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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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. 0-22892
TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
600 TRAVIS
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS
FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF NOVEMBER 13, 1996, THERE WERE OUTSTANDING 26,238,306
SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1996 (unaudited) and June 30, 1996 . . . 3
Unaudited Consolidated Statement of Operations for the Three Months
Ended September 30, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity for the
Three Months Ended September 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Legal Proceedings
Changes in Securities
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Other Information
Exhibits and Reports on Form 8-K
</TABLE>
2
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,886 $ 4,764
Stock subscriptions receivable -- 12,242
Accounts receivable from joint venture partners 336 719
Receivable from affiliates 998 968
Prepaid expenses 1,913 1,943
--------- ---------
Total current assets 15,133 20,636
--------- ---------
Oil and gas properties:
Oil and gas properties, at cost, using
successful efforts method 80,431 78,158
Less - accumulated depreciation, depletion,
amortization and impairment 14,201 13,258
--------- ---------
Oil and gas properties, net 66,230 64,900
--------- ---------
Prepaid expenses 11,114 11,594
--------- ---------
Total assets $ 92,477 $ 97,130
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 4,305 $ 4,654
Accounts payable to affiliates 409 3,101
Note payable to affiliate 1,734 1,734
--------- ---------
Total current liabilities 6,448 9,489
Long-term debt to affiliate 60,000 60,000
Other noncurrent liabilities 8,861 8,779
--------- ---------
75,309 78,268
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of September 30, 1996 and June 30, 1996,
18,403,666 and 18,724,530 shares issued and outstanding
at September 30, 1996 and June 30, 1996, respectively 184 187
Common stock, $0.01 par value, 250,000,000 shares
authorized as of September 30, 1996 and June 30, 1996,
26,238,306 and 25,500,320 shares issued and outstanding
at September 30, 1996 and June 30, 1996, respectively 262 255
Warrants outstanding to purchase shares of Convertible
Exchangeable Preferred Stock 2,883 2,883
Additional paid-in capital 80,000 80,004
Accumulated deficit (66,161) (64,467)
--------- ---------
17,168 18,862
--------- ---------
Total liabilities and stockholders' equity $ 92,477 $ 97,130
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-----------------------------
1996 1995
<S> <C> <C>
Revenue:
Oil and gas sales $ 4,500 $ 1,527
------------ ------------
Costs and expenses:
Production and operating expenses 1,947 5,778
Exploration expenses 116 158
Depreciation, depletion and amortization 956 105
Management fee and general and administrative
expenses allocated from affiliate 726 1,572
General and administrative expenses 486 647
------------ ------------
4,231 8,260
------------ ------------
Operating income (loss) 269 (6,733)
Interest income 154 35
Gain on sale of oil and gas properties -- 11,319
Interest and other financing costs -- (256)
Interest expense - affiliate (2,117) (1,819)
------------ ------------
Net (loss) income (1,694) 2,546
Preferred stock dividends (997) --
------------ ------------
Net (loss) income available
to common shareholders $ (2,691) $ 2,546
============ ============
Net (loss) income per share $ (0.10) $ 0.10
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
1996 1995
<S> <C>
Cash flows from operating activities:
Net (loss) income $ (1,694) $ 2,546
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation, depletion and amortization 956 105
Gain on sale of oil and gas properties -- (11,319)
Other 549 --
Changes in operating working capital:
Decrease in accounts receivable from joint
venture partners 383 2,925
Increase in receivable from affiliates (30) (10)
Decrease in prepaid expenses 29 4
Decrease in accounts payable,
accrued liabilities and other current liabilities (348) (5,194)
(Decrease) increase in accounts payable to affiliates (2,692) 3,849
---------- ----------
Net cash used in operating activities (2,847) (7,094)
---------- ----------
Cash flows from investing activities:
Additions to oil and gas properties (2,273) (54)
Proceeds from sale of oil and gas properties -- 15,000
---------- ----------
Net cash (used in) provided by investing
activities (2,273) 14,946
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Series A Preferred Stock 12,242 --
Repayment of notes payable -- (10,467)
---------- ----------
Net cash provided by (used in) financing
activities 12,242 (10,467)
---------- ----------
Net increase (decrease) in cash and cash equivalents 7,122 (2,615)
Cash and cash equivalents at beginning of year 4,764 3,864
---------- ----------
Cash and cash equivalents at end of period $ 11,886 $ 1,249
========== ==========
Cash paid for interest $ 1,836 $ 421
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Warrants
outstanding
to purchase shares
Preferred Stock Common Stock of Convertible
--------------------- ------------------- Exchangeable Additional
Number of Number of Preferred paid-in Accumulated
Shares Par Value Shares Par Value Stock capital deficit Total
------ --------- ------ --------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 18,725 $ 187 25,500 $ 255 $ 2,883 $ 80,004 $(64,467) $18,862
Conversion of Series A
Preferred Stock into
common stock
(unaudited) (321) (3) 738 7 -- (4) -- --
Net loss for the three
months ended
September 30, 1996
(unaudited) -- -- -- -- -- -- (1,694) (1,694)
------ ---------- ------ --------- ------- --------- -------- -------
Balance, September 30,
1996 (unaudited) 18,404 $ 184 26,238 $ 262 $ 2,883 $ 80,000 $(66,161) $17,168
====== ========== ====== ========= ======= ========= ======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Tatham Offshore, Inc. ("Tatham Offshore" or the "Company") is an independent
energy company engaged in the development, exploration and production of oil
and gas reserves located primarily offshore the United States in the Gulf of
Mexico (the "Gulf"). The Company is an approximately 38% - owned subsidiary of
DeepTech International Inc. ("DeepTech"), a diversified energy company, which,
through its affiliates, is engaged in providing contract drilling services, oil
and gas gathering and transmission, technology and engineering services,
geological and geophysical technology services, gas processing and liquids
marketing, oil and gas marketing and, through the Company and other affiliates,
oil and gas exploration, development and production.
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 period covered by such
statements. These interim consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The management agreement between the Company 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 the Company. Effective July 1, 1996, the management agreement was
amended to provide for an annual management fee of 24% of DeepTech's overhead
expenses. During the three months ended September 30, 1996, DeepTech charged
Tatham Offshore $0.7 million under this agreement.
As of September 30, 1996, the Company had $60.0 million aggregate principal
amount of Convertible Promissory Notes (the "Subordinated Notes") outstanding,
all of which were held by DeepTech. Interest expense related to this borrowing
totaled $1.8 million for the three months ended September 30, 1996.
During the three months ended September 30, 1996, the Company sold
substantially all of its oil and gas production to Offshore Gas Marketing,
Inc., an affiliate of the Company.
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY:
The following table summarizes the Company's outstanding equity:
<TABLE>
<CAPTION>
Outstanding at Conversion/
---------------------------------- Liquidation Dividend Dividends Exchange
Equity June 30, 1996 September 30, 1996 Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C> <C>
Senior Preferred Stock 7,500 7,500 $1,000 per share 9% $450,000 (c)
(a)
Series A Preferred Stock 18,717,030 18,396,166 $1.50 per share 12% (d)(e)
828,000
Series B Preferred Stock -- -- (f) $1.00 per share 8% -- (d)(e)
Series C Preferred Stock -- -- $0.50 per share 4% -- (d)(e)
Mandatory Redeemable
Preferred Stock -- -- $0.50 per share -- -- (e)(g)
Warrants (b) 6,403,918 6,403,918(f) N/A -- -- (h)
Common Stock 25,500,320 26,238,306 N/A -- -- --
</TABLE>
- -----------------
(a) Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), an
affiliate of the Company, holds all outstanding shares.
(b) DeepFlex Production Services, Inc., an affiliate of the
Company, holds 5,329,043 of the outstanding Warrants.
(c) The Partnership has made an irrevocable offer to the Company
to sell all or any portion of the Senior Preferred Stock at a
price equal to $1,000 per share, plus interest thereon at 9%
per annum less the sum of any dividends paid thereon. In the
event the Company does not purchase the Senior Preferred Stock
on or before September 30, 1998, then for a period of 90 days
thereafter it shall be convertible into Series A Preferred
Stock. The conversion ratio shall be equal to (i) the
liquidation preference amount plus accumulated unpaid
dividends divided by (ii) the arithmetic average of closing
prices for the 20 trading days following October 1, 1998 of
the Series A Preferred Stock.
(d) At any time from July 1, 1996 until December 31, 1998, each
share may be exchanged for four Exchange Warrants each of
which entitles the holder thereof to purchase one share of
common stock at $0.653 per share. At any time after July 1,
1996, the holder may convert the liquidation value and unpaid
dividends into shares of common stock at $0.653 per share.
(e) On or after July 1, 1997, redeemable at the option of the
Company.
(f) On October 1, 1996, a total of 74,379 Warrants were exercised
for an equivalent number of shares of Series B Preferred
Stock.
(g) The Company is required to redeem at a redemption price of
$0.50 per share if the Company redeems any shares of Series A,
B or C Preferred Stock. The Company is also required to
redeem at a redemption price of $0.50 per share from net
proceeds from the sale of common stock pursuant to the
exercise of Exchange Warrants, subject to certain conditions.
(h) Holders are entitled to purchase, for $1.00 per share, one
share of either (i) Series B Preferred Stock on or before
October 1, 1996 or (ii) Series C Preferred Stock on or before
January 1, 1997. All remaining unexercised Warrants will
automatically be converted into Mandatory Redeemable Preferred
Stock on January 1,1997.
Primary earnings (loss) per share is computed by dividing common equity in net
income (loss) by the weighted average number of shares and common stock
equivalents outstanding during the period. The weighted average number of
shares outstanding for purposes of computing primary earnings (loss) per share
were 25,927,636 shares and 25,000,000 shares for the three months ended
September 30, 1996 and 1995, respectively.
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
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 of the Company.
The Company is involved in certain legal proceedings which have arisen in the
ordinary course of business. Management believes that the outcome of such
proceedings will not have a material adverse effect on the Company's financial
position.
The Company anticipates substantial future capital expenditures associated with
the full development of its oil and gas properties. Realization of the full
potential of the Company's properties is dependent upon the ability to obtain
sufficient additional capital or project financing.
In September 1996, the Company entered into a drilling arrangement (the
"Drilling Arrangement") with Sedco Forex Division of Schlumberger Technology
Corporation ("Sedco Forex"). The Drilling Arrangement includes the use of
either the semisubmersible drilling rig, the FPS Bill Shoemaker, owned by an
affiliate of DeepTech, or a substitute rig capable of drilling in up to 1,500
feet of water. The Drilling Arrangement will become effective upon the
mobilization of a rig to the Company's initial location. The initial contract
term of the Drilling Arrangement is for 90 days or, if sooner, the completion
of the Company's initial drilling operation and the mobilization of the rig to
another location. The Company may, at its option, extend the initial contract
term through (i) three successive one well options or (ii) two successive one
year terms. Under the terms of the Drilling Arrangement, the Company has
committed to pay Sedco Forex a drilling rate of $70,000 per day with a standby
rate of $66,700 per day. As security for its obligations under the Drilling
Arrangement, the Company is required to post an irrevocable letter of credit or
cash collateral of $6.3 million, which amount is equal to the aggregate
operating day rate for the contract term. In the event that the Company
exercises its option to extend the Drilling Arrangement, the Company and Sedco
Forex must agree upon additional security for the extension period. During the
term of the Drilling Arrangement, the Company has the right to sub-contract the
rig to other operators. If the rig is sub-contracted to another operator, the
Company will receive the difference between the sub-contract rate and the above
agreed upon rates, if any. The FPS Bill Shoemaker is owned by an affiliate of
DeepTech and operated by Sedco Forex under a charter agreement. Sedco Forex
has the right to substitute a similar drilling rig for the FPS Bill Shoemaker
in the event the FPS Bill Shoemaker is unavailable due to a previously
submitted bid for work offshore Canada. In the event Sedco Forex elects to
carry out such rig substitution, the Company has (i) an option to use the FPS
Bill Shoemaker in the Newfoundland Grand Banks Area rather than the substitute
rig to complete the initial contract term prior to the use by the third party,
subject to availability, and subject to higher contract rates to account for
the additional costs incurred by Sedco Forex as a result of operations offshore
Canada, and (ii) an additional option, upon completion of the third party work
and subject to the use of the rig for certain other projects, to contract to
use the rig for the drilling of one well at the then prevailing contract price.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Part I of this
quarterly report.
GENERAL
Tatham Offshore is an independent energy company engaged in the development and
production of, and the exploration for, offshore oil and gas reserves, with
activities concentrated primarily in the Flextrend (water depths of 600 to
1,500 feet) and Deepwater (water depths greater than 1,500 feet) areas of the
Gulf. The Company's current portfolio of mineral leaseholds consists of 15
offshore oil and gas leases in the Gulf which include producing properties and
undeveloped acreage.
The following discussion is intended to assist in the understanding of the
Company's financial condition and results of operations for the three months
ended September 30, 1996.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared with Three Months Ended
September 30, 1995
Revenue from oil and gas sales totaled $4.5 million for the three months ended
September 30, 1996 as compared with $1.5 million for the three months ended
September 30, 1995. During the three months ended September 30, 1996, the
Company sold 1,475 MMcf of gas and 60,640 barrels of oil at average prices of
$2.15 per thousand cubic feet ("Mcf") and $21.87 per barrel, respectively.
During the same period in 1995, the Company sold 236 MMcf of gas and 72,500
barrels of oil at average prices of $1.54 per Mcf and $16.02 per barrel,
respectively. The increase in oil and gas revenue is due primarily to
production initiated from the Company's Viosca Knoll Block 817 (Phar Lap)
project and higher oil and gas prices partially offset by lower oil production
from the Company's Ewing Bank 914 #2 well.
Production and operating expenses for the three months ended September 30, 1996
totaled $1.9 million as compared with $5.8 million for the same period in 1995.
The decrease in production and operating expenses is primarily comprised of (i)
a decrease of $1.4 million in transportation services primarily related to the
restructuring of certain transportation agreements with the Partnership, (ii) a
decrease in workover and repair expenses of $2.0 million and (iii) a net
decrease in operating costs related to Viosca Knoll, Ewing Bank, West Delta,
West Cameron and Ship Shoal properties of $0.5 million.
Exploration expenses for the three months ended September 30, 1996 totaled $0.1
million as compared with $0.2 million for the three months ended September 30,
1995. Exploration costs during the three months ended September 30, 1996 and
1995 included expenses incurred under the amended technology services agreement
with an affiliate of the Company.
Depreciation, depletion and amortization totaled $1.0 million for the three
months ended September 30, 1996 as compared with $0.1 million for the three
months ended September 30, 1995. Depreciation, depletion and amortization for
the three months ended September 30, 1996 reflected costs applicable to the
Company's investment in the West Delta 35 project, the Ewing Bank 914 #2 well
and the Viosca Knoll Block 817 project. Depreciation, depletion and
amortization for the three months ended September 30, 1995 reflected costs
applicable to the Company's investment in the West Delta 35 project and the
Ewing Bank 914 #2 well. The increase in depreciation, depletion and
amortization expense is primarily attributable to the initiation of production
from the Viosca Knoll Block 817 project.
General and administrative expenses, including the management fee allocated
from DeepTech, for the three months ended September 30, 1996 were $1.2 million
as compared with $2.2 million for the same period in 1995. The decrease in
general and administrative expenses for the three months ended September 30,
1996 reflected a decrease in direct general and administrative expenses of
$0.2 million and a decrease in staff and overhead expenses allocated to the
Company under its management agreement with DeepTech of $0.8 million. As a
result of DeepTech's reduction of services provided to the Company, the Company
and DeepTech amended the management agreement effective July 1, 1996 to provide
for a 24% overhead allocation as compared to a 40% overhead allocation during
the three months ended September 30, 1995.
10
<PAGE> 11
Operating income for the three months ended September 30, 1996 was $0.3 million
as compared with an operating loss of $6.7 million for the three months ended
September 30, 1995. The change in operating income (loss) was due to the items
discussed above.
During the three months ended September 30, 1995, the Company recognized an
$11.3 million gain related to the sale of its working interests in three oil
and gas properties to Flextrend Development Company, L.L.C. ("Flextrend
Development"), a subsidiary of the Partnership, as a result of the Company
waiving a portion of its options to prepay the existing Payout Amount (as
discussed below) and receive a reassignment of its working interests.
Interest expense, net of interest income, for each of the three months ended
September 30, 1996 and 1995 totaled $2.0 million. For the three months ended
September 30, 1996 and 1995, $1.8 million of the interest expense was
attributable to interest payable to DeepTech on the Subordinated Notes.
After considering $1.0 million of preferred stock dividends in arrears, the
Company's net loss available to common shareholders for the three months ended
September 30, 1996 was $2.7 million as compared with net income available to
common shareholders for the three months ended September 30, 1995 of $2.5
million.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. The Company intends to satisfy its immediate capital
requirements and other working capital needs primarily from cash on hand, cash
generated from continuing operations and proceeds from the exercise of
outstanding Warrants. At September 30, 1996, the Company had $11.9 million of
cash and cash equivalents.
Cash from continuing operations is derived primarily from production from the
Company's Viosca Knoll Block 817 project which is currently producing a total
of approximately 100 MMcf per day. Tatham Offshore currently owns a 25%
working interest in the Viosca Knoll Block 817 project which interest is
subject to a production payment equal to 25% of the net operating cash flow
from such working interest.
Tatham Offshore also has producing wells at Ewing Bank 914 and at its Silent
Beauty project at West Delta Block 35 which contribute to cash from continuing
operations. The Company owns a 100% working interest in the Ewing Bank 914 #2
well and a 38% working interest in the Silent Beauty project. The Ewing Bank
914 #2 well is currently producing at a rate of approximately 725 barrels of
oil, 1.9 MMcf of gas and 2,050 barrels of water per day.
As a result of a rights offering in February 1996, the Company received $12.6
million in gross proceeds ($11.3 million in net proceeds) pursuant to the
exercise of Rights to purchase 25,120,948 Warrants at $.50 per warrant. As of
October 1, 1996, a total of 18,791,409 Warrants had been exercised to purchase
an equivalent number of shares of Series A and B Preferred Stock at $1.00 per
share which generated an additional $18.8 million in proceeds to the Company.
As of October 1, 1996, there were 6,329,539 Warrants outstanding. Each of the
remaining Warrants may be exercised to purchase one share of Series C Preferred
Stock, which has a liquidation preference of $.50 per share, at any time prior
to 5:00 p.m. New York time on January 1, 1997 at the purchase price of $1.00
per share. Each Warrant remaining unexercised at 5:00 p.m. New York time on
January 1, 1997 shall be automatically converted, without any action on the
part of the holder thereof, into one share of Mandatory Redeemable Preferred
Stock, which shall have a liquidation preference of $0.50 per share and shall
be mandatorily redeemable by the Company under certain circumstances. At any
time from July 1, 1996 until December 31, 1998, each share of Series A, B or C
Preferred Stock may be exchanged for four Exchange Warrants each of which shall
entitle the holder thereof to purchase one share of Common Stock at $0.653 per
share. The Exchange Warrants will expire July 1, 1999. Alternatively, at any
time after July 1, 1996, the holder of any shares of Series A, B or C Preferred
Stock will have the right, at the holder's option, to convert the liquidation
value of such stock and accrued and unpaid dividends into shares of Common
Stock at $0.653 per share. On and after July 1, 1997, the Convertible
Exchangeable Preferred
11
<PAGE> 12
Stock will be redeemable at the option of the Company. Through October 31,
1996, a total of 320,864 shares of Series A Preferred Stock had been converted
into 737,986 shares of Common Stock.
Uses of Cash. The Company's primary uses of cash consist of (i) amounts due
under the Subordinated Notes, (ii) expenses associated with operating its
producing properties, including its production payment and leasehold
abandonment liabilities, (iii) capital expenditures necessary to fund its
portion of the development costs attributable to its working interests,
including its obligations under the Drilling Arrangement, (iv) platform access
fees and processing and commodity charges payable to the Partnership and (v)
payments due under the management agreement with DeepTech.
As of September 30, 1996, Tatham Offshore had $60.0 million aggregate principal
amount of Subordinated Notes outstanding, the maximum principal amount of
Subordinated Notes issuable, all of which were held by DeepTech. The
Subordinated Notes bear interest at a rate of 11 3/4% per annum, payable in
arrears (approximately $1.8 million per quarter); provided, however, that
effective July 1, 1997, interest shall accrue at a rate of 13% per annum. The
principal amount of the Subordinated Notes is payable in seven equal annual
installments of approximately $8.6 million each commencing August 1, 1999. For
the three months ended September 30, 1996, Tatham Offshore paid DeepTech $1.8
million in interest on the Subordinated Notes.
During the year ended June 30, 1996, the Company began incurring abandonment
costs related to its West Cameron 436 property, in which it owns a 47% working
interest. The West Cameron 436 property ceased production in 1994. The total
estimated abandonment obligation, net to the Company's working interest, of
$1.2 million was fully accrued as of June 30, 1995. Through September 30,
1996, the Company has incurred $0.9 million of the estimated abandonment costs.
Tatham Offshore is obligated to pay to the Partnership commodity charges, based
on the volume of oil and gas transported or processed, under certain
transportation agreements. Also, the Company is obligated to pay to the
Partnership $1.6 million in platform access fees annually relative to its 25%
working interest in its Phar Lap property.
The management fee agreement between the Company and DeepTech provides for an
annual management fee which is intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to Tatham Offshore. Effective July 1, 1996, the management agreement
was amended to provide for an annual management fee of 24% of DeepTech's
overhead expenses. For the three months ended September 30, 1996, the Company
was charged $0.7 million in management fees pursuant to this agreement.
Liquidity Outlook. During the year ended June 30, 1995 and the first six
months of fiscal 1996, Tatham Offshore experienced liquidity problems resulting
primarily from substantial negative cash flow from operations. In order to
improve liquidity and partially address its capital requirements, Tatham
Offshore (i) sold, subject to certain reversionary rights, all of its
then-existing working interests in its Viosca Knoll Block 817, Garden Banks
Block 72 and Garden Banks Block 117 properties (the "Assigned Properties") to
Flextrend Development for $30 million, (ii) raised additional equity through
the sale of Warrants and Series A and B Preferred Stock, (iii) prepaid certain
of its demand charge obligations through the assignment of certain assets
pursuant to an agreement with the Partnership and (iv) reduced its overhead by
lowering the level of services required under its management agreement with
DeepTech.
Flextrend Development has initiated production from each of the Assigned
Properties. As discussed above, the Phar Lap property is currently producing
approximately 100 MMcf per day. In addition to four producing wells on Garden
Banks Block 72 (Spectacular Bid), which are currently producing approximately
4,100 barrels of oil and 14.5 MMcf of gas per day, an additional well is
currently being drilled. The Garden Banks Block 117 (Spend A Buck) property is
currently producing approximately 2,100 barrels of oil, 3.5 MMcf of gas and
3,100 barrels of water per day from one well. Flextrend Development is
currently drilling a second well at Garden Banks Block 117.
Tatham Offshore is entitled to receive a reassignment of the Assigned
Properties, subject to reduction and conditions as discussed below, after
Flextrend Development has received net revenues equal to the Payout Amount.
12
<PAGE> 13
As of September 30, 1996, the Payout Amount was $90.4 million comprised of (a)
the sum of (i) initial acquisition and transaction costs of $32.1 million, (ii)
development and operating costs of $70.8 million, (iii) prepaid demand charges
of $7.5 million and (iv) interest of $10.1 million reduced by (b) net revenue
of $30.1 million. Tatham Offshore and the Partnership have agreed that in the
event the Company furnishes the Partnership with a financing commitment from a
lender with a credit rating of BBB- or better covering 100% of the then
outstanding Payout Amount, the interest rate utilized to compute the Payout
Amount shall be adjusted from and after the date of such commitment to the
interest rate specified in such commitment, whether utilized or not. At any
time prior to December 10, 1996, Flextrend Development may exercise either of
the following options: (i) to permanently retain 50% of the assigned working
interests in either the Phar Lap property or the Spectacular Bid/Spend A Buck
properties or (ii) to permanently retain 50% of the assigned working interest
in all three of the Assigned Properties in exchange for forgiving 25% in the
case of option (i) or 50% in the case of option (ii) of the then-existing
Payout Amount exclusive of the $7.5 million plus interest added to the Payout
Amount in connection with the restructuring of certain transportation
agreements with the Partnership. In the event Flextrend Development elects to
reduce the Payout Amount, it will become obligated to fund any further
development costs attributable to the Company's portion of the working
interests, such costs to be added to the Payout Amount. Otherwise, any further
development costs will be funded by Flextrend Development on a discretionary
basis, such costs to be added to the Payout Amount. Further, in the event
Flextrend Development forgoes its right to permanently retain a working
interest in all or a portion of the Assigned Properties, it will be entitled to
recover from working interest revenues in respect of the Assigned Properties
all future demand charges payable for platform access and processing, in their
inverse order of maturity, prior to any reassignment to the Company. If
however, Tatham Offshore (i) satisfies in full the future demand charges
payable for platform access and processing, (ii) delivers evidence that it has
received a rating of BBB-, or better, from at least two reputable rating
agencies or (iii) delivers evidence that an entity with a rating of BBB-, or
better, has agreed to guarantee, assume or, to the reasonable satisfaction of
the Partnership, otherwise become responsible for such future demand charges
payable, then Tatham Offshore would receive a reassignment of the Assigned
Properties upon satisfaction of the Payout Amount. In the event the Payout
Amount has been satisfied but none of the above conditions have been met,
Tatham Offshore is entitled to receive one-third (1/3) of the revenues, net of
operating expenses and platform access and processing fees, until such time as
one of the above conditions is met.
In September 1996, the Company entered into the Drilling Arrangement with Sedco
Forex. The Drilling Arrangement includes the use of either the semisubmersible
drilling rig, the FPS Bill Shoemaker, or a substitute rig capable of drilling
in up to 1,500 feet of water. The Drilling Arrangement will become effective
upon the mobilization of a rig to the Company's initial location. The initial
contract term of the Drilling Arrangement is for 90 days or, if sooner, the
completion of the Company's initial drilling operation and the mobilization of
the rig to another location. The Company may, at its option, extend the
initial contract term through (i) three successive one well options or (ii) two
successive one year terms. Under the terms of the Drilling Arrangement, the
Company has committed to pay Sedco Forex a drilling rate of $70,000 per day
with a standby rate of $66,700 per day. As security for its obligations under
the Drilling Arrangement, the Company is required to post an irrevocable letter
of credit or cash collateral of $6.3 million, which amount is equal to the
aggregate operating day rate for the contract term. In the event that the
Company exercises its option to extend the Drilling Arrangement, the Company
and Sedco Forex must agree upon additional security for the extension period.
During the term of the Drilling Arrangement, the Company has the right to
sub-contract the rig to other operators. If the rig is sub-contracted to
another operator, the Company will receive the difference between the
sub-contract rate and the above agreed upon rates, if any. The FPS Bill
Shoemaker is owned by an affiliate of DeepTech and operated by Sedco Forex
under a charter agreement. Sedco Forex has the right to substitute a similar
drilling rig for the FPS Bill Shoemaker in the event the FPS Bill Shoemaker is
unavailable due to a previously submitted bid for work offshore Canada. In the
event Sedco Forex elects to carry out such rig substitution, the Company has
(i) an option to use the FPS Bill Shoemaker in the Newfoundland Grand Banks
Area rather than the substitute rig to complete the initial contract term prior
to the use by the third party, subject to availability, and subject to higher
contract rates to account for the additional costs incurred by Sedco Forex as a
result of operations offshore Canada, and (ii) an additional option, upon
completion of the third party work and subject to the use of the rig for
certain other projects, to contract to use the rig for the drilling of one well
at the then prevailing contract price.
13
<PAGE> 14
The Company currently intends to fund its operations with cash on hand and cash
from continuing operations through at least June 30, 1997. Although the
restructuring of the Company's existing demand charge obligations with the
Partnership, the reduction of its overhead and the initiation of production
from the Viosca Knoll Block 817 field have significantly reduced the Company's
cash flow deficit, the Company does not anticipate generating positive cash
flow prior to the first to occur of (i) obtaining a refinancing commitment
which could allow the Company to reacquire all or a portion of the Assigned
Properties from Flextrend Development, (ii) actual payout of the Payout Amount
and the resulting reversion of all or a portion of the Assigned Properties
which the Company anticipates will occur no sooner than the end of fiscal 1998
or (iii) the initial production from the Company's Sunday Silence field. In
order to initiate production from the Sunday Silence field, the Company will
require substantial additional capital to install a production facility and
drill additional development wells. There can be no assurance, however, that
the Company will be able to obtain additional financing on terms that are
acceptable to the Company.
To meet these additional capital needs, the Company will continue to pursue the
implementation of its business strategy which will focus primarily on (i)
attempting to develop and initiate production from the Company's Sunday Silence
field under a farmout or financing arrangement with an industry partner or
financial institution, (ii) analyzing the results of drilling operations on the
Assigned Properties in an effort to maximize the value of its reversionary
interest and attempting to obtain a financing commitment to reacquire the
properties or, at a minimum, to cause a reduction in the interest rate utilized
in the calculation of the Payout Amount, (iii) attempting to sell or farmout
interests in its other properties, (iv) attempting to reinitiate production at
Genuine Risk (Ship Shoal Block 331) under a farmout arrangement with an
industry partner or, alternatively, selling the property or salvaging the
platform and equipment located at Genuine Risk for sale to a third party or
redeployment on another property, (v) seeking to acquire interests in producing
properties on a carried or financed basis and (vi) pursuing the possible merger
of the Company with an industry partner with sufficient capital resources
available to meet the capital requirements for the development of the combined
entity's properties.
The ability of the Company to satisfy its capital needs beyond those funded
with the proceeds from the sale of the equity securities offered pursuant to
the rights offering will depend upon its success in implementing its business
strategy, particularly its ability to develop and initiate production from the
Sunday Silence field. Although the Company has pursued farmout and outside
financing arrangements for its Sunday Silence project, as of this date, the
Company has not been able to obtain an acceptable farmout arrangement with an
industry partner or develop a financing arrangement under the current economic
conditions. On November 28, 1995, a federal law was enacted that offers
deepwater royalty relief for certain federal leases located in 200 meters or
greater of water depth in the Gulf. For federal leases acquired prior to
November 20, 1995, an applicant must demonstrate that the proposed new
production for which the royalty relief is sought would not be economic to
develop absent the royalty relief. Proposed interim regulations regarding
application procedures were published by the Minerals Management Service
("MMS") in May 1996. The Company submitted an application under the published
interim regulations in October 1996 and such application is currently being
considered. Under federal law, the MMS has up to 180 days to respond to such
application. Under the new legislation, a minimum of the first 52.5 million
equivalent barrels of oil production from the Sunday Silence project would be
exempt from federal royalties if such relief is granted. The Company believes
that if the requested royalty abatement is granted, the resulting improved
economics for the project will be sufficient to obtain development financing or
an industry farmout arrangement. However, there can be no assurance that the
Company will be able to obtain the requested royalty abatement, enter into a
farmout or financing arrangement on favorable terms, that the Sunday Silence
field will be successfully developed or that production will be initiated
therefrom on a timely basis, if at all.
The Company has never paid dividends on its common or preferred stock. The
Company expects to retain all available earnings generated by its operations
for the growth and development of its business.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
15
<PAGE> 16
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.
TATHAM OFFSHORE, INC.
Date: November 12, 1996 By: /s/ DENNIS A. KUNETKA
___________________________________________
Dennis A. Kunetka
Senior Vice President - Corporate Finance
(Signing on behalf of the Registrant
and as Principal Accounting Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) TATHAM
OFFSHORE INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER
30, 1996 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 11,886
<SECURITIES> 0
<RECEIVABLES> 1,334
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,133
<PP&E> 80,431
<DEPRECIATION> 14,201
<TOTAL-ASSETS> 92,477
<CURRENT-LIABILITIES> 6,448
<BONDS> 0
<COMMON> 262
0
184
<OTHER-SE> 16,722
<TOTAL-LIABILITY-AND-EQUITY> 92,477
<SALES> 4,500
<TOTAL-REVENUES> 4,500
<CGS> 1,947
<TOTAL-COSTS> 2,063
<OTHER-EXPENSES> 956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,117
<INCOME-PRETAX> (1,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,694)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
