<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 0-22892
TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT
THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF NOVEMBER 2, 1998, THERE WERE OUTSTANDING 26,074,321 SHARES OF
COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
================================================================================
<PAGE> 2
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION...................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1998 (unaudited) and June 30, 1998............3
Unaudited Consolidated Statement of Operations for the Three Months
Ended September 30, 1998 and 1997, respectively...........................................4
Unaudited Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1998 and 1997.........................................................5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Three Months Ended September 30, 1998 (unaudited).........................................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS............................................................................16
PART II. OTHER INFORMATION.....................................................................17
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES ......................................................................................18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,568 $ 2,689
Accounts receivable 2,435 2,957
Receivable from affiliates 26 514
Prepaid expenses 165 167
--------- ---------
Total current assets 4,194 6,327
--------- ---------
Property and equipment:
Semisubmersible drilling rigs 136,381 135,754
Oil and gas properties, at cost, using successful efforts method -- 26,762
--------- ---------
136,381 162,516
Less - accumulated depreciation, depletion, amortization and impairment 7,876 27,532
--------- ---------
Property and equipment, net 128,505 134,984
--------- ---------
Restricted cash 6,100 --
Deferred costs 11,746 11,529
Debt issue costs, net 549 578
--------- ---------
Total assets $ 151,094 $ 153,418
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,542 $ 3,812
Notes payable to affiliates 23,257 11,374
Long term debt currently payable 58,148 59,156
--------- ---------
Total current liabilities 82,947 74,342
Other noncurrent liabilities -- 3,416
--------- ---------
82,947 77,758
--------- ---------
Minority interests in consolidated subsidiary 250 250
--------- ---------
Stockholders' equity (deficit) (Note 4):
Preferred stock, $0.01 par value, 110,000,000 shares authorized as of
September 30, 1998 and June 30, 1998, 17,299,717 and 17,960,732 shares
issued and outstanding at September 30, 1998 and June 30, 1998,
respectively 173 180
Common stock, $0.01 par value, 250,000,000 shares authorized
as of September 30, 1998 and June 30, 1998, 26,074,321 and
30,001,026 shares issued and outstanding as of September 30,
1998 and June 30, 1998, respectively 261 300
Additional paid-in capital 185,944 192,179
Accumulated deficit (118,481) (117,249)
--------- ---------
67,897 75,410
--------- ---------
Total liabilities and stockholders' equity $ 151,094 $ 153,418
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
----------------------
1998 1997
<S> <C> <C>
Revenue:
Drilling services $ 12,100 $ --
-------- --------
12,100 --
-------- --------
Costs and expenses:
Drilling operating expenses 7,543 --
Depreciation 1,383 --
Management fee 155 264
General and administrative expenses 1,173 93
-------- --------
10,254 357
-------- --------
Operating income (loss) 1,846 (357)
Interest income 32 102
Interest and other financing costs (2,329) --
Interest expense and other financing costs - affiliates (560) --
-------- --------
Net loss from continuing operations $ (1,011) $ (255)
Discontinued operations (Note 2)
Loss from oil and gas operations (221) (2,179)
-------- --------
Net loss $ (1,232) $ (2,434)
-------- --------
Preferred stock dividends $ (764) $ (984)
-------- --------
Net loss allocable to common shareholders $ (1,996) $ (3,418)
======== ========
Weighted average number of shares 28,080 2,741
======== ========
Basic and diluted loss per common share
from continuing operations (Note 5) $ (0.06) $ (0.45)
======== ========
Basic and diluted loss per common share
from discontinued operations (Note 5) $ (0.01) $ (0.80)
======== ========
Basic and diluted loss per common share (Note 5) $ (0.07) $ (1.25)
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------- --------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,232) $ (2,434)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 1,641 1,485
Amortization of debt issue costs 742 --
Costs and expenses settled by issuance of common stock -- 169
Noncash interest expense 444 1,709
Changes in operating working capital:
Decrease in accounts receivable 522 50
Decrease in receivable from affiliates 488 30
Decrease in prepaid expenses 2 --
Increase (decrease) in accounts payable and accrued liabilities (1,515) 2,511
Increase (decrease) in accounts payable to affiliates (2,832) 301
-------- --------
Net cash provided by (used in) operating activities (1,740) 3,821
-------- --------
Cash flows from investing activities:
Additions to oil and gas properties -- (315)
Additions to semisubmersible drilling rigs (628) --
Deferred costs (217) (3,414)
Conveyance of oil and gas properties (1,605) --
-------- --------
Net cash used in investing activities (2,450) (3,729)
-------- --------
Cash flows from financing activities:
Repayment of notes payable (1,008) --
Proceeds from notes payable to affiliate 10,890 --
Increase in restricted cash (6,100) --
Debt issue costs (713) --
-------- --------
Net cash provided by financing activities 3,069 --
-------- --------
Net (decrease) increase in cash and cash equivalents (1,121) 92
Cash and cash equivalents at beginning of year 2,689 7,887
-------- --------
Cash and cash equivalents at end of period $ 1,568 $ 7,979
======== ========
</TABLE>
Supplemental disclosures to the Statement of Cash Flows - see Note 7.
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ------------------------ Additional
Number of Number of paid-in Accumulated
Shares Par value Shares Par value capital deficit Total
--------- --------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 17,961 $ 180 30,001 $ 300 $ 192,179 $(117,249) $ 75,410
Merger related transaction (See Note 2) (661) $ (7) (3,927) $ (39) $ (6,235) $ -- $ (6,281)
(unaudited)
Net loss for the three months ended
September 30, 1998 (unaudited) -- -- -- -- -- (1,232) (1,232)
------ --------- --------- --------- ------- --------- ---------
Balance, September 30, 1998 (unaudited) 17,300 $ 173 $ 26,074 $ 261 185,944 $(118,481) $ 67,897
====== ========= ========= ========= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION:
Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is a
diversified energy company currently pursuing, through its operating
subsidiaries, energy related opportunities in Atlantic Canada, including
offshore contract drilling services, substantial natural gas gathering and
transmission facilities and related energy infrastructure. Historically, Tatham
Offshore was 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"). As of June 30, 1998, Tatham Offshore was an approximately
94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified
energy company. In connection with the merger of DeepTech with a subsidiary of
El Paso Energy Corporation ("El Paso Energy") and related transactions completed
on or before August 14, 1998, (i) Tatham Offshore transferred its ownership of
Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation
and former wholly-owned subsidiary of Tatham Offshore which holds interests in
the Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to
DeepTech, (ii) Tatham Offshore conveyed its remaining oil and gas properties to
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), (iii) DeepTech
contributed all of the outstanding shares of capital stock of DeepFlex
Production Services, Inc. ("DeepFlex") to Tatham Offshore and (iv) DeepTech
divested itself of its equity ownership interest in Tatham Offshore. DeepFlex, a
Delaware corporation and wholly-owned subsidiary of Tatham Offshore, was formed
in January 1995 and through its subsidiaries, focuses on the acquisition and
deployment of semisubmersible drilling rigs for contract drilling. RIGCO North
America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned
subsidiaries of DeepFlex, own interests in the FPS Laffit Pincay (the "Laffit
Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together with the
Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling
rigs.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
Partners"). North Atlantic Partners is the sponsor of a proposal to construct a
natural gas pipeline offshore Newfoundland and Nova Scotia to the eastern
seaboard of the United States.
The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company").
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the period covered by such statements. These interim
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1998.
NOTE 2 - RECENT EVENTS:
On February 27, 1998, DeepTech entered into an Agreement and Plan of Merger (the
"Merger Agreement") with El Paso Natural Gas Company ("El Paso") and El Paso
Acquisition Company ("El Paso Acquisition"), a wholly-owned subsidiary of El
Paso, pursuant to which DeepTech would merge (the "Merger") with El Paso, or
under certain circumstances, with El Paso Acquisition. Subsequently, DeepTech,
El Paso and El Paso Acquisition executed Amendment No. 1 to the Merger Agreement
(the "Amended Merger Agreement") with El Paso Energy to reflect El Paso's
reorganization of its corporate structure. The holders of a majority of
DeepTech's common stock approved the Amended Merger Agreement on July 19, 1998.
Pursuant to the Amended Merger Agreement, DeepTech merged with El Paso
Acquisition on August 14, 1998.
As a result of the Merger and related transactions, some of the assets of Tatham
Offshore and DeepTech were restructured so that DeepFlex became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech. Pursuant to the Redemption Agreement
(discussed below), Tatham Offshore agreed to transfer all of its remaining
assets located in the Gulf to the Partnership, a former affiliate. As such, all
of the Company's oil and gas operations in the Gulf are reflected as
discontinued operations in the financial statements. Further, DeepTech divested
itself of its equity ownership interest
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
in Tatham Offshore by offering all of the shares of Tatham Offshore common stock
and Series A Preferred Stock held by DeepTech to the stockholders of DeepTech in
a Rights Offering (discussed below).
On August 14, 1998, Tatham Offshore transferred its remaining assets located in
the Gulf to the Partnership in exchange for Tatham Offshore's Series B 9%
Convertible Preferred Stock (the "Senior Preferred Stock") which was owned by
the Partnership (the "Redemption Agreement"). Under the terms of the Redemption
Agreement, the Partnership exchanged 7,500 shares of Senior Preferred Stock and
all related accrued and unpaid dividends due to the Partnership as of the date
of the exchange for 100% of Tatham Offshore's right, title and interest in and
to Viosca Knoll Blocks 772, 773, 774, 817, 818 and 861 (subject to an existing
production payment obligation), West Delta Block 35, Ewing Bank Blocks 871, 914,
915 and 916 and the platform located on Ship Shoal Block 331. At the closing,
Tatham Offshore paid the Partnership $1,605,000, the amount related to the net
cash generated from such properties from January 1, 1998 through August 14,
1998. In addition, the Partnership assumed all abandonment and restoration
obligations associated with the platform and leases. At the closing of the
Redemption Agreement on August 14, 1998, the management fees charged to Tatham
Offshore by DeepTech were reduced by 50% effective retroactively to January 1,
1998 and the balance of $1,405,000 owed to DeepTech was paid. As of August 14,
1998, DeepTech no longer operates Tatham Offshore under a management
agreement. Tatham Offshore has hired a management team and support personnel
required to conduct its contract drilling services business and implement its
Atlantic Canada strategy.
On July 16, 1998, the Commission declared effective Tatham Offshore's
Registration Statement on Form S-1 relating to the offering of rights to the
DeepTech stockholders to purchase DeepTech's 28,073,450 shares of Tatham
Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock (the "Rights Offering"). As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011
shares of common stock and 3,455,444 shares of Series A Preferred Stock which
resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0
million. In exchange for committing to purchase a specified portion of the stock
underlying any unexercised Rights, TB Securities received a fee of $6.9 million.
In connection with the Rights Offering, Tatham Offshore purchased and cancelled
all of the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 shares and 653,365 shares, respectively, and the proceeds from such
purchase by Tatham Offshore were contributed by DeepTech to Tatham Offshore.
DeepTech no longer owns any of Tatham Offshore's capital stock as a result of
the Rights Offering.
Following the asset restructuring, Tatham Offshore's marine services business
includes the operation of two semisubmersible drilling rigs, the FPS Bill
Shoemaker and the FPS Laffit Pincay, currently owned by DeepFlex. In addition,
Tatham Offshore will continue to pursue energy related opportunities in
Atlantic Canada, including the North Atlantic pipeline project, related gas
processing facilities, a facility for the generation of electricity and other
related investments.
NOTE 3 - RELATED PARTY TRANSACTIONS:
Management Agreement
The management agreement between Tatham Offshore and DeepTech provided for an
annual management fee which was intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the three months ended September 30, 1998, DeepTech charged
Tatham Offshore $310,000 under this agreement. The management agreement was
terminated August 14, 1998.
Notes Payable to Affiliates
Tatham Offshore is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, LLC ("Tatham Brothers") which proceeds were loaned to DeepFlex
to fund certain improvements to the Rigs. The loan bears interest at the Prime
Rate plus 1 1/2% per annum and is due on January 19, 1999. The loan from Tatham
Brothers to DeepFlex, plus accrued interest, was included as a part of the short
term financing arrangement discussed below.
8
<PAGE> 9
In connection with the Merger, the Company entered into a $22.9 million short
term financing arrangement with Tatham Brothers to provide for funds to (i)
satisfy approximately $1.6 million of cash requirements with respect to the
Redemption Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in
connection with the Management Agreement between Tatham Offshore and DeepTech,
(iii) pay approximately $6.9 million to TB Securities with respect to
obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit
for potential tax liabilities, (v) refinance $5.1 million in existing loans to
DeepFlex and (vi) pay fees and expenses associated with the short term
financing. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent
company of TB Securities. The short term financing bears interest at the rate of
12% per annum and is due on January 15, 1999. It is secured by a pledge of
DeepFlex of its interest in a certain payment-in-kind Subordinated Promissory
Note issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of
the Company, which has a current outstanding balance of approximately $71.9
million.
The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998,
was executed in connection with the Merger and related transactions and is by
and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso. Pursuant
to the Standby Agreement, to the extent that any of the Company's Common Stock
or Series A Preferred Stock was not subscribed for by holders of DeepTech common
stock in the Rights Offering, Tatham Brothers committed to purchase such number
of unsubscribed shares in order for DeepTech to receive net proceeds from the
Rights Offering of not less than $75 million (the "Standby Commitment"). In
addition, Tatham Brothers had the right to purchase any shares which DeepTech
held after the Rights Offering and the satisfaction of the Standby Commitment.
Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the
Standby Commitment, which guarantee was backed by a letter of credit from
NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the Standby
Commitment, under the terms of a Repayment Agreement between Mr. Tatham and
Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr.
Tatham an option to purchase up to a one-third membership interest in Tatham
Brothers for $1,000 through the issuance of new membership units, and (ii) Mr.
Tatham had the right, but not the obligation, to lend to Tatham Brothers all
sums necessary for Tatham Brothers to fulfill its obligations under the Standby
Commitment.
Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by
and between Tatham Brothers and Tatham Offshore, in consideration of the Standby
Commitment, the Company agreed to pay to Tatham Brothers a fee ranging from $5.8
million to $7.5 million depending upon the date of closing of the Rights
Offering. Such fee was payable by the Company in cash, or at Tatham Brothers'
election in shares of Tatham Offshore Common Stock. Tatham Brothers elected to
take cash.
Subsequent to executing the Standby Agreement and the Purchase Commitment
Agreement, Tatham Brothers and TB Securities entered into a Contribution,
Assignment and Assumption Agreement pursuant to which, in exchange for certain
consideration, Tatham Brothers assigned all of its rights and interest under the
Standby Agreement and the Purchase Commitment Agreement to TB Securities. See
Notes 1 and 2 for additional related party transactions completed in connection
with the Merger.
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity as of
September 30, 1998:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding (a) Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Series A Preferred Stock (b) 16,904,133 (d) $1.50 per share 12% $ 6,846,000 (b)(c)
Series B Preferred Stock 74,379 $1.00 per share 8% $ 12,000 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 11,000 (b)(c)
Common Stock 26,074,321 (d) N/A -- -- --
</TABLE>
(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible
Preferred Stock and replaced this stock with Series B 9% Senior
Convertible Preferred Stock ("Senior Preferred Stock"). The Senior
Preferred Stock was convertible into Series A Preferred Stock using a
conversion ratio equal to (i) the liquidation preference amount plus
accumulated unpaid dividends divided by (ii) $0.9375, the closing price of
the Series A Preferred Stock on February 27, 1998. Each share of the
Senior Preferred Stock was 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 held all outstanding
shares. In connection with the Redemption Agreement, the Senior Preferred
Stock and all related unpaid dividends was redeemed in full in connection
with the Merger. See Note 2.
(b) At any time until December 31, 1998, each share may be exchanged for 0.4
Exchange Warrants. Each full Exchange Warrant entitles the holder thereof
to purchase one share of Tatham Offshore common stock at $6.53 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 Tatham Offshore common stock at $6.53 per share.
(c) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(d) In connection with the Rights Offering, Tatham Offshore purchased and
cancelled all of the shares of Common Stock and Series A Preferred Stock
that were not acquired by the holders of Rights or TB Securities in the
Rights Offering, 3,926,746 shares and 653,365 shares, respectively, and
the proceeds from such purchase by Tatham Offshore were contributed by
DeepTech to Tatham Offshore.
NOTE 5 - EARNINGS PER SHARE:
During the three months ended September 30, 1998, Tatham Offshore adopted
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 establishes new guidelines for computing earnings per share
("EPS") and requires dual presentation of basic and diluted EPS for entities
with complex capital structures. Basic EPS excludes dilution and is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects potential dilution and is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period increased by the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. All prior period EPS data has been restated to conform with the
provisions of SFAS No. 128.
Tatham Offshore excluded from its computation of diluted EPS the effect of
antidilutive securities related to its outstanding convertible exchangeable
preferred stocks discussed in Note 3 and its convertible production payment
related to 25% of the net operating cash flow from Viosca Knoll Block 817.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position 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 development and implementation of the North Atlantic pipeline project and
related opportunities in Atlantic Canada. Realization of the potential of the
North Atlantic pipeline project and related opportunities in Atlantic Canada is
dependent upon the ability of the Company to obtain sufficient additional
capital or project financing.
10
<PAGE> 11
NOTE 7 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
(in thousands)
<S> <C> <C>
Interest $ 1,700 $ --
Taxes $ -- $ --
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
(in thousands)
<S> <C> <C>
Debt issued to refinance accounts payable
to affiliates $ 5,153 $ --
Senior Preferred Stock redeemed under
the Redemption Agreement $ 7,500 $ --
Debt issued to finance Rights Offering $ 6,923 $ --
</TABLE>
As discussed in Note 2, Tatham conveyed its remaining oil and gas assets to the
Partnership per the Redemption Agreement. The assets and liabilities conveyed
were as follows (in thousands):
<TABLE>
<S> <C>
Cash $ (1,605)
Oil and gas properties, net (5,466)
Accounts payable 755
Accounts payable to DeepTech 1,062
Accounts payable to the Partnership 2,480
Other noncurrent liabilities 3,416
---------
Increase in paid in capital $ 642
=========
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Item 1.
"Consolidated Financial Statements" and is intended to assist in the
understanding of the Company's financial condition and results of operations for
the three months ended September 30, 1998.
GENERAL
Tatham Offshore is an independent energy company currently pursuing energy
related opportunities in Atlantic Canada, including offshore contract drilling
services, the North Atlantic pipeline project, related gas processing
facilities, a facility for the generation of electricity and other related
investments. Historically, Tatham Offshore has been in the oil and gas
exploration and development business, primarily in the Gulf. The Company has
refocused its business from the oil and gas exploration and production business
in the Gulf to an integrated frontier investment strategy targeting Atlantic
Canada with an initial emphasis on the offshore contract drilling business.
Accordingly, in connection with DeepTech's merger (the "Merger") with a
subsidiary of El Paso completed on August 14, 1998, Tatham Offshore (i)
transferred its ownership of Tatham Development, which owns oil and gas
producing properties, to DeepTech and its remaining oil and gas properties to
the Partnership, and (ii) acquired from DeepTech ownership of DeepFlex and
therefore the Laffit Pincay and the Bill Shoemaker. The Company's oil and gas
operations in the Gulf are reflected as discontinued operations in the financial
statements.
Unless otherwise indicated, (i) all current and prospective information gives
effect to the Merger and related transactions completed on or before August 14,
1998, including the disposition of all of Tatham Offshore's exploration and
production assets located in the Gulf, the related retirement of certain amounts
of Tatham Offshore's Preferred Stock, the contribution to Tatham Offshore of two
semisubmersible drilling rigs, and the assumption of certain debt, (ii) all
references to "Tatham Offshore" are to Tatham Offshore, Inc. and its
subsidiaries, (iii) all references to the "Company" are to Tatham Offshore, Inc.
and its subsidiaries and DeepFlex Production Services, Inc. and its subsidiaries
("DeepFlex"), and (iv) all financial information and per share data gives effect
to the one for ten reverse stock split Tatham Offshore completed on November 24,
1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenue from drilling services totaled $12.1 million for the three months ended
September 30, 1998. During this period, the Bill Shoemaker generated a total of
$10.0 million in revenue and the Laffit Pincay generated a total of $2.1 million
in revenue. No drilling service revenue was recorded by the Company for the
period ending September 30, 1997 since the Company did not own the Rigs during
that period.
Operating expenses for the three months ended September 30, 1998 totaled $7.5
million and were attributable to the management fee and direct operating
expenses for the Rigs. During this period, the Bill Shoemaker's operating
expenses totaled $3.8 million and the Laffit Pincay's operating expenses totaled
$3.7 million. No operating expense for the Rigs was recorded by the Company for
the period ending September 30, 1997 since the Company did not own the Rigs
during that period.
Depreciation expense totaled $1.4 million for the period ending September 30,
1998. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled
$0.9 million and $0.5 million, respectively. No depreciation expense relating to
the Rigs was recorded during the period ending September 30, 1997 since the
Company did not own the Rigs during that period.
General and administrative expense totaled $1.3 million for the three months
ending September 30, 1998 as compared to $0.4 million for the three months
ending September 30, 1997. General and administrative expense includes staff and
overhead costs allocated to the Company under a management agreement with
DeepTech of $0.2 million and $0.3 million for the three months ended September
30, 1998 and 1997, respectively. In connection with the Merger, the management
agreement between the Company and DeepTech was terminated on August 14, 1998.
General and administrative expense for the three months ending September 30,
1998 includes staff and overhead costs for the operation of the marine services
and Atlantic Canada businesses whereas general and administrative costs for the
three months ended September 30, 1997 include costs relative to the Atlantic
Canada business only.
12
<PAGE> 13
General and administrative costs attributable to discontinued operations totaled
$0.3 million and $1.1 million for the three months ending September 30, 1998 and
1997, respectively.
Operating income for the three months ended September 30, 1998 totaled $1.8
million as compared to an operating loss of $0.4 million for the three months
ended September 30, 1997. The change was due to the items discussed above.
Interest income totaled $32,000 for the three months ended September 30, 1998 as
compared with $102,000 for the three months ended September 30, 1997 and
included interest income from available cash.
Interest expense for the three months ended September 30, 1998 totaled $2.9
million. For the three months ended September 30, 1998, interest expense
relating to the RIGCO Credit Facility totaled $2.3 million and interest expense
relating to borrowings from Tatham Brothers totaled $0.6 million. For the three
months ended September 30, 1997, $1.7 million of interest expense related to
borrowings under the Subordinated Notes held by DeepTech is included in the loss
from discontinued operations.
As a result of transferring all of its oil and gas properties in the Gulf to
DeepTech and the Partnership in connection with the Merger, the Company reported
a net loss from discontinued operations of $0.2 million for the three months
ended September 30, 1998 as compared with a net loss from discontinued
operations of $2.2 million for the three month period ended September 30, 1997.
During the period from July 1, 1998 through August 14, 1998, the Company sold
479 million cubic feet ("MMcf") of natural gas and 1,200 barrels of oil at
average prices of $1.86 per thousand cubic feet ("Mcf") of natural gas and $7.13
per barrel of oil, respectively. During the three months ended September 30,
1997, the Company sold 1,539 MMcf of natural gas and 8,855 barrels of oil at
average prices of $2.36 per Mcf and $17.54 per barrel, respectively.
Tatham Offshore eliminated all of its Senior Preferred Stock and the associated
preferred stock dividends in arrears as a result of the Redemption Agreement and
repurchased and cancelled 653,365 shares of its Series A Preferred Stock in
connection with the Rights Offering. Tatham Offshore's remaining preferred stock
dividends totaled $0.8 million for the three months ended September 30, 1998 as
compared with $1.0 million for the three months ended September 30, 1997. After
taking preferred stock dividends into account, the Company's net loss allocable
to common shareholders for the three months ended September 30, 1998 was $2.0
million, or $0.07 per share, as compared with a net loss allocable to common
shareholders for the three months ended September 30, 1997 of $3.4 million, or
$1.25 per share. The net loss per share calculation for the period ended
September 30, 1997 has been adjusted to reflect the one-for-ten reverse stock
split that was completed in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's exploration and production activities have generated
and utilized substantially all of the operating cash flow. Prospectively, the
Company's contract drilling activities are expected to generate and utilize
substantially all of the operating cash flow, at least during the near term. See
"-- Liquidity Outlook."
Sources of Cash. Effective with the Merger transactions, the Company transferred
all of its oil and gas properties in the Gulf to DeepTech and the Partnership.
The Company expects to be dependent upon cash on hand and cash generated from
its drilling services operations to pay its operating expenses, service its debt
and satisfy its other obligations. However, as described below, the Company will
need to raise substantial capital (equity, debt or both) or enter into other
arrangements to allow the Company to implement its business strategy in Atlantic
Canada. If either of the Rigs is not employed for any extended period of time,
the absence of associated revenues may have a material adverse effect on the
Company, including limiting the Company's ability to raise capital from external
sources. The Laffit Pincay has not been employed since mid-August 1998. See
"--Uses of Cash" and "--Liquidity Outlook."
Uses of Cash. The Company expects that its primary uses of cash will consist of
(i) scheduled interest payments on the Credit Facility (as defined below), (ii)
amounts necessary to fund capital expenditures related to the Rigs that are not
funded by customers, (iii) amounts necessary to staff and maintain the Rigs
while they are not under contract, and (iv) amounts necessary to pay general and
administrative and other operational expenses. In addition, the Company will use
available cash to fund the pursuit of its business strategy in Atlantic Canada.
Such uses will include funding initial expenditures related to the North
Atlantic Partners pipeline project, the remainder of the Company's Atlantic
Canada strategy and any of the Company's other potential capital expenditures.
13
<PAGE> 14
At the current interest rate of 11%, scheduled interest payments on the Credit
Facility are approximately $1.6 million per quarter.
Oil prices have declined substantially during 1998, which has caused the demand
for drilling rigs to decline. The Laffit Pincay does not have a current drilling
contract and has been warm-stacked in Grand Isle Block 71, offshore Louisiana
since mid-August 1998. In addition to the Laffit Pincay, there are several
similarly equipped semisubmersibles currently deployed in the Gulf that do not
have current drilling contracts or commitments. Cash costs to warm-stack the
Laffit Pincay are approximately $600,000 per month. Although the Laffit Pincay
is currently being marketed, there can be no assurances as to when a drilling
contract for the Laffit Pincay will be secured or to the term of such contract.
North Atlantic Partners is the sponsor of a proposal to construct a natural gas
pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire.
As of September 30, 1998, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Partners, has incurred $11.7 million in
developmental costs in connection with such project and related infrastructure
projects. The Company anticipates that the ultimate capital costs of the
pipeline and related projects, if approved, could be in excess of several
billion dollars. The Company plans to secure joint venture partners and obtain
debt and/or equity financing to satisfy the capital requirements for the
Atlantic Canada projects, as required.
Liquidity Outlook. The Company intends to fund its immediate cash requirements
with cash on hand and cash from its drilling services operations. At September
30, 1998, the Company had $1.6 million of cash and cash equivalents. In
addition, the Company has $6.1 million in restricted cash that has been posted
to secure a letter of credit of a like amount. Both El Paso Energy and the
Company were required to post letters of credit in connection with certain
Merger related agreements.
On September 30, 1996, a subsidiary of DeepFlex entered into a $65 million
senior secured credit facility with a syndicate of lenders (as amended, the
"Credit Facility"). Proceeds from the Credit Facility were used to acquire the
Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to
retire $30.3 million of other rig related indebtedness. In April 1997, the
Credit Facility was amended to provide for an additional $12 million to fund the
remaining refurbishments and upgrades to the Bill Shoemaker. The Credit Facility
(i) matures on March 31, 1999, (ii) bears interest at the Prime Rate plus 3% per
annum (11.0% at September 30, 1998), payable quarterly, (iii) is secured by the
two semisubmersible drilling rigs and all of the related assets, (iv) required a
quarterly principal payment of excess cash flow as defined in the credit
agreement with a minimum principal amortization of $250,000 per quarter
beginning on December 31, 1996 and ending on September 30, 1998, (v) provided
the Lenders warrants to acquire a 5% minority equity interest in the
subsidiaries which own the Rigs, and (vi) is subject to customary conditions and
covenants, including the maintenance of a minimum level of working capital. As
of September 30, 1998, amounts outstanding under the Credit Facility totaled
$58.1 million. On September 25, 1998, the parties to the Credit Facility amended
the agreement to (i) extend the maturity date to March 31, 1999, (ii) waive all
principal payments until the maturity date, and (iii) extend the expiration date
on the warrants issued to the lenders under the original Credit Facility to
March 31, 1999. The Company paid a total of 0.5% of the outstanding principal
balance to the lenders in connection with the amendment. Management believes it
will be able to refinance the Credit Facility upon its maturity.
Tatham Offshore is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain
improvements to the Rigs. The loan bears interest at the Prime Rate plus 1 1/2%
per annum and is due on January 19, 1999. The loan from Tatham Brothers to
DeepFlex, plus accrued interest, was included as a part of the short term
financing arrangement discussed below.
In connection with the Merger, the Company entered into a $22.9 million short
term financing arrangement with Tatham Brothers to provide for funds to (i)
satisfy approximately $1.6 million of cash requirements with respect to the
Redemption Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in
connection with the Management Agreement between Tatham Offshore and DeepTech,
(iii) pay approximately $6.9 million to TB Securities with respect to
obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit
for potential tax liabilities, (v) refinance $5.1 million in existing loans to
DeepFlex and (vi) pay fees and expenses associated with the short term
financing. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent
company of TB Securities. The short term financing bears interest at the rate of
12% per annum and is due on January 15, 1999. It is secured by a pledge of
DeepFlex of its interest in a certain payment-in-kind Subordinated Promissory
Note issued by
14
<PAGE> 15
RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of the Company,
which has a current outstanding balance of approximately $71.9 million. The
Company anticipates that it will refinance the short term financing with Tatham
Brothers upon its maturity or pay off the facility with proceeds from the
refinancing of the Credit Facility discussed above.
On September 15, 1998, a draw of $1.4 million was made on the above-mentioned
letter of credit by DeepTech to fund certain tax liabilities incurred in
connection with the Merger.
The Bill Shoemaker is currently under contract to Shell Offshore Inc. ("Shell")
in the Gulf. The contract with Shell extends through at least January 1999.
Following the drilling activities for Shell, the Bill Shoemaker is under
contract to be mobilized to the Grand Banks area in Atlantic Canada to conduct a
two-well program (with three options permitting up to seven additional wells) at
predetermined rates for Husky Oil Operations Limited. Management believes that
revenue from the Bill Shoemaker contracts will provide sufficient liquidity to
permit the Company to pay (i) its operating expenses on both the Bill Shoemaker
and the Laffit Pincay, (ii) its general and administrative costs and (iii) its
cash interest expense requirements under the Credit Facility. Until such time as
the Laffit Pincay is generating operating revenue, additional capital
expenditures will need to be funded by customers or other third party sources.
The Company is refocusing its business from the development, exploration and
production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada with initial emphasis on the offshore
contract drilling business. The Company believes that the Atlantic Canada region
offers significant investment opportunities and the Company plans to expand the
number of drilling rigs it will own as well as diversify its business to include
the North Atlantic pipeline project, related gas processing facilities, a
facility for the generation of electricity and other related investments. The
Company has incurred approximately $11.7 million in costs associated with its
Atlantic Canada strategy.
The ability of the Company to satisfy its future capital needs with respect to
its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic Partners pipeline
project, will depend upon its ability to raise substantial amounts of additional
capital and to implement its business strategy successfully. With respect to the
Company's Atlantic Canada strategy, (i) the Company does not currently possess
the capital necessary to implement its business strategy completely and there
can be no assurances that the Company will be able to obtain sufficient capital
for any or all of the projects, (ii) there can be no assurances that these
projects and other opportunities will prove to be economical or that they will
occur, and (iii) many of these projects will require governmental approvals,
almost all of which the Company has yet to receive. Moreover, if there are
developments that the Company determines to be indicative of a lack of
reasonable opportunity to realize benefits for the Company's stockholders, then
the Company will pursue other opportunities, wherever located, as the Company
determines to be in the Company's best interests.
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.
Year 2000. The year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the year. The Company
believes that substantially all of its information technology software and
equipment are year 2000 compliant and that this problem will have no affect on
the Company's internal operations. The Company believes that the costs relating
to the assessment of the year 2000 issue will be de minimus. Although the
Company intends to interact only with those third parties that have year 2000
compliant computer systems, it is impossible for the Company to monitor all such
systems. The Company has initiated discussions with the operator of the Bill
Shoemaker and Laffit Pincay and based on initial discussions, believes that
there will be no disruption in the operation of its drilling rigs as a result of
the year 2000 issue. Currently, the Company has no information concerning the
year 2000 compliance status of its customers and vendors. There can be no
assurances that such systems will not have a material adverse impact on the
Company's business and operations.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management
15
<PAGE> 16
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 and (v) 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to some market risk due to the floating interest rate
under the Credit Facility. See "Item 2--Liquidity Outlook." Under the Credit
Facility, the remaining principal is due on March 31, 1999 along with the final
interest payment. On September 30, 1998, the Credit Facility had a principal
balance of $58,148,000 and an interest rate based on the prime rate plus 3% (11%
at September 30, 1998). A 1 1/2% increase in interest rates could result in a
$875,000 annual increase in interest expense on the existing principal balance.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with
Citibank, N.A., which covered $36.5 million of the principal amount under the
Credit Facility and provided a maximum fixed effective interest rate of 11.74%.
This cap agreement terminated on September 30, 1998.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.45 Promissory Note from Tatham Offshore, Inc. to Tatham
Brothers, LLC for $22,889,102 dated August 14, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on August 28, 1998,
regarding the change in control of Tatham Offshore, Inc. and
acquisition and disposition of assets described in "Item
2--General."
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TATHAM OFFSHORE, INC.
Date: November 16, 1998 By: /s/ DENNIS A. KUNETKA
----------------- ---------------------------------------
Dennis A. Kunetka
Chief Financial Officer and Secretary
(Signing on behalf of the Registrant
and as Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ----------
<S> <C>
10.45 Promissory Note from Tatham Offshore, Inc. to Tatham Brothers,
LLC for $22,889,102 dated August 14, 1998.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Pay to the order of
NationsBank, N.A.
By:/s/ KEN HAMILTON
----------------------------
Ken Hamilton, Vice President
Tatham Brothers, LLC
PROMISSORY NOTE
$22,889,102.00 Houston, Texas August 14, 1998
1. For value received, the undersigned, Tatham Offshore, Inc. ("Maker"), hereby
promises to pay to the order of Tatham Brothers, LLC, its successors or assigns
("Payee"), without setoff, at 7500 Chase Tower, 600 Travis, Houston, Texas
77002, or at such other place as from time to time may be designated by the
holder of this Promissory Note (this "Note"), in lawful money of the United
States of America, the principal sum of TWENTY-TWO MILLION EIGHT HUNDRED
EIGHTY-NINE THOUSAND ONE HUNDRED AND TWO DOLLARS ($22,889,102.00) (the
"Principal Amount"), with interest on the principal balance from time to time
remaining unpaid from and after the date hereof until maturity, computed from
the date of the advance at the Stated Rate hereinafter set forth, and, to the
extent permitted by law, on any overdue principal and the interest thereon, at
the Delinquent Rate hereinafter set forth.
2. Interest shall accrue on the principal balance from time to time outstanding
hereunder until maturity at a rate equal to twelve percent (12%) per annum (the
"Stated Rate"), but in no event to exceed the Maximum Rate (hereinafter
defined). Interest shall be calculated on the basis of the actual number of days
elapsed (including the first day, but excluding the last) and computed on the
basis of a 360 day year. All past due principal and interest shall bear interest
from maturity (whether caused by acceleration or otherwise) until paid at the
Delinquent Rate as hereinafter defined.
3. Maker and Payee hereby agree that the expression "Delinquent Rate" as used
herein means the lesser of (i) the Maximum Rate or (ii) the sum of four percent
(4%) plus the Prime Interest Rate (hereinafter defined) and the expression
"Prime Interest Rate" as used herein means the prime interest or reference rate
as announced or published by the Houston, Texas office of Chase Bank, a national
banking association, from time to time, it being understood that such prime
interest or reference rate may not actually be charged by, and may not be the
lowest rate actually charged to any customer of, such bank, and the expression
"Maximum Rate" as used herein means the greater of (a) the maximum rate of
interest from time to time permitted under federal laws applicable to the
indebtedness evidenced hereby or (b) the maximum rate of interest from time to
time permitted under Texas laws applicable to the indebtedness evidenced hereby.
4. Maker agrees to pay promptly upon receipt of an invoice from Payee, all costs
and expenses of Payee, including, without limitation, reasonable attorney's
fees, (i) associated with the making of the loan hereunder, and (ii) in
connection with the enforcement and collection hereof, whether or not any suit
is brought on this Note or any foreclosure or other proceeding is brought. The
provisions of this Paragraph 4 are not intended to limit in any manner Maker's
obligations to pay costs and expenses of Payee as may be elsewhere provided
herein.
Page 1 of 7
<PAGE> 2
5. The outstanding principal and interest balance on this Note shall be due and
payable in full on January 15, 1999.
6. Maker and Payee agree that Maker shall use the funds it receives pursuant to
this Note only for the following purposes: (i) to satisfy a payment of
approximately $1,400,000 in management fees owed to DeepTech International Inc.
("DeepTech") pursuant to that certain Agreement and Plan of Merger, dated as of
February 27, 1998, as amended, by and among DeepTech, El Paso Energy Corporation
and El Paso Acquisition Company, (ii) to satisfy its payment obligations under
that certain Redemption Agreement dated February 27, 1998, by and between Maker
and Flextrend Development Company, L.L.C., (iii) to pay the fees and expenses
and collateral requirements related to the issuance of a letter of credit
pursuant to that certain Tax Sharing Agreement dated June 25, 1998, by and
between Maker, DeepTech and DeepFlex Production Services, Inc. ("Guarantor"),
(iv) to pay refinancing amounts (principal, interest, fees and expenses) due
under that certain Promissory Note dated May 15, 1998 issued by Guarantor
payable to Payee in the original principal amount of $5,000,000, (v) to fund
Maker's payment of Payee's fee, if Payee elects to take cash, pursuant to the
terms of that certain Purchase Commitment Agreement, dated February 27, 1998, as
amended, by and between Maker and Payee (the "Commitment Agreement"), and (vi)
to fund the fees and expenses related to this Note and related agreements.
7. Maker shall have the right to prepay, in full or in part, the then unpaid
principal balance on this Note (together with all accrued and unpaid interest
then due). All prepayments shall be applied first to unpaid accrued interest,
with the balance being applied to principal.
8. This Note is guaranteed by Guarantor pursuant to that certain Limited
Recourse Guaranty Agreement dated of even date herewith executed by Guarantor in
favor of Payee (the "Guaranty"), and such Guaranty is secured by that certain
Pledge and Security Agreement (the "Pledge") dated of even date herewith
executed by Guarantor in favor of Payee as secured party.
9. Except as may be otherwise provided herein or in any instrument securing the
payment of this Note, the makers, signers, sureties, and endorsers of this Note
severally waive demand, presentment, notice of dishonor, notice of intent to
accelerate payment hereof, notice of acceleration, diligence in collecting,
grace, notice, and protest, and agree to one or more extensions for any period
or periods of time and partial payments, before or after maturity, without
prejudice to the holder.
10. The following shall constitute events of default hereunder (the "Events of
Default"): (a) the failure to pay or perform any other obligation, liability or
indebtedness of Maker or Guarantor or any of their subsidiaries to any other
party with a value of more than $50,000; (b) the commencement of a proceeding
against Maker or Guarantor for dissolution or liquidation, the voluntary or
involuntary termination or dissolution of Maker or Guarantor or the merger or
consolidation of Maker or Guarantor or any of their subsidiaries with or into
another entity; (c) the insolvency of, the business failure of, the appointment
of a custodian, trustee, liquidator or receiver for or for any of the property
of, the assignment for the benefit of creditors by, or the filing of a petition
under bankruptcy, insolvency or debtor's relief law or the lifting of a petition
for any adjustment of indebtedness, composition or extension by or against Maker
or Guarantor or any of their subsidiaries; (d) the determination by Payee that
any representation or warranty made to Payee by Maker or Guarantor in any Loan
Documents (herein defined) is or was, when it was made, untrue or materially
misleading; (e) the entry of a judgment against Maker or Guarantor or any of
their subsidiaries which Payee deems to be of a material nature, in Payee's sole
discretion; (f) the seizure or forfeiture of, or the issuance of any writ of
possession, garnishment or attachment, or any turnover order for any property of
Maker or Guarantor or any of their
Page 2 of 7
<PAGE> 3
subsidiaries; (g) the determination by Payee that a material adverse change has
occurred in the financial condition of Maker or Guarantor or any of their
subsidiaries; (h) the failure of Maker's or any of its subsidiaries business to
comply with any law or regulation controlling its operation; (i) except to the
extent covered by (d) above or (j) below, the failure by Maker or Guarantor or
any of their subsidiaries to perform, observe, or comply with any covenant,
agreement, or term contained in this Note (including without limitation, the
covenants set forth in Paragraph 13 and the representations and warranties in
Paragraph 14), the Guaranty, the Pledge or any other document executed in
connection with this Note (collectively, the "Loan Documents") or in any other
agreement with Payee or its affiliates, and such default shall continue
unremedied for a period of thirty (30) days after receipt of written notice
thereof from Payee, (j) the failure of Maker or Guarantor or any of their
subsidiaries to pay any amount (principal, interest, fees or otherwise) when due
to Payee or its affiliates, whether payable pursuant to the Loan Documents or
otherwise, (k) Maker or any of its subsidiaries sells or otherwise disposes of
any asset with either a book value or a fair market value greater than $1
million, or (l) Payee, in its sole discretion, determines that amounts owed to
Payee and its affiliates by Maker and its affiliates are not secured by assets
adequate to cover such indebtedness.
11. Whenever there is an Event of Default under this Note (a) the entire balance
outstanding hereunder and all other obligations of Maker to Payee (however
acquired or evidenced) shall, at the option of Payee, become immediately due,
and/or (b) the rate of interest on the unpaid principal shall be increased to
the Delinquent Rate. The provisions herein for a Delinquent Rate and a
delinquency charge shall not be deemed to extend the time for any payment
hereunder or to constitute a "grace period" giving Maker a right to cure any
default. At Payee's option, any accrued and unpaid interest, fees or charges
may, for purposes of computing and accruing interest on a daily basis after the
due date of the Note or any installment thereof, be deemed to be a part of the
principal balance, and interest shall accrue on a daily compounded basis after
such date at the Delinquent Rate provided in this Note until the entire
outstanding balance of principal and interest is paid in full. Upon a default
under this charge against any deposit accounts of Maker (as well as any money,
instruments, securities, documents, chattel paper, credits, claims demands,
income and any other property, rights and interests of Maker), which at any time
shall come into the possession or custody or under the control of Payee or any
of its agents, affiliates or correspondents, any and all obligations due
hereunder. Additionally, Payee shall have all rights and remedies available
under each of the documents executed in connection with this Note, as well as
all rights and remedies available at law or in equity.
12. The failure at any time of Payee to exercise any of its options or any other
rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to
the exercise of any of its options or rights at a later date. All rights and
remedies of Payee shall be cumulative and may be pursued singly, successively or
together, at the option of Payee. The acceptance by Payee of any partial payment
shall not constitute a waiver of any default or of any of Payee's rights under
this Note. No waiver of any of its rights hereunder, and no modification or
amendment of this Note, shall be deemed to be made by Payee unless the same
shall be in writing, duly signed on behalf of Payee; each such waiver shall
apply only with respect to the specific instance involved, and shall in no way
impair the rights of Payee or the obligations of Maker to Payee in any other
respect at any other time.
Page 3 of 7
<PAGE> 4
13. Maker covenants and agrees that, so long as amounts under this Note are
outstanding:
(a) Maker shall deliver to Payee, at Payee's request from time to
time, and simultaneously with distributions of financial
reports to shareholders as required by the Securities and
Exchange Act of 1934 or the bylaws of Maker (the "Bylaws"),
copies of financial reports prepared in accordance with
generally accepted accounting principles in effect from time
to time;
(b) Promptly after Maker knows of any material condition or event
that could have a material adverse impact on (i) the loan
evidenced by this Note, (ii) the collateral securing this Note
pursuant to the Guaranty and the Pledge, or (iii) the ability
of Maker or Guarantor to make payments pursuant to this Note
(a "Material Adverse Effect"), Maker shall deliver a notice to
Payee describing the same in reasonable detail and the action
Maker proposes to take with respect thereto;
(c) Maker shall keep, or cause to be kept, insured by financially
sound and reputable insurers acceptable to Payee all property
of a character usually insured by persons or entities engaged
in the same or similar business against loss or damage of the
kinds and in the amounts customarily insured against by such
persons or entities and carry such other insurance as is
usually carried by such persons or entities similarly
situated;
(d) Promptly after Maker knows of the occurrence of any Event of
Default, any pending or threatened litigation involving claims
in excess of $50,000, the failure to pay or perform any
obligation, liability or indebtedness of Maker or any
guarantor of Maker to Payee, whether under this Note, the
Guaranty, the Pledge or any documents executed in connection
with this Note, as and when due (whether at maturity or by
acceleration), Maker shall deliver a notice to Payee
describing the same in reasonable detail and the action Maker
proposes to take with respect thereto;
(e) Maker shall perform, and cause its subsidiaries to perform,
all of its material obligations under the Loan Documents and
all other contractual and legal obligations, as and when the
same become due;
(f) Maker, without the prior written consent of the Payee, shall
not, and shall not permit its subsidiaries to, create, assume
or incur any indebtedness greater than $2,000,000 other than
indebtedness outstanding on the date hereof; and
(g) Maker will not, and shall not permit its subsidiaries to,
create, incur, assume or permit to exist any lien, other than
to Payee, on any of its properties (now owned or hereafter
acquired) and other than liens existing on the date hereof.
14. Maker represents and warrants to Payee that the following statements are
true, correct, and complete as of the date hereof except to the extent that such
representations and warranties expressly relate to an earlier date:
(a) Maker (i) is a corporation, duly formed, validly existing, and
in good standing under the laws of State of Delaware; (ii) has
all requisite power and authority to own its assets and carry
on its business as now being conducted; and (iii) is qualified
to do business as a foreign corporation, and is in good
standing under the laws of each jurisdiction where failure to
so qualify would have a Material Adverse Effect;
(b) Maker has the requisite power and authority to execute,
deliver, and perform this Note;
(c) the execution, delivery and performance of this Note and the
consummation of the transactions contemplated hereby, have
been duly approved by the board of directors of Maker, and
such approval has not been rescinded, revoked or modified in
any manner;
Page 4 of 7
<PAGE> 5
(d) the execution, delivery and performance of this Note and any
other document to which Maker is a party shall not violate or
conflict with (i) the Bylaws, (ii) Maker's Certificate of
Incorporation, (iii) any material agreement to which Maker is
a party, or (iv) any regulations or restrictions applicable to
the business of Maker as now being conducted; and
(e) Maker possesses all permits, franchises, licenses, and
authorizations necessary to conduct its business as now
conducted except where the failure to so possess would not
cause a Material Adverse Effect, and is not in violation of
any such permits, franchises, licenses, or authorizations
where such violation would have a Material Adverse Effect.
15. All agreements between Maker and the holder hereof, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
contingency or event whatsoever, whether by reason of acceleration of the
maturity hereof or otherwise, shall the amount contracted for, charged,
received, paid or agreed to be paid to the holder hereof for the use,
forbearance, or detention of the funds evidenced hereby or otherwise, or for the
performance or payment of any covenant or obligation contained in any instrument
securing the payment hereof, exceed the maximum amount permissible under
applicable law. If, from any circumstance whatsoever, interest would otherwise
be payable to the holder hereof in excess of the maximum lawful amount, the
interest payable to the holder hereof shall be reduced to the maximum amount
permitted under applicable law; and if from any circumstance the holder hereof
shall ever receive anything of value deemed interest by applicable law in excess
of the maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal hereof and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
hereof, such excess shall be refunded to Maker. All interest paid or agreed to
be paid to the holder hereof shall, to the extent permitted by applicable law,
be amortized, prorated, allocated, and spread throughout the full period of the
loan evidenced hereby until payment in full of the principal (including the
period of any renewal or extension hereof) so that the interest hereon for such
full period shall not exceed the maximum amount permitted by applicable law. The
term "applicable law" as used herein shall mean the laws of the State of New
York or the laws of the United States, whichever laws allow the greater rate of
interest, as such laws now exist or may be changed or amended or come into
effect in the future. This paragraph shall control all agreements between the
Maker and the holder hereof.
16. The unenforceability or invalidity of any provision of this Note shall not
affect the enforceability or validity of any other provision herein and the
invalidity or unenforceability of any provision of this Note or of the documents
executed in connection with this Note to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to other
persons or circumstances.
17. This Note shall be binding upon and inure to the benefit of Maker and Payee
and their respective successors, assigns, heirs and personal representatives,
provided, however, that no obligations of Maker or Payee hereunder can be
assigned without the prior written consent of Payee, which consent shall not be
unreasonably withheld.
18. Any notice required to be given under this Note shall be given in writing
and shall be deemed to be given as of the date such notice is deposited in the
mail addressed to Maker or Payee, as applicable, at the last address of Maker or
Payee, as applicable, shown on the records of Maker or Payee, as applicable.
Page 5 of 7
<PAGE> 6
19. THIS NOTE REPRESENTS THE FINAL AGREEMENT OF THE PARTIES HERETO AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
20. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK (WITHOUT REGARD TO ANY CONFLICT OF LAW PRINCIPLES WHICH, IF APPLIED, MIGHT
PERMIT OR REQUIRE THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION) AND THE
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO TRANSACTIONS IN
NEW YORK.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
Page 6 of 7
<PAGE> 7
IN WITNESS WHEREOF, the undersigned has set his hand as of the date
first written above.
MAKER:
Tatham Offshore, Inc.
By: /s/ DENNIS A. KUNETKA
-----------------------------
Dennis A. Kunetka
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TATHAM
OFFSHORE INC. AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS AT SEPTEMBER 30,
1998 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,568
<SECURITIES> 0
<RECEIVABLES> 2,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,194
<PP&E> 136,381
<DEPRECIATION> 7,876
<TOTAL-ASSETS> 151,094
<CURRENT-LIABILITIES> 82,947
<BONDS> 0
0
173
<COMMON> 261
<OTHER-SE> 67,463
<TOTAL-LIABILITY-AND-EQUITY> 151,094
<SALES> 12,100
<TOTAL-REVENUES> 12,100
<CGS> 7,543
<TOTAL-COSTS> 7,543
<OTHER-EXPENSES> 1,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,889
<INCOME-PRETAX> (1,011)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,775)
<DISCONTINUED> (221)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,996)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
