Offshore."
Interest and other financing costs for the three months ended March 31, 1998
totaled $5.6 million as compared with $3.3 million for the same period in 1997.
Interest and other financing costs for the three months ended March 31, 1998
14
<PAGE> 17
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 $2.5 million. Interest and other financing costs for the three
months ended March 31, 1997 included (i) interest and amortization of debt issue
costs and discounts related to the Senior Notes of $2.7 million, (ii) interest
and amortization of debt issue costs related to the Senior Subordinated Notes of
$0.3 million, (iii) interest and amortization of debt issue costs related to the
RIGCO Credit Facility of $0.1 million, (iii) interest costs related to $11.0
million of third-party indebtedness of the Company of $0.1 million and (iv)
other interest expense of $0.1 million. The Company capitalized $2.2 million of
interest costs related to the RIGCO Credit Facility during the three months
ended March 31, 1997 in connection with the FPS Bill Shoemaker make-ready
project.
During the three months ended March 31, 1998, the Company recorded an income tax
benefit of $0.9 million as compared with an income tax expense of $1.1 million
for the three months ended March 31, 1997.
After taking into account $52,000 of income resulting from minority interests in
consolidated subsidiaries, the Company's net loss for the three months ended
March 31, 1998 totaled $1.7 million, or $0.08 per share. For the three months
ended March 31, 1997, the Company reported net income of $1.7 million, or $0.09
per share, after taking into account a $0.4 million loss resulting from minority
interests in consolidated subsidiaries. See Item 1. "Consolidated Financial
Statements -- Notes to Consolidated Financial Statements -- Note 3 -- Summary of
Significant Accounting Policies."
NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1997
Oil and gas sales from the Company's marketing operations totaled $58.3 million
for the nine months ended March 31, 1998 as compared with $89.7 million for the
nine months ended March 31, 1997. During the nine months ended March 31, 1998
and 1997, the Company derived its oil and gas revenue by marketing the oil and
gas production of the Partnership and Tatham Offshore. During the nine months
ended March 31, 1998, the Company sold 18,578 MMcf of gas and 753,485 barrels of
oil at average prices of $2.49 per Mcf and $15.84 per barrel, respectively.
During the same period in 1997, the Company sold 27,244 MMcf of gas and 893,000
barrels of oil at average prices of $2.55 per Mcf and $22.54 per barrel,
respectively.
Drilling services totaled $51.3 million for the nine months ended March 31, 1998
representing revenue from contract drilling services provided by the FPS Laffit
Pincay and the FPS Bill Shoemaker. Drilling services totaled $9.1 million for
the nine months ended March 31, 1997 and represented revenue from contract
drilling services provided by the FPS Laffit Pincay from October 1, 1996 through
March 31, 1997. Prior to October 1, 1996, the Company conducted its contract
drilling services related to the FPS Laffit Pincay through DeepFlex Partners
which activity is included in equity earnings for the period from July 1, 1996
through September 30, 1996.
Equity in earnings totaled $1.6 million for the nine months ended March 31, 1998
as compared with $8.6 million for the same period in 1997. Equity in earnings
for the nine months ended March 31, 1998 primarily included equity earnings of
the Partnership whereas equity in earnings for the nine months ended March 31,
1997 primarily included equity earnings of the Partnership and DeepFlex Partners
of $8.4 million and $0.2 million, respectively. During the nine months ended
March 31, 1998, the Partnership had total operating revenue of $63.2 million as
compared with $84.3 million for the nine months ended March 31, 1997. For the
nine months ended March 31, 1998, total gathering and transportation throughput,
net to the Partnership, was 763 Bcf of gas as compared with 741 Bcf of gas for
the nine months ended March 31, 1997. Oil volumes from Poseidon Oil Pipeline,
net to the Partnership, totaled 6.4 million barrels and 4.0 million barrels for
the nine months ended March 31, 1998 and 1997, respectively. In addition, the
Partnership produced and sold 10,874 MMcf of gas and 562,000 barrels of oil at
average prices of $2.03 per Mcf and $18.90 per barrel, respectively, during the
nine months ended March 31, 1998. During the same period in 1997, the
Partnership produced and sold 15,546 MMcf of gas and 571,000 barrels of oil at
average prices of $2.17 per Mcf and $22.04 per barrel, respectively. DeepFlex
Partners had operating revenue of $4.4 million and nonoperating revenue of $0.2
million for the nine months ended March 31, 1997. DeepFlex Partners'
depreciation and operating expenses totaled $3.3 million and other expenses
totaled $1.2 million for the nine months ended March 31, 1997.
15
<PAGE> 18
Oil and gas purchases by the Company's marketing operations for the nine months
ended March 31, 1998 totaled $57.7 million as compared with $88.4 million for
the same period in 1997. The activity for both periods primarily represented the
cost of oil and gas purchased from the Partnership and Tatham Offshore for
resale. During the nine months ended March 31, 1998, the Company purchased
18,578 MMcf of gas and 753,485 barrels of oil at average prices of $2.48 per Mcf
and $15.53 per barrel, respectively. During the nine months ended March 31,
1997, the Company purchased 27,244 MMcf of gas and 873,000 barrels of oil at
average prices of $2.53 per Mcf and $22.19 per barrel, respectively.
Operating expenses for the nine months ended March 31, 1998 totaled $25.2
million and included costs to operate the FPS Laffit Pincay and FPS Bill
Shoemaker. Operating expenses for the nine months ended March 31, 1997 totaled
$5.0 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 nine months ended March 31, 1998 totaled $2.4
million as compared with $0.2 million for the nine months ended March 31, 1997
and was primarily related to equity losses of Tatham Offshore. During the nine
months ended March 31, 1998, Tatham Offshore had total operating revenue of $9.3
million and interest income of $0.2 million. During the nine months ended March
31, 1998, Tatham Offshore produced and sold 3,739 MMcf of gas and 14,795 barrels
of oil at average prices of $2.41 per Mcf and $17.02 per barrel, respectively.
Tatham Offshore's depreciation and operating expenses totaled $11.7 million and
other expenses totaled $1.7 million for the nine months ended March 31, 1998. In
addition, Tatham Offshore's net loss was increased by $2.8 million in preferred
stock dividends in arrears for the nine months ended March 31, 1998. During the
nine months ended March 31, 1997, Tatham Offshore had total operating revenue of
$16.5 million and interest income of $0.4 million. During the nine months ended
March 31, 1997, Tatham Offshore produced and sold 5,354 MMcf of gas and 153,000
barrels of oil at average prices of $2.43 per Mcf and $22.86 per barrel,
respectively. Tatham Offshore's depreciation and operating expenses totaled
$13.9 million and other expenses totaled $6.3 million for the nine months ended
March 31, 1997. In addition, Tatham Offshore's net loss was increased by $3.0
million in preferred stock dividends in arrears for the nine months ended March
31, 1997.
Depreciation and amortization totaled $4.1 million for the nine months ended
March 31, 1998 as compared with $0.9 million for the same period in 1997. 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 nine months ended March 31, 1998
totaled $4.5 million as compared with $1.7 million for the same period in 1997.
The increase of $2.8 million is primarily due to legal fees and other expenses
associated with the impending Merger with El Paso.
Operating income for the nine months ended March 31, 1998 totaled $17.1 million
as compared with operating income of $11.1 million for the same period in 1997.
The change in operating income primarily represented the net effect of the items
discussed above.
Interest and other income for the nine months ended March 31, 1998 totaled $2.7
million as compared with $7.0 million for the same period in 1997. Interest and
other income for the nine months ended March 31, 1998 included interest income
derived from (i) the Subordinated Notes of $1.7 million and (ii) available cash
of $1.0 million. Interest and other income for the nine months ended March 31,
1997 included interest income derived from (i) the Subordinated Notes of $5.3
million and (ii) the PIK Notes payable from DeepFlex Partners of $1.2 million
and (iii) other affiliate debt and available cash of $0.5 million. See Item 1.
"Consolidated Financial Statements -- Notes to Consolidated Financial Statements
- -- Note 7 -- Related Party Transactions -- Subordinated Notes Receivable from
Tatham Offshore."
Interest and other financing costs for the nine months ended March 31, 1998
totaled $17.1 million as compared with $11.6 million for the same period in
1997. Interest and other financing costs for the nine months ended March 31,
1998 included (i) interest and amortization of debt issue costs and discounts
related to the Senior Notes of $8.1 million, (ii) interest and amortization of
debt issue costs related to the Senior Subordinated Notes of $1.4 million and
(iii) interest and amortization of debt issue costs related to the RIGCO Credit
Facility of $7.6 million, net of $0.3 million in interest capitalized related to
the FPS Bill Shoemaker. Interest and other financing costs for the nine
16
<PAGE> 19
months ended March 31, 1997 included (i) interest and amortization of debt issue
costs and discounts related to the Senior Notes of $8.1 million, (ii) interest
and amortization of debt issue costs related to the Senior Subordinated Notes of
$0.3 million, (iii) interest and amortization of debt issue costs related to the
RIGCO Credit Facility of $0.8 million, net of $3.8 million in interest
capitalized related to the FPS Bill Shoemaker, (iv) interest and amortization of
debt issue costs related to $41.5 million of other indebtedness of the Company
of $1.5 million and (v) other interest expense of $0.9 million.
During the nine months ended March 31, 1998, the Company recorded income tax
expense of $0.9 million as compared with $2.2 million for the nine months ended
March 31, 1997.
After taking into account a $0.2 million loss resulting from minority interests
in consolidated subsidiaries, the Company's net income for the nine months ended
March 31, 1998 totaled $1.6 million, or $0.08 per share. For the nine months
ended March 31, 1997, the Company reported net income of $3.3 million, or $0.19
per share, after taking into account a $1.0 million loss resulting from minority
interests in consolidated subsidiaries. See Item 1. "Consolidated Financial
Statements -- Notes to Consolidated Financial Statements -- Note 3 -- Summary of
Significant Accounting Policies."
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
Sources of cash. As a holding company whose material assets currently 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 nine months ended
March 31, 1998, Leviathan and Offshore Marketing made their required cash
payments to DeepTech for their management fees. Tatham Offshore made their
required cash payments to DeepTech for their management fees through December
31, 1997. See Item 1. "Consolidated Financial Statements -- Notes to
Consolidated Financial Statements -- Note 2 -- Recent Events" for a discussion
of the Redemption Agreement and the forgiveness of certain amounts charged to
Tatham Offshore. DeepFlex 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 nine months ended March 31,
1998 was $12.7 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 nine months ended March 31, 1998, RIGCO generated $24.1 million of
net operating cash flow, $17.6 million of which was used to pay interest and
principal due under the RIGCO Credit Facility and $5.4 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
17
<PAGE> 20
Statement. In addition to the warrants and options covered by the Registration
Statement, DeepTech has issued options pursuant to its non-employee director and
employee plans. Since all of DeepTech's unvested options would automatically
vest as a result of the "change of control" occurring upon the closing of the
Merger, DeepTech has decided to accelerate the vesting date of all of the
unvested options to permit such holders to have the ability to participate in
the Rights Offering. As of March 31, 1998, DeepTech had outstanding warrants and
options to acquire 4,371,538 shares of common stock. During the nine months
ended March 31, 1998, warrants and options totaling 5,448,829 were exercised at
prices ranging from $4.00 per share to $10.15 per share resulting in $29.2
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 $13.50 per share) and the closing price of DeepTech common stock
on May 11, 1998 ($14.00 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 $16.8 million for the nine months
ended March 31, 1998) 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.
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 exchanged its 1,016,957 shares of Tatham Offshore
Series C Preferred Stock for 406,783 Tatham Offshore exchange warrants and
immediately converted these exchange warrants into 406,783 shares of Tatham
Offshore common stock at $6.53 per share for a total cost of $2.7 million.
Tatham Offshore used the proceeds to redeem all of its 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. DeepFlex
received $2.1 million as a result of this redemption by Tatham Offshore. In
March 1998, DeepFlex conveyed the 406,783 shares of Tatham Offshore common stock
to DeepTech.
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 March 31, 1998, the Company had $39.9 million of funds available primarily as
a result of the exercise of 5.4 million warrants and options resulting in $29.2
million in proceeds to DeepTech.
In September 1997, DeepTech and Tatham Offshore entered into the Restructuring
Agreement whereby DeepTech forgave the interest payments due in September and
December 1997 under the Subordinated Notes and, on December 17, 1997, 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,
DeepTech no longer has the $60.0 million of Subordinated Notes receivable from
Tatham Offshore or approximate $27.0 million accumulated loss of Tatham Offshore
in excess of DeepTech's investment recorded on the consolidated balance sheet at
June 30, 1997. Instead, the net of these amounts, approximately $33.0 million,
is reflected on the consolidated balance sheet as an equity investment at March
31, 1998. Tatham Offshore 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. None of the holders of the
Senior Notes and the Senior Subordinated Notes requested DeepTech to repurchase
any of the debt outstanding.
18
<PAGE> 21
Upon consummation of the Rights Offering, Tatham Offshore and DeepFlex/RIGCO
will operate independently of DeepTech and substantially all of their agreements
with DeepTech will terminate. See Item 1. "Consolidated Financial Statements --
Notes to Consolidated Financial Statements -- Note 2 -- Recent Events."
The Company anticipates that the Merger with El Paso will occur in June or July
1998. However, if such Merger does not occur, 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 sale of equity securities of Tatham Offshore,
(ii) the exercise of additional outstanding warrants to acquire DeepTech common
stock and (iii) the issuance of additional debt or debt refinancing. DeepTech
intends to attempt to effect the rights offering of Tatham Offshore stock even
if the Merger with El Paso fails to occur. However, there can be no assurance
that the Rights Offering will be consummated or DeepTech will be able to raise
capital 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 nine months ended March 31, 1998 generated $24.1 million of
operating net cash flows, all of which service obligations under the RIGCO
Credit Facility and other outstanding accounts payable. The employment of both
drilling rigs for the remainder of fiscal year ending June 30, 1998 is expected
to generate approximately $6.9 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 operations
and borrowings under the Partnership Credit Facility (discussed below). Net cash
provided by operating activities for the year ended March 31, 1998 totaled $13.2
million. At March 31, 1998, the Partnership had cash and cash equivalents of
$1.3 million.
Cash from 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 its producing properties. Oil and
gas properties are depleting assets and will produce reduced volumes of oil and
gas in the future unless additional wells are drilled or recompletions of
existing wells are successful.
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 three months ended March 31, 1998 totaled $6.3 million.
The Partnership Credit Facility is a revolving credit facility providing for up
to $300 million of available credit subject to customary terms and conditions,
including certain 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
19
<PAGE> 22
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 March 31, 1998, the Partnership had
$251.0 million outstanding under its credit facility bearing interest at an
average floating rate of 6.3% per annum. In April 1998, the Partnership Credit
Facility was amended to allow for the Merger of DeepTech and El Paso, the
acquisition of certain assets of Tatham Offshore pursuant to the Redemption
Agreement and certain other transactions. Currently, approximately $32.0 million
of additional funds are available under the Partnership Credit Facility.
In March 1998, Stingray amended an existing term loan agreement to provide for
additional borrowings of $11.1 million and to extend the maturity date of the
loan from December 31, 2000 to March 31, 2003. The amended agreement requires
Stingray to make 18 quarterly principal payments of $1.6 million commencing on
December 31, 1998. The term loan agreement is principally secured by current and
future gas transportation contracts between Stingray and its customers. As of
March 31, 1998, Stingray had $28.5 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 March
31, 1998, POPCO had $123.0 million outstanding under its credit facility bearing
interest at an average floating rate of 6.9% per annum. Currently, approximately
$27.0 million of additional funds are available under the POPCO Credit Facility.
In December 1996, Viosca Knoll entered into a revolving credit facility (the
"Viosca Knoll Credit Facility") with a syndicate of commercial banks to provide
up to $100 million for the addition of compression to the Viosca Knoll system
and for other working capital needs of Viosca Knoll, including funds for a
one-time distribution of $25 million to its partners. 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 March 31, 1998, Viosca Knoll had $60.0
million outstanding under its credit facility bearing interest at an average
floating rate of 6.4% per annum. Currently, approximately $22.9 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 Viosca Knoll Block 817 wells (75% working interest
owned by the Partnership) are currently producing a gross aggregate average of
approximately 49 MMcf of gas per day. Pursuant to the Redemption Agreement, the
Partnership has agreed to acquire the remaining 25% working interest in Viosca
Knoll Block 817. The Garden Banks Block 72 wells (50% working interest owned by
the Partnership) are currently producing a gross aggregate average of
approximately 1,965 barrels of oil and 8 MMcf of gas per day. The Garden Banks
Block 117 wells (50% working interest owned by the Partnership) are currently
producing a gross aggregate average of approximately 1,975 barrels of oil and
3.7 MMcf of gas 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,
(vi) debt service on its outstanding indebtedness and (vii) the payment of the
appreciation of Unit Rights that will fully vest as a result of the "change of
control" occurring upon the closing of the Merger.
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. See the discussion
below relative to the conversion of Preference Units to Common Units. At the
current distribution rate of $0.525 per Unit, the
20
<PAGE> 23
quarterly Partnership distributions total $16.0 million in respect of the
Preference Units, Common Units and general partner interest ($64.0 million on an
annual basis, including $26.1 million to Leviathan). The Partnership believes
that it will be able to continue to pay at least the current quarterly
distribution of $0.525 per Preference and Common Unit for the foreseeable
future.
The Preference Units are currently entitled to receive from Available Cash, as
defined in the Partnership Agreement, a Minimum Quarterly Distribution for each
quarter of $0.275 per Preference Unit, plus any arrearage in the payment of the
Minimum Quarterly Distribution for prior quarters, before any distribution of
Available Cash is made to holders of Common Units for such quarter. In May 1998,
the Partnership notified the holders of its Preference Units of their right to
convert their Preference Units into an equal number of Common Units, provided
that, on August 5, 1998, after giving effect to the conversion of all Preference
Units as to which a notice of conversion had been timely received by the
Partnership, there were at least 2,000 holders of 100 or more Common Units of
the Partnership (the "Liquidity Condition"). Subject to the satisfaction of the
Liquidity Condition, after August 5, 1998, Preference Units will not be entitled
to (i) any cash distributions in excess of the minimum quarterly distribution of
$0.275 per Unit or (ii) any distribution preferences over the Common Units, and
the preference period will end. Subject to the satisfaction of the Liquidity
Condition, holders of Preference Units must convert to Common Units in order to
participate in (i) any cash distributions above the minimum quarterly
distributions of $0.275 per Unit or (ii) future increases of such distributions
of the Partnership, if any. The Partnership anticipates that substantially all
of the holders of the Preference Units will elect to convert their Preference
Units into Common Units since the current quarterly distributions are
significantly in excess of the minimum quarterly distribution; however, no
assurance can be made that the current quarterly distribution rate will be
increased or maintained. If less than all of the Preference Units are converted
into Common Units as of August 5, 1998, the Partnership must again notify the
remaining holders of the Preference Units of their right to convert their
Preference Units into Common Units once each year for another two years.
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 three months ended March
31, 1998, the Partnership paid Leviathan Incentive Distributions totaling $2.4
million and will pay Leviathan an Incentive Distribution of $3.0 million in May
1998.
The Partnership anticipates that its capital expenditures and equity investments
for the remaining portion of 1998 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 placed in service in April 1998 at a cost of approximately
$32 million, is strategically located to exploit reserves in the East Cameron
and Garden Banks area of the Gulf and is 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 1995, the Partnership adopted the Unit Rights Appreciation Plan (the "Plan")
to provide the Partnership with the ability of making awards of Unit Rights, as
hereinafter defined, to certain officers and employees of the Partnership or its
affiliates as an incentive for these individuals to continue in the service of
the Partnership or its affiliates. Under the Plan, the Partnership has granted
to certain officers and employees of the Partnership or its affiliates the right
to purchase, or realize the appreciation of, a Preference Unit or Common Unit
(see above) (a "Unit Right"), pursuant to the provisions of the Plan. As of
March 31, 1998, a total of 1,200,000 Unit Rights had been granted under the
Plan. The exercise prices of the Preference Units covered by the Unit Rights
granted pursuant to the Plan range from $15.6875 to $21.50, the closing prices
of the Preference Units as reported on the New York Stock Exchange on the date
the Unit Rights were granted. As of March 31, 1998, the Partnership had accrued
$5.7 million related to the appreciation and vesting of the outstanding Unit
Rights. However, as a result of the "change of control" occurring upon the
closing of the Merger discussed in Note 2, the Unit Rights will fully vest and
the Partnership will be obligated to pay the holders of the Unit Rights an
amount equal to the difference between the grant price of the Preference Units
and the closing price of the Preference Units on the date of the Merger, or a
date otherwise specified. The closing price of the Preference Units on May 11,
1998 was $29 15/16 per Unit.
21
<PAGE> 24
Any substantial capital expenditures by Stingray, POPCO and Viosca Knoll are
anticipated to be funded by borrowings under their respective credit facilities.
The Partnership's cash capital expenditures and equity investments for the three
months ended March 31, 1998 were $16.6 million. The Partnership may in the
future 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 $4.2 million for the three months ended March 31, 1998. The
Partnership capitalized $0.5 million of such costs in connection with
construction projects 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 existing operations. At March 31, 1998, Tatham Offshore had
$2.3 million of cash and cash equivalents. See "-- Liquidity Outlook."
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 49 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 nine months ended March 31, 1998, Tatham Offshore's net
revenue from this property was reduced by $1.2 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 8 MMcf of gas and 16 barrels of oil per day.
In February 1998, DeepFlex 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 Tatham Offshore 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 its 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.
DeepFlex conveyed the 406,783 shares of Tatham Offshore common stock to DeepTech
in March 1998.
Revenue from currently producing properties will need to be replaced by revenue
from other sources. Tatham Offshore will receive proceeds from the Rights
Offering, if consummated, if the net proceeds exceed the total of (i) $75.0
million and (ii) the amount of certain estimated tax payments of Tatham
Offshore. See "-- Liquidity Outlook."
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 its Atlantic Canada projects. See "-- Liquidity
Outlook."
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 nine months ended March 31, 1998, Tatham
Offshore was charged $3.3 million in management fees pursuant to this agreement.
If the transactions contemplated by the Redemption Agreement are consummated,
the management fees charged to Tatham Offshore by DeepTech will be reduced by
50% effective retroactively to January 1, 1998. See "-- Liquidity Outlook."
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. Through March 31, 1998, Tatham Offshore Canada Limited,
the Canadian representative of North Atlantic, has incurred $10.4 million of
pre-developmental costs in connection with such project and related
infrastructure projects. Tatham Offshore anticipates that pre-developmental
costs associated with the North Atlantic pipeline project could reach
approximately $12.0 million by late 1998 and the ultimate capital costs of the
project, if approved, could be in excess of several billion dollars. See "--
Liquidity Outlook."
22
<PAGE> 25
Liquidity Outlook. In order to improve liquidity and partially address its
current capital requirements, Tatham Offshore entered the Restructuring
Agreement with DeepTech whereby 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 existing operations. Tatham Offshore generated
approximately $0.9 million in positive operating cash flow for the nine months
ended March 31, 1998.
Tatham Offshore is refocusing its business from the development, exploration and
production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada with initial emphasis on the offshore
contract drilling business. Currently, Tatham Offshore has entered into
contracts and other agreements which, if consummated, will allow Tatham Offshore
to (i) divest itself of its oil and gas properties and related assets located in
the Gulf, (ii) operate independently of DeepTech, (iii) acquire two
semisubmersible drilling rigs and (iv) redeem its Senior Preferred Stock. See
Item 1. "Consolidated Financial Statements -- Notes to Consolidated Financial
Statements -- Note 2 -- Recent Events." Tatham Offshore believes that the
Atlantic Canada region offers significant investment opportunities and Tatham
Offshore plans to expand the number of drilling rigs it will own as well as
diversify its business to include the North Atlantic pipeline project, related
gas processing facilities, a facility for the generation of electricity and
other related investments.
Prospectively, Tatham Offshore's material assets will consist primarily of stock
of and notes receivable from its subsidiaries. Tatham Offshore expects to be
dependent upon cash on hand and cash generated from its drilling services
operations to pay its operating expenses, service its debt and satisfy its other
obligations.
Tatham Offshore's primary uses of cash after the consummation of the Merger and
Rights Offering will consist of (i) expenses associated with operating its
offshore drilling services business, (ii) acquisition, operating and other
expenditures with potential opportunities, including the North Atlantic pipeline
project, (iii) expenditures required to service debt, including the
approximately $60.0 million of rig related debt Tatham Offshore will assume in
connection with the Merger related transactions and (iv) general and
administrative costs, including the costs of hiring and maintaining a management
team and support personnel.
Additionally, Sedco Forex Division of Schlumberger Technology Corporation
("Sedco Forex") currently markets, manages, mans and operates the two
semisubmersible drilling rigs that are being conveyed to Tatham Offshore under
management agreements. However, if the management agreement(s) with Sedco Forex
are not renewed or extended or are terminated by Sedco Forex, Tatham Offshore
does not currently have the ability to operate the rigs and would be required to
engage a new operator. There can be no assurances that Tatham Offshore could
find, within a reasonable period of time, an alternate company to manage and
operate the rigs for a reasonable fee.
After the Merger, Atlantic Canada opportunities, if realized, will require
Tatham Offshore to raise substantial capital (equity, debt or both) or enter
into other arrangements (such as joint ventures) to allow Tatham Offshore to
generate operating cash flow to fund on-going activities and operations. The
ability of Tatham Offshore to satisfy its future capital needs with respect to
its planned Atlantic Canada strategy will depend upon its ability to raise
additional capital and to implement its business strategy successfully. Tatham
Offshore does not currently possess the capital necessary to implement its
Atlantic Canada business strategy completely, and there can be no assurances
Tatham Offshore will be able to obtain sufficient capital for any or all of its
planned projects. Further, there can be no assurances that these projects and
other opportunities will prove to be economical or that they will occur. Many of
the Atlantic Canada projects will require government approvals, almost all of
which Tatham Offshore has yet to receive. Moreover, if there are developments
that Tatham Offshore determines to be indicative of a lack of reasonable
opportunity to realize benefits for Tatham Offshore's stockholders, then Tatham
Offshore will pursue other opportunities, wherever located, as Tatham Offshore
determines to be in its best interests.
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
and Tatham Offshore's ability to access equity markets in
23
<PAGE> 26
the future. See Item 1. "Consolidated Financial Statements -- Notes to the
Consolidated Financial Statements -- Note 8 -- Commitments and Contingencies --
Tatham Offshore."
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> 27
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
On February 27, 1998, six DeepTech stockholders, representing more than
50% of the outstanding shares of DeepTech common stock, approved the
Agreement and Plan of Merger among El Paso Natural Gas Company, El Paso
Acquisition Company and DeepTech.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
10.1 Agreement and Plan of Merger, dated as of February
27, 1998, among El Paso Natural Gas Company, El Paso
Acquisition Company and DeepTech International Inc.
10.2 Contribution and Distribution Agreement, dated as of
February 27, 1998 among DeepTech International Inc.,
DeepFlex Production Services, Inc., El Paso Natural
Gas Company and Tatham Offshore, Inc.
10.3 Standby Agreement, dated as of February 27, 1998,
among DeepTech International Inc., Tatham Offshore,
Inc., Thomas P. Tatham, Tatham Brothers, LLC and El
Paso Natural Gas Company.
10.4 Form of Tax Sharing Agreement among DeepTech
International Inc., DeepFlex Production Services,
Inc. and Tatham Offshore, Inc.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
25
<PAGE> 28
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: May 14, 1998 /s/ LARI PARADEE
---------------------------------------
Lari Paradee
Vice President - Controller
(Principal Accounting Officer)
Date: May 14, 1998 /s/ DENNIS A. KUNETKA
--------------------------------------
Dennis A. Kunetka
Senior Vice President - Corporate Finance
26
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Agreement and Plan of Merger, dated as of February 27, 1998, among El
Paso Natural Gas Company, El Paso Acquisition Company and DeepTech
International Inc.
10.2 Contribution and Distribution Agreement, dated as of February 27, 1998
among DeepTech International Inc., DeepFlex Production Services, Inc.,
El Paso Natural Gas Company and Tatham Offshore, Inc.
10.3 Standby Agreement, dated as of February 27, 1998, among DeepTech
International Inc., Tatham Offshore, Inc., Thomas P. Tatham, Tatham
Brothers, LLC and El Paso Natural Gas Company.
10.4 Form of Tax Sharing Agreement among DeepTech International Inc.,
DeepFlex Production Services, Inc. and Tatham Offshore, Inc.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of February 27, 1998 (this
"Agreement"), among El Paso Natural Gas Company, a Delaware corporation
("Parent"), El Paso Acquisition Company, a Delaware corporation ("Merger Sub"),
and DeepTech International Inc., a Delaware corporation (the "Company").
WITNESSETH:
WHEREAS the respective Boards of Directors of Parent and the Company have
approved the merger of the Company with and into Parent (the "Merger") or with
or into Merger Sub if the Merger is restructured as provided herein, upon the
terms and subject to the conditions set forth herein, whereby each issued and
outstanding share of Common Stock, par value $0.01 per share, of the Company
("Company Common Stock"), not owned by Parent, the Company or their respective
Subsidiaries (as defined in Section 8.4) will be converted into shares of common
stock, par value $3.00 per share, of Parent ("Parent Common Stock"), and/or
cash;
WHEREAS the respective Boards of Directors of each of Parent and the
Company have determined that the Merger is in furtherance of and consistent with
their respective long-term business strategies and is in the best interest of
their respective stockholders; and
WHEREAS under certain circumstances the Merger may be restructured as
provided herein to merge the Company with or into Merger Sub, and accordingly
the Board of Directors of Merger Sub and Parent as sole stockholder have
approved such merger, upon the terms and subject to the condition set forth
herein.
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Company shall be merged with and into Parent at the Effective Time
(as defined in Section 1.2). Following the Merger, the separate corporate
existence of the Company shall cease and Parent shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of the Company in accordance with the DGCL.
Section 1.2 Effective Time. The Merger shall become effective when the
Certificate of Merger (the "Certificate of Merger"), executed in accordance with
the relevant provisions of the DGCL, is filed with the Secretary of State of the
State of Delaware or such later time which the parties hereto shall have agreed
upon and designated in such filing as the effective time of the Merger. When
used in this Agreement, the term "Effective Time" shall mean the date and time
at which the Certificate of Merger is accepted for record or such later time
established by the Certificate of Merger. The filing of the Certificate of
Merger shall be made on the date of the Closing (as defined in Section 1.10).
Section 1.3 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL.
Section 1.4 Charter and By-laws; Directors. (a) At the Effective Time,
the Restated Certificate of Incorporation of Parent, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law. At the Effective Time, the By-laws of Parent, as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter changed or amended as provided therein or in the
Certificate of Incorporation or by applicable law.
(b) The directors of Parent at the Effective Time shall be the directors of
the Surviving Corporation until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
A-1
<PAGE> 2
Section 1.5 Conversion of Securities. As of the Effective Time, by virtue
of the Merger and without any action on the part of Parent, the Company or the
holders of any securities of Parent:
(a) Each issued and outstanding share of Parent Common Stock shall
remain outstanding and shall represent one validly issued, fully paid and
nonassessable share of Parent Common Stock.
(b) All shares of Company Common Stock that are held in the treasury
of the Company and shares of Company Common Stock owned by Parent or any
Subsidiary of Parent shall be canceled and no cash, capital stock of Parent
or other consideration shall be delivered in exchange therefor.
(c) Subject to Sections 1.5(b), 1.6 and 1.7, at the Effective Time
each issued and outstanding share of Company Common Stock shall be
converted into, at the election of the holder thereof, one of the following
(as adjusted pursuant to this Article I, the "Merger Consideration"):
(i) for each such share of Company Common Stock (other than shares
as to which a Cash Election (as defined in Section 1.6(a)) has been
effectively made and not revoked or lost pursuant to Section 1.6, the
right to receive a number of shares of Parent Common Stock, including
the associated Parent Rights (as defined in Section 2.2) (collectively,
the "Stock Consideration") equal to the result (calculated to four
decimal places) obtained by multiplying (x) $14.00 by (y) a fraction,
the numerator of which shall equal 29,291,594.5 and the denominator of
which shall equal the sum of (i) the aggregate number of shares of
Company Common Stock outstanding immediately prior to the Effective Time
and (ii) the aggregate number of shares of Company Common Stock which
could be acquired upon the exercise in full of all options and warrants
to purchase Company Common Stock outstanding immediately prior to the
Effective Time (after giving effect to any anti-dilution adjustments, if
any, applicable to such options and warrants in connection with the
Rights Offering (as defined in Section 5.11(a)) (such fraction is
referred to herein as the "Multiplier"), and dividing the result
(rounded up to the nearest full cent) by the average (calculated to four
decimal places) of the closing sales prices of a share of Parent Common
Stock on the New York Stock Exchange (the "NYSE") Composite Tape, as
reported in The Wall Street Journal, during the ten consecutive trading
days ending on and including the trading day immediately prior to the
Effective Time (the "Average Price") (provided that if the Average Price
is more than $75.00, the Average Price shall be deemed for purposes of
this paragraph to be $75.00, and if the Average Price is less than
$50.00, the Average Price shall be deemed for purposes of this paragraph
to be $50.00) (the "Exchange Ratio"); and
(ii) for each such share of Company Common Stock as to which a Cash
Election has been made, the right to receive an amount in cash, without
interest (the "Cash Consideration"), equal to the result (rounded up to
the nearest full cent) obtained by multiplying (a) $14.00 by (b) the
Multiplier.
(d) (i) Each of the Company's Equity Incentive Plan, as amended, and
Non-Employee Director Stock Option Plan (collectively, the "Company Stock
Plans"), and each outstanding stock option held by any current or former
employee or director (an "Option") thereunder, (A) shall be assumed by
Parent at the Effective Time, and each such Option shall become an option
to purchase a number of shares of Parent Common Stock (a "Substitute
Option") equal to the number of shares of Company Common Stock subject to
such Option multiplied by the Exchange Ratio (rounded to the nearest whole
share, with 0.5 shares being rounded up) or (B) at the option of the holder
of such Option exercisable by written notice to the Company prior to the
Effective Time, shall be cancelled immediately prior to the Effective Time
in exchange for a payment in cash as provided below (a "Cash-out Option").
The per share exercise price for each Substitute Option shall be the
current exercise price per share of Company Common Stock divided by the
Exchange Ratio (rounded up to the nearest full cent), and each Substitute
Option otherwise shall be subject to all of the other terms and conditions
of the original Option to which it relates. The cash payment for each
Cash-out Option shall be equal to the product of (x) the number of shares
of Company Common Stock subject to such Option and (y) the excess of the
Cash Consideration over the exercise price per share of Company Common
Stock subject to such Option. Parent shall provide to the Company at the
Effective Time funds to make the payments provided in the
A-2
<PAGE> 3
preceding sentence. Prior to the Effective Time, the Company shall take
such additional actions as are necessary under applicable law and the
applicable agreements and Company Stock Plans to effect the transactions
contemplated by this paragraph.
(ii) As soon as practicable after the Effective Time, Parent shall
cause to be included under a registration statement on Form S-8 of
Parent all shares of Parent Common Stock which are subject to Substitute
Options and all shares of Parent Common Stock which were issued in
exchange for Company Common Stock which constituted performance shares
or restricted stock of the Company to the extent such registration is
legally required for such Parent Common Stock to be freely tradable by
such holder, and shall maintain the effectiveness of such registration
statement until all Substitute Options have been exercised, expired or
forfeited.
(e) (i) At the Effective Time, each warrant (a "Warrant") to purchase
shares of Company Common Stock outstanding immediately prior to the
Effective Time pursuant to any of the warrant agreements listed in Section
3.2 of the Company Disclosure Schedule (as defined in Article III) (the
"Warrant Agreements") shall remain outstanding and shall thereafter
represent the right to receive, upon exercise of such Warrant, solely the
Merger Consideration receivable by a holder of the number of shares of
Company Common Stock for which such Warrant is exercisable immediately
prior to the Merger. For the purpose of determining the form of Merger
Consideration receivable in respect of any such Warrant, such Warrant shall
be treated in the same manner as any share of Company Common Stock as to
which a Stock Election (as defined in Section 1.6(a)) has been made. Parent
as the Surviving Corporation in the Merger hereby assumes the due and
punctual observance and performance of each and every covenant and
condition of such Warrant Agreement to be performed and observed by the
Company and all the obligations and liabilities thereunder, subject to the
provisions of this paragraph, which, to the extent required by the terms of
any Warrant Agreement, have been deemed appropriate by resolution of the
Board of Directors of the Company.
(ii) Parent shall take all such further actions as may be required
as of or after the Effective Time in order to comply with the
obligations and liabilities of the Company under each Warrant Agreement.
(f) As a result of the Merger and without any action on the part of
the holder thereof, at the Effective Time, all shares of Company Common
Stock shall, pursuant to Section 1.5(c), cease to be outstanding and the
certificates representing such shares shall be canceled and retired and
shall cease to exist, and each holder of such shares of Company Common
Stock shall thereafter cease to have any rights with respect to such shares
of Company Common Stock, except the right to receive, without interest, the
Merger Consideration and cash for fractional shares of Parent Common Stock
in accordance with Section 1.9 upon the surrender of a certificate
representing such shares of Company Common Stock (a "Certificate").
Section 1.6 Company Common Stock Elections. Each holder of shares of
Company Common Stock (other than holders of shares to be canceled as set forth
in Section 1.5(b)) shall have the right to submit a request specifying the
number of shares of Company Common Stock which such holder desires to have
converted into the right to receive either (i) the Cash Consideration or (ii)
the Stock Consideration in accordance with the following procedures:
(a) Each holder of shares of Company Common Stock may specify in a
request made in accordance with the provisions of this Section 1.6 (an
"Election") (i) the number of such shares which such holder desires to have
converted into the right to receive the Cash Consideration in the Merger (a
"Cash Election") and (ii) the number of such shares which such holder
desires to have converted into the Stock Consideration in the Merger (a
"Stock Election"). Each holder of shares of Company Common Stock may
specify, by completion of the box provided therefor on the Form of Election
(as defined in subsection (c) below), that (x) in the event the Average
Price is less than $50.00, such share of Company Common Stock shall be
converted into the right to receive the Cash Consideration, notwithstanding
such holder's Stock Election, and (y) in the event the Average Price is
greater than $75.00, such share of Company Common Stock shall be converted
into the right to receive the Stock
A-3
<PAGE> 4
Consideration, notwithstanding such holder's Cash Election. Each share of
Company Common Stock as to which no Election is in effect at the Election
Record Date (as defined in Section 1.6(e)) or for which an Election has
been made but has been revoked or withdrawn or is otherwise no longer
effective shall be called a "Non-Electing Share." Subject to Section 1.7,
the Non-Electing Shares of each holder of shares of Company Common Stock
shall be treated for purposes of this Agreement as if such shares were
covered by a Stock Election.
(b) Parent shall authorize Parent's Transfer Agent or such other
person as shall be reasonably acceptable to the Company to receive
Elections and to act as Exchange Agent hereunder (the "Exchange Agent").
(c) Parent shall prepare, for use by stockholders of the Company in
surrendering Certificates, a form (the "Form of Election") pursuant to
which each holder of Company Common Stock may make Elections. The Form of
Election shall be mailed to stockholders of record of the Company on the
earliest practicable date on or after the latest to occur of (i) the
expiration or termination of the waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) the mailing of
the Information Statement/Prospectus (as defined in Section 5.2) to
stockholders of the Company and (iii) the mailing of the Rights Offering
Prospectuses (as defined in Section 5.11(a)) to stockholders of the
Company.
(d) The Company shall use all reasonable efforts to make the Form of
Election available to all persons who become stockholders of record of the
Company during the period between such record date and the Election Record
Date (as defined in Section 1.6(e)).
(e) An Election shall have been properly made only if the Exchange
Agent shall have received, by 5:00 p.m., New York City time, on the
twentieth day following the date of mailing of the Form of Election (such
time on such day being referred to herein as the "Election Record Date"), a
properly completed and signed Form of Election accompanied by the
Certificate or Certificates representing the shares of Company Common Stock
to which such Form of Election relates (or by an appropriate guarantee of
delivery of such Certificate or Certificates as set forth in such Form of
Election from a member of any registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank
or trust company having an office or correspondent in the United States,
provided such Certificate or Certificates are in fact delivered by the time
set forth in such guarantee of delivery).
(f) Any holder of record of shares of Company Common Stock may at any
time prior to the Election Record Date change such holder's Election by
written notice received by the Exchange Agent at or prior to the Election
Record Date accompanied by a properly completed Form of Election. Parent
shall have the right in its sole discretion to permit changes in Elections
after the Election Record Date.
(g) Any holder of record of shares of Company Common Stock may at any
time prior to the Election Record Date revoke such holder's Election by
written notice received by the Exchange Agent at or prior to the Election
Record Date or by withdrawal prior to the Election Record Date of such
holder's Certificates previously deposited with the Exchange Agent. Any
revocation of an Election may be withdrawn by notice of such withdrawal
delivered at or prior to the Election Record Date. Any stockholder of the
Company who shall have deposited Certificates with the Exchange Agent shall
have the right to withdraw such Certificates by written notice received by
the Exchange Agent at or prior to the Election Record Date. Parent shall
obtain from the Exchange Agent an agreement to return all Forms of Election
and accompanying Certificates to the stockholders submitting the same in
the event this Agreement shall be terminated in accordance with its terms.
(h) Parent shall have the right to make rules, not inconsistent with
the terms of this Agreement, governing the validity of Forms of Election,
the manner and extent to which Elections are to be taken into account in
making the determinations prescribed by Section 1.7, the issuance and
delivery of certificates for Parent Common Stock into which shares of
Company Common Stock are converted in the Merger
A-4
<PAGE> 5
and the payment for shares of Company Common Stock converted into the right
to receive the Cash Consideration in the Merger.
Section 1.7 Special Cash Rights; Restructuring of Merger. (a)
Notwithstanding any provision of Section 1.5 or 1.6, in the event that the
portion of the aggregate consideration paid or deemed paid with respect to the
Company Common Stock pursuant to the Merger (including the Aggregate Cash
Consideration (as defined below)) (the "Aggregate Merger Consideration") which
shall be paid or deemed paid other than in the form of Parent Common Stock
(which shall be deemed to include, without limitation, cash paid upon the
acquisition by Parent or any of its Subsidiaries of Company Common Stock,
Options or Warrants, whether pursuant to the Merger, the Stockholder Agreements
(as hereinafter defined in Section 3.11) or otherwise, the fair market value of
the Rights (as defined in Section 5.11(a)) distributed to holders of Company
Common Stock pursuant to the Rights Offering, any Excess Proceeds (as defined in
the Contribution and Distribution Agreement) transferred to Tatham Offshore,
Inc. ("Offshore") pursuant to the Contribution and Distribution Agreement (as
defined in Section 5.11(a)), and cash paid in lieu of fractional shares) (the
"Aggregate Cash Consideration") shall exceed 50% of the Aggregate Merger
Consideration (the "Tax-Free Merger Maximum Cash Consideration"), no share of
Company Common Stock shall be converted into the right to receive the Stock
Consideration in the Merger unless (i) a valid Stock Election is in effect with
respect to such share of Company Common Stock at the Election Record Date and
(ii) such Stock Election expressly specifies, by completion of the box provided
therefor on the Form of Election, that such share of Company Common Stock shall
be converted into the right to receive the Stock Consideration in the Merger
notwithstanding that the receipt of Parent Common Stock in the Merger may be
taxable to the holder of such share of Company Common Stock. For the purpose of
determining the Aggregate Merger Consideration and the Tax-Free Merger Maximum
Cash Consideration, a share of Parent Common Stock shall be valued at the lowest
of (x) the closing trading price of a share of Parent Common Stock on the NYSE
Composite Tape on the date of the Effective Time, (y) the median, rounded to
four decimal places, of the high and low trading price of a share of Parent
Common Stock on the NYSE Composite Tape on the date of the Effective Time and
(z) the Average Price.
(b) If the Aggregate Cash Consideration shall exceed the Tax-Free Merger
Maximum Cash Consideration, (i) the Merger shall be restructured as a merger of
Merger Sub with and into the Company, and (ii) without any further action by the
Board of Directors or stockholders of Parent or the Company, the provisions set
forth in Section 1.12 hereof shall be applicable to the Merger.
Section 1.8 Parent to Make Cash and Certificates Available; Transfer Taxes;
Withholding. (a) As soon as practicable after the Effective Time, Parent shall
deposit with the Exchange Agent, in trust for the holders of shares of Company
Common Stock, certificates for shares of Parent Common Stock and cash
representing the Merger Consideration payable pursuant to Sections 1.5, 1.6, 1.7
and 1.9 (such certificates and cash, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund"). The Exchange Agent shall invest any cash included in the
Exchange Fund as directed by Parent, on a daily basis. Any interest or other
income resulting from such investments shall be paid to Parent. As soon as
practicable after the Effective Time, the Exchange Agent shall distribute to
each holder of shares of Company Common Stock converted into the right to
receive the Cash Consideration or the Stock Consideration pursuant to Sections
1.5, 1.6, 1.7 and 1.9, upon surrender to the Exchange Agent (to the extent not
previously surrendered with a Form of Election) of one or more Certificates for
cancellation, a check for the amount of cash to which such holder is entitled
under such sections and certificates representing the shares of Parent Common
Stock to which such holder is entitled under such sections. As soon as
practicable after the Effective Time, the Exchange Agent shall mail to each
holder of record of a Certificate or Certificates whose shares were converted
pursuant to this Article I (other than any holder who previously surrendered all
its Certificates with a Form of Election or pursuant to a guarantee of delivery
set forth in a Form of Election) (A) a letter of transmittal in form reasonably
acceptable to Parent (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon actual delivery
of the Certificates to the Exchange Agent) and (B) instructions for use in
effecting the surrender of the Certificates.
(b) Upon surrender for cancellation to the Exchange Agent of a Certificate,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor a
A-5
<PAGE> 6
certificate representing that number of whole shares of Parent Common Stock
issuable and the cash payable to such holder pursuant to Sections 1.5, 1.6, 1.7
and 1.9 of this Agreement. Each share of Parent Common Stock into which a share
of Company Common Stock shall be converted shall be deemed to have been issued
at the Effective Time. If any certificate representing shares of Parent Common
Stock or cash or other property is to be issued or delivered in a name other
than that in which the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and that the person requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates for
such shares of Parent Common Stock in a name other than that of the registered
holder of the Certificate surrendered or shall establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable. Parent or
the Exchange Agent shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Company Common Stock such amounts as Parent or the Exchange Agent is
required to deduct and withhold with respect to the making of such payment under
the Internal Revenue Code of 1986, as amended (the "Code"), or under any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Parent or the Exchange Agent, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Company Common Stock in respect of which such deduction and
withholding was made by Parent or the Exchange Agent.
Section 1.9 Dividends, Fractional Shares, etc. (a) Notwithstanding any
other provisions of this Agreement, no dividends or other distributions declared
after the Effective Time on Parent Common Stock shall be paid with respect to
any shares of Company Common Stock represented by a Certificate, until such
Certificate is surrendered for exchange as provided herein. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of certificates for Parent Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions with a record date after the
Effective Time theretofore payable with respect to such whole shares of Parent
Common Stock and not paid, less the amount of any withholding taxes that may be
required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Parent Common Stock, less the amount of any
withholding taxes that may be required thereon.
(b) At or after the Effective Time, there shall be no transfer on the stock
transfer books of the Company of the shares of Company Common Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing any such shares are presented to the Surviving
Corporation, they shall be canceled and exchanged for the Merger Consideration,
if any, deliverable in respect thereof pursuant to this Agreement.
(c) No fractional shares of Parent Common Stock shall be issued pursuant to
the Merger. In lieu of the issuance of any fractional share of Parent Common
Stock pursuant to the Merger, cash adjustments shall be paid to holders in
respect of any fractional share of Parent Common Stock that could otherwise be
issuable, and the amount of such cash adjustment shall be equal to the product
of such fractional amount and the Average Price.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Parent Common Stock) that remains
unclaimed by the former stockholders of the Company six months after the
Effective Time or for such longer time as Parent shall determine shall be
delivered to Parent. Any former stockholder of the Company who has not
theretofore complied with this Article I shall thereafter look only to the
Surviving Corporation and Parent for payment of the applicable Merger
Consideration, cash in lieu of fractional shares and unpaid dividends and
distributions on Parent Common Stock deliverable in respect of each share of
Company Common Stock such stockholder holds as determined pursuant to this
Agreement, in each case without any interest thereon.
(e) To the fullest extent permitted by law, none of Parent, the Company,
the Surviving Corporation, the Exchange Agent or any other person shall be
liable to any former holder of shares of Company Common
A-6
<PAGE> 7
Stock for any amount properly delivered to a public official pursuant to
applicable or unclaimed property, escheat or similar laws.
(f) In the event that any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such reasonable amount as Parent may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Parent
Common Stock, as provided in this Section 1.9, deliverable in respect thereof
pursuant to this Agreement.
(g) In the event of any change in the Parent Common Stock between the date
of this Agreement and the Effective Time by reason of any stock split, stock
dividend, subdivision, reclassification, combination, exchange of Parent Common
Stock or the like, the Merger Consideration, the maximum and minimum prices of
the Parent Common Stock used to determine the Average Price, and other terms set
forth in this Agreement shall be appropriately adjusted.
Section 1.10 Closing. The closing of the Merger (the "Closing") and all
actions contemplated by this Agreement to occur at the Closing shall take place
at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1900 Pennzoil
Place, South Tower, 711 Louisiana Street, Suite 1900, Houston, Texas, at 10:00
a.m., local time, on a date to be specified by the parties, which (subject to
fulfillment or waiver of the conditions set forth in Article VI) shall be no
later than the second business day following the day on which the last of the
conditions set forth in Article VI shall have been fulfilled or waived, or at
such other time and place as Parent and the Company shall agree.
Section 1.11 Transfer Taxes. Parent and the Company shall cooperate in
the preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary or
other taxes and any other fees and similar taxes which become payable in
connection with the Merger other than transfer or other taxes described in
Section 1.8(b) (collectively, "Transfer Taxes"). From and after the Effective
Time, Parent shall pay or cause to be paid, without deduction or withholding
from any amounts payable to the holders of Company Stock, all Transfer Taxes.
Section 1.12 Restructuring. If the Aggregate Cash Consideration exceeds
the Tax-Free Merger Maximum Cash Consideration, Parent, Merger Sub and the
Company agree as follows:
(a) As promptly as practicable after the Election Record Date, the
Merger shall be restructured as provided in this Section 1.12 (the
"Alternative Taxable Merger").
(b) The following provisions shall apply to the Alternative Taxable
Merger:
(i) Section 1.1 of this Agreement shall be deemed to read as
follows:
Section 1.1 The Merger. Upon the terms and subject to the
conditions hereof, and in accordance with the Delaware General
Corporation Law (the "DGCL"), Merger Sub shall be merged with and
into the Company at the Effective Time (as defined in Section 1.2).
Following the Merger, the separate corporate existence of Merger Sub
shall cease and the Company shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of the Company in accordance
with the DGCL.
(ii) Section 1.4 of this Agreement shall be deemed to read as
follows:
Section 1.4 Charter and By-laws; Directors. (a) At the
Effective Time, the Certificate of Incorporation of the Company shall
be amended to read in its entirety as set forth in Exhibit A. At the
Effective Time, the By-laws of Merger Sub, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter changed or amended as provided therein
or in the Certificate of Incorporation or by applicable law.
A-7
<PAGE> 8
(b) The directors of Merger Sub at the Effective Time shall be
the directors of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
(iii) The introductory paragraph of Section 1.5 and Section 1.5(a)
of this Agreement shall be deemed to read as follows:
Section 1.5 Conversion of Securities. As of the Effective
Time, by virtue of the Merger and without any action on the part of
Parent, Merger Sub, the Company or the holders of any securities of
Parent:
(a) Each issued and outstanding share of common stock of Merger
Sub shall be converted into and become one validly issued, fully paid
and nonassessable share of common stock of the Surviving Corporation.
(iv) All references in this Agreement to the Surviving Corporation
shall be deemed references to the Company as the Surviving Corporation
in the Alternative Taxable Merger.
(v) The condition set forth in Section 6.1(e) of this Agreement
shall not be applicable to the Alternative Taxable Merger.
(vi) References to Parent in Sections 6.2(a) and (b) of this
Agreement shall be deemed to include references to Merger Sub.
Section 1.13 Alternative Restructuring. (a) At the option of Parent,
exercisable by written notice to the Company, the Merger shall be restructured
as provided in this Section 1.13 (the "Alternative Tax-Free Merger"); provided,
however, that if Parent makes such election, Parent shall not be permitted to
assert, and shall be deemed to have waived, each condition to its obligation to
close the Merger, which condition would be satisfied, if such alternative
structure were not used.
(b) The following provisions shall apply to the Alternative Tax-Free
Taxable Merger:
(i) Section 1.1 of this Agreement shall be deemed to read as follows:
Section 1.1 The Merger. Upon the terms and subject to the
conditions hereof, and in accordance with the Delaware General
Corporation Law (the "DGCL"), the Company shall be merged with and into
Merger Sub at the Effective Time (as defined in Section 1.2). Following
the Merger, the separate corporate existence of the Company shall cease
and Merger Sub shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights
and obligations of the Company in accordance with the DGCL.
(ii) Section 1.4 of this Agreement shall be deemed to read as follows:
Section 1.4 Charter and By-laws; Directors. (a) At the Effective
Time, the Certificate of Incorporation of Merger Sub as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation. At the Effective Time, the
By-laws of Merger Sub, as in effect immediately prior to the Effective
Time, shall be the By-laws of the Surviving Corporation until thereafter
changed or amended as provided therein or in the Certificate of
Incorporation or by applicable law.
(b) The directors of Merger Sub at the Effective Time shall be the
directors of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
(iii) The introductory paragraph of Section 1.5 and Section 1.5(a) of
this Agreement shall be deemed to read as follows:
Section 1.5 Conversion of Securities. As of the Effective Time,
by virtue of the Merger and without any action on the part of Parent,
Merger Sub, the Company or the holders of any securities of Parent:
A-8
<PAGE> 9
(a) Each issued and outstanding share of common stock of Merger Sub
shall remain outstanding and shall represent one validly issued, fully
paid and nonassessable share of common stock of the Surviving
Corporation.
(iv) All references in this Agreement to the Surviving Corporation
shall be deemed references to Merger Sub as the Surviving Corporation in
the Alternative Tax-Free Merger.
Section 1.14. Guarantee. Parent hereby absolutely and unconditionally
guarantees the performance by Merger Sub of all of its obligations under this
Agreement. The liability of Parent hereunder shall be primary and not as a
surety, and shall not be affected by the bankruptcy of Merger Sub or any failure
or delay by the Company in exercising any right or remedy. Parent hereby waives
notice or demand of performance in the acceptance of its obligations hereunder.
Section 1.15. Dissenting Shares. Notwithstanding Section 1.5(c), if the
Merger is restructured in the form of the Alternative Taxable Merger as provided
in Section 1.12, any shares of Company Common Stock outstanding immediately
prior to the Effective Time and held by a holder who (i) has not executed a
written consent in favor of the Merger, (ii) is required by the terms of this
Agreement to accept consideration for shares of Company Common Stock owned by
such holder other than in the form of Parent Common Stock and cash in lieu of
fractional shares, and (iii) has demanded appraisal for such shares of Company
Common Stock in accordance with the DGCL (the "Dissenting Shares") shall not be
converted into a right to receive the Merger Consideration, unless such holder
fails to perfect or withdraws or otherwise loses its right to appraisal or it is
determined that such holder does not have appraisal rights in accordance with
the DGCL. If, after the Effective Time, such holder fails to perfect or
withdraws or loses its right to appraisal, or if it is determined that such
holder does not have an appraisal right, such shares of Company Common Stock
shall be treated as if they had been converted as of the Effective Time into a
right to receive in exchange for each share of Company Common Stock the Merger
Consideration. The Company shall give Parent prompt notice of any demands
received by the Company for appraisal of any shares of Company Common Stock, and
Parent shall have the right to control all negotiations and proceedings with
respect to such demands except as required by applicable law. The Company shall
not, except with the prior written consent of Parent, make any payment with
respect to, or settle or offer to settle, any such demands.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows (such
representations and warranties (as well as other provisions of this Agreement)
are qualified by the matters identified on a disclosure schedule (the "Parent
Disclosure Schedule") delivered by Parent to the Company prior to execution of
this Agreement):
Section 2.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not, alone or in the aggregate, have a Parent
Material Adverse Effect. For the purposes of this Agreement, a "Parent Material
Adverse Effect" means any state of facts, event, change or effect which,
individually or in the aggregate, (i) has a material adverse effect on the
business, properties, assets, condition (financial or otherwise), liabilities or
results of operations of Parent and its Subsidiaries taken as a whole, other
than effects arising out of or resulting from changes in general economic
conditions, stock or financial market fluctuations, or oil and gas industry
conditions, or (ii) would prevent the consummation of the material transactions
contemplated hereby. Complete and correct copies as of the date hereof of the
Restated Certificate of Incorporation and By-laws of Parent have been delivered
to the Company as part of the Parent Disclosure Schedule.
A-9
<PAGE> 10
Section 2.2 Capitalization. The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Common Stock, and 25,000,000 shares of
Preferred Stock, par value $.01 per share (the "Parent Preferred Stock"). As of
February 26, 1998, (a) 60,773,150 shares of Parent Common Stock were validly
issued and outstanding, fully paid, and nonassessable, (b) no shares of Parent
Preferred Stock were issued and outstanding and (c) 4,284,773 shares of Parent
Common Stock were reserved for issuance pursuant to stock options ("Parent Stock
Options") of Parent. As of the date of this Agreement, there are no bonds,
debentures, notes or other indebtedness issued or outstanding having the right
to vote with Parent's stockholders, whether together or as a separate class, on
any matters on which Parent's stockholders may vote. As of the date of this
Agreement, except for Parent Stock Options and rights ("Parent Rights") issued
pursuant to the Amended and Restated Shareholder Rights Agreement, dated July
23, 1997 between Parent and The First National Bank of Boston, there are no
options, warrants, calls, convertible securities or other rights, agreements or
commitments presently outstanding obligating Parent to issue, deliver or sell
shares of its capital stock, or obligating Parent to grant, extend or enter into
any such option, warrant, call or other such right, agreement or commitment. All
of the shares of Parent Common Stock issuable in accordance with this Agreement
in exchange for Company Common Stock at the Effective Time in accordance with
this Agreement will be, when so issued, duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights and shall be delivered free
and clear of all liens, claims, charges and encumbrances of any kind or nature
whatsoever.
Section 2.3 Subsidiaries. Each Subsidiary of Parent is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to the
business of such Subsidiary) and has the corporate or similar power to carry on
its business as it is now being conducted or currently proposed to be conducted.
Each Subsidiary of Parent is duly qualified to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary except where the failure to be so qualified, when taken together with
all such failures, has not had, and would not reasonably be expected to have, a
Parent Material Adverse Effect. Section 2.3 of the Parent Disclosure Schedule
contains, with respect to each Subsidiary of Parent, its name and jurisdiction
of organization and, with respect to each Subsidiary that is not wholly owned,
the percentage of outstanding capital stock or equity capital owned by Parent or
a Subsidiary. All the outstanding shares of capital stock or equity capital of
each Subsidiary of Parent are validly issued, fully paid and nonassessable, and,
to the extent owned by Parent or by a Subsidiary of Parent, are owned free and
clear of any liens, claims or encumbrances. There are no existing options,
warrants, calls, convertible securities or other rights, agreements or
commitments of any character relating to the issued or unissued capital stock or
other securities of any of the Subsidiaries of Parent. Except as set forth in
Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
Parent does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or entity
or have any obligation, commitment or undertaking to acquire any such interest.
Section 2.4 Authority Relative to this Agreement. Parent has the
corporate power to enter into this Agreement and each other agreement executed
and delivered in connection with the material transactions contemplated hereby
(the "Related Agreements") to which Parent is a party and to carry out its
obligations hereunder and thereunder. The execution and delivery of this
Agreement and the Related Agreements to which Parent is a party and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by Parent's Board of Directors. This Agreement and each Related
Agreement to which Parent is a party constitutes a valid and binding obligation
of Parent enforceable against Parent in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought. No other corporate proceedings on the part of Parent are necessary to
authorize this Agreement or any Related Agreement to which Parent is a party and
the transactions contemplated hereby or thereby. Parent is not subject to or
obligated under (i) any charter, by-law, indenture or other loan or credit
document provision or (ii) any other contract, license, franchise, permit,
order, decree, concession, lease, instrument or judgment or any statute, law,
ordinance, rule or regulation applicable to Parent or any of its Subsidiaries or
A-10
<PAGE> 11
their respective properties or assets, which would be breached or violated, or
under which there would be a default (with or without notice or lapse of time,
or both), or under which there would arise a right of termination, cancellation,
modification or acceleration of any obligation, or any right to payment or
compensation, or the loss of a material benefit, by its executing and carrying
out this Agreement or any Related Agreement to which Parent is a party other
than, in the case of clause (ii) only, (A) any breaches, violations, defaults,
terminations, cancellations, modifications, accelerations, rights to payment or
compensation, or losses which, either alone or in the aggregate, have not had,
and would not reasonably be expected to have, a Parent Material Adverse Effect
and (B) the laws and regulations referred to in the next sentence. Except as
required by the HSR Act, the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or approval
of, any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (each, a "Governmental
Entity"), is necessary for the consummation by Parent of the Merger or the other
transactions contemplated by this Agreement or any Related Agreement to which
Parent is a party, other than filings, registrations, authorizations, consents
or approvals the failure to make or obtain which has not had, and would not
reasonably be expected to have, a Parent Material Adverse Effect.
Section 2.5 Reports and Financial Statements. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Reports on
Form 10-K for the fiscal years ended December 31, 1995 and December 31, 1996, as
filed with the Securities and Exchange Commission (the "Commission"), (ii)
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and
September 30, 1997, as filed with the Commission, (iii) proxy statements related
to all meetings of its stockholders (whether annual or special) since December
31, 1995, and (iv) all other reports or registration statements filed by Parent
with the Commission since December 31, 1995, except for preliminary material (in
the case of clauses (iii) and (iv) above) and except for registration statements
on Form S-8 relating to employee benefit plans and annual reports on Form 11-K
with respect to such plans, which are all the documents that Parent was required
to file with the Commission since that date (the documents in clauses (i)
through (iv) being referred to herein collectively as the "Parent SEC Reports").
As of their respective dates, the Parent SEC Reports complied as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the Commission
thereunder applicable to such Parent SEC Reports. As of their respective dates,
the Parent SEC Reports did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of Parent included in the Parent SEC
Reports comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto. The financial statements included in the Parent SEC Reports
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto); present fairly, in all material respects, the financial position
of Parent and its Subsidiaries as at the dates thereof and the results of their
operations and cash flows for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end adjustments, any
other adjustments described therein and the fact that certain information and
notes have been condensed or omitted in accordance with the Exchange Act and the
rules promulgated thereunder; and are in all material respects in accordance
with the books of account and records of Parent and its Subsidiaries.
Section 2.6 Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports filed and delivered to the Company prior to the date of
this Agreement, since September 30, 1997, there has not been any transaction,
commitment, dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) which, alone or in
the aggregate, has had, or would reasonably be expected to have, a Parent
Material Adverse Effect.
Section 2.7 Litigation. Except as disclosed in the Parent SEC Reports
filed prior to the date of this Agreement, there is no suit, action or
proceeding to which Parent or any of its Subsidiaries is a party pending or, to
the actual knowledge of the individuals listed in Section 2.7 of the Parent
Disclosure Schedule ("Parent
A-11
<PAGE> 12
Knowledge"), threatened against Parent or any of its Subsidiaries which, alone
or in the aggregate, has had or would reasonably be expected to have, a Parent
Material Adverse Effect, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Parent or any
of its Subsidiaries which, alone or in the aggregate, has had, or would
reasonably be expected to have, any such Parent Material Adverse Effect.
Section 2.8 Compliance with Applicable Laws. Parent and each of its
Subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not reasonably be expected to have, a
Parent Material Adverse Effect (the "Parent Permits"). Parent and each of its
Subsidiaries is in compliance with the terms of the Parent Permits, except for
any failure to comply which, alone or in the aggregate, has not had, and would
not reasonably be expected to have, a Parent Material Adverse Effect. Except as
disclosed in the Parent SEC Reports filed and delivered to the Company prior to
the date of this Agreement, the businesses of Parent and its Subsidiaries are
not being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which, alone or in the
aggregate, have not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect.
Section 2.9 Tax Matters. To the Parent Knowledge, Parent has not taken
any action which would prevent the Merger from constituting a reorganization
within the meaning of Section 368(a) of the Code.
Section 2.10 Parent Action. The Board of Directors of Parent (at a
meeting duly called and held) has by the requisite vote of all directors present
(a) determined that the Merger is advisable and fair to and in the best
interests of Parent and its stockholders and (b) approved the Merger and the
transactions contemplated thereby in accordance with the DGCL and Parent's
Restated Certificate of Incorporation.
Section 2.11 Public Utility. Parent is not a "holding company," a
"subsidiary company" of a "holding company," an affiliate of a "holding
company," or a "public utility company," as such terms are defined in the Public
Utility Holding Company Act of 1935, as amended (the "Holding Company Act").
Section 2.12 Representations and Warranties Regarding Merger Sub. Parent
and Merger Sub jointly and severally represent and warrant to the Company as
follows:
(A) Merger Sub is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Merger Sub has
not engaged in any business since it was incorporated other than in
connection with its organization and the transactions contemplated by this
Agreement.
(B) The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, par value $.01 per share, all of which are validly
issued and outstanding, fully paid and nonassessable and are directly owned
by Parent free and clear of all liens, claims and encumbrances.
(C) Merger Sub has the corporate power to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by the Board of Directors and sole stockholder of
Merger Sub. This Agreement constitutes a valid and binding obligation of
Merger Sub enforceable against Merger Sub in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. No other corporate proceedings on the
part of Merger Sub are necessary to authorize this Agreement and the
transactions contemplated hereby. Except as required by the HSR Act, the
Securities Act (as defined in Section 2.4), the Exchange Act (as defined in
Section 2.4) and the corporation, securities or blue sky laws or
regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any Governmental Entity (as defined
in Section 2.4) is necessary for the consummation by Merger Sub of the
Merger or the transactions contemplated by this Agreement, other than
filings, registrations, authoriza-
A-12
<PAGE> 13
tions, consents or approvals the failure to make or obtain which would not
prevent the consummation of the transactions contemplated this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent as follows (such
representations and warranties (as well as other provisions of this Agreement)
are qualified by the matters identified on a disclosure schedule (the "Company
Disclosure Schedule") delivered by the Company to Parent prior to execution of
this Agreement):
Section 3.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not, alone or in the aggregate, have a
Company Material Adverse Effect. For the purposes of this Agreement, a "Company
Material Adverse Effect" means any state of facts, event, change or effect
which, individually or in the aggregate, (i) has a material adverse effect on
the business, properties, assets, condition (financial or otherwise),
liabilities or results of operations of the Company and the Company Subsidiaries
(as defined below) taken as a whole, other than effects arising out of or
resulting from changes in general economic conditions, stock or financial market
fluctuations, or oil and gas industry conditions, or (ii) would prevent the
consummation of the material transactions contemplated hereby. Complete and
correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of the Company have been delivered to Parent as part of the Company
Disclosure Schedule. The term "Company Subsidiary" shall mean each Subsidiary of
the Company other than any member of the Offshore Group. The term "Offshore
Group" means Offshore, DeepFlex Production Services, Inc. ("Deepflex") and their
Subsidiaries, other than Tatham Offshore Development, Inc. The term "MSG
Entities" shall mean Deepflex and its Subsidiaries.
Section 3.2 Capitalization. The authorized capital stock of the Company
consists of 100,000,000 shares of Company Common Stock and 10,000,000 shares of
Preferred Stock, $.01 par value (the "Company Preferred Stock"). As of February
27, 1998, 24,708,807 shares of Company Common Stock were validly issued and
outstanding, fully paid and nonassessable, and no shares of Company Preferred
Stock were issued and outstanding. As of the date of this Agreement, there are
no bonds, debentures, notes or other indebtedness issued or outstanding having
the right to vote with Company's stockholders, whether together or as a separate
class, on any matters on which the Company's stockholders may vote. As of the
date of this Agreement, except for (a) Options issued pursuant to the Company
Stock Plans which are listed in Section 3.2 of the Company Disclosure Schedule
(which contains the name of the Option holder, the date of grant, the exercise
price, the vesting and expiration dates and the number of shares of Company
Common Stock covered by each such Option) and (b) Warrants issued pursuant to
the Warrant Agreements listed in Section 3.2 of the Company Disclosure Schedule
(which contains the name of the Warrantholder, the exercise price, the
expiration dates and the number of shares of Company Common Stock covered by
each such Warrant), such options and warrants covering not in excess of
4,582,787.5 shares of Company Common Stock, there are no options, warrants,
calls, convertible securities or other rights, agreements or commitments
presently outstanding obligating the Company to issue, deliver or sell shares of
its capital stock or debt securities, or obligating the Company to grant, extend
or enter into any such option, warrant, call or other such right, agreement or
commitment. After the Effective Time, except for obligations in respect of the
Options and Warrants, the Surviving Corporation will have no obligation to
issue, transfer or sell any shares of stock of the Company or the Surviving
Corporation pursuant to any Company Employee Benefit Plan (as defined in Section
3.10).
Section 3.3 Subsidiaries. Each Company Subsidiary is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to the
business of such Company
A-13
<PAGE> 14
Subsidiary) and has the corporate or similar power to carry on its business as
it is now being conducted or currently proposed to be conducted. Each Company
Subsidiary is duly qualified to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary except where the
failure to be so qualified, when taken together with all such failures, has not
had, and would not reasonably be expected to have, a Company Material Adverse
Effect. Section 3.3 of the Company Disclosure Schedule contains, with respect to
each Company Subsidiary, its name and jurisdiction of organization and, with
respect to each Company Subsidiary that is not wholly owned, the number of
issued and outstanding shares of capital stock or equity capital and the number
of shares of capital stock or equity capital owned by the Company or a Company
Subsidiary. Except as set forth in Section 3.3 of the Company Disclosure
Schedule, all the outstanding shares of capital stock or equity capital of each
Company Subsidiary are validly issued, fully paid and nonassessable, and those
owned by the Company or by a Company Subsidiary are owned free and clear of any
liens, claims or encumbrances. There are no existing options, warrants, calls,
convertible securities or other rights, agreements or commitments of any
character relating to the issued or unissued capital stock or other securities
of any of the Subsidiaries of the Company. Except as set forth in Section 3.3 of
the Company Disclosure Schedule, the Company does not directly or indirectly own
any interest in any other corporation, partnership, joint venture or other
business association or entity or have any obligation, commitment or undertaking
to acquire any such interest.
Section 3.4 Authority Relative to this Agreement. The Company and its
Subsidiaries have the corporate power to enter into this Agreement and each
Related Agreement to which the Company or any of its Subsidiaries is a party and
to carry out their obligations hereunder and thereunder. The execution and
delivery of this Agreement and each Related Agreement to which the Company or
any of its Subsidiaries is a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of the Company or the Board of Directors and, if required, the
stockholders of the relevant Subsidiary, and this Agreement and the Merger have
been duly authorized by the written consent (the "Consent") of the holders of a
majority of the shares of the Company outstanding as of the record date therefor
determined in accordance with Section 228 of the DGCL (the "Consent Date"). This
Agreement and each Related Agreement to which the Company or any of its
Subsidiaries is a party constitutes a valid and binding obligation of the
Company or such Subsidiary enforceable against the Company or such Subsidiary in
accordance with its terms except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. No other corporate proceedings on the part
of the Company or any of its Subsidiaries are necessary to authorize this
Agreement or any Related Agreement to which the Company or any of its
Subsidiaries is a party and the transactions contemplated hereby or thereby.
Except as set forth in Section 3.4 of the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries is subject to or obligated under (i) any
charter, by-law, indenture or other loan or credit document or (ii) any other
contract (other than Options and Warrants set forth in Section 3.2 of the
Company Disclosure Schedule), license, franchise, permit, order, decree,
concession, lease, instrument or judgment or any statute, law, ordinance, rule
or regulation applicable to the Company or any of its Subsidiaries or their
respective properties or assets which would be breached or violated, or under
which there would be a default (with or without notice or lapse of time, or
both), or under which there would arise a right of termination, cancellation,
modification or acceleration of any obligation, or any right to payment or
compensation, or the loss of a material benefit, by its executing and carrying
out this Agreement or any Related Agreement to which the Company or any of its
Subsidiaries is a party, other than, in the case of clause (ii) only, (A) any
breaches, violations, defaults, terminations, cancellations, modifications,
accelerations, rights to payment or compensation, or losses which, either alone
or in the aggregate, have not had, and would not reasonably be expected to have,
a Company Material Adverse Effect and (B) the laws and regulations referred to
in the next sentence. Except as required by the HSR Act, the Securities Act, the
Exchange Act, and the corporation, securities or blue sky laws or regulations of
the various states, no filing or registration with, or authorization, consent or
approval of, any Governmental Entity is necessary for the consummation by the
Company and its Subsidiaries of the Merger or the other transactions
contemplated by this Agreement or any Related Agreement to which the Company or
A-14
<PAGE> 15
any of its Subsidiaries is a party, other than filings, registrations,
authorizations, consents or approvals the failure to make or obtain which has
not had, and would not reasonably be expected to have, a Company Material
Adverse Effect.
Section 3.5 Reports and Financial Statements. The Company has previously
furnished Parent with true and complete copies, for each of the Company and
Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), of its (i) Annual Reports
on Form 10-K for the fiscal years ended June 30, 1996 and June 30, 1997 (in the
case of the Company) and for the fiscal years ended December 31, 1996 and
December 31, 1995 (in the case of Leviathan), in each case, as filed with the
Commission, (ii) Quarterly Report on Form 10-Q for the quarters ended September
30, 1997 and December 31, 1997, as filed with the Commission, (iii) proxy
statements related to all meetings of its stockholders or to the extent
applicable, limited partners (whether annual or special) since December 31, 1995
and (iv) all other reports or registration statements filed by the Company or
Leviathan with the Commission since June 30, 1996 (in the case of the Company)
and since December 31, 1995 (in the case of Leviathan), except for preliminary
material (in the case of clauses (iii) and (iv) above) and except for
registration statements on Form S-8 relating to employee benefit plans and
annual reports on Form 11-K with respect to such plans, which are all the
documents that the Company or Leviathan were required to file with the
Commission since that date (the documents in clauses (i) through (iv) being
referred to herein collectively as the "Company Group SEC Reports"). As of their
respective dates, the Company Group SEC Reports complied as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the Commission
thereunder applicable to such Company Group SEC Reports. As of their respective
dates, the Company Group SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The audited consolidated financial
statements and unaudited interim financial statements of the Company or
Leviathan, as the case may be, included in the Company Group SEC Reports comply
as to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the Commission with respect thereto.
The financial statements included in the Company Group SEC Reports have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of the Company
or Leviathan, and their respective Subsidiaries, as the case may be, as at the
dates thereof and the results of their operations and cash flows for the periods
then ended subject, in the case of the unaudited interim financial statements,
to normal year-end adjustments and any other adjustments described therein and
the fact that certain information and notes have been condensed or omitted in
accordance with the Exchange Act and the rules promulgated thereunder; and are
in all material respects in accordance with the books of account and records of
the Company or Leviathan and their respective Subsidiaries.
Section 3.6 Absence of Certain Changes or Events. Except as disclosed in
the Company Group SEC Reports filed and delivered to Parent prior to the date of
this Agreement or in Section 3.6 of the Company Disclosure Schedule, since
December 31, 1997, the Company and the Company Subsidiaries have operated their
respective businesses in the ordinary course of business consistent with past
practice and there has not been (i) any transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether or
not in the ordinary course of business) which, alone or in the aggregate, has
had, or would reasonably be expected to have, a Company Material Adverse Effect;
(ii) any damage, destruction or loss, whether or not covered by insurance, which
has had, or would reasonably be expected to have, a Company Material Adverse
Effect; (iii) any declaration, setting aside or payment of any dividend or
distribution (whether in cash, stock or property) with respect to the capital
stock of the Company or any of the Company Subsidiaries (other than (x)
dividends or distributions between the Company and wholly owned Company
Subsidiaries, (y) regular quarterly cash dividends by Leviathan, Leviathan Gas
Pipeline Company ("LGPC") and Leviathan Holdings Company ("Holdings") declared
and paid in amounts (including any increases thereof) and at times consistent
with past practice and (z) the distribution of Offshore capital stock to the
Company and the holders of Company Common Stock in accordance with the terms of
the Contribution and Distribution Agreement and the Tax Sharing Agreement (each
as defined in Section 5.11(a)); (iv) any material change in the Company's
accounting principles, practices or methods;
A-15
<PAGE> 16
(v) any repurchase or redemption with respect to its capital stock; (vi) any
stock split, combination or reclassification of any of the Company's capital
stock or the issuance or authorization of any issuance of any other securities
in respect of, in lieu of or in substitution for, shares of the Company's stock;
(vii) any grant of or any amendment (other than (A) to accelerate vesting or (B)
to waive an anti-dilution adjustment in connection with the Contribution and the
Rights Offering (as defined in Section 5.11(a)) in exchange for a proportionate
number of shares of Offshore capital stock) of the terms of any warrant or
option to purchase shares of capital stock of the Company other than pursuant to
the Company Option Plans; (viii) any granting by the Company or any of the
Company Subsidiaries to any director, officer or employee of the Company or any
of the Company Subsidiaries of (A) any increase in compensation (other than in
the case of employees in the ordinary course of business consistent with past
practice), (B) any increase in severance or termination pay, or (C) acceleration
of compensation or benefits; (ix) any entry by the Company or any of the Company
Subsidiaries into any employment, severance, bonus or termination agreement with
any director, officer or employee of the Company or any of the Company
Subsidiaries; or (x) any agreement (whether or not in writing), arrangement or
understanding to do any of the foregoing. The Company has exercised the option
under the Restructuring Option Agreement dated September 22, 1997, between the
Company and Offshore (the "Restructuring Agreement"), to exchange the
$60,000,000 Subordinated Convertible Promissory Note of Offshore held by the
Company for 26,666,667 shares of common stock of Offshore (the "Exchange").
Section 3.7 Litigation. Except as disclosed in the Company Group SEC
Reports filed and delivered to Parent prior to the date of this Agreement, there
is no suit, action or proceeding to which the Company or any Company Subsidiary
is a party pending or, to the actual knowledge of Thomas P. Tatham, Charles M.
Darling IV, Donald V. Weir, Grant E. Sims, John H. Gray or Kenneth H. Hamilton
("Company Knowledge"), threatened against the Company or any of its Subsidiaries
which, alone or in the aggregate, has had or would reasonably be expected to
have, a Company Material Adverse Effect, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Company or any of the Company Subsidiaries which, alone or in the
aggregate, has had, or would reasonably be expected to have, any such Company
Material Adverse Effect.
Section 3.8 Compliance with Applicable Laws. The Company and each of the
Company Subsidiaries holds all permits, licenses, variances, exemptions, orders
and approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not reasonably be expected to have a
Company Material Adverse Effect (the "Company Permits"). The Company and each of
the Company Subsidiaries is in compliance in all material respects with the
terms of the Company Permits. Except as disclosed in the Company Group SEC
Reports filed and delivered to Parent prior to the date of this Agreement, the
businesses of the Company and the Company Subsidiaries are not being conducted
in violation of any law, ordinance or regulation of any Governmental Entity,
except for possible violations which alone or in the aggregate have not had, and
would not reasonably be expected to have, a Company Material Adverse Effect. To
the Company Knowledge, during the past five years, none of the Company's or any
of the Company Subsidiaries' officers, employees or agents, nor any other person
acting on behalf of any of them or the Company or any of the Company
Subsidiaries, has, directly or indirectly, given or agreed to give any gift or
similar benefit to any customer, supplier, governmental employee or other person
in violation of any law, ordinance or regulation of any Governmental Entity,
including, without limitation, the Foreign Corrupt Practices Act, except for
violations or penalties which could not reasonably be expected to cost the
Company more than $500,000 individually or in the aggregate.
Section 3.9 Tax Matters. To the Company Knowledge, the Company has not
taken any action which would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code.
Section 3.10 Employee Benefit Plans. (a) Section 3.10(a) of the Company
Disclosure Schedule hereto sets forth a list of all "employee benefit plans," as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and all other material employee benefit or compensation
arrangements, including, without limitation, any such arrangements providing
severance pay, sick leave, vacation pay, salary continuation for disability,
retirement benefits, deferred compensation, bonus
A-16
<PAGE> 17
pay, incentive pay, stock options (including those held by directors, employees,
and consultants), hospitalization insurance, medical insurance, life insurance,
scholarships or tuition reimbursements, that are maintained by the Company, any
Company Subsidiary or any Company ERISA Affiliate (as defined in Section
3.10(g)) or to which the Company, any Company Subsidiary or any Company ERISA
Affiliate is obligated to contribute thereunder for current or former directors,
employees, independent contractors, consultants and leased employees of the
Company, any Company Subsidiary or any Company ERISA Affiliate (the "Company
Employee Benefit Plans").
(b) None of the Company Employee Benefit Plans is a "multiemployer plan,"
as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and neither
the Company nor any Company ERISA Affiliate presently maintains or has
maintained such a plan.
(c) Except as provided in Part 6 of Title I of ERISA, the Company does not
maintain or contribute to any plan or arrangement which provides or has any
liability to provide life insurance or medical or other employee welfare
benefits to any employee or former employee upon his retirement or termination
of employment, and the Company has never represented, promised or contracted
(whether in oral or written form) to any employee or former employee that such
benefits would be provided.
(d) Except as provided in the Options and Warrants, the execution of, and
performance of the transactions contemplated in, this Agreement will not, either
alone or upon the occurrence of subsequent events, result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any employee. The only severance agreements or
severance policies applicable to the Company or the Company Subsidiaries in the
event of a change of control of the Company are the agreements and policies
specifically referred to in Section 3.10(d) of the Company Disclosure Schedule.
Except as disclosed in Section 3.10(d) of the Company Disclosure Schedule, no
payment or benefit which will or may be made by the Company, Parent or any of
their Subsidiaries or affiliates with respect to any employee of the Company or
any Company Subsidiary will be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.
(e) Each Company Employee Benefit Plan that is intended to qualify under
Section 401 of the Code, and each trust maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the IRS, and, to the Company's knowledge, nothing has occurred with
respect to the operation or organization of any such Company Employee Benefit
Plan that would cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
With respect to any Company Employee Benefit Plan or other employee benefit plan
which is a "defined benefit plan" within the meaning of Section 3(35) of ERISA,
(i) the Company has not incurred and is not reasonably likely to incur any
liability under Title IV of ERISA (other than for the payment of premiums, all
of which have been paid when due), (ii) the Company has not incurred any
accumulated funding deficiency within the meaning of Section 412 of the Code and
has not applied for or obtained a waiver of any minimum funding standard or an
extension of any amortization period under Section 412 of the Code, (iii) no
"reportable event" (as such term is defined in Section 4043 of ERISA but
excluding any event for which the provision for 30-day notice to the Pension
Benefit Guaranty Corporation has been waived by regulation) has occurred or is
expected to occur and (iv) since December 31, 1996, no material adverse change
in the financial condition of any such plan has occurred.
(f) (i) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any of
the Company Employee Benefit Plans to any funds or trusts established thereunder
or in connection therewith have been made by the due date thereof, (ii) the
Company has complied in all material respects with any notice, reporting and
documentation requirements of ERISA and the Code, (iii) there are no pending
actions, claims or lawsuits which have been asserted, instituted or, to the
Company's knowledge, threatened, in connection with the Company Employee Benefit
Plans, and (iv) the Company Employee Benefit Plans have been maintained, in all
material respects, in accordance with their terms and with all provisions of
ERISA and the Code (including rules and regulations thereunder) and other
applicable federal and state laws and regulations.
A-17
<PAGE> 18
(g) Section 3.10(g) of the Company Disclosure Schedule sets forth a
complete list of all amounts outstanding relating to bonuses payable to
employees and any obligation to pay bonuses to employees relating to the
Company's performance, the employee's performance or the transactions
contemplated hereby.
For purposes of this Agreement, "Company ERISA Affiliate" means any
business or entity which is a member of the same "controlled group of
corporations," under "common control" or an "affiliated service group" with the
Company within the meanings of Sections 414(b), (c) or (m) of the Code, or
required to be aggregated with the Company under Section 414(o) of the Code, or
is under "common control" with the Company, within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
Section 3.11 Company Action. The Board of Directors of the Company (at a
meeting duly called and held) has by the requisite vote of all directors present
(a) determined that the Merger is advisable and fair to and in the best
interests of the Company and its stockholders, (b) approved the Merger and the
transactions contemplated by this Agreement and the Stockholder Agreements dated
the date hereof between Parent and each of Thomas P. Tatham, Donald V. Weir,
Charles M. Darling IV, Grant E. Sims, Lehman Brothers Holdings, Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, as custodian, and DLJ Capital Corp.
(collectively, the "Stockholder Agreements") and the transactions contemplated
thereby in accordance with the DGCL and the Company's Certificate of
Incorporation, and (c) approved the Consent for the purposes of Article VIII of
the Company's Certificate of Incorporation. The Company is not subject to
Section 203 of the DGCL.
Section 3.12 Taxes. (a) The term "Tax" as used herein means any federal,
state, local, or foreign income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under Code sec. 59A), customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not. The term "Tax Return" as used herein means any return,
declaration, report, claim for refund, or information return or statement
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof. All citations to the Code, or the Treasury Regulations
promulgated thereunder, shall include any amendments or any substitute or
successor provisions thereto. Leviathan has been validly characterized as a
partnership for Tax purposes at all times throughout its existence.
(b) Each of the Company and the Company Subsidiaries has filed all material
Tax Returns required to be filed by any of them and has paid (or the Company has
paid on its behalf), or has set up an adequate reserve for the payment of, all
Taxes required to be paid in respect of the periods covered by such Tax Returns.
The information contained in such Tax returns is true, complete and accurate in
all material respects. Neither the Company nor any Company Subsidiary is
delinquent in the payment of any material Tax, assessment or governmental
charge. No material deficiencies for any Taxes have been proposed, asserted or
assessed against the Company or any of the Company Subsidiaries that have not
been finally settled or paid in full, and no requests for waivers of the time to
assess any such Tax are pending. None of the Company and the Company
Subsidiaries is obligated, or is reasonably expected to be obligated, to make
any payments, or is a party to any agreement that on account of the transactions
contemplated by this Agreement would obligate it, or reasonably be expected to
obligate it, to make any payments that will not be deductible under Section 280G
of the Code. Each of the Company and the Company Subsidiaries has withheld and
paid all material Taxes required to be withheld and paid and has complied with
all information and backup withholding requirements, including maintaining all
necessary records in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(c) Except as set forth in Section 3.12(c) of the Company Disclosure
Schedule, none of Company or the Company Subsidiaries has, since December 31,
1994, been a member of an affiliated group, within the meaning of Code sec.
1504, filing a consolidated income Tax Return other than a group the common
parent of which is the Company. None of the Company and its Subsidiaries has any
material liability for the Taxes of any Person other than the Company and its
Subsidiaries (A) under Reg. sec.1.1502-6 (or any similar provision
A-18
<PAGE> 19
of state, local, or foreign law), (B) as a transferee or successor, (C) by
contract, or (D) otherwise. For this purpose, "Person" shall mean an individual,
a partnership, a corporation, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization, or a governmental entity.
(d) Section 3.12(d) of the Company Disclosure Schedule sets forth the
following information as of December 31, 1997 (as well as on an estimated pro
forma basis as of the Effective Time giving effect to the consummation of the
transactions contemplated hereby): (A) the Tax basis of the Company and each
Company Subsidiary in its assets; (B) the Tax basis of the stockholder(s) of the
MSG Entities in the stock of each such entity (or the amount of any excess loss
account, as that term is defined in Reg. sec. 1.1502-19); (C) the amount of any
net operating loss, net capital loss, unused investment or other credit, unused
foreign tax, or excess charitable contribution allocable to the Company or any
Company Subsidiary; and (D) the amount of any deferred gain or loss allocable to
the Company or any Company Subsidiary arising out of any deferred intercompany
transaction, as that term is defined in Reg. sec. 1.1502-13.
Section 3.13 Certain Agreements. (a) Neither the Company nor any of the
Company Subsidiaries is in default (or would be in default with notice or lapse
of time, or both) under any indenture, note, credit agreement, loan document,
lease, license, concession or other agreement including, but not limited to, any
Company Employee Benefit Plan, whether or not such default has been waived,
which default, alone or in the aggregate with other such defaults, has had, or
would reasonably be expected to have, a Company Material Adverse Effect.
(b) Section 3.13(b) of the Company Disclosure Schedule describes all
contracts, agreements and transactions, involving consideration of more than
$100,000 for any individual contract, agreement or transaction or series of
related contracts, agreements or transactions, between the Company or any of the
Company Subsidiaries, on the one hand, and any Related Party (as defined below),
on the other hand, which are currently in effect or which were in effect or were
consummated at any time on or after January 1, 1995 and sets forth all current
balances payable to or receivable from such Related Party related thereto as of
the date of this Agreement. For the purpose of this Agreement, "Related Party"
means (i) any officer or director of the Company, Offshore or Leviathan or any
of their respective Subsidiaries, (ii) any spouse, former spouse, child, parent,
parent of a spouse, sibling or grandchild of any of the persons listed in clause
(i), (iii) any Affiliate (as defined in Section 5.3) of any of the persons
listed in clauses (i) and (ii) (other than the Company or any Company
Subsidiary), and (iv) any member of the Offshore Group.
Section 3.14 Compliance with Worker Safety and Environmental Laws. (a)
The properties, assets and operations of the Company and the Company
Subsidiaries and their predecessors are and have been in compliance with all
applicable federal, state, local, and foreign laws, rules and regulations,
orders, decrees, common law, judgments, permits and licenses relating to public
and worker health and safety (collectively, "Worker Safety Laws") and the
protection, regulation and clean-up of the indoor and outdoor environment and
activities or conditions related thereto, including, without limitation, those
relating to the generation, handling, disposal, transportation or release of
hazardous or toxic materials, substances, wastes, pollutants and contaminants
including, without limitation, asbestos, petroleum, radon and polychlorinated
biphenyls (collectively, "Environmental Laws"), except for any violations that,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Company Material Adverse Effect. With respect to such
properties, assets and operations, including any previously owned, leased or
operated properties, assets or operations, there are no past, present or
reasonably anticipated future events, conditions, circumstances, activities,
practices, incidents, actions or plans of the Company or any of the Company
Subsidiaries and their predecessors that may interfere with or prevent
compliance or continued compliance with applicable Worker Safety Laws and
Environmental Laws, other than any such interference or prevention that,
individually or in the aggregate, has not had, and would not reasonably be
expected to have, a Company Material Adverse Effect.
(b) The Company and the Company Subsidiaries and their predecessors have
not caused or permitted any property, asset, operation, including any previously
owned property, asset or operation, to use, generate, manufacture, refine,
transport, treat, store, handle, dispose, transfer or process hazardous or toxic
materials, substances, wastes, pollutants or contaminants, except in material
compliance with all Environmental Laws
A-19
<PAGE> 20
and Worker Safety Laws, other than any such activity that, individually or in
the aggregate, has not had, and would not reasonably be expected to have, a
Company Material Adverse Effect. The Company and the Company Subsidiaries have
not reported to any Governmental Entity any material violation of an
Environmental Law or any release, discharge or emission of any hazardous or
toxic materials, substances, wastes, pollutants or contaminants, other than any
such violation, release, discharge or emission that, individually or in the
aggregate, has not had, and would not reasonably be expected to have, a Company
Material Adverse Effect. To the Company Knowledge, there are no pending,
threatened or asserted claims or liabilities under CERCLA, 42 U.S.C. sec.9601 et
seq., RCRA, 42 U.S.C. sec.6901 et seq., or equivalent state law provisions and
no current or former property, asset or operation of the Company or any Company
Subsidiary is identified or currently proposed for the National Priorities List
at 40 CFR sec.300, Appendix B, or the CERCLIS or equivalent state lists or
hazardous substances release sites.
Section 3.15 Financial Advisor. The Company's Board of Directors has
received the opinion of Chase Securities Inc. to the effect that, as of the date
hereof, the Merger Consideration, together with the Rights to be distributed to
the holders of Company Common Stock in the Rights Offering, is fair from a
financial point of view to the holders of Company Common Stock. Except for Chase
Securities, Inc., no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of the Company. The Company has previously delivered to Parent
copies of the engagement letter, dated February 4, 1998, from Chase Securities
Inc. to the Company.
Section 3.16 Public Utility. The Company is not a "holding company," a
"subsidiary company" of a "holding company," an affiliate of a "holding
company," or a "public utility company," as such terms are defined in the
Holding Company Act.
Section 3.17 Offshore Group. (a) Except as disclosed in the Company Group
SEC Reports filed and delivered to Parent prior to the date of this Agreement or
in Section 3.17(a) of the Company Disclosure Schedule or as does not otherwise
have, and would not reasonably be expected to have, a Company Material Adverse
Effect, neither the Company nor any Company Subsidiary has any joint and several
liabilities or obligations arising out of the assets, business, operations,
debts or liabilities of the Offshore Group.
(b) Neither the Company nor any Company Subsidiary is contractually liable,
either primarily or contingently, for any liability or obligation of any member
of the Offshore Group under any indenture or other loan or credit document or
any other contract, license, lease or instrument to which any member of the
Offshore Group is a party, except for liabilities or obligations set forth in
Section 3.17(b) of the Company Disclosure Schedule which will be released prior
to the Effective Time.
(c) Since December 31, 1997, except as permitted by this Agreement or any
Related Agreement or as otherwise set forth in Section 3.17(c) of the Company
Disclosure Schedule, neither the Company nor any Company Subsidiary has made any
investment, loan, payment, advance or contribution of funds or property to any
member of the Offshore Group or forgiven or capitalized any amounts owed by any
member of the Offshore Group to the Company or any Company Subsidiary (other
than the Exchange).
(d) The assets owned or leased by the MSG Entities are used in connection
with the ownership or operation of such entities' semi-submersible drilling rigs
and are not used in connection with the business of the Company and the Company
Subsidiaries.
Section 3.18 Limitation on Company Representations and Warranties. Except
as set forth in Section 3.4, 3.5, 3.13(b) or 3.17, no representations or
warranties delivered by the Company in this Agreement shall cover, apply to, or
otherwise pertain to any member of the Offshore Group or any assets, business,
operations or information related thereto.
A-20
<PAGE> 21
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business by the Company Pending the Merger. Except
as contemplated by the Company Disclosure Schedule, this Agreement and the
Related Agreements during the period from the date of this Agreement to the
Effective Time, the Company shall, and shall cause each of the Company
Subsidiaries to, (i) carry on its business in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted and, to the
extent consistent therewith, use all reasonable efforts to keep available the
services of its current officers and employees and preserve its relationships
with customers, suppliers, licensors, lessors and others having business
dealings with it to the end that its goodwill and ongoing business shall be
unimpaired at the Effective Time and (ii) prepare and timely file all Tax
Returns and amendments required to be filed by any of the Company and the
Company Subsidiaries prior to the Effective Time and pay all Taxes relating to
such Tax Returns before they shall become delinquent. Except as otherwise
expressly permitted or contemplated by this Agreement, the Related Agreements or
the Company Disclosure Schedule, the Company shall not, and shall not permit any
of the Company Subsidiaries to, without the prior written consent of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its stockholders in their
capacity as such (other than (x) dividends and other distributions by
direct or indirect wholly owned Subsidiaries, (y) regular quarterly cash
dividends by Leviathan, LGPC and Holdings declared and paid in amounts
(including any increases thereof) and at times consistent with past
practice and (z) the distribution of Offshore capital stock to the holders
of Company Common Stock in accordance with the terms of the Contribution
and Distribution Agreement and the Tax Sharing Agreement), (ii) other than
in the case of any direct or indirect wholly owned Company Subsidiary,
split, combine or reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock, or (iii) purchase, redeem or
otherwise acquire any shares of capital stock of the Company or any of its
Subsidiaries or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities (other than a
purchase or an acquisition resulting from a required repurchase offer by
the Company pursuant to the Indenture dated as of March 21, 1994 between
the Company and the Bank of New York, successor in interest to the First
Interstate Bank of Texas, N.A. and the related loan and security documents
(collectively, as amended, the "Company Indenture") and the Company's
Senior Subordinated Promissory Note dated January 23, 1997 payable to Hare
& Co. (the "Subordinated Note") as a consequence of any of the Company's
election under the Restructuring Agreement, the Contribution and the Rights
Offering (as defined in Section 5.11(a)) or the transactions contemplated
by the Contribution and Distribution Agreement);
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber
(other than the pledges or other encumbrances described in Section 4.1(e))
any shares of its capital stock, any other voting securities or equity
equivalent or any securities convertible into, or any rights, warrants or
options to acquire any such shares, voting securities, equity equivalent or
convertible securities, other than the issuance of shares of Company Common
Stock upon the exercise of Options (whether or not presently exercisable)
outstanding on the date of this Agreement or upon the exercise of Warrants
outstanding on the date of this Agreement, in each case in accordance with
their current terms;
(c) amend its articles or certificate of incorporation or by-laws or
other comparable organizational documents;
(d) acquire or agree to acquire (i) by merging or consolidating with,
or by purchasing a substantial portion of the assets of or equity in, or by
any other manner, any business or any corporation, partnership, association
or other business organization or division thereof or (ii) any assets
except, in the case of clauses (i) and (ii), for transactions not exceeding
$100,000 individually or $1,000,000 for all transactions pursuant to
clauses (i) and (ii) in the aggregate;
A-21
<PAGE> 22
(e) except for Permitted Encumbrances or as required by contracts and
agreements set forth in the Company Disclosure Schedule, sell, lease,
license, mortgage or otherwise encumber or subject to any lien, charge or
encumbrance or otherwise dispose of, or agree to sell, lease, license,
mortgage or otherwise encumber or subject to any lien, charge or
encumbrance or otherwise dispose of, any of its assets, other than
transactions that are in the ordinary course of business consistent with
past practice and not material to the Company and the Company Subsidiaries
taken as a whole; when used in this Agreement, the term "Permitted
Encumbrances" shall include any liens, title defects, preferential rights
or other encumbrances upon any of the relevant individual's or entities'
property, assets or revenues, whether now owned or hereafter acquired, that
are (i) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like liens arising in the ordinary course of business which are
not overdue for a period of more than 60 days or which are being contested
in good faith by appropriate proceeding, (ii) pledges or deposits in
connection with workers' compensation, unemployment insurance and other
social security legislation and deposits securing liability to insurance
carriers under insurance or self-insurance arrangements, (iii) for taxes
not yet due or which are being contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are
maintained on the books of the Company or the Company Subsidiaries, as the
case may be, in conformity with GAAP, (iv) deposits to secure the
performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds
and other obligations of a like nature incurred in the ordinary course of
business, (v) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the
Company or such Company Subsidiary, (vi) created pursuant to construction,
operating and maintenance agreements, space lease agreements and other
similar agreements, in each case having ordinary and customary terms and
entered into in the ordinary course of business by the Company and the
Company Subsidiaries and (vii) created pursuant to or arising under the
Company Indenture, the Subordinated Note or the Second Amended and Restated
Credit Agreement dated as of March 23, 1995 between Leviathan, Chase
Manhattan Bank, as administrative agent, and the lenders thereto and the
related loan and security documents (collectively, as amended, the
"Leviathan Credit Agreement");
(f) incur any indebtedness for borrowed money, guarantee any such
indebtedness, issue or sell any debt securities or warrants or other rights
to acquire any debt securities, guarantee any debt securities or make any
loans, advances or capital contributions to, or other investments in, any
other person, or enter into any arrangement having the economic effect of
any of the foregoing, other than indebtedness incurred in the ordinary
course of business consistent with past practice which is prepayable at any
time without premium or penalty;
(g) alter (through merger, liquidation, reorganization, restructuring
or in any other fashion) the corporate structure or ownership of the
Company or any Company Subsidiary other than as contemplated by this
Agreement and the Related Agreements;
(h) except as required under any collective bargaining agreement,
enter into or adopt any new, or amend any existing, severance plan,
agreement or arrangement or enter into any new or amend any existing
Company Employee Benefit Plan or employment or consulting agreement, other
than as required by law;
(i) increase the compensation payable or to become payable to its
officers or employees, except for (i) increases in the ordinary course of
business consistent with past practice in salaries or wages of employees of
the Company or any of its Subsidiaries and (ii) to the extent required
under the terms of any applicable incentive plan or arrangement set forth
in the Company Disclosure Schedule, the payment of annual incentive bonuses
relating to the fiscal year ending June 30, 1998;
(j) grant or award any stock options, restricted stock, performance
shares, stock appreciation rights or other equity-based incentive awards;
A-22
<PAGE> 23
(k) take any action with respect to accounting policies or procedures
for Tax or accounting purposes (other than actions required to be taken by
Tax laws or generally accepted accounting principles) or make or change any
election with respect to Taxes (except that the Company can elect to forgo
the carryback of net operating losses existing as of June 30, 1997);
(l) except as disclosed in the Company's or Leviathan's capital
expenditure plan which has been disclosed to Parent prior to the date of
this Agreement or in the Company Disclosure Schedule or for maintenance
capital expenditures in the ordinary course of business consistent with
past practice or capital expenditures to repair or replace casualty losses,
make or agree to make any new capital expenditure or expenditures in excess
of $100,000 individually or $1,000,000 in the aggregate;
(m) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto) of the
Company included in the Company Group SEC Reports or incurred in the
ordinary course of business consistent with past practice or as required by
law;
(n) settle or compromise any material federal, state, local or foreign
Tax liability;
(o) except as expressly provided in this Agreement, enter into, amend,
terminate or waive any provision of, any agreement or arrangement with any
Related Party or enter into any transaction with any Related Party;
(p) take any action which would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code; or
(q) enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
Section 4.2 Partnerships and Joint Ventures. Notwithstanding anything in
this Agreement to the contrary, (i) the Company shall have the right to take all
such actions it reasonably deems necessary or appropriate to cause LGPC,
Leviathan and applicable Subsidiaries of Leviathan to perform their obligations
under contracts to which they are parties, (ii) nothing in this Agreement shall
restrict LGPC and its Subsidiaries from taking such actions as they reasonably
deem necessary or appropriate by reason of any capital calls or equity issuances
by any entities (partnerships, limited liability companies or other joint
ventures) in which Leviathan or Subsidiaries of Leviathan own an interest as of
the date of this Agreement in order to maintain their proportionate equity
interest in such entities and (iii) to the extent that the Company and the
Company Subsidiaries are required to take any action or are precluded from
taking any action with respect to Viosca Knoll Gathering Company pursuant to any
provision of this Agreement and Parent declines a request by the Company to
waive the restrictions in this Agreement with respect to any such action, Parent
shall be deemed to have waived any and all fiduciary duties and obligations owed
to Parent or any Subsidiary thereof, in its capacity as a partner in Viosca
Knoll Gathering Company, in connection with any such action by the Company, VK
Deepwater Gathering Company, L.L.C., or any other Company Subsidiaries.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Access and Information. The Company and the Company
Subsidiaries shall afford to Parent and to Parent's accountants, counsel and
other representatives reasonable access during normal business hours (and at
such other times as the parties may mutually agree) throughout the period prior
to the Effective Time to all of its properties, books, contracts, commitments,
records and personnel, and, during such period, shall furnish promptly to Parent
(i) a copy of each report, schedule and other document filed or received by it
pursuant to the requirements of federal or state securities laws, and (ii) all
other information concerning its business, properties and personnel as Parent
may reasonably request.
A-23
<PAGE> 24
Section 5.2 Registration Statement/Information Statement. Parent and the
Company shall cooperate and promptly prepare, and Parent shall file with the
Commission as soon as practicable, a Registration Statement on Form S-4 (the
"Form S-4") under the Securities Act, with respect to the Parent Common Stock
issuable in the Merger, a portion of which Registration Statement shall also
serve as the information statement of the Company with respect to the Merger
(the "Information Statement/Prospectus"). Notwithstanding the foregoing, Parent
may elect to cause the Company to file the Information Statement/Prospectus as
confidential proxy material and to defer the filing of the Form S-4 until the
Commission has provided written comments with respect thereto or has indicated
that the Information Statement/Prospectus will not be reviewed, and shall
thereafter file the Form S-4 as promptly as reasonably practicable. The
respective parties will cause the Information Statement/Prospectus and the Form
S-4 to comply as to form in all material respects with the applicable provisions
of the Securities Act, the Exchange Act and the rules and regulations
thereunder. Parent shall use all reasonable efforts, and the Company will
cooperate with Parent, to have the Form S-4 declared effective by the Commission
as promptly as practicable after the filing thereof (including without
limitation, responding to any comments received from the Commission with respect
thereto) and to keep the Form S-4 effective as long as is necessary to
consummate the Merger. Each of Parent and the Company shall, as promptly as
practicable, provide to the other copies of any written comments received from
the Commission with respect to the Information Statement/Prospectus or the Form
S-4 and advise the other of any oral comments with respect to the Information
Statement/Prospectus or the Form S-4 received from the Commission. Parent shall
use its best efforts to obtain, prior to the effective date of the Form S-4, all
necessary state securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by this Agreement and will pay all
expenses incident thereto. Parent agrees that none of the information supplied
or to be supplied by Parent for inclusion or incorporation by reference in the
Form S-4 or the Information Statement/Prospectus (i) in the case of the
Information Statement/Prospectus and each amendment or supplement thereto, at
the time of mailing thereof, or (ii) in the case of the Form S-4 and each
amendment or supplement thereto, at the time it is filed or becomes effective,
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
Company agrees that none of the information supplied or to be supplied by the
Company for inclusion or incorporation by reference in the Form S-4 or the
Information Statement/Prospectus (i) in the case of the Information
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof, or, (ii) in the case of the Form S-4 or any amendment or
supplement thereto, at the time it is filed or becomes effective, will contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. For purposes of
the foregoing, it is understood and agreed that information concerning or
related to Parent will be deemed to have been supplied by Parent and information
concerning or related to the Company shall be deemed to have been supplied by
the Company. No amendment or supplement to the Information Statement/Prospectus
will be made by Parent or the Company without the approval (not to be
unreasonably delayed or withheld) of the other party. Parent will advise the
Company, promptly after it receives notice thereof, of the time when the Form S4
has become effective or any supplement or amendment has been filed, the issuance
of any stop order, or the suspension of the qualification of Parent Common Stock
issuable in connection with the Merger for offering or sale in any jurisdiction.
Section 5.3 Compliance with the Securities Act. At least 30 days prior to
the Effective Time, the Company shall deliver to Parent a list of names and
addresses of those persons who were, in the Company's reasonable judgment, at
the date of this Agreement, "affiliates" (each such person, an "Affiliate") of
the Company within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act. The Company shall deliver or cause to be
delivered to Parent, prior to the Effective Time, from each of the Affiliates of
the Company identified in the foregoing list, an Affiliate Letter in the form
attached hereto as Exhibit B (an "Affiliate Letter"). Parent shall be entitled
to place legends as specified in such Affiliate Letters on the certificates
evidencing any Parent Common Stock to be received by such Affiliates pursuant to
the terms of the Agreement, and to issue appropriate stop transfer instructions
to the transfer agent for the Parent Common Stock, consistent with the terms of
such Affiliate Letters.
A-24
<PAGE> 25
Section 5.4 Stock Exchange Listing. Parent shall use its best efforts to
list on the NYSE, upon official notice of issuance, the Parent Common Stock to
be issued pursuant to the Merger.
Section 5.5 Employee Matters. As of the Effective Time, the employees of
the Company and each Company Subsidiary listed in Section 5.5(a) of the Company
Disclosure Schedule shall continue employment with the Surviving Corporation and
its Subsidiaries, respectively, in the same positions and at the same level of
wages and/or salary and without having incurred a termination of employment or
separation from service; provided, however, except as may be specifically
required by applicable law or any contract, neither the Surviving Corporation
and its Subsidiaries, on the one hand, nor any employee, on the other hand,
shall be obligated to continue any employment relationship or any specific terms
of employment for any specific period of time. The Company has agreed to make
certain severance payments to terminated employees as provided in the
Contribution and Distribution Agreement (as defined in Section 5.11(a)). At the
request of Parent, the Company shall terminate immediately prior to the
Effective Time any employee of the Company and the Company Subsidiaries listed
in Section 5.5(b) of the Company Disclosure Schedule. As of the Effective Time,
Parent shall be the sponsor of the Company Employee Benefit Plans sponsored by
the Company immediately prior to the Effective Time, and Parent shall and shall
cause its Subsidiaries to satisfy all obligations and liabilities under such
Company Employee Benefit Plans; provided, however, that, except as hereafter
provided in this Section 5.5 or in the Company Disclosure Schedule, nothing
contained in this Agreement shall limit or restrict Parent's or its
Subsidiaries' right on or after the Effective Time to amend, modify or terminate
any of the Company Employee Benefit Plans. To the extent any employee benefit
plan, program or policy of Parent or their affiliates is made available to any
person who is an employee of the Company or any of the Company Subsidiaries
immediately prior to the Effective Time: (i) service with the Company and the
Company Subsidiaries by any employee prior to the Effective Time shall be
credited for eligibility and vesting purposes and for purposes of qualifying for
any additional benefits tied to periods of service (such as higher rates of
matching contributions and eligibility for early retirement) under such plan,
program or policy, but not for benefit accrual purposes; and (ii) with respect
to any welfare benefit plans to which such employees may become eligible, Parent
shall cause such plans to provide credit for any co-payments or deductibles by
such employees and waive all pre-existing condition exclusions and waiting
periods, other than limitations or waiting periods that have not been satisfied
under any welfare plans maintained by the Company and the Company Subsidiaries
for their employees prior to the Effective Time. At the reasonable request of
Parent, the Company shall amend, modify or terminate any of the Company Employee
Benefit Plans at or immediately prior to the Effective Time (whichever the
Parent may request) and shall take such other steps as Parent may reasonably
request to facilitate the administration after the Effective Time of the
compensation and benefit plans, programs and arrangements of the Surviving
Corporation.
Section 5.6 Indemnification. (a) From and after the Effective Date, the
Surviving Corporation shall indemnify, defend and hold harmless the officers,
directors and employees of the Company and the Company Subsidiaries (except to
the extent such persons are liable due to performance in the capacity as an
officer, director or employee of any Subsidiary of the Company other than a
Company Subsidiary) who were such at any time prior to the Effective Time (the
"Indemnified Parties") from and against all losses, expenses, claims, damages or
liabilities arising out of the transactions contemplated by this Agreement to
the fullest extent permitted or required under applicable law, and the
Indemnified Parties shall be advanced expenses subject to a customary
reimbursement agreement. All rights to indemnification existing in favor of the
directors, officers or employees of the Company and the Company Subsidiaries as
provided in the Company's certificate of incorporation or By-laws, as in effect
as of the date hereof, with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect
thereafter. Parent shall maintain in effect for not less than six years after
the Effective Time the current policies of directors' and officers' liability
insurance maintained by the Company with respect to matters occurring on or
prior to the Effective Time; provided, however, that Parent may substitute
therefor policies of at least the same coverage (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are no less
advantageous to the Indemnified Parties; and provided, further, that Parent
shall not be required in order to maintain or procure such coverage to pay an
annual premium in excess of 150% of the current annual premium paid by the
Company for its existing coverage (the "Cap"); and provided, further, that if
equivalent
A-25
<PAGE> 26
coverage cannot be obtained, or can be obtained only by paying an annual premium
in excess of the Cap, Parent shall only be required to obtain as much coverage
as can be obtained by paying an annual premium equal to the Cap.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Effective Time, the parties hereto agree
to cooperate and use their respective reasonable efforts to vigorously defend
against and respond thereto.
(c) Any Indemnified Party, upon learning of any claim, action, suit,
proceeding or investigation for which such party may seek indemnification under
this Section 5.6, shall promptly notify Parent.
Section 5.7 HSR Act. The Company and Parent shall file as soon as
practicable notifications under the HSR Act in connection with the Merger and
the transactions contemplated hereby, and shall respond as promptly as
practicable to any inquiries received from the Federal Trade Commission and the
Antitrust Division of the Department of Justice for additional information or
documentation.
Section 5.8 Additional Agreements. (a) Subject to the terms and
conditions herein provided, each of the parties hereto agrees diligently to use
all commercially reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as soon as reasonably practical,
including using all commercially reasonable efforts to (i) obtain all necessary
waivers, consents and approvals, (ii) effect all necessary registrations and
filings, (iii) lift any injunction to the Merger (and, in such case, to proceed
with the Merger as expeditiously as possible), (iv) work diligently in
cooperation with the other party in connection with the consummation of any
repurchase offer or consent solicitation required pursuant to the Company's
Indenture or the Subordinated Note as a consequence of the Contribution and the
Rights Offering, the Merger, the Company's disposition of Deepflex or the
Company's election made pursuant to the Restructuring Agreement and the
obtaining of the consent of the holders of the notes issued pursuant to the
Company Indenture and the Subordinated Note to the amendments described in
Appendix A, provided that Parent shall control any solicitation of consents
contemplated by this clause (iv) and shall be responsible for all costs and
expenses incurred by any party hereto in connection with such solicitation of
consents, (v) to the extent deemed desirable by the Company, obtain waivers from
holders of applicable Options and Warrants with respect to any antidilution
adjustment, if any, in connection with the Contribution and the Rights Offering
in exchange for a proportionate share of the Offshore stock, and (vi) otherwise
promptly satisfy the conditions set forth in Article VI.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and/or directors of Parent and the Company shall take all such
necessary action.
(c) Following the Effective Time, Parent shall use all reasonable efforts
to conduct the business and otherwise act in a manner which would not jeopardize
the characterization of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
Section 5.9 No Shop. The Company agrees (a) that neither it nor any of
its Subsidiaries or affiliates shall, and it shall direct and use its best
efforts to cause its officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries or affiliates) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, the Company and
the Company Subsidiaries, taken as a whole (any such proposal or offer being
hereinafter referred to as an "Alternative Proposal"), or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Alternative Proposal, or
release any third party from any obligations under any existing standstill
agreement or arrangement, or enter into any agreement with respect to an
Alternative Proposal, or otherwise facilitate any effort or attempt to make or
implement an Alternative Proposal; (b) that it will immediately cease and cause
to be terminated any existing activities,
A-26
<PAGE> 27
discussions or negotiations with any parties with respect to any of the
foregoing, and it will take the necessary steps to inform the individuals or
entities referred to above of the obligations undertaken in this Section 5.9;
and (c) that it will notify Parent immediately if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, it.
Notwithstanding the foregoing, prior to the Consent Date, the Company may,
directly or indirectly, furnish information and access to, and may participate
in discussions and negotiate with, any person, if (i) such person has submitted
an unsolicited written proposal to the Board of Directors of the Company
relating to an Alternative Proposal, (ii) the Board of Directors of the Company
believes, after consultation with its financial advisor, that such Alternative
Proposal is superior from a financial point of view to the transactions
contemplated by this Agreement and the Related Agreements and (iii) the Board of
Directors of the Company determines in its good faith judgment that it is
required to take such action to comply with the Board of Directors' fiduciary
duty imposed by law (a "Superior Proposal"). Such Board of Directors shall
provide a copy of any such written proposal to Parent immediately after receipt
thereof and thereafter keep Parent promptly advised of any development with
respect thereto and any revision of the terms of such Superior Proposal. Nothing
in this Section 5.9 shall (x) permit the Company to terminate this Agreement,
(y) permit the Company or any Company Subsidiary to enter into any agreement or
arrangement with respect to an Alternative Proposal during the term of this
Agreement (it being agreed that during the term of this Agreement, neither the
Company nor any Company Subsidiary shall enter into any agreement or arrangement
with any person that provides for, or in any way facilitates, an Alternative
Proposal (other than a confidentiality agreement in customary form)), or (z)
affect any other obligation of the Company under this Agreement.
Section 5.10 Advice of Changes; SEC Filings. The Company shall confer on
a regular basis with Parent on operational matters. Parent and the Company shall
promptly advise each other orally and in writing of any change or event that has
had, or could reasonably be expected to have, a Company Material Adverse Effect
or a Parent Material Adverse Effect, as the case may be. The Company and Parent
shall promptly provide each other (or their respective counsel) copies of all
filings made by such party with the SEC or any other Governmental Entity in
connection with this Agreement and the transactions contemplated hereby other
than any filing by the Company pursuant to the HSR Act.
Section 5.11 Certain Additional Matters. (a) Prior to the Closing, the
Company shall (i) contribute to Offshore all of the outstanding shares of
capital stock of Deepflex owned by the Company (the "Contribution") and (ii)
distribute pro rata to the holders of Company Common Stock rights (the "Rights")
to purchase all of the common and preferred stock and/or units representing the
same (the "Offshore Shares") owned or to be acquired by the Company in Offshore
(the "Rights Offering") as provided in the Contribution and Distribution
Agreement attached as Exhibit C (the "Contribution and Distribution Agreement").
The Company and Offshore will also execute and deliver a Tax Sharing Agreement
in the form attached as Exhibit D (the "Tax Sharing Agreement") immediately
prior to the Contribution and will execute and deliver such other definitive
documentation necessary to effectuate the Contribution and the Rights Offering
and document the contractual relationship between Offshore and the Company
(collectively, the "Offshore Documentation") as Parent, the Company and Offshore
shall in reasonable good faith mutually agree on. The Company shall cause
Offshore to execute and deliver the Offshore Documentation. The Company and
Offshore shall not amend, modify or waive any provisions of the Contribution and
Distribution Agreement or the Tax Sharing Agreement without the consent of
Parent. The Company shall, and shall cause Offshore, promptly to prepare and to
file with the Commission as soon as practical and in no event later than March
31, 1998, a Registration Statement under the Securities Act, with respect to the
Offshore Shares issuable or deliverable upon exercise of the Rights (the "Rights
Offering Registration Statements"), a portion of which shall also serve as the
prospectus of the Company and Offshore with respect to the offering and sale of
the Offshore Shares (the "Rights Offering Prospectuses"). The Company will, and
will cause Offshore to, use all reasonable efforts, and Parent and the Company
will cooperate with Offshore, to have the Rights Offering Registration
Statements declared effective by the Commission as promptly as practical after
the filing thereof, and to mail to stockholders of the Company in connection
with the Contribution and the Rights Offering the Rights Offering Prospectuses.
The Company shall, and shall cause Offshore to, perform its obligations required
to be performed prior to the Effective Time under the Contribution and
Distribution
A-27
<PAGE> 28
Agreement, the Offshore Documentation and any other agreements executed in
connection with this Agreement.
(b) Between the date hereof and the Closing, except as contemplated by
this Agreement and the Related Agreements (i) the Company and the Company
Subsidiaries shall not invest, loan, pay or otherwise advance or contribute any
funds or property to any member of the Offshore Group or pay any Taxes (as
defined in the Tax Sharing Agreement) relating to the assets, business or
operations of any member of the Offshore Group or forgive or capitalize any
amounts owed by any member of the Offshore Group to the Company or any of the
Company Subsidiaries, (ii) immediately prior to the Effective Time, the Company
shall cause the members of the Offshore Group to (and the members of the
Offshore Group shall) pay in cash all amounts owed by them to the Company or any
of the Company Subsidiaries (except (x) if the transactions contemplated by the
Redemption Agreement attached as Exhibit E (the "Redemption Agreement") are
consummated, the management fees under the First Amended and Restated Management
Agreement dated November 10, 1993 between Offshore and the Company will be
reduced by 50% effective retroactively to January 1, 1998, (y) management fees
under the Management Agreement dated November 10, 1993 between the Company and
Deepflex, as amended, dated January 19, 1995 that accrue from December 19, 1997
through the Closing, will be contributed or forgiven at or prior to the Closing,
and (z) as otherwise provided in the Contribution and Distribution Agreement))
and (iii) immediately prior to the Effective Time, the Company shall cause the
members of the Offshore Group to (and the members of the Offshore Group shall)
reimburse the Company for any payments of Taxes made by the Company or any
Company Subsidiaries after January 1, 1998 and prior to the Effective Time which
relate to the assets, business or operations of any member of the Offshore
Group.
(c) Contemporaneously with the execution and delivery of this Agreement,
each of Thomas P. Tatham, Donald V. Weir, Charles M. Darling IV, John H. Gray,
Grant E. Sims, James H. Lytal, Donald A. Sanders, Ben T. Morris and Michael T.
Willis and Parent have entered into agreements (the "Subsidiaries Agreements")
pursuant to which Parent will acquire all outstanding interests in Holdings,
Offshore Gas Marketing, Inc. and Offshore Gas Processors, Inc. (the
"Subsidiaries Securities") not owned by the Company concurrently with the
Closing.
(d) Contemporaneously with the execution and delivery of this Agreement,
Leviathan and Offshore are entering into an agreement (the "Leviathan Purchase
Agreement") pursuant to which Offshore will purchase the shares of capital stock
of Offshore held by Leviathan in exchange for Offshore's interests in certain
oil and gas properties. The Company shall cause Offshore to perform its
obligations to be performed prior to the Effective Time under the Leviathan
Purchase Agreement.
Section 5.12 Confidentiality Agreement. Each party shall keep all
information received pursuant to this Agreement confidential in accordance with
the confidentiality provisions of the offer letter executed December 19, 1997
between Parent and the Company.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(b) The Form S-4 shall have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the
effectiveness of the Form S-4 shall have been issued by the Commission and
remain in effect and all necessary approvals under state securities laws
relating to the issuance or trading of the Parent Common Stock to be issued
to stockholders of the Company in connection with the Merger shall have
been obtained.
A-28
<PAGE> 29
(c) No preliminary or permanent injunction or other order by any
federal or state court in the United States of competent jurisdiction which
prevents the consummation of the Merger shall have been issued and remain
in effect (each party agreeing to use all commercially reasonable efforts
to have any such injunction lifted).
(d) The Parent Common Stock to be issued to Company stockholders in
connection with the Merger shall have been approved for listing on the
NYSE, subject only to official notice of issuance.
(e) On the Closing Date, the opinion of Fried, Frank, Harris, Shriver
& Jacobson, counsel to Parent, shall have been delivered to the Company and
Parent in form and substance reasonably satisfactory to the Company and
Parent to the effect that the Merger or, if applicable, the Alternative Tax
Free Merger, will qualify as a reorganization within the meaning of Section
368(a) of the Code, if applicable. In rendering such opinion, such counsel
shall be entitled to rely upon representations made by Parent and the
Company in certificates in the forms attached hereto as Exhibits F and G.
(f) The Contribution and the Rights Offering as provided in Section
5.11(a) hereof shall have occurred (including the effectiveness of the
Rights Offering Registration Statements and the consummation of the
transactions contemplated therein) and the Offshore Documentation shall
have been executed and delivered and be in full force and effect.
(g) The holders of notes issued pursuant to the Company Indenture and
the Subordinated Note shall have consented to the transactions related to
the Contribution and the Rights Offering and the holders of notes issued
pursuant to the Company Indenture and the Subordinated Note shall have
consented to the amendments described in Appendix A; provided that if such
note holders elect to exercise their rights under any repurchase offer
related to the transactions contemplated by the Merger Agreement and the
Related Agreements, Parent shall finance the Company's repurchase thereof
concurrently with the Closing or the consummation of such repurchase offer,
if later.
Section 6.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment (or waiver by the Company) at or prior to the Effective Time of
the following additional conditions:
(a) Performance of Obligations; Representations and
Warranties. Parent and Merger Sub shall have performed in all material
respects each of its agreements contained in this Agreement required to be
performed at or prior to the Effective Time, each of the representations
and warranties of Parent and Merger Sub contained in this Agreement that is
qualified as to materiality shall be true and correct at and as of the
Effective Time as if made at and as of such time (other than
representations and warranties which address matters only as of a certain
date, which shall be true and correct as of such certain date) and each of
the representations and warranties that is not so qualified shall be true
and correct in all material respects at and as of the Effective Time as if
made on and as of such date (other than representations and warranties
which address matters only as of a certain date, which shall be true and
correct in all material respects as of such certain date), in each case
except as contemplated or permitted by this Agreement, and the Company
shall have received certificates signed on behalf of Parent by an executive
officer of Parent to such effect.
(b) Consents and Authorizations. All consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be made, by Parent and Merger Sub for the consummation by it of the
transactions contemplated by this Agreement shall have been obtained and
made by Parent and Merger Sub, except for those consents, waivers,
approvals, authorizations, orders and filings the failure of which to
obtain would not and would not reasonably be expected to adversely affect
the Closing.
(c) Subsidiaries Agreements. Parent shall have complied in all
material respects with its obligations to be performed prior to the
Effective Time under the Subsidiaries Agreements.
Section 6.3 Conditions to Obligations of Parent to Effect the Merger. The
obligations of Parent to effect the Merger shall be subject to the fulfillment
(or waiver by Parent) at or prior to the Effective Time of the following
additional conditions:
A-29
<PAGE> 30
(a) Performance of Obligations; Representations and Warranties. The
Company shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed at or prior
to the Effective Time, (i) each of the representations and warranties of
the Company contained in this Agreement that is qualified as to materiality
shall be true and correct at and as of the Effective Time as if made at and
as of such time (other than representations and warranties which address
matters only as of a certain date, which shall be true and correct as of
such certain date) and (ii) each of the representations and warranties that
is not so qualified shall be true and correct in all material respects at
and as of the Effective Time as if made on and as of such date (other than
representations and warranties which address matters only as of a certain
date, which shall be true and correct in all material respects as of such
certain date) except for such inaccuracies or breaches which either (a) do
not adversely affect the Company or any Company Subsidiary or the value of
the Merger to Parent or Parent's ability to operate the businesses of the
Company and the Company Subsidiaries after the Effective Time or (b) have
been cured by the Company within ten days after Parent's delivery to the
Company of written notice of each such inaccuracy or breach; in the case of
(i) and (ii), except as contemplated or permitted by this Agreement, and
Parent shall have received a certificate signed on behalf of the Company by
an executive officer of the Company to such effect.
(b) Consents Under Agreements. The Company shall have obtained the
consent or approval of each person that is not a Governmental Entity whose
consent or approval shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, or other agreement or instrument of the Company and the
Company Subsidiaries, except as to which the failure to obtain such
consents and approvals, individually or in the aggregate, would not be
expected, in the reasonable opinion of Parent, to have a Company Material
Adverse Effect or to have a material adverse effect upon the consummation
of the transactions contemplated in this Agreement.
(c) No Litigation. There shall not be pending any suit, action or
proceeding by any domestic Governmental Entity (i) challenging the
acquisition by Parent of any shares of Company Common Stock, seeking to
restrain or prohibit the consummation of the Merger or seeking to obtain
from Parent or the Company any damages that are material in relation to the
Company and the Company Subsidiaries taken as a whole, (ii) seeking to
prohibit or limit the ownership, operation or control by the Company,
Parent or any of their respective Subsidiaries of any portion of the
business or assets of the Company or Parent and their respective
Subsidiaries, or to compel the Company or Parent and their respective
Subsidiaries to dispose of or hold separate any portion of the combined
business or assets of the Company or Parent and their respective
Subsidiaries, as a result of the Merger, which in either case, is material
in relation to the Company and the Company Subsidiaries taken as a whole,
or (iii) seeking to impose limitations on the ability of Parent to acquire
or hold, or exercise full rights of ownership of, any shares of Company
Common Stock.
(d) Subsidiaries Agreements. Each party selling Subsidiaries
Securities pursuant to the Subsidiaries Agreements shall have complied in
all material respects with its obligations to be performed prior to the
Effective Time under the Subsidiaries Agreements.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of any matters
presented in connection with the Merger by the stockholders of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by either the Company or Parent if there has been a breach of the
representations, warranties, covenants or agreements on the part of the
other set forth in this Agreement, which breach would result in the
condition set forth in Section 6.2(a), in the case of a breach by Parent or
Merger Sub, or
A-30
<PAGE> 31
Section 6.3(a), in the case of a breach by the Company, not being
satisfied, and such breach has not been cured within ten business days
following receipt by the breaching party of notice of such breach from the
non-breaching party;
(c) by either Parent or the Company if any permanent order, decree,
ruling or other action of a court or other competent authority restraining,
enjoining or otherwise preventing the consummation of the Merger shall have
become final and non-appealable;
(d) by either Parent or the Company if the Merger shall not have been
consummated on or before June 30, 1998, unless the failure to consummate
the Merger is the result of a material breach of any covenant or agreement
contained in this Agreement by the party seeking to terminate this
Agreement which has not been cured within ten business days following
receipt by the breaching party of notice of such breach from the
non-breaching party; provided that, at the option of Parent, exercisable by
notice in writing to the Company on or prior to June 30, 1998, the earliest
date on which this Agreement may be terminated under this paragraph (d)
shall be extended to September 30, 1998; and provided, further, that Parent
shall have the right to exercise such option only if in the exercise notice
Parent agrees that Parent shall permanently waive and be deemed to have
waived all of its conditions to Closing except for the following: (x)
Sections 6.1(a)-(f) and 6.3(d) (other than with respect to the Subsidiaries
Agreements relating to each of Michael T. Willis, Donald A. Sanders and Ben
T. Morris), (y) Section 6.3(a) with respect to covenants and agreements,
and (z) Section 6.3(a) with respect to representations or warranties of the
Company only to the extent Parent has given at least five days notice of
its non binding intent to exercise Parent's right to extend and either (i)
the Company has not delivered an officer's certificate with respect to the
matters provided for in Section 6.3(a) (substituting the date of the
certificate for the Effective Time in such certificate) or (ii) the
officer's certificate was not to the Company's knowledge true and accurate.
(e) by the Company, prior to the date on which the Consent has been
executed by the holders of a majority of the shares of Company Common Stock
outstanding as of the Consent Date, if the Board of Directors of the
Company has received a Superior Proposal which the Board of Directors has
resolved to accept; provided that concurrently with, and as a condition to
the validity of, any such purported termination, the Company shall pay to
Parent the sum of $20,000,000 in cash; provided that upon the tender of
such $20,000,000 payment by the Company, Parent shall be deemed to have
waived any and all claims Parent may have at law or in equity against the
Company, its Subsidiaries or their respective officers, directors or
employees arising out of or relating to this Agreement or Related
Agreements; and provided, further, that nothing in this paragraph (e) shall
constitute a waiver of any claim Parent may have at law or in equity
against a third party for tortious interference with contract arising out
of or relating to any Alternative Proposal.
Section 7.2 Effect of Termination. (a) In the event of termination of
this Agreement by either Parent or the Company, as provided in Section 7.1, this
Agreement shall forthwith become void and there shall be no liability hereunder
on the part of the Company, Parent or their respective officers or directors
(except for Section 5.12, Section 7.1(e), which liability on the part of the
Company thereunder shall be limited to $20,000,000, this Section 7.2 and Article
VIII, which shall survive the termination); provided, however, that nothing
contained in this Section 7.2 shall relieve any party hereto from any liability
for any willful breach of a representation or warranty contained in this
Agreement or the breach of any covenant or agreement contained in this
Agreement.
(b) If either the Company or Parent has willfully breached a
representation, warranty, covenant or agreement set forth in this Agreement that
results in the other party terminating this Agreement pursuant to Section
7.1(c), then, in addition to any other remedies available to the non-breaching
party, the breaching party shall promptly reimburse the non-breaching party for
all substantiated out-of-pocket costs and expenses incurred by the non-breaching
party in connection with this Agreement and the transactions contemplated
hereby, including, without limitation, costs and expenses of accountants,
attorneys and financial advisors, up to an aggregate of $5,000,000 (the
"Expenses Fee"). Each of Parent and the Company acknowledges that the agreements
contained in this Section 7.2(b) are an integral part of the transactions
contemplated in this
A-31
<PAGE> 32
Agreement, and that, without these agreements, Parent and the Company would not
enter into this Agreement; accordingly, if the breaching party fails to promptly
pay the amount due pursuant to this Section 7.2(b), and, in order to obtain such
payment, the non-breaching party commences a suit which results in a judgment
for the Expenses Fee, the breaching party shall pay to the non-breaching party
its costs and expenses (including attorney's fees) in connection with such suit.
Section 7.3 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the stockholders of the Company, but, after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing duly executed by each of the parties hereto.
Section 7.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein which may legally be waived. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing duly executed by such party. The failure
of any party to this Agreement to assert any of its rights under this Agreement
or otherwise shall not constitute a waiver of such rights.
Section 7.5 Exclusive Remedy for Inaccuracy or Breach of Representation or
Warranty. Except as expressly provided in Section 7.2(a) and (b) hereof, a
party's sole and exclusive remedy with respect to the inaccuracy or breach of
any representation or warranty provided by the other party shall be to (i) elect
not to close the Merger and the other transactions contemplated by this
Agreement to the extent permitted by Article VI and (ii) elect to terminate this
Agreement to the extent permitted by Article VII.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties. Except to the
extent expressly set forth in Articles II and III, the parties hereto have not
made and expressly negate and waive any representations or warranties (express,
implied, statutory or otherwise) with respect to this Agreement or the title,
condition or quality of any rights or assets of the Company or any Company
Subsidiary or the accuracy or completeness of any information provided or
obtained. The representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall terminate at the Effective
Time or, if sooner, the termination of this Agreement.
Section 8.2 Disclosure Schedules. Each disclosure identified in the
Parent Disclosure Schedule and the Company Disclosure Schedule or elsewhere in
this Agreement constitutes a disclosure by the disclosing party with respect to
all applicable Sections of this Agreement, regardless of any reference to a
particular Section or subsection.
Section 8.3 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, one day after
being delivered to a nationally recognized overnight courier or when telecopied
(with a confirmatory copy sent by such overnight courier) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Parent or Merger Sub, to
El Paso Natural Gas Company
1001 Louisiana
Houston, Texas 77002
Attention: William A. Wise
A-32
<PAGE> 33
Facsimile No.: (713) 757-6030
and
Attention: Britton White, Jr.
Facsimile No.: (713) 757-1872
with a copy (which shall not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
Attention: Gary P. Cooperstein
Facsimile No.: (212) 859-4000
(b) if to the Company, to
DeepTech International Inc.
600 Travis Street
Suite 7500
Houston, Texas 77002
Attention: Chief Executive Officer
Facsimile No.: (713) 224-7574
with a copy (which shall not constitute notice) to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
711 Louisiana Street, Suite 1900
Houston, Texas 77002
Attention: Rick L. Burdick
Facsimile No.: (713) 236-0822
Section 8.4 Interpretation. When a reference is made in this Agreement to
a Section or Article, such reference shall be to a Section or Article of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." The phrase "the date
hereof" in this Agreement means the date of this Agreement. As used in this
Agreement, the word "Subsidiary" when used with respect to any relevant
individual or entity, means any other individual or entity that directly or
indirectly is controlled by such relevant individual or entity in question. As
used herein, the term "control" (including its derivatives and similar terms)
means the power to, directly or indirectly, direct or cause the direction of the
management and policies of such relevant individual or entity.
Section 8.5 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 8.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement and the other written agreements executed by the parties in connection
herewith constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and there are no promises, undertakings,
representations or warranties by the Company or Parent relative to the subject
matter of this Agreement not expressly set forth or referred to herein. This
Agreement, except for the provisions of Section 5.6, is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
Section 8.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
A-33
<PAGE> 34
Section 8.8 Assignment. Except as contemplated by Sections 1.11 and 1.12,
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned, transferred, disposed of or otherwise alienated by either of
the parties hereto (whether voluntarily or involuntarily, with or without
consideration, by operation of law or otherwise) without the prior written
consent of the other party (which consent may be granted or withheld in such
party's sole discretion). An attempted assignment, transfer, disposition or
alienation in violation of this Agreement shall be null, void and ineffective.
Subject to the two preceding sentences, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by, the parties and their respective
successors and assigns.
Section 8.9 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms, conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic and
legal substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner in order that the transactions contemplated by this Agreement may be
consummated as originally contemplated to the fullest extent possible.
Section 8.10 Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific wording or were
otherwise breached. It is accordingly agreed that the parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, such remedy being in addition to
any other remedy to which any party is entitled at law or in equity.
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized
all as of the date first written above.
DEEPTECH INTERNATIONAL INC.
By:
--------------------------------------
Name:
Title:
EL PASO ACQUISITION COMPANY
By:
--------------------------------------
Name:
Title:
EL PASO NATURAL GAS COMPANY
By:
--------------------------------------
Name:
Title:
A-34
<PAGE> 35
CERTIFICATE OF CORPORATE SECRETARY
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Corporate Secretary of Parent, and that, as such, he is familiar with
the facts herein certified and is duly authorized to certify the same and does
hereby certify and resolve on behalf of Parent that: (i) this Agreement has been
adopted by Parent pursuant to Section 251(f) of the Delaware General Corporation
Law, (ii) Parent's Restated Certificate of Incorporation does not require a vote
of its stockholders for the adoption of this Agreement, (iii) this Agreement
does not amend in any respect Parent's Restated Certificate of Incorporation,
(iv) each share of stock of Parent outstanding immediately prior to the
effective date of the Merger is to be an identical outstanding or treasury share
of the Surviving Corporation after the Effective Time, and (v) the authorized
unissued shares or the treasury shares of common stock of Parent to be issued or
delivered under this Agreement plus those initially issuable upon conversion of
any other shares, securities or obligations to be issued or delivered under this
Agreement do not exceed 20% of the shares of common stock of Parent outstanding
immediately prior to the Effective Time.
IN WITNESS WHEREOF, I hereunder subscribe my name effective as of the 27th
day of February, 1998.
By:
--------------------------------------
Name:
Title: Corporate Secretary of El
Paso Natural Gas Company
A-35
<PAGE> 36
CERTIFICATE OF SECRETARY
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of the Company, and that, as such, he is familiar with the
facts herein certified and is duly authorized to certify the same and does
hereby certify and resolve on behalf of the Company that this Agreement has been
adopted by written consent of the holders of a majority of the outstanding
shares of capital stock of the Company entitled to vote thereon.
IN WITNESS WHEREOF, I hereunder subscribe my name effective as of the 27th
day of February, 1998.
By:
--------------------------------------
Name:
Title: Secretary of DeepTech
International Inc.
A-36
<PAGE> 1
EXHIBIT 10.2
APPENDIX B
CONTRIBUTION AND DISTRIBUTION AGREEMENT
This CONTRIBUTION AND DISTRIBUTION AGREEMENT (the "Agreement") is made as
of the 27th day of February, 1998 among DeepTech International Inc., a Delaware
corporation (the "Company"), Tatham Offshore, Inc., a Delaware corporation
("Offshore"), DeepFlex Production Services, Inc., a Delaware corporation
("DeepFlex"), and El Paso Natural Gas Company, a Delaware corporation
("Parent").
BACKGROUND
A. The Company and its affiliates are the holders of the shares of common
stock and preferred stock of Offshore set forth on Schedule 1.
B. DeepFlex desires to satisfy a portion of certain indebtedness owed by
DeepFlex to the Company by causing Offshore to transfer the shares of capital
stock of Offshore held by DeepFlex to the Company.
C. The Company desires to sell, and Offshore desires to purchase, a portion
of certain indebtedness owed by DeepFlex to the Company, in exchange for which
Offshore will transfer all of the stock of Tatham Offshore Development, Inc.
("TODI"), to the Company and Offshore will cancel certain reversionary
interests.
D. The Company desires to capitalize the remaining portion of the
indebtedness owed by DeepFlex to the Company.
E. The Company desires to contribute to Offshore, and Offshore desires to
accept the contribution of, the stock of DeepFlex.
F. The Company desires to distribute on a pro rata basis to the holders of
the Company's common stock, par value $0.01 per share ("Company Common Stock"),
rights (the "Rights") to purchase the Offshore Shares (as hereinafter defined)
on the terms and subject to the conditions set forth herein (including the sale
of the underlying Offshore Shares, the "Rights Offering") and Offshore is
willing to cooperate with the Company in connection therewith.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
set forth below:
"Action" shall mean any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
"Commission" shall mean the Securities and Exchange Commission.
"Company Indenture" shall mean the Indenture dated as of March 21, 1994
between the Company and the Bank of New York, successor in interest to the First
Interstate Bank of Texas, N.A. and the related loan and security documents.
"Completion Date" shall mean the earlier of (i) the date on which all of
the Offshore Shares shall have been subscribed and paid for pursuant to the
Rights Offering, including any subscriptions and payments for Offshore Shares by
Tatham Brothers, Thomas P. Tatham and/or Offshore, and such subscriptions shall
have been accepted by the Company and (ii) the Final Expiration Date.
"DeepFlex Note" shall mean (i) the Second Amended and Restated Senior
Promissory Note dated March 1, 1995, issued by DeepFlex to the Company and (ii)
any other indebtedness owed by DeepFlex or any of its Subsidiaries to the
Company or any Company Subsidiary.
B-1
<PAGE> 2
"DeepFlex Shares" shall mean the shares of capital stock of DeepFlex owned,
directly or indirectly, by the Company.
"Distribution" shall mean the distribution pursuant to the Rights Offering
of the Rights to holders of record on the Record Date of Company Common Stock.
"Distribution Date" shall mean the date of effecting the Distribution.
"Effective Time" shall have the meaning ascribed to it in the Merger
Agreement.
"Estimated Tax Amount" shall mean the tax estimated to be due by DeepFlex
or Offshore as set forth on the Price Tax Schedule (as defined in the Tax
Sharing Agreement).
"Excess Proceeds" means the net proceeds of the Rights Offering in excess
of $75 million.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"FPS" shall mean the FPS III, Inc., a Delaware corporation and/or FPS V,
Inc., a Delaware corporation.
"Final Expiration Date" shall mean the date on which the right of Tatham
Brothers, Thomas P. Tatham and Offshore to exercise any Rights pursuant to the
Rights Offering shall terminate, which date shall be the close of business on
the later of (x) two days after the General Expiration Date and (y) five days
after the date of the Effective Time.
"General Expiration Date" shall mean the date fixed by the Board of
Directors of Offshore on which the right of all holders of Rights (other than
Tatham Brothers, Thomas P. Tatham and Offshore) to exercise Rights pursuant to
the Rights Offering shall terminate, which date shall be not more than 50 days
following the Distribution Date.
"Initial Proceeds" shall have the meaning ascribed to it in Section 4.3
hereof.
"Initial Subscription Period" shall mean the period fixed by the Board of
Directors of Offshore for holders of Rights to purchase the Offshore Shares
subject to such Rights (exclusive of any period (an "Additional Period") fixed
by the Board of Directors of Offshore for the purchase of any unsubscribed
Shares), which period shall expire no later than the General Expiration Date.
"Leviathan" shall mean Leviathan Gas Pipeline Partners, L.P.
"Merger Agreement" shall mean the Agreement and Plan of Merger, among
Parent, El Paso Acquisition Company and the Company, dated as of February 27,
1998.
"Offshore Common Stock" shall mean the common stock, par value $0.01 per
share, of Offshore listed on Schedule 1 attached hereto.
"Offshore Preferred Stock" shall mean the Series A 12% Convertible
Exchangeable Preferred Stock, par value $0.01 per share, Series B 8% Convertible
Exchangeable Preferred Stock, par value $0.01 per share, Series C 4% Convertible
Exchangeable Preferred Stock, par value $0.01 per share, 9% Senior Convertible
Preferred Stock, par value $0.01 per share, and Mandatory Redeemable Preferred
Stock, par value $0.01 per share, of Offshore listed on Schedule 1 attached
hereto.
"Offshore Shares" shall mean (i) the shares of Offshore Common Stock and
Offshore Preferred Stock or (ii) units comprised of such shares.
"Prospectus" shall mean the prospectus(es) to be distributed to the holders
of Company Common Stock in connection with the Rights Offering.
"Record Date" shall mean the record date for the Distribution fixed by the
Company's Board of Directors or any committee thereof.
"Redemption Agreement" shall mean the Redemption Agreement dated the date
hereof between Leviathan and Offshore.
B-2
<PAGE> 3
"Registration Statement" shall mean the registration statement(s)
registering the offering and sale of the Rights and the Offshore Shares pursuant
to the Rights Offering.
"RIGCO" shall mean RIGCO North America, L.L.C., a Delaware limited
liability company.
"Rig Distribution" shall have the meaning ascribed to it in Section 3.2
hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Senior Preferred Stock" shall mean the 9% Senior Convertible Preferred
Stock, par value $0.01 per share, of Offshore.
"Subordinated Note" shall mean the Company's Senior Subordinated Note dated
January 23, 1997 payable to Hare & Co.
"Tatham Brothers" shall mean Tatham Brothers, L.L.C., a Delaware limited
liability company.
"Tax" shall have the meaning ascribed to it in the Tax Sharing Agreement.
"Tax Sharing Agreement" shall have the meaning ascribed to it in the Merger
Agreement.
Other capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Merger Agreement.
2. PRELIMINARY ACTION.
2.1 Registration Statement and Prospectus. The Company and Offshore shall
prepare and file the Registration Statement (which shall include the Prospectus)
with the Commission as promptly as practical, and in no event later than March
31, 1998. Subject to the conditions set forth herein, the Company and Offshore
shall use all commercially reasonable efforts to cause the Registration
Statement to become effective under the Securities Act. The Company and Offshore
shall cause the Prospectus to be mailed to the holders of record on the Record
Date of Company Common Stock.
2.2 Federal Securities Laws. The Company and Offshore shall take all such
other action as may be necessary or appropriate under the securities laws of the
United States in connection with the Rights Offering to permit the Rights and
the Offshore Shares to be offered and sold as provided herein.
2.3 Blue Sky. The Company and Offshore shall take all such action as may
be necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the Rights
Offering to permit the offering and sale of the Rights and the Offshore Shares
as provided herein.
2.4 Listing. Offshore may prepare and file an application to effect the
listing of the Offshore Shares on the Nasdaq National Market.
2.5 Representations and Warranties Regarding TODI. Offshore represents and
warrants to Parent and the Company as of the date of this Agreement and as of
the date of the Contribution as follows:
(a) TODI is a corporation validly existing and in good standing under
the laws of Delaware. The authorized capital stock of TODI consists of
1,000 shares of common stock, par value $.01, of which 1 share is validly
issued and outstanding, which is owned by Offshore. There are no options,
warrants, calls, convertible securities or other rights, agreements or
commitments obligating TODI to issue, deliver or sell shares of its capital
stock or obligating TODI to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment.
(b) Except as listed on Schedule 2, TODI is not a party to any
contracts or agreements and has no liabilities or obligations, whether
absolute or contingent, accrued or unaccrued, matured or unmatured.
2.6 No Other Representations or Warranties; Consents. Each party hereto
understands and agrees that, except as expressly provided in Section 2.5, no
party hereto is, in this Agreement or in any other agreement or document
contemplated by this Agreement or otherwise, representing or warranting in any
way (i) that the
B-3
<PAGE> 4
obtaining of any consents or approvals, the execution and delivery of any
agreements or the making of any filings or applications contemplated by this
Agreement will satisfy the provisions of any or all applicable laws or (ii)
matters relating to the business, operations, assets, debts or liabilities of
DeepFlex, Offshore or their respective Subsidiaries. Notwithstanding the
foregoing, the parties shall use all commercially reasonable efforts to obtain
all consents and approvals, to enter into all agreements and to make all filings
and applications which may be required for the consummation of the transactions
contemplated by this Agreement, including, without limitation, all applicable
regulatory filings or consents under federal or state laws and all necessary
consents, approvals, agreements, filings and applications.
3. THE CONTRIBUTION.
3.1 The Contribution. Subject to the satisfaction of the conditions set
forth in Article 7 hereof, at least seven days prior to the Distribution Date:
(a) (i) the Company shall sell to Offshore, and Offshore shall
purchase from the Company $8 million of the DeepFlex Note in exchange for
(x) the delivery by Offshore to the Company of a stock certificate
evidencing the outstanding share of capital stock of TODI, duly endorsed
for transfer, free and clear of all liens, charges and encumbrances, and
(y) the irrevocable termination and cancellation by Offshore of all its
rights to receive an assignment of certain interests in oil and gas
properties under the Agreement for Purchase and Sale by and between
Offshore and Flextrend Development Company, L.L.C. dated June 30, 1995 and
(ii) in satisfaction of $12 million of the amount due and owing with
respect to the DeepFlex Note, DeepFlex shall deliver to the Company stock
certificates evidencing all of the shares of Offshore Common Stock and
Offshore Preferred Stock owned by DeepFlex, duly endorsed for transfer,
free and clear of all liens, charges and encumbrances;
(b) in full satisfaction of the remaining balance of the DeepFlex Note
held by the Company, the Company shall contribute to the capital of
DeepFlex the balance of the amount due and owing with respect to the
DeepFlex Note after the repayment and transfer in paragraph (a) (or, in the
case of indebtedness due and owing from a DeepFlex Subsidiary, transfer
such indebtedness to DeepFlex); and
(c) the Company shall contribute to the capital of Offshore the
DeepFlex Shares, by delivery to Offshore of stock certificates evidencing
the DeepFlex Shares, duly endorsed for transfer, free and clear of all
liens, charges and encumbrances (the contributions described in clauses (a)
through (c) are referred to herein collectively as the "Contribution").
3.2 Optional Rig Distribution. Prior to the Contribution, at Offshore's
option, the Company shall cause RIGCO to distribute to FPS either (but not both
of) the FPS Laffit Pincay or the FPS Bill Shoemaker (the "Rig Distribution");
provided, however, that such Rig Distribution shall occur only if the gain
realized (as calculated for federal income tax purposes) by RIGCO on the
distribution is no more than $48 million.
4. THE RIGHTS OFFERING.
4.1 The Rights Offering. The Company shall take all steps required to
effect the Rights Offering and Offshore shall cooperate with the Company in
connection therewith, including, without limitation, the transactions
contemplated by Section 2.
4.2 Terms of the Rights Offering.
(a) Pursuant to the Rights Offering, the Company will distribute to
the holders of record on the Record Date of the Company Common Stock, pro
rata, Rights to purchase all of the Offshore Shares. The Rights will be
transferable by the holders thereof and will be listed or admitted to
trading on NASDAQ.
(b) The subscription price payable for the Offshore Shares by holders
of Rights shall be $3.25 per Offshore Share.
B-4
<PAGE> 5
(c) Subject to paragraph (e) below, each Right will expire on the
General Expiration Date, unless theretofore exercised by the holder thereof
by completion of the subscription form mailed to holders of Rights,
accompanied by payment of the aggregate subscription price for the Offshore
Shares covered thereby.
(d) At Offshore's election, the subscription form will include an
over-subscription option which will permit each holder who exercises in
full the Rights distributed to such holder to elect to subscribe, pro rata
with all holders of Rights who exercise their over-subscription option
(each, a "Subscribing Holder"), for any Offshore Shares covered by
unexercised Rights ("Unsubscribed Shares"). As promptly as practicable
following the Initial Subscription Period, the Company shall notify each
Subscribing Holder of the number of Unsubscribed Shares to be distributed
to such holder and the aggregate subscription price therefor, and each
Subscribing Holder shall have until the General Expiration Date to deliver
to the Company payment of the subscription price for the Unsubscribed
Shares to be delivered to such holder.
(e) Immediately following the General Expiration Date, any Rights to
acquire Unsubscribed Shares which have not been subscribed for as provided
in paragraph (d) ("Remaining Shares") will be transferred to Tatham
Brothers and Tatham Brothers shall be obligated to exercise such number of
Rights, if any, as is required by the Standby Agreement dated the date
hereof among Parent, the Company, Offshore, Tatham Brothers and Thomas P.
Tatham (the "Standby Agreement").
(f) Thomas P. Tatham has guaranteed the obligations of Tatham Brothers
under the Standby Agreement and is obligated pursuant to such guarantee to
perform prior to the Final Expiration Date the obligations of Tatham
Brothers described in clause (e) of this Section 4.2, to the extent Tatham
Brothers has not theretofore performed such obligations in accordance with
the Standby Agreement.
(g) Offshore shall purchase on the Final Expiration Date all Remaining
Shares not purchased by Tatham Brothers at the subscription price of $3.25
per Offshore Share.
(h) All Rights of Tatham Brothers, Thomas P. Tatham and Offshore to
exercise any Rights covering Remaining Shares shall expire on the Final
Expiration Date.
(i) All net proceeds received by the Company from any holder of
Rights, including, without limitation, Tatham Brothers, Thomas P. Tatham
and/or Offshore upon the exercise of Rights, constitute net proceeds of the
Rights Offering and shall be distributed as provided in Section 4.3.
(j) The completion of the Rights Offering is subject to the
satisfaction of the conditions set forth in Article 7 hereof and the prior
consummation of the Contribution.
(k) Other terms of the Rights Offering shall be determined by mutual
agreement between the Company, Parent and Offshore.
4.3 Proceeds of Rights Offering. The first $75 million of net proceeds
(the "Initial Proceeds") of the Rights Offering shall be retained by the
Company. Subject to Section 3.03 of the Tax Sharing Agreement, the Company shall
contribute the Excess Proceeds to the capital of Offshore. If the Completion
Date occurs prior to the date of the Effective Time, the Initial Proceeds,
together with the Estimated Tax Amount, shall be deposited by the Company in
escrow in accordance with an escrow agreement in the form of Schedule 3 hereto.
4.4 Expenses of Contribution and Rights Offering. Subject to Sections 5.2
and 5.3, the first $1 million of expenses related in any way to the Contribution
and the Rights Offering, including, without limitation, all legal, financial
advisory, accounting and printing fees of the Company and Offshore ("Expenses"),
shall be borne by the Company and any Expenses in excess of $1 million shall be
borne by Offshore. Neither the Company nor Offshore has retained (or will
retain) a financial advisor in connection with the Contribution and the Rights
Offering.
B-5
<PAGE> 6
5. ADDITIONAL ASSURANCES; INDEMNIFICATION.
5.1 Mutual Assurances. Parent, the Company and Offshore agree to cooperate
with respect to the Contribution and the Rights Offering and to execute such
further documents and instruments as may be necessary to effect the transactions
contemplated thereby.
5.2 Indemnification.
(a) From and after the Effective Time, Offshore shall indemnify,
defend and hold Parent and its Subsidiaries (including the Company and the
Company Subsidiaries) and the officers, directors and employees of each
such entity (other than members of the Offshore Indemnified Group (defined
herein), the "Parent Indemnified Group") harmless from and against all
losses, expenses, claims, damages and liabilities (other than Taxes, which
are governed by the Tax Sharing Agreement) to which the Parent Indemnified
Group may be or become subject that relate to (i) the assets, business,
operations, debts or liabilities of the Offshore Group, whether arising
prior to, concurrent with or after the Contribution or the Rights Offering,
(ii) the failure to obtain all necessary third party consents to the
Contribution or the Rights Offering (other than the failure to obtain all
necessary consents under the Company Indenture and the Subordinated Note in
connection with the Contribution and the Rights Offering, or the failure to
obtain any other necessary third party consents as to which Offshore or the
Company notify Parent to the extent the failure to obtain the consent is a
result of Parent's election to unreasonably withhold or delay its consent
under Section 4.1 of the Merger Agreement (the "5.2(a)(ii) Consents")), or
(iii) any filing by any member of the Offshore Group under the Securities
Act or the Exchange Act (including, without limitation, the Registration
Statement) or any information relating to the Offshore Group contained in
any filing made by any member of the Company Group in each case whether
made prior to or concurrent with the Effective Time.
(b) From and after the Effective Time, Parent shall indemnify, defend
and hold the Offshore Group and the officers, directors and employees
thereof (other than members of the Company Indemnified Group, the "Offshore
Indemnified Group") harmless from and against all losses, expenses, claims,
damages and liabilities (other than Taxes, which are governed by the Tax
Sharing Agreement) to which the Offshore Indemnified Group may be or become
subject that relate to (i) the assets, business, operations, debts or
liabilities of the Company Group, whether arising prior to, concurrent
with, or after the Contribution or the Rights Offering, (ii) the failure to
obtain the 5.2(a)(ii) Consents, or (iii) any filing by any member of the
Company Group (other than to the extent a filing by a member of the Company
Group contained or contains information relating to the Offshore Group)
under the Securities Act or the Exchange Act, whether made prior to or
concurrent with the Effective Time.
6. COVENANTS.
6.1 Employment Matters. As of the Effective Time, the employees of the
Company and each Company Subsidiary listed in Schedule 4 hereto (the "Spin Off
Employees") shall be offered full-time employment by Offshore or one of its
Subsidiaries; provided, however, that except as may be specifically required by
applicable law or any contract, neither Offshore and its Subsidiaries, on the
one hand, nor any employee, on the other hand, shall be obligated to continue
any employment relationship or any specific terms of employment for any specific
period of time. Effective as of the Effective Time, Offshore shall, and hereby
does, assume all obligations arising under any employment agreement or
arrangement (written or oral) between the Company or any of its Subsidiaries and
the Spin Off Employees (including, without limitation, any obligation of the
Company under lease agreements relating to automobiles provided by the Company
to any Spin Off Employee prior to the Effective Time), and, effective as of the
Effective Time, the Company and its Subsidiaries shall be, and hereby are,
indemnified by Offshore from all obligations arising under such employment
agreements or arrangements.
6.2 Offshore Defined Contribution Plan. Effective as of the Effective
Time, Offshore shall establish a defined contribution plan for the benefit of
the Spin Off Employees and any other full-time Offshore employees (the "Offshore
DC Plan"). As promptly as practicable after the Effective Time, the Company
shall cause the trustee of the DeepTech International Inc. Section 401(k) Plan
(the "DeepTech DC Plan")
B-6
<PAGE> 7
to transfer to the trustee of the Offshore DC Plan the account balances of each
Spin Off Employee with respect to whom the DeepTech DC Plan maintains an account
as of the close of business on the date of the Effective Time. Such transfers
shall be equal to the value of the transferred account balances as of the close
of business on the day preceding the date of transfer and shall be in cash,
except that the Offshore DC Plan shall accept the following: (a) Company Common
Stock (which, as of the Effective Time, will represent solely the right to
receive the Merger Consideration) for the Company Common Stock fund portion of
such account balances (together with the Offshore Shares distributed in
connection with the Distribution); and (b) amounts credited to the DeepTech DC
Plan which are held in mutual funds which are also investment media in the
Offshore DC Plan. Offshore shall cause the Offshore DC Plan (x) to permit the
Spin Off Employees to sell from the Company Common Stock fund portion of the
Offshore DC Plan any shares of the Parent Common Stock received in the Merger
and (y) not to permit the future investment in the shares of Company Common
Stock or the common stock of any other entity that does not sponsor the Offshore
DC Plan (except for investments through mutual funds or other collective
investment vehicles with respect to which participants have no control over the
individual investments thereof).
6.3 Severance and Consulting Arrangements.
(a) In the case of any person listed on Schedule 5 hereto, such person
shall be entitled to severance as provided below, if such person is not
offered employment by the Surviving Corporation, Parent or any of their
Subsidiaries in Houston at such person's current base salary as of the
Effective Time or is terminated by the Surviving Corporation, Parent or any
of their Subsidiaries prior to January 1, 1999. In the case of any person
listed on Schedule 6 hereto, such person shall be entitled to severance as
provided below, if (i) such person is not employed by Offshore or any of
its Subsidiaries in Houston as of the Effective Time, unless such person is
offered employment by the Surviving Corporation, Parent or any of their
Subsidiaries in Houston at such person's current base salary as of the
Effective Time or (ii) such person is employed by the Surviving
Corporation, Parent or any of their Subsidiaries at such person's current
base salary as of the Effective Time and is terminated by the Surviving
Corporation, Parent or any of their Subsidiaries prior to January 1, 1999.
Any person entitled to severance as provided in this paragraph shall
receive a lump sum cash payment equal to six months' base salary based upon
such person's current monthly base salary paid to such employee as of the
date of termination. Until January 1, 1999, none of Offshore and its
Subsidiaries listed shall employ or enter into any consulting arrangement
with any employee listed on Schedule 5.
(b) Certain individuals listed on Schedule 7 hereto may enter into
agreements to provide certain consulting services to the Company and
Offshore for a period of six months after the Effective Time. The Company
and Offshore shall each pay one half of the costs of such consulting
agreements.
6.4 Offshore Group/Company Group Arrangements. All arrangements and
agreements between any member of the Offshore Group and the Company Group are
set forth in the Company Disclosure Schedule. Except as contemplated by this
Agreement, the Merger Agreement (including the Company Disclosure Schedule) and
the related Agreements, it is the intention of the parties hereto that between
the date of this Agreement and the Effective Time the Company Group and the
Offshore Group shall be operated as independent corporate groups and there shall
be no new investment, contribution, financing or credit support or payments of
Taxes (as defined in the Tax Sharing Agreement) provided by any member of either
group to any member of the other group, and any additional funds required by any
member of either group from the date of this Agreement to the Effective Time
shall be obtained from such group's internally generated funds or from third
parties. Except as contemplated by this Agreement, the Merger Agreement
(including the Company Disclosure Schedule) and the related Agreements, in
furtherance of the foregoing, between the date of this Agreement and the
Effective Time, no member of the Company Group shall invest, loan, pay or
otherwise advance or contribute any funds or property (other than the accrual of
(i) amounts payable under that certain First Amended and Restated Management
Agreement dated November 10, 1993 between Offshore and the Company (the
"Management Agreement"), as amended, and (ii) interest on indebtedness
outstanding on the date of this Agreement under the DeepFlex Note) to any member
of the Offshore Group or pay any Taxes relating to the assets, business or
operations of any member of the Offshore Group or forgive
B-7
<PAGE> 8
or capitalize any amounts owed by any member of the Offshore Group to any member
of the Company Group (other than, if the transactions contemplated by the
Redemption Agreement are consummated, the reduction by 50% of the management
fees payable by Offshore to the Company pursuant to the Management Agreement,
effective retroactively to January 1, 1998). Except as contemplated by this
Agreement, the Merger Agreement (including the Company Disclosure Schedule) and
the Related Agreements, immediately prior to the Effective Time, the members of
the Offshore Group (i) shall pay in cash all amounts owed by them to any member
of the Company Group (except that amounts outstanding under the Management
Agreement which relate to DeepFlex and its Subsidiaries will be contributed to
Offshore or forgiven and the DeepFlex Note will be treated as provided in
Article 3 hereof) and (ii) shall reimburse the Company for any payments of Taxes
made by the Company or any Company Subsidiary after January 1, 1998 and prior to
the Effective Time which relate to the assets, business or operations of any
member of the Offshore Group. Any amounts owing by the Company Group to the
Offshore Group (all of which are set forth in the Company Disclosure Schedule)
will be offset against amounts otherwise owed to the Company under the DeepFlex
Note. Other than the Tax Sharing Agreement, this Agreement and the agreements
marked with an asterisk as continuing agreements in the Company Disclosure
Schedule, all intercompany agreements and arrangements between any member of the
Offshore Group and any member of the Company Group shall terminate as of the
Effective Time. The Company and Offshore shall take or shall cause to be taken
all actions necessary to effectuate the termination of such agreements.
6.5 Restrictions on Amendments. The Company and Offshore shall not amend,
modify, waive or extend any time period under any provisions of this Agreement,
the Redemption Agreement, or the Tax Sharing Agreement prior to the Effective
Time without the consent of Parent.
6.6 Sublease. As of the Effective Time, subject to the approval by the
lessor of (i) the assignment of the existing lease to Parent, as successor to
the Company, and (ii) the sublease contemplated hereby, the Company shall
sublease to Offshore, and Offshore shall sublease from the Company, the space
currently occupied by the Company on the 74th and 75th floor of 600 Travis
Street, Houston, Texas, pursuant to the Sublease Agreement attached as Schedule
8 hereto, which shall be executed and delivered at the Effective Time.
6.7 North Atlantic Partners. Leviathan has entered into an agreement,
attached as Schedule 9 hereto, with North Atlantic Pipeline Partners, L.P., an
indirect wholly owned subsidiary of Offshore, and other parties, dated February
5, 1998, relating to the participation by Leviathan in a proposed pipeline
project in Canadian Atlantic waters (the "NAP Agreement"). The Company and
Offshore agree that no payments shall be made by or on behalf of Leviathan
pursuant to the NAP Agreement and Leviathan will not incur any liability or
obligation under the NAP Agreement prior to the first anniversary of the
Effective Time, and the NAP Agreement may be terminated by Leviathan at any time
prior to the first anniversary of the Effective Time without cost, liability,
expense or continuing obligation on the part of Leviathan or any of its
affiliates. No press release or other public disclosure that mentions Parent or
its Subsidiaries shall be made with respect to the NAP Agreement or the
transactions contemplated thereby, except by Offshore with the prior consent of
Parent, which will not be unreasonably withheld or delayed.
6.8 Exchange of Senior Preferred Stock. As promptly as practical, and in
any event no later than Monday, March 2, 1998, Offshore shall take, and the
Company shall cause Leviathan to take, all such actions as shall be necessary to
exchange the outstanding shares of the Senior Preferred Stock for a
substantially identical series of preferred stock of Offshore, except that such
new series of preferred stock shall not be redeemable and shall be immediately
convertible into Offshore Common Stock. References in this Agreement to the
Senior Preferred Stock shall include the shares of preferred stock of Offshore
for which the Senior Preferred Stock shall be exchanged.
6.9 Cross-Guarantees. Each of the Company, Offshore, Leviathan and
DeepFlex shall be responsible for its respective premium obligations under the
premium finance agreements between such parties and AFCO Credit Corporation.
Prior to the Effective Time, each of the Company, Offshore, Leviathan and
DeepFlex shall pay any unpaid portion of its premium obligations under such
agreements, whether or not such obligations are then due and payable.
B-8
<PAGE> 9
7. CONDITIONS TO THE CONTRIBUTION AND THE COMPLETION OF THE RIGHTS OFFERING.
The Contribution and the completion of the Rights Offering shall be subject
to the satisfaction or waiver of the following conditions (provided that the
condition in Section 7.3 shall apply solely to the Rights Offering):
7.1 Securities Law Compliance. The transactions contemplated hereby shall
be in compliance with applicable federal and state securities laws and
applicable Nasdaq regulations, and the Registration Statement shall have been
declared effective and no stop orders shall have been instituted with respect
thereto under the Securities Act.
7.2 Legal Proceedings. No preliminary or permanent injunction or other
order by any federal or state court in the United States of competent
jurisdiction which prevents the consummation of the Contribution or the Rights
Offering shall have been issued and remain in effect (each party agreeing to use
all commercially reasonable efforts to have any such injunction lifted).
7.3 Proceeds of Rights Offering. The net proceeds actually received and
retained by the Company pursuant to the Rights Offering shall be not less than
the Initial Proceeds and the Estimated Tax Amount shall have been paid by
Offshore or retained by the Company out of the Excess Proceeds, and such amounts
shall have been deposited in escrow in accordance with Section 4.3, if required.
8. MISCELLANEOUS.
8.1 Waiver and Amendment. Any agreement on the part of a party hereto to
any waiver shall be valid only if set forth in an instrument in writing duly
executed by such party. The failure of any party to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of such rights.
This Agreement may not be amended except by an instrument in writing duly
executed by each of the parties hereto.
8.2 Assignment. No party may assign its rights and obligations hereunder
without the prior written consent of the other; provided, however, that, so long
as such party remains primarily obligated and responsible with respect thereto,
any party may assign its rights hereunder to any of its affiliates (which
remains an affiliate) or to any person or entity with which the assigning party
is merged or consolidated if such person is the surviving entity or which
acquires all or substantially all of the assets of such party.
8.3 No Third-Party Beneficiaries. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
8.4 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement, and shall be effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
8.5 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to its rules
of conflicts of laws thereof.
8.6 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.7 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally, one day after being
delivered to a nationally recognized overnight courier or
B-9
<PAGE> 10
when telecopied (with a confirmatory copy sent by such overnight courier) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or the Company, to
El Paso Natural Gas Company
1001 Louisiana
Houston, Texas 77002
Attention: William A. Wise
Facsimile No.: (713) 757-6030
and
Attention: Britton White, Jr.
Facsimile No.: (713) 757-1872
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
Attention: Gary P. Cooperstein
Facsimile No.: (212) 859-4000
(b) if to Offshore or DeepFlex, to
Tatham Offshore, Inc.
7500 Chase Tower
600 Travis Street
Houston, Texas 77002
Attention: Chief Executive Officer
Facsimile No.: (713) 224-7574
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place -- South Tower
Houston, Texas 77002
Attention: Rick L. Burdick
Facsimile No.: (713) 236-0822
8.8 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
8.9 Termination. Parent's obligations under this Agreement shall terminate
upon termination of the Merger Agreement if the Merger has not been consummated
prior thereto.
B-10
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DEEPTECH INTERNATIONAL INC.
By:
----------------------------------
Name:
Title:
TATHAM OFFSHORE, INC.
By:
----------------------------------
Name:
Title:
DEEPFLEX PRODUCTION SERVICES, INC.
By:
----------------------------------
Name:
Title:
EL PASO NATURAL GAS COMPANY
By:
----------------------------------
Name:
Title:
B-11
<PAGE> 1
EXHIBIT 10.3
STANDBY AGREEMENT
This STANDBY AGREEMENT, dated as of February 27, 1998 (the
"Agreement"), between Thomas P. Tatham (the "Stockholder"), DeepTech
International Inc., a Delaware corporation (the "Company"), Tatham Brothers,
LLC, a Delaware limited liability company ("Tatham Brothers"), Tatham Offshore,
Inc., a Delaware corporation ("Offshore"), and El Paso Natural Gas Company, a
Delaware corporation ("Parent").
Parent, the Company and El Paso Acquisition Company, a
Delaware corporation ("Merger Sub"), are entering into an Agreement and Plan of
Merger (the "Merger Agreement") on the date of this Agreement pursuant to which
Parent proposes to acquire the entire equity interest in the Company pursuant
to the merger (the "Merger") of the Company with Parent or Merger Sub, as a
result of which each outstanding share of Common Stock, $.01 par value, of the
Company (the "Company Common Stock"), would be converted into the right to
receive Common Stock, $3.00 par value, of Parent (the "Parent Common Stock") or
cash as provided in the Merger Agreement.
As part of the transactions contemplated by the Merger
Agreement, the Company, Offshore, DeepFlex Production Services, Inc.
("DeepFlex") and Parent are entering into a Contribution and Distribution
Agreement (the "Contribution Agreement") on the date of this Agreement pursuant
to which the Company will contribute to Offshore the stock of DeepFlex in
exchange for the consideration stated in the Contribution Agreement.
Pursuant to the Contribution Agreement, the Company will
distribute on a pro rata basis to the holders of Company Common Stock rights
(the "Rights") to purchase all of the Offshore Shares (as defined in the
Contribution Agreement) (the "Rights Offering").
Parent and the Company desire to induce Tatham Brothers to
enter into this Agreement by entering into the Merger Agreement, and Tatham
Brothers desires to induce Parent and the Company to enter into the Merger
Agreement by entering into this Agreement.
Capitalized terms used but not defined herein have the
meanings set forth in the Contribution Agreement.
Accordingly, in consideration of the mutual covenants and
agreements set forth herein and in consideration of $1.00 and such other
valuable consideration the receipt of which is hereby acknowledged, the parties
hereto agree as follows:
<PAGE> 2
1. Standby Commitment. (a) To the extent any Unsubscribed
Shares have not theretofore been subscribed and paid for in the Rights Offering
(the "Remaining Shares"), on the General Expiration Date, the Company will
provide Tatham Brothers with a notice in writing setting forth the number of
Remaining Shares and the aggregate subscription price therefor as provided in
Section 4.2 of the Contribution Agreement. No later than the Final Expiration
Date, Tatham Brothers shall purchase from the Company (and the Company shall
sell to Tatham Brothers), at the subscription price of $3.25 per Remaining
Share, that number of such Remaining Shares, if any, which is necessary to
provide the Company with net proceeds from the Rights Offering at least equal
to $75 million.
(b) At the closing of the purchase and sale of such Remaining Shares,
Tatham Brothers shall make payment in cash to the Company of the subscription
price for the Remaining Shares purchased by Tatham Brothers and, except as
otherwise required by the Letter of Credit described in Section 3, the Company
shall deliver to Tatham Brothers stock certificates representing the Remaining
Shares purchased pursuant to this Agreement (the "Acquired Shares"), free and
clear of all liens, charges and encumbrances (other than those created by
Tatham Brothers).
(c) In consideration for Tatham Brothers' commitment to purchase any
Remaining Shares, Tatham Brothers will receive from Offshore a fee pursuant to
the Purchase Commitment Agreement, dated as of even date herewith, between
Tatham Brothers and Offshore.
2. Guarantee. (a) The Stockholder hereby absolutely and
unconditionally guarantees the performance by Tatham Brothers of its obligation
under Section 1 of this Agreement (the "Obligation"). To the extent that
Tatham Brothers fails to tender payment of the Obligation on the Final
Expiration Date, the Stockholder shall immediately pay to the Company any
unpaid portion of the Obligation.
(b) The liability of the Stockholder under this guarantee shall be
primary and not as a surety, and shall not be affected by the bankruptcy of
Tatham Brothers, the Company or Offshore or any failure or delay by the Company
or Parent in exercising any right or remedy against Tatham Brothers, or any
amendment or waiver of any provision of the Contribution Agreement, the Merger
Agreement or any other agreement executed and delivered in connection with the
foregoing. The Stockholder hereby waives notice or demand of performance in
the acceptance of its obligations hereunder.
3. Letter of Credit. The Stockholder has obtained from
NationsBank, N.A. ("NationsBank") an irrevocable letter of credit in the form
of Exhibit A hereto (the "Letter of Credit") in favor of the Company. The cost
of issuance of the Letter of Credit is being borne by Parent and Parent shall
pay all such costs related to the issuance of the Letter of Credit directly to
NationsBank (and Parent shall reimburse the Stockholder promptly if and to the
extent any payments of fees and costs (excluding in all cases any
-2-
<PAGE> 3
obligation to reimburse NationsBank for drawings under the Letter of Credit)
under the Letter of Credit shall have been made by the Stockholder).
4. Other Acts. The parties to this Agreement agree to, in a
prompt manner and using all commercially reasonable efforts, prepare, file or
draft such documents and perform such acts as required by the Letter of Credit,
including, without limitation, upon the termination of the Merger Agreement
pursuant to the terms thereof, the preparation and delivery of a signed
certificate to such effect or, upon the closing of the Merger, the preparation
of a signed certificate to such effect, and other certificates and documents
required by the Letter of Credit (including certificates for any Offshore
Shares) required to be delivered to NationsBank.
5. Representations and Warranties of Tatham Brothers. Tatham
Brothers hereby represents and warrants to Parent that:
(a) Tatham Brothers is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Delaware;
(b) Tatham Brothers has all requisite right,
power and authority to execute and deliver this Agreement and perform all its
obligations hereunder;
(c) the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate or similar action on
Tatham Brothers' part and does not constitute a violation of, conflict with or
result in a material default under (i) any contract or agreement to which
Tatham Brothers is a party or by which Tatham Brothers is bound, (ii) any
judgment, decree or order applicable to Tatham Brothers or (iii) to Tatham
Brothers' actual knowledge, any law, rule or regulation of any governmental
body applicable to Tatham Brothers, including, without limitation, any
securities laws exemptions, in the case of clauses (i) through (iii), except
for violations, conflicts or defaults which would not, or would not reasonably
be expected to, materially affect Tatham Brothers' ability to perform its
obligations under this Agreement;
(d) this Agreement has been duly executed and
delivered by Tatham Brothers; and
(e) this Agreement constitutes a valid and
binding agreement on Tatham Brothers' part, enforceable against Tatham Brothers
in accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
-3-
<PAGE> 4
6. Miscellaneous.
6.1 Waiver and Amendment. Any agreement on the part of a
party hereto to any waiver shall be valid only if set forth in an instrument in
writing duly executed by such party. The failure of any party to assert any of
its rights under this Agreement or otherwise shall not constitute a waiver of
such rights. This Agreement may not be amended except by an instrument in
writing duly executed by each of the parties hereto.
6.2 Assignment. Any party to this Agreement may assign
its rights or interests hereunder without obtaining the written consent of any
other party. No such assignment shall relieve the assigning party of any of
its obligations under this Agreement and any non-assigning party shall have the
right to seek remedies directly from the assigning party without seeking the
same from the assignee. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of, and be enforceable by, the parties
and their respective successors and permitted assigns. The parties hereto
acknowledge that NationsBank has been granted a security interest in all of the
right, title and interest of the Stockholder and Tatham Brothers in and to this
Agreement.
6.3 No Third-Party Beneficiaries. This Agreement is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder, except that NationsBank is a third party beneficiary of
Section 1(b) and such section may not be amended or modified without the
express written consent of NationsBank.
6.4 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement, and
shall be effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
6.5 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware, without
regard to its rules of conflicts of laws thereof.
6.6 Headings. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
6.7 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, one day after being delivered to a nationally recognized overnight
courier or when telecopied (with a confirmatory copy sent by such overnight
courier) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Parent or the Company, to
-4-
<PAGE> 5
El Paso Natural Gas Company
1001 Louisiana
Houston, Texas 77002
Attention: William A. Wise
Facsimile No.: (713) 757-6030
and
Attention: Britton White, Jr.
Facsimile No.: (713) 757-1872
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
Attention: Gary P. Cooperstein
Facsimile No.: (212) 859-4000
(b) if to Tatham Brothers, the Stockholder or
Offshore, to
7500 Chase Tower
600 Travis
Houston, Texas 77002
Attention: Thomas P. Tatham
Facsimile No.: (713) 224-7574
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place - South Tower
Houston, Texas 77002
Attention: Rick L. Burdick
Facsimile No.: (713) 236-0822
6.8 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms, conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic and
legal substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable
-5-
<PAGE> 6
manner in order that the transactions contemplated by this Agreement may be
consummated as originally contemplated to the fullest extent possible.
6.9 Termination. This Agreement shall terminate upon
termination of the Merger Agreement if the Merger has not been consummated
prior thereto.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EL PASO NATURAL GAS COMPANY
By:
------------------------------
Name:
Title:
TATHAM OFFSHORE, INC.
By:
------------------------------
Name:
Title:
---------------------------------
Thomas P. Tatham
DEEPTECH INTERNATIONAL INC.
By:
------------------------------
Name:
Title:
TATHAM BROTHERS, L.L.C.
By:
------------------------------
Name:
Title:
-7-
<PAGE> 1
EXHIBIT 10.4
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (the "Agreement") is made as of the ___ day
of ___ 1998 among DeepTech International Inc., a Delaware corporation (the
"Company"), Tatham Offshore, Inc., a Delaware corporation ("Offshore"), and
DeepFlex Production Systems, Inc., a Delaware corporation ("DeepFlex").
BACKGROUND
A. Company is the common parent of an affiliated group that files
a consolidated federal income tax return.
B. DeepFlex has been a member of the Company affiliated group
since January 19, 1995.
C. The Company and Offshore have entered into a Contribution and
Distribution Agreement dated February 27, 1998 (the "Distribution Agreement").
D. Pursuant to the Distribution Agreement, (i) in satisfaction of
an aggregate of approximately $12 million of the DeepFlex Note (as defined in
the Distribution Agreement), DeepFlex will distribute to Company the Offshore
Preferred Stock (as defined in the Distribution Agreement) and the Offshore
Common Stock (as defined in the Distribution Agreement) held by it (the "Stock
Repayment") and (ii) the Company will sell to Offshore approximately $8 million
of the principal amount of the DeepFlex
<PAGE> 2
Note, in exchange for which Offshore will deliver to the Company a stock
certificate (or certificates) evidencing all of the outstanding shares of
capital stock of TODI (as hereinafter defined), and all rights of Offshore to
receive an assignment of certain interests in oil and gas properties under the
Agreement and Purchase and Sale by and between Offshore and Flextrend
Development Company, L.L.C. dated June 30, 1996 will be irrevocably terminated
and canceled (the "TODI Payment" and together with the Stock Repayment, the
"Repayment").
E. Pursuant to the Distribution Agreement, the Company will
contribute to DeepFlex the outstanding balance of the DeepFlex Note held by the
Company after the transfers described in paragraph D above (the "Note
Capitalization").
F. Pursuant to the Distribution Agreement, the Company will
contribute to the capital of Offshore all of the shares of common stock of
DeepFlex owned by the Company (the "Contribution").
G. Pursuant to the Distribution Agreement, the Company will
distribute to the holders of the Company's common stock, par value $0.01 per
share ("Company Common Stock"), rights to purchase all of the Offshore Common
Stock and all of the Offshore Preferred Stock held by Company.
H. Offshore and Flextrend Development Company, L.L.C., a Delaware
limited liability company ("Flextrend"), have entered into a Redemption
Agreement dated February 27, 1998 (the "Redemption Agreement"), pursuant to
which Offshore will transfer certain oil and gas properties to Leviathan Gas
Pipeline Partners, L.P., a Delaware limited partnership (the "Partnership"), in
redemption of Senior Preferred Stock
-2-
<PAGE> 3
(as defined in the Redemption Agreement) owned or beneficially owned by the
Partnership.
I. Company, El Paso Natural Gas Company, a Delaware corporation
("Parent"), and El Paso Acquisition Company ("Merger Sub"), a Delaware
corporation ("Merger Sub"), have entered into an Agreement and Plan of Merger
dated February ___, 1998 (the "Merger Agreement"), pursuant to which, after the
closing of the transactions contemplated by the Distribution Agreement, Company
shall merge with Parent or Merger Sub.
NOW, THEREFORE, Company, on behalf of itself and its present and
future Subsidiaries, other than the members of the DeepFlex Group (as
hereinafter defined) and other than members of the Offshore Group (as
hereinafter defined) (the "Company Group") and Offshore and DeepFlex, on behalf
of themselves and the members of the DeepFlex Group and the Offshore Group,
enter into this Agreement to provide for the allocation among the Company
Group, the DeepFlex Group and the Offshore Group of all responsibilities,
liabilities and benefits relating to or affecting Taxes (as hereinafter
defined) paid or payable by any of them for all taxable periods, whether
beginning before, on or after the Contribution Date and to provide for certain
other matters. This Agreement also provides, among other things, for Company
and DeepFlex to assist each other for an interim period in the preparation of
Tax Returns (as hereinafter defined) required to be filed after the
Contribution Date.
-3-
<PAGE> 4
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"Adjustment Request" means any claim for Tax refund, carryback or any
other self-audit adjustment or similar claim.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor thereto.
"Company Businesses" means the present, former and future
Subsidiaries, divisions and businesses of any member of the Company Group.
"Company Tax Attributes" means the following Tax attributes of Company
and DeepWater Production Systems, Inc. ("DeepWater") (but not of any other
member of the Company Group and in the case of consolidated Tax attributes, not
including any portion of a Tax attribute attributable to a member of the
Company Group other than Company and DeepWater under applicable regulations)
actually existing at the Effective Time, subject to adjustment on audit or as a
result of a Tax Contest: (i) net operating loss carryovers, (ii) alternative
minimum tax ("AMT") credit carryovers, but only to the extent that Company or
DeepWater had such AMT credit carryovers as of June 30, 1997, and (iii) capital
loss carryovers.
"Contribution Date" shall mean the date the Contribution is effected;
provided, however, that for purposes of allocating items of income between
taxable periods, the Contribution Date shall be treated as ending at the time
of the Contribution.
-4-
<PAGE> 5
"DeepFlex Businesses" means the present, former and future
Subsidiaries, divisions and other businesses of any member of the DeepFlex
Group which are not, or are not contemplated by the Distribution Agreement to
be, part of the Company Group immediately after the Contribution.
"DeepFlex Group" means DeepFlex and its Subsidiaries before the
Contribution.
"Effective Time" means the Effective Time as defined by the Merger
Agreement.
"FPS" means FPS III, Inc. and FPS V, Inc., each a Delaware
corporation.
"Merger Transactions" means the Repayment, the Note Capitalization,
the Rig Distribution (if it occurs), the Contribution, the Rights Offering (as
defined by the Distribution Agreement), the transfer of the Offshore Shares
pursuant to the exercise of Rights (as defined by the Distribution Agreement),
the purchase of Offshore Shares by Tatham Brothers, LLC, a Delaware limited
liability company, or Thomas P. Tatham and/or Offshore pursuant to the Standby
Agreement and the lapse (if any) of Rights on the Expiration Date (as defined
by the Distribution Agreement).
"Offshore Group" shall mean Offshore and its former, present and
future Subsidiaries (other than members of the DeepFlex Group); provided, that
TODI shall be treated as a member of the Offshore Group with respect to all
periods up to and including the TODI Payment Date. For periods after the TODI
Payment Date, TODI shall be considered a member of the Company Group.
-5-
<PAGE> 6
"Rig Distribution" means a distribution by RIGCO North America, LLC, a
Delaware limited liability company ("RIGCO"), to FPS of one of the drilling
rigs owned by RIGCO as of the date of the Merger Agreement.
"Separate Tax" means any Tax computed by reference to the assets and
activities of a single entity.
"Subsidiary" means any entity that directly or indirectly is
"controlled" by the entity in question. "Control" for this purpose means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of an entity, whether through
ownership of voting securities, by contract or otherwise.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not; provided,
however, that for purposes of Section 2.02(d), Section 2.03(d), Section 3.01,
and Section 3.02, the term "Tax" shall not include any alternative minimum tax.
"Tax Authority" means, with respect to any Tax, the governmental
entity or political subdivision thereof that imposes such Tax, and the agency
(if any) charged with the collection of such Tax for such entity or
subdivision.
-6-
<PAGE> 7
"Tax Benefit" means the amount by which any Tax Item decreases the
liability for Taxes on or with respect to a Tax Return.
"Tax Contest" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the members of the Company Group, the Offshore
Group or the DeepFlex Group (including any administrative or judicial review of
any claim for refund).
"Tax Detriment" means the amount by which any Tax Item increases the
liability for Taxes on or with respect to a Tax Return.
"Tax Item" means any item affecting Taxes, including but not limited
to items of income, gain, loss, deduction, and credit.
"Tax Return" means any return, declaration, report, claim for refund,
estimated Tax filing, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
"TODI" means Tatham Offshore Development, Inc., a Delaware
corporation.
"TODI Payment Date" means the date the TODI Payment is effected;
provided, however, that for purposes of allocating Tax Items between taxable
periods, the TODI Payment Date shall be treated as ending at the time of the
TODI Payment.
-7-
<PAGE> 8
ARTICLE II
LIABILITY FOR TAXES; TAX RETURNS
Section 2.01 Manner of Preparation of Returns. In the absence of
controlling change in law or circumstances, all Tax Returns filed by Company,
TODI, Offshore or DeepFlex (or required to be prepared by DeepFlex under
Sections 2.02 and 2.03) after the date of this Agreement shall be prepared on a
basis consistent with the elections, accounting methods, conventions, and
principles of taxation used for the most recent taxable periods for which Tax
Returns involving similar items have been filed. Subject to the provisions of
this Agreement, all decisions relating to the preparation and filing of all Tax
Returns and any audit or other review of such Tax Returns shall be made in the
sole discretion of the party responsible under this Agreement for the filing of
such Tax Return. Without the prior written consent of Offshore or DeepFlex,
the Company will not elect to retain any carryovers of any member of the
Offshore Group or the DeepFlex Group under Treasury Regulation Section
1.1502-20(g). Except as consistent with past practice or as required by law,
Company shall take no position on any Company Pre-Contribution Federal
Consolidated Return or Company Pre-Contribution State Combined Return (as both
terms are hereinafter defined) that would be adverse to a member of the
DeepFlex Group in subsequent periods. Except as required by a change in law
after February 27, 1998, Company shall prepare the Company Pre-Contribution
Federal Consolidated Returns and Company Pre-Contribution State Combined
Returns on the basis that the "check the box" election (attached hereto) made
by RIGCO to be treated as a corporation for federal Tax purposes is to be
treated as a transfer of assets from a partnership to a corporation governed by
Code Sections 351, 357(c), and any other Section of the Code relating to
Section 351, and shall thereafter maintain such position and shall allow
DeepFlex to participate in the defense of such position in a manner similar to
that contemplated by Section 5.03(c) of this Agreement.
-8-
<PAGE> 9
Section 2.02 Company Pre-Contribution Federal Consolidated
Returns.
(a) All federal consolidated Tax Returns not yet filed as of the
date hereof which include at least one member of the Company Group and at least
one member of the DeepFlex Group that are required to be filed after the
Contribution Date for periods beginning before the Contribution Date (a
"Company Pre-Contribution Federal Consolidated Return") shall be prepared and
filed by Company and Company shall include the Tax Items of includible members
of the DeepFlex Group on such Tax Returns. To permit Company to prepare and
file such Tax Returns, DeepFlex shall, for each taxable period for which a
member of the DeepFlex Group is included in a Company Pre-Contribution Federal
Consolidated Return, provide Company with (in all cases subject to the
provisions of Section 2.02(b)) (i) a true and correct (in all material
respects) pro-forma consolidated federal income Tax Return for all members of
the DeepFlex Group included in the Company Pre-Contribution Federal
Consolidated Return (a "DeepFlex Pre-Contribution Federal Consolidated
Return"), together with an accompanying computation of the pro-forma
consolidated federal tax liability of such members of the DeepFlex Group
(provided that, for any period which includes the Merger Transactions, the
DeepFlex Pre-Contribution Federal Consolidated Return shall not include any Tax
Item arising from the Merger Transactions), (ii) a true and correct (in all
material respects) pro-forma separate federal income Tax Return for each member
of the DeepFlex Group included in the Company Pre-Contribution Federal
Consolidated Return, together with accompanying computations of the pro-forma
separate federal income Tax liability of each such member of the DeepFlex
Group, (iii) a reconciliation of book income to federal taxable income for each
member of the DeepFlex Group included in the DeepFlex Pre-Contribution Federal
Consolidated Return, and (iv) for any period that includes the Merger
Transactions, a pro-forma consolidated federal income Tax Return for all
members of the DeepFlex Group included in the Company Pre-Contribution Federal
Consolidated Return which includes any Tax Items arising from the Merger
Transactions. DeepFlex shall provide Company with such returns and
-9-
<PAGE> 10
computations on or before the later of (x) the first day of the fourth month
following the end of the period to which such returns and computations relate,
or (y) the date that is ten (10) days after the date hereof.
(b) The above-mentioned pro-forma consolidated and separate
federal income Tax Returns, and pro-forma computations of the consolidated
federal income Tax liability of members of the DeepFlex Group included in any
Company Pre-Contribution Federal Consolidated Return, shall be prepared by (i)
apportioning the income of the members of the DeepFlex Group on a closing of
the books method between the period up to and including the Contribution Date
and the period after the Contribution Date as if the relevant taxable period
ended on the Contribution Date, (ii) giving effect to net operating loss
carryovers, capital loss carryovers, excess charitable deduction carryovers,
and other similar carryover items to the extent such carryover items are
available to be used (taking into account applicable limitations, if any) on
the Company Pre-Contribution Federal Consolidated Return, and (iii) not
considering or giving any effect to any net operating loss carryback, capital
loss carryback, or other similar carryback item.
(c) With respect to each taxable period covered by Section
2.02(a), DeepFlex and Offshore hereby jointly and severally agree to pay the
Company or any successor thereto, including Parent the DeepFlex Group Federal
Tax Liability (as defined in Section 2.02(d)), at the times contemplated
herein.
(d) The "DeepFlex Group Federal Tax Liability" for any taxable
period in which a member of the DeepFlex Group is included in a Company
Pre-Contribution Federal Consolidated Return shall be the excess of:
(i) the lesser of:
-10-
<PAGE> 11
(A) The Tax liability shown on the
DeepFlex Pre-Contribution Federal
Consolidated Return, or
(B) The Tax liability shown on the
Company Pre-Contribution Federal
Consolidated Return, recalculated by
disregarding the net gain, if any, resulting
from the Merger Transactions; over
(ii) all estimated payments theretofore actually
made by DeepFlex to Company on account of such Tax
liability.
If the amount referred to in clause (ii) exceeds the amount referred to in
clause (i), within ten (10) days of the filing by Company of the applicable
Company Pre-Contribution Federal Consolidated Return, Company shall pay such
excess to DeepFlex.
Section 2.03 Pre-Contribution State Combined, Unitary or
Consolidated Income Tax Returns.
(a) All state combined, unitary, or consolidated income Tax
Returns not yet filed as of the date hereof which include at least one member
of the DeepFlex Group and at least one member of the Company Group that may be
or are required to be filed by Company or a member of the Company Group for
periods beginning before the Contribution Date ("Company Pre-Contribution State
Combined Returns") shall be prepared and filed by Company and Company shall
include the income of the includible members of the DeepFlex Group on such Tax
Returns. To permit Company to prepare and file such Tax Returns, DeepFlex
shall, for each taxable period for which a member of the DeepFlex Group is
includible in a Company Pre-Contribution State Combined Return,
-11-
<PAGE> 12
provide Company with (in all cases subject to the provisions of Section
2.03(b)) (i) a true and correct (in all material respects) pro-forma state
combined, unitary or consolidated Tax Return (whichever applicable) for each
member of the DeepFlex Group includible in the Company Pre-Contribution State
Combined Return (a "DeepFlex Pre-Contribution State Combined Return"), together
with an accompanying computation of the pro-forma combined, unitary or
consolidated Tax liability (whichever applicable) of such members of the
DeepFlex Group (provided that, for any period which includes the Merger
Transactions, the DeepFlex Pre-Contribution State Combined Return shall not
include any Tax Item arising from the Merger Transactions), (ii) a true and
correct (in all material respects) pro-forma separate state income Tax Return
for each member of the DeepFlex Group includible in the Company
Pre-Contribution State Combined Return together with accompanying computations
of the pro-forma separate state income Tax liability of each such member of the
DeepFlex Group, (iii) a reconciliation of the separate company state Taxable
income of each such member of the DeepFlex Group to its separate Taxable income
for federal purposes (as determined pursuant to Section 2.02(a) above), (iv)
any apportionment factors prescribed by applicable state law and all other
information necessary or appropriate for the proper apportionment and
allocation of the combined, unitary or consolidated group income, and (v) for
any period that includes the Merger Transactions, a pro-forma state combined,
unitary or consolidated Tax Return for all members of the DeepFlex Group
included in the Company Pre-Contribution State Combined Return which includes
any Tax Item arising from the Merger Transactions. DeepFlex shall provide
Company with such returns and computations on or before the later of (x) the
first day of the fourth month following the end of the period to which such
returns and computations relate, or (y) the date that is ten (10) days after
the date hereof.
(b) The above-mentioned state pro-forma Tax Returns and
computations of the state combined, unitary or consolidated Tax liability of
members of the DeepFlex Group
-12-
<PAGE> 13
includible in the Company Pre-Contribution State Combined Return shall be
prepared by (i) apportioning the income of the members of the DeepFlex Group
between the period up to and including the Contribution Date and the period
after the Contribution Date as if the relevant taxable period ended on the
Contribution Date, (ii) giving effect to net operating loss carryovers, capital
loss carryovers, excess charitable deduction carryovers, and other similar
carryover items to the extent such carryover items are available to be used
(taking into account applicable limitations, if any) on the Company
Pre-Contribution State Combined Return, and (iii) not considering or giving any
effect to any net operating loss carryback, capital loss carryback, or other
similar carryback item.
(c) With respect to each taxable period covered by Section
2.03(a), DeepFlex and Offshore hereby jointly and severally agree to pay the
Company or any successor thereto, including Parent, the DeepFlex Group State
Tax Liability (as defined by Section 2.03(d)), at the times contemplated
herein.
(d) The "DeepFlex Group State Tax Liability" for any taxable
period in which a member of the DeepFlex Group is included in a Company
Pre-Contribution State Combined Return shall be the excess of:
(i) the lesser of:
(A) The Tax liability shown on the DeepFlex
Pre-Contribution State Combined Return, or
(B) The Tax liability shown on the Company
Pre-Contribution State Combined Return, recalculated
by disregarding the net gain, if
-13-
<PAGE> 14
any, resulting from the Merger Transactions included
in such Return; over
(ii) all estimated payments theretofore actually made by
DeepFlex to Company on account of such Tax liability.
If the amount referred to in clause (ii) exceeds the amount referred to in
clause (i), within ten (10) days of the filing by Company of the applicable
Company Pre-Contribution State Combined Return, Company shall pay such excess
to DeepFlex.
Section 2.04 Payment of DeepFlex Federal and State Tax Liability
(a) Company shall calculate the DeepFlex Group Federal Tax
Liability and the DeepFlex Group State Tax Liability for each of the periods
covered by Sections 2.02 and 2.03 and shall provide DeepFlex with written
notification of such calculation (together with supporting documentation
sufficient to enable DeepFlex or Offshore to verify the computation of the
amount due) (such notice and supporting documentation is collectively referred
to as the "Notice") as soon as practicable after receiving from DeepFlex the
returns and computations referenced in Section 2.02(a) or Section 2.03(a), as
the case may be, but in any event no later than ten (10) days after filing the
applicable Company Pre- Contribution Federal Consolidated Return or Company
Pre-Contribution State Combined Return. Within twenty (20) days of receipt of
the Notice, Offshore or DeepFlex shall either (i) pay the amount shown as due
to the Company, or (ii) notify the Company in writing if it disputes the amount
shown as due and pay to the Company the portion of such amount which Offshore
or DeepFlex does not dispute as due to the Company. In the case of a dispute,
such notice shall contain Offshore's explanation of the dispute, its
computation (based on all information in its possession, including the
-14-
<PAGE> 15
documentation supplied by Company) of the amount due and supporting
documentation sufficient to enable Company to verify Offshore's computation of
the amount due. If Offshore and DeepFlex fail to so notify Company within
twenty (20) days, Company's computation of the DeepFlex Group Federal Tax
Liability or DeepFlex Group State Tax Liability shall become final.
(b) If Offshore disputes in writing the amount shown as due on a
Notice, Offshore and Company shall attempt in good faith to resolve such
dispute. If Company and DeepFlex or Offshore, as the case may be, are unable
to resolve the dispute, either party may utilize the dispute mechanism provided
for in Article VI. No later than two (2) days following the Accounting Firm's
decision, DeepFlex or Offshore shall make any required payment to Company.
Section 2.05 Other Pre-Contribution Tax Returns.
(a) DeepFlex Group. Tax Returns required to be filed for periods
beginning before the Contribution Date which include one or more members of the
DeepFlex Group, other than Tax Returns for which Company bears the filing
responsibility under Sections 2.02 and 2.03, shall be filed by the applicable
member(s) of the DeepFlex Group, and DeepFlex (and Offshore) shall be liable
for, and shall indemnify and hold harmless the Company Group against, all Taxes
due with respect to such Tax Returns. DeepFlex, Offshore and Company believe
that there is no Tax not specifically covered by Sections 2.02 and 2.03 which
is legally imposed on more than one legal entity (e.g., joint and several
liability); however, if there is any such Tax, it shall be allocated in
accordance with the principles of Sections 2.02, 2.03 and 2.04.
(b) TODI.
-15-
<PAGE> 16
(i) Offshore will include the income of TODI (including
any deferred income triggered into income by Treasury Regulation Section
1.1502-13 and Treasury Regulation Section 1.1502-14 and any excess loss
accounts taken into income under Treasury Regulation Section 1.1502-19) on the
Offshore federal consolidated income (and state combined, consolidated or
unitary) Tax Returns for all periods ending on or before the TODI Payment Date
and pay any Taxes attributable to such income. TODI will furnish Tax
information to Offshore for inclusion in Offshore's federal consolidated income
(and state combined, consolidated or unitary) Tax Return for the period ending
on the TODI Payment Date in accordance with TODI's past custom and practice.
Offshore will allow Company an opportunity to review and comment upon such
Offshore Group Tax Returns (including any amended Tax Returns) to the extent
that they relate to TODI. Except as consistent with past practice, Offshore
will take no position on such Tax Returns that relate to TODI that would
adversely affect TODI after the TODI Payment Date. The income of TODI will be
apportioned on a closing of the books method between the period up to and
including the TODI Payment Date and the period after the TODI Payment Date as
if the relevant taxable period ended on the TODI Payment Date. Offshore will
not elect to retain any net operating loss carryovers or capital loss
carryovers of TODI under Treasury Regulation Section 1.1502-20(g).
(ii) Offshore shall prepare and cause to be filed any
Separate Tax Returns of TODI required to be filed for periods beginning and
ending before the TODI Payment Date, and Offshore shall pay any Taxes shown as
due (and not yet paid) on such Tax Returns. Except as consistent with past
practice or as required by law, Offshore shall take no position on any such Tax
Return that would be adverse to TODI in subsequent periods. Offshore shall
allow Company a thirty (30) day opportunity to review and comment upon any such
Tax Return prior to its filing.
-16-
<PAGE> 17
(iii) TODI shall prepare and file any Separate Tax Returns
of TODI for Tax periods which begin before the TODI Payment Date and end after
the TODI Payment Date ("Straddle Periods"). Offshore shall be liable for the
portion of the Taxes shown as due on such return which relates to the portion
of such Straddle Period ending on the TODI Payment Date. For purposes of this
Section, in the case of any Taxes that are imposed on a periodic basis and are
payable for a Straddle Period, the portion of such Tax which relates to the
portion of such Taxable period ending on the TODI Payment Date shall (x) in the
case of any Taxes other than Taxes based upon or related to income or receipts,
be deemed to be the amount of such Tax for the entire Taxable period multiplied
by a fraction the numerator of which is the number of days in the Taxable
period ending on the TODI Payment Date and the denominator of which is the
number of days in the entire Taxable period, and (y) in the case of any Tax
based upon or related to income or receipts, be deemed equal to the amount
which would be payable if the relevant Taxable period ended on the TODI Payment
Date. Any credits relating to a Straddle Period shall be allocated according
to the preceding sentence. All determinations necessary to give effect to the
foregoing allocations shall be made in a manner consistent with the prior
practice of TODI. Company shall provide Offshore with a thirty (30) day
opportunity to review and comment upon any Tax Return described in this
Paragraph (iii) prior to the filing of any such Tax Return. No later than the
date on which TODI files the applicable Tax Return, Company shall send written
notification to Offshore of the amount due under this Section 2.05(b), together
with supporting documentation sufficient to enable Offshore to verify the
computation of the amount due. Within twenty (20) days of the receipt by
Offshore of such written notification and documentation, Offshore shall either
(A) pay to Company the amount due, or (B) if Offshore disputes the Company's
determination of the amount due pursuant to this Section, pay the undisputed
portion (if any) of the amount due to Company and notify the Company in writing
of the dispute. In the case of a
-17-
<PAGE> 18
dispute, such notice shall contain Offshore's explanation of the dispute, its
computation (based on all information in its possession, including the
documentation supplied by Company) of the amount due and supporting
documentation sufficient to enable Company to verify Offshore's explanations
and computations. If Offshore fails to dispute Company's computation of the
amount due within such twenty (20) days, Offshore shall be deemed to have
acknowledged that the amount due as computed by Company is correct and agreed
to. Offshore and Company shall attempt in good faith to resolve any dispute as
to the amount due and either party may utilize the dispute resolution process
of Article VI if the parties are unable to agree on a resolution to the
dispute. No later than two (2) days following the Accounting Firm's decision,
Offshore or DeepFlex shall make any required payment to Company.
(c) Offshore Group. Company and Offshore believe that no member
of the Offshore Group is (or ever has been) includible on any federal
consolidated or state combined, unitary or consolidated Tax Return that
includes a member of the Company Group, and all parties to this Agreement shall
prepare and file all Tax Returns consistent with such belief. Members of the
Offshore Group shall be exclusively liable for Taxes imposed on any members of
the Offshore Group. If any member of the Offshore Group is includible on any
federal consolidated or state combined, unitary or consolidated Tax Return that
includes a member of the Company Group, Offshore shall be liable for, and shall
indemnify and hold harmless the Company Group for Taxes attributable to Tax
Items of members of the Offshore Group which are includible on such Tax Return,
computed as if all such members of the Offshore Group (and only such members)
had filed a true and correct federal consolidated or state combined, unitary or
consolidated Tax Return (whichever applicable) (provided that such computation
shall be made by taking into account only those net operating losses of the
Offshore Group actually used on the applicable Company (or Company Group
member) Tax Return). Notwithstanding the
-18-
<PAGE> 19
preceding sentence, no member of the Offshore Group shall be considered a
member of the Company Group.
Section 2.06 Filing of Post-Contribution Tax Returns. All Tax
Returns for periods beginning on or after the Contribution Date shall be the
responsibility of the DeepFlex Group if such Tax Returns relate exclusively to
the DeepFlex Businesses, and shall be the responsibility of the Company Group
if such Tax Returns relate exclusively to the Company Businesses.
Section 2.07 Certification. Each Tax Return and computation of
Tax liability required to be provided to Company by DeepFlex or Offshore, or to
Offshore or DeepFlex by Company, pursuant to this Agreement shall be
accompanied by a statement signed by the Chief Financial Officer of such entity
to the effect that such officer has reviewed for completeness and accuracy the
Tax Return and computation of the Tax liability and the documentation in
support thereof and has determined that such return and computation properly
reflect the taxable income (or loss), Tax liability and credits of the entity
or entities, as the case may be, to which such return and computation relate
for the period covered thereby.
ARTICLE III
RIG DISTRIBUTION; MERGER TRANSACTIONS; LOSS SHARING
Section 3.01 Rig Tax and Excess Value Tax.
(a) If, pursuant to Section 3.2 of the Distribution Agreement, a
Rig Distribution has occurred prior to the Effective Time, Offshore shall pay
Company any Rig Tax, as
-19-
<PAGE> 20
defined in paragraph (a) of this Section. For purposes of this Agreement, "Rig
Tax" shall be the excess (if any) of
(x) the actual Taxes owed by members of the Company Group
and members of the DeepFlex Group for all periods which include the Rig
Distribution, over
(y) the notional Taxes (but not less than zero) that
would have been owed by members of the Company Group and the members of the
DeepFlex Group for all periods which include the Rig Distribution if such Rig
Distribution had not occurred.
(b) Offshore shall pay Company any Excess Value Tax, as defined in
paragraph (b) of this Section. For purposes of this Agreement, "Excess Value
Tax" shall be the excess (if any) of
(x) the actual Taxes owed by members of the Company Group
and members of the DeepFlex Group for all periods which include any of the
Merger Transactions reduced by the Rig Tax, over
(y) the notional Taxes (but not less than zero) that
would have been owed by members of the Company Group and members of the
DeepFlex Group for all periods which include any of the Merger Transactions,
calculated (A) by disregarding the Rig Distribution, and (B) as if the overall
gain on the Merger Transactions (other than the Rig Distribution) is reduced by
the Excess Value Gain.
(c) "Excess Value Gain" shall mean the excess, if any, of (x) the
sum of (A) the fair market value on the Distribution Date (as defined in the
Distribution Agreement) of the Rights issued by the Company and (B) the net
proceeds of the Rights Offering
-20-
<PAGE> 21
received by the Company, over (y) the sum of (C) the adjusted tax basis of
Company in the DeepFlex Shares after adjustment pursuant to Treasury Regulation
Section . 1.1502-32 for the period ending on the Contribution Date, and after
giving effect to any deemed distributions for payments required to be made by
DeepFlex to Company under this Agreement, but otherwise without giving effect
to the Merger Transactions (other than the Stock Repayment), (D) the adjusted
tax basis of the DeepFlex Note that is actually capitalized (as contemplated by
Section 3.1(b) of the Distribution Agreement), reduced by any deemed payments
on the DeepFlex Note for payments required to be made by DeepFlex to Company
under this Agreement (E) the adjusted tax basis of the Company in the Offshore
Shares, determined after giving effect to any deemed distributions for payments
required to be made by Offshore to Company under this Agreement, but otherwise
without giving effect to the Merger Transactions (other than the Stock
Repayment), and (F) any increase in the adjusted tax basis of the Company in
the shares of Offshore as a result of the contribution of "Excess Proceeds" to
Offshore pursuant to Section 4.3 of the Distribution Agreement. The parties
agree that, for this purpose, the fair market value of the Rights on the
Distribution Date shall be the trading price of the rights on such date,
subject to adjustment only in connection with a Tax Contest.
Section 3.02 Merger Transactions Tax. Offshore shall pay Company
any Merger Transactions Tax, as defined in paragraph (a) of this Section.
(a) "Merger Transactions Tax" shall mean the lesser of:
(x) $ 7 million; or
(y) the excess of (i) the actual Taxes owed by members of
the Company Group and members of the DeepFlex Group for all periods which
include any of the Merger Transactions reduced by the sum of the Rig Tax and
the Excess Value Tax, over (ii) the notional Taxes that would have been owed by
members of the Company Group
-21-
<PAGE> 22
and members of the DeepFlex Group for all periods which include any of the
Merger Transactions, calculated by disregarding the Merger Transactions; if
there is no such excess, the amount described in this clause (y) shall be zero.
Section 3.03 Payment of Rig Tax and Merger Transactions Tax.
(a) The parties shall cause Price Waterhouse, L.L.P. or any other
firm mutually agreed upon by the parties ("Price") to provide Offshore and
Company with a schedule at least ten (10) days prior to the Completion Date (as
defined in the Distribution Agreement) setting forth an estimate of the Rig
Tax, the Excess Value Tax and the Merger Transactions Tax (the "Price Tax
Schedule"). Prior to the Completion Date, DeepFlex shall pay the amount of
such estimated Taxes to Company. Company may retain any Excess Proceeds (as
defined in the Distribution Agreement) in satisfaction of all or a portion of
DeepFlex's unpaid payment obligations under the preceding sentence.
(b) No later than ten (10) days after filing the applicable
Company Pre-Contribution Federal Consolidated Return for the period that ends
on the Effective Time, Company shall recompute the Rig Tax, the Excess Value
Tax and the Merger Transactions Tax based on the Tax Items of the Company
affiliated group as reported and shall provide DeepFlex with written
notification of such computations (together with supporting documentation
sufficient to enable DeepFlex or Offshore to verify the computation)
(collectively, the "Merger Transactions Tax Notice"). If the amount shown as
due on the Merger Transactions Tax Notice exceeds the amount previously paid to
Company under Section 3.03(a), Company shall return such excess to Offshore
along with the Merger Transactions Tax Notice. Within twenty (20) days of
receipt of the Merger Transactions Tax Notice, Offshore or DeepFlex shall
notify the Company in
-22-
<PAGE> 23
writing if it disputes the amount shown as due or owing (if Offshore and
DeepFlex fail to so notify Company within twenty (20) days, Company's
computation of the Merger Transactions Tax shall become final). In the case of
a dispute, such notice shall contain Offshore's or DeepFlex's explanation of
the dispute, its computation (based on all information in its possession,
including the documentation supplied by Company) of the amount due or owing and
supporting documentation sufficient to enable Company to verify Offshore's
computation of the amount due. If Offshore and DeepFlex do not dispute the
amount shown as due, Offshore shall pay to Company the amount shown as due on
the Merger Transactions Tax Notice in excess of the amount shown as due on the
Price Tax Schedule.
(c) If Offshore disputes the amount shown as due or owing on the
Merger Transactions Tax Notice, Offshore and Company shall attempt in good
faith to resolve such dispute. If Company and DeepFlex or Offshore, as the
case may be, are unable to resolve the dispute, either party may utilize the
dispute mechanism provided for in Article VI. No later than two (2) days
following the Accounting Firm's decision, Offshore or Company shall make any
required payment to the other.
Section 3.04 Loss Sharing.
(a) If Company (or any successor in interest) uses any Company Tax
Attribute in a taxable period beginning after the Effective Time, Company shall
pay Offshore (as provided in Section 3.04(b)) an amount equal to the Tax
Benefit received by Company and any affiliated group in which it or its
successor is a member as a result of the use of such Company Tax Attribute.
For purposes of this Section, a Company Tax Attribute shall be deemed to be
used if such Company Tax Attribute actually would have been used, assuming that
Company and any affiliated group in which it or its successor is a
-23-
<PAGE> 24
member had no net operating loss carryovers, AMT credit carryovers or capital
loss carryovers other than the Company Tax Attributes.
(b) On or about each September 15, Offshore may send a written
notification to Company requesting that Company compute the amount due under
paragraph (a) with respect to the preceding taxable year and provide Offshore
with an officer's certificate detailing the amount of the Company Tax
Attributes used by Company Group (or its successor) together with supporting
documentation sufficient for Offshore to verify Company's computation of the
amount owing (the "Officer's Certificate"). Within 45 days of receipt of such
written notification, Company shall deliver to Offshore the Officer's
Certificate along with the payment, if any, shown as due and owing on the
Officer's Certificate. Offshore shall notify Company in writing within twenty
(20) days of receipt of the Officer's Certificate if it disputes the amount
shown as owing thereon. In the case of a dispute, such notice shall contain
Offshore's explanation of the dispute, its computation (based on all
information in its possession, including the documentation supplied by Company)
of the amount owing and supporting documentation sufficient to enable Company
to verify Offshore's computation of the amount owing. If Offshore fails to so
notify Company within twenty (20) days, Offshore shall be deemed to have
accepted and agreed to the computation of the amount shown as owing on the
Officer's Certificate, and Offshore shall be precluded from contesting such
amount. If Offshore disputes the amount shown as owing on the Officer's
Certificate, Offshore and Company shall attempt in good faith to resolve such
dispute. If Company and Offshore are unable to resolve the dispute, either
party may utilize the dispute mechanism provided for in Article VI. No later
than two (2) days following the Accounting Firm's decision, Company shall make
any required payment to Offshore.
(c) If the Company receives (or has reason to believe it will
receive) a report of a revenue agent of a Tax Authority (an "Agent's Report")
that raises an issue which, if
-24-
<PAGE> 25
resolved in favor of the Tax Authority, would eliminate the Company's ability
to use any Company Tax Attributes previously reported as existing as of the day
after the Effective Time ("Challenged Company Tax Attributes"), Company's
obligation to make any payments under this Section 3.04 with respect to
Challenged Company Tax Attributes shall be suspended pending resolution of the
issues raised in the Agent's Report. Upon final resolution of the issues
raised in the Agent's Report, Company shall make a payment to Offshore equal to
the Tax Benefits realized on the use of a Challenged Company Tax Attribute to
the extent that such Challenged Company Tax Attribute was unaffected by the
resolution, together with interest at a rate of ten (10)% per annum from the
date on which the payment would have been made but for the preceding sentence.
Adjustments to Company Tax Attributes pursuant to resolution of the issues
raised in the Agent's Report are governed by Section 4.03.
Section 3.05 Transfer Taxes. Company and Offshore shall each be
responsible for one-half of any sales and use, gross receipts, or other
transfer Taxes imposed on the transfers occurring pursuant to Distribution
Agreement and Redemption Agreement, except that Offshore shall be responsible
for 100% of any such Taxes payable in connection with the Rig Distribution.
-25-
<PAGE> 26
ARTICLE IV
DEFICIENCIES AND REFUNDS OF TAXES
Section 4.01 Deficiencies and Refunds Relating to Company
Consolidated and Combined Tax Returns.
(a) If an adjustment is made with respect to any Tax Return of the
Company (or any member of the Company Group) in which any member of the
DeepFlex Group is included or in which any Merger Transaction occurs, DeepFlex
or Offshore shall pay Company:
(i) in the case of an adjustment to a period not
described in Sections 2.02(a) or 2.03(a), as the case may be, to the extent of
the increase in Taxes payable by Company for such period, the excess of (A) the
federal consolidated or state combined, unitary or consolidated Tax liability
of the DeepFlex Group computed as if all the members of the DeepFlex Group
included in the Tax Return had filed a federal consolidated or state combined,
unitary or consolidated Tax Return (whichever applicable) based on the Tax
Items of members of the DeepFlex Group as so adjusted (including the effect of
adjustments to prior taxable periods), including interest and penalties, over
(B) the federal consolidated or state combined, unitary or consolidated Tax
liability of the DeepFlex Group computed as if all the members of the DeepFlex
Group included in the Tax Return had filed a federal consolidated or state
combined, unitary or consolidated Tax Return (whichever applicable) based on
the Tax Items of members of the DeepFlex Group as reported (or, if applicable,
as previously adjusted); or
(ii) in the case of adjustments to periods described in
Sections 2.02(a) or 2.03(a), or any period in which a Merger Transaction
occurs, the excess of (A) the sum of (w) the Rig Tax, (x) the Excess Value Tax,
(y) the Merger Transactions Tax and (z) the DeepFlex Group Federal Tax
Liability or the DeepFlex Group State Tax Liability, whichever applicable, all
computed based on the Tax Items of members of the DeepFlex
-26-
<PAGE> 27
Group as so adjusted (including the effect of adjustments to prior taxable
periods), including interest and penalties, over (B) the sum of (w) the Rig
Tax, (x) the Excess Value Tax, (y) the Merger Transactions Tax, and (z) the
DeepFlex Group Federal Tax Liability or DeepFlex Group State Tax Liability, all
computed based on the Tax Items of members of the DeepFlex Group as reported
(or, if applicable, as previously adjusted). If the amount described in clause
(ii)(B) exceeds the amount described in clause (ii)(A), then Company shall pay
to Offshore such excess, but only to the extent of amounts previously paid by
Offshore or DeepFlex to Company with respect to the Rig Tax, the Excess Value
Tax, the Merger Transactions Tax, the DeepFlex Group Federal Tax Liability and
the DeepFlex Group State Tax Liability. The parties acknowledge that any
payments required to be made by Company under the preceding sentence shall be
offset to the extent of payments required to be made by Offshore or DeepFlex
under this Article IV.
Section 4.02 TODI.
(a) Offshore Tax Returns. If any adjustment is made with respect
to a Tax Return which includes TODI and at least one other member of the
Offshore Group, Offshore shall pay, indemnify and hold harmless Company and
TODI against any Taxes resulting from such adjustment.
(b) Separate Taxes of TODI. If any adjustment is made with
respect to a Separate Tax of TODI for periods beginning before the TODI Payment
Date, Offshore shall pay Company the excess of (i) the Separate Tax liability
of TODI for the applicable Tax period (or, in the case of a Straddle Period,
for the portion of the Straddle Period ending on the TODI Payment Date
(computed in the manner set forth in Section 2.05(b)(ii))), over (ii) the
applicable Separate Tax liability of TODI as so reported (or, if
-27-
<PAGE> 28
applicable, as previously adjusted) for the applicable Tax period (or, in the
case of a Straddle Period, for the portion of the Straddle Period ending on the
TODI Payment Date (computed in the manner set forth in Section 2.05(b)(ii))).
Section 4.03 Recovery of Loss Sharing. If any adjustment is made
affecting the amount or use (within the meaning of Section 3.04) of the Company
Tax Attributes, Offshore shall return to Company any payments made by Company
to Offshore under Section 3.04 to the extent that such payments would not have
been made had the amount and use of the Company Tax Attributes been originally
computed based on the Tax Items of members of the DeepFlex Group and the
Company Group as so adjusted. Any return payment made under this Section 4.03
shall include interest at a rate of ten (10)% per annum from the date on which
Company made the payment being returned.
Section 4.04 Manner and Time of Payments. Company shall compute
the amount of any payment due to be made by Offshore under this Article IV, and
shall provide Offshore with written notification of such computations (together
with supporting documentation sufficient to enable Offshore to verify the
computation) (collectively, the "Adjustment Notice"). Within twenty (20) days
of receipt of the Adjustment Notice, Offshore shall either (i) pay the amount
shown as due on the Adjustment Notice, or (ii) notify the Company in writing if
it disputes the amount shown as due and pay to Company any amount not in
dispute. If Offshore and DeepFlex fail to so notify Company within twenty (20)
days, Company's computation of the amount due shall become final. In the case
of a dispute, such notice shall contain Offshore's explanation of the dispute,
its computation of the amount due and supporting documentation sufficient to
enable Company to verify Offshore's computation of the amount due.
-28-
<PAGE> 29
(b) If Offshore disputes the amount shown as due on an Adjustment
Notice, Offshore and Company shall attempt in good faith to resolve such
dispute. If Company and Offshore are unable to resolve the dispute, either
party may utilize the dispute mechanism provided for in Article VI. No later
than two (2) days following the Accounting Firm's decision, Offshore shall make
any required payment to Company.
(c) Any payments made to Company under this Article that are made
after the date that is ten (10) days after receipt by Offshore of the
applicable Adjustment Notice shall include interest at a rate of ten (10)% per
annum.
Section 4.05 Tax Refunds Generally. No member of the DeepFlex
Group shall be entitled to any payment or benefit as a result of the receipt of
any Tax refund received by any member of the Company Group, and TODI shall not
be entitled to any payment or benefit as a result of the receipt of any Tax
refund received by any member of the Offshore Group or the DeepFlex Group.
ARTICLE V
TAX AUDITS, TRANSACTIONS AND OTHER MATTERS
Section 5.01 Claims for Refund, Carrybacks, and Self-Audit
Adjustments. Notwithstanding anything herein to the contrary, Adjustment
Requests with respect to any Company Pre-Contribution Federal Consolidated
Return, any Company Pre-Contribution State Combined Return, or any Separate Tax
Return of TODI for periods beginning before the Contribution Date, shall be
made at the sole discretion of Company.
Section 5.02 Notice of Tax Contests. Company shall provide prompt
notice to Offshore or DeepFlex of any pending or threatened Tax audit,
assessment or proceeding
-29-
<PAGE> 30
or other Tax Contest of which it becomes aware related to Taxes for Tax periods
for which it may receive a payment from Offshore or DeepFlex under this
Agreement. Such notice shall contain factual information (to the extent known)
describing any asserted Tax liability in reasonable detail and shall be
accompanied by copies of any notice and other documents received from any Tax
Authority in respect of any such matters. If Company has knowledge of an
asserted Tax liability with respect to a matter for which it may receive a
payment from Offshore or DeepFlex under this Agreement and fails to give
Offshore or DeepFlex prompt notice of such asserted Tax liability, then (i) if
Offshore or DeepFlex is precluded from contesting the asserted Tax liability in
any forum as a result of the failure to give prompt notice, Offshore or
DeepFlex shall have no obligation to indemnify Company for or make payments
with respect to any Taxes arising out of such asserted Tax liability, and (ii)
if Offshore or DeepFlex is not precluded from contesting the asserted Tax
liability in any forum, but such failure to give prompt notice results in a
monetary detriment to Offshore or DeepFlex, then any amount which Offshore or
DeepFlex is otherwise required to pay Company pursuant to this Agreement shall
be reduced by the amount of such detriment.
Section 5.03 Control of Tax Contests
(a) Except as otherwise provided in this Section 5.03, (i) Company
shall have the exclusive authority to represent each member of the DeepFlex
Group before any Tax Authority or before any court with respect to any Tax
Contest affecting the Tax liability of any member of the DeepFlex Group or the
Company Group for any period beginning before the Contribution Date, and (ii)
Company shall have full responsibility and discretion in handling, settling or
contesting all other Tax Contests relating to the Company Group, and Offshore
and DeepFlex shall have no right to participate in the handling, settling or
contesting of such other Tax Contests.
-30-
<PAGE> 31
(b) Company shall allow Offshore or DeepFlex to assume control of
the defense or prosecution, as the case may be, of the portion of any Tax
Contest (other than Tax Contests described in Section 5.03(c)), if such portion
relates exclusively to a Tax Item of a member of the DeepFlex Group or to a Tax
of TODI for which Offshore or DeepFlex is potentially liable to make a payment
to Company pursuant to this Agreement, provided that, prior to assuming such
control, Offshore or DeepFlex, as the case may be, reaffirms in writing its
potential indemnification obligation with respect to such Taxes under this
Agreement. Anything in this Section 5.03 to the contrary notwithstanding, (i)
Company shall have the right to participate, at its own expense, in any portion
of a Tax Contest controlled by Offshore or DeepFlex pursuant to this Section
5.03(b), (ii) Offshore or DeepFlex shall not settle any portion of a Tax
Contest controlled by it pursuant to this Section 5.03(b) without Company's
consent, which consent shall not be unreasonably withheld, provided that if
Company does not consent to such settlement proposal and such settlement would
not have adversely affected the Company Group and TODI, the obligations of
Offshore and DeepFlex hereunder shall be limited to the amount that would have
resulted if the settlement had been approved, and (iii) Company shall have the
right to settle (and to cause Offshore and DeepFlex to settle) any portion of a
Tax Contest controlled by Offshore or DeepFlex pursuant to this Section 5.03(b)
if such settlement would be reasonable for a person liable for all Taxes of all
members of the Company Group, the DeepFlex Group and the Offshore Group for all
periods, determined as if the only Tax Items disputed under the Tax Contest
were the Tax Items disputed under the portion of the Tax Contest controlled by
Offshore or DeepFlex under this paragraph (and, if Offshore or DeepFlex
disputes whether the proposed settlement would be reasonable for a person
liable for all Taxes of all members of the Company Group, the DeepFlex Group
and the Offshore Group for all periods, determined as if the only Tax Items
disputed under the Tax Contest were the Tax Items disputed under the portion of
-31-
<PAGE> 32
the Tax Contest controlled by Offshore or DeepFlex under this paragraph, the
parties shall utilize the dispute mechanism provided for in Article VI and the
Accounting Firm shall decide whether Company has the right to settle (or to
cause settlement of) the Tax Contest under this clause (iii)). If neither
Offshore nor DeepFlex assumes control of the defense or prosecution, as the
case may be, of the portion of any Tax Contest described in the first sentence
of this paragraph, Offshore and DeepFlex shall indemnify Company for fees and
expenses incurred by Company in connection with Company's defense or
prosecution of such portion of such Tax Contest.
(c) Company and Offshore shall jointly control (and each party
shall bear their own expenses in connection with) any Tax Contest relating to
the Merger Transactions, to the extent that such Tax Contest could result in
Offshore or DeepFlex making a payment to Company hereunder and Offshore or
DeepFlex reaffirms in writing its potential indemnification obligation under
this Agreement. Company shall have the authority to settle any such Tax
Contest with the consent of Offshore or DeepFlex, which consent shall not be
unreasonably withheld. If Offshore withholds consent to settlement of a Tax
Contest and such settlement would not have resulted in Offshore and DeepFlex
making any payments to Company in excess of payments actually made pursuant to
the ultimate resolution of the Tax Contest, Offshore shall indemnify Company
for any Taxes owed by Company that would not have been owed had Offshore
consented to the settlement. Likewise, Offshore shall have the authority to
settle any such Tax Contest with the consent of Company, which consent shall
not be unreasonably withheld. If Company withholds consent to settlement of a
Tax Contest and such settlement would not have adversely affected Company, the
obligations of Offshore and DeepFlex hereunder shall be limited to the amount
that would have resulted if Company had consented to the settlement.
-32-
<PAGE> 33
(d) In the case of any Tax Contest which relates exclusively to
Taxes of members of the Offshore Group or DeepFlex Group for which Offshore,
DeepFlex or the members of the Offshore Group or the DeepFlex Group have no
obligation to make a payment to Company under this Agreement, Offshore,
DeepFlex or the applicable member(s) of the Offshore Group or the DeepFlex
Group shall have exclusive control over the Tax Contest; provided that Company
shall be allowed to participate (at its own expense) in such Tax Contest if the
resolution of the Tax Contest could result in a Tax Detriment to any member of
the Company Group.
(e) Offshore will allow TODI and its representatives to
participate (at its own expense) in any audits of the Offshore federal
consolidated income (or state combined, unitary or consolidated) Tax Returns to
the extent such Tax Returns relate to TODI. Offshore will not settle any such
audit in a manner which would adversely affect TODI after the TODI Payment Date
without the prior written consent of Company.
Section 5.04 Retention of Books and Records. Offshore, DeepFlex
and Company each agrees to retain all Tax Returns, related schedules and
workpapers, and all material records and other documents relating thereto
existing on the date hereof or created through or with respect to taxable
periods ending on or before the Contribution Date, until the later of (a) the
expiration of the statute of limitations (including extensions of which such
party has been notified) of the taxable years to which such Tax Returns and
other documents relate, or (b) the date that is ten (10) years after the
Contribution Date.
Section 5.05 Cooperation re Return Filings, Examinations and
Controversies.
(a) Offshore's and DeepFlex's Obligations. Except as
otherwise provided in this Article V, Offshore, DeepFlex and each other member
of the Offshore
-33-
<PAGE> 34
Group and DeepFlex Group shall fully cooperate with Company and its
representatives, in a prompt and timely manner, in connection with (i) the
preparation and filing of and (ii) any inquiry, audit, examination,
investigation, dispute, or litigation involving, any Tax Return filed or
required to be filed by or for any member of the Company Group for any taxable
period beginning before the Contribution Date. Such cooperation shall include,
but not be limited to, (x) the execution and delivery to Company by the
appropriate Offshore Group or DeepFlex Group member of any power of attorney
required to allow Company and its counsel to represent Offshore, DeepFlex or
such other Offshore Group or DeepFlex Group member in any Tax Contest which
Company shall have the right to control pursuant to the terms of Section 5.03
of this Agreement, provided, that such power of attorney shall be used only in
a manner consistent with the terms of this Article V, and (y) making available
to Company, during normal business hours, and within thirty (30) days of any
request therefor, all books, records and information, and the assistance of all
officers and employees, necessary or useful in connection with any Tax inquiry,
audit, examination, investigation, dispute, litigation or any other matter.
Offshore and DeepFlex agree to make (or to cause members of the DeepFlex Group)
any elections necessary for any member of the DeepFlex Group to be included in
a Pre-Contribution Federal Consolidated Return or Pre-Contribution State
Combined Return.
(b) Company's Obligations. Except as otherwise provided
in this Article V, Company shall fully cooperate with Offshore, DeepFlex and
their representatives, in a prompt and timely manner, in connection with (i)
the preparation and filing of and (ii) any inquiry, audit, examination,
investigation, dispute, or litigation involving, any Tax Return filed or
required to be filed by or for any member of the DeepFlex Group or Offshore
Group. Such cooperation shall include, but not be limited to, (x) the
execution and delivery to Offshore or DeepFlex by the appropriate Company Group
member of any power of attorney required to allow Offshore or DeepFlex and its
-34-
<PAGE> 35
counsel to represent Company in any Tax Contest which Offshore or DeepFlex
shall have the right to control pursuant to the terms of Section 5.03 of this
Agreement, provided, that such power of attorney shall be used only in a manner
consistent with the terms of this Article V, and (y) making available to
Offshore or DeepFlex, during normal business hours, and within thirty (30) days
of any request therefor, all books, records and information, and the assistance
of all officers and employees, necessary or useful in connection with any tax
inquiry, audit, examination, investigation, dispute, litigation or any other
matter.
(c) Remedy for Failure to Comply. If Company reasonably
determines that Offshore or DeepFlex is not for any reason fulfilling its
obligations under Section 5.05(a), or if Offshore or DeepFlex reasonably
determines that Company is not for any reason fulfilling its obligations under
Section 5.05(b), then Company, Offshore or DeepFlex, as the case may be, shall
have the right to appoint, at the expense of the other, an independent entity
such as a nationally-recognized public accounting firm to assist the other in
meeting its obligations under this Section 5.05. Such entity shall have
complete access to all books, records and information, and the complete
cooperation of all officers and employees, of Offshore, DeepFlex or Company, as
the case may be.
ARTICLE VI
DISPUTE RESOLUTION
Section 6.01 Dispute Resolution. If after good faith negotiations
the parties cannot agree on the application of this Agreement to any matter,
then the matter will be referred to a nationally recognized accounting firm
acceptable to each of the parties (the ''Accounting Firm''). The Accounting
Firm shall furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45
-35-
<PAGE> 36
days after its acceptance of the matter for resolution. Any such resolution by
the Accounting Firm will be conclusive and binding on all parties to this
Agreement (except to the extent such resolution is redetermined pursuant to a
Tax Contest). Each party shall pay its own fees and expenses (including the
fees and expenses of its representatives) incurred in connection with the
referral of the matter to the Accounting Firm. All fees and expenses of the
Accounting Firm in connection with such referral shall be shared equally by the
parties.
ARTICLE VIII
LETTERS OF CREDIT
Section 7.01 Initial Letters of Credit.
(a) In the event that a Rig Distribution occurs prior to the
Effective Time, then to secure the payment obligations of Offshore under
Section 3.01, Section 4.01 (but only to the extent that an adjustment results
in an increase in the amount of the Rig Tax) and Section 4.03, Offshore shall
deliver to Company simultaneously with the execution of this Agreement an
initial letter of credit in the amount of $7.5 million (the "Offshore Letter of
Credit"). The initial Offshore Letter of Credit shall, except as otherwise
provided in the Offshore Letter of Credit, expire one year from the date
hereof.
(b) In the event Offshore delivers to Company the Offshore Letter
of Credit pursuant to Section 7.01(a), then, to secure the payment obligations
of Company under Section 3.04, Company shall deliver to Offshore simultaneously
with the execution of this Agreement an initial letter of credit in the amount
of $7.5 million (the "Company Letter of Credit"). The initial Company Letter
of Credit shall, except as otherwise provided in the Company Letter of Credit,
expire one year from the date hereof.
-36-
<PAGE> 37
Section 7.02 Renewal Letters of Credit. Subject to Section 7.03,
Offshore shall deliver to Company at least ten (10) days prior to the
expiration of any Offshore Letter of Credit a new Offshore Letter of Credit in
an amount equal to $7.5 million less any amount drawn down against the expiring
Offshore Letter of Credit or any earlier Offshore Letter of Credit by reason of
a failure to make a payment under Section 3.01, Section 4.01 (but only to the
extent that an adjustment results in an increase in the amount of the Rig Tax)
or Section 4.03. Subject to Section 7.03, Company shall deliver to Offshore at
least ten (10) days prior to the expiration of any Company Letter of Credit a
new Company Letter of Credit in an amount equal to $7.5 million less any amount
drawn down against the expiring Company Letter of Credit or any earlier Company
Letter of Credit by reason of a failure to make a payment under Section 3.04.
Section 7.03 Term. The obligations of Offshore and Company to
deliver a renewal Offshore Letter of Credit and a renewal Company Letter of
Credit, respectively, shall expire on the "Final Expiration Date" which shall
be the later of (i) the date that is five years from the Effective Time, or
(ii) if Company notifies Offshore within five years of the Effective Time that
Company has received (or has reason to believe it will receive) an Agent's
Report proposing to challenge the Company's treatment of the Merger
Transactions, the earlier of: (A) the date that is eight years from the
Effective Time, or (B) the date that is sixty (60) days after the date of the
"determination" (within the meaning of Code Section 1313) of the issues raised
in the Agent's Report.
Section 7.04 Drawing on Letters of Credit. Offshore shall be
entitled to drawdown on the Company Letter of Credit and Company shall be
entitled to drawdown on the Offshore Letter of Credit after compliance with the
drawdown procedures set forth in the applicable Letter of Credit, under any of
the following circumstances:
-37-
<PAGE> 38
(a) If Offshore fails to pay Company any amount payable to Company
under Section 3.01, Section 4.01 (but only to the extent that an adjustment
results in an increase in the amount of the Rig Tax), Section 4.03 or Section
7.06 on or prior to the due date for such payment, then (so long as such
default in payment shall be continuing) Company (or its successor) shall be
entitled to drawdown the Offshore Letter of Credit to the extent of the amount
so payable;
(b) If Company fails to pay Offshore an amount payable to Offshore
under Section 3.04 or Section 7.06 on or prior to the due date for such
payment, then (so long as such default in payment shall be continuing) Offshore
shall be entitled to drawdown the Company Letter of Credit to the extent of
the amount so payable;
(c) If Company has not received a renewal Offshore Letter of
Credit from Offshore by the date required under Section 7.02, then (so long as
Company has not received such renewal Offshore Letter of Credit), Company shall
be entitled to drawdown the Offshore Letter of Credit to the full extent of the
Offshore Letter of Credit, but only by a draft directing deposit into an escrow
account (the "Offshore L/C Escrow Account") of the funds being drawn down. If,
after the drawdown of the Offshore Letter of Credit pursuant to the preceding
sentence, Offshore fails to pay Company any amount payable to Company under
Section 3.01, Section 4.01 (but only to the extent that an adjustment results
in an increase in the amount of the Rig Tax), Section 4.03 or Section 7.06 on
or prior to the due date for such payment, then (so long as such default in
payment shall be continuing) Company (or its successor) shall be entitled to
drawdown the Offshore L/C Escrow Account to the extent of the amount so
payable. Upon the Final Expiration Date, any funds remaining in the Offshore
L/C Escrow Account will be returned to Offshore.
-38-
<PAGE> 39
(d) If Offshore has not received a renewal Company Letter of
Credit from Company by the date required under Section 7.02, then (so long as
Offshore has not received such renewal Company Letter of Credit), Offshore
shall be entitled to drawdown the Company Letter of Credit to the full extent
of the Company Letter of Credit, but only by a draft directing deposit into an
escrow account (the "Company L/C Escrow Account") of the funds being drawn
down. If, after the drawdown of the Company Letter of Credit pursuant to the
preceding sentence, Company fails to pay Offshore an amount payable to Offshore
under Section 3.04 or Section 7.06 on or prior to the due date for such
payment, then (so long as such default in payment shall be continuing) Offshore
shall be entitled to drawdown the Company L/C Escrow Account to the extent of
the amount so payable. Upon the Final Expiration Date, any funds remaining in
the Company L/C Escrow Account will be returned to Company.
Section 7.05 L/C Escrow Account.
(a) At any time after the funding of the Offshore L/C Escrow
Account pursuant to Section 7.04(c), Offshore shall have the right to deliver
to Company a renewal or substitute Offshore Letter of Credit provided that such
Offshore Letter of Credit is equal to the amount in the Offshore L/C Escrow
Account, and upon delivery thereof, Company shall instruct the escrow agent to
release to Offshore the funds in the Offshore L/C Escrow Account.
(b) At any time after the funding of the Company L/C Escrow
Account pursuant to Section 7.04(d), Company shall have the right to deliver to
Offshore a renewal or substitute Company Letter of Credit provided that such
Company Letter of Credit is equal to the amount in the Company L/C Escrow
Account, and upon delivery
-39-
<PAGE> 40
thereof, Offshore shall instruct the escrow agent to release to Company the
funds in the Company L/C Escrow Account.
(c) Offshore and Company, acknowledging that any Offshore L/C
Escrow Account established under Section 7.04(c) will be established to secure
Offshore's obligations hereunder, and that any Company L/C Escrow Account
established under Section 7.04(d) will be established to secure Company's
obligations hereunder, hereby agree that all Taxes payable with respect to any
earnings or investments in the Offshore L/C Escrow Account shall be payable by
Offshore and that all Taxes payable with respect to any earnings or investments
in the Company L/C Escrow Account shall be payable by Company.
Section 7.06 Wrongful Drawdowns.
(a) Any wrongful drawdown by Company or Offshore of funds (the
"Breaching Party") against its Letter of Credit shall be restored by the
Breaching Party to the other party on demand, together with interest at 12%,
compounded quarterly, commencing from the date of such wrongful drawdown. If
the Breaching Party fails to comply with the requirements of the preceding
sentence, the other party shall be entitled to recover said funds from the
Breaching Party in an action at law;
(b) Any wrongful drawdown by a Breaching Party of funds from an
L/C Escrow Account shall be restored by the Breaching Party to the L/C Escrow
Account on demand, together with interest at 12%, compounded quarterly,
commencing from the date of such wrongful drawdown. If the Breaching Party
fails to comply with the requirements of the preceding sentence, the other
party shall be entitled to recover said funds from the Breaching Party in an
action at law;
-40-
<PAGE> 41
(c) A Breaching party shall be liable to the other party for all
costs and expenses incurred by such other party in connection with any wrongful
drawdown of a Letter of Credit or L/C Escrow Account;
(d) As liquidated damages, and not as a penalty, in addition to
any amounts to which it is entitled under the preceding paragraphs, the other
party shall be entitled to receive from the Breaching Party with respect to any
wrongful drawdown an amount equal to 50% of the amount of such funds.
Section 7.07 Election to Forego Letters of Credit. Company (or
its successor) may elect at any time to release Offshore from its obligation to
provide the Offshore Letter of Credit which will in turn release Company from
its obligation to provide the Company Letter of Credit. If Company so elects,
it shall provide written notification of its election to Offshore. Within five
(5) days of receipt of such written notification, Offshore shall deliver to
Company the Company Letter of Credit and shall acknowledge to Company in
writing that Company's obligations under this Article VII to provide the
Company Letter of Credit have been discharged. Within five (5) days of receipt
by Company of the items described in the preceding sentence, Company shall
deliver to Offshore the Offshore Letter of Credit and shall acknowledge to
Offshore in writing that Offshore's obligations under this Article VII to
provide the Offshore Letter of Credit have been discharged.
-41-
<PAGE> 42
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired thereby.
Section 8.02 Modification of Agreement. No modification, amendment
or waiver of any provision of this Agreement shall be effective unless the same
shall be in writing and signed by each of the parties hereto and then such
modification, amendment or waiver shall be effective only in the specific
instance and for the purpose for which given.
Section 8.03 Entire Agreement; Termination of Prior Agreements;
Conflict With Other Agreements. This agreement constitutes the entire
agreement of the parties concerning the subject matter hereof and supersedes
all other agreements, whether or not written, in respect of any Tax between or
among any member or members of the Offshore Group or DeepFlex Group, on the one
hand, and any member or members of the Company Group, on the other hand. Any
and all such other agreements are hereby canceled.
Section 8.04 Indemnification for Fees and Expenses; Interest;
Gross-Up.
(a) Gross-Up. The parties hereto agree to report all payments
received by a party (the "Indemnified Party") from another party (the
"Indemnifying Party") hereunder as capital contributions or distributions, as
the case may be, made immediately prior to the Contribution. In the event that
a Tax Authority determines that Taxes are owing by an Indemnified Party as a
result of the receipt of a payment (other than a payment of Merger Transactions
Tax) by an Indemnifying Party, the Indemnifying Party shall make an additional
payment (a "Gross-Up Payment") to the Indemnified Party equal to the sum
-42-
<PAGE> 43
of (i) the amount of such Taxes and (ii) any additional Taxes that will be
imposed on the Gross-Up Payment.
(b) Interest. If any payment required to be made under this
Agreement is made after the original due date (without extensions) for the
filing of the Tax Return to which such payment relates (the "Return Due Date"),
such payment shall include interest at a rate of 8% on the amount of the
payment required based on the number of days from the Return Due Date to the
date of payment.
Section 8.05 Deconsolidation Date. The parties believe that
members of the DeepFlex Group will cease to be includible on any Company (or
Company Group member) Tax Return on the Contribution Date and will prepare all
Tax Returns consistent with that belief. If the members of the DeepFlex Group
will cease to be includible on any Company (or Company Group member) Tax Return
on a date other than the Contribution Date, then all calculations made
hereunder with respect to the Contribution Date shall be made with respect to
such other date.
Section 8.06 Taxes of Other Persons DeepFlex and Offshore shall
pay, indemnify, and hold harmless Company against the Taxes of any Person other
than the Company and its Subsidiaries on a consolidated or combined basis (i)
under Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv)
otherwise, but only to the extent that such liability arises as a result of any
member of the DeepFlex Group or the Offshore Group being a member of an
affiliated group of which no member of the Company Group was a member. For
this purpose, "Person" shall mean an individual, a partnership, a corporation,
an association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity.
-43-
<PAGE> 44
Section 8.07 Taxes Generally. Without in any way limiting the
obligations of Offshore, DeepFlex or any member of the Offshore Group and the
DeepFlex Group, Company shall indemnify and hold harmless the Offshore Group
and the DeepFlex Group from all Taxes imposed on the Company and any of them on
a consolidated or combined basis (i) under Reg. Section 1.1502-6 (or any
similar provision of state, local, or foreign law), (ii) as a transferee or
successor, (iii) by contract, or (iv) otherwise. Offshore shall indemnify and
hold harmless Company (and TODI) from all Taxes imposed on TODI and any member
of the Offshore Group on a consolidated or combined basis (i) under Reg.
Section 1.1502-6 (or any similar provision of state, local, or foreign law),
(ii) as a transferee or successor, (iii) by contract, or (iv) otherwise.
Section 8.08 Alternative Minimum Tax Credits. DeepFlex and
Company agree to use their best efforts to allocate any available AMT credits
attributable to periods beginning before the Contribution Date pursuant to a
reasonable allocation method. If the parties are unable to agree on a
reasonable allocation method, the matter of allocating any AMT credits will be
referred to the Accounting Firm for resolution pursuant to Article VI. With
respect to any AMT (including AMT resulting from an adjustment) actually
payable with respect to a Company Pre-Contribution Federal Consolidated Tax
Return, a Company Pre-Contribution State Combined Tax Return, or any Company
Tax Return that includes the Merger Transactions, the party to whom the AMT
credit is allocated under this paragraph shall pay and be liable for the AMT
(which, in the case of an adjustment, shall be deemed for this purpose to
include interest and penalties relating to the AMT adjustment) relating to the
credit.
Section 8.09 Value Adjustment. If the fair market value of the
property described in Section 3.1(a)(i)(x) and (y) of the Distribution
Agreement (the "XY Property") is
-44-
<PAGE> 45
determined in a Tax Contest to be greater than approximately $8 million,
Company shall be treated as selling, and Offshore as buying, an amount of the
DeepFlex Note equal to the fair market value (as so determined) of the XY
Property. If the fair market value of the Offshore Common Stock and Offshore
Preferred Stock transferred to Company in partial satisfaction of the DeepFlex
Note is determined in a Tax Contest to be greater than approximately $12
million, DeepFlex shall be treated as satisfying an amount of the DeepFlex Note
equal to the fair market value (as so determined) of such Offshore Common Stock
and Offshore Preferred Stock. For purposes of Section 3.01(c)(y)(D), the
amount of the DeepFlex Note treated as capitalized shall be determined by
taking into account the adjustments pursuant to the first two sentences of this
Section ("Value Adjustments"), but only to the extent such Value Adjustments
exceed the gain realized by RIGCO on the Rig Distribution.
Section 8.10 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, one day after being delivered to a nationally recognized overnight
courier or when telecopied (with a confirmatory copy sent by such overnight
courier) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Company, to
El Paso Natural Gas Company
1001 Louisiana Street
Houston, Texas 77062
Attention: Judy A. Vandagriff
Vice President, Tax
Facsimile No.: (713) 757-8269
-45-
<PAGE> 46
with copies to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Ave., N.W.
Suite 800
Washington, D.C. 20004-2505
Attention: Alan S. Kaden
Facsimile No.: (202) 639-7003
(b) if to Offshore or DeepFlex, to
Tatham Offshore, Inc.
7400 Texas Commerce Tower
600 Travis
Houston, Texas 77002
Attention: President
Facsimile No.: (713) 224-7574
with copies to:
Akin, Gump, Strauss, Hauer & Feld, P.C.
711 Louisiana Street
Suite 1900
Houston, TX 77002
Attention: Rick L. Burdick
Facsimile No.: (713) 236-0822
Section 8.11 Application to Present and Future Subsidiaries. This
Agreement is being entered into by Company, Offshore and DeepFlex on behalf of
themselves and each member of the Company Group, the Offshore Group, and the
DeepFlex Group, respectively. This Agreement shall constitute a direct
obligation of each such member and shall be deemed to have been readopted and
affirmed on behalf of any corporation which becomes a member of the Company
Group, the Offshore Group or the DeepFlex
-46-
<PAGE> 47
Group in the future. Company, Offshore and DeepFlex hereby guarantee the
performance of all actions, agreements and obligations provided for under this
Agreement of each member of the Company Group, the Offshore Group and the
DeepFlex Group respectively. Company, Offshore and DeepFlex shall, upon the
written request of the other, cause any of their respective group members
formally to execute this Agreement. This Agreement shall be binding upon, and
shall inure to the benefit of, the successors, assigns and persons controlling
any of the corporations bound hereby.
Section 8.12 Term. This Agreement shall commence on the date of
execution indicated above and shall continue in effect until otherwise agreed
to in writing by Company and Offshore, or their successors.
Section 8.13 Titles and Headings. Titles and headings to sections
herein are inserted for the convenience of reference only and are not intended
to be a part or to affect the meaning or interpretation of this Agreement.
Section 8.14 Singular and Plural. As used herein, the singular shall
include the plural and vice versa.
Section 8.15 Governing Law. This Agreement shall be governed, and
construed in accordance with, the laws of the State of Texas, without regard to
its rules of conflicts of laws thereof.
Section 8.16 Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when one or more counterparts have been
signed by each party and delivered to the other parties.
-47-
<PAGE> 48
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
[ ]
By:
-----------------------------------
Title:
[ ]
By:
-----------------------------------
Title:
-48-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DEEPTECH
INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT MARCH
31, 1998 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 39,911
<SECURITIES> 0
<RECEIVABLES> 13,733
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,145
<PP&E> 135,174
<DEPRECIATION> 6,476
<TOTAL-ASSETS> 233,678
<CURRENT-LIABILITIES> 80,962
<BONDS> 96,414
0
0
<COMMON> 249
<OTHER-SE> 36,342
<TOTAL-LIABILITY-AND-EQUITY> 233,678
<SALES> 109,523
<TOTAL-REVENUES> 111,161
<CGS> 82,956
<TOTAL-COSTS> 85,366
<OTHER-EXPENSES> 4,147
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,080
<INCOME-PRETAX> 2,525
<INCOME-TAX> 944
<INCOME-CONTINUING> 1,581
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,581
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.06
</TABLE>
