<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report August 14, 1998 (Date of earliest event reported)
TATHAM OFFSHORE, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-22892 76-0269967
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
600 Travis, Suite 7400
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (713) 224-7400
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<PAGE> 2
ITEM 1. CHANGE IN CONTROL OF REGISTRANT
Tatham Offshore, Inc., a Delaware corporation (the "Company"),
underwent a change of control when DeepTech International Inc. ("DeepTech"), a
Delaware corporation and the former owner of 28,073,450 shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"), representing
93.9% of the outstanding shares of Common Stock of the Company, consummated a
rights offering (the "Rights Offering") on August 14, 1998. Pursuant to the
Rights Offering, DeepTech granted transferable rights (the "Rights") to holders
of DeepTech common stock, par value $0.01 per share (the "DeepTech Stock"), to
purchase an aggregate of 28,073,450 shares of Common Stock, and 4,670,957
shares of Series A 12% Convertible Exchangeable Preferred Stock, $0.01 par
value per share (the "Preferred Stock" and, together with the Common Stock, the
"Underlying Shares"), of the Company, which shares were owned by DeepTech. On
July 16, 1998, each stockholder received one Right for each share of DeepTech
Stock owned on June 12, 1998. Each Right entitled its holder to purchase
1.046357 shares of the Common Stock and 0.174096 shares of the Preferred Stock
for a total subscription price of $3.25.
As a result of the consummation of the Rights Offering, Tatham
Brothers Securities, LLC ("TBS"), an affiliate of Mr. Thomas P. Tatham, the
Chairman, Chief Executive Officer and 1% shareholder of the Company,
acquired 80% of the common stock of the Company in satisfaction of an
obligation. This obligation was satisfied using funds contributed to TBS by
its sole member, Tatham Brothers, LLC, which borrowed the money from Mr.
Tatham. Pursuant to a Pledge and Security Agreement dated August 14, 1998,
Tatham Brothers, LLC has pledged all of its membership interest in TBS to
secure the indebtedness to Mr. Tatham.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 27, 1998, El Paso Natural Gas Company ("El Paso"), a
Delaware corporation, El Paso Acquisition Company ("Merger Sub"), a wholly
owned subsidiary of El Paso, and DeepTech executed an Agreement and Plan of
Merger (as amended, the "Merger Agreement"), pursuant to which DeepTech was to
merge (the "Merger") with El Paso or one of its affiliates In connection with
the Merger, DeepTech, El Paso and the Company entered into certain agreements
pursuant to which the Company agreed to dispose of certain of its assets and,
in exchange, acquire new assets or redeem certain stock.
Disposition of Tatham Offshore Development, Inc. and Acquisition of
DeepFlex Production Services, Inc. Pursuant to the terms of the Contribution
and Distribution Agreement dated February 27, 1998 among DeepTech, the Company,
El Paso, and DeepFlex Production Services, Inc. ("DeepFlex"), (i) DeepTech
contributed to the Company all of the outstanding capital stock of DeepFlex,
which owns two semisubmersible drilling rigs, the FPS Lafit Pincay and the FPS
Bill Shoemaker, (ii) the Company purchased from DeepTech approximately $8
million of the debt owed by DeepFlex to DeepTech (the "DeepFlex Debt"), (iii)
DeepFlex satisfied $12 million of the DeepFlex Debt by delivering to DeepTech
all shares of Common Stock and Preferred Stock of the Company owned by DeepFlex
and (iv) DeepTech contributed the remaining balance of the DeepFlex Debt to the
capital of DeepFlex.
<PAGE> 3
Further, in exchange for the satisfaction of the DeepFlex Debt, the
Company (i) conveyed to DeepTech all of its interest in Tatham Offshore
Development, Inc. ("TODI"), which owns 100% of the working interest in Ewing
Bank Blocks 958, 959, 1002 and 1003 and (ii) cancelled its reversionary working
interests of 37.5% in Viosca Knoll Block 817, 25% in Garden Banks Block 72 and
25% in Garden Banks Block 117 (the "Reversionary Interests").
Disposition of Oil and Gas Properties. Pursuant to the Redemption
Agreement dated February 27, 1998 by and between the Company and Flextrend
Development Company, L.L.C. ("Flextrend"), a wholly owned subsidiary of
Leviathan Gas Pipeline Partners, L.P., a New York Stock Exchange - listed
master limited partnership (the "Partnership") in which DeepTech owned an
effective 23.2% interest, the Company conveyed to Flextrend all of the
Company's right, title, and interest in Ship Shoal Block 331, West Delta Block
35, Viosca Knoll Blocks 772, 773, 774, 817, 818 and 861 and Ewing Bank Blocks
871, 914, 915, and 916 (the "Properties"). Flextrend also received all
revenues and assumed all costs, obligations and liabilities of the Properties
arising after January 1, 1998. In exchange for the Properties, the Partnership
conveyed to the Company 7,500 shares of the Company's 9% Series B Senior
Convertible Preferred Stock. The transactions described in Item 2 were finally
completed on August 14, 1998.
For additional information related to Items 1 and 2 above and the
transactions related thereto, please refer to: (i) the Information Statement on
Schedule 14C (Reg. No. 000-22892) filed by the Company with the Securities
Exchange Commission (the "SEC") on June 5, 1998, as amended, and effective June
25, 1998; (ii) the Registration Statement on Form S-1 (Reg. No. 333-49859)
filed by the Company with the SEC on April 10, 1998, as amended, and effective
July 14, 1998 and (iii) the Registration Statement on Form S-4 (Reg. No.
333-49863) filed by El Paso Natural Gas Company with the SEC on April 10, as
amended, and effective July 15, 1998.
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Acquired Business.
Audited consolidated balance sheet and related consolidated statements
of operations, of cash flows and of stockholder's equity (deficit) of DeepFlex
Production Services, Inc. and its subsidiaries at June 30, 1997 and 1996, and
the results of their operations and their cash flows for the years ended June
30, 1997 and 1996.
(b) Pro Forma Financial Information.
Unaudited pro forma condensed consolidated financial statements of
Tatham Offshore, Inc. and its subsidiaries at and for the nine months ended
March 31, 1998 and for the year ended June 30, 1997.
(c) Exhibits.
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
2.1 Contribution and Distribution Agreement dated
February 27, 1998, among DeepTech International Inc.,
Tatham Offshore, Inc., El Paso Natural Gas Company and
DeepFlex Production Services, Inc.
2.2 Redemption Agreement dated February 27, 1998, by and
between Tatham Offshore, Inc. and Flextrend Development
Company, L.L.C.
<PAGE> 5
Item 7(a)
Audited consolidated balance sheet and related consolidated statements of
operations, of cash flows and of stockholder's equity (deficit) of DeepFlex
Production Services, Inc. and its subsidiaries at June 30, 1997 and 1996, and
the results of their operations and their cash flows for the years ended June
30, 1997 and 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DeepFlex Production Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholder's equity
(deficit) present fairly, in all material respects, the financial position of
DeepFlex Production Services, Inc. and its subsidiaries at June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
two 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.
As described in Note 6, the RIGCO Credit Facility expires September 30,
1998. The Company is currently in negotiation with the lenders to refinance this
credit facility.
As described in Note 1, the Company, a subsidiary of DeepTech International
Inc., and its affiliates have significant transactions with DeepTech
International Inc. and its affiliates. Accordingly, the financial statements
should be read in conjunction with the consolidated financial statements of
DeepTech International Inc.
PRICE WATERHOUSE LLP
Houston, Texas
March 18, 1998
<PAGE> 6
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, -------------------
1998 1997 1996
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 580 $ 49 $ 5,492
Account receivable....................................... 7,441 413 2
Prepaid expenses......................................... 165 563 --
Notes receivable from affiliate.......................... -- -- 8,241
-------- -------- -------
Total current assets............................. 8,186 1,025 13,735
-------- -------- -------
Semisubmersible drilling rigs.............................. 133,813 126,287 151
Less: Accumulated depreciation............................. 5,320 1,219 --
-------- -------- -------
Semisubmersible drilling rigs, net............... 128,493 125,068 151
-------- -------- -------
Construction fund collateral account....................... -- 554 --
Note receivable from affiliate............................. -- -- 40,490
Equity investments......................................... -- -- 11,939
Debt issue costs, net...................................... 1,157 2,861 485
-------- -------- -------
Total assets..................................... $137,836 $129,508 $66,800
======== ======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities................. $ 4,077 $ 5,936 $ 643
Current portion of notes payable......................... 64,841 7,893 14,310
Note payable to DeepTech................................. 72,974 67,046 38,105
-------- -------- -------
Total current liabilities........................ 141,892 80,875 53,058
Notes payable.............................................. -- 68,357 5,931
Long-term debt............................................. -- -- 11,000
-------- -------- -------
Total liabilities................................ 141,892 149,232 69,989
-------- -------- -------
Minority interests in consolidated subsidiaries............ 250 250 --
-------- -------- -------
Commitments and contingencies (Note 10)
Stockholder's equity (deficit):
Common stock, $.001 par value, 1,000 shares authorized, 1
share issued and outstanding.......................... -- -- --
Additional paid-in capital............................... 2 2 1
Accumulated deficit...................................... (4,308) (19,976) (3,190)
-------- -------- -------
(4,306) (19,974) (3,189)
-------- -------- -------
Total liabilities and stockholder's equity
(deficit)...................................... $137,836 $129,508 $66,800
======== ======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 7
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31, YEAR ENDED JUNE 30,
------------------------- -------------------
1998 1997 1997 1996
----------- ----------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
Drilling services............................. $51,257 $ 9,083 $ 14,609 $ --
Equity in earnings............................ -- 697 -- 1,310
------- ------- -------- -------
51,257 9,780 14,609 1,310
------- ------- -------- -------
Costs and expenses:
Operating expenses............................ 25,224 5,007 8,201 --
Depreciation.................................. 3,914 809 1,219 --
Losses of equity investee..................... -- -- 1,261 --
Management fee................................ 2,288 1,729 2,287 1,761
General and administrative expenses........... 108 (179) 49 712
------- ------- -------- -------
31,534 7,366 13,017 2,473
------- ------- -------- -------
Operating income (loss)......................... 19,723 2,414 1,592 (1,163)
Gain on sale of drilling rig.................... -- -- -- 562
Gain (loss) on investment....................... 11,500 -- (10,688) --
Interest income................................. 231 441 902 223
Interest income -- affiliates................... -- 1,195 1,199 6,510
Interest expense................................ (7,641) (2,344) (2,214) (2,547)
Interest expense -- affiliates.................. (8,145) (5,186) (7,577) (5,826)
------- ------- -------- -------
Net income (loss)............................... $15,668 $(3,480) $(16,786) $(2,241)
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 8
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH 31, YEAR ENDED JUNE 30,
------------------------- -------------------
1998 1997 1997 1996
----------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $15,668 $ (3,480) $(16,786) $ (2,241)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of debt issue costs............. 1,730 1,474 2,046 243
Depreciation................................. 3,914 809 1,219 --
Equity in earnings........................... -- (697) -- (1,310)
Losses of equity investee.................... -- -- 1,261 --
Gain in sale of drilling rig................. -- -- -- (562)
(Gain) loss on investment.................... (11,500) -- 10,688 --
Noncash interest income...................... -- (1,195) (1,195) (5,790)
Noncash interest expense..................... 8,127 5,186 7,577 5,826
Noncash management fees...................... 2,288 1,607 2,337 1,761
Noncash general and administrative expense... -- -- -- 600
Other noncash items.......................... -- -- -- (531)
Changes in operating working capital:
(Increase) decrease in accounts
receivable.............................. (7,028) (504) (355) 220
Decrease (increase) in prepaid expenses.... 398 (191) (563) --
(Decrease) increase in accounts payable and
accrued liabilities..................... (1,859) (238) 5,293 160
------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 11,738 2,771 11,522 (1,624)
------- -------- -------- --------
Cash flows from investing activities:
Additions to semisubmersible drilling rigs...... (7,339) (46,234) (62,622) (151)
Investment in equity investees.................. (2,656) (1,017) (1,017) (1,010)
Proceeds from equity investee's redemption of
preferred stock.............................. 2,156 -- -- --
Proceeds from sale of common stock (Note 3)..... -- -- -- 14,708
Advances to affiliates.......................... -- -- -- (23,886)
Repayment of advance from affiliates............ -- 1,751 1,751 6,566
------- -------- -------- --------
Net cash used in investing activities... (7,839) (45,500) (61,888) (3,773)
------- -------- -------- --------
Cash flows from financing activities:
Decrease (increase) in restricted cash.......... 554 (280) (554) --
Proceeds from issuance of notes payable......... -- 65,992 77,992 20,241
Proceeds from note payable to DeepTech.......... 9,668 7,831 12,916 4,845
Repayment of notes payable...................... (11,409) (30,750) (31,000) (2,927)
Repayment of notes payable to affiliates........ -- -- -- (3,415)
Repayment of note payable to DeepTech........... (2,156) (1,845) (10,260) (7,127)
Debt issue costs................................ (25) (3,639) (4,171) (728)
------- -------- -------- --------
Net cash (used in) provided by financing
activities............................ (3,368) 37,309 44,923 10,889
------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 531 (5,420) (5,443) 5,492
Cash and cash equivalents at beginning of
period.......................................... 49 5,492 5,492 --
------- -------- -------- --------
Cash and cash equivalents at end of period........ $ 580 $ 72 $ 49 $ 5,492
======= ======== ======== ========
</TABLE>
Supplemental disclosures to the statement of cash flows -- see Note 9.
The accompanying notes are an integral part of this financial statement.
<PAGE> 9
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL
NUMBER PAR PAID-IN ACCUMULATED
OF SHARES VALUE CAPITAL DEFICIT TOTAL
--------- ----- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995...................... 1 $-- $ 1 $ (949) $ (948)
Net loss for the year ended June 30, 1996... -- -- -- (2,241) (2,241)
-- --- --- -------- --------
Balance, June 30, 1996...................... 1 -- 1 (3,190) (3,189)
Additional paid in capital from DeepTech
International Inc......................... -- -- 1 -- 1
Net loss for the year ended June 30, 1997... -- -- -- (16,786) (16,786)
-- --- --- -------- --------
Balance, June 30, 1997...................... 1 -- 2 (19,976) (19,974)
Net income for the nine months ended March
31, 1998 (unaudited)...................... -- -- -- 15,668 15,668
-- --- --- -------- --------
Balance, March 31, 1998 (unaudited)......... 1 $-- $ 2 $ (4,308) $ (4,306)
== === === ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 10
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
DeepFlex Production Services, Inc. ("DeepFlex"), a Delaware corporation and
wholly-owned subsidiary of DeepTech International Inc. ("DeepTech"), was formed
on January 19, 1995 and through its subsidiaries and equity interests, focuses
on the acquisition and deployment of semisubmersible drilling rigs for contract
drilling. DeepTech is a diversified energy company engaged, through its
operating subsidiaries, in offshore contract drilling services and the
acquisition, development, production, processing, transportation and marketing
of, and the exploration for, oil and gas located offshore the United States in
the Gulf of Mexico and offshore eastern Canada.
In March 1995, DeepFlex entered into a partnership agreement with an
affiliate of Coflexip Stena Offshore Inc. ("Coflexip") to form DeepFlex
Production Partners, L.P. ("DeepFlex Partners"). DeepFlex Partners, effectively
owned 50% by DeepFlex and 50% by Coflexip, operated the FPS Laffit Pincay, a
second generation semisubmersible drilling rig, through September 30, 1996.
In December 1995, DeepFlex entered into an agreement with Highwood
Partners, L.P. ("Highwood Partners") to form Deepwater Drillers, L.L.C.
("Deepwater Drillers") to exercise an option assigned from an indirect
subsidiary of DeepTech to acquire the FPS Bill Shoemaker, a second generation
semisubmersible drilling rig. At inception, Deepwater Drillers was owned 50% by
a wholly-owned subsidiary of DeepFlex and 50% by Highwood Partners. On June 30,
1996, FPS V, Inc. ("FPS V"), a wholly-owned subsidiary of DeepTech, acquired
Highwood Partners' 50% interest. DeepTech subsequently contributed its
investment in FPS V to DeepFlex.
On September 30, 1996, Deepwater Drillers was merged with and into RIGCO
North America, L.L.C. ("RIGCO"), a wholly-owned indirect subsidiary of DeepFlex.
RIGCO also acquired the FPS Laffit Pincay from DeepFlex Partners in exchange for
payment-in-kind indebtedness ("PIK Notes") (See Notes 3, 4, 5 and 6).
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
DeepFlex and its wholly-owned subsidiaries (collectively referred to as the
"Company"). The Company uses the equity method to account for its investment in
entities in which the Company owns 50% or less.
The financial data for the nine months ended March 31, 1998 and 1997 is
unaudited; however, this data has been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. This interim data
reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair statement of the results of operations for such
interim periods.
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.
SEMISUBMERSIBLE DRILLING RIGS
The cost of the semisubmersible drilling rigs is capitalized and
depreciated using the straight-line method over the drilling rigs' estimated
useful lives of 25 years.
<PAGE> 11
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment losses on long-lived assets (including the semisubmersible
drilling rigs) are recognized 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.
CAPITALIZATION OF INTEREST
Interest and other financing costs are capitalized in connection with
construction projects as part of the cost of the asset and amortized over the
related asset's estimated useful life.
DEBT ISSUE COSTS
Debt issue costs are capitalized and amortized over the life of the related
indebtedness.
REVENUE RECOGNITION
Revenue from services is recognized in the period rendered. All of the
Company's operating revenues are generated from contract drilling services
related to the use of its two semisubmersible drilling rigs.
INCOME TAXES
The Company's results are included with its parent, DeepTech, in a
consolidated federal income tax return. DeepTech and its subsidiaries which are
part of the consolidated tax group, including the Company, are parties to
intercompany tax sharing agreements which describe the method of determining the
intercompany charge for income taxes. Under its tax sharing agreement, the
Company is to calculate a provision for income taxes equal to that which would
be calculated if the Company filed a separate income tax return. Tax loss and
other tax benefit carryforwards are similarly calculated for the Company on a
separate return basis. Federal income taxes currently payable are remitted to
DeepTech and state income taxes are remitted to the applicable state taxing
authorities.
ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount 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.
OTHER
The fair values of the financial instruments included in the Company's
assets and liabilities approximate their carrying values.
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
About Capital Structure". This statement, which establishes standards for
disclosing information about an entity's capital structure previously not
required by nonpublic entities, is effective for fiscal years beginning after
December 15, 1997 and will not affect the Company.
<PAGE> 12
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- SEMISUBMERSIBLE DRILLING RIGS:
Additions to semisubmersible drilling rigs during the year ended June 30,
1997 related to the acquisition of the FPS Laffit Pincay from DeepFlex Partners
for the assumption of all of the then outstanding PIK Notes of $40,056,000 and
the acquisition, refurbishment and upgrade of the FPS Bill Shoemaker. During the
years ended June 30, 1997 and 1996, the Company capitalized $7,140,000 and
$1,021,000, respectively, of interest costs related to the refurbishment and
upgrade of the semisubmersible drilling rigs.
Both the FPS Laffit Pincay and the FPS Bill Shoemaker are currently
operated under management and charter agreements with Sedco Forex Division
("Sedco Forex") of Schlumberger Technology Corporation. Sedco Forex is
responsible for all aspects of operating and marketing of the drilling rigs,
subject to agreed budgets and certain authorizations for new contracts. The
agreements with Sedco Forex provide them with a management fee and the
recoupment of their actual operating costs. During July 1997, Sedco Forex
completed the refurbishment and upgrade on the FPS Bill Shoemaker and mobilized
the rig to offshore eastern Canada where it conducted drilling operations.
In November 1994, the Company acquired a semisubmersible drilling rig, the
FPS Eddie Delahoussaye, for $11,000,000 (Note 6). Effective March 31, 1995, the
Company transferred the FPS Eddie Delahoussaye to DeepFlex Partners for the
issuance of PIK Notes in the amount of $14,763,000 which was the Company's cost
of acquisition and capital additions since November 1994.
In September 1995, the Company sold the FPS Eddie Delahoussaye (on behalf
of DeepFlex Partners) to Reading & Bates (U.K.) Limited for $18,000,000 which
was comprised of (i) $3,000,000, (ii) 1,232,057 shares of Reading & Bates
Corporation ("Reading & Bates") common stock and (iii) the forgiveness of
$292,000 of trade receivables due Reading & Bates from a wholly-owned subsidiary
of DeepTech. DeepFlex Partners transferred the net sales proceeds (including the
Reading & Bates common stock) to the Company as repayment of a portion of the
PIK Notes issued by DeepFlex Partners. The Reading & Bates common stock was
subsequently sold for $14,708,000.
NOTE 4 -- NOTES RECEIVABLE FROM AFFILIATES:
BRIDGE LOAN
In October 1995, DeepFlex entered into a bridge loan agreement (the "Bridge
Loan") with Tatham Offshore, Inc. ("Tatham Offshore"), a subsidiary of DeepTech,
whereby DeepFlex agreed to make $12,500,000 of interim bridge financing
available to fund a portion of Tatham Offshore's working capital and capital
requirements. DeepFlex advanced Tatham Offshore $8,000,000 under the Bridge
Loan. All indebtedness outstanding under the Bridge Loan accrued interest at a
rate of 15% per annum. Interest income related to outstanding advances under the
Bridge Loan totaled $210,000 for the year ended June 30, 1996. The terms of the
Bridge Loan required Tatham Offshore to undertake an equity offering or to
implement another refinancing or asset disposition sufficient to repay the
outstanding indebtedness under the Bridge Loan. On January 31, 1996, DeepFlex
subscribed for the purchase of 10,000,000 Tatham Offshore 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 the remaining principal and accrued interest
outstanding under the Bridge Loan.
PROMISSORY NOTES
In December 1995, a wholly-owned subsidiary of DeepFlex and Highwood
Partners formed Deepwater Drillers to acquire the FPS Bill Shoemaker for
$14,500,000 pursuant to the exercise of an option assigned
<PAGE> 13
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the Company (Notes 1 and 6). As of June 30, 1996, the Company advanced
$8,241,000 to Deepwater Drillers from proceeds from the Highwood Notes (Note 6)
in exchange for promissory notes ("Promissory Notes"). The Promissory Notes bore
interest at 12% per annum, payable quarterly, were due on March 31, 1997 and
were secured by a mortgage on the FPS Bill Shoemaker. Interest income related to
the Promissory Notes totaled $510,000 for the year ended June 30, 1996. In
connection with the contribution by DeepTech of its investment in FPS V to
DeepFlex, the merger of Deepwater Drillers with and into RIGCO and the repayment
of the Highwood Notes (Note 6), the Promissory Notes were settled.
PIK NOTES
As of June 30, 1996, DeepFlex Partners owed DeepFlex $40,490,000 aggregate
principal amount of PIK Notes which comprises the long term note receivable from
affiliate on the accompanying consolidated balance sheet. The PIK Notes from
DeepFlex Partners bore interest at 12% per annum, payable quarterly, and were
due on March 31, 2002.
Interest was paid under certain circumstances by the issuance of additional
PIK Notes. The PIK Notes were subordinate to all indebtedness incurred by
DeepFlex Partners and were secured by a first mortgage on the FPS Laffit Pincay.
On September 30, 1996, RIGCO acquired the FPS Laffit Pincay from DeepFlex
Partners for the assumption of the then outstanding PIK Notes payable to
DeepFlex of $40,056,000. Interest income related to the PIK Notes totaled
$1,195,000 and $5,790,000 for the years ended June 30, 1997 and 1996,
respectively.
NOTE 5 -- EQUITY INVESTMENTS:
At June 30, 1997, the Company owned 26% of Tatham Offshore's Series A 12%
Convertible Exchangeable Preferred Stock ("Series A Preferred Stock"), 76% of
Tatham Offshore's Series C 4% Convertible Exchangeable Preferred Stock ("Series
C Preferred Stock") and 86% of Tatham Offshore's Mandatory Redeemable Preferred
Stock. See Note 11. In June 1997, the Company reserved its investment in Tatham
Offshore's Series A, Series C and Mandatory Redeemable Preferred Stocks which is
included in loss on investments on the accompanying consolidated statement of
operations. The Company's investment in Tatham Offshore, DeepFlex Partners and
Deepwater Drillers totaled $9,671,000, $1,258,000 and $1,010,000, respectively,
at June 30, 1996.
The summarized financial information for the Company's significant
investments in unconsolidated subsidiaries which are accounted for using the
equity method is as follows:
SUMMARIZED BALANCE SHEET
<TABLE>
<CAPTION>
DEEPWATER DRILLERS DEEPFLEX PARTNERS
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997(a) 1996 1997(b) 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets................................. $ -- $ -- $ -- $ 659
Noncurrent assets.............................. -- 19,554 -- 42,403
Current liabilities............................ -- 17,528 -- 57
Noncurrent liabilities......................... -- -- -- 40,490
</TABLE>
- ---------------
(a) On September 30, 1996, Deepwater Drillers was merged with and into RIGCO.
(b) Effective September 30, 1996, RIGCO acquired the FPS Laffit Pincay for the
assumption of all PIK Notes then outstanding of $40,056,000. Accordingly,
at June 30, 1997, the FPS Laffit Pincay is included in property and
equipment on the Company's consolidated balance sheet.
<PAGE> 14
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARIZED HISTORICAL OPERATING RESULTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEEPFLEX PARTNERS
YEAR ENDED JUNE 30,
--------------------
1997(a) 1996
-------- --------
<S> <C> <C>
Operating revenue........................................... $ 4,448 $ 4,668
Other income................................................ 179 5,130
Operating expenses.......................................... (2,805) (3,927)
Depreciation................................................ (504) (760)
Impairment, abandonment and other........................... (2,645) --
Other expenses.............................................. (1,195) (2,491)
------- -------
Net (loss) income........................................... (2,522) 2,620
Ownership percentage........................................ 50% 50%
------- -------
Equity in (losses) earnings................................. $(1,261) $ 1,310
======= =======
</TABLE>
- ---------------
(a) Effective September 30, 1996, RIGCO acquire the FPS Laffit Pincay from
DeepFlex Partners. Accordingly, activity related to the operations of the
FPS Laffit Pincay for the period from October 1, 1996 through June 30, 1997
is included in the Company's consolidated statement of operations.
NOTE 6 -- INDEBTEDNESS:
Outstanding indebtedness is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Highwood Notes.................................. $ -- $ -- $ 8,241 $ --
Term Loan....................................... -- -- 6,069 5,931
RIGCO Credit Facility........................... 7,893 68,357 -- --
Wilrig AS promissory notes...................... -- -- -- 11,000
Note payable to parent.......................... 67,046 -- 38,105 --
</TABLE>
HIGHWOOD NOTES
Prior to June 30, 1996, DeepFlex issued promissory notes to Highwood
Partners (the "Highwood Notes") for an aggregate principal amount of $8,241,000
which funds were advanced to Deepwater Drillers in exchange for Promissory Notes
(Note 4). The Company retired the Highwood Notes in connection with obtaining
the RIGCO Credit Facility discussed below. The Highwood Notes were secured by a
mortgage on the FPS Bill Shoemaker, the Promissory Notes issued to the Company
by Deepwater Drillers and a portion of the PIK Notes, bore interest at 12% per
annum, payable quarterly and were due March 31, 1997. Interest expense for the
years ended June 30, 1997 and 1996 totaled $23,000 and $510,000, respectively.
TERM LOAN
In February 1996, DeepFlex entered into a term loan agreement to borrow $12
million (the "Term Loan") from a syndicate of commercial lenders. The Term Loan
bore interest at 12% per annum, payable monthly, was due on July 15, 1997 and
was secured by substantially all tangible and intangible assets owned by
DeepFlex. In addition, the lenders required an assignment by DeepFlex of the
first preferred ship mortgage on the FPS Laffit Pincay. In connection with the
Term Loan, DeepTech issued to the lenders
<PAGE> 15
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
warrants to purchase an aggregate of up to 2,666,667 shares of DeepTech common
stock at $4.50 per share. One of the lenders, Citibank, N.A., required that Mr.
Thomas P. Tatham (the Chief Executive Officer, Chairman of the Board of
Directors and principal stockholder of DeepTech) guarantee $6,000,000 of the
Term Loan. In exchange for Mr. Tatham agreeing to guarantee a portion of the
Term Loan, Mr. Tatham received from Citibank, N.A. warrants to purchase 333,333
shares of DeepTech common stock, twenty-five percent of the loan fees payable by
DeepFlex to Citibank, N.A. and a quarterly fee equal to 50 basis points per
annum for the period the guaranty was outstanding. Proceeds from the Term Loan
were utilized to repay $3,492,000 of the Short-Term Notes, discussed below, for
expenses incurred in connection with the Term Loan and for working capital and
general corporate requirements. The Company retired the Term Loan in connection
with obtaining the RIGCO Credit Facility discussed below. Interest expense and
amortization of debt issue costs related to the Term Loan for the years ended
June 30, 1997 and 1996 totaled $850,000 and $783,000, respectively.
RIGCO CREDIT FACILITY
On September 30, 1996, RIGCO entered into a $65 million senior secured
credit facility with a syndicate of lenders (the "RIGCO Credit Facility").
Proceeds from the RIGCO Credit Facility were used to acquire the FPS Bill
Shoemaker, to fund significant upgrades to the FPS Bill Shoemaker, and to retire
the Highwood Notes and the Term Loan. In April 1997, the RIGCO Credit Facility
was amended to provide for an additional $12,000,000 to fund the remaining
refurbishments and upgrades to the FPS Bill Shoemaker. The RIGCO Credit Facility
was amended in July 1997 to revise certain covenants. The RIGCO Credit Facility
(i) matures on September 30, 1998, (ii) bears interest at the prime rate plus 3%
per annum (11.5% at June 30, 1997), payable quarterly, (iii) is secured by all
tangible and intangible assets of RIGCO including the two semisubmersible
drilling rigs, (iv) requires a quarterly principal payment of excess cash flow
as defined in the credit agreement with a minimum principal amortization of
$250,000 per quarter beginning on December 31, 1996 and (v) is subject to
customary conditions and covenants, including the maintenance of a minimum level
of working capital. As of June 30, 1997, amounts outstanding under the RIGCO
Credit Facility totaled $76,250,000. Debt issue costs related to the RIGCO
Credit Facility of $4,400,000 were capitalized and are being amortized over the
two-year life of the credit facility. Interest incurred and amortization of debt
issue costs related to the RIGCO Credit Facility totaled $7,282,000 for the year
ended June 30, 1997. The construction fund collateral account on the
accompanying consolidated balance sheet represents remaining funds available
from the RIGCO Credit Facility which were restricted for use related to the
refurbishment and upgrade of the FPS Bill Shoemaker. In connection with
providing the RIGCO Credit Facility, lending syndicate members were issued
warrants to purchase an aggregate of 5% of RIGCO's outstanding equity.
As required by the RIGCO Credit Facility, RIGCO purchased an interest rate
cap from a financial institution which established a maximum rate of 11.74% per
annum on $36.5 million of outstanding principal for the remaining term of the
credit facility.
The Company is currently in negotiation with the lenders to refinance this
credit facility.
WILRIG AS PROMISSORY NOTES
In November 1994, the Company acquired from Wilrig AS ("Wilrig") a
semisubmersible drilling rig, the FPS Eddie Delahoussaye (Note 3). In connection
with this acquisition, the Company obtained an option to acquire the FPS Bill
Shoemaker (Note 1) from Wilrig. As consideration, DeepTech and the Company
issued to Wilrig (i) promissory notes in the aggregate principal amount of
$11,000,000 (the "Wilrig Notes") due December 1997 and (ii) warrants which
granted Wilrig the right to exchange the principal and interest
<PAGE> 16
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding under the promissory notes for common stock of DeepTech at the rate
of $10.00 per share up to a maximum of 1,100,000 shares (the "Wilrig Warrants").
Interest expense related to this debt was payable quarterly at 10% per annum and
totaled $617,000 and $1,100,000 for the years ended June 30, 1997 and 1996,
respectively. DeepFlex transferred the FPS Eddie Delahoussaye to DeepFlex
Partners in exchange for PIK notes in March 1995. On January 23, 1997, DeepTech
assumed the Wilrig Notes from the Company by increasing the note payable to
DeepTech discussed below and agreed to assign the Wilrig Warrants to Mr. Tatham.
NOTE PAYABLE TO DEEPTECH
Advances made to the Company by DeepTech are evidenced by an unsecured line
of credit, are due on demand and, if no demand is made, on November 14, 2000 and
bear interest at 14.5% per annum. Interest expense related to outstanding
advances totaled $7,577,000 and $5,826,000 for the years ended June 30, 1997 and
1996, respectively. See Note 9. DeepTech may, at its sole discretion, make
additional advances at the request of the Company. See Note 11.
NOTES PAYABLE TO AFFILIATES
In January 1996, the Company issued $3,415,000 in unsecured notes payable
(the "Short-Term Notes") bearing interest at 18% per annum and due on February
15, 1996 to affiliates of DeepTech in settlement of interest which was due on
January 1, 1996 that was related to DeepTech's affiliate indebtedness. DeepFlex
paid the Short-Term Notes in February 1996 as discussed above. Interest expense
related to this debt totaled $77,000 for the year ended June 30, 1996.
NOTE 7 -- RELATED PARTY TRANSACTIONS:
DeepTech has entered into management agreements with each of its
subsidiaries, including DeepFlex, pursuant to which each affiliate is charged an
annual management fee in exchange for operational, financial, accounting and
administrative services. The management fee is intended to reimburse DeepTech
for the estimated costs of services provided to each affiliate. Effective July
1, 1995, November 1, 1995 and July 1, 1996, the management agreement was amended
to provide for an annual management fee of 7.5%, 18.8% and 18%, respectively, of
DeepTech's unreimbursed overhead. For the years ended June 30, 1997 and 1996,
DeepFlex incurred $2,458,000 and $2,078,000, respectively, under this management
agreement of which DeepFlex charged $171,000 and $317,000, respectively, to
DeepFlex Partners pursuant to a management agreement between DeepFlex and
DeepFlex Partners whereby DeepFlex provided operational, financial, accounting
and administrative services to DeepFlex Partners. Management fees charged to
DeepFlex by DeepTech for the years ended June 30, 1997 and 1996 are included in
the note payable to DeepTech (Note 6) as DeepFlex did not make cash payments of
management fees to DeepTech during such periods. See Notes 9 and 11.
On June 30, 1996, DeepFlex exercised 4,670,957 Tatham Offshore warrants to
purchase an equal number of shares of Tatham Offshore Series A Preferred Stock
for $1.00 per share by increasing its note payable to DeepTech by $4,670,957.
DeepTech, in turn, offset its then outstanding receivable from Tatham Offshore
for costs allocated under its management agreement by $4,670,957.
In February 1996, the FPS Laffit Pincay began providing contract drilling
services to Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), an affiliate of
DeepTech, which included the drilling and completion of the Garden Banks Block
117 #2 well in the Gulf of Mexico. As a result of RIGCO acquiring the FPS Laffit
Pincay in September 1996, RIGCO assumed this drilling contract. For the year
ended June 30, 1997, the Company's operating revenue included $10,779,000
related to these services provided to Leviathan. For the
<PAGE> 17
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period from February 1996 through September 30, 1996, DeepFlex Partners reported
operating revenue of $9,116,000 related to these services.
In connection with the sale of the FPS Eddie Delahoussaye (Note 3), Mr.
Tatham was awarded a $200,000 bonus which he deferred under the DeepTech
deferred compensation arrangement. The DeepTech deferred compensation
arrangement required Mr. Tatham to defer all of his cash salary and entitled him
to receive options to purchase a number of shares of either DeepTech or Tatham
Offshore or preference units of Leviathan equal to 300% of his cash salary
divided by the lesser of the closing price on June 30, 1995 (DeepTech -- $4.00,
Tatham Offshore -- $35.00 and Leviathan -- $11.875) or the average closing price
for the applicable month. On September 25, 1995, Mr. Tatham exercised his
options under DeepTech's deferred compensation arrangement and received 150,000
shares of DeepTech common stock at an option price of $4.00 per share. This
$600,000 bonus is included in general and administrative expenses for the year
ended June 30, 1996 on the accompanying consolidated statement of operations.
In connection with the issuance of the Highwood Notes (Note 6), DeepTech
granted Highwood Partners warrants to acquire 472,973 shares of DeepTech common
stock at $5.00 per share until December 5, 1997. Highwood Partners assigned such
warrants to Westgate International, L.P. ("Westgate") who exercised all of these
warrants on September 30, 1996 to acquire 472,973 shares of DeepTech common
stock. In June 1997, DeepTech registered the shares of common stock acquired by
Westgate pursuant to the warrant agreement. As of June 30, 1997, Westgate,
Elliott Associates, L.P. and Martley International, Inc., which are entities
under common control with Highwood Partners, owned a total of 472,973 shares of
DeepTech common stock and 6,037,784 shares of Tatham Offshore Series A Preferred
Stock. See Notes 4 and 6.
In June 1997, RIGCO factored $1,300,000 of its accounts receivable to
DeepTech in order to fund certain obligations. RIGCO agreed to pay DeepTech 1%
per month of the outstanding accounts receivable balance until collected by
DeepTech. DeepTech collected all of the factored accounts receivable subsequent
to June 30, 1997.
In December 1996, DeepFlex exercised 1,016,957 Tatham Offshore warrants to
acquire shares of Tatham Offshore's Series C Preferred Stock at $1.00 per share.
The remaining 4,312,086 Tatham Offshore warrants held by DeepFlex were
automatically converted into 4,312,086 shares of Tatham Offshore's Mandatory
Redeemable Preferred Stock on January 1, 1997. See Notes 5 and 11.
NOTE 8 -- INCOME TAXES:
The Company has been and will be included in the consolidated federal
income tax returns filed by DeepTech. DeepFlex and DeepTech have entered into a
tax sharing agreement providing for the manner of determining payments with
respect to federal income tax liabilities (Note 2).
There were no intercompany charges for federal income taxes for the period
ended June 30, 1997 and 1996.
No amounts were currently due for federal income taxes at June 30, 1997 or
1996.
<PAGE> 18
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
Depreciable/amortizable assets.............................. $(4,772) $ (134)
Gross deferred liability.................................. (4,772) (134)
------- -------
Investment in Tatham Offshore............................... 3,923 --
NOL carryforwards........................................... 7,640 1,218
------- -------
Gross deferred asset...................................... 11,563 1,218
------- -------
Net deferred tax asset...................................... 6,791 1,084
Valuation allowances........................................ (6,791) (1,084)
------- -------
$ -- $ --
======= =======
</TABLE>
Because of the Company's cumulative losses, valuation allowances of
$6,791,000 and $1,084,000 at June 30, 1997 and 1996, respectively, were provided
against the net deferred tax assets. 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 the Company's NOL carryforwards under
its intercompany tax sharing agreement with DeepTech.
NOTE 9 -- SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
CASH PAID, NET OF AMOUNTS CAPITALIZED, DURING EACH OF THE PERIODS PRESENTED
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
--------------
1997 1996
---- ------
(IN THOUSANDS)
<S> <C> <C>
Interest.................................................... $445 $4,618
Taxes....................................................... $ -- $ --
</TABLE>
<PAGE> 19
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Additions to property and equipment (Note 3)................ $(40,000) $ --
Acquisition of accounts receivable (Note 3)................. (56) --
Assumption of PIK Notes (Note 3)............................ 40,056 --
Warrants issued in connection with the RIGCO Credit Facility
(Note 6).................................................. 250 --
Investment in Tatham Offshore (Note 4)...................... -- (5,000)
Reduction of note receivable from Tatham Offshore (Note
4)........................................................ -- 5,000
Issuance of notes payable (Note 6).......................... -- 3,415
Decrease in note payable to DeepTech (Note 6)............... -- (3,415)
Investment in Series A Preferred Stock (Note 7)............. -- (4,671)
Increase in note payable to DeepTech (Note 7)............... 11,000 4,671
Conveyance of note payable (Note 6)......................... (11,000) --
Increase in note payable to DeepTech related to interest
expense (Note 6).......................................... 7,577 5,826
Increase in note payable to DeepTech related to management
fees (Note 7)............................................. 2,458 2,078
Increase in note payable to DeepTech related to bonus
awarded to Mr. Tatham (Note 7)............................ -- 600
Increase in PIK Note from DeepFlex Partners related to
interest income (Note 4).................................. (1,195) (5,790)
Increase in PIK Note from DeepFlex Partners related to
management fees (Note 7).................................. (122) (317)
Increase in PIK Note from DeepFlex Partners related to
settlement of certain acquisition costs................... -- (531)
Sale of semisubmersible drilling rigs (Note 3).............. -- 14,763
Increase in PIK Note from DeepFlex Partners (Note 3)........ -- (14,763)
Repayment of PIK Note from DeepFlex Partners (Note 3)....... -- 14,708
</TABLE>
NOTE 10 -- 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 the results of
operations of the Company.
NOTE 11 -- SUBSEQUENT EVENTS:
In February 1998, DeepFlex exchanged its 1,016,957 shares of Tatham
Offshore Series C Preferred Stock for 406,783 Tatham Offshore exchange warrants
and immediately converted these exchange warrants into 406,783 shares of Tatham
Offshore common stock at $6.53 per share for a total cost of $2,656,000. Tatham
Offshore used the proceeds to redeem all of the 4,991,377 shares of Mandatory
Redeemable Preferred Stock outstanding at $0.50 per share as required under the
terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex received
$2,156,000 as a result of this redemption by Tatham Offshore.
In March 1998, DeepFlex transferred all of its shares of Tatham Offshore
Series A Preferred Stock (Notes 5 and 7) and common stock (discussed above) to
DeepTech in satisfaction of $12,000,000 under its unsecured line of credit with
DeepTech.
<PAGE> 20
DEEPFLEX PRODUCTION SERVICES, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF DEEPTECH INTERNATIONAL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 2, 1998, DeepTech announced that its Board of Directors and a
majority of its stockholders had approved entering into a definitive merger
agreement with El Paso Natural Gas Company (the "Merger"), expected to close in
June or July 1998. Prior to the Merger, shares of Tatham Offshore common stock
and Series A Preferred Stock currently held by DeepTech will be offered to the
stockholders of DeepTech in a rights offering. In connection with the Merger,
DeepTech will contribute to the capital of DeepFlex all of its remaining amounts
due from DeepFlex under an intercompany line of credit, except for $8,000,000,
prior to contributing all of the outstanding shares of capital stock of DeepFlex
to Tatham Offshore. Upon completion of this transaction, the Company will be a
wholly-owned subsidiary of Tatham Offshore. Further, DeepTech will exchange the
remaining $8,000,000 due from DeepFlex under an intercompany line of credit for
Tatham Offshore's assignment to DeepTech of all of the outstanding shares of
capital stock of Tatham Offshore Development, Inc. which owns leases covering
Ewing Bank Blocks 958, 959, 1002 and 1003 located in the Gulf of Mexico.
<PAGE> 21
Item 7(b)
Unaudited pro forma condensed consolidated financial statements of Tatham
Offshore, Inc. and its subsidiaries at and for the nine months ended March 31,
1998 and for the year ended June 30, 1997.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements at and
for the nine months ended March 31, 1998 and for the year ended June 30, 1997
have been prepared based on the historical consolidated balance sheet and
statement of operations of Tatham Offshore, Inc. and its subsidiaries ("Tatham
Offshore"). The historical balance sheet and statement of operations were
adjusted to give effect to the transactions identified below (the
"Transactions"). The balance sheet was adjusted by giving effect to the
Transactions as if they had occurred on March 31, 1998. The statements of
operations for the nine months ended March 31, 1998 and for the year ended June
30, 1997 were adjusted by giving effect to the Transactions as if they had
occurred on July 1, 1997 and July 1, 1996, respectively.
Tatham Offshore, 94%-owned by DeepTech International Inc. ("DeepTech")
which is a diversified energy company, is currently engaged in exploration and
production activities in the flextrend and deepwater areas of the Gulf of Mexico
(the "Gulf") and is pursuing energy related opportunities in Atlantic Canada,
including substantial natural gas gathering and transmission facilities and
related energy infrastructure. DeepFlex Production Services, Inc. ("DeepFlex"),
a wholly-owned subsidiary of DeepTech, through its subsidiaries, focuses on the
acquisition and deployment of semisubmersible drilling rigs for contract
drilling services. DeepFlex owns and operates two semisubmersible drilling rigs,
the FPS Bill Shoemaker and the FPS Laffit Pincay.
The pro forma financial information gives effect to the following
Transactions:
(1) The Boards of Directors of El Paso Natural Gas Company ("El Paso")
and DeepTech and a majority of DeepTech stockholders have approved a
definitive merger agreement (the "Merger"). Prior to and in connection with
the Merger, the following events will occur. In March 1998, DeepFlex
conveyed to DeepTech all of its equity ownership in Tatham Offshore
(including 406,783 shares of common stock and 4,670,957 shares of Series A
12% Convertible Exchangeable Preferred Stock ("Series A Preferred Stock"))
as satisfaction of $12 million of the amount DeepFlex owes to DeepTech
under an intercompany line of credit. DeepTech will offer all of the shares
of Tatham Offshore common stock and Series A Preferred Stock held by
DeepTech, including the equity conveyed by DeepFlex in March 1998, to the
stockholders of DeepTech in a rights offering. Additionally, DeepTech will
contribute to the capital of DeepFlex all of its remaining amounts due from
DeepFlex under an intercompany line of credit, except for $8.0 million,
prior to contributing all of the outstanding shares of capital stock of
DeepFlex to Tatham Offshore. Further, DeepTech will exchange the remaining
$8.0 million due from DeepFlex for Tatham Offshore's assignment to DeepTech
of all of the outstanding shares of capital stock of Tatham Offshore
Development, Inc. ("Tatham Development") which owns leases covering Ewing
Bank Blocks 958, 959, 1002 and 1003 located in the Gulf.
(2) Additionally, in connection with the Merger, Leviathan Gas
Pipeline Partners, L.P. (the "Partnership"), effectively owned 23.2% by
DeepTech and 27.3% by El Paso after the Merger, has agreed to exchange
7,500 shares of Tatham Offshore Series B 9% Senior Convertible Preferred
Stock ("Senior Preferred Stock") currently held by the Partnership for 100%
of Tatham Offshore's right, title and interest in and to its remaining oil
and gas assets located in the Gulf. Tatham Offshore has agreed to pay an
amount to the Partnership at closing equal to the net cash generated from
these properties, if any, from January 1, 1998 through the closing date and
the Partnership has agreed to assume all abandonment and restoration
obligations associated with these assets.
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of Tatham Offshore's consolidated financial condition or
results of operations that might have occurred had the Transactions been
completed at the beginning of the period or as of the date specified, and do not
purport to indicate Tatham Offshore's consolidated financial position or results
of operations for any future period or at any future date. The unaudited pro
forma condensed consolidated financial statements should be read in the context
of the related historical consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
<PAGE> 22
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DEEPFLEX PRO FORMA
HISTORICAL PRO FORMA(A) ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 2,309 $ 580 $ -- $ 2,889
Accounts receivable................... 916 7,441 -- 8,357
Prepaid assets........................ 116 165 -- 281
--------- -------- -------- ---------
Total current assets.......... 3,341 8,186 -- 11,527
--------- -------- -------- ---------
Property and equipment:
Oil and gas properties, at cost....... 51,919 -- (22,079)(b) --
(29,840)(c)
Semisubmersible drilling rigs......... -- 133,813 -- 133,813
--------- -------- -------- ---------
51,919 133,813 (51,919) 133,813
Less: Accumulated depreciation,
depletion, amortization and
impairment......................... 24,374 5,320 (24,374)(c) 5,320
--------- -------- -------- ---------
Property and equipment, net........ 27,545 128,493 (27,545) 128,493
--------- -------- -------- ---------
Deferred costs.......................... 10,428 -- -- 10,428
Debt issue costs, net................... -- 1,157 -- 1,157
--------- -------- -------- ---------
Total assets.................. $ 41,314 $137,836 $(27,545) $ 151,605
========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities........................ $ 3,527 $ 4,077 $ -- $ 7,604
Notes payable......................... -- 64,841 -- 64,841
Note payable to DeepTech.............. -- 8,000 (8,000)(b) --
--------- -------- -------- ---------
Total current liabilities..... 3,527 76,918 (8,000) 72,445
Other noncurrent liabilities............ 7,229 -- (400)(b) --
(6,829)(c)
--------- -------- -------- ---------
Total liabilities............. 10,756 76,918 (15,229) 72,445
--------- -------- -------- ---------
Minority interests in consolidated
subsidiaries.......................... -- 250 -- 250
--------- -------- -------- ---------
Stockholders' equity:
Preferred stock....................... 180 -- --(c) 180(d)(f)
Common stock.......................... 300 -- -- 300(e)(f)
Additional paid-in capital............ 146,520 64,976 (14,422)(b) 198,437
1,363(c)
Accumulated deficit................... (116,442) (4,308) 743(b) (120,007)
--------- -------- -------- ---------
30,558 60,668 (12,316) 78,910(g)
--------- -------- -------- ---------
Total liabilities and
stockholders' equity........ $ 41,314 $137,836 $(27,545) $ 151,605
========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 23
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEEPFLEX
PRO PRO FORMA
HISTORICAL FORMA(A) ADJUSTMENTS PRO FORMA
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Drilling services.............................. $ -- $51,257 $ -- $51,257
Oil and gas sales.............................. 9,276 -- (9,276)(b) --
------- ------- ------- -------
9,276 51,257 (9,276) 51,257
------- ------- ------- -------
Costs and expenses:
Production, operating and exploration
expenses.................................... 4,253 25,224 (4,196)(b) 25,224
(57)(c)
Depreciation, depletion and amortization....... 3,125 3,914 (3,125)(b) 3,914
Management fee and general and administrative
expenses.................................... 4,364 2,396 (55)(b) 6,700
(5)(c)
------- ------- ------- -------
11,742 31,534 (7,438) 35,838
------- ------- ------- -------
Operating (loss) income.......................... (2,466) 19,723 (1,838) 15,419
Interest income.................................. 205 231 -- 436
Interest and other financing costs............... -- (7,641) -- (7,641)
Interest expense -- affiliates................... (1,743) -- 1,743(d) --
------- ------- ------- -------
Net (loss) income................................ (4,004) 12,313 (95) 8,214(f)
Preferred stock dividends........................ (2,829) -- 506(e) (2,323)
------- ------- ------- -------
Net (loss) income available to common
shareholders................................... $(6,833) $12,313 $ 411 $ 5,891
======= ======= ======= =======
Weighted average number of shares outstanding.... 13,083 13,083
======= =======
Basic net (loss) income per common share......... $ (0.52) $ 0.45
======= =======
Diluted number of shares......................... 13,083 18,019
======= =======
Diluted net (loss) income per common share....... $ (0.52) $ 0.33
======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 24
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEEPFLEX PRO FORMA
HISTORICAL PRO FORMA(G) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Drilling services....................... $ -- $19,057 $ -- $19,057
Oil and gas sales....................... 20,723 -- (20,723)(b) --
-------- ------- -------- -------
20,723 19,057 (20,723) 19,057
-------- ------- -------- -------
Costs and expenses:
Production, operating and exploration
expenses............................. 9,007 10,840 (8,927)(b) 10,840
(80)(c)
Depreciation, depletion and
amortization......................... 5,364 1,723 (4,964)(b) 1,723
(400)(c)
Impairment, abandonment and other....... 41,674 -- (41,674)(b) --
Management fee and general and
administrative expenses.............. 4,846 2,336 (185)(b) 6,915
(82)(c)
-------- ------- -------- -------
60,891 14,899 (56,312) 19,478
-------- ------- -------- -------
Operating (loss) income................... (40,168) 4,158 35,589 (421)
Interest income........................... 571 915 -- 1,486
Interest and other financing costs........ -- (1,610) -- (1,610)
Interest expense -- affiliates............ (8,374) -- 8,374(d) --
-------- ------- -------- -------
Net (loss) income......................... (47,971) 3,463 43,963 (545)
Preferred stock dividends................. (3,920) -- 675(e) (3,245)
-------- ------- -------- -------
Net (loss) income available to common
shareholders............................ $(51,891) $ 3,463 $ 44,638 $(3,790)
======== ======= ======== =======
Weighted average number of shares
outstanding............................. 2,665 2,665
======== =======
Basic and diluted net loss per common
share................................... $ (19.47) $ (1.42)
======== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 25
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements have
been prepared to reflect the Transactions described on page F-2 and the
application of the adjustments to the historical amounts as described below. The
exchange Transaction amounts were based on negotiated values as determined by
DeepTech and El Paso and were generally accounted for in the pro forma financial
information at the net book value since the parties were under the common
control of DeepTech.
BALANCE SHEET
(a) To record the Transactions resulting in DeepTech's contribution of all of
the outstanding shares of capital stock of DeepFlex to Tatham Offshore.
DEEPFLEX PRODUCTION SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 580 $ -- $ 580
Accounts receivable................................ 7,441 -- 7,441
Prepaid assets..................................... 165 -- 165
-------- -------- --------
Total current assets....................... 8,186 -- 8,186
-------- -------- --------
Property and equipment:
Semisubmersible drilling rigs...................... 133,813 -- 133,813
Less: Accumulated depreciation..................... 5,320 -- 5,320
-------- -------- --------
Property and equipment, net........................ 128,493 -- 128,493
-------- -------- --------
Debt issue costs, net................................ 1,157 -- 1,157
-------- -------- --------
Total assets............................... $137,836 $ -- $137,836
======== ======== ========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Accounts payable and accrued liabilities............. $ 4,077 $ -- $ 4,077
Notes payable........................................ 64,841 -- 64,841
Note payable to DeepTech............................. 72,974(1) (64,974)(2) 8,000
-------- -------- --------
Total liabilities.......................... 141,892 (64,974) 76,918
-------- -------- --------
Minority interest in consolidated subsidiaries....... 250 -- 250
-------- -------- --------
Stockholder's (deficit) equity:
Common stock....................................... -- -- --
Additional paid in capital......................... 2 64,974(2) 64,976
Accumulated deficit................................ (4,308) -- (4,308)
-------- -------- --------
(4,306) 64,974 60,668
-------- -------- --------
$137,836 $ -- $137,836
======== ======== ========
</TABLE>
--------------------
(1) Includes the results of the conveyance by DeepFlex of all of its equity
ownership in Tatham Offshore (including 406,783 shares of common stock
and 4,670,957 shares of Series A Preferred Stock) to DeepTech as
satisfaction of $12 million of the amount owed to DeepTech under an
intercompany line of credit.
(2) To record DeepTech's contribution to the capital of DeepFlex all of
the remaining amounts due to DeepTech under an intercompany line of
credit, except for $8,000,000. See note (b) below.
<PAGE> 26
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) To record DeepTech's contribution to the capital of DeepFlex all of the
remaining amounts due to DeepTech under an intercompany line of credit,
except for $8,000,000. See note (b) below.
(b) To record DeepTech's exchange of the remaining $8,000,000 due from DeepFlex
for Tatham Offshore's assignment to DeepTech of all of the outstanding
shares of capital stock of Tatham Development.
<TABLE>
<S> <C>
Tatham Offshore's investment in Tatham Development:
Oil and gas properties.................................... $ 22,079,000
Abandonment obligations................................... (400,000)
Accumulated deficit....................................... 743,000
------------
Net investment.................................... 22,422,000
Forgiveness of amount due to DeepTech....................... (8,000,000)
------------
Reduction of paid-in capital................................ $ 14,422,000
============
</TABLE>
(c) To record Tatham Offshore's redemption of the Senior Preferred Stock held
by the Partnership in exchange for the assignment to the Partnership of
Tatham Offshore's remaining oil and gas properties located in the Gulf. See
Transactions described in (1) and (2) on page F-2.
<TABLE>
<S> <C>
Tatham Offshore's assets and liabilities conveyed:
Oil and gas properties.................................... $ 29,840,000
Accumulated depreciation, depletion, amortization and
impairment............................................. (24,374,000)
Other noncurrent liabilities.............................. (6,829,000)
------------
Increase in paid-in capital............................... $ (1,363,000)
============
</TABLE>
(d) The aggregate number of issued shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall not exceed 25,120,948
shares at any given time. As of May 15, 1998, the number of shares
outstanding was 17,557,648 shares of Series A Preferred Stock, 74,379
shares of Series B Preferred Stock and 321,205 shares of Series C Preferred
Stock.
(e) Excludes (i) 400,000 shares of common stock reserved for issuance under
Tatham Offshore's employee stock option plan, pursuant to which options
covering 102,500 shares have been granted at a weighted average price of
$4.51 per share and (ii) 100,000 shares of common stock reserved for
issuance under Tatham Offshore's director stock option plan, pursuant to
which options covering 34,000 shares have been granted at a weighted
average of $5.86 per share.
(f) To the extent that no more than $75 million of proceeds are received from
the Rights Offering, Tatham Offshore has agreed to purchase the remaining
unsubscribed shares of Tatham Offshore common stock and Series A Preferred
Stock. The number of shares of common stock and Series A Preferred Stock
subject to this purchase agreement will not exceed 3,926,756 and 653,347,
respectively. After the purchase by Tatham Offshore, DeepTech, subject to
certain limitations, will contribute the proceeds from such purchase to
Tatham Offshore.
(g) Tatham Offshore will receive no proceeds from the Rights Offering unless
DeepTech stockholders and/or an affiliate of Tatham Offshore exercise
Rights which generate net proceeds to DeepTech in excess of $75 million. In
such event, Tatham Offshore will receive any amounts in excess of $75
million (which could reach a maximum of approximately $12.2 million), which
amounts will be used, first, to satisfy certain estimated tax liabilities
and, second, for general corporate purposes.
<PAGE> 27
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
(a) To adjust historical results of operations to reflect the drilling
operations of DeepFlex contributed by DeepTech to Tatham Offshore in
connection with the Merger as if such events had occurred at the beginning
of the period.
DEEPFLEX PRODUCTION SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Drilling services...................................... $51,257 $ -- $51,257
------- ------- -------
Costs and expenses:
Operating expenses................................... 25,224 -- 25,224
Depreciation......................................... 3,914 -- 3,914
General and administrative expenses.................. 2,396 -- 2,396
------- ------- -------
31,534 -- 31,534
------- ------- -------
Operating income (loss)................................ 19,723 -- 19,723
Gain on investment..................................... 11,500 (11,500)(1) --
Interest income........................................ 231 -- 231
Interest expense....................................... (7,641) -- (7,641)
Interest expense -- affiliates......................... (8,145) 8,145(2) --
------- ------- -------
Net income............................................. $15,668 $(3,355) $12,313(3)
======= ======= =======
</TABLE>
--------------------
(1) Exclude non-recurring gains related to an investment in Tatham Offshore
as this gain would not have been recorded had the Transaction described
in (1) on page F-2 occurred at the beginning of the period presented.
See footnote (g)(4) on page F-9.
(2) Affiliate interest expense was eliminated as had the Transaction
described in (1) on page F-2 occurred on July 1, 1997, DeepFlex would
not have incurred these charges. As a condition precedent to closing,
all of DeepFlex' affiliate debt payable to DeepTech will be eliminated.
(3) Due to net operating tax loss carryforwards and anticipated losses for
federal income tax purposes, a pro forma provision for federal income
taxes was not recorded.
(b) To reverse historical results of operations related to the assets and
liabilities transferred to the Partnership as if such transfer had occurred
at the beginning of the period.
(c) To reverse the historical results of operations related to the conveyance
of Tatham Development to DeepTech as if such conveyance had occurred at the
beginning of the period.
(d) To reverse Tatham Offshore's historical interest expense related to the
conversion of $60 million notes payable to DeepTech into common equity on
December 17, 1997.
(e) To reverse the preferred dividends related to the Senior Preferred Stock
redeemed in conjunction with the conveyance to the Partnership of the
remaining oil and gas assets located in the Gulf.
(f) Due to significant net operating tax loss carryforwards and anticipated
losses for federal income tax purposes, a pro forma provision for federal
income taxes was not recorded.
<PAGE> 28
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) To adjust results of operations to reflect the drilling operations of
DeepFlex contributed by DeepTech to Tatham Offshore in connection with the
Merger as if such events had occurred at the beginning of the period.
DEEPFLEX PRODUCTION SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Drilling services..................................... $ 14,609 $ 4,448(2) $19,057
-------- ------- -------
Costs and expenses:
Operating expenses.................................. 8,201 2,639(2) 10,840
Depreciation........................................ 1,219 504(2) 1,723
Losses of equity investee........................... 1,261 (1,261)(1) --
General and administrative expenses................. 2,336 -- 2,336
-------- ------- -------
13,017 1,882 14,899
-------- ------- -------
Operating income (loss)............................... 1,592 2,566 4,158
Loss on investment.................................... (10,688) 10,688(4) --
Interest income....................................... 902 13(2) 915
Interest income -- affiliates......................... 1,199 (1,199)(1) --
Interest expense...................................... (2,214) (908)(2) (1,610)
1,512(5)
Interest expense -- affiliates........................ (7,577) 7,577(3) --
-------- ------- -------
Net (loss) income..................................... $(16,786) $20,249 $ 3,463(6)
======== ======= =======
</TABLE>
--------------------
(1) To reverse equity losses of DeepFlex Production Partners, L.P.
("DeepFlex Partners"), a 50%-owned equity investee of DeepFlex, and
interest income from DeepFlex Partners as had DeepFlex acquired 100% of
the drilling rig activity at the beginning of the period presented (see
footnote (g)(2) below), this activity would not have been recorded.
Additionally, DeepFlex would not have had any affiliate indebtedness
due to it by DeepFlex Partners.
(2) To record 100% of the drilling operations of DeepFlex Partners for the
three-month period prior to DeepFlex acquiring 100% of the drilling rig
assets of DeepFlex Partners.
(3) Exclude interest expense charged by DeepTech as had the Transaction
described in (1) on page F-2 occurred on July 1, 1996, DeepFlex would
not have incurred these charges. As a condition precedent to closing,
all of DeepFlex' affiliate debt payable to DeepTech will be eliminated.
(4) Exclude non-recurring losses related to an investment in Tatham
Offshore as this loss would not have been recorded had the Transaction
described in (1) on page F-2 occurred at the beginning of the period
presented. Also, see footnote (a)(1) on page F-8.
(5) To reverse interest expense related to other debt not related to
current operations as calculated below:
<TABLE>
<CAPTION>
DEBT INTEREST RATE PERIOD INTEREST
(IN THOUSANDS) (PER ANNUM) OUTSTANDING EXPENSE
-------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Wilrig Notes(1).................. $11,000 10% 206 days $ 617
Term Loan(1)..................... 12,000 12% 92 days 368
Debt issue costs primarily
related to Term Loan(1)........ (2) -- -- 504
Highwood Notes(1)................ 765 12% 92 days 23
------
Total............................ $1,512
======
</TABLE>
------------------------
(1) See "Note 6 -- Indebtedness" on page F-47 for a further discussion
of the indebtedness of DeepFlex.
(2) Not applicable.
(6) Due to net operating tax loss carryforwards and anticipated losses for
federal income tax purposes, a pro forma provision for federal income
taxes was not recorded.
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TATHAM OFFSHORE, INC.
Date: August 28, 1998 By: /s/ DENNIS A. KUNETKA
-------------------------------
Dennis A. Kunetka
Chief Financial Officer
<PAGE> 30
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
2.1 Contribution and Distribution Agreement dated February 27, 1998,
among DeepTech International Inc., Tatham Offshore, Inc., El Paso
Natural Gas Company and DeepFlex Production Services, Inc.
2.2 Redemption Agreement dated February 27, 1998, by and between Tatham
Offshore, Inc. and Flextrend Development Company, L.L.C.
</TABLE>
<PAGE> 1
EXHIBIT 2.1
CONTRIBUTION AND DISTRIBUTION AGREEMENT
This CONTRIBUTION AND DISTRIBUTION AGREEMENT (the "Agreement") is made
as of the 27th day of February, 1998 among DeepTech International Inc., a
Delaware corporation (the "Company"), Tatham Offshore, Inc., a Delaware
corporation ("Offshore"), DeepFlex Production Services, Inc., a Delaware
corporation ("DeepFlex"), and El Paso Natural Gas Company, a Delaware
corporation ("Parent").
BACKGROUND
A. The Company and its affiliates are the holders of the shares
of common stock and preferred stock of Offshore set forth on Schedule 1.
B. DeepFlex desires to satisfy a portion of certain indebtedness
owed by DeepFlex to the Company by causing Offshore to transfer the shares of
capital stock of Offshore held by DeepFlex to the Company.
C. The Company desires to sell, and Offshore desires to purchase,
a portion of certain indebtedness owed by DeepFlex to the Company, in exchange
for which Offshore will transfer all of the stock of Tatham Offshore
Development, Inc. ("TODI"), to the Company and Offshore will cancel certain
reversionary interests.
D. The Company desires to capitalize the remaining portion of the
indebtedness owed by DeepFlex to the Company.
E. The Company desires to contribute to Offshore, and Offshore
desires to accept the contribution of, the stock of DeepFlex.
F. The Company desires to distribute on a pro rata basis to the
holders of the Company's common stock, par value $0.01 per share ("Company
Common Stock"), rights (the "Rights") to purchase the Offshore Shares (as
hereinafter defined) on the terms and subject to the conditions set forth
herein (including the sale of the underlying Offshore Shares, the "Rights
Offering") and Offshore is willing to cooperate with the Company in connection
therewith.
<PAGE> 2
NOW, THEREFORE, the parties agree as follows:
1. Definitions.
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"Action" shall mean any action, suit, arbitration, inquiry, proceeding
or investigation by or before any court, any governmental or other regulatory
or administrative agency or commission or any arbitration tribunal.
"Commission" shall mean the Securities and Exchange Commission.
"Company Indenture" shall mean the Indenture dated as of March 21,
1994 between the Company and the Bank of New York, successor in interest to the
First Interstate Bank of Texas, N.A. and the related loan and security
documents.
"Completion Date" shall mean the earlier of (i) the date on which all
of the Offshore Shares shall have been subscribed and paid for pursuant to the
Rights Offering, including any subscriptions and payments for Offshore Shares
by Tatham Brothers, Thomas P. Tatham and/or Offshore, and such subscriptions
shall have been accepted by the Company and (ii) the Final Expiration Date.
"DeepFlex Note" shall mean (i) the Second Amended and Restated Senior
Promissory Note dated March 1, 1995, issued by DeepFlex to the Company and (ii)
any other indebtedness owed by DeepFlex or any of its Subsidiaries to the
Company or any Company Subsidiary.
"DeepFlex Shares" shall mean the shares of capital stock of DeepFlex
owned, directly or indirectly, by the Company.
"Distribution" shall mean the distribution pursuant to the Rights
Offering of the Rights to holders of record on the Record Date of Company
Common Stock.
"Distribution Date" shall mean the date of effecting the Distribution.
"Effective Time" shall have the meaning ascribed to it in the Merger
Agreement.
"Estimated Tax Amount" shall mean the tax estimated to be due by
DeepFlex or Offshore as set forth on the Price Tax Schedule (as defined in the
Tax Sharing Agreement).
"Excess Proceeds" means the net proceeds of the Rights Offering in
excess of $75 million.
2
<PAGE> 3
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"FPS" shall mean the FPS III, Inc., a Delaware corporation and/or FPS
V, Inc., a Delaware corporation.
"Final Expiration Date" shall mean the date on which the right of
Tatham Brothers, Thomas P. Tatham and Offshore to exercise any Rights pursuant
to the Rights Offering shall terminate, which date shall be the close of
business on the later of (x) two days after the General Expiration Date and (y)
five days after the date of the Effective Time.
"General Expiration Date" shall mean the date fixed by the Board of
Directors of Offshore on which the right of all holders of Rights (other than
Tatham Brothers, Thomas P. Tatham and Offshore) to exercise Rights pursuant to
the Rights Offering shall terminate, which date shall be not more than 50 days
following the Distribution Date.
"Initial Proceeds" shall have the meaning ascribed to it in Section
4.3 hereof.
"Initial Subscription Period" shall mean the period fixed by the Board
of Directors of Offshore for holders of Rights to purchase the Offshore Shares
subject to such Rights (exclusive of any period (an "Additional Period") fixed
by the Board of Directors of Offshore for the purchase of any unsubscribed
Shares), which period shall expire no later than the General Expiration Date.
"Leviathan" shall mean Leviathan Gas Pipeline Partners, L.P.
"Merger Agreement" shall mean the Agreement and Plan of Merger, among
Parent, El Paso Acquisition Company and the Company, dated as of February 27,
1998.
"Offshore Common Stock" shall mean the common stock, par value $0.01
per share, of Offshore listed on Schedule 1 attached hereto.
"Offshore Preferred Stock" shall mean the Series A 12% Convertible
Exchangeable Preferred Stock, par value $0.01 per share, Series B 8%
Convertible Exchangeable Preferred Stock, par value $0.01 per share, Series C
4% Convertible Exchangeable Preferred Stock, par value $0.01 per share, 9%
Senior Convertible Preferred Stock, par value $0.01 per share, and Mandatory
Redeemable Preferred Stock, par value $0.01 per share, of Offshore listed on
Schedule 1 attached hereto.
"Offshore Shares" shall mean (i) the shares of Offshore Common Stock
and Offshore Preferred Stock or (ii) units comprised of such shares.
"Prospectus" shall mean the prospectus(es) to be distributed to the
holders of Company Common Stock in connection with the Rights Offering.
3
<PAGE> 4
"Record Date" shall mean the record date for the Distribution fixed by
the Company's Board of Directors or any committee thereof.
"Redemption Agreement" shall mean the Redemption Agreement dated the
date hereof between Leviathan and Offshore.
"Registration Statement" shall mean the registration statement(s)
registering the offering and sale of the Rights and the Offshore Shares
pursuant to the Rights Offering.
"RIGCO" shall mean RIGCO North America, L.L.C., a Delaware limited
liability company.
"Rig Distribution" shall have the meaning ascribed to it in Section
3.2 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Senior Preferred Stock" shall mean the 9% Senior Convertible
Preferred Stock, par value $0.01 per share, of Offshore.
"Subordinated Note" shall mean the Company's Senior Subordinated Note
dated January 23, 1997 payable to Hare & Co.
"Tatham Brothers" shall mean Tatham Brothers, L.L.C., a Delaware
limited liability company.
"Tax" shall have the meaning ascribed to it in the Tax Sharing
Agreement.
"Tax Sharing Agreement" shall have the meaning ascribed to it in the
Merger Agreement.
Other capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Merger Agreement.
2. Preliminary Action.
2.1 Registration Statement and Prospectus. The Company and
Offshore shall prepare and file the Registration Statement (which shall include
the Prospectus) with the Commission as promptly as practical, and in no event
later than March 31, 1998. Subject to the conditions set forth herein, the
Company and Offshore shall use all commercially reasonable efforts to cause the
Registration Statement to become effective under the Securities Act. The
Company and Offshore shall cause the Prospectus to be mailed to the holders of
record on the Record Date of Company Common Stock.
4
<PAGE> 5
2.2 Federal Securities Laws. The Company and Offshore shall take
all such other action as may be necessary or appropriate under the securities
laws of the United States in connection with the Rights Offering to permit the
Rights and the Offshore Shares to be offered and sold as provided herein.
2.3 Blue Sky. The Company and Offshore shall take all such action
as may be necessary or appropriate under the securities or blue sky laws of
states or other political subdivisions of the United States in connection with
the Rights Offering to permit the offering and sale of the Rights and the
Offshore Shares as provided herein.
2.4 Listing. Offshore may prepare and file an application to
effect the listing of the Offshore Shares on the Nasdaq National Market.
2.5 Representations and Warranties Regarding TODI. Offshore
represents and warrants to Parent and the Company as of the date of this
Agreement and as of the date of the Contribution as follows:
(a) TODI is a corporation validly existing and in good standing
under the laws of Delaware. The authorized capital stock of TODI consists of
1,000 shares of common stock, par value $.01, of which 1 share is validly
issued and outstanding, which is owned by Offshore. There are no options,
warrants, calls, convertible securities or other rights, agreements or
commitments obligating TODI to issue, deliver or sell shares of its capital
stock or obligating TODI to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment.
(b) Except as listed on Schedule 2, TODI is not a party to any
contracts or agreements and has no liabilities or obligations, whether absolute
or contingent, accrued or unaccrued, matured or unmatured.
2.6 No Other Representations or Warranties; Consents. Each party
hereto understands and agrees that, except as expressly provided in Section
2.5, no party hereto is, in this Agreement or in any other agreement or
document contemplated by this Agreement or otherwise, representing or
warranting in any way (i) that the obtaining of any consents or approvals, the
execution and delivery of any agreements or the making of any filings or
applications contemplated by this Agreement will satisfy the provisions of any
or all applicable laws or (ii) matters relating to the business, operations,
assets, debts or liabilities of DeepFlex, Offshore or their respective
Subsidiaries. Notwithstanding the foregoing, the parties shall use all
commercially reasonable efforts to obtain all consents and approvals, to enter
into all agreements and to make all filings and applications which may be
required for the consummation of the transactions contemplated by this
Agreement, including, without limitation, all applicable regulatory filings or
consents
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<PAGE> 6
under federal or state laws and all necessary consents, approvals, agreements,
filings and applications.
3. The Contribution.
3.1 The Contribution. Subject to the satisfaction of the
conditions set forth in Article 7 hereof, at least seven days prior to the
Distribution Date:
(a) (i) the Company shall sell to Offshore, and Offshore shall
purchase from the Company $8 million of the DeepFlex Note in exchange for (x)
the delivery by Offshore to the Company of a stock certificate evidencing the
outstanding share of capital stock of TODI, duly endorsed for transfer, free
and clear of all liens, charges and encumbrances, and (y) the irrevocable
termination and cancellation by Offshore of all its rights to receive an
assignment of certain interests in oil and gas properties under the Agreement
for Purchase and Sale by and between Offshore and Flextrend Development
Company, L.L.C. dated June 30, 1995 and (ii) in satisfaction of $12 million of
the amount due and owing with respect to the DeepFlex Note, DeepFlex shall
deliver to the Company stock certificates evidencing all of the shares of
Offshore Common Stock and Offshore Preferred Stock owned by DeepFlex, duly
endorsed for transfer, free and clear of all liens, charges and encumbrances;
(b) in full satisfaction of the remaining balance of the DeepFlex
Note held by the Company, the Company shall contribute to the capital of
DeepFlex the balance of the amount due and owing with respect to the DeepFlex
Note after the repayment and transfer in paragraph (a) (or, in the case of
indebtedness due and owing from a DeepFlex Subsidiary, transfer such
indebtedness to DeepFlex); and
(c) the Company shall contribute to the capital of Offshore the
DeepFlex Shares, by delivery to Offshore of stock certificates evidencing the
DeepFlex Shares, duly endorsed for transfer, free and clear of all liens,
charges and encumbrances (the contributions described in clauses (a) through
(c) are referred to herein collectively as the "Contribution").
3.2 Optional Rig Distribution. Prior to the Contribution, at
Offshore's option, the Company shall cause RIGCO to distribute to FPS either
(but not both of) the FPS Laffit Pincay or the FPS Bill Shoemaker (the "Rig
Distribution"); provided, however, that such Rig Distribution shall occur only
if the gain realized (as calculated for federal income tax purposes) by RIGCO
on the distribution is no more than $48 million.
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<PAGE> 7
4. The Rights Offering.
4.1 The Rights Offering. The Company shall take all steps
required to effect the Rights Offering and Offshore shall cooperate with the
Company in connection therewith, including, without limitation, the
transactions contemplated by Section 2.
4.2 Terms of the Rights Offering.
(a) Pursuant to the Rights Offering, the Company will distribute
to the holders of record on the Record Date of the Company Common Stock, pro
rata, Rights to purchase all of the Offshore Shares. The Rights will be
transferable by the holders thereof and will be listed or admitted to trading
on NASDAQ.
(b) The subscription price payable for the Offshore Shares by
holders of Rights shall be $3.25 per Offshore Share.
(c) Subject to paragraph (e) below, each Right will expire on the
General Expiration Date, unless theretofore exercised by the holder thereof by
completion of the subscription form mailed to holders of Rights, accompanied by
payment of the aggregate subscription price for the Offshore Shares covered
thereby.
(d) At Offshore's election, the subscription form will include an
over-subscription option which will permit each holder who exercises in full
the Rights distributed to such holder to elect to subscribe, pro rata with all
holders of Rights who exercise their over-subscription option (each, a
"Subscribing Holder"), for any Offshore Shares covered by unexercised Rights
("Unsubscribed Shares"). As promptly as practicable following the Initial
Subscription Period, the Company shall notify each Subscribing Holder of the
number of Unsubscribed Shares to be distributed to such holder and the
aggregate subscription price therefor, and each Subscribing Holder shall have
until the General Expiration Date to deliver to the Company payment of the
subscription price for the Unsubscribed Shares to be delivered to such holder.
(e) Immediately following the General Expiration Date, any Rights
to acquire Unsubscribed Shares which have not been subscribed for as provided
in paragraph (d) ("Remaining Shares") will be transferred to Tatham Brothers
and Tatham Brothers shall be obligated to exercise such number of Rights, if
any, as is required by the Standby Agreement dated the date hereof among
Parent, the Company, Offshore, Tatham Brothers and Thomas P. Tatham (the
"Standby Agreement").
(f) Thomas P. Tatham has guaranteed the obligations of Tatham
Brothers under the Standby Agreement and is obligated pursuant to such
guarantee to perform prior to the Final Expiration Date the obligations of
Tatham Brothers described in clause
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<PAGE> 8
(e) of this Section 4.2, to the extent Tatham Brothers has not theretofore
performed such obligations in accordance with the Standby Agreement.
(g) Offshore shall purchase on the Final Expiration Date all
Remaining Shares not purchased by Tatham Brothers at the subscription price of
$3.25 per Offshore Share.
(h) All Rights of Tatham Brothers, Thomas P. Tatham and Offshore
to exercise any Rights covering Remaining Shares shall expire on the Final
Expiration Date.
(i) All net proceeds received by the Company from any holder of
Rights, including, without limitation, Tatham Brothers, Thomas P. Tatham and/or
Offshore upon the exercise of Rights, constitute net proceeds of the Rights
Offering and shall be distributed as provided in Section 4.3.
(j) The completion of the Rights Offering is subject to the
satisfaction of the conditions set forth in Article 7 hereof and the prior
consummation of the Contribution.
(k) Other terms of the Rights Offering shall be determined by
mutual agreement between the Company, Parent and Offshore.
4.3 Proceeds of Rights Offering. The first $75 million of net
proceeds (the "Initial Proceeds") of the Rights Offering shall be retained by
the Company. Subject to Section 3.03 of the Tax Sharing Agreement, the Company
shall contribute the Excess Proceeds to the capital of Offshore. If the
Completion Date occurs prior to the date of the Effective Time, the Initial
Proceeds, together with the Estimated Tax Amount, shall be deposited by the
Company in escrow in accordance with an escrow agreement in the form of
Schedule 3 hereto.
4.4 Expenses of Contribution and Rights Offering. Subject to
Sections 5.2 and 5.3, the first $1 million of expenses related in any way to
the Contribution and the Rights Offering, including, without limitation, all
legal, financial advisory, accounting and printing fees of the Company and
Offshore ("Expenses"), shall be borne by the Company and any Expenses in excess
of $1 million shall be borne by Offshore. Neither the Company nor Offshore has
retained (or will retain) a financial advisor in connection with the
Contribution and the Rights Offering.
5. Additional Assurances; Indemnification.
5.1 Mutual Assurances. Parent, the Company and Offshore agree to
cooperate with respect to the Contribution and the Rights Offering and to
execute such further documents and instruments as may be necessary to effect
the transactions contemplated thereby.
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<PAGE> 9
5.2 Indemnification.
(a) From and after the Effective Time, Offshore shall indemnify,
defend and hold Parent and its Subsidiaries (including the Company and the
Company Subsidiaries) and the officers, directors and employees of each such
entity (other than members of the Offshore Indemnified Group (defined herein),
the "Parent Indemnified Group") harmless from and against all losses, expenses,
claims, damages and liabilities (other than Taxes, which are governed by the
Tax Sharing Agreement) to which the Parent Indemnified Group may be or become
subject that relate to (i) the assets, business, operations, debts or
liabilities of the Offshore Group, whether arising prior to, concurrent with or
after the Contribution or the Rights Offering, (ii) the failure to obtain all
necessary third party consents to the Contribution or the Rights Offering
(other than the failure to obtain all necessary consents under the Company
Indenture and the Subordinated Note in connection with the Contribution and the
Rights Offering, or the failure to obtain any other necessary third party
consents as to which Offshore or the Company notify Parent to the extent the
failure to obtain the consent is a result of Parent's election to unreasonably
withhold or delay its consent under Section 4.1 of the Merger Agreement (the
"5.2(a)(ii) Consents")), or (iii) any filing by any member of the Offshore
Group under the Securities Act or the Exchange Act (including, without
limitation, the Registration Statement) or any information relating to the
Offshore Group contained in any filing made by any member of the Company Group
in each case whether made prior to or concurrent with the Effective Time.
(b) From and after the Effective Time, Parent shall indemnify,
defend and hold the Offshore Group and the officers, directors and employees
thereof (other than members of the Company Indemnified Group, the "Offshore
Indemnified Group") harmless from and against all losses, expenses, claims,
damages and liabilities (other than Taxes, which are governed by the Tax
Sharing Agreement) to which the Offshore Indemnified Group may be or become
subject that relate to (i) the assets, business, operations, debts or
liabilities of the Company Group, whether arising prior to, concurrent with, or
after the Contribution or the Rights Offering, (ii) the failure to obtain the
5.2(a)(ii) Consents, or (iii) any filing by any member of the Company Group
(other than to the extent a filing by a member of the Company Group contained
or contains information relating to the Offshore Group) under the Securities
Act or the Exchange Act, whether made prior to or concurrent with the Effective
Time.
6. Covenants.
6.1 Employment Matters. As of the Effective Time, the employees
of the Company and each Company Subsidiary listed in Schedule 4 hereto (the
"Spin Off Employees") shall be offered full-time employment by Offshore or one
of its Subsidiaries; provided, however, that except as may be specifically
required by applicable
9
<PAGE> 10
law or any contract, neither Offshore and its Subsidiaries, on the one hand,
nor any employee, on the other hand, shall be obligated to continue any
employment relationship or any specific terms of employment for any specific
period of time. Effective as of the Effective Time, Offshore shall, and hereby
does, assume all obligations arising under any employment agreement or
arrangement (written or oral) between the Company or any of its Subsidiaries
and the Spin Off Employees (including, without limitation, any obligation of
the Company under lease agreements relating to automobiles provided by the
Company to any Spin Off Employee prior to the Effective Time), and, effective
as of the Effective Time, the Company and its Subsidiaries shall be, and hereby
are, indemnified by Offshore from all obligations arising under such employment
agreements or arrangements.
6.2 Offshore Defined Contribution Plan. Effective as of the
Effective Time, Offshore shall establish a defined contribution plan for the
benefit of the Spin Off Employees and any other full-time Offshore employees
(the "Offshore DC Plan"). As promptly as practicable after the Effective Time,
the Company shall cause the trustee of the DeepTech International Inc. Section
401(k) Plan (the "DeepTech DC Plan") to transfer to the trustee of the Offshore
DC Plan the account balances of each Spin Off Employee with respect to whom the
DeepTech DC Plan maintains an account as of the close of business on the date
of the Effective Time. Such transfers shall be equal to the value of the
transferred account balances as of the close of business on the day preceding
the date of transfer and shall be in cash, except that the Offshore DC Plan
shall accept the following: (a) Company Common Stock (which, as of the
Effective Time, will represent solely the right to receive the Merger
Consideration) for the Company Common Stock fund portion of such account
balances (together with the Offshore Shares distributed in connection with the
Distribution); and (b) amounts credited to the DeepTech DC Plan which are held
in mutual funds which are also investment media in the Offshore DC Plan.
Offshore shall cause the Offshore DC Plan (x) to permit the Spin Off Employees
to sell from the Company Common Stock fund portion of the Offshore DC Plan any
shares of the Parent Common Stock received in the Merger and (y) not to permit
the future investment in the shares of Company Common Stock or the common stock
of any other entity that does not sponsor the Offshore DC Plan (except for
investments through mutual funds or other collective investment vehicles with
respect to which participants have no control over the individual investments
thereof).
6.3 Severance and Consulting Arrangements.
(a) In the case of any person listed on Schedule 5 hereto, such
person shall be entitled to severance as provided below, if such person is not
offered employment by the Surviving Corporation, Parent or any of their
Subsidiaries in Houston at such person's current base salary as of the
Effective Time or is terminated by the Surviving Corporation, Parent or any of
their Subsidiaries prior to January 1, 1999. In the case of
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<PAGE> 11
any person listed on Schedule 6 hereto, such person shall be entitled to
severance as provided below, if (i) such person is not employed by Offshore or
any of its Subsidiaries in Houston as of the Effective Time, unless such person
is offered employment by the Surviving Corporation, Parent or any of their
Subsidiaries in Houston at such person's current base salary as of the
Effective Time or (ii) such person is employed by the Surviving Corporation,
Parent or any of their Subsidiaries at such person's current base salary as of
the Effective Time and is terminated by the Surviving Corporation, Parent or
any of their Subsidiaries prior to January 1, 1999. Any person entitled to
severance as provided in this paragraph shall receive a lump sum cash payment
equal to six months' base salary based upon such person's current monthly base
salary paid to such employee as of the date of termination. Until January 1,
1999, none of Offshore and its Subsidiaries listed shall employ or enter into
any consulting arrangement with any employee listed on Schedule 5.
(b) Certain individuals listed on Schedule 7 hereto may enter into
agreements to provide certain consulting services to the Company and Offshore
for a period of six months after the Effective Time. The Company and Offshore
shall each pay one half of the costs of such consulting agreements.
6.4 Offshore Group/Company Group Arrangements. All arrangements
and agreements between any member of the Offshore Group and the Company Group
are set forth in the Company Disclosure Schedule. Except as contemplated by
this Agreement, the Merger Agreement (including the Company Disclosure
Schedule) and the related Agreements, it is the intention of the parties hereto
that between the date of this Agreement and the Effective Time the Company
Group and the Offshore Group shall be operated as independent corporate groups
and there shall be no new investment, contribution, financing or credit support
or payments of Taxes (as defined in the Tax Sharing Agreement) provided by any
member of either group to any member of the other group, and any additional
funds required by any member of either group from the date of this Agreement to
the Effective Time shall be obtained from such group's internally generated
funds or from third parties. Except as contemplated by this Agreement, the
Merger Agreement (including the Company Disclosure Schedule) and the related
Agreements, in furtherance of the foregoing, between the date of this Agreement
and the Effective Time, no member of the Company Group shall invest, loan, pay
or otherwise advance or contribute any funds or property (other than the
accrual of (i) amounts payable under that certain First Amended and Restated
Management Agreement dated November 10, 1993 between Offshore and the Company
(the "Management Agreement"), as amended, and (ii) interest on indebtedness
outstanding on the date of this Agreement under the DeepFlex Note) to any
member of the Offshore Group or pay any Taxes relating to the assets, business
or operations of any member of the Offshore Group or forgive or capitalize any
amounts owed by any member of the Offshore Group to any member of the Company
Group (other than, if the transactions contemplated by the
11
<PAGE> 12
Redemption Agreement are consummated, the reduction by 50% of the management
fees payable by Offshore to the Company pursuant to the Management Agreement,
effective retroactively to January 1, 1998). Except as contemplated by this
Agreement, the Merger Agreement (including the Company Disclosure Schedule) and
the Related Agreements, immediately prior to the Effective Time, the members of
the Offshore Group (i) shall pay in cash all amounts owed by them to any member
of the Company Group (except that amounts outstanding under the Management
Agreement which relate to DeepFlex and its Subsidiaries will be contributed to
Offshore or forgiven and the DeepFlex Note will be treated as provided in
Article 3 hereof) and (ii) shall reimburse the Company for any payments of
Taxes made by the Company or any Company Subsidiary after January 1, 1998 and
prior to the Effective Time which relate to the assets, business or operations
of any member of the Offshore Group. Any amounts owing by the Company Group to
the Offshore Group (all of which are set forth in the Company Disclosure
Schedule) will be offset against amounts otherwise owed to the Company under
the DeepFlex Note. Other than the Tax Sharing Agreement, this Agreement and
the agreements marked with an asterisk as continuing agreements in the Company
Disclosure Schedule, all intercompany agreements and arrangements between any
member of the Offshore Group and any member of the Company Group shall
terminate as of the Effective Time. The Company and Offshore shall take or
shall cause to be taken all actions necessary to effectuate the termination of
such agreements.
6.5 Restrictions on Amendments. The Company and Offshore shall
not amend, modify, waive or extend any time period under any provisions of this
Agreement, the Redemption Agreement, or the Tax Sharing Agreement prior to the
Effective Time without the consent of Parent.
6.6 Sublease. As of the Effective Time, subject to the approval
by the lessor of (i) the assignment of the existing lease to Parent, as
successor to the Company, and (ii) the sublease contemplated hereby, the
Company shall sublease to Offshore, and Offshore shall sublease from the
Company, the space currently occupied by the Company on the 74th and 75th floor
of 600 Travis Street, Houston, Texas, pursuant to the Sublease Agreement
attached as Schedule 8 hereto, which shall be executed and delivered at the
Effective Time.
6.7 North Atlantic Partners. Leviathan has entered into an
agreement, attached as Schedule 9 hereto, with North Atlantic Pipeline
Partners, L.P., an indirect wholly owned subsidiary of Offshore, and other
parties, dated February 5, 1998, relating to the participation by Leviathan in
a proposed pipeline project in Canadian Atlantic waters (the "NAP Agreement").
The Company and Offshore agree that no payments shall be made by or on behalf
of Leviathan pursuant to the NAP Agreement and Leviathan will not incur any
liability or obligation under the NAP Agreement prior to the first anniversary
of the Effective Time, and the NAP Agreement may be terminated by Leviathan at
any time
12
<PAGE> 13
prior to the first anniversary of the Effective Time without cost, liability,
expense or continuing obligation on the part of Leviathan or any of its
affiliates. No press release or other public disclosure that mentions Parent
or its Subsidiaries shall be made with respect to the NAP Agreement or the
transactions contemplated thereby, except by Offshore with the prior consent of
Parent, which will not be unreasonably withheld or delayed.
6.8 Exchange of Senior Preferred Stock. As promptly as practical,
and in any event no later than Monday, March 2, 1998, Offshore shall take, and
the Company shall cause Leviathan to take, all such actions as shall be
necessary to exchange the outstanding shares of the Senior Preferred Stock for
a substantially identical series of preferred stock of Offshore, except that
such new series of preferred stock shall not be redeemable and shall be
immediately convertible into Offshore Common Stock. References in this
Agreement to the Senior Preferred Stock shall include the shares of preferred
stock of Offshore for which the Senior Preferred Stock shall be exchanged.
6.9 Cross-Guarantees. Each of the Company, Offshore, Leviathan
and DeepFlex shall be responsible for its respective premium obligations under
the premium finance agreements between such parties and AFCO Credit
Corporation. Prior to the Effective Time, each of the Company, Offshore,
Leviathan and DeepFlex shall pay any unpaid portion of its premium obligations
under such agreements, whether or not such obligations are then due and
payable.
7. Conditions to the Contribution and the Completion of the Rights
Offering.
The Contribution and the completion of the Rights Offering shall be
subject to the satisfaction or waiver of the following conditions (provided
that the condition in Section 7.3 shall apply solely to the Rights Offering):
7.1 Securities Law Compliance. The transactions contemplated
hereby shall be in compliance with applicable federal and state securities laws
and applicable Nasdaq regulations, and the Registration Statement shall have
been declared effective and no stop orders shall have been instituted with
respect thereto under the Securities Act.
7.2 Legal Proceedings. No preliminary or permanent injunction or
other order by any federal or state court in the United States of competent
jurisdiction which prevents the consummation of the Contribution or the Rights
Offering shall have been issued and remain in effect (each party agreeing to
use all commercially reasonable efforts to have any such injunction lifted).
7.3 Proceeds of Rights Offering. The net proceeds actually
received and retained by the Company pursuant to the Rights Offering shall be
not less than the Initial Proceeds and the Estimated Tax Amount shall have been
paid by Offshore or retained by
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<PAGE> 14
the Company out of the Excess Proceeds, and such amounts shall have been
deposited in escrow in accordance with Section 4.3, if required.
8. Miscellaneous.
8.1 Waiver and Amendment. Any agreement on the part of a party
hereto to any waiver shall be valid only if set forth in an instrument in
writing duly executed by such party. The failure of any party to assert any of
its rights under this Agreement or otherwise shall not constitute a waiver of
such rights. This Agreement may not be amended except by an instrument in
writing duly executed by each of the parties hereto.
8.2 Assignment. No party may assign its rights and obligations
hereunder without the prior written consent of the other; provided, however,
that, so long as such party remains primarily obligated and responsible with
respect thereto, any party may assign its rights hereunder to any of its
affiliates (which remains an affiliate) or to any person or entity with which
the assigning party is merged or consolidated if such person is the surviving
entity or which acquires all or substantially all of the assets of such party.
8.3 No Third-Party Beneficiaries. This Agreement is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder.
8.4 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement, and shall be
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
8.5 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without regard
to its rules of conflicts of laws thereof.
8.6 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.7 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, one day
after being delivered to a nationally recognized overnight courier or when
telecopied (with a confirmatory copy sent by such overnight courier) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
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<PAGE> 15
(a) if to Parent or the Company, to
El Paso Natural Gas Company
1001 Louisiana
Houston, Texas 77002
Attention: William A. Wise
Facsimile No.: (713) 757-6030
and
Attention: Britton White, Jr.
Facsimile No.: (713) 757-1872
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
Attention: Gary P. Cooperstein
Facsimile No.: (212) 859-4000
(b) if to Offshore or DeepFlex, to
Tatham Offshore, Inc.
7500 Chase Tower
600 Travis Street
Houston, Texas 77002
Attention: Chief Executive Officer
Facsimile No.: (713) 224-7574
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place - South Tower
Houston, Texas 77002
Attention: Rick L. Burdick
Facsimile No.: (713) 236-0822
8.8 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms, conditions and provisions of this Agreement
shall nevertheless remain in full force and
15
<PAGE> 16
effect so long as the economic and legal substance of the transactions
contemplated hereby are not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that
the transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
8.9 Termination. Parent's obligations under this Agreement shall
terminate upon termination of the Merger Agreement if the Merger has not been
consummated prior thereto.
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<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
DEEPTECH INTERNATIONAL INC.
By:
-----------------------------------
Name:
Title:
TATHAM OFFSHORE, INC.
By:
-----------------------------------
Name:
Title:
DEEPFLEX PRODUCTION SERVICES, INC.
By:
-----------------------------------
Name:
Title:
EL PASO NATURAL GAS COMPANY
By:
-----------------------------------
Name:
Title:
17
<PAGE> 1
EXHIBIT 2.2
================================================================================
REDEMPTION AGREEMENT
by and between
TATHAM OFFSHORE, INC.,
and
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
FEBRUARY 27, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
1. Transfer of the Properties...............................................1
2. Delivery of Senior Preferred Stock.......................................1
3. Representations and Warranties of the Company............................1
3.1. Organization....................................................1
3.2. Authority and Conflicts.........................................1
3.3. Authorization...................................................2
3.4. Enforceability..................................................2
3.5. Title...........................................................2
3.6. Contracts.......................................................2
3.7. Litigation and Claims...........................................2
3.8. Approvals and Preferential Rights...............................3
3.9. Compliance with Law and Permits.................................3
3.10. Status of Contracts............................................3
3.11. Production Burdens, Taxes, Expenses and Revenues...............3
3.12. Production Balances............................................3
3.13. Expenditure Commitments........................................3
3.14. Payout Balances................................................4
3.15. Qualification..................................................4
3.16. Absence of Certain Changes.....................................4
3.17. Disclaimer.....................................................4
4. Representations and Warranties of Flextrend..............................4
4.1. Organization....................................................4
4.2. Authority and Conflicts.........................................4
4.3. Authorization...................................................5
4.4. Enforceability..................................................5
4.5. Qualification...................................................5
4.6. Senior Preferred Stock..........................................5
5. Closing..................................................................5
5.1. The Closing.....................................................5
5.2. Deliveries by Company at Closing................................6
5.3. Possession......................................................7
5.4. Deliveries by Flextrend At Closing..............................7
6. Assumption by Flextrend..................................................7
7. Production, Proceeds, Expenses and Taxes.................................7
7.1. Division of Substances..........................................7
7.2. Division of Expenses............................................7
7.3. Division of Proceeds............................................8
-i-
<PAGE> 3
7.4. Property Tax Prorations.........................................8
7.5. Adjustments.....................................................8
8. Negative Covenants.......................................................8
9. Survival and Indemnification.............................................9
9.1. Survival and Notice.............................................9
9.2. The Company's Indemnification...................................9
9.3. Flextrend's Indemnification....................................10
10. Further Assurances.....................................................10
11. Notice.................................................................10
12. Assignment.............................................................11
13. Governing Law..........................................................11
14. Expenses and Fees......................................................12
15. Integration............................................................12
16. Waiver or Modification.................................................12
17. Headings...............................................................12
18. Invalid Provisions.....................................................12
19. Multiple Counterparts..................................................13
20. Termination............................................................13
21. Guarantee..............................................................13
22. Certain Definitions....................................................13
-ii-
<PAGE> 4
EXHIBITS
Exhibit 1 - Oil and Gas Properties
Exhibit 3.6 - Contracts
Exhibit 3.7 - Litigation and Claims
Exhibit 3.8 - Approvals and Preferential Rights
Exhibit 3.13 - Commitments
Exhibit 3.14 - Payout Balances
Exhibit 21 - Form of Guarantee
ANNEXES
Annex IA - Assignment of Leases and Bill of Sale [State Filing Form]
Annex IB - Assignment of Leases and Bill of Sale [MMS Filing Form]
-iii-
<PAGE> 5
REDEMPTION AGREEMENT
This Redemption Agreement is made and entered into on this the 27th day
of February, 1998, by and between Tatham Offshore, Inc., a Delaware corporation
(the "Company"), and Flextrend Development Company, L.L.C., a Delaware limited
liability company ("Flextrend").
1. TRANSFER OF THE PROPERTIES. Subject to the terms and conditions herein set
forth, in consideration of (i) redemption of the 7,500 shares of 9% Senior
Convertible Preferred Stock, par value $0.01 per share, of the Company (the
"Senior Preferred Stock"), owned or beneficially owned by the Partnership and
(ii) all accrued and unpaid dividends on the shares of Senior Preferred Stock
due to the Partnership, the Company agrees to sell, assign, convey and deliver
to Flextrend, and Flextrend agrees to acquire from the Company, effective as of
7:00 a.m. at the location of each of the Oil and Gas Properties on the date of
Closing (as defined in Section 5.1(a)) all of the interest of the Company in
and to the Properties as they exist on such date as such Properties are more
specifically described on Exhibit 1.
2. DELIVERY OF SENIOR PREFERRED STOCK. In consideration for the transfer of
the Properties to Flextrend, Flextrend shall cause the Partnership to agree
that all accrued and unpaid dividends on the shares of Senior Preferred Stock
shall conclusively be deemed to have been satisfied and paid in full, and the
shares of Senior Preferred Stock owned or beneficially owned by the Partnership
shall be redeemed, and Flextrend shall cause the Partnership to deliver to the
Company the shares of Senior Preferred Stock, free and clear of all
Encumbrances.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to Flextrend as follows:
3.1. ORGANIZATION. The Company is a corporation validly existing and
in good standing under the laws of the State of Delaware and is qualified to do
business in and is in good standing under the laws of Texas, Louisiana and
Alabama.
3.2. AUTHORITY AND CONFLICTS. The Company has full corporate power and
authority to carry on its business as presently conducted, to enter into this
Agreement and any agreements contemplated hereby to which it is a party and to
perform its obligations hereunder and thereunder. The execution and delivery of
this Agreement by the Company and any agreement contemplated hereby does not,
and the consummation of the transactions contemplated hereunder and thereunder
shall not, (a) violate or be in conflict with, or require the consent of any
person or entity under, any provision of the Company's governing documents, (b)
conflict with, result in a breach of, constitute a default (or an
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event that with the lapse of time or notice, or both would constitute a
default) under, or require any consent, authorization or approval under any
agreement or instrument to which the Company is a party or to which any of the
Properties or the Company is bound, except as disclosed in Exhibit 3.8, (c)
violate any provision of or require any consent, authorization or approval
under any judgment, decree, judicial or administrative order, award, writ,
injunction, statute, rule or regulation applicable to the Company, or (d)
result in the creation of any Encumbrance on any of the Properties other than
those contemplated by either this Agreement or any related agreements and
documents.
3.3. AUTHORIZATION. The execution and delivery of this Agreement and
the agreements contemplated hereby have been, and the performance of this
Agreement and the agreements contemplated hereby and the transactions
contemplated hereby and thereby shall be at the time required to be performed
hereunder, duly and validly authorized by all requisite corporate action on the
part of the Company.
3.4. ENFORCEABILITY. This Agreement has been duly executed and
delivered on behalf of the Company and constitutes the legal, valid and binding
obligation of the Company enforceable in accordance with its terms, except as
enforceability may be limited by Equitable Limitations. All documents and
instruments required hereunder to be executed and delivered by the Company
shall be duly executed and delivered and shall constitute legal, valid and
binding obligations of the Company enforceable in accordance with their terms,
except as enforceability may be limited by Equitable Limitations.
3.5. TITLE. The Company has (i) Marketable Title to the Oil and Gas
Properties and (ii) defensible title to all of the Properties other than the
Oil and Gas Properties.
3.6. CONTRACTS. Exhibit 3.6 contains a complete list of all contracts
that constitute a part of the Properties or by which the Properties are bound
or subject (collectively, the "Contracts").
3.7. LITIGATION AND CLAIMS. Except as set forth on Exhibit 3.7, no
claim, demand, filing, cause of action, administrative proceeding, lawsuit or
other litigation is pending or, to the best knowledge of the Company,
threatened that could now or hereafter adversely affect the ownership,
development or operation of any of the Properties, other than proceedings
relating to the industry generally and as to which the Company is not a named
party. No written or oral notice from any governmental body or any other person
has been received by the Company (i) claiming any violation or repudiation of
the Oil and Gas Properties or any violation of any law, ordinance, code, rule
or regulation with respect to the Oil and Gas Properties or (ii) requiring, or
calling attention to, the need for any work, repairs, construction, alterations
or installations on or in connection with the Properties with which the Company
has not complied.
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3.8. APPROVALS AND PREFERENTIAL RIGHTS. Exhibit 3.8 contains a
complete and accurate list of all approvals required to be obtained by the
Company for the assignment of the Properties to Flextrend and all preferential
purchase rights that affect the Properties.
3.9. COMPLIANCE WITH LAW AND PERMITS. The Properties have been
operated in compliance with the provisions and requirements of all laws,
orders, regulations, rules and ordinances issued or promulgated by all
governmental authorities having jurisdiction with respect to the Properties,
noncompliance with which reasonably may be expected to have a material adverse
effect on the Properties. All necessary governmental authorizations with regard
to the ownership, development or operation of the Properties have been obtained
where the failure to obtain such authorizations reasonably may be expected to
have a material adverse effect on the Properties, and no material violations
exist in respect of such licenses, permits or authorizations.
3.10. STATUS OF CONTRACTS. (i) To the Company's knowledge, all of the
Contracts and the rights and obligations of the Company thereunder are in full
force and effect, and (ii) the Company is not in breach of or default, or with
the lapse of time or the giving of notice, or both, would be in breach or
default, with respect to any of its obligations thereunder to the extent that
such breaches or defaults reasonably may be expected to have a material adverse
effect on the Properties.
3.11. PRODUCTION BURDENS, TAXES, EXPENSES AND REVENUES. All rents,
royalties, excess royalty, overriding royalty interests and other payments due
under or with respect to the Oil and Gas Properties have been properly and
timely paid; and all ad valorem, property, production, severance and other
taxes based on or measured by the ownership of the Properties or the production
of Substances therefrom, have been properly and timely paid. All expenses due
and payable as of the date hereof under the terms of the Contracts have been
properly and timely paid. All of the proceeds from the sale of Substances have
been properly and timely paid to the Company by the purchasers of production
without suspense or indemnity other than standard division order indemnities.
3.12. PRODUCTION BALANCES. None of the purchasers under any
production sales contracts are entitled to "make-up" or otherwise receive
deliveries of Substances at any time on or after January 1, 1998, without
paying at such time the full contract price therefor. No person is entitled to
receive any portion of the interest of the Company in any Substances or to
receive cash or other payments to "balance" any disproportionate allocation of
Substances under any operating agreement, gas balancing and storage agreement,
gas processing or dehydration agreement, or other similar agreements.
3.13. EXPENDITURE COMMITMENTS. Exhibit 3.13 contains a complete and
accurate list of (i) all authorities for expenditures ("AFE") to drill, rework
or plug and
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abandon Wells or for other capital expenditures pursuant to any of the
Contracts that have been proposed by any person on or after January 1, 1998,
whether or not accepted by the Company or any other person, and (ii) all AFE
and oral or written commitments to drill, rework or plug and abandon Wells or
for other capital expenditures pursuant to any of the Contracts for which all
of the activities anticipated in such AFE or commitments have not been
completed by the date of this Agreement.
3.14. PAYOUT BALANCES. Exhibit 3.14 contains a complete and accurate
list of the status of cost recovery or other "payout" balance, as of the dates
shown in Exhibit 3.14, for each Well that is subject to a reversion or other
adjustment at some level of cost recovery or payout.
3.15. QUALIFICATION. To the extent required with respect to the
ownership, development and operation of the Properties, the Company is properly
qualified by the MMS to own and operate the Properties.
3.16. ABSENCE OF CERTAIN CHANGES. Since January 1, 1998, the
Properties have not suffered any material destruction, damage or loss; provided
that no representation or warranty is made in this Section 3.16 relating to
Viosca Knoll Block 817.
3.17. DISCLAIMER. Except as set forth herein, the Properties are
being transferred to Flextrend hereunder "as is", "where is" and "with all
faults" without any representations or warranties of any kind, including,
without limitation, those relating to merchantability, fitness for purpose,
quality, condition, value or otherwise.
4. REPRESENTATIONS AND WARRANTIES OF FLEXTREND. Flextrend represents and
warrants to the Company that:
4.1. ORGANIZATION. Flextrend is a limited liability company validly
existing and in good standing under the laws of the State of Delaware and is
qualified to do business in and is in good standing under the laws of Texas,
Louisiana, and Alabama.
4.2. AUTHORITY AND CONFLICTS. Flextrend has full limited liability
company power and authority to carry on its business as presently conducted, to
enter into this Agreement and any agreements contemplated hereby to which it is
a party, and to perform its obligations hereunder and thereunder. Flextrend has
full corporate or similar power and authority to purchase the Properties on the
terms described in this Agreement. The execution and delivery of this Agreement
by the Company and any agreement contemplated hereby does not, and the
consummation of the transactions contemplated hereunder and thereunder shall
not, (a) violate or be in conflict with, or require the consent of any person
or entity under, any provision of Flextrend's governing documents, (b) conflict
with, result in a breach of, constitute a default (or an event that with the
lapse of time or notice, or both, would constitute a default) under, or require
any consent,
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<PAGE> 9
authorization or approval under any agreement or instrument to which Flextrend
is a party or is bound, (c) violate any provision of or require any consent
(except for qualifying with and filing the appropriate bonds and transfer
documents with the MMS), authorization or approval under any judgment, decree,
judicial or administrative order, award, writ, injunction, statute, rule or
regulation applicable to Flextrend, or (d) result in the creation of any
Encumbrance on the Senior Preferred Stock.
4.3. AUTHORIZATION. The execution and delivery of this Agreement and
the agreements contemplated hereby have been and the performance of this
Agreement and the transactions contemplated thereby shall be at the time
required to be performed hereunder, duly and validly authorized by all
requisite partnership action on the part of Flextrend.
4.4. ENFORCEABILITY. This Agreement has been duly executed and
delivered on behalf of Flextrend and constitutes a legal, valid and binding
obligation of Flextrend enforceable in accordance with its terms, except as
enforceability may be limited by Equitable Limitations. All documents and
instruments required hereunder to be executed and delivered by Flextrend shall
be duly executed and delivered and shall constitute legal, valid and binding
obligations of Flextrend enforceable in accordance with their terms, except as
enforceability may be limited by Equitable Limitations.
4.5. QUALIFICATION. To the extent required with respect to the
ownership, development and operation of the Properties, Flextrend is properly
qualified by the MMS to own and, upon the MMS' acceptance of the required bond
from Flextrend, operate the Properties.
4.6. SENIOR PREFERRED STOCK. The shares of Senior Preferred Stock are
owned by the Partnership free and clear of all Encumbrances.
5. CLOSING.
5.1. THE CLOSING. (a) The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., 1900 Pennzoil Place, South Tower, 711 Louisiana
Street, Suite 1900, Houston, Texas 77002 on the later of (i) July 1, 1998 or
(ii) such later date which shall be one business day following the Completion
Date (as defined in the Contribution Agreement); provided that, should the
Completion Date fall on or after October 1, 1998, the Company may, at its
option, elect to close the transactions contemplated by this Agreement on any
date on or after October 1, 1998, with ten (10) days' prior notice to
Flextrend, in which case, the Closing shall be deemed to occur on a date
specified by the Company. Time shall be of the essence in this Agreement.
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(b) The obligation of each of the parties hereto to effect the
transactions contemplated hereby is subject to the satisfaction or waiver of the
following conditions: (i) the representations and warranties made by the other
party in this Agreement shall be true and correct on and as of the date hereof
(unless stated to relate to a specific earlier date, in which case such
representations and warranties shall be true and correct in all material
respects as of such earlier date), but only if the failure to be true would,
after giving effect to any indemnification rights, have a material adverse
effect on the value or operation of the Properties and the other party shall
have performed its covenants and agreements herein to be performed prior to the
Closing, except where the failure to perform such covenants and agreements would
not, individually or in the aggregate, have a material adverse effect on the
value or operation of any of the Properties or the ability of such other party
to consummate the transactions contemplated hereby, and an executive officer of
the other party shall have provided a certificate to such effect, dated the date
hereof; (ii) all material consents and filings required in connection with the
transactions contemplated hereby shall have been obtained or made; and (iii) the
other party shall have made the deliveries required to be made by it pursuant to
this Section 5.
5.2. DELIVERIES BY COMPANY AT CLOSING. The Company shall have
delivered to Flextrend the following instruments, properly executed and
acknowledged:
5.2.1. Counterparts of the following: (i) State Assignment;
and (ii) MMS Assignment.
5.2.2. Such other instruments as are necessary to effectuate
the conveyance of the Properties to Flextrend.
5.2.3. With respect to any leases in which the Company owns
less than all of the operating rights or leasehold interests and is designated
as the operator under the applicable operating or other similar agreement, (i)
letters to all working interest owners in which the Company resigns as the
operator and recommends Flextrend or an affiliate of Flextrend as the successor
operator and (ii) any forms promulgated by the appropriate governmental
authority and necessary for the resignation by the Company as operator, which
forms shall be completed and executed by the Company and shall designate
Flextrend or an affiliate of Flextrend as the operator under the applicable
operating or other similar agreement. With respect to any leases in which the
Company owns all of the leasehold interests or operating rights and is
designated as the operator, any forms promulgated by the appropriate
governmental authority and necessary for the resignation by the Company as
operator, which forms shall be completed and executed by the Company and shall
designate Flextrend or an affiliate of Flextrend as the operator under the
applicable operating or other similar agreement.
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5.3. POSSESSION. At the Closing, the Company shall deliver to
Flextrend at Flextrend's offices all of the Data and shall deliver to Flextrend
possession of the other Properties.
5.4. DELIVERIES BY FLEXTREND AT CLOSING. Against delivery of the
documents and materials described in Section 5.2, Flextrend shall cause the
Partnership to deliver to the Company, free and clear of all Encumbrances, a
duly executed certificate or certificates representing the 7,500 shares of
Senior Preferred Stock owned or beneficially owned by the Partnership, together
with transfer powers endorsed in blank relating to such certificates.
6. ASSUMPTION BY FLEXTREND. At Closing, Flextrend shall assume all of the
costs, obligations and liabilities of the Company relating to the Properties
that arise from or relate to (i) the period beginning on January 1, 1998, (ii)
plugging, abandonment or similar restoration operations relating to any Wells,
platforms or other facilities on or related to the Properties necessary or
appropriate to comply with all contracts, and any rules, laws, regulations or
orders of any governmental authority relating to such plugging, abandonment and
similar restoration operations and (iii) that certain (a) Production Payment
Agreement dated September 19, 1995 between the Company and J. Ray McDermott
Properties, Inc. and (b) Production Payment Agreement dated September 19, 1995
between the Company and F-W Oil Interests, Inc. Except to the extent provided
in clause (ii) and (iii) of the immediately preceding sentence, Flextrend shall
not assume any costs, obligations or liabilities (including negligence and
strict liability) that relate to the Properties and arise from or relate to the
period ending prior to January 1, 1998; or any obligation of the Company or any
other person to pay and discharge any refunds, including interest and
penalties, if any, that may be imposed by any governmental agency arising from
the sale of the Substances prior to January 1, 1998. Notwithstanding anything
to the contrary herein, the Company expressly reserves and retains any and all
of its rights and interests in and to that certain (a) Exchange Agreement dated
September 19, 1995 between the Company and J. Ray McDermott Properties, Inc.
and (b) Exchange Agreement dated September 19, 1995 between the Company and F-W
Oil Interests, Inc.
7. PRODUCTION, PROCEEDS, EXPENSES AND TAXES.
7.1. DIVISION OF SUBSTANCES. After the Closing, all Substances
produced from the Oil and Gas Properties on or after January 1, 1998 shall be
owned by Flextrend. All Substances produced and sold from the Oil and Gas
Properties prior to January 1, 1998 shall be owned by the Company.
7.2. DIVISION OF EXPENSES. Subject to Section 9 hereof, all costs,
expenses incurred and other expenditures incurred in connection with the
Properties and attributable to the period ending prior to January 1, 1998 shall
be borne by the Company.
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Subject to Section 9 hereof, all costs, expenses and other expenditures
incurred in connection with the Properties and attributable to the period
beginning on January 1, 1998 other than costs and expenses not assumed by
Flextrend under Section 6 shall be borne by Flextrend.
7.3. DIVISION OF PROCEEDS. All net proceeds earned in connection with
the Properties attributable to the period ending prior to January 1, 1998 shall
be deemed to be owned by the Company. All proceeds earned in connection with
the Properties attributable to the period beginning on January 1, 1998 shall be
deemed to be owned by Flextrend.
7.4. PROPERTY TAX PRORATIONS. Real and personal property taxes for
the Properties for the year in which Closing occurs shall be prorated between
Flextrend and the Company as of January 1, 1998. If the actual taxes are not
known as of the Closing Date, the Company's share of such taxes shall be
determined by using (i) the rates and mileages for the year prior to the year
in which the Closing occurs, with appropriate adjustments for any known and
verifiable changes thereto, and (ii) the assessed values for the year in which
Closing occurs.
7.5. ADJUSTMENTS. At the Closing, the Company or Flextrend, as
appropriate, shall make a cash payment to the other to give effect to the
provisions of Section 7 to the extent then determinable and promptly after such
amount is finally determinable, the Company or Flextrend shall make such
payments as may be necessary to make final settlement. If, after the Closing,
the Company receives any proceeds that pursuant to this Section 7 belong to
Flextrend, then the Company shall deliver such proceeds to Flextrend within
five Business Days after receipt of such proceeds. If, after the Closing,
Flextrend receives any proceeds that pursuant to this Section 7 belong to the
Company, then such proceeds shall be returned to the Company within five
Business Days after receipt of such proceeds. If after Closing either party
hereto receives invoices for costs or expenses that pursuant to the terms of
this Section 7 are the responsibility of the other party, the party receiving
such invoices shall immediately deliver them to the other party.
8. NEGATIVE COVENANTS.
Except as Flextrend may otherwise consent in writing, between
the date of this Agreement and the date of Closing and except as contemplated by
this Agreement, the Company shall not:
(a) sell, transfer, assign, convey or otherwise dispose of any
Properties other than (i) oil, gas and other hydrocarbons produced, saved and
sold in the ordinary course of business, and (ii) personal property and
equipment which is replaced with
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property and equipment of comparable or better value and utility in the
ordinary and routine maintenance and operation of the Properties;
(b) create or permit the creation of any Encumbrance on the
Properties, other than Permitted Encumbrances;
(c) grant any preferential right to purchase or similar right
or agree to require the consent of any party to the transfer and assignment of
the Properties to Flextrend;
(d) designate any Person, other than Flextrend, as an
operator of the Properties;
(e) incur or agree to incur any contractual obligation or
liability, whether absolute, contingent, matured or unmatured, which would
constitute an assumed liability by Flextrend as provided in Section 6 above;
provided that, the Company may incur such obligations or liabilities in the
ordinary course of business or in the ordinary and routine maintenance and
operation of the Properties with the consent of Flextrend which consent shall
not be unreasonably withheld or delayed; provided that any such obligation or
liability would not, either individually or in the aggregate, have a material
adverse effect on any of the Properties;
(f) enter into any transaction the effect of which, considered
as a whole, would be to cause the Company's ownership interest in any of the
Working Interests to be altered from its ownership interest as of the date
hereof; or
(g) agree or commit to do any of the foregoing.
9. SURVIVAL AND INDEMNIFICATION.
9.1. SURVIVAL AND NOTICE. The liability of Flextrend and the Company
under each of their respective representations, warranties and covenants
contained in this Agreement shall survive the Closing and execution and
delivery of the assignments contemplated hereby. Any assertion by any party to
this Agreement that any party is liable for the inaccuracy of any
representation or warranty or the breach of any covenant (except in Section
7.5, which shall survive until the closing of the applicable statute of
limitations) must be made in writing and must be given to the other party not
later than the first Business Day occurring eighteen months after the date of
Closing. The notice shall state the facts known to the person providing such
notice that give rise to such notice in sufficient detail to allow the
receiving person to evaluate the claim.
9.2. THE COMPANY'S INDEMNIFICATION. To the extent permitted by law,
the Company, from and after Closing, shall defend, indemnify and hold Flextrend
harmless
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from and against any and all damage, loss, cost, expense, obligation, claim or
liability, including reasonable counsel fees and reasonable expenses of
investigating, defending arid prosecuting litigation (collectively, the
"Liability"), suffered by Flextrend as a result of (i) any cost, liability or
obligation that was not assumed by Flextrend pursuant to Section 6 (other than
Liability resulting from the inaccuracy of any representation or warranty or
the breach of a covenant by Flextrend contained in this Agreement); (ii) the
failure of the Company to comply with the bulk sales laws of Texas or any other
jurisdiction in connection with the transactions provided for in this
Agreement; (iii) any brokers' or finders' fees or commissions arising with
respect to brokers or finders retained or engaged by the Company and resulting
from or relating to the transactions contemplated in this Agreement; (iv) the
inaccuracy of any representation or warranty of the Company set forth in this
Agreement; and (v) the breach of, or failure to perform or satisfy, any of the
covenants of the Company set forth in this Agreement.
9.3. FLEXTREND'S INDEMNIFICATION. To the extent permitted by law,
Flextrend, from and after Closing, shall defend, indemnify and hold the Company
harmless from and against any and all Liability suffered by the Company as a
result of (i) any cost, liability or obligation that was assumed by Flextrend
pursuant to Section 6 (other than Liability resulting from the inaccuracy of
any representation or warranty or the breach of a covenant of the Company
contained in this Agreement); (ii) the failure of Flextrend to comply with the
bulk sales laws of Texas or any other jurisdiction in connection with the
transactions provided for in this Agreement; (iii) any brokers or finders' fees
or commissions arising with respect to brokers or finders retained or engaged
by Flextrend and resulting from or relating to the transactions contemplated in
this Agreement; (iv) the inaccuracy of any representation or warranty of
Flextrend set forth in this Agreement; and (v) the breach of, or failure to
perform or satisfy any of the covenants of Flextrend set forth in this
Agreement.
10. FURTHER ASSURANCES. After the Closing, the Company and Flextrend shall
execute, acknowledge and deliver or cause to be executed, acknowledged and
delivered such instruments and take such other action as may be necessary or
advisable to carry out their obligations under this Agreement and under any
exhibit, document, certificate or other instrument delivered pursuant hereto.
The Company and Flextrend, as applicable, shall cooperate and use their best
efforts to obtain all approvals and consents required by or necessary for the
transactions contemplated by this Agreement that are customarily obtained after
Closing.
11. NOTICE. All notices required or permitted under this Agreement shall be in
writing and, (a) if by air courier, shall be deemed to have been given one
Business Day after the date deposited with a recognized carrier of overnight
mail, with all freight or other charges prepaid, (b) if by telegram, shall be
deemed to have been given one Business Day after delivered to the wire service,
(c) if by telex, provided a confirmation is received and
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such notice is also sent by U.S. mail, shall be deemed to have been given when
such telex is sent, (d) if mailed, shall be deemed to have been given three
Business Days after the date when sent by registered or certified mail, postage
prepaid, and (e) if sent by telecopier, provided a confirmation is received and
such notice is also sent by U.S. mail, shall be deemed to have been given when
such telecopy is sent, addressed as follows:
The Company: Tatham Offshore, Inc.
7400 Texas Commerce Tower
600 Travis
Houston, Texas 77002
Attention: Chief Executive Officer
Telecopier: (713) 224-7574
with a copy to: Rick L. Burdick
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
711 Louisiana Street, Suite 1900
Houston, Texas 77002
Flextrend: Flextrend Development Company, L.L.C.
7200 Texas Commerce Tower
600 Travis Street
Houston, Texas 77002
Attention: President
Telecopier: (713) 547-5151
or to such other address as either party hereto may from time to time designate
by notice in writing to the other.
12. ASSIGNMENT. This Agreement and any of the rights, interests or obligations
hereunder may be assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other party;
provided that, in the case of any assignment as described above, no such
assignment shall relieve the assigning party of any of its obligations under
this Agreement and the non-assigning party shall have the right to seek
remedies directly from the assigning party without seeking the same from the
assignee. Subject to the preceding sentence, this Agreement will be binding
upon and inure to the benefit of, and be enforceable by, the parties and their
respective successors and permitted assigns.
13. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas without giving effect to any
principles of conflicts of laws. The validity of the various conveyances
affecting the title to real property shall be governed by and construed in
accordance with the laws of the jurisdiction in which such
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property is situated. The representations and warranties contained in such
conveyances and the remedies available because of a breach of such
representations and warranties shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to the principles of
conflict of laws.
14. EXPENSES AND FEES. (i) Each of the parties hereto shall pay the fees and
expenses of their respective counsel, accountants and other experts incident to
the negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby, (ii) Flextrend and the Company shall each pay
one half of (x) the cost of all fees for the recording of transfer documents
described in Section 5.2 and (y) any sales, transfer, stamp or other excise
taxes resulting from the transfer of the Properties to Flextrend, and (iii) all
other costs shall be borne by the party incurring such costs.
15. INTEGRATION. This Agreement, the exhibits hereto and the other agreements
to be entered into by the parties under the provisions of this Agreement set
forth the entire agreement and understanding of the parties in respect of the
transactions contemplated hereby and supersede all prior agreements, prior
arrangements and prior understandings relating to the subject matter hereof.
16. WAIVER OR MODIFICATION. This Agreement may be amended, modified,
superseded or cancelled, and any of the terms, covenants, representations,
warranties or conditions hereof may be waived, only by a written instrument
executed by a duly authorized officer of Flextrend and the Company, or, in the
case of a waiver or consent, by or on behalf of the party or parties waiving
compliance or giving such consent. No waiver by any party of any condition, or
of any breach of any covenant, agreement, representation or warranty contained
in this Agreement, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such condition or breach or
waiver of any other condition or of any breach of any other covenant,
agreement, representation or warranty.
17. HEADINGS. The Section headings contained in this Agreement are for
convenient reference only and shall not in any way affect the meaning or
interpretation of this Agreement.
18. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable; this Agreement shall
be construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part hereof; and the remaining provisions of
this Agreement shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its severance from
this Agreement.
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19. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of
identical counterparts, each of which for all purposes is to be deemed as
original, and all of which constitute, collectively, one agreement; but in
making proof of this Agreement, it shall not be necessary to produce or account
for more than one such counterpart.
20. TERMINATION. This Agreement may be terminated by mutual written consent of
the parties hereto.
21. GUARANTEE. All obligations of Flextrend hereunder shall be unconditionally
guaranteed by the Partnership pursuant to that certain form of Guarantee
attached hereto as Exhibit 21.
22. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
"AFEs" shall have the meaning set out in Section 3.13 above.
"Agreement" shall mean this Redemption Agreement, as the same may from
time to time be amended or supplemented.
"Business Day" shall mean a day other than the days that banking
institutions are required or permitted to be closed under the laws of the State
of Texas.
"Closing" shall have the meaning set out in Section 5.1(a) above.
"Contracts" shall have the meaning set out in Section 3.6.
"Contribution Agreement" shall mean the Contribution and Distribution
Agreement made as of the date hereof among DeepTech International Inc., a
Delaware corporation, the Company, DeepFlex Production Services, Inc., a
Delaware corporation, and El Paso Natural Gas Company, a Delaware corporation.
"Data" shall mean all (i) abstracts, title opinions, title reports,
title policies, lease and land files, surveys, analyses, compilations,
correspondence, filings with regulatory agencies, other documents and
instruments that relate to the Properties; (ii) geological, engineering,
exploration, production, and other technical data, magnetic field recordings,
digital processing tapes, field prints, summaries, reports and maps, whether
written or in an electronically reproducible form, that are in the possession or
control of the Company, and relate to the Oil and Gas Properties; and (iii) all
other books, records, files and magnetic tapes containing financial, title or
other information that are in the possession or control of the Company, or any
affiliate of the Company (excluding Flextrend), and in any manner relate to the
Properties; provided that "Data" shall not include any of the foregoing
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to the extent such Data is subject to a licensing agreement that does not
permit access to Flextrend.
"Employee" shall mean any current, former, or retired employee,
consultant or director of the Company whose duties relate or related to the
business conducted with the Properties.
"Encumbrances" shall refer to each and all of the following items:
mortgages, claims, charges, security interests, liens, obligations,
encumbrances, imperfections of title or other matters affecting title, and any
rights of third parties whatsoever.
"Equipment" shall mean all equipment, fixtures, physical facilities or
interests therein of every type and description to the extent that the same are
used or held for use in connection with the ownership, development or operation
of the Properties, whether located on or off the Properties.
"Equitable Limitations" shall mean applicable bankruptcy,
reorganization or moratorium statutes, equitable principles or other similar
laws affecting the rights of creditors generally.
"Laws" shall refer to each and all of the following: domestic
(federal, state or local) or foreign laws, statutes, ordinances, rules,
regulations, decrees or orders.
"Liability" shall have the meaning set out in Section 9.2.
"Liens" shall mean all encumbrances, liens, claim, easements, rights,
agreements, instruments, obligations, burdens or defects.
"Marketable Title" shall mean such title as (i) will enable Flextrend,
as the Company's successor in title, to receive from a particular Oil and Gas
Property at least the Net Revenue Interests for the leases identified in Exhibit
1, without reduction, suspension or termination throughout the term of such
lease, except for any reduction, suspension or termination (a) caused by
Flextrend, any of its affiliates (other than the Company), successors in title
or assigns, (b) caused by orders of the appropriate regulatory agency having
jurisdiction over such Oil and Gas Property that are promulgated after January
1, 1998 and that concern pooling, unitization, communitization or spacing
matters affecting such Oil and Gas Property, (c) or otherwise set forth in
Exhibit 1; (ii) will obligate Flextrend, as the Company's successor in title, to
bear no greater Working Interests other than the Working Interests for each of
the leases identified in Exhibit 1, without increase throughout the term of such
lease, except for any increase (a) caused by Flextrend, any of its affiliates
(other than the Company), successors in title or assigns, (b) that also results
in the Net Revenue Interests associated with such lease being proportionately
increased, (c) caused by contribution requirements provided for under provisions
similar to those
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contained in Article VII.B. of the A.A.P.L. Form 610-1982 Model Form Operating
Agreement, (d) caused by orders of the appropriate regulatory agency having
jurisdiction over an Oil and Gas Property that are promulgated after January 1,
1998, and that concern pooling, unitization, communitization or spacing matters
affecting a particular Oil and Gas Property, or (e) otherwise set forth in
Exhibit 1; and (iii) is free and clear of all Liens except for Permitted
Encumbrances.
"MMS" shall mean the Minerals Management Service.
"MMS Assignment" shall mean both the Assignment of Leases and Bill of
Sale for filing with the MMS in the form of Annex IB.
"Net Revenue Interest" shall mean that interest in the gross production
of oil and gas and other minerals from the Properties subject to the oil, gas
and mineral leases to which Flextrend will be entitled to by virtue of its
acquisition of the Working Interests after deducting all landowner royalties,
overriding royalties and similar burdens attributable to the Working Interest.
"Oil and Gas Properties" shall mean all properties described in Exhibit
1 whether such properties are in the nature of fee interests, leasehold
interests, working interests, farmout rights, royalty, overriding royalty or
other non-working or carried interests, operating rights or other mineral rights
of every nature and any rights that arise by operation of law or otherwise in
all properties and lands pooled, unitized, communitized or consolidated with
such properties.
"Partnership" shall mean Leviathan Gas Pipeline Partners, L.P. and any
affiliate or subsidiary thereof.
"Payment Rights" shall mean all (i) accounts, instruments and general
intangibles (as such terms are defined in the Uniform Commercial Code of Texas)
attributable to the Properties with respect to any period of time on or after
January 1, 1998 and (ii) liens and security interests in favor of the Company,
whether choate or inchoate, under any law, rule or regulation or under the
Contracts (a) arising from the ownership, operation, sale or other disposition
on or after January 1, 1998 of any of the Properties and (b) arising in favor of
the Company as the operator of certain of the Oil and Gas Properties.
"Permitted Encumbrances" shall mean (i) liens for taxes not yet
delinquent, (ii) lessors' royalties, overriding royalties, division orders,
reversionary interests, and similar burdens that do not operate to reduce the
net revenue interests of the Company in any of the Oil and Gas Properties to
less than the amount set forth therefor in Exhibit 1, (iii) the consents and
rights described in Exhibit 3.8, (iv) the Contracts, (v) except to the extent
any amounts related thereto are due and payable, any mechanic and materialmen,
operator, non-operator, contractor and subcontractor or similar liens created by
the
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Contracts or operation of law, and (vi) the Liens created by the documents
contemplated hereby.
"Person" shall include an individual, a partnership, a limited
liability company, a corporation, a trust, an unincorporated organization, a
government or any department or agency thereof and any other entity.
"Properties" shall mean the Oil and Gas Properties, Wells, Substances,
Equipment, Data, Contracts and Payment Rights. "Properties" shall include any
additional interests acquired by Flextrend in a particular operation as a result
of one or more working interest owners electing to go non-consent under the
applicable operating agreements.
"State Assignment" shall mean an Assignment of Leases and Bill of Sale
for recordation in the appropriate real property records of the appropriate
parishes and/or counties in Louisiana, Alabama and Mississippi where the
Assignment needs to be recorded in the form of Annex IA.
"Substances" shall mean all severed crude oil, natural gas, casinghead
gas, drip gasoline, natural gasoline, petroleum, natural gas liquids,
condensate, products, liquids and other hydrocarbons and other minerals or
materials of every kind and description produced from the Oil and Gas Properties
on or after January 1, 1998.
"Wells" shall mean all oil, condensate or natural gas wells, water
source wells, and water and other types of injection wells either located on the
Oil and Gas Properties or held for use in connection with the Oil and Gas
Properties, whether producing, operating, shut-in or temporarily abandoned.
"Working Interest" shall mean the interest that Flextrend will be
acquiring pursuant to the terms of this Agreement upon which will be calculated
Flextrend's proportionate share of the costs, expenses and liabilities
attributable to the oil, gas and mineral leases described herein.
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This Agreement has been executed as of the date first set forth above.
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
By:
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Name:
Title:
TATHAM OFFSHORE, INC.
By:
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Name:
Title:
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