<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 0-22892
TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 10, 1997, THERE WERE OUTSTANDING 27,755,727 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...................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1997
(unaudited) and June 30, 1997..............................................................3
Unaudited Consolidated Statement of Operations for
the Three Months Ended September 30, 1997 and 1996, respectively..........................4
Unaudited Consolidated Statement of Cash Flows for
the Three Months Ended September 30, 1997 and 1996........................................5
Consolidated Statement of Stockholders' Equity
(Deficit) for the Three Months Ended September 30, 1997 (unaudited).......................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................11
PART II. OTHER INFORMATION.....................................................................15
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 ......................................................................................16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,979 $ 7,887
Accounts receivable from joint venture partners 151 201
Receivable from affiliates 1,320 1,350
--------- ---------
Total current assets 9,450 9,438
--------- ---------
Oil and gas properties:
Oil and gas properties, at cost, using
successful efforts method 81,396 81,081
Less - accumulated depreciation, depletion,
amortization and impairment 51,727 50,329
--------- ---------
Oil and gas properties, net 29,669 30,752
--------- ---------
Deferred costs 4,731 1,317
--------- ---------
Total assets $ 43,850 $ 41,507
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 3,896 $ 1,385
Accounts payable to affiliates 456 155
--------- ---------
Total current liabilities 4,352 1,540
Obligation under option agreement 61,709 --
Long-term debt to affiliate -- 60,000
Other noncurrent liabilities 7,750 7,663
--------- ---------
73,811 69,203
--------- ---------
Stockholders' equity (deficit) (Note 3):
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of September 30, 1997 and June 30, 1997,
24,343,931 shares issued and outstanding
at September 30, 1997 and June 30, 1997 243 243
Common stock, $0.01 par value, 250,000,000 shares authorized
as of September 30, 1997 and June 30, 1997, 27,655,727
shares and 27,355,727 shares issued and outstanding
at September 30, 1997 and June 30, 1997, respectively 277 274
Additional paid-in capital 84,391 84,225
Accumulated deficit (114,872) (112,438)
--------- ---------
(29,961) (27,696)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 43,850 $ 41,507
========= =========
</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,
--------------------
1997 1996
<S> <C> <C>
Revenue:
Oil and gas sales $ 3,785 $ 4,500
------- -------
Costs and expenses:
Production and operating expenses 1,669 1,947
Exploration expenses 25 116
Depreciation, depletion and amortization 1,485 956
Management fee and general and administrative
expenses allocated from affiliate 1,057 726
General and administrative expenses 375 486
------- -------
4,611 4,231
------- -------
Operating (loss) income (826) 269
Interest income 102 154
Interest expense - affiliate (1,710) (2,117)
------- -------
Net loss (2,434) (1,694)
Preferred stock dividends (984) (997)
------- -------
Net loss available to common shareholders $(3,418) $(2,691)
======= =======
Net loss per common share $ (0.12) $ (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,
----------------------
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,434) $ (1,694)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 1,485 956
Costs and expenses settled by issuance of common stock 169 --
Noncash interest expense related to option agreement 1,709 --
Other -- 549
Changes in operating working capital:
Decrease in accounts receivable from joint
venture partners 50 383
Decrease (increase) in receivable from affiliates 30 (30)
Decrease in prepaid expenses -- 29
Increase (decrease) in accounts payable and accrued
liabilities 2,511 (348)
Increase (decrease) in accounts payable to affiliates 301 (2,692)
-------- --------
Net cash provided by (used in) operating activities 3,821 (2,847)
-------- --------
Cash flows from investing activities:
Additions to oil and gas properties (315) (2,273)
Deferred costs (3,414) --
-------- --------
Net cash used in investing activities (3,729) (2,273)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Series A Preferred Stock -- 12,242
-------- --------
Net cash provided by financing activities -- 12,242
-------- --------
Net increase in cash and cash equivalents 92 7,122
Cash and cash equivalents at beginning of year 7,887 4,764
-------- --------
Cash and cash equivalents at end of period $ 7,979 $ 11,886
======== ========
Cash paid for interest $ -- $ 1,836
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ----------------------- Additional
Number of Number of paid-in Accumulated
Shares Par Value Shares Par Value capital deficit Total
---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 24,344 $ 243 27,356 $ 274 $ 84,225 $ (112,438) $ (27,696)
Issuance of common stock
(unaudited) -- -- 300 3 166 -- 169
Net loss for the three months
ended September 30, 1997
(unaudited) -- -- -- -- -- (2,434) (2,434)
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, September 30, 1997
(unaudited) 24,344 $ 243 27,656 $ 277 $ 84,391 $ (114,872) $ (29,961)
========== ========== ========== ========= ========== ========== ==========
</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"), a Delaware corporation, is an
independent energy company engaged in the development, exploration and
production of oil and gas reserves located primarily offshore the United States
in the Gulf of Mexico (the "Gulf") and offshore eastern Canada, and in the
development of offshore pipeline infrastructure offshore eastern Canada. Tatham
Offshore is an approximately 36%-owned subsidiary of DeepTech International
Inc. ("DeepTech"), a diversified energy company, which, through its affiliates,
is engaged in offshore contract drilling services and the acquisition,
development, production, processing, gathering, transportation and marketing
of, and the exploration for, oil and gas located offshore in the Gulf and
offshore eastern Canada.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic").
North Atlantic is the sponsor of a proposal to construct a substantial natural
gas pipeline offshore Newfoundland and Nova Scotia to the eastern seaboard of
the United States.
In 1996, Tatham Offshore formed a wholly-owned subsidiary, Tatham Offshore
Development Company, Inc. ("Tatham Offshore Development"), a Delaware
corporation, to hold certain of Tatham Offshore's oil and gas leases.
The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company").
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,
1997.
NOTE 2 - RELATED PARTY TRANSACTIONS:
Management Agreement
The management 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 the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the three months ended September 30, 1997, DeepTech charged
Tatham Offshore $1.1 million under this agreement.
Notes Payable to DeepTech
As of June 30, 1997, Tatham Offshore had $60.0 million aggregate principal
amount of Subordinated Convertible Promissory Notes (the "Subordinated Notes")
outstanding, all of which were held by DeepTech.
In September 1997, DeepTech and Tatham Offshore entered into an option
agreement to restructure the Subordinated Notes (the "Restructuring Option
Agreement"). Under the Restructuring Option Agreement, DeepTech agreed to
forgive the next two scheduled interest payments under the Subordinated Notes,
a total of $3.9 million. In exchange, DeepTech received several options from
Tatham Offshore and agreed to restructure the Subordinated Notes by
consummating one of the following transactions: (i) to convert all of the
principal amount outstanding under the Subordinated Notes into shares of Tatham
Offshore common stock at the market price at the time the option is exercised;
(ii) to purchase shares of 6% Senior Preferred Stock of Tatham Offshore with a
liquidation value of $60 million, the proceeds from which would be used to
prepay the Tatham Offshore Subordinated Notes; or (iii) to purchase all of the
outstanding capital stock of Tatham Offshore Development for $60 million, the
proceeds from which would be used to prepay the outstanding balance of the
Subordinated Notes. DeepTech is required to select one of the above
restructuring transactions on or before December 31, 1997.
7
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Tatham Offshore Development holds the leasehold interests in Ewing Bank Blocks
958, 959, 1002 and 1003, collectively, the Sunday Silence Project. Under the
Restructuring Option Agreement, Tatham Offshore has the right to pursue the
sale, farmout or other disposition of the Sunday Silence Project during the
option period. In the event that Tatham Offshore enters into a sales agreement
for 100% of Tatham Offshore Development or the Sunday Silence Project prior to
the expiration of the option period, DeepTech has the further option to receive
50% of the cash proceeds from such transaction as a prepayment of the
Subordinated Notes. If DeepTech elects this option, DeepTech has agreed to
convert the remaining principal amount of the Subordinated Notes into common
stock of Tatham Offshore at the market price. For purposes of determining the
market price of Tatham Offshore's common stock under this agreement, the
parties have agreed that the market price shall be the average of the closing
prices for the ten trading days immediately preceding the exercise of the
option. DeepTech's option to acquire Tatham Offshore Development also includes
all of Tatham Offshore's interest in the Drilling Arrangement discussed in Note
5. Tatham Offshore agreed not to sell less than 100% of its interest in Tatham
Offshore Development pending the exercise by DeepTech of one of its options.
As a result of the terms of the Restructuring Option Agreement, the
Subordinated Notes and the related interest payable of $1.7 million accumulated
from July 1, 1997 through September 18, 1997, the date on which the DeepTech
Board of Directors approved the Restructuring Option Agreement, are included in
obligation under option agreement on the accompanying consolidated balance
sheet at September 30, 1997.
NOTE 3 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity as of
September 30, 1997:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Senior Preferred Stock (a) 7,500 $1,000 per share 9% $ 1,125,000 (e)
Series A Preferred Stock (b) 17,932,513 $1.50 per share 12% $ 4,035,000 (f)(g)
Series B Preferred Stock 74,379 $1.00 per share 8% $ 6,000 (f)(g)
Series C Preferred Stock (c) 1,338,162 $0.50 per share 4% $ 20,000 (f)(g)
Mandatory Redeemable
Preferred Stock (d) 4,991,377 $0.50 per share -- $ -- (g)(h)
Common Stock 27,655,727 -- -- $ -- --
</TABLE>
- ---------------
(a) Each share of the Senior Preferred Stock is senior to all other classes
of Tatham Offshore preferred and common stock in the case of
liquidation, dissolution or winding up of Tatham Offshore. Leviathan Gas
Pipeline Partners, L.P. (the "Partnership"), an affiliate of the
Company, holds all outstanding shares.
(b) DeepFlex Production Services, Inc. ("DeepFlex Services"), an affiliate
of Tatham Offshore, holds 4,670,957 shares of the outstanding Series A
Preferred Stock.
(c) DeepFlex Services holds 1,016,957 shares of the outstanding Series C
Preferred Stock.
(d) DeepFlex Services holds 4,312,086 shares of the outstanding Mandatory
Redeemable Preferred Stock.
(e) The Partnership has made an irrevocable offer to the Company to sell all
or any portion of the Senior Preferred Stock to the Company or its
designee at a price equal to $1,000 per share, plus interest thereon at
9% per annum less the sum of any dividends paid thereon. In the event
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.
(f) At any time 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 Tatham Offshore common stock at $0.653 per share.
The Exchange Warrants expire on July 1, 1999. Alternatively, at any
time, the holder of any shares may convert the liquidation value and
accrued and unpaid dividends into shares of Tatham Offshore common stock
at $0.653 per share. Through September 30, 1997, a total of 784,517
shares of Series A Preferred Stock had been converted into 1,855,407
shares of Tatham Offshore common stock.
(g) On or after July 1, 1997, redeemable at the option of the Company.
(h) 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 Tatham Offshore
common stock pursuant to the exercise of Exchange Warrants, subject to
certain conditions.
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE:
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 27,407,901 shares and 25,927,636 shares for the three months ended
September 30, 1997 and 1996, respectively.
SFAS No. 128, "Earnings per Share", was issued in February 1997. SFAS No. 128
establishes new guidelines for computing and presenting earnings per share and
is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Pro forma basic net loss per share for the
Company is equal to the primary loss per share for the three months ended
September 30, 1997 and 1996 as presented on the accompanying consolidated
statement of operations.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
Drilling Arrangement
In September 1996, the Company entered into a drilling arrangement (the
"Drilling Arrangement") with Sedco Forex Division of Schlumberger Technology
Corporation ("Sedco Forex") to provide the Company with the use of a
semisubmersible drilling rig capable of drilling in water depths of up to 1,500
feet. The Drilling Arrangement will become effective upon the mobilization of
the rig to the Company's initial drilling location. Once effective, the
Drilling Arrangement will last for 90 days or, if sooner, the date on which the
Company completes its initial drilling operations and the rig is mobilized to
another location. After the initial well, the Company may, at its option,
extend the Drilling Arrangement through three successive one-well options or
two successive one-year terms.
Under the terms of the Drilling Arrangement, the Company has committed to pay
Sedco Forex a drilling rate of $70,000 per day for the initial well. As
security for its obligations under the Drilling Arrangement, the Company will
be required to post an irrevocable letter of credit or cash collateral of $6.3
million, which amount is equal to the aggregate operating dayrate for the
initial contract well. If the Company elects to extend the Drilling
Arrangement, the dayrate for the three well extension option would be $75,000
per day. If the Company elects to extend the Drilling Arrangement under the
one-year options, the dayrate for the initial year would be $75,000 per day.
The dayrate for the second year under this option would be based on prevailing
market rates. Under either of the extension options, 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 subcontract the
rig to other operators and receive the difference between the subcontract rate
and the above agreed upon rates, if any, subject to a fee of 10% of the
difference payable to Sedco Forex. In order to obtain the dayrates outlined
above, the Company must exercise its option to drill the initial well by the
later of (i) 180 days after June 30, 1997 or (ii) 30 days after the completion
of a well that Sedco Forex has committed to drill for a third party. If the
Company initiates the Drilling Arrangement after the end of the option period,
all drilling dayrates will be at prevailing market rates. The Company has
agreed to fund the capital requirements necessary to upgrade and modify a
drilling rig to drill in water depths of 1,500 feet if it wishes to utilize the
rig in water depths greater than its current water depth rating. Tatham
Offshore estimates that the capital costs required for the upgrade would total
approximately $22 million.
The Company has a second option under the Drilling Arrangement to utilize a rig
offshore eastern Canada for the drilling of one well, at the existing contract
rate, following the completion of drilling activity for a third party.
The Nasdaq National Market
On October 7, 1997, Tatham Offshore received notification from The Nasdaq Stock
Market, Inc. ("Nasdaq") that because the Company had reported losses from
operations and/or net losses in three of the past four fiscal years and had a
net tangible asset value of less than $4.0 million as of June 30, 1997, Tatham
Offshore no longer met the listing requirements for continued inclusion on The
Nasdaq National Market. On October 20, 1997, Tatham Offshore responded to
Nasdaq's notification by detailing the pro forma effect of each of the three
options under the Restructuring Option Agreement with DeepTech. Under each
option, the Company's pro forma net tangible asset
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
value is in excess of $4.0 million as of December 31, 1997, the date on which
DeepTech must exercise one of the three options. However, on November 6, 1997,
Tatham Offshore received notification from Nasdaq that its securities were
scheduled to be removed from The Nasdaq National Market effective with the
opening of business on November 13, 1997. On November 10, 1997, Tatham Offshore
filed a request for an oral hearing with Nasdaq which allows Tatham Offshore to
maintain its listing on The Nasdaq National Market pending the outcome of the
hearing. In the event Nasdaq delists Tatham Offshore's common stock, the
holders thereof could suffer a decrease in marketability of their shares and
the liquidity of their investment in Tatham Offshore's common stock and its
preferred stocks which are convertible into common stock, which may have a
material adverse effect on the market value of Tatham Offshore's common stock.
On October 22, 1997, Tatham Offshore received a notification from Nasdaq that
because Tatham Offshore failed to maintain a closing bid price greater than or
equal to $1.00 per share of its common stock for the last ten consecutive trade
dates, Tatham Offshore no longer met the listing requirements for continued
inclusion on The Nasdaq National Market. On November 13, 1997, the shareholders
of Tatham Offshore approved the Board of Directors to effect a reverse stock
split of up to ten-for-one which, when and if effected, should allow the bid
price of Tatham Offshore's common stock to be in excess of the Nasdaq minimum
price requirement.
Other
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 operations of
the Company. Various legal actions 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 consolidated financial position or
results of operations of the Company.
The Company anticipates substantial future capital expenditures associated with
the full development of its oil and gas properties and the North Atlantic
pipeline project. Realization of the full potential of the Company's properties
and the North Atlantic pipeline project is dependent upon the ability to obtain
sufficient additional capital or project financing.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
quarterly report and is intended to assist in the understanding of the
Company's financial condition and results of operations for the three months
ended September 30, 1997.
GENERAL
Tatham Offshore is an independent energy company engaged in the development,
exploration and production of oil and gas reserves located primarily in the
flextrend and deepwater areas of the Gulf and offshore eastern Canada, and in
the development of offshore pipeline infrastructure offshore eastern Canada.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenue from oil and gas sales totaled $3.8 million for the three months ended
September 30, 1997 as compared with $4.5 million for the three months ended
September 30, 1996. During the three months ended September 30, 1997, the
Company sold 1,539 million cubic feet ("MMcf") of gas and 8,855 barrels of oil
at average prices of $2.36 per thousand cubic feet ("Mcf") and $17.54 per
barrel, respectively. During the same period in 1996, the Company sold 1,475
MMcf of gas and 60,640 barrels of oil at average prices of $2.15 per Mcf and
$21.87 per barrel, respectively. The decrease in oil and gas sales is primarily
a result of no oil and gas production from the Company's Ewing Bank 914 #2 well
which was shut-in in May 1997 and lower oil prices partially offset by
increased oil and gas production from the Company's Viosca Knoll Block 817 and
higher gas prices.
Production and operating expenses for the three months ended September 30, 1997
totaled $1.7 million as compared with $1.9 million for the same period in 1996.
The decrease of $0.2 million is primarily comprised of a net decrease of $0.8
million in the cost of transportation services and production, operating and
workover expenses offset by an increase of $0.6 million related to a production
payment equal to 25% of the net operating cash flow from the Company's working
interest in the Viosca Knoll Block 817.
Exploration expenses for the three months ended September 30, 1997 totaled
$25,000 as compared with $0.1 million for the three months ended September 30,
1996. Exploration expenses primarily included delay rentals and minimum
royalties.
Depreciation, depletion and amortization totaled $1.5 million for the three
months ended September 30, 1997 as compared with $1.0 million for the three
months ended September 30, 1996. The increase is primarily attributable to the
initiation of production from the first well at Viosca Knoll Block 817 in
December 1995 and from an additional seven wells during 1996.
General and administrative expenses, including the management fee allocated
from DeepTech, for the three months ended September 30, 1997 totaled $1.4
million as compared with $1.2 million for the same period in 1996. The increase
reflected an increase in staff and overhead expenses allocated to the Company
under its management agreement with DeepTech of $0.3 million offset by a
decrease in direct general and administrative expenses of $0.1 million. Tatham
Offshore amended its management agreement with DeepTech effective July 1, 1997
to provide for a 26% overhead allocation as compared to a 24% overhead
allocation during the three months ended September 30, 1996.
Operating loss for the three months ended September 30, 1997 was $0.8 million
as compared with operating income of $0.3 million for the three months ended
September 30, 1996. The change in operating income was due to the items
discussed above.
Interest income for the three months ended September 30, 1997 totaled $0.1
million as compared with $0.2 million for the same period in 1996 and included
interest income from available cash.
11
<PAGE> 12
Interest expense for the three months ended September 30, 1997 totaled $1.7
million as compared with $2.1 million for the three months ended September 30,
1996 and primarily relates to interest under the Subordinated Notes. See Item
1. "Consolidated Financial Statements -- Note 2 -- Related Party Transactions
- -- Notes Payable to DeepTech."
After taking into account $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, 1997 was $3.4 million, or $0.12 per share, as compared with
net loss available to common shareholders for the three months ended September
30, 1996 of $2.7 million, or $0.10 per share, after taking into account $1.0
million of preferred stock dividends in arrears.
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 and
cash generated from continuing operations. At September 30, 1997, the Company
had $8.0 million of cash and cash equivalents. However, as described below, the
Company will need to raise substantial capital (equity, debt or both) or enter
into other arrangements (such as drilling and development commitments) to
develop its current inventory of properties and prospects to allow the Company
to generate operating cash flow to fund on-going activities and operations.
Cash from continuing operations is derived primarily from production from the
Company's working interest in Viosca Knoll Block 817 which is currently
producing a total of approximately 70 MMcf of gas and 170 barrels of oil per
day. The Company's current 25% working interest in the Viosca Knoll Block 817
is subject to a production payment equal to 25% of the net operating cash flow
from such working interest. For the three months ended September 30, 1997, the
Company's net revenue from this property was reduced by $0.6 million of
production payment obligations.
Tatham Offshore also has producing wells at its West Delta Block 35 which
contribute to cash from continuing operations. The Company owns a 38% working
interest in West Delta Block 35 which is currently producing at a rate of
approximately 6 MMcf of gas and 70 barrels of oil per day.
The Company anticipates that declining revenue from currently producing
properties will need to be replaced by revenue from production from the Sunday
Silence Project, the North Atlantic pipeline project or from other sources.
Uses of Cash. The Company's primary uses of cash consist of (i) expenses
associated with operating its producing properties, including its leasehold
abandonment liabilities, (ii) capital expenditures necessary to fund its
portion of the development costs attributable to its working interests,
including its obligations under the Drilling Arrangement, (iii) platform access
fees and processing and commodity charges payable to the Partnership, (iv)
payments due under the management agreement with DeepTech and (v) expenditures
related to the North Atlantic pipeline project currently being proposed.
Tatham Offshore is obligated to pay to the Partnership commodity charges, based
on the volume of oil and gas transported or processed, under certain
transportation agreements. The Company is also obligated to pay to the
Partnership $1.6 million in platform access fees annually relative to its 25%
working interest in its Viosca Knoll Block 817.
The management fee agreement between Tatham Offshore and DeepTech provides for
an annual management fee which is intended to reimburse DeepTech for the
estimated costs of its operational, financial, accounting and administrative
services provided to Tatham Offshore. Effective July 1, 1997, the management
agreement was amended to provide for an annual management fee of 26% of
DeepTech's overhead expenses. For the three months ended September 30, 1997,
DeepTech charged Tatham Offshore $1.1 million in management fees pursuant to
this agreement.
North Atlantic is the sponsor of a proposal to build a major natural gas
pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire.
As of September 30, 1997, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic, has incurred $4.7 million of
pre-developmental costs in connection with
12
<PAGE> 13
such project. The Company anticipates that pre-developmental costs associated
with the North Atlantic pipeline project could ultimately reach approximately
$10 million by the spring of 1998 and the ultimate capital costs of the
project, if approved, could reach $3.0 billion to $3.5 billion. During October
1997, North Atlantic filed applications with the Federal Energy Regulatory
Commission and its Canadian counterpart, the National Energy Board, for
approval of its proposed subsea pipeline. Action by the Canadian and United
States regulatory authorities on North Atlantic's pipeline proposal is expected
to occur by mid 1998.
Liquidity Outlook. In order to improve liquidity and partially address its
capital requirements, Tatham Offshore entered into the Restructuring Option
Agreement with DeepTech in September 1997.
Under the Restructuring Option Agreement, DeepTech agreed to forgive the next
two scheduled interest payments under the Subordinated Notes, a total of $3.9
million. In exchange, DeepTech received several options from Tatham Offshore
and agreed to restructure the Subordinated Notes by consummating one of the
following transactions: (i) to convert all of the principal amount outstanding
under the Subordinated Notes into shares of Common Stock at the market price at
the time the option is exercised; (ii) to purchase shares of 6% Senior
Preferred Stock of Tatham Offshore with a liquidation preference value of $60
million, the proceeds from which would be used to prepay the outstanding
balance of the Subordinated Notes; or (iii) to purchase all of the outstanding
capital stock of Tatham Offshore Development for $60 million, the proceeds from
which would be used to prepay the outstanding balance of the Subordinated
Notes. DeepTech is required to select one of the above restructuring
transactions on or before December 31, 1997. As a result, the Company will no
longer be obligated to make interest or principal payments under the
Subordinated Notes. As a result of entering into the Restructuring Option
Agreement with DeepTech, the Company reclassified its $60 million of
Subordinated Notes and the related interest payable of $1.7 million to
"obligation under option agreement" on its consolidated balance sheet at
September 30, 1997, pending DeepTech's exercise of one of its options described
above. Additionally, the Company believes that by consummating one of the above
restructuring transactions that it will be able to continue to maintain its
listing on The Nasdaq National Market.
Tatham Offshore Development holds the leasehold interests in the Sunday Silence
Project. Under the Restructuring Option Agreement, Tatham Offshore has the
right to pursue the sale, farmout or other disposition of the Sunday Silence
Project during the option period. In the event that Tatham Offshore enters into
a sales agreement for 100% of Tatham Offshore Development or the Sunday Silence
Project prior to the expiration of the option period, DeepTech has the further
option to receive 50% of the cash proceeds from such transaction as a
prepayment of the Subordinated Notes. If DeepTech elects this option, DeepTech
has agreed to convert the remaining principal amount of the Subordinated Notes
into Common Stock at the market price. For purposes of determining the market
price of Common Stock under this agreement, the parties have agreed that the
market price shall be the average of the closing prices for the ten trading
days immediately preceding the exercise of the option. DeepTech's option to
acquire Tatham Offshore Development also includes all of Tatham Offshore's
interest in the Drilling Arrangement with Sedco Forex for the use of a
semisubmersible drilling rig in the Gulf. Tatham Offshore agreed not to sell
less than 100% of its interest in Tatham Offshore Development pending the
exercise by DeepTech of one of its options.
In September 1996, in order to assure the availability of a drilling rig for
use on the Sunday Silence Project, Tatham Offshore entered into the Drilling
Arrangement with Sedco Forex to provide Tatham Offshore with the use of a
semisubmersible drilling rig capable of drilling in water depths of up to 1,500
feet. The Drilling Arrangement will become effective upon the mobilization of
the rig to Tatham Offshore's initial drilling location. Once effective, the
Drilling Arrangement will last for 90 days or, if sooner, the date on which
Tatham Offshore completes its initial drilling operations and the rig is
mobilized to another location. After the initial well, Tatham Offshore may, at
its option, extend the Drilling Arrangement through three successive one well
options or two successive one year terms. See Item 1. "Consolidated Financial
Statements -- Note 5 -- Commitments and Contingencies -- Drilling Arrangement."
The Company currently intends to fund its immediate cash requirements with cash
on hand and cash from continuing operations. The Company generated
approximately $0.7 million in positive operating cash flow for the three months
ended September 30, 1997. Tatham Offshore does not anticipate generating
significant positive operating cash flow prior to the first to occur of (i) the
completion of the initial phase of the pipeline proposed by North Atlantic or
(ii) the initial production from its Sunday Silence Project.
13
<PAGE> 14
The ability of the Company to satisfy its future capital needs will depend upon
its ability to raise additional capital and to successfully implement its
business strategy, particularly its ability to obtain regulatory approval and
financing for its North Atlantic pipeline project and initiate production from
the Sunday Silence Project. Tatham Offshore anticipates that the new pipeline
will be constructed and owned by a consortium of Canadian and United States
companies once regulatory approval is obtained. In addition, the Company
believes that since the royalty abatement has been granted, the resulting
improved economics for the Sunday Silence Project should be sufficient to
obtain development financing or an industry farmout arrangement. There can be
no assurance, however, that Tatham Offshore will be able to obtain regulatory
approval, joint venture partners or adequate financing for these projects.
Tatham Offshore has never declared or paid dividends on its common or preferred
stock. Tatham Offshore expects to retain all available earnings generated by
its operations for the growth and development of its business.
On October 7, 1997, Tatham Offshore received notification from Nasdaq that
because the Company had reported losses from operations and/or net losses in
three of the past four fiscal years and had a net tangible asset value of less
than $4.0 million as of June 30, 1997, Tatham Offshore no longer met the
listing requirements for continued inclusion on The Nasdaq National Market. On
October 20, 1997, Tatham Offshore responded to Nasdaq's notification by
detailing the pro forma effect of each of the three options under the
Restructuring Option Agreement with DeepTech. Under each option, the Company's
pro forma net tangible asset value is in excess of $4.0 million as of December
31, 1997, the date on which DeepTech must exercise one of the three options.
However, on November 6, 1997, Tatham Offshore received notification from Nasdaq
that its securities were scheduled to be removed from The Nasdaq National
Market effective with the opening of business on November 13, 1997. On November
10, 1997, Tatham Offshore filed a request for an oral hearing with Nasdaq which
allows Tatham Offshore to maintain its listing on The Nasdaq National Market
pending the outcome of the hearing. In the event Nasdaq delists Tatham
Offshore's common stock, the holders thereof could suffer a decrease in
marketability of their shares and the liquidity of their investment in Tatham
Offshore's common stock and its preferred stocks which are convertible into
common stock, which may have a material adverse effect on the market value of
Tatham Offshore's common stock.
On October 22, 1997, Tatham Offshore received a notification from Nasdaq that
because Tatham Offshore failed to maintain a closing bid price greater than or
equal to $1.00 per share of its common stock for the last ten consecutive trade
dates, Tatham Offshore no longer met the listing requirements for continued
inclusion on The Nasdaq National Market. On November 13, 1997, the shareholders
of Tatham Offshore approved the Board of Directors to effect a reverse stock
split of up to ten-for-one which, when and if effected, should allow the bid
price of Tatham Offshore's common stock to be in excess of the Nasdaq minimum
price requirement.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "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's results of operations and financial condition are: (i)
competitive practices in the industry in which the Company competes, (ii) the
impact of current and future laws and government regulations affecting the
industry in general and the Company's operations in particular, (iii)
environmental liabilities to which the Company may become subject in the future
that are not covered by an indemnity or insurance, (iv) the impact of oil and
natural gas price fluctuations, (v) the production rates and reserve estimates
associated with the Company's producing oil and gas properties and (vi)
significant changes from expectations of capital expenditures and operating
expenses and unanticipated project delays. The Company disclaims any obligation
to update any forward-looking statements to reflect events or circumstances
after the date hereof.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment to First Amended and Restated
Management Agreement Between DeepTech
International Inc. and Tatham Offshore, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on July 21, 1997.
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 14, 1997 By: /s/ E. LYNN HILL
------------------------------------------
E. Lynn Hill
Chief Financial Officer
(Signing on behalf of the Registrant and as
Principal Financial Officer)
Date: November 14, 1997 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
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Fifth Amendment to First Amended and Restated Management
Agreement Between DeepTech International Inc. and Tatham
Offshore, Inc.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIFTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND TATHAM OFFSHORE, INC.
This Fifth Amendment dated as of July 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending the
First Amended and Restated Management Agreement dated as of November 10, 1993
(the "Agreement", as amended) between DeepTech International Inc. and Tatham
Offshore, Inc. Unless otherwise defined in the Amendment, all capitalized terms
herein shall have the meanings ascribed to them in the Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend certain compensation and other provisions included in the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Subsection 3.1. Section 3.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing
it with the following:
3.1 Fee. Prior to July 1, 1993, the annual compensation
due DII from TOI for services provided pursuant to
this Agreement shall accrue in accordance with the
original terms and conditions of the Agreement prior
to any amendments. On and as of July 1, 1993 through
and including October 31, 1995, the annual
compensation (prorated for any portion of a year)
due DII from TOI for services provided pursuant to
this Agreement shall be (i) a base fee of
$2,000,000.00 plus (ii) 40% of DII's Unreimbursed
Overhead, if any. On and as of November 1, 1995
through and including June 30, 1996, the annual
compensation (prorated for any portion of a year)
due DII from TOI for services provided pursuant to
this Agreement shall be 27.4% of DII's Overhead. On
and as of July 1, 1996 through and including June
30, 1997, the annual compensation due DII from TOI
for services provided pursuant to this Agreement
shall be 24% of DII's Overhead. On and as of July 1,
1997 through the term of this Agreement, the annual
compensation (prorated for any portion of a year)
due DII from TOI for services provided pursuant to
this Agreement shall be 26% of DII's Overhead.
TOI shall also promptly reimburse DII with respect to amounts incurred
for the direct benefit of TOI.
1
<PAGE> 2
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
DEEPTECH INTERNATIONAL INC. TATHAM OFFSHORE, INC.
By: /s/ Donald V. Weir By: /s/ Eric Lynn Hill
---------------------------- ------------------------------
Donald V. Weir Eric Lynn Hill
Chief Financial Officer Chief Financial Officer
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TATHAM
OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER
30, 1997 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,979
<SECURITIES> 0
<RECEIVABLES> 1,471
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,450
<PP&E> 81,396
<DEPRECIATION> 51,727
<TOTAL-ASSETS> 43,850
<CURRENT-LIABILITIES> 4,352
<BONDS> 61,709
0
243
<COMMON> 277
<OTHER-SE> (30,481)
<TOTAL-LIABILITY-AND-EQUITY> 43,850
<SALES> 3,785
<TOTAL-REVENUES> 3,785
<CGS> 1,669
<TOTAL-COSTS> 1,694
<OTHER-EXPENSES> 1,485
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,710
<INCOME-PRETAX> (2,434)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,434)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
