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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 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 NUMBER. 0-22892
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TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 224-7400
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
WARRANTS
SERIES A 12% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES B 8% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES C 4% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
MANDATORY REDEEMABLE PREFERRED STOCK
EXCHANGE WARRANTS
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 12 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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. X
---
AS OF SEPTEMBER 2, 1997, THERE WERE OUTSTANDING 27,355,727 SHARES OF COMMON
STOCK OF THE REGISTRANT. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE VOTING
STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES WAS AN ESTIMATED $7.0 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
ITEMS 10, 11, 12 AND 13 OF PART III HAVE BEEN OMITTED FROM THIS REPORT,
SINCE TATHAM OFFSHORE WILL FILE WITH THE SECURITIES AND EXCHANGE COMMISSION,
NOT LATER THAN 120 DAYS AFTER THE CLOSE OF ITS FISCAL YEAR, A DEFINITIVE PROXY
STATEMENT, PURSUANT TO REGULATION 14A, WHICH INVOLVES THE ELECTION OF
DIRECTORS. THE INFORMATION REQUIRED BY ITEMS 10, 11, 12 AND 13 OF PART III OF
THIS REPORT, WHICH WILL APPEAR IN THE DEFINITIVE PROXY STATEMENT, IS
INCORPORATED BY REFERENCE INTO THIS ANNUAL REPORT.
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
SECOND AMENDMENT TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1997
INDEX
<TABLE>
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PART I.......................................................................................1
Items 1 & 2 Business and Properties ...................................................1
Item 3. Legal Proceedings.........................................................12
Item 4. Submission of Matters to a Vote of Security Holders ......................12
PART II.....................................................................................13
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters .....13
Item 6. Selected Financial Data...................................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................16
Item 8. Financial Statements and Supplementary Data...............................21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................21
PART III....................................................................................22
Item 10. Directors and Executive Officers of the Registrant........................22
Item 11. Executive Compensation....................................................23
Item 12. Security Ownership of Certain Beneficial Owners and Management ...........23
Item 13. Certain Relationships and Related Transactions............................23
PART IV.....................................................................................24
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..........24
</TABLE>
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The following text is qualified in its entirety by reference to the more
detailed information and consolidated financial statements (including the notes
thereto) appearing elsewhere in this Second Amendment to the Annual Report on
Form 10-K (the "Annual Report"). Unless the context otherwise requires,
references in this Annual Report to "Tatham Offshore" or to the "Company" or its
operations shall mean Tatham Offshore, Inc., a Delaware corporation, and its
subsidiaries. For a description of certain items used herein relating to the oil
and gas industry, see Items 1 & 2. "Business and Properties -- Certain
Definitions."
PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
OVERVIEW
Tatham Offshore, an independent energy company founded in 1989, is 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")
focusing principally on the flextrend and deepwater areas, and in the
development of offshore pipeline infrastructure offshore eastern Canada.
As of June 30, 1997, approximately 36.6% of the issued and outstanding
common stock of Tatham Offshore, par value $0.01 per share (the "Common
Stock"), was owned by 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,
transportation and marketing of, and the exploration for, oil and gas located
primarily offshore the United States in the Gulf and offshore eastern Canada.
DeepTech also owns $60 million principal amount of Subordinated Convertible
Promissory Notes of the Company (the "Subordinated Notes"). DeepFlex Production
Services, Inc. ("DeepFlex"), a wholly-owned subsidiary of DeepTech, owns (i)
4,670,957 shares of the Company's Series A 12% Convertible Exchangeable
Preferred Stock, (ii) 1,016,957 shares of the Company's Series C 4% Convertible
Exchangeable Preferred Stock and (iii) 4,312,086 shares of the Company's
Mandatory Redeemable Preferred Stock. Leviathan Gas Pipeline Partners, L.P.
(the "Partnership"), an affiliate of the Company, owns 7,500 shares of the
Company's 9% Senior Convertible Preferred Stock. The Common Stock is traded on
The Nasdaq Stock Market ("Nasdaq") under the symbol "TOFF". The closing price
of the Common Stock on Nasdaq was $.50 per share on September 2, 1997. The
Series A 12% Convertible Exchangeable Preferred Stock, the Series C 4%
Convertible Exchangeable Preferred Stock and the Mandatory Redeemable Preferred
Stock are traded in the over-the-counter market under the symbols "TOFFL,"
"TOFFN" and "TOFFM," respectively. See Item 5. "Market for Registrant's Common
Stock and Related Stockholder Matters."
RECENT EVENTS
North Atlantic Pipeline Project. In June 1997, Tatham Offshore Canada, Ltd.
("Tatham Offshore Canada"), a wholly-owned subsidiary of Tatham Offshore, and
certain other parties began reviewing and discussing various potential
arrangements relating to the construction of a substantial natural gas pipeline
from offshore Newfoundland and Nova Scotia to the eastern seaboard of the United
States. Tatham Offshore Canada is the Canadian representative of North Atlantic
Pipeline Partners, L.P. ("North Atlantic"), which is the sponsor of the
proposal to build an approximately 2,500 kilometer offshore pipeline. As of
June 30, 1997, Tatham Offshore Canada has incurred $1.3 million in
pre-developmental costs in connection with such project. Tatham Offshore Canada
anticipates that the pre-developmental costs could ultimately reach
approximately $10 million and that the ultimate capital costs of the project
could be approximately $3.0 billion to $3.5 billion. North Atlantic has not yet
filed an application seeking approval of the appropriate Canadian and United
States regulatory authorities, and there can be no assurance that, if filed,
such authorities will approve such project or if, or when, such project will be
constructed. Two competing projects have been filed by integrated energy
companies with far greater financial and other resources than are available to
the Company.
Tatham Offshore Canada, as the Canadian representative of North Atlantic,
has entered into a non-binding agreement with the Partnership regarding
participation in the North Atlantic pipeline project. Such agreement is subject
to the negotiation and completion of formal definitive agreements and
contemplates that the Partnership will hold a pro rata partnership interest of
up to 20% in North Atlantic. Under such agreement, Tatham Offshore Canada is
responsible for pre-developmental costs up to $10 million. The Partnership has
no financial commitment to the project until and unless an application is filed
with, and approved by, the appropriate Canadian and United States regulatory
authorities. Tatham Offshore Canada is seeking additional participants on the
same basis as that offered to the Partnership.
Deepwater Royalty Relief. In June 1997, the Company received notification
from the Minerals Management Service (the "MMS") that its application for
deepwater royalty relief relative to its Ewing Bank Blocks 958, 959, 1002 and
1003 (the "Sunday Silence Project") had been approved. The royalty relief
provides for the abatement of the federal royalty on the first 52.5 million
barrels of oil equivalent produced from the field. The royalty suspension will
continue until the end of
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the month in which the cumulative production from the Sunday Silence Project
reaches the royalty suspension volume. The granting of royalty relief is
subject to (i) the Company filing a pre-production report with the MMS, (ii)
the Company having provided accurate data to the MMS regarding performance
measures and (iii) the prices of oil or natural gas production for a calendar
year not exceeding a certain level. See "--Oil and Gas Properties --
Description of Properties -- Ewing Bank Blocks 958, 959, 1002 and 1003" for a
further discussion of this royalty relief abatement.
Restructuring of Subordinated Notes. DeepTech currently holds the
Company's Subordinated Notes with an aggregate principal amount of $60.0
million. Through June 30, 1997, the Subordinated Notes bore interest at a rate
of 11 3/4% per annum, payable quarterly. During the year ended June 30, 1997,
Tatham Offshore paid $7.1 million in interest to DeepTech under the notes.
Effective July 1, 1997, the interest rate under the Subordinated Notes
increased to 13% per annum. Under the terms of the Subordinated Notes, the
principal amount of the notes is payable in seven equal annual installments
beginning August 1, 1999.
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 has 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 has 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 the Tatham Offshore Development
Company, Inc. ("Tatham Offshore Development"), a wholly-owned subsidiary of
Tatham Offshore, for $60 million, the proceeds from which would be used to
prepay the outstanding balance of the Subordinated Notes. DeepTech is required
to select one of the above restructuring transactions on or before December 31,
1997. As a result, the Company will no longer be obligated to make interest or
principal payments under the Subordinated Notes. Additionally, the Company
believes that by consummating one of the above restructuring transactions that
it will be able to continue to maintain its Nasdaq listing.
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 the market price shall be the average of the closing prices for the
ten trading days immediately preceding the exercise of the option. DeepTech's
option to acquire Tatham Offshore Development also includes all of Tatham
Offshore's interest in a drilling arrangement with Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex") for the use of a
semisubmersible drilling rig in the Gulf. Tatham Offshore has agreed not to
sell less than 100% of its interest in Tatham Offshore Development pending the
exercise by DeepTech of one of its options. See "- Oil and Gas Properties -
Drilling Contract" for a further discussion of the drilling arrangement and
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
OIL AND GAS PROPERTIES
GENERAL
Tatham Offshore currently has a portfolio of mineral leaseholds which
includes producing properties and undeveloped leases. Tatham Offshore owns
interests in 15 oil and gas leases in the Gulf covering approximately 83,200
gross (72,500 net) acres. See "--Oil and Gas Reserves" for an estimate of the
Company's total proved developed reserves of oil and gas and a discussion of
the assumptions used in, and inherent difficulties relating to, estimating
reserves.
In 1995, Tatham Offshore assigned to the Partnership a 75% working
interest in Viosca Knoll Block 817, a 50% working interest in Garden Banks
Block 72 and a 50% working interest in Garden Banks Block 117 (the "Assigned
Properties") subject to certain reversionary rights. The Partnership is
entitled to retain all of the revenue attributable to the Assigned Properties
until it has received net revenue equal to the Payout Amount (as defined
herein). Prior to December 10, 1996, "Payout Amount" was defined as an amount
equal to all costs incurred by the Partnership with respect to the Assigned
Properties (including the $30 million acquisition cost paid to Tatham Offshore
and platform leasing and processing fees payable to subsidiaries of the
Partnership) plus interest thereon at a rate of 15% per annum.
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Effective December 10, 1996, the Partnership exercised its option to
permanently retain 50% of the assigned working interest in the Assigned
Properties in exchange for forgiving 50% of the then-existing Payout Amount.
Subsequent to December 10, 1996, only 50% of the development and operating
costs attributable to the Assigned Properties are added to the Payout Amount
and 50% of the net revenue from the Assigned Properties reduce the Payout
Amount. As of June 30, 1997, the Payout Amount totaled $45.9 million.
As a result of the Partnership's election to retain 50% of the Assigned
Properties, Tatham Offshore could receive an assignment of a 50% interest in
the Assigned Properties upon the satisfaction of the Payout Amount. When and if
the Payout Amount will be satisfied depends upon a multitude of variables. See
"-- Competition" and "-- Regulation." The Payout Amount has been adversely
affected by significant cost overruns, including those incurred in the drilling
of the Garden Banks Block 117 #2 well, as well as significant delays in placing
the Assigned Properties on production. The Company has determined that given
the current estimates of commodity prices and proved reserves, the possibility
that the designated revenue from the Assigned Properties will be sufficient to
satisfy the Payout Amount is remote.
DESCRIPTION OF SIGNIFICANT PROPERTIES
Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property
that is comprised of 5,760 gross (1,440 net) acres located 40 miles off the
coast of Louisiana in approximately 650 feet of water. Tatham Offshore owns a
25% working interest (the "Subject Interest") in the Viosca Knoll Block 817
acreage, which interest is burdened by a convertible production payment
described below. See "-- Reversionary Interests."
Under the convertible production payment, the holders are entitled in the
aggregate to 25% of the proceeds from the production attributable to the
Subject Interest (after deducting all leasehold operating expenses, including
platform access and processing fees) until the holders have received the
aggregate sum of $16.0 million. At the option of the holders, the unrecovered
portion of the convertible production payment may be converted into Common
Stock at a price of $8.00 per share. Under certain conditions, such holders
have the right to require DeepTech to purchase the convertible production
payment for an amount equal to 50% of the unrecovered portion thereof. At June
30, 1997, the unpaid portion of the convertible production payment obligation
totaled $12.5 million.
The Partnership, as operator, concluded a drilling program and placed
eight wells on production at Viosca Knoll Block 817. The Partnership does not
anticipate drilling any more wells or having any other major expenditures with
respect to this property except for the possible recompletion of certain
existing wells. The Viosca Knoll Block 817 project is currently producing an
aggregate of approximately 79 MMcf of gas, 310 barrels of oil and 800 barrels
of water per day. From the inception of production in December 1995 through
June 30, 1997, the Viosca Knoll Block 817 project has produced 8.6 Bcf of gas
and 11,995 barrels of oil, net to the Company's 25% working interest. Gas
production from Viosca Knoll Block 817 is dedicated to the Partnership for
gathering through the Viosca Knoll system.
West Delta Block 35. West Delta Block 35, a producing field located 10
miles off the coast of Louisiana in approximately 60 feet of water, was
acquired by Tatham Offshore in 1992 to drill for and produce remaining reserves
in a fault block of an abandoned field. In late 1992, Tatham Offshore
farmed-out the property and retained a 38% working interest in West Delta Block
35. The West Delta Block 35 field commenced production in July 1993. Two wells
are currently producing in the aggregate approximately 71 barrels of oil, 5.7
MMcf of gas and 90 barrels of water per day. From the inception of production
through June 30, 1997, the West Delta 35 field has produced 2.7 Bcf of gas and
31,500 barrels of oil, net to the Company's interest. The gas production from
the West Delta 35 field is transported onshore through an interstate pipeline
system and the oil production is currently transported onshore by barge.
Ewing Bank Blocks 958, 959, 1002 and 1003. Tatham Offshore Development
owns a 100% working interest in Ewing Bank Blocks 958, 959, 1002 and 1003, the
Sunday Silence Project, a recently discovered and currently undeveloped field
that is comprised of 20,160 gross acres located approximately six miles south
of Ewing Bank Blocks 914 and 915 (discussed below) in water depths ranging from
1,400 to 1,600 feet. In July 1994, Tatham Offshore completed the drilling of an
exploratory well, the Ewing Bank 958 #1. Logs and sidewall cores indicate that
the Ewing Bank 958 #1 well contains approximately 380 feet of oil and gas pay.
The Ewing Bank 958 #1 well, which was drilled to a total measured depth of
17,600 feet, identified pay zones in the Pliocene aged formations lying
primarily at measured depths between 10,000 and 15,000 feet.
Tatham Offshore completed drilling a second well at Ewing Bank Block 1003
in September 1994 to delineate the field. During October 1994, the Ewing Bank
1003 #1 delineation well was flow-tested at a rate of approximately 8,700
barrels of oil and 5.4 MMcf of gas per day.
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Subject to obtaining financing or an appropriate industry participant, the
Company anticipates that the initial two wells and any subsequent delineation
wells will be reentered and completed for production after the installation of
a SPAR buoy production facility. Production from the Sunday Silence Project is
dedicated to the Partnership under the Ewing Bank Agreement (as defined
herein).
On June 5, 1997, the Company received notification from the MMS that its
application for deepwater royalty relief for the Sunday Silence Project had
been approved under a federal law that was enacted in November 1995. The
royalty relief provides for the abatement of federal royalty on the first 52.5
million barrels of oil equivalent produced from the Sunday Silence Project.
Tatham Offshore believes that the improved economics for the project under
royalty relief will be sufficient to obtain development financing or an
industry farmout arrangement. However, there can be no assurance that the
Company will enter into a farmout or financing arrangement on favorable terms,
successfully develop this field or initiate production therefrom on a timely
basis, if at all. The granting of royalty relief to Tatham Offshore is subject
to certain requirements, including the installation of the SPAR buoy platform
and the restriction that actual development costs incurred be at least 80% of
the estimated development costs. The total estimated development cost is
approximately $250 million. In addition, construction of the SPAR buoy
production facility must commence within two years of the date of the granting
of the royalty relief. Such royalty relief will continue until the end of the
month in which the field's cumulative production reaches 52.5 million barrels
of oil equivalent. See "- Recent Events - Deepwater Royalty Relief" and "--
Restructuring of Subordinated Notes."
Ewing Bank Blocks 914 and 915. The Company owns a 100% working interest in
each of Ewing Bank Blocks 914 and 915, which are both located in a water depth
of approximately 1,000 feet. From the inception of production through June 30,
1997, the Ewing Bank 914 #2 well has produced a total of 1.2 million barrels of
oil and condensate and 3.4 Bcf of gas. In May 1997, the Ewing Bank 914 #2 well
was shut-in as a result of a downhole mechanical problem. Although the Company
is currently evaluating potential workover or recompletion alternatives for
this well, Tatham Offshore reserved its remaining investment in the Ewing Bank
914 #2 well and certain adjacent leases of $2.4 million at June 30, 1997. In
addition, as of June 30, 1997, the Company accrued $3.3 million of additional
costs associated with the abandonment of this well and the Ewing Bank 915 #4
well.
Any future production from this field is dedicated to the Partnership for
transportation under the Ewing Bank Agreement. Under the Ewing Bank Agreement,
the Partnership's obligation to construct facilities to transport production
from new wells is subject to the mutual agreement of the parties and the
Partnership's determination that such facilities will be economically feasible.
See "-- Customers and Contracts -- Ewing Bank Gathering Agreement."
Ship Shoal Block 331. Ship Shoal Block 331 is located 75 miles off the
coast of Louisiana in approximately 370 feet of water. Tatham Offshore holds a
100% working interest in the 5,278 gross acres lease. Production problems
associated with the completions of the three wellbores have resulted in minimal
production from the property and the Company has decided not to pursue further
completion operations at this time. In connection with the Company's assessment
of its Ship Shoal Block 331 property and its decision not to pursue further
operations, the Company reserved its remaining investment in this property of
$30.0 million as of June 30, 1997. In addition, as of June 30, 1997, Tatham
Offshore had accrued $3.3 million associated with the abandonment of the
platform and wells. Prior to the production problems, the Ship Shoal Block 331
project produced 88 MMcf of gas and 41,875 barrels of oil.
Reversionary Interests. The Company has reversionary working interests of
37.5% in Viosca Knoll Block 817, 25% in Garden Banks Block 72 and 25% in Garden
Banks Block 117 if the Payout Amount is satisfied. The Company has determined
that given the current estimates of commodity prices and proved reserves, the
possibility that the designated revenue from the Assigned Properties will be
sufficient to satisfy the Payout Amount is remote. See "-- General."
DRILLING CONTRACT
In September 1996, the Company entered into a drilling arrangement (the
"Drilling Arrangement") with 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, Tatham Offshore has committed
to pay Sedco Forex a drilling rate of $70,000 per day for the initial well. As
security for its obligations under the Drilling Arrangement, 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
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operating dayrate for the initial contract well. If Tatham Offshore elects to
extend the Drilling Arrangement, the dayrate for the three well extension
option would be $75,000 per day. If 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, Tatham Offshore 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 rates will be at prevailing market rates.
Tatham Offshore has agreed to fund the capital requirements necessary to
upgrade and modify a drilling rig to drill in water depths of 1,500 feet if it
wishes to utilize the rig in water depths greater than its current water depth
rating. Tatham Offshore estimates that the capital costs required for the
upgrade would total approximately $19.0 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.
CUSTOMERS AND CONTRACTS
Ewing Bank Gathering Agreement. In 1992, Ewing Bank Gathering Company,
L.L.C., a subsidiary of the Partnership, DeepTech and Tatham Offshore entered
into the Ewing Bank Gathering Agreement (the "Ewing Bank Agreement"). Pursuant
to the Ewing Bank Agreement and the Master Gas Dedication Agreement (as
discussed below), all existing and future oil and gas production from Tatham
Offshore's leaseholds in the Ewing Bank project area, which primarily includes
Ewing Bank Block 914 and the Sunday Silence Project, is dedicated to the
Partnership for transportation. Effective February 1, 1996, all remaining
existing demand charges payable by Tatham Offshore under this agreement were
prepaid. Tatham Offshore remains obligated to pay commodity charges under the
existing agreement equal to 4% of the commodity value of oil and gas
transported by the Partnership. See the Company's "Notes to Consolidated
Financial Statements -- Note 3 -- Oil and Gas Properties -- Transportation and
Processing Agreements" located elsewhere in this Annual Report.
The Ewing Bank Agreement remains in effect for the productive life of the
reserves or, if earlier, the expiration of 50 years from the date of first
production (August 1993). Under the Ewing Bank Agreement, the Partnership has
agreed to provide future gathering facilities subject to mutual agreement
between the parties and the determination by the Partnership that such
facilities would be economic. If pursuant to the Ewing Bank Agreement such
facilities are constructed by the Partnership or any of its subsidiaries to
transport additional production from the Ewing Bank project area, the
construction of such facilities would require Tatham Offshore to pay additional
demand and commodity charges.
Master Gas Dedication Agreement. In December 1993, the Partnership and
Tatham Offshore entered into the Master Gas Dedication Agreement pursuant to
which Tatham Offshore dedicated to the Partnership transportation of all future
production, if any, from Tatham Offshore's Viosca Knoll Block 817, Garden Banks
Block 72, Garden Banks Block 117 and Ship Shoal Block 331 project areas and, in
certain cases, additional acreage contained in adjoining areas of mutual
interest. In exchange, the Partnership agreed to install certain pipeline
facilities necessary to transport production from these areas and to provide
transportation services with respect to such production. At the time Tatham
Offshore assigned the Partnership its working interests in the Assigned
Properties, the Partnership assumed all of Tatham Offshore's obligations under
the Master Gas Dedication Agreement and certain ancillary agreements with
respect to the Viosca Knoll Block 817, Garden Banks Block 72 and Garden Banks
Block 117 properties.
Marketing Agreements. Tatham Offshore and Offshore Gas Marketing, Inc.
("Offshore Marketing"), an affiliate of Tatham Offshore, have entered into
agreements whereby Offshore Marketing has agreed to purchase all of the gas,
oil and condensate produced by Tatham Offshore. The agreement provides Offshore
Marketing fees equal to 2% of the sales value of crude oil and condensate and
$0.015 per dekatherm of natural gas for selling the Company's production.
During the year ended June 30, 1997, Tatham Offshore's sales to Offshore
Marketing totaled $20.5 million.
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OIL AND GAS RESERVES
Estimates of Tatham Offshore's oil and gas reserves as of June 30, 1997
have been made by Ryder Scott Company Petroleum Engineers, an independent
engineering consulting firm ("Ryder Scott"). Ryder Scott's estimate of Tatham
Offshore's total proved developed reserves of oil and gas were as follows:
<TABLE>
<CAPTION>
June 30, 1997
Oil (barrels) Gas(1) (MMcf)
------------- -------------
Proved Proved
Developed Developed
------------- -------------
<S> <C> <C>
Viosca Knoll Block 817(2) 98,480 10,910
West Delta Block 35 26,542 1,382
------- ------
Total 125,022 12,292
======= ======
</TABLE>
- ---------------
(1) Gas volumes are stated at the legal pressure base of the state or
area in which the reserves are located and at 60 degrees Fahrenheit.
(2) As of June 30, 1997, the Company's 25% working interest is subject to
a $12.5 million convertible production payment payable from 25% of the net
proceeds from such interest. See "-- Oil and Gas Properties -- Description
of Properties -- Viosca Knoll Block 817."
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the
subject properties, the assumed effects of regulation by governmental agencies
and assumptions concerning future oil and gas prices, future operating costs
and future plugging and abandonment costs, all of which may vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group
of properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Furthermore, Tatham Offshore's Viosca Knoll Block 817 property has only
been producing since December 1995; accordingly, estimates of future production
are based on this limited history. Estimates with respect to proved reserves
that may be developed and produced in the future are often based upon
volumetric calculations and upon analogy to similar types of reserves rather
than upon actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history will
result in variations, which may be substantial, in the estimated reserves. A
significant portion of Tatham Offshore's reserves is based upon volumetric
calculations.
6
<PAGE> 9
The following table sets forth, as of June 30, 1997, the estimated
future net cash flows and the present value of estimated future net cash flows
discounted at 10% per annum, from the production and sale of the proved
developed reserves attributable to Tatham Offshore's interest in oil and gas
properties as of such date, as determined by Ryder Scott in accordance with the
requirements of applicable accounting standards before income taxes. All of
Tatham Offshore's reserves at June 30, 1997 were classified as proved developed
reserves by Ryder Scott.
<TABLE>
<CAPTION>
June 30, 1997
----------------
Proved Developed
(In thousands)
<S> <C>
Estimated future net cash flows from proved
reserves before income taxes(1)............... $ 12,666
Present value of estimated future net cash flows
from proved reserves before income taxes
(discounted at 10%) .......................... $ 11,043
</TABLE>
- ---------------
(1) In preparing such estimates, Ryder Scott used prices of $17.20 per
barrel of oil and $2.39 per Mcf of gas as of June 30, 1997, the weighted
average prices that Tatham Offshore received from its properties.
In accordance with applicable requirements of the Securities and
Exchange Commission (the "Commission"), the estimated discounted future net
revenue from estimated proved reserves are based on prices and costs at fiscal
year end unless future prices or costs are contractually determined at such
date. Actual future prices and costs may be materially higher or lower. Actual
future net revenue also will be affected by factors such as actual production,
supply and demand for oil and gas, curtailments or increases in consumption by
natural gas purchasers, changes in governmental regulations or taxation and the
impact of inflation on costs.
In accordance with the methodology approved by the Commission, specific
assumptions were applied in the computation of the reserve evaluation
estimates. Under this methodology, future net cash flows are determined by
reducing estimated future gross cash flows to Tatham Offshore for oil and
natural gas sales by the estimated costs to develop and produce the underlying
reserves, including future capital expenditures, operating costs,
transportation costs, royalty and overriding royalty burdens, production
payments and net profits interest expense on certain of Tatham Offshore's
properties.
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions
as to timing of future oil and natural gas prices and production, which may
prove to be inaccurate. In addition, the calculations of estimated net revenue
do not take into account the effect of certain cash outlays, including, among
other things, general and administrative costs, interest expense and dividends.
The present value of future net cash flows shown above should not be construed
as the current market value as of June 30, 1997, or any prior date, of the
estimated oil and natural gas reserves attributable to Tatham Offshore's
properties.
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth certain information regarding the
production volumes of, average unit prices received for and average production
costs for Tatham Offshore's sale of oil and gas for the periods indicated:
<TABLE>
<CAPTION>
Natural Gas (MMcf) Oil and Condensate (Mbbl)
Year Ended June 30, Year Ended June 30,
--------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net production................. 7,180 3,274 1,505 170 418 333
Average sales price............ $2.36 $2.51 $1.67 $22.35 $18.83 $16.67
Average production costs (1)... $1.03 $1.50 $2.33 $6.19 $19.86 $28.02
</TABLE>
- ---------------
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include demand and commodity charges under transportation
agreements, platform access and processing fees, maintenance and repair,
labor and utilities costs.
7
<PAGE> 10
The relationship between Tatham Offshore's average prices and its average
production costs depicted by the table above is not necessarily indicative of
future results of operations expected by Tatham Offshore. Average production
costs exceeded average sales prices in 1995 due primarily to production
problems experienced by the Ewing Bank 914 #2 well and three wells at Ship
Shoal Block 331. See "-- Oil and Gas Properties -- Description of Properties --
Ewing Bank Blocks 914 and 915" and " -- Ship Shoal Block 331".
ACREAGE
The following table sets forth the developed and undeveloped oil and gas
acreage in which Tatham Offshore held an interest as of June 30, 1997.
Undeveloped acreage is considered to be those lease acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves. A substantial portion of Tatham Offshore's acreage is
undeveloped. Gross acres in the following table refer to the combined number of
acres in which a working interest is owned directly by Tatham Offshore. The
number of net acres is the sum of the fractional ownership of working interests
owned directly by Tatham Offshore in the gross acres.
<TABLE>
<CAPTION>
Gross Net
------- -------
<S> <C> <C>
Developed acreage....................... 6,472 4,042
Undeveloped acreage..................... 76,695 68,474
------ ------
Total acreage....................... 83,167 72,516
====== ======
</TABLE>
OIL AND GAS DRILLING ACTIVITY
The following table sets forth the gross and net number of productive, dry
and total exploratory wells and development wells that Tatham Offshore drilled
in each of the years ended June 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- -------------------
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY
Natural Gas -- -- -- -- -- --
Oil -- -- -- -- 2.00 1.50
Dry -- -- -- -- 2.00 2.00
---- ---- ---- ---- ---- ----
Total -- -- -- -- 4.00 3.50
==== ==== ==== ==== ==== ====
DEVELOPMENT
Natural Gas 4.00 1.00 3.00 .75 1.00 1.00
Oil -- -- 1.00 .25 -- --
Dry -- -- 1.00 .25 -- --
---- ---- ---- ---- ---- ----
Total 4.00 1.00 5.00 1.25 1.00 1.00
==== ==== ==== ==== ==== ====
</TABLE>
As of June 30, 1997 and September 2, 1997, Tatham Offshore owned 10 gross
and 2.76 net producing wells.
COMPETITION
The exploration and production of oil and gas is highly competitive.
Increases in worldwide energy production capability, decreases in energy
consumption as a result of conservation efforts, and the continued development
of alternate energy sources have brought about substantial surpluses in oil and
gas supplies in recent years resulting in substantial competition for the
marketing of oil and gas. As a result, there have been reductions in oil and
gas prices and delays in producing and marketing natural gas after it is
discovered. Changes in government regulations relating to the production,
transportation and marketing of gas have also resulted in significant changes
in the historical marketing patterns of the industry. Generally, these changes
have resulted in the abandonment by many pipelines of long-term contracts for
the purchase of gas, the development by gas producers of their own marketing
programs to take advantage of new regulations requiring pipelines to transport
natural gas for regulated fees and an increasing tendency to rely on short-term
sales contracts priced at spot market prices. See "-- Regulation."
Many of the Company's competitors have financial and other resources
substantially in excess of those available to Tatham Offshore and may,
accordingly, be better positioned to acquire and exploit prospects, hire
personnel and market production. In addition, many of Tatham Offshore's larger
competitors may be better able to withstand the effect of changes in factors
such as worldwide oil and natural gas prices and levels of production, the cost
and availability of
8
<PAGE> 11
alternative fuels and the application of government regulations, which affect
demand for oil and natural gas production and which are beyond the control of
Tatham Offshore.
REGULATION
The oil and gas industry is extensively regulated by federal and state
authorities in the United States. Legislation affecting the oil and gas
industry is under constant review and statutes are constantly being adopted,
expanded or amended. Further, numerous departments and agencies, both federal
and state, have issued rules and regulations binding on the oil and gas
industry and its individual members, some of which carry substantial penalties
for the failure to comply. The regulatory burden on the oil and gas industry
increases its cost of doing business.
The exploration, production and development operations of Tatham Offshore
are subject to regulation at the federal and state levels. Such regulation
includes requiring permits for the drilling of wells and maintaining bonds and
insurance in order to drill or operate wells, and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled and the plugging and abandoning of
wells. Tatham Offshore's exploration, production and development operations are
also subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration units, the
density of wells that may be drilled, the levels of production, and the
unitization or pooling of gas and oil properties.
Substantially all of Tatham Offshore's oil and gas lease acreage was
granted by the federal government and is being administered by various federal
agencies. Such leases require compliance with detailed federal regulations and
orders that regulate, among other matters, drilling and operations on these
leases and calculation of royalty payments to the federal government. The
Mineral Leasing Act of 1920 ("MLA") and similar acts and regulations place
limitations on the number of acres under federal leases that may be owned in
any one state. The MLA and the Outer Continental Shelf Land Act and related
regulations also may restrict a corporation from the holding of federal onshore
oil and gas leases if stock of such corporation is owned by citizens of foreign
countries that are not deemed reciprocal under such act. Reciprocity depends,
in large part, on whether the laws of the foreign jurisdiction prohibit or
otherwise restrict a citizen of the United States from owning minerals and/or
rights related thereto in such jurisdiction.
Tatham Offshore presently has interests in or rights to offshore leases
located in federal waters. Federal leases are administered by the MMS.
Individuals and entities must qualify with the MMS prior to owning and
operating any leasehold or right-of-way interest in federal waters. Such
qualification with the MMS generally involves filing certain documents with the
MMS and obtaining an area-wide performance bond and, in some cases,
supplemental bonds representing security deemed necessary by the MMS in excess
of the area-wide bond requirements for facility abandonment and site clearance
costs.
ENVIRONMENTAL
General. Tatham Offshore's operations are subject to extensive federal,
state and local statutory and regulatory requirements relating to environmental
affairs, health and safety, waste management and chemical products. In recent
years, these requirements have become increasingly stringent and in certain
circumstances, they impose "strict liability" on a company, rendering it liable
for environmental damage without regard to negligence or fault on the part of
such company. To the Company's knowledge, its operations are in substantial
compliance, and are expected to continue to comply in all material respects,
with applicable environmental laws, regulations and ordinances.
It is possible, however, that future developments, such as stricter
environmental laws, regulations or enforcement policies could affect the
handling, manufacture, use, emission or disposal of substances or wastes by
Tatham Offshore. In addition, some risk of environmental costs and liabilities
is inherent in Tatham Offshore's operations and products as it is with other
companies engaged in similar or related businesses, and there can be no
assurance that material costs and liabilities, including substantial fines and
criminal sanctions for violation of environmental laws and regulations, will
not be incurred by the Company. Furthermore, the Company will likely be
required to increase its expenditures during the next several years to comply
with higher industry and regulatory safety standards. However, such
expenditures cannot be accurately estimated at this time.
Solid Waste. Tatham Offshore's operations may generate or transport both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the federal Resource Conservation and Recovery Act ("RCRA"), as amended, 42
U.S.C. SS. 6901 et. seq., and its regulations, and comparable state statutes
and regulations. Further, it is possible that some wastes that are currently
classified as nonhazardous, via exemption or otherwise, perhaps including
wastes currently generated during exploration, development and production
operations may, in the future be designated as "hazardous
9
<PAGE> 12
wastes," which are subject to more rigorous and costly treatment, storage,
transportation and disposal requirements. Such changes in the regulations may
result in additional expenditures or operating expenses by Tatham Offshore.
Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et. seq., and
comparable state statutes, also known as "Superfund" laws, impose liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that cause or contribute to the release of a "hazardous
substance" into the environment. These persons include the current owner or
operator of a site, the past owner or operator of a site, and companies that
transport, dispose of or arrange for the disposal of the hazardous substances
found at the site. CERCLA also authorizes the Environmental Protection Agency
("EPA") or state agency and, in some cases third parties, to take actions in
response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur. Despite
the "petroleum exclusion" of Section 101(14) that currently encompasses natural
gas, Tatham Offshore may nonetheless generate or transport "hazardous
substances" within the meaning of CERCLA, or comparable state statutes, in the
course of its ordinary operations. Thus, Tatham Offshore may be responsible
under CERCLA or the state equivalents for all or part of the costs required to
clean up sites where a release of a hazardous substance has occurred.
Air. Tatham Offshore's operations may be subject to the Clean Air Act
("CAA"), 42 U.S.C. SS. 7401-7642, et. seq., and comparable state statutes. The
1990 CAA amendments and accompanying regulations, state or federal, may impose
certain pollution control requirements with respect to air emissions from
operations, particularly in instances where a company constructs a new facility
or modifies an existing facility. Tatham Offshore may also be required to incur
certain capital expenditures in the next several years for air pollution
control equipment in connection with maintaining or obtaining operating permits
and approvals addressing other air emission-related issues. However, Tatham
Offshore does not believe its operations will be materially adversely affected
by any such requirements.
Water. The Federal Water Pollution Control Act ("FWPCA"), or Clean Water
Act, 33 U.S.C. SS. 1311 et. seq., imposes strict controls against the
unauthorized discharge of produced waters and other oil and gas wastes into
navigable waters. The FWPCA provides for civil and criminal penalties for any
unauthorized discharges of oil and other hazardous substances in reportable
quantities and, along with the Oil Pollution Act of 1990 ("OPA"), imposes
substantial potential liability for the costs of removal, remediation and
damages. Similarly, the OPA imposes liability for the discharge of oil into or
upon navigable waters or adjoining shorelines. Among other things, the OPA
raises liability limits, narrows defenses to liability and provides more
instances in which a responsible party is subject to unlimited liability. One
provision of the OPA requires that offshore facilities establish and maintain
evidence of financial responsibility of $150 million. State laws for the
control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of an unauthorized discharge of petroleum or its
derivatives into state waters. Further, the Coastal Zone Management Act
authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore and
protect coastal waters.
Endangered Species. The Endangered Species Act ("ESA") seeks to ensure
that activities do not jeopardize endangered or threatened plant and animal
species, nor destroy or modify the critical habitat of such species. Under the
ESA, certain exploration and production operations, as well as actions by
federal agencies, may not significantly impair or jeopardize the species or its
habitat. The ESA provides for criminal penalties for willful violations of the
Act. Other statutes which provide protection to animal and plant species and
thus may apply to Tatham Offshore's operations are the Marine Mammal Protection
Act, the Marine Protection and Sanctuaries Act, the Fish and Wildlife
Coordination Act, the Fishery Conservation and Management Act and the Migratory
Bird Treaty Act . The National Historic Preservation Act may impose similar
requirements.
Communication of Hazards. The Occupational Safety and Health Act ("OSHA"),
as amended, 29 U.S.C. SS. 651 et. seq., the Emergency Planning and Community
Right-to-Know Act ("EPCRA"), as amended, 42 U.S.C. SS. 11001 et. seq., and
comparable state statutes require the Company to organize and disseminate
information to employees, state and local organizations, and the public about
the hazardous materials used in its operations and its emergency planning.
OPERATIONAL HAZARDS AND INSURANCE
Tatham Offshore's exploration, production and development operations are
subject to the usual hazards incident to the drilling and production of natural
gas and crude oil, such as blowouts, cratering, explosions, uncontrollable flows
of oil, natural gas or well fluids, fires, pollution, releases of toxic gas and
other environmental hazards and risks. These hazards can cause personal injury
and loss of life, severe damage to and destruction of property and equipment,
pollution or environmental damages and suspension of operations. In addition, a
pipeline may experience damage as a result of an accident or other natural
disaster. To mitigate the impact of repair costs associated with such an
accident or disaster, Tatham Offshore maintains insurance of various types that
it considers to be adequate to cover its operations. Such insurance is subject
to deductibles that Tatham Offshore considers reasonable and not excessive.
Tatham Offshore's
10
<PAGE> 13
insurance does not cover every potential risk associated with the drilling and
production of oil and natural gas. Consistent with insurance coverage generally
available to the industry, Tatham Offshore's insurance policies do not provide
coverage for losses or liabilities relating to pollution, except for sudden and
accidental occurrences.
The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Company's operations and financial
condition. The Company believes that it is adequately insured for public
liability and property damage to others with respect to its operation. However,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
EMPLOYEES
Tatham Offshore has no employees. All individuals, including executive
officers, necessary to meet the financial, geological, engineering and other
technical and administrative requirements of Tatham Offshore are provided by
DeepTech pursuant to a management agreement with Tatham Offshore (the
"Management Agreement"), or affiliates of DeepTech pursuant to service
contracts. The Management Agreement, as amended, provides for an annual
management fee of 24% of DeepTech's overhead expenses. For the year ended June
30, 1997, Tatham Offshore reimbursed DeepTech $3.3 million pursuant to such
Management Agreement.
CERTAIN DEFINITIONS
The following are abbreviations and words commonly used in the oil and gas
industry and in this Annual Report.
"bbl" or "barrel" means barrels, a standard measure of volume for oil,
condensate and natural gas liquids which equals 42 U.S. gallons.
"Bcf" means billion cubic feet (or thousand MMcf).
"condensate" means a hydrocarbon mixture that becomes liquid and
separates, similar to crude oil, from natural gas when it is produced.
"development well" means a well drilled within the proved area of an oil
or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
"exploratory well" means a well drilled to find commercially productive
hydrocarbons in an unproved area or to extend significantly a known oil or
natural gas reservoir.
"farm-in" or "farm-out" refers to an agreement whereunder the owner of a
working interest in an oil and gas lease delivers the contractual right to earn
the working interest or a portion thereof to another party who desires to drill
on the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn a working interest in the acreage. The assignor usually
retains a royalty or a working interest after payout in the lease. The assignor
is said to have "farmed-out" the acreage. The assignee is said to have
"farmed-in" the acreage.
"gross" oil and natural gas wells or gross acres are the total number of
wells or acres, respectively, in which the Company has an interest, without
regard to the size of that interest.
"Mbbl" means thousand barrels.
"Mcf" means thousand cubic feet, a standard measure of volume for gas.
"MMbtu" means million British Thermal Units, a unit of heat measure with
one btu being the amount of heat needed to raise the temperature of one pound
of water one degree Fahrenheit.
"MMcf" means million cubic feet.
"net" oil and natural gas wells or "net" acres or "net" production or
reserves are the total gross number of wells or acres, respectively, in which
the Company has an interest multiplied times the Company's working interest in
such wells or acres.
11
<PAGE> 14
"OCS" means Outer Continental Shelf, an area offshore the United States
over which the federal government has jurisdiction, which extends from the end
of state territorial waters (three to twelve nautical miles offshore, depending
on the state) to 200 nautical miles from shore. The term OCS as used herein
includes not only those areas on the Shelf itself, but those areas in the
flextrend and the deepwater, to a limit of 200 nautical miles, as well.
"royalty" means an interest in an oil and gas lease that gives the owner
of the interest the right to receive a portion of the production from the
leased acreage (or of the proceeds of the sale thereof), but generally does not
require the owner to pay any portion of the costs of drilling or operating the
wells on the leased acreage. Royalties may be either landowner's royalties,
which are reserved by the owner of the leased acreage at the time the lease is
granted, or overriding royalties, which are usually carved from the leasehold
interest pursuant to an assignment to a third party reserved by an owner of the
leasehold in connection with a transfer of the leasehold to a subsequent owner.
"working interest" means an interest in an oil and gas lease that gives
the owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
In this Annual Report, natural gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located and at 60
degrees Fahrenheit.
ITEM 3. LEGAL PROCEEDINGS
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 or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective June 5, 1996, the shareholders approved the issuance of 7,500
shares of the Company's 9% Senior Convertible Preferred Stock and the adoption
of an amendment to the Company's Non-Employee Director Stock Option Plan. The
Information Statement disclosing the shareholder approval of such actions was
approved by the Commission in May 1997.
No matters were submitted to a vote of the security holders of the
Company during the quarter ended June 30, 1997.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of September 2, 1997, there were approximately 156 holders of record of
the Common Stock. The following table sets forth, for the periods indicated,
the high and low sales prices for the Common Stock as quoted on Nasdaq.
<TABLE>
<CAPTION>
Common Stock Price Range
------------------------
High Low
<S> <C> <C>
YEAR ENDED JUNE 30, 1996
First Quarter........................................................... 5 1/4 2
Second Quarter.......................................................... 2 3/8 7/8
Third Quarter .......................................................... 1 1/4 1/2
Fourth Quarter.......................................................... 2 1/8 5/8
YEAR ENDED JUNE 30, 1997
First Quarter........................................................... 1 3/8 3/4
Second Quarter.......................................................... 15/16 7/16
Third Quarter........................................................... 15/16 1/2
Fourth Quarter.......................................................... 3/4 1/2
PERIOD FROM JULY 1, 1997 THROUGH SEPTEMBER 2, 1997 ........................ 5/8 9/32
</TABLE>
Tatham Offshore has never declared or paid cash dividends on the Common
Stock and does not anticipate that it will pay any cash dividends on the Common
Stock in the foreseeable future. The payment of future dividends, if any, will
be determined by the Board of Directors in light of conditions then-existing,
including the Company's operating results, financial condition, capital
requirements, general business conditions and other factors the Board of
Directors deems relevant. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The following table summarizes the Company's outstanding equity at June
30, 1997 and September 2, 1997:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Exchange Nasdaq
Equity Outstanding Preference Rate Features Symbol
------ ------------ ---------------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Senior Preferred Stock (a) 7,500 $1,000 per share 9% (e) N/A
Series A Preferred Stock (b) 17,932,513 $1.50 per share 12% (f)(g) TOFFL
Series B Preferred Stock 74,379 $1.00 per share 8% (f)(g) TOFFO
Series C Preferred Stock (c) 1,338,162 $0.50 per share 4% (f)(g) TOFFN
Mandatory Redeemable
Preferred Stock (d) 4,991,377 $0.50 per share -- (g)(h) TOFFM
Common Stock 27,355,727 N/A -- -- TOFF
</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. The Partnership holds all
outstanding shares.
(b) DeepFlex holds 4,670,957 shares of the outstanding Series A Preferred Stock.
(c) DeepFlex holds 1,016,957 shares of the outstanding Series C Preferred Stock.
(d) DeepFlex 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 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 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 unpaid dividends into shares of Common
Stock at $0.653 per share. Through June 30, 1997 and September 2, 1997, a
total of 784,517 shares of Series A Preferred Stock had been converted into
1,855,407 shares of 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 Common Stock pursuant to the exercise of
Exchange Warrants, subject to certain conditions.
13
<PAGE> 16
RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to sales and other issuances by Tatham
Offshore within the past three fiscal years of Tatham Offshore securities, the
sales or issuances of which were not registered pursuant to the Securities Act
of 1933 (the "Securities Act").
In September 1995, Tatham Offshore issued two industry partners warrants
to acquire an aggregate of up to 2,000,000 shares of its common stock at an
exercise price of $8.00 per share as partial consideration for the acquisition
of a 25% working interest in Viosca Knoll Block 817 and an approximate 12.5%
working interest in the remainder of the Viosca Knoll Block 817 unit. The
warrants are exercisable for a period of five years through conversion of the
unpaid balance of a $16 million production payment payable issued in connection
with the acquisition of such working interests which is payable out of 25% of
the net cash flow from the working interests so acquired. Such transaction was
completed without registration under the Securities Act in reliance on the
exemption provided by Section 4(2) of the Securities Act.
In February 1996, Tatham Offshore issued 7,500 shares of its 9% Senior
Convertible Preferred Stock to Leviathan Gas Pipeline Partners, L.P. as partial
consideration for the satisfaction of certain demand charge obligations. Such
transaction was completed without registration under the Securities Act in
reliance on the exemptions provided by Section 4(2) of the Securities Act.
14
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company for each
of the three years ended June 30, 1997, 1996 and 1995 and at June 30, 1997 and
1996 have been derived from the consolidated financial statements and notes
thereto which are included elsewhere in this Annual Report. The selected
financial data at and for each of the two years ended June 30, 1994 and 1993
and at June 30, 1995 have been derived from the historical financial statements
of the Company. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements of Tatham Offshore and
the notes thereto which are included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(In thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
REVENUE:
Oil and gas sales to affiliates .................. $ 20,543 $ 15,904 $ 7,800 $ 11,971 $ --
Oil and gas sales ................................ 180 166 254 175 268
-------- -------- -------- -------- -------
Total revenue ............................. 20,723 16,070 8,054 12,146 268
-------- -------- -------- -------- -------
COSTS AND EXPENSES:
Production and operating expenses ................ 8,465 13,203 13,745 8,509 341
Exploration expenses ............................. 542 637 11,459 3,067 1,104
Depreciation, depletion and amortization ......... 5,364 1,758 1,210 983
Impairment, abandonment and other ................ 41,674 8,000 -- -- --
Management fee and general and administrative
expenses allocated from affiliate ............. 3,279 4,436 4,967 3,377 2,658
General and administrative expenses .............. 1,567 1,839 2,145 1,496 398
-------- -------- -------- -------- -------
Total operating costs .................... 60,891 29,873 33,526 17,432 4,501
-------- -------- -------- -------- -------
Operating loss ................................... (40,168) (13,803) (25,472) (5,286) (4,233)
Gain on sale of oil and gas properties ........... -- 22,641 1,496 -- --
Interest income .................................. 571 113 836 431 3
Interest and other financing costs ............... (8,374) (8,161) (11,631) (3,935) (2,094)
-------- -------- -------- -------- -------
Net (loss) income ................................ $(47,971) $ 790 $(34,771) $ (8,790) $(6,324)
======== ======== ======== ======== =======
Net (loss) income available to common stockholders $(51,891) $ 509 $(34,771) $ (9,925) $(6,444)
======== ======== ======== ======== =======
Net (loss) income per share ...................... $ (1.95) $ 0.02 $ (1.34) $ (0.45) $ (0.32)
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- ------- ---------
(In thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Oil and gas properties, net ........... $ 30,752 $64,900 $ 70,829 $46,453 $ 7,910
Total assets .......................... 42,485 97,130 94,720 99,291 8,274
Deferred income ....................... -- -- 30,000 -- --
Long term debt ........................ 60,000 60,000 60,000 60,000 21,469
Convertible, redeemable preferred stock -- -- -- -- 3,600
Stockholders' (deficit) equity ........ (27,696) 18,862 (20,020) 14,751 (19,465)
</TABLE>
15
<PAGE> 18
ITEM 7. 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 the notes thereto located elsewhere in
this Annual Report and the information set forth under the heading "Selected
Financial Data." This discussion is intended to assist in the understanding of
Tatham Offshore's financial position and results of operations for each of the
years ended June 30, 1997, 1996 and 1995.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
Revenue from oil and gas sales totaled $20.7 million for the year ended
June 30, 1997 as compared with $16.1 million for the year ended June 30, 1996.
During the year ended June 30, 1997, the Company sold 7,180 MMcf of gas and
170,000 barrels of oil and condensate at average prices of $2.36 per Mcf and
$22.35 per barrel, respectively. During the year ended June 30, 1996, the
Company sold 3,274 MMcf of gas and 418,000 barrels of oil and condensate at
average prices of $2.51 per Mcf and $18.83 per barrel, respectively. The
increase is primarily due to increased production from the Viosca Knoll Block
817 project and higher oil prices partially offset by lower oil and gas
production from the Ewing Bank 914 #2 well and lower gas prices.
Production and operating expenses for the year ended June 30, 1997 totaled
$8.5 million as compared with $13.2 million for the year ended June 30, 1996.
The decrease of $4.7 million is comprised of (i) a decrease of $4.0 million in
the cost of transportation services primarily related to lower oil production
and the restructuring of certain transportation agreements with the
Partnership, (ii) a decrease of $2.0 million in workover and repair expenses,
(iii) a decrease of $0.2 million in operating costs primarily related to the
Viosca Knoll Block 817 project and (iv) an increase of $1.5 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 property. During the
year ended June 30, 1996, the Company incurred $2.3 million of workover and
repair expenses related to the Ewing Bank 914 #2 well.
Exploration expenses for the year ended June 30, 1997 totaled $0.5
million as compared with $0.6 million for the year ended June 30, 1996.
Exploration expenses for both periods included delay rentals, minimum royalties
and costs incurred under an amended technology services agreement with an
affiliate of DeepTech.
Depreciation, depletion and amortization totaled $5.4 million for the
year ended June 30, 1997 as compared with $1.8 million for the year ended June
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 calendar 1996.
Impairment, abandonment and other for the year ended June 30, 1997
totaled $41.7 million as compared with $8.0 million for the year ended June 30,
1996. Impairment, abandonment and other for the year ended June 30, 1997
consisted of a charge to reserve the Company's investment in its Ewing Bank 914
#2 well, certain adjacent leases and Ship Shoal Block 331 property, to fully
accrue the Company's abandonment obligations associated with the Ewing Bank 914
#2 and 915 #4 wells and the Ship Shoal Block 331 property and to expense the
Company's net prepaid demand charges related to obligations under certain
transportation agreements. See "Notes to Consolidated Financial Statements --
Note 3 -- Oil and Gas Properties -- Impairment, Abandonment and Other" located
elsewhere in this Annual Report. In connection with the Company's assessment of
its Ship Shoal Block 331 property and its decision to seek a sale of all or a
portion of such property, or a joint venture partner, the Company reduced its
investment in its Ship Shoal Block 331 property by $8.0 million during the year
ended June 30, 1996.
General and administrative expenses, including the management fee
allocated from DeepTech, for the year ended June 30, 1997 totaled $4.8 million
as compared with $6.3 million for the year ended June 30, 1996. The decrease of
$1.5 million reflected a decrease in direct general and administrative expenses
of $0.3 million and a decrease in staff and overhead expenses allocated to the
Company under its Management Agreement with DeepTech of $1.2 million. As a
result of DeepTech's reduction of services provided to Tatham Offshore, the
Company amended its Management Agreement effective July 1, 1996 to provide for
a 24% overhead allocation as compared to an effective 31.6% overhead allocation
during the year ended June 30, 1996.
Operating loss for the year ended June 30, 1997 totaled $40.2 million as
compared with an operating loss of $13.8 million for the year ended June 30,
1996. The change in operating loss was due to the items discussed above.
16
<PAGE> 19
During the year ended June 30, 1996, the Company recognized a $22.6 million
gain related to the sale of its working interest in the Assigned Properties to
the Partnership as a result of the Company waiving its options to prepay the
then-existing Payout Amount and receive a reassignment of its working
interests.
Interest expense, net of interest income, for the year ended June 30,
1997 totaled $7.8 million as compared with $8.0 million for the year ended June
30, 1996. For the years ended June 30, 1997 and 1996, interest expense of $7.1
million was attributable to interest payable to DeepTech under the Subordinated
Notes.
After considering $3.9 million in preferred dividends in arrears, Tatham
Offshore's net loss available to common stockholders for the year ended June
30, 1997 was $51.9 million as compared with net income available to common
stockholders for the year ended June 30, 1996 of $0.5 million after considering
$0.3 million in preferred dividends in arrears.
YEAR ENDED JUNE 30, 1996 COMPARED WITH YEAR ENDED JUNE 30, 1995
Revenue from oil and gas sales totaled $16.1 million for the year ended
June 30, 1996 as compared with $8.1 million for the year ended June 30, 1995.
During the year ended June 30, 1996, the Company sold 3,274 MMcf of gas and
418,000 barrels of oil at average prices of $2.51 per Mcf and $18.83 per
barrel, respectively. During the same period in 1995, the Company sold 1,505
MMcf of gas and 333,000 barrels of oil at average prices of $1.67 per Mcf and
$16.67 per barrel, respectively. The increase is due primarily to increased
production from the Ewing Bank 914 #2 well, the initiation of production at the
Viosca Knoll Block 817 project in December 1995 and higher oil and gas prices.
During the year ended June 30, 1995, the Ewing Bank 914 #2 well was shut-in for
approximately four months to allow the Company to replace the flow lines from
the subsea wellhead to a fixed platform. During the year ended June 30, 1996,
the Ewing Bank 914 #2 well was shut-in approximately six weeks during which the
Company completed repair operations on the flow lines.
Production and operating expenses for the year ended June 30, 1996
totaled $13.2 million as compared with $13.7 million for the same period in
1995. The decrease of $0.5 million is comprised of (i) a decrease of $1.5
million in transportation services primarily related to the restructuring of
certain transportation agreements with the Partnership, (ii) a decrease in
workover expenses of $0.8 million and (iii) a net decrease in operating costs
related to Ewing Bank, West Delta, West Cameron and Ship Shoal properties of
$1.8 million offset by $2.3 million of costs associated with the repair of the
flow lines that connect the Ewing Bank 914 #2 well to a fixed platform and $1.3
million of operating costs associated with the Viosca Knoll Block 817 project.
Exploration expenses for the year ended June 30, 1996 totaled $0.6 million
as compared with $11.5 million for the year ended June 30, 1995. During the
year ended June 30, 1995, the Company expensed drilling costs of $10.6 million
associated with the Ewing Bank 915 #4 and Viosca Knoll Block 818 #1 wells.
Exploration expenses for both periods included delay rentals, minimum royalties
and costs incurred under an amended technology services agreement with an
affiliate of DeepTech.
Depreciation, depletion and amortization for the year ended June 30, 1996
totaled $1.8 million as compared with $1.2 million for the year ended June 30,
1995. Depreciation, depletion and amortization for the year ended June 30, 1996
reflected costs associated with the West Delta Block 35 and Viosca Knoll Block
817 projects and the Ewing Bank 914 #2 well whereas depreciation, depletion and
amortization for the year ended June 30,1995 reflected costs associated with
the West Delta Block 35 and Ship Shoal Block 331 projects and the Ewing Bank
914 #2 well.
In connection with the Company's assessment of its Ship Shoal Block 331
property and its decision to seek a sale of all or a portion of such property,
or a joint venture partner, the Company reduced its investment in its Ship
Shoal Block 331 property by $8.0 million during the year ended June 30, 1996
which is included in impairment, abandonment and other.
General and administrative expenses, including the management fee and
general and administrative expenses allocated from DeepTech, for the year ended
June 30, 1996 totaled $6.3 million as compared with $7.1 million for the same
period in 1995. The decrease of $0.8 million reflected a $0.5 million decrease
related to the Company reducing the amount of managerial and administrative
services provided by DeepTech pursuant to the Management Agreement and a $0.3
million decrease in direct general and administrative expenses incurred by the
Company. As a result of DeepTech's reduction of services provided to Tatham
Offshore, the Company amended its Management Agreement effective November 1,
1995 to provide for an effective 31.6% overhead allocation during the year
ended June 30, 1996 as compared to a 40% overhead allocation during the year
ended June 30, 1995.
The operating loss for the year ended June 30, 1996 was $13.8 million as
compared with $25.5 million for the year ended June 30, 1995. The change in
operating loss was due to the items discussed above.
17
<PAGE> 20
During the year ended June 30, 1996, the Company recognized a $22.6 million
gain related to the sale of the Assigned Properties to the Partnership as a
result of the Company waiving its options to prepay the then-existing Payout
Amount and receive a reassignment of its working interests. During the year
ended June 30, 1995, the Company recognized a $1.5 million gain primarily
related to a farmout agreement on its Viosca Knoll project.
Interest expense, net of interest income, for the year ended June 30, 1996
totaled $8.0 million as compared with $10.8 million for the year ended June 30,
1995. For the years ended June 30, 1996 and 1995, interest expense of $7.1
million was attributable to interest payable to DeepTech under the Subordinated
Notes.
After considering $0.3 million of preferred dividends in arrears, the
Company's net income available to common stockholders for the year ended June
30, 1996 was $0.5 million as compared with a net loss available to common
stockholders for the year ended June 30, 1995 of $34.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. Tatham Offshore intends to satisfy its immediate capital
requirements and other working capital needs primarily from cash on hand and
cash generated from continuing operations. At June 30, 1997, Tatham Offshore
had $7.9 million of cash and cash equivalents. However, as described below,
Tatham Offshore will need to raise substantial capital (equity, debt or both)
or enter into other arrangements (such as drilling and development commitments)
to develop its current inventory of properties and prospects 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
Tatham Offshore's working interest in Viosca Knoll Block 817 which is currently
producing a total of approximately 79 MMcf of gas and 310 barrels of oil per
day. Tatham Offshore's current 25% working interest in 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 year ended June 30, 1997, Tatham Offshore's
net revenue from this property was reduced by $3.5 million of production
payment obligations.
Tatham Offshore also has producing wells at its West Delta Block 35 which
contribute to cash from continuing operations. Tatham Offshore owns a 38%
working interest in the West Delta Block 35 project which is currently
producing at a rate of approximately 5.7 MMcf of gas and 71 barrels of oil per
day.
Tatham Offshore anticipates that declining revenue from properties on
production will need to be replaced by revenue from production from the Sunday
Silence Project, the North Atlantic Pipeline project or from other sources.
As a result of a rights offering in February 1996, Tatham Offshore received
$12.6 million in gross proceeds ($11.3 million in net proceeds) pursuant to the
exercise of Tatham Offshore rights to purchase 25,120,948 Tatham Offshore
warrants at $0.50 per warrant. A total of 20,129,571 Warrants were exercised to
purchase 18,717,030 shares, 74,379 shares and 1,338,162 shares of Series A, B
and C Preferred Stock, respectively, at $1.00 per share which generated an
additional $20.1 million in proceeds to Tatham Offshore.
On January 1, 1997, each of the 4,991,377 Warrants outstanding were
automatically converted, without any action on the part of the holder thereof,
into one share of Mandatory Redeemable Preferred Stock with a liquidation
preference of $0.50 per share. At any time 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 expire July 1, 1999.
Alternatively, at any time, 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. After July 1, 1997, the Convertible
Exchangeable Preferred Stock are redeemable at the option of Tatham Offshore.
Through September 2, 1997, a total of 784,517 shares of Series A Preferred
Stock had been converted into 1,855,407 shares of Common Stock.
Uses of Cash. Tatham Offshore's primary uses of cash consist of (i) amounts
due under the Subordinated Notes, (ii) expenses associated with operating its
producing properties, including its 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
18
<PAGE> 21
payable to the Partnership, (v) expenditures related to the North Atlantic
Pipeline project currently under consideration, (vi) payments due under the
Management Agreement with DeepTech and (vii) amounts due under an affiliate
note discussed below.
DeepTech currently holds the Company's Subordinated Notes with an aggregate
principal amount of $60.0 million. Through June 30, 1997, the Subordinated
Notes bore interest at a rate of 11 3/4% per annum, payable quarterly. During
the year ended June 30, 1997, Tatham Offshore paid $7.1 million in interest to
DeepTech under these notes. Effective July 1, 1997, the interest rate under the
Subordinated Notes increased to 13% per annum. Under the terms of the
Subordinated Notes, the principal amount of the notes is payable in seven equal
annual installments beginning August 1, 1999.
In September 1997, DeepTech and Tatham Offshore entered into the
Restructuring Option Agreement. Under the Restructuring Option Agreement,
DeepTech has 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 has 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. Additionally, the Company
believes that by consummating one of the above restructuring transactions that
it will be able to continue to maintain its Nasdaq listing.
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 has agreed
not to sell less than 100% of its interest in Tatham Offshore Development
pending the exercise by DeepTech of one of its options.
During the year ended June 30, 1997, Tatham Offshore completed the
abandonment of its West Cameron 436 property, in which it owns a 47% working
interest, at a net cost to Tatham Offshore of $1.0 million. Unless production
is restored from the Ewing Bank 914 #2 well and the Ship Shoal Block 331 lease,
Tatham Offshore will be required to abandon its facilities on these properties
within the next 12 to 18 months. Tatham Offshore has estimated that the
abandonment liabilities for these properties will total approximately $7.1
million.
Tatham Offshore is obligated to pay to the Partnership commodity charges,
based on the volume of oil and gas transported or processed, under certain
transportation agreements. Tatham Offshore is also obligated to pay to the
Partnership $1.6 million in platform access fees annually relative to its 25%
working interest in its Viosca Knoll Block 817 property.
North Atlantic is the sponsor of a proposal to build a major natural gas
pipeline from offshore Newfoundland and Nova Scotia to the eastern seaboard of
the United States. As of June 30, 1997, Tatham Offshore Canada, the Canadian
representative of North Atlantic, has incurred $1.3 million in
pre-developmental costs in connection with such project. Tatham Offshore
anticipates that pre-developmental costs associated with the North Atlantic
pipeline project could ultimately reach approximately $10 million and the
ultimate capital costs of the project could reach $3.0 billion to $3.5 billion.
See Items 1 and 2. "Business and Properties -- Recent Events -- North
Atlantic Pipeline Project."
19
<PAGE> 22
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 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 year ended June 30, 1997, DeepTech
charged Tatham Offshore $3.3 million in management fees pursuant to this
agreement.
During the year ended June 30, 1997, Tatham Offshore paid DeepTech $1.7
million under an unsecured promissory note which bore interest at 14.5% per
annum.
Liquidity Outlook. In order to improve liquidity and partially address its
capital requirements in recent years, Tatham Offshore (i) sold, subject to
certain reversionary rights, all of its then-existing working interests in the
Assigned Properties to the Partnership for $30 million and certain drilling
commitments, (ii) raised additional equity through the sale of Warrants and
Series A, B and C 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 levels of
services required under its Management Agreement.
Although the Partnership has initiated production from each of the Assigned
Properties, management has determined that given the current estimates of
commodity prices and proved reserves, the possibility that the designated
revenue from the Assigned properties will be sufficient to satisfy the Payout
Amount is remote. However, Tatham Offshore does own a 25% working interest
(subject to a production payment) in Viosca Knoll Block 817 which is currently
producing a total of approximately 79 MMcf of gas and 310 barrels of oil per
day.
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.
Under the terms of the Drilling Arrangement, Tatham Offshore has committed
to pay Sedco Forex a drilling rate of $70,000 per day for the initial well. As
security for its obligations under the Drilling Arrangement, Tatham Offshore
will be required to post an irrevocable letter of credit or cash collateral of
$6.3 million, which amount is equal to the aggregate operating dayrate for the
initial contract well. If Tatham Offshore elects to extend the Drilling
Arrangement, the dayrate for the three well extension option would be $75,000
per day. If Tatham Offshore elects to extend the Drilling Arrangement under the
one year options, the dayrate for the initial year would be $75,000 per day.
The dayrate for the second year under this option would be based on prevailing
market rates. Under either of the extension options, Tatham Offshore and Sedco
Forex must agree upon additional security for the extension period. During the
term of the Drilling Arrangement, Tatham Offshore has the right to subcontract
the rig to other operators and receive the difference between the subcontract
rate and the above agreed upon rates, if any, subject to a fee of 10% of the
difference payable to Sedco Forex. In order to obtain the dayrates outlined
above, Tatham Offshore must exercise its option to drill the initial well by
the later of (i) 180 days after June 30, 1997 or (ii) 30 days after the
completion of a well that Sedco Forex has committed to drill for a third party.
If Tatham Offshore initiates the Drilling Arrangement after the end of the
option period, all drilling dayrates will be at prevailing market rates. Tatham
Offshore has agreed to fund the capital requirements necessary to upgrade and
modify a drilling rig to drill in water depths of 1,500 feet if it wishes to
utilize the rig in water depths greater than its current water depth rating.
Tatham Offshore estimates that the capital costs required for the upgrade would
total approximately $19.0 million.
Tatham Offshore has a second option under the Drilling Arrangement to
utilize a rig offshore eastern Canada for the drilling of one well, at the
existing contract rate, following the completion of drilling activity for a
third party.
Tatham Offshore currently intends to fund its immediate operational needs
with cash on hand and cash from continuing operations. The restructuring of
Tatham Offshore's existing demand charge obligations with the Partnership, the
reduction of its overhead, the initiation of full production from Viosca Knoll
Block 817 and improved commodity
20
<PAGE> 23
prices enabled Tatham Offshore to generate approximately $0.7 million in
positive operating cash flow for the three months ended June 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.
The ability of Tatham Offshore to satisfy its future capital needs will
depend upon its ability to raise additional capital and to successfully
implement its business strategy, particularly its ability to obtain regulatory
approval and financing for its North Atlantic pipeline project and initiate
production from the Sunday Silence Project. Tatham Offshore anticipates that
the new pipeline will be constructed and owned by a consortium of Canadian and
United States companies once regulatory approval is obtained. As of June 30,
1997, Tatham Offshore Canada had incurred $1.3 million with respect to this new
venture. Tatham Offshore anticipates that the ultimate pre-development costs
associated with the North Atlantic project could reach approximately $10.0
million and that the ultimate capital costs of the project would be
approximately $3.0 billion to $3.5 billion. There can be no assurance, however,
that Tatham Offshore will be able to obtain regulatory approval, joint venture
partners or adequate financing for this project.
In addition, Tatham Offshore believes that since the royalty abatement has
been granted, the resulting improved economics for the Sunday Silence Project
will be sufficient to obtain development financing or an industry farmout
arrangement. See Items 1 and 2. "Business and Properties -- Recent Events
- -- Deepwater Royalty Relief" and "-- Oil and Gas Properties -- Description of
Properties -- Ewing Bank Blocks 958, 959, 1002 and 1003."
Tatham Offshore has never declared or paid dividends on its common or
preferred stock. Tatham Offshore expects to retain all available earnings
generated by its operations for the growth and development of its business.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This Annual 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" in the
Company's definitive proxy statement (the "Proxy Statement") relating to the
1997 annual stockholders meeting (the "Annual Meeting"), is incorporated herein
by reference.
The following table sets forth certain information as of September 2, 1997
regarding the executive officers of Tatham Offshore. Each executive officer
named in the following table has been elected to serve until his successor is
duly appointed or elected or until his earlier removal or resignation from
office. No arrangement or understanding exists between any executive officer of
Tatham Offshore and any other person pursuant to which he was or is to be
selected as an officer.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C>
Thomas P. Tatham..........................51 Chairman of the Board, Chief Executive Officer and a Director
Antoine Gautreaux, Jr.....................44 Chief Operating Officer and a Director
E. Lynn Hill..............................51 Chief Financial Officer
Dennis A. Kunetka.........................48 Senior Vice President -- Corporate Finance
Kenneth E. Beeney.........................38 Vice President-- Chief Geophysicist and a Director
John D. Pike..............................42 Vice President -- Chief Geologist
Edward J. Gibbon, Jr......................51 Vice President -- Reservoir Engineering
Jeffrey K. Lucas..........................41 Vice President -- Land Manager
</TABLE>
Thomas P. Tatham has served as Chairman of the Board and a Director of
Tatham Offshore since its inception in 1988. In addition, Mr. Tatham has served
as Chairman of the Board, Chief Executive Officer and a Director of DeepTech
International Inc. ("DeepTech") and Chairman of the Board of Leviathan Gas
Pipeline Company ("Leviathan"), affiliates of Tatham Offshore, since October
1989 and February 1989, respectively. In addition, Mr. Tatham served as Chief
Executive Officer of Leviathan from February 1989 until June 1995. Mr. Tatham
has over 25 years experience in the oil and gas industry. He founded Mid
American Oil Company in 1970 and served as Chairman of the Board and Chief
Executive Officer until he sold his interest therein to Centex Corporation in
1979. In 1979, Mr. Tatham founded Tatham Corporation to acquire Sugar Bowl Gas
Corporation ("Sugar Bowl"), the second largest intrastate pipeline system in
Louisiana. He served as Chairman of the Board of Tatham Corporation from 1979
to December 1983, at which time it sold the assets of Sugar Bowl to a joint
venture between MidCon Corp. and Texas Oil and Gas, Inc. From 1984 to 1988, Mr.
Tatham pursued personal investments in various industries, including the oil
and gas industry.
Antoine Gautreaux, Jr. has served as Chief Operating Officer of Tatham
Offshore since July 1996, a Director since October 1996 and as Senior Vice
President -- Operations from September 1995 to July 1996. Prior to joining the
Company, Mr. Gautreaux was employed by Placid Oil Company for 21 years in
various capacities, including Manager of Drilling and Production. Mr. Gautreaux
received a B.S. degree from Nichols State University.
E. Lynn Hill has served as Chief Financial Officer and Secretary of Tatham
Offshore since March 1997. Prior to joining Tatham Offshore, Mr. Hill served as
Senior Vice President -- Finance, Administration and Secretary -- Treasurer of
Global Natural Resources, Inc. from July 1988 to March 1997. Mr. Hill has over
28 years of experience in finance and auditing in energy related companies and
in public accounting. Mr. Hill received a B.B.A. degree from the University of
North Texas and is a certified public accountant.
Dennis A. Kunetka has served as Senior Vice President -- Corporate Finance
of Tatham Offshore since October 1993. Mr. Kunetka has served as Senior Vice
President -- Corporate Finance and Investor Relations of DeepTech and Leviathan
since August 1993. Prior to joining Tatham Offshore, Mr. Kunetka served as Vice
President and Controller of United Gas Pipe Line Company and its parent
company, United Gas Holding Corporation. Prior to joining United in 1984, Mr.
Kunetka spent 11 years with Getty Oil Company in various tax, financial and
regulatory positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the
University of Houston, a J.D. degree from South Texas College of Law and is a
certified public accountant.
22
<PAGE> 25
Kenneth E. Beeney has served as a Director and Vice President -- Chief
Geophysicist of Tatham Offshore since August 1993. Mr. Beeney has 15 years of
exploration experience, with a primary focus in the Gulf of Mexico. Prior to
joining Tatham Offshore in 1989, Mr. Beeney worked for Tenneco Oil Company
("Tenneco Oil") for eight years and Anadarko Petroleum Corporation on a variety
of exploration assignments. Mr. Beeney received a B.S. in Geophysics from the
Colorado School of Mines.
John D. Pike joined Tatham Offshore in 1991 and has served as Vice
President and Chief Geologist of Tatham Offshore since August 1993. Mr. Pike
has 15 years of exploration experience, with primary focus on various offshore
Louisiana trends. Prior to joining Tatham Offshore, Mr. Pike served Tenneco Oil
from 1981 to 1988 and Forest Oil Company from 1988 to 1991 in a variety of
exploration assignments. Mr. Pike received B.S. and M.S. degrees in Geology
from Texas A&M University and is a member of the American Association of
Petroleum Geologists.
Edward J. Gibbon, Jr. has served as Vice President -- Reservoir Engineering
of Tatham Offshore since September 1995. Mr. Gibbon has served as Vice
President -- Reservoir Engineering of Deepwater Production Systems, Inc., an
affiliate of Tatham Offshore, since September 1993. Prior thereto Mr. Gibbon
served as the President of IDM Engineering, Inc., a company he founded and
which specialized in reservoir engineering studies and economic evaluations.
Mr. Gibbon received a Degree of Petroleum Engineering from the Colorado School
of Mines.
Jeffrey K. Lucas joined Tatham Offshore in 1989 and has served as Vice
President -- Land Manager of Tatham Offshore since June 1991. Mr. Lucas has
worked in the oil industry for 18 years. Prior to joining Tatham Offshore, Mr.
Lucas served in various capacities, including Division Landman, in the Land
Department of Tenneco Oil from 1979 to 1989 and was primarily responsible for
negotiating lease acquisitions in the Rocky Mountain area and the Gulf. Mr.
Lucas received a B.S. in Mineral Land Management from the University of
Colorado.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Election of Directors --
Executive Compensation" in the Proxy Statement relating to the Annual Meeting
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Election of Directors --
Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between
or among the Company, the Partnership, DeepTech and certain other related
parties is summarized in the Company's "Notes to Consolidated Financial
Statements -- Note 3 -- Oil and Gas Properties --" and "-- Note 6 -- Related
Party Transactions --" located elsewhere in this Annual Report.
The information appearing under the captions "Election of Directors --
Certain Relationships and Related Transactions", "-- Equity Incentive Plan",
and "-- Non Employee Director Stock Option Plan" in the Proxy Statement is
incorporated herein by reference.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements
As to financial statements and supplementary information, reference is
made to "Index to Consolidated Financial Statements" on page F-1 of
this Annual Report.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report.
3. (a) Exhibits
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Tatham
Offshore (filed as exhibit 3.1 in Tatham Offshore's
Annual Report on Form 10-K for the fiscal year
ended June 30, 1994, and incorporated herein by
reference).
3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for
the fiscal year ended June 30, 1994, and
incorporated herein by reference).
3.3 Certificate of Amendment of Certificate of
Incorporation of Tatham Offshore (filed as Exhibit
3.1 to the Tatham Offshore, Inc. Quarterly Report
on Form 10-Q for the quarter ended December 31,
1995, Commission File No. 0-22892 and incorporated
herein by reference).
4.1 Certificate of Designation Establishing the Series
A Convertible Exchangeable Preferred Stock of
Tatham Offshore (filed as Exhibit 4.1 to the Tatham
Offshore, Inc. Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995, Commission
File No. 0-22892 and incorporated herein by
reference).
4.2 Certificate of Designation Establishing the Series B
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.2 to the Tatham Offshore, Inc. Quarterly
Report on Form 10-Q for the quarter ended December
31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).
4.3 Certificate of Designation Establishing the Series C
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.3 to the Tatham Offshore, Inc. Quarterly
Report on Form 10-Q for the quarter ended December
31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).
4.4 Certificate of Designation Establishing the
Mandatory Redeemable Preferred Stock (filed as
Exhibit 4.4 to the Tatham Offshore, Inc. Quarterly
Report on Form 10-Q for the quarter ended December
31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).
4.5 Warrant Agreement relating to the warrants
entitling the holder thereof to purchase shares of
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.5 to the Tatham Offshore, Inc. Quarterly
Report on Form 10-Q for the quarter ended December
31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).
24
<PAGE> 27
4.6 Exchange Warrant Agreement relating to the warrants
entitling the holder thereof to purchase shares of
Tatham Offshore's Common Stock (filed as Exhibit
4.6 to the Tatham Offshore, Inc. Quarterly Report
on Form 10-Q for the quarter ended December 31,
1995, Commission File No. 0-22892 and incorporated
herein by reference).
10.1 Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank
of Texas, N.A., as Trustee (filed as Exhibit 10.17
to DeepTech's Registration Statement on Form S-1,
File No. 33-76999, and incorporated herein by
reference).
10.2 Amended and Restated Management Agreement, effective
as of July 1, 1992, between DeepTech and Tatham
Offshore (filed as Exhibit 10.1 to Amendment No. 4
to Tatham Offshore's Registration Statement on Form
S-1, File No. 33-70120, and incorporated herein by
reference).
10.3 First Amendment to the Amended and Restated
Management Agreement, dated as of January 1, 1995,
between DeepTech and Tatham Offshore (filed as
Exhibit 10.71 to DeepTech's Registration Statement
on Form S-1, File No. 33-88688, and incorporated
herein by reference).
10.4 Letter Agreement dated March 22, 1995 between
Tatham Offshore and Ewing Bank Gathering Company,
L.L.C. amending the Gathering Agreement dated July
1, 1992 (filed as Exhibit 10.44 to DeepTech's
Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, Commission File No. 0-23934
and incorporated herein by reference).
10.5 Gas Purchase Agreement dated July 26, 1993 between
Offshore Marketing and Tatham Offshore (filed as
Exhibit 10.17 to Tatham Offshore's Registration
Statement on Form S- 1, File No. 33-70120, and
incorporated herein by reference).
10.6 Condensate Purchase Agreement dated July 26, 1993
between Offshore Marketing and Tatham Offshore
(filed as Exhibit 10.18 to Tatham Offshore's
Registration Statement on Form S-1, File No.
33-70120, and incorporated herein by reference).
10.7 Farmout Agreement, dated October 1, 1994, between
Tatham Offshore, F-W Oil Interests, Inc., O.P.I.
International, Inc., and J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.48 to
DeepTech's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995, Commission File No.
0-23934 and incorporated herein by reference).
10.8 Agreement dated July 2, 1993 and amended on
December 6, 1993 between Fina Oil and Chemical
Company and Petrofina Delaware, Incorporated and
Tatham Offshore covering Viosca Knoll Blocks
772/773, 774, 817, 818 and 861 (filed as Exhibit
10.20 to Tatham Offshore's Registration Statement
on Form S-1, File No. 33-70120, and incorporated
herein by reference).
10.9 Unit Agreement for Outer Continental Shelf
Exploration, Development and Production Operations
for the Ewing Bank Blocks 871, 914, 915, 916, 958
and 959, Ewing Bank Area, Offshore Louisiana, dated
May 13, 1988 by and among Mobil-X, Sohio, Kerr-
McGee and Kerr-McGee Federal Limited Partnership
I-1981 (filed as Exhibit 10.22 to Tatham Offshore's
Registration Statement on Form S-1, File No.
33-70120, and incorporated herein by reference).
10.10 Unit Agreement for Outer Continental Shelf
Exploration, Development and Production Operations
for the Viosca Knoll Blocks 772, 773, 774, 817, 818
and 861, Viosca Knoll Area Offshore Louisiana,
dated July 7, 1993 by and among Tatham Offshore,
Petrofina Delaware, Incorporated and Fina Oil &
Chemical Company (filed as Exhibit 10.23 to Tatham
Offshore's Registration Statement on Form S-1, File
No. 33-70120, and incorporated herein by
reference).
10.11 DeepTech Registration Rights Agreement by and
between Tatham Offshore and DeepTech (filed as
Exhibit 10.25 to Tatham Offshore's Registration
Statement on Form S-1, File No.
33-70120, and incorporated herein by reference).
25
<PAGE> 28
10.12 Indemnification Agreement dated as of October 16,
1993 between Tatham Offshore and its directors
(filed as Exhibit 10.26 to Tatham Offshore's
Registration Statement on Form S-1, File No.
33-70120, and incorporated herein by reference).
10.13 Subordinated Convertible Note Purchase Agreement
between Tatham Offshore and DeepTech, as amended
(filed as exhibit 10.30 in Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June
30, 1994, and incorporated herein by reference).
10.14 11 3/4% Subordinated Convertible Promissory Note
made payable by the Company to the order of the
holder thereof (filed as exhibit 10.31 in Tatham
Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated
herein by reference).
10.15 Form of Stock Option Agreement by and between the
Optionee and Tatham Offshore (filed as exhibit
10.35 in Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1994, and
incorporated herein by reference).
10.16 Agreement for Purchase and Sale by and between
Tatham Offshore, Inc., as Seller, and Flextrend
Development Company, L.L.C., as Buyer, dated June
30, 1995 (filed as Exhibit 6(a) to the Leviathan
Gas Pipeline Partners, L.P. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995,
Commission File Number 1-11680 and incorporated
herein by reference).
10.17 Production Payment Agreement dated as of September
19, 1995 by Tatham Offshore in favor of F-W Oil
Interests, Inc. (filed as Exhibit 10.91 to
DeepTech's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, Commission File
No. 0-23934 and incorporated herein by reference).
10.18 Production Payment Agreement dated as of September
19, 1995 by Tatham Offshore in favor of J. Ray
McDermott Properties, Inc. (filed as Exhibit 10.92
to DeepTech's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, Commission File No.
0-23934 and incorporated herein by reference).
10.19 Tatham Offshore, Inc. Employee Equity Incentive
Plan (filed as Exhibit 10.47 to Tatham Offshore's
Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, and incorporated herein by
reference).
10.20 Tatham Offshore, Inc. Non-Employee Director Stock
Option Plan (filed as Exhibit 10.48 to Tatham
Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995, and incorporated
herein by reference).
10.21 Master Drilling Agreement and Drilling Order
between Tatham Offshore, Inc. and Sedco Forex
Division, Schlumberger Technology Corporation dated
September 19, 1996 (filed as Exhibit 10.50 to
Tatham Offshore's First Amendment to the Annual
Report on Form 10-K/A for the fiscal year ended
June 30, 1996, and incorporated herein by
reference).
10.22 Fourth Amendment to First Amended and Restated
Management Agreement Between DeepTech International
Inc. and Tatham Offshore, Inc. dated as of May 1,
1997 (filed as Exhibit 10.22 to Tatham Offshore's
First Amendment to the Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1997, and
incorporated herein by reference).
21.1* List of Subsidiaries of Tatham Offshore, Inc.
23.1* Consent of Independent Accountants,
PricewaterhouseCoopers LLP.
23.2* Consent of Ryder Scott Company Petroleum Engineers,
Independent Petroleum Engineers.
24.1 Power of Attorney (included on the signature pages
of Tatham Offshore's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997).
- ---------------
* Filed herewith
(b) Reports on Form 8-K
None.
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this First Amendment to the
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TATHAM OFFSHORE, INC.
(Registrant)
By: /s/ Dennis A. Kunetka
---------------------------
Dennis A. Kunetka
Chief Financial Officer
July 6, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
First Amendment to the Annual Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date(s)
indicated.
<TABLE>
<S> <C>
* *
- ---------------------------------------- -----------------------------
Thomas P. Tatham, Chairman of the Board Donald S. Taylor, Director
July 6, 1998 July 6, 1998
* *
- ---------------------------------------- -----------------------------
Antoine Gautreaux, Jr., Director and Kenneth E. Beeney, Director and
Chief Operating Officer Vice President - Chief Geophysicist
July 6, 1998 July 6, 1998
* /s/ Dennis A. Kunetka
- ---------------------------------------- -----------------------------
E. Lynn Hill, Chief Financial Officer Dennis A. Kunetka, Chief Financial Officer
July 6, 1998 (Principal Financial Officer and Principal Accounting Officer)
July 6, 1998
* *
- ---------------------------------------- -----------------------------
Jonathan D. Pollock, Director Diana J. Walters, Director
July 6, 1998 July 6, 1998
* *
- ---------------------------------------- -----------------------------
Phillip G. Clarke, Director Roger B. Vincent, Sr., Director
July 6, 1998 July 6, 1998
* *
- ---------------------------------------- -----------------------------
Humbert B. Powell, III, Director James G. Niven, Director
July 6, 1998 July 6, 1998
*
- ----------------------------------------
Clyde E. Nath, Director
July 6, 1998
*By: /s/ Dennis A. Kunetka
- ----------------------------------------
Dennis A. Kunetka
Attorney-in-Fact
</TABLE>
27
<PAGE> 30
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants............................................... F-2
Consolidated Balance Sheet as of June 30, 1997 and 1996......................... F-3
Consolidated Statement of Operations for the Years Ended
June 30, 1997, 1996 and 1995............................................... F-4
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1997, 1996 and 1995............................................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995......................................... F-6
Notes to Consolidated Financial Statements...................................... F-7
</TABLE>
F-1
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tatham Offshore, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders'
equity present fairly, in all material respects, the financial position of
Tatham Offshore, Inc. and its subsidiaries at June 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
September 19, 1997
F-2
<PAGE> 32
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,887 $ 4,764
Stock subscriptions receivable -- 12,242
Accounts receivable from joint venture partners 201 719
Receivable from affiliates 1,350 968
Prepaid expenses -- 1,943
--------- --------
Total current assets 9,438 20,636
--------- --------
Oil and gas properties:
Oil and gas properties, at cost, using
successful efforts method 81,081 78,158
Less - accumulated depreciation, depletion,
amortization and impairment 50,329 13,258
--------- --------
Oil and gas properties, net 30,752 64,900
--------- --------
Deferred costs and prepaid expenses 1,317 11,594
--------- --------
Total assets $ 41,507 $ 97,130
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 1,385 $ 4,654
Accounts payable to affiliates 155 3,101
Notes payable to affiliate -- 1,734
--------- --------
Total current liabilities 1,540 9,489
Long-term debt to affiliate 60,000 60,000
Other noncurrent liabilities 7,663 8,779
--------- --------
69,203 78,268
--------- --------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit) (Note 5):
Preferred stock, $0.01 par value, 110,000,000 shares authorized as of June
30, 1997 and 1996, respectively, 24,343,931 and 18,724,530 shares issued
and outstanding at June 30, 1997
and 1996, respectively 243 187
Common stock, $0.01 par value, 250,000,000 shares authorized
as of June 30, 1997 and 1996, respectively, 27,355,727 and
25,500,320 shares issued and outstanding as of June 30, 1997
and 1996, respectively 274 255
Warrants outstanding to purchase shares of Convertible
Exchangeable Preferred Stock -- 2,883
Additional paid-in capital 84,225 80,004
Accumulated deficit (112,438) (64,467)
--------- --------
(27,696) 18,862
--------- --------
Total liabilities and stockholders' equity (deficit) $ 41,507 $ 97,130
========= ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 33
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Oil and gas sales to affiliates $ 20,543 $ 15,904 $ 7,800
Oil and gas sales 180 166 254
-------- -------- --------
20,723 16,070 8,054
-------- -------- --------
Costs and expenses:
Production and operating expenses 8,465 13,203 13,745
Exploration expenses 542 637 11,459
Depreciation, depletion and amortization 5,364 1,758 1,210
Impairment, abandonment and other 41,674 8,000 --
Management fee and general and administrative
expenses allocated from affiliate 3,279 4,436 4,967
General and administrative expenses 1,567 1,839 2,145
-------- -------- --------
60,891 29,873 33,526
-------- -------- --------
Operating loss (40,168) (13,803) (25,472)
Interest income 571 113 836
Gain on sale of oil and gas properties -- 22,641 1,496
Interest and other financing costs -- (255) (4,566)
Interest expense - affiliates (8,374) (7,906) (7,065)
-------- -------- --------
Net income (loss) $(47,971) $ 790 $(34,771)
======== ======== ========
Net income (loss) available to common stockholders $(51,891) $ 509 $(34,771)
======== ======== ========
Net income (loss) per common share $ (1.95) $ 0.02 $ (1.39)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 34
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(47,971) $ 790 $(34,771)
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation, depletion and amortization 5,364 1,758 1,210
Impairment, abandonment and other 41,674 8,000 --
Amortization of debt issue costs -- -- 2,810
Gain on sale of oil and gas properties -- (22,641) (1,496)
Other 2,377 1,889 --
Changes in operating working capital:
Decrease (increase) in accounts receivable from joint venture
partners 518 2,743 (2,837)
(Increase) decrease in receivable from affiliates (382) 303 (773)
Decrease (increase) in prepaid expenses 29 175 (81)
(Decrease) increase in accounts payable and accrued liabilities (3,221) (7,809) 15,697
(Decrease) increase in accounts payable to affiliates (2,946) 7,208 (4,092)
-------- -------- --------
Net cash used in operating activities (4,558) (7,584) (24,333)
-------- -------- --------
Cash flows from investing activities:
Additions to oil and gas properties (2,923) (9,143) (25,686)
Deferred costs (1,317) -- --
Proceeds from deferred income related to the
Assigned Properties -- 15,000 15,000
Proceeds from the sale of oil and gas properties -- -- 1,619
-------- -------- --------
Net cash (used in) provided by investing activities (4,240) 5,857 (9,067)
-------- -------- --------
Cash flows from financing activities:
Repayment of notes payable -- (10,468) (11,428)
Proceeds from notes payable to affiliate -- 8,000 --
Repayment of notes payable to affiliate (1,734) (8,000) --
Proceeds of offering of Warrants, net of underwriting fees,
commissions and offering costs -- 11,291 --
Proceeds from issuance of Series A Preferred Stock 12,242 1,804 --
Proceeds from issuance of Series B Preferred Stock 74 -- --
Proceeds from issuance of Series C Preferred Stock 1,339 -- --
Debt issue costs -- -- (183)
-------- -------- --------
Net cash provided by (used in) financing activities 11,921 2,627 (11,611)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,123 900 (45,011)
Cash and cash equivalents at beginning of year 4,764 3,864 48,875
-------- -------- --------
Cash and cash equivalents at end of year $ 7,887 $ 4,764 $ 3,864
======== ======== ========
</TABLE>
Supplemental disclosures to the statement of cash flows - see Note 9.
The accompanying notes are in integral part of this financial statement.
F-5
<PAGE> 35
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, 1994 -- $ -- 25,000 $ 250 $ -- $ 44,987 $(30,486) $14,751
Net loss for the year
ended June 30, 1995 -- -- -- -- -- -- (34,771) (34,771)
------- ----- ------- ---- -------- -------- -------- -------
Balance, June 30, 1995 -- -- 25,000 250 -- 44,987 (65,257) (20,020)
Offering of Warrants, net -- -- -- -- 11,291 -- -- 11,291
Issuance of Senior
Preferred Stock 8 -- -- -- -- 7,500 -- 7,500
Issuance of Series A
Preferred Stock 18,717 187 -- -- (8,408) 26,939 -- 18,718
Issuance of common stock -- -- 500 5 -- 578 -- 583
Net income for the year
ended June 30, 1996 -- -- -- -- -- -- 790 790
------- ----- ------- ---- -------- -------- -------- -------
Balance, June 30, 1996 18,725 187 25,500 255 2,883 80,004 (64,467) 18,862
Issuance of Series B
Preferred Stock 74 1 -- -- (34) 107 -- 74
Issuance of Series C
Preferred Stock 1,338 13 -- -- (602) 1,928 -- 1,339
Conversion of Warrants
into Mandatory Redeemable
Preferred Stock 4,991 50 -- -- (2,247) 2,197 -- --
Conversion of Series A
Preferred Stock into
Common Stock (784) (8) 1,856 19 -- (11) -- --
Net loss for the year
ended June 30, 1997 -- -- -- -- -- -- (47,971) (47,971)
------- ----- ------- ---- -------- -------- --------- -------
Balance, June 30, 1997 24,344 $ 243 27,356 $274 $ -- $ 84,225 $(112,438) $(27,696)
======= ===== ======= ==== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 36
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
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 in the development of offshore pipeline
infrastructure offshore eastern Canada. The Company is an approximately
36.6%-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, transportation and marketing of, and the exploration
for, oil and gas located offshore in the Gulf and offshore eastern Canada.
In March 1997, the Company formed a wholly-owned subsidiary, Tatham Offshore
Canada Limited, to pursue certain opportunities offshore eastern Canada and to
be 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, Nova Scotia to the
eastern seaboard of the United States. In April 1996, the Company 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
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"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Debt issue costs
Debt issue costs are capitalized and amortized over the expected life of the
related indebtedness. Any unamortized debt issue costs are expensed at the time
the related indebtedness is repaid or otherwise terminated.
Oil and gas properties
The Company accounts for its oil and gas exploration and production activities
using the successful efforts method of accounting. Under this method, costs of
successful exploratory wells, development wells and acquisitions of mineral
leasehold interests are capitalized. Production, exploratory dry hole and other
exploration costs, including geological and geophysical costs and delay
rentals, are expensed as incurred. Unproved properties are assessed
periodically and any impairment in value is recognized currently as impairment,
abandonment and other expense. Upon discovery of proved reserves, the costs of
unproved properties are transferred to proved properties.
Depreciation, depletion and amortization of the capitalized costs of producing
oil and gas properties, consisting principally of tangible and intangible costs
incurred in developing a property and costs of productive leasehold interests,
are computed on the unit-of-production method. Unit-of-production rates are
based on annual estimates of remaining proved developed reserves or proved
reserves, as appropriate, for each property. Estimated dismantlement,
restoration and abandonment costs and estimated residual salvage values are
taken into account in determining depreciation provisions. Other noncurrent
liabilities at June 30, 1997 and 1996 include $7,663,000 and $811,000,
respectively, of accrued dismantlement, restoration and abandonment costs.
F-7
<PAGE> 37
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", effective July 1, 1996. SFAS No. 121 requires
recognition of impairment losses on long-lived assets (including proved
properties, wells, equipment and related facilities) if the carrying amount of
such assets, grouped at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows from other assets, exceeds
the estimated undiscounted future cash flows of such assets. Measurement of any
impairment loss is based on the fair value of the assets. Prior to the adoption
of SFAS No. 121, the Company recorded impairments to the extent that the net
book value of oil and gas properties, on an overall basis, exceeded the
estimated undiscounted future net revenue of proved oil and gas reserves, net
of income taxes. Implementation of SFAS No. 121 did not have a material effect
on the Company's financial position or results of operations. See Note 3.
Repair and maintenance costs are charged to expense as incurred; additions,
improvements and replacements are capitalized.
Deferred costs
The Company capitalizes costs related to advisory, legal and other direct
project costs of pending transactions as deferred costs. At June 30, 1997, the
Company had capitalized $1,317,000 of pre-development costs related to its
sponsorship of North Atlantic's proposal to construct a pipeline offshore
eastern Canada as discussed in Note 1.
Revenue recognition
Revenue from oil and gas sales is recognized upon delivery in the period of
production.
Income taxes
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities.
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. For the years ended June 30, 1997,
1996 and 1995, the weighted average number of shares outstanding for purposes
of computing primary earnings (loss) per share were 26,650,835 shares,
41,311,555 shares and 25,000,000 shares, 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 year ended June 30, 1997
as presented on the accompanying consolidated statement of operations. Pro
forma basic net income per share and pro forma dilutive earnings per share is
$0.03 per share and $0.02 per share, respectively, for the year ended June 30,
1996.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, including those related to oil and gas reserves and potential
environmental liabilities, that affect the reported amounts of certain assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the related reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates. Management believes that its estimates are
reasonable.
F-8
<PAGE> 38
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other
The fair values of the financial instruments included in the Company's assets
and liabilities approximate their carrying values.
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation",
effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the
fair value method of accounting for their stock-based compensation plans, the
Company has elected to continue to utilize the intrinsic value method under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". The adoption of SFAS No. 123 did not have a material adverse
effect on the Company's financial position or results of operations at adoption
and during the years ended June 30, 1997 and 1996.
Certain amounts in prior years have been reclassified to conform to the current
year's presentation.
NOTE 3 - OIL AND GAS PROPERTIES:
Capitalized Costs
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------
1997 1996
------------------------------------------ -----------------------------------------
As Previously As As Previously As
Filed Reclassifications Adjusted Filed Reclassifications Adjusted
----------- ----------------- -------- ------------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
Proved properties $ 6,050 $ (604) $ 5,446 $ 6,050 $ (604) $ 5,446
Unproved properties 1,539 604 2,143 1,539 604 2,143
Wells, equipment and related facilities 73,492 -- 73,492 70,569 -- 70,569
----------- -------------- ---------- ---------- --------------- -----------
Total capitalized costs 81,081 -- 81,081 78,158 -- 78,158
Accumulated depreciation, depletion
amortization and impairment (50,329) -- (50,329) (13,258) -- (13,258)
----------- -------------- ---------- ---------- --------------- -----------
Net capitalized costs $ 30,752 $ -- $ 30,752 $ 64,900 $ -- $ 64,900
=========== ============== ========== ========== =============== ===========
</TABLE>
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Activities
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Acquisition of proved properties $ - $ 2,373 $ --
Exploration 542 637 11,459
Development 2,923 8,799 20,559
--------- --------- ---------
Total costs incurred $ 3,465 $ 11,809 $ 32,018
========= ========= =========
</TABLE>
Results of Operations for Oil and Gas Producing Activities
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Oil and gas sales $ 20,723 $ 16,070 $ 8,054
Production and operating expenses (8,465) (13,203) (13,745)
Exploration expenses (542) (637) (11,459)
Depreciation, depletion and amortization (5,364) (1,758) (1,210)
Impairment, abandonment and other (41,674) (8,000) --
---------- ---------- ----------
Results of operations from oil and gas producing
activities (excluding corporate overhead,
interest costs and income tax benefits) $ (35,322) $ (7,528) $ (18,360)
========== ========== ==========
</TABLE>
F-9
<PAGE> 39
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Sale of Properties to Flextrend Development Company, L.L.C.
On June 30, 1995, Flextrend Development Company, L.L.C. ("Flextrend
Development"), a subsidiary of Leviathan Gas Pipeline Partners, L.P. (the
"Partnership"), which is an effective 23.2% owned affiliate of DeepTech,
entered into a purchase and sale agreement (the "Purchase and Sale Agreement")
with Tatham Offshore. Pursuant to the Purchase and Sale Agreement, Flextrend
Development acquired, subject to certain reversionary interests, a 75% working
interest in Viosca Knoll Block 817, a 50% working interest in Garden Banks
Block 72 and a 50% working interest in Garden Banks Block 117 (the "Assigned
Properties") from Tatham Offshore for $30,000,000. The Company received
$15,000,000 at closing and an additional $15,000,000 on August 15, 1995.
Flextrend Development is entitled to retain all of the revenue attributable to
the Assigned Properties until it has received net revenue equal to the Payout
Amount (as defined below), whereupon the Company is entitled to receive a
reassignment of the Assigned Properties, subject to reduction and conditions as
discussed below. Prior to December 10, 1996, "Payout Amount" was defined as an
amount equal to all costs incurred by Flextrend Development with respect to the
Assigned Properties (including the $30,000,000 acquisition cost paid to the
Company) plus interest thereon at a rate of 15% per annum. Effective February
1, 1996, the Partnership entered into an agreement with Tatham Offshore
regarding the restructuring of certain transportation agreements that increased
the amount recoverable from the Payout Amount by $7,500,000 plus interest (see
"Impairment, Abandonment and Other" discussion below). During the year ended
June 30, 1996, the Company waived its options to prepay the then-existing
Payout Amount and receive a reassignment of its working interests and
recognized $22,641,000 as a gain on the sale of oil and gas properties.
Effective December 10, 1996, Flextrend Development exercised its option to
permanently retain 50% of the acquired working interest in the Assigned
Properties in exchange for forgiving 50% of the then-existing Payout Amount
exclusive of the $7,500,000 plus interest added to the Payout Amount in
connection with the restructuring of certain transportation agreements
discussed above. Flextrend Development remains obligated to fund any further
development costs attributable to Tatham Offshore's portion of the working
interests, with such costs to be added to the Payout Amount. Flextrend
Development's election to retain 50% of the acquired working interest in the
Assigned Properties reduced the Payout Amount from $94,020,000 to $50,760,000.
Subsequent to December 10, 1996, only 50% of the development and operating
costs attributable to the Assigned Properties are added to the Payout Amount
and 50% of the net revenue from the Assigned Properties reduce the Payout
Amount. As of June 30, 1997, the Payout Amount totaled $45,918,000. See
"Impairment, Abandonment and Other" discussion below.
Viosca Knoll Block 817
In September 1995, the Company reacquired an aggregate 25% working interest in
Viosca Knoll Block 817 and an approximate 12.5% working interest in the
remainder of Viosca Knoll Blocks 772/773, 774, 818 and 861 (collectively, the
"Viosca Knoll Properties") from two industry partners for a total of
$16,000,000 in convertible production payments payable from 25% of the net cash
flow from the Viosca Knoll Properties so acquired. The estimated net present
value of the convertible production payments payable of $2,000,000 was recorded
as oil and gas properties on the date of acquisition. The unpaid portion of the
production payments is convertible into Tatham Offshore common stock at any
time during the first five years at $8.00 per share. Under certain
circumstances, the industry partners may require DeepTech to purchase the
convertible production payments for an amount equal to 50% of the unrecovered
portion thereof. At June 30, 1997, the unpaid portion of the production payment
obligation totaled $12,535,000. For the year ended June 30, 1997, production
and operating expenses include $1,465,000 of production payments made during
the year.
During the year ended June 30, 1995, the Company recognized a $1,500,000 gain
related to the farmout of 25% of its working interest in its Viosca Knoll
Properties to third parties.
Transportation and Processing Agreements
General. In December 1993, Tatham Offshore entered into a master gas dedication
arrangement with the Partnership (the "Master Dedication Agreement"). Under the
Master Dedication Agreement, Tatham Offshore dedicated all production from its
Garden Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain
adjoining areas of mutual interest to the Partnership for transportation. In
exchange, the Partnership agreed to install the pipeline facilities necessary
to transport production from the areas and certain related facilities and to
provide transportation
F-10
<PAGE> 40
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
services with respect to such production. Tatham Offshore agreed to pay certain
fees for transportation services and facilities access provided under the Master
Dedication Agreement. Pursuant to the terms of the Purchase and Sale Agreement,
Flextrend Development assumed all of Tatham Offshore's obligations under the
Master Dedication Agreement and certain ancillary agreements with respect to the
Assigned Properties.
Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing Bank
Agreement") among Tatham Offshore, DeepTech, and a subsidiary of the
Partnership, Tatham Offshore dedicated all natural gas and crude oil produced
from eight of its Ewing Bank leases for gathering and redelivery by the
Partnership and was obligated to pay a demand rate as well as a commodity
charge equal to 4% of the market price of production actually transported.
Tatham Offshore's Ewing Bank 914 #2 well commenced production in August 1993.
Production and operating expenses on the accompanying consolidated statement of
operations included demand and commodity fees of $1,493,000, $5,090,000 and
$6,906,000 for the years ended June 30, 1997, 1996 and 1995, respectively,
related to the Ewing Bank Agreement. In March 1996, the Partnership settled all
remaining unpaid demand charge obligations under this agreement in exchange for
certain consideration as discussed below.
Ship Shoal. Tatham Offshore and the Partnership also entered into a gathering
and processing agreement (the "Ship Shoal Agreement") pursuant to which the
Partnership constructed a gathering line from Tatham Offshore's Ship Shoal
Block 331 lease to interconnect with a third-party pipeline at the
Partnership's processing facilities located on its Ship Shoal Block 332
platform. Pursuant to the terms of the Ship Shoal Agreement, and in
consideration for constructing the interconnect, refurbishing the platform and
providing access to the processing facilities, Tatham Offshore was required to
pay the Partnership demand charges and has dedicated all production from its
Ship Shoal 331 lease and eight additional surrounding leases for gathering and
processing by the Partnership for additional commodity fees. Production and
operating expenses on the accompanying consolidated statement of operations
include demand and commodity fees of $638,000, $997,000 and $1,408,000 for the
years ended June 30, 1997, 1996 and 1995, respectively, related to the Ship
Shoal Agreement. In March 1996, the Partnership settled all remaining unpaid
demand charge obligations under this agreement in exchange for certain
consideration as discussed below.
Transportation Agreements Settled. Effective February 1, 1996, Tatham Offshore
entered into an agreement with the Partnership to prepay its remaining demand
charge obligations under the Ewing Bank and Ship Shoal Agreements. Under the
agreement, Tatham Offshore's demand charge obligations relative to the Ewing
Bank Gathering System and the pipeline facilities constructed by the
Partnership for its Ship Shoal property have been prepaid in full. In exchange,
Tatham Offshore (i) issued to the Partnership 7,500 shares of Senior Preferred
Stock (as defined in Note 5) with a liquidation preference of $1,000 per share,
(ii) added the sum of $7,500,000 to the Payout Amount under the Purchase and
Sale Agreement with Flextrend Development and (iii) granted to the Partnership
certain rights to use and acquire the Ship Shoal Block 331 platform. The
Partnership has the right to utilize the Ship Shoal Block 331 platform and
related facilities at a rental rate of $1.00 per annum for such period as the
platform is owned by Tatham Offshore and located on the Ship Shoal Block 331,
provided such use does not interfere with lease operations or other activities
of Tatham Offshore. In addition, the Partnership has a right of first refusal
relative to a sale of the platform. The agreement with the Partnership resulted
in a reduction in demand charge payments of $4,100,000 and $7,800,000 for the
years ended June 30, 1996 and 1997, respectively. Tatham Offshore remains
obligated to pay the commodity charges under these agreements. At June 30,
1996, the total present value of the unamortized demand charge obligations of
$13,507,000 was reflected as prepaid expenses and the $7,500,000 addition to
the Payout Amount, including accrued interest of $469,000, was classified as a
production payment and included in other noncurrent liabilities in the
accompanying consolidated balance sheet. See "Impairment, Abandonment and
Other" discussion below.
Impairment, Abandonment and Other
In May 1997, the Company shut-in the Ewing Bank 914 #2 well as a result of a
downhole mechanical problem. Although Tatham Offshore is evaluating potential
workover and recompletion alternatives for this well, the Company, at June 30,
1997, reserved its remaining investment in the Ewing Bank 914 #2 well and
certain adjacent leases and accrued additional costs associated with the
abandonment of this well and the Ewing Bank 915 #4 well.
F-11
<PAGE> 41
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Problems resulting from the completion of three wellbores at Ship Shoal Block
331 have resulted in only a minimal amount of production from the property and
the Company has decided not to pursue further recompletion operations at this
time. As a result of the Company's decision, at June 30, 1997, the Company
reserved its investment in its Ship Shoal Block 331 and accrued costs
associated with the abandonment of the platform and wells.
In addition, the Company has determined that given the current estimates of
commodity prices and proved reserves, the possibility that the designated
revenue from the Assigned Properties will be sufficient to satisfy the Payout
Amount is remote. Unless the Payout Amount is reduced to zero, the Partnership
will retain 100% of the revenue from its working interest in the Assigned
Properties.
In summary, impairment, abandonment and other on the accompanying consolidated
statement of operations includes the following items related to the Ewing Bank
and Ship Shoal properties discussed above.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
1997 1996
(In thousands)
<S> <C> <C>
Reserve investments in oil and gas properties $ 32,389 $ 8,000
Accrue abandonment costs 6,622 --
Expense prepaid demand charges, net 2,663 --
-------- --------
$ 41,674 $ 8,000
======== ========
</TABLE>
NOTE 4 - INDEBTEDNESS:
Long-term debt - affiliates
As of June 30, 1997, the Company had $60,000,000 aggregate principal amount of
Subordinated Convertible Promissory Notes (the "Subordinated Notes")
outstanding. The Subordinated Notes bore interest at a rate of 11 3/4% per
annum, payable quarterly. Effective July 1, 1997, the interest rate increased
to 13% per annum. Interest expense related to this borrowing totaled
$7,040,000, $7,060,000 and $7,050,000 for the years ended June 30, 1997, 1996
and 1995, respectively. Under the terms of the Subordinated Notes, the
principal amount of the notes was payable in seven equal annual installments of
approximately $8,571,000 commencing August 1, 1999. See Note 10.
Other
Interest expense related to third party debt totaled $256,000 and $665,000 for
the years ended June 30, 1996 and 1995, respectively. Amortization of debt
issue costs of $2,810,000 is included as interest expense in the accompanying
statement of operations for the year ended June 30, 1995.
F-12
<PAGE> 42
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 - STOCKHOLDERS' EQUITY:
The following table summarizes the Company's outstanding equity:
<TABLE>
<CAPTION>
Dividends In Arrears
Shares Outstanding at June 30, June 30, Conversion/
------------------------------ Liquidation Dividend ------------------------ Exchange
Equity 1997 1996 Preference Rate 1997 1996 Features
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Preferred
Stock (a) 7,500 7,500 $1,000 per share 9% $ 956,000 $281,000 (e)
Series A Preferred
Stock (b) 17,932,513 18,717,030 $1.50 per share 12% 3,228,000 -- (f)(g)
Series B Preferred
Stock 74,379 -- $1.00 per share 8% 4,000 -- (f)(g)
Series C Preferred
Stock (c) 1,338,162 -- $0.50 per share 4% 13,000 -- (f)(g)
Mandatory Redeemable
Preferred Stock (d) 4,991,377 -- $0.50 per share -- -- -- (g)(h)
Warrants -- 6,403,918 N/A -- -- -- (i)
Common Stock 27,355,727 25,500,320 N/A -- -- -- --
</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. The
Partnership holds all outstanding shares. See Note 3.
(b) DeepFlex Production Services, Inc. ("DeepFlex Services"), an affiliate of
the Company, 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 Tatham Offshore to sell all
or any portion of the Senior Preferred Stock to Tatham Offshore 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 Tatham
Offshore 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 June 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 common stock pursuant to the exercise of
Exchange Warrants, subject to certain conditions.
(i) On January 1, 1997, all outstanding Warrants were automatically converted,
without any action on the part of the holders thereof, into an equal number
of shares of Mandatory Redeemable Preferred Stock.
Common Stock
Effective February 1996, an amendment to the Company's Restated Certificate of
Incorporation increased the number of authorized shares of the Company's common
stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000 shares
and the number of shares of preferred stock, $0.01 par value per share, from
10,000,000 shares to 110,000,000 shares. This increase in authorized capital
was necessary in order for the Company to effect the rights offering, as
discussed below.
During the year ended June 30, 1996, the Company issued 245,182 shares of
common stock to certain management personnel of DeepTech in connection with
DeepTech's deferred compensation arrangement discussed in Note 6.
Preferred Stock
The Company filed a registration statement (the "Offering") with the Securities
and Exchange Commission (the "Commission") which was declared effective on
December 26, 1995, relating to the granting to all holders of Tatham Offshore's
common stock, on the record date, December 26, 1995, rights (the "Rights") to
purchase up to
F-13
<PAGE> 43
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
25,120,948 warrants (the "Warrants"). Each Right entitled the holder to
subscribe to purchase one Warrant at the purchase price of $.50 per Warrant. In
February 1996, the Company issued 25,120,948 Warrants and received $12,560,000
in gross proceeds ($11,291,000 in net proceeds) pursuant to the exercise of
Rights. A total of 20,129,571 Warrants were exercised to purchase 18,717,030
shares, 74,379 shares and 1,338,162 shares of Series A, B and C Preferred
Stock, respectively, at $1.00 per share which generated an additional
$15,459,000 in proceeds to the Company. The remaining 4,991,377 Warrants
outstanding on January 1, 1997 were automatically converted into an equal
number of shares of Mandatory Redeemable Preferred Stock.
Stock Compensation Plans
On August 28, 1995, the Company filed a registration statement on Form S-8 with
the Commission for the registration of 4,000,000 shares of common stock
authorized for issuance upon exercise of options under the Company's Equity
Incentive Plan (the "Incentive Plan") and 1,000,000 shares of common stock
authorized for issuance upon exercise of options under the Company's
Non-Employee Director Stock Option Plan (the "Director Option Plan" and
collectively with the Incentive Plan, the "Option Plans"). The Incentive Plan,
as amended, provides the Company the ability to issue a variety of awards
pursuant to the plan including stock options, restricted stock, stock
appreciation rights and stock value equivalent awards. In June 1996, the
Company issued 255,138 shares of common stock to outside directors pursuant to
the exercise of options granted under the Director Option Plan in settlement of
directors' fees and meeting attendance fees for the year ended June 30, 1996.
During the years ended June 30, 1997 and 1996, Tatham Offshore issued 90,000
options and 130,000 options, respectively, pursuant to the Director Option
Plan. Options outstanding under the Option Plans at June 30, 1997 totaled
245,000 of which 95,000 options were exercisable. In addition, Tatham Offshore
issued 790,000 stock appreciation rights pursuant to the Incentive Plan during
the year ended June 30, 1997.
NOTE 6 - RELATED PARTY TRANSACTIONS:
DeepTech
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, 1993, the management agreement
between the Company and DeepTech provided for an annual management fee equal to
40% of DeepTech's overhead. Effective November 1, 1995 and July 1, 1996, the
Company amended its management agreement with DeepTech to provide for an annual
management fee of 27.4% and 24%, respectively, of DeepTech's overhead. During
the years ended June 30, 1997, 1996 and 1995, DeepTech charged Tatham Offshore
$3,279,000, $4,436,000 and $4,967,000, respectively, under the management
agreement. On June 30, 1996, DeepFlex Services exercised 4,670,957 of its
10,000,000 Warrants to purchase an equal number of shares of Series A Preferred
Stock at $1.00 per share by offsetting the then outstanding payable to DeepTech
for costs allocated under the management agreement by $4,670,957.
On November 1, 1995, the Company converted $1,734,000 of its accounts payable
to an affiliate into an unsecured promissory note payable to DeepTech (the
"Affiliate Note"). The Affiliate Note bore interest at 14.5% per annum, payable
quarterly, and the principal was payable to DeepTech in six monthly
installments which began on January 31, 1997. Interest expense related to the
Affiliate Note totaled $202,000 and $170,000 for the years ended June 30, 1997
and 1996, respectively.
In October 1995, DeepFlex Services entered into a bridge loan agreement (the
"Bridge Loan") with Tatham Offshore whereby DeepFlex Services agreed to make
$12,500,000 of interim bridge financing available to fund a portion of the
Company's working capital and capital requirements. Tatham Offshore borrowed a
total of $8,000,000 under the Bridge Loan which accrued interest at a rate of
15% per annum. Interest expense related to borrowings under the Bridge Loan
totaled $210,000 for the year ended June 30, 1996. On January 31, 1996,
DeepFlex Services subscribed for the purchase of 10,000,000 Warrants, pursuant
to the exercise of Rights which had been assigned from DeepTech, at a cost of
$5,000,000, which was paid through the forgiveness of $5,000,000 of principal
and interest due under the Bridge Loan. In February 1996, Tatham Offshore used
Offering proceeds to repay in full the remaining principal and accrued interest
outstanding under the Bridge Loan.
F-14
<PAGE> 44
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective July 1, 1995, DeepTech established three deferred compensation
arrangements: (i) a mandatory arrangement for DeepTech's Chief Executive
Officer (the "DeepTech CEO"), (ii) a mandatory arrangement for certain senior
executives of DeepTech and (iii) an optional arrangement for all other
employees of DeepTech. Pursuant to the terms of each arrangement, participants
deferred all or a portion of their cash salary until no later than July 1,
1996. During each month in the deferral period, each participant was entitled
to receive options to purchase a number of shares of either DeepTech or Tatham
Offshore or Preference Units of the Partnership equal to a percentage (ranging
from 100% to 300% of their cash salary) divided by the lesser of the closing
price on June 30, 1995 (DeepTech - $4.00, Tatham Offshore - $3.50 and the
Partnership - $11.875) or the average closing price for the applicable month.
Options were exercisable only by cancellation of the participant's cash salary.
Each participant earned credits equal to a multiple, based on the option
elected, of their deferred cash salary. Any participant except the DeepTech CEO
could have received all or a portion of their salary in cash if they did not
elect to exercise any options. To the extent that the Company issued its common
stock pursuant to the exercise of options granted under these arrangements, it
received an offsetting credit against its management fees payable to DeepTech.
In November 1995, DeepTech terminated the deferred compensation arrangement for
all but three employees of DeepTech. In November 1995 and June 1996, the
Company issued 120,948 shares and 124,234 shares, respectively, of its common
stock in connection with the mandatory arrangement for certain senior
executives of DeepTech and received a $360,000 credit against its management
fees payable to DeepTech.
Other
The Partnership charged Tatham Offshore $1,995,000 and $1,722,000 for the years
ended June 30, 1997 and 1996, respectively, for commodity and platform access
fees associated with the Viosca Knoll 817 lease in accordance with certain
agreements between the parties. Commodity charges are based on the volume of
oil and gas transported or processed.
During the years ended June 30, 1997, 1996 and 1995, the Company sold 99%, 99%
and 97%, respectively, of its production to Offshore Gas Marketing, Inc.
("Offshore Marketing"), an 80%-owned subsidiary of DeepTech. Through October
1995, the sales prices were based upon contractually agreed-upon posted prices.
In November 1995, Tatham Offshore renegotiated its agreement with Offshore
Marketing to provide Offshore Marketing fees equal to 2% of the sales value of
crude oil and condensate and $0.015 per dekatherm of natural gas for selling
the Company's production.
Dover Technology, Inc. ("Dover"), a 50%-owned subsidiary of DeepTech, charged
Tatham Offshore $160,000, $601,000 and $747,000 for the years ended June 30,
1997, 1996 and 1995, respectively, for services related to the acquisition,
development, exploration or evaluation of oil and gas properties. Tatham
Offshore's payable to Dover for these services in the amount of $1,734,000 at
November 1, 1995 was converted into the Affiliate Note.
During the year ended June 30, 1996, the Company forgave a $90,000 advance to
an officer of DeepTech who is also a stockholder of the Company in exchange for
consulting fees rendered by the officer/stockholder to Tatham Offshore.
F-15
<PAGE> 45
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7 - INCOME TAXES:
The Company's deferred income tax liabilities (assets) at June 30, 1997 and
1996 consist of net operating loss ("NOL") carryforwards and the tax effect of
timing differences between financial and tax reporting related to the
recognition of certain amounts as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1997 1996
(in thousands)
<S> <C> <C>
Oil and gas properties $ 702 $ 1,142
----------- -----------
Gross deferred liability 702 1,142
----------- -----------
NOL carryforwards (38,315) (22,445)
----------- -----------
Gross deferred asset (38,315) (22,445)
----------- -----------
Net deferred tax asset (37,613) (21,303)
Valuation allowances 37,613 21,303
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Because of the Company's cumulative losses, valuation allowances of $37,613,000
and $21,303,000 at June 30, 1997 and 1996, respectively, were provided against
the net deferred tax assets. At June 30, 1997, the Company had approximately
$112,691,000 of regular tax NOL carryforwards and approximately $111,280,000 of
alternative minimum tax NOL carryforwards. These losses begin to expire in the
year 2005. Although substantial changes in a company's ownership can result in
an annual limitation on the utilization of federal income tax NOL
carryforwards, it is not anticipated that this restriction will significantly
affect the utilization of Tatham Offshore's NOL carryforwards.
NOTE 8 - 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 $19.0 million.
F-16
<PAGE> 46
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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. Realization of the full
potential of the Company's properties is dependent upon the ability to obtain
sufficient additional capital or project financing.
NOTE 9 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Cash paid for interest, net of
amounts capitalized $ 7,249 $ 7,693 $ 8,548
</TABLE>
Supplemental disclosures of noncash investing and financing activities
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Additions to oil and gas properties $ -- $ (2,000) $ --
Issuance of notes payable -- -- 12,813
Increase (reduction) in accounts payable
and accrued liabilities -- 2,000 (12,813)
Deferred income related to oil and gas
properties held for sale -- -- 15,000
Receivable from affiliate -- -- (15,000)
Stock subscriptions receivable -- (12,242) --
Issuance of Series A Preferred Stock -- 16,913 --
Payable to affiliate -- (4,671) --
</TABLE>
NOTE 10 - SUBSEQUENT EVENTS:
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 has agreed to
forgive the next two scheduled interest payments under the Subordinated Notes,
a total of $3,900,000. In exchange, DeepTech received several options from
Tatham Offshore and has 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.
Tatham Offshore Development holds the leasehold interests in Ewing Bank Blocks
958, 959, 1002 and 1003, the Sunday Silence Project. Under the Restructuring
Option Agreement, Tatham Offshore has the right to pursue the
F-17
<PAGE> 47
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 with Sedco Forex
for the use of a semisubmersible drilling rig in the Gulf. Tatham Offshore has
agreed not to sell less than 100% of its interest in Tatham Offshore
Development pending the exercise by DeepTech of one of its options.
NOTE 11 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
Oil and gas reserves
The following table represents the Company's net interest in estimated
quantities of developed and undeveloped reserves of crude oil, condensate and
natural gas and changes in such quantities at fiscal year end 1997, 1996 and
1995. Estimates of the Company's reserves at June 30, 1997, 1996 and 1995 have
been made by the independent engineering consulting firm, Ryder Scott Company
Petroleum Engineers. Net proved reserves are the estimated quantities of crude
oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are proved reserve volumes that can be expected to be recovered through
existing wells with existing equipment and operating methods. Proved
undeveloped reserves are proved reserve volumes that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
significant expenditure is required for recompletion.
Estimates of reserve quantities are based on sound geological and engineering
principles, but, by their very nature, are still estimates that are subject to
substantial upward or downward revision as additional information regarding
producing fields and technology becomes available.
<TABLE>
<CAPTION>
Oil/Condensate (barrels)
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Proved reserves -- June 30, 1994 13,351 (4,401) 8,950
Revisions of previous estimates 3 -- 3
Extensions, discoveries and other additions 1,767 (1,767) --
Production (333) -- (333)
Sales of reserves in place (2,733) -- (2,733)
------------ ------------ ------------
Proved reserves - June 30, 1995 12,055 (6,168) 5,887
Revisions of previous estimates (168) -- (168)
Extensions, discoveries and other additions 398 -- 398
Production (418) -- (418)
------------ ------------ ------------
Proved reserves -- June 30, 1996 11,867 (6,168) 5,699
Revisions of previous estimates (11,608) 6,168 (5,440)(b)
Extensions, discoveries and other additions 36 -- 36
Production (170) -- (170)
------------ ----------- ------------
Proved reserves -- June 30, 1997 125 -- 125
============ =========== ============
Proved developed reserves -- June 30, 1995 3,661 -- 3,661
============ =========== ============
Proved developed reserves -- June 30, 1996 3,388 -- 3,388
============ =========== ============
Proved developed reserves -- June 30, 1997 125 -- 125
============ =========== ============
</TABLE>
- -----------------
(a) The Company has complied with the Securities and Exchange Commission's
position by revising downward the proved reserves associated with the
Company's Sunday Silence field.
(b) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels
as a result of the assignment of the working interests in Ship Shoal Block
331 to a third party and (ii) the elimination of 2.1 million barrels as a
result of the abandonment of the Ewing Bank Block 914 #2 well.
F-18
<PAGE> 48
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Natural gas (MCF)
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- -----------
(In thousands)
<S> <C> <C> <C>
Proved reserves -- June 30, 1994 99,300 (6,162) 93,138
Revisions of previous estimates (7,146) -- (7,146)
Extensions, discoveries and other additions 1,117 (1,117) --
Production (1,505) -- (1,505)
Sales of reserves in place (50,156) -- (50,156)
------------ ----------- -----------
Proved reserves - June 30, 1995 41,610 (7,279) 34,331
Revisions of previous estimates (3,902) -- (3,902)
Purchase of reserves in place 17,160 -- 17,160
Extensions, discoveries and other additions 8,427 -- 8,427
Production (1,035) -- (1,035)
------------ ----------- -----------
Proved reserves -- June 30, 1996 62,260 (7,279) 54,981
Revisions of previous estimates (43,328) 7,279 (36,049)(b)
Extensions, discoveries and other additions 540 -- 540
Production (7,180) -- (7,180)
------------ ----------- -----------
Proved reserves -- June 30, 1997 12,292 -- 12,292
============ =========== ===========
Proved developed reserves -- June 30, 1995 13,930 -- 13,930
============ =========== ===========
Proved developed reserves -- June 30, 1996 35,274 -- 35,274
============ =========== ===========
Proved developed reserves -- June 30, 1997 12,292 -- 12,292
============ =========== ===========
</TABLE>
- -----------------
(a) The Company has complied with the Securities and Exchange Commission's
position by revising downward the proved reserves associated with the
Company's Sunday Silence field.
(b) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 24,369 MMcf as a
result of the assignment of the working interests in Ship Shoal Block 331
to a third party and (ii) the elimination of 3,178 MMcf as a result of the
abandonment of the Ewing Bank Block 914 #2 well.
In general, estimates of economically recoverable oil and natural gas reserves
and of the future net revenue therefrom are based upon a number of variable
factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs and
future plugging and abandonment costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group
of properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Furthermore, Tatham Offshore's wells have only been producing for a short
period of time and, accordingly, estimates of future production are based on
this limited history. Estimates with respect to proved reserves that may be
developed and produced in the future are often based upon volumetric
calculations and upon analogy to similar types of reserves rather than upon
actual production history. Estimates based on these methods are generally less
reliable than those based on actual production history. Subsequent evaluation
of the same reserves based upon production history will result in variations,
which may be substantial, in the estimated reserves. A significant portion of
Tatham Offshore's reserves is based upon volumetric calculations.
Future net cash flows
The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
Accordingly, future cash inflows were determined by applying year-end oil and
gas prices to the Company's estimated share of future production from proved
oil and gas reserves. The average prices utilized in the calculation
F-19
<PAGE> 49
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of the standardized measure of discounted future net cash flows at June 30, 1997
were $17.20 per barrel of oil and $2.39 per MCF of gas. Future production and
development costs were computed by applying year-end costs to future years.
Future income taxes were derived by applying year-end statutory tax rates to the
estimated net future cash flows taking into consideration the Company's NOL
carryforwards. A prescribed 10% discount factor was applied to the future net
cash flows.
In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Future cash inflows $ 31,512 $ -- $ 31,512
Future production costs (16,750) -- (16,750)
Future development costs (2,096) -- (2,096)
Future income tax expenses -- -- --
------------ ----------- -----------
Future net cash flows 12,666 -- 12,666
Annual discount at 10% rate (1,623) -- (1,623)
------------ ----------- -----------
Standardized measure of discounted future
net cash flows $ 11,043 $ -- $ 11,043
============ =========== ===========
</TABLE>
- -----------------
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
<TABLE>
<CAPTION>
June 30,1996
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Future cash inflows $ 383,130 $ (142,772) $ 240,358
Future production costs (128,195) 53,199 (74,996)
Future development costs (89,024) 44,400 (44,624)
Future income tax expenses (14,882) 14,451 (431)
------------ ----------- ------------
Future net cash flows 151,029 (30,722) 120,307
Annual discount at 10% rate (47,346) 17,033 (30,313)
------------ ----------- ------------
Standardized measure of discounted future
net cash flows $ 103,683 $ (13,689) $ 89,994
============ =========== ============
</TABLE>
- -----------------
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
F-20
<PAGE> 50
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Future cash inflows $ 275,415 $ (115,899) $ 159,516
Future production costs (100,638) 51,944 (48,694)
Future development costs (88,801) 44,400 (44,401)
Future income tax expenses -- -- --
------------ ----------- ------------
Future net cash flows 85,976 (19,555) 66,421
Annual discount at 10% rate (37,993) 16,578 (21,415)
------------ ----------- ------------
Standardized measure of discounted future
net cash flows $ 47,983 $ (2,977) $ 45,006
============ =========== ============
</TABLE>
_________________
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Proved Proved
Developed Undeveloped Total
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Undiscounted estimated future net cash flows
from proved reserves before income taxes $ 12,666 $ -- $ 12,666
Adjustment - Sunday Silence field (a) -- -- --
------------ ------------ ------------
Adjusted undiscounted estimated future net cash
flows from proved reserves before income taxes $ 12,666 $ -- $ 12,666
============ ============ ============
Present value of future net cash flows from
proved reserves before income taxes,
discounted at 10% $ 11,043 $ -- $ 11,043
Adjustment - Sunday Silence field (a) -- -- --
------------ ------------ ------------
Adjusted present value of future net cash flows
from proved reserves before income taxes,
discounted at 10% $ 11,043 $ -- $ 11,043
============ ============ ============
</TABLE>
_________________
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
F-21
<PAGE> 51
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following are the principal sources of change in the standardized measure:
<TABLE>
<CAPTION>
Year Ended June 30, 1997
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Beginning of year $ 103,683 $ (13,689) $ 89,994
Sales and transfers of oil and gas produced,
net of production costs (13,771) -- (13,771)
Net changes in prices and production costs (52,887) 17,532 (35,355)
Extensions, discoveries and improved
recovery, less related costs 627 -- 627
Changes in estimated future development costs 70,198 (41,239) 28,959
Previously estimated development costs
incurred during the year 2,976 -- 2,976
Revisions of previous quantity estimates (78,596) 31,337 (47,259) (b)
Net change in income taxes 5,330 (5,330) --
Accretion of discount 10,901 (1,902) 8,999
Changes in production rates, timing and other (37,418) 13,291 (24,127)
------------ ----------- ------------
End of year $ 11,043 $ -- $ 11,043
============ =========== ============
</TABLE>
_________________
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
(b) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels
of oil and 24,369 MMcf of gas as a result of the assignment of the working
interests in Ship Shoal Block 331 to a third party and (ii) the elimination
of 2.1 million barrels of oil and 3,178 MMcf of gas as a result of the
abandonment of the Ewing Bank Block 914 #2 well.
<TABLE>
<CAPTION>
Year Ended June 30, 1996
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Beginning of year $ 47,983 $ (2,977) $ 45,006
Sales and transfers of oil and gas produced,
net of production costs (8,678) -- (8,678)
Net changes in prices and production costs 38,730 (11,932) 26,798
Extensions, discoveries and improved
recovery, less related costs 3,746 -- 3,746
Changes in estimated future development costs 5,764 (3,177) 2,587
Previously estimated development costs
incurred during the year 1,987 -- 1,987
Revisions of previous quantity estimates (3,198) -- (3,198)
Purchase of reserves in place 18,200 -- 18,200
Net change in income taxes (5,330) 5,330 --
Accretion of discount 4,798 (297) 4,501
Changes in production rates, timing and other (319) (636) (955)
------------ ----------- ------------
End of year (b) $ 103,683 $ (13,689) $ 89,994
============ =========== ============
</TABLE>
_________________
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
(b) The standardized measure calculations at June 30, 1995 exclude the
Company's obligations to pay demand charges to an affiliate relative to its
Ewing Bank and Ship Shoal properties. These demand charges were prepaid in
full during the year ended June 30, 1996. See Note 6.
F-22
<PAGE> 52
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30, 1995
----------------------------------------------
As Previously
Filed Adjustments (a) As Adjusted
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Beginning of year $ 107,665 $ (6,863) $ 100,802
Sales and transfers of oil and gas produced,
net of production costs (3,156) -- (3,156)
Net changes in prices and production costs (32,805) (5,756) (38,561)
Extensions, discoveries and improved
recovery, less related costs 1,227 (1,227) --
Changes in estimated future development costs (10,909) 3,177 (7,732)
Previously estimated development costs
incurred during the year 13,000 -- 13,000
Revisions of previous quantity estimates (6,917) -- (6,917)
Sales of reserves in place (25,298) -- (25,298)
Net change in income taxes 18,410 -- 18,410
Accretion of discount 12,607 (4,368) 8,239
Changes in production rates, timing and other (25,841) 12,060 (13,781)
------------ ----------- ------------
End of year (b) $ 47,983 $ (2,977) $ 45,006
============ =========== ============
</TABLE>
_________________
(a) The Company has complied with the position of the Securities and Exchange
Commission by revising downward the standardized measure information
related to the Company's Sunday Silence field.
(b) The standardized measure calculations at June 30, 1995 and 1994 exclude the
Company's obligations to pay demand charges to an affiliate relative to its
Ewing Bank and Ship Shoal properties. These demand charges were prepaid in
full during the year ended June 30, 1996. See Note 6.
F-23
<PAGE> 53
EXHIBIT INDEX
21.1 List of Subsidiaries of Tatham Offshore, Inc.
23.1 Consent of Independent Accountants.
23.2 Consent of Ryder Scott Company Petroleum Engineers,
Independent Petroleum Engineers.
<PAGE> 1
EXHIBIT 21.1
TATHAM OFFSHORE SUBSIDIARIES
Tatham Offshore, Inc., a Delaware corporation
Tatham Offshore Development, Inc., a Delaware corporation
Tatham Offshore Canada Limited, a Nova Scotia company
Tatham Offshore (Jersey) Ltd., a company organized under the laws of Jersey
North Atlantic Pipeline Company, L.L.C., a Delaware limited liability company
North Atlantic Pipeline (Nova Scotia) Company, U.L.C., a Nova Scotia
unlimited liability company
North Atlantic Pipeline Partners, L.P., a Delaware limited partnership
North Atlantic Pipeline Partners, L.P., a Newfoundland limited partnership
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (33-96274) of our report dated September 19,1997
relating to the financial statements of Tatham Offshore, Inc. for the year
ended June 30, 1997 appearing on page F-2 of this Form 10-K/A.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 2, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF RYDER SCOTT COMPANY PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference into the
Registration Statement on Form S-8 (File Number 33-96274) of Tatham Offshore,
Inc. of the use of our report, Estimated Net Reserves and Income Data
Attributable to Certain Leasehold and Royalty Interests of Tatham Offshore,
Inc., dated as of June 30, 1997, and all references to our firm appearing in
this Annual Report on Form 10-K/A of Tatham Offshore, Inc. for the fiscal year
ended June 30, 1997.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
July 6, 1998
