<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-22892
TATHAM OFFSHORE, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 76-0269967
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
600 Travis
Suite 7400
Houston, Texas 77002
(Address of Principal Executive Offices, including Zip Code)
(713) 224-7400
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of February 13, 1998, there were outstanding 29,913,333 shares of common
stock, par value $0.01 per share, of the Registrant.
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<PAGE> 2
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION...................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1997 (unaudited) and June 30, 1997.............3
Unaudited Consolidated Statement of Operations for the Three and Six Months
Ended December 31, 1997 and 1996, respectively............................................4
Unaudited Consolidated Statement of Cash Flows for the Six Months
Ended December 31, 1997 and 1996..........................................................5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Six Months Ended December 31, 1997 (unaudited)............................................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................11
PART II. OTHER INFORMATION.....................................................................16
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES ......................................................................................18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,919 $ 7,887
Accounts receivable from joint venture partners 189 201
Receivable from affiliates 774 1,350
Prepaid assets 116 --
------------ -----------
Total current assets 3,998 9,438
------------ -----------
Oil and gas properties:
Oil and gas properties, at cost, using
successful efforts method 51,906 81,081
Less - accumulated depreciation, depletion,
amortization and impairment 23,366 50,329
------------ -----------
Oil and gas properties, net 28,540 30,752
------------ -----------
Deferred costs 8,963 1,317
------------ -----------
Total assets $ 41,501 $ 41,507
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 2,386 $ 1,385
Accounts payable to affiliates 198 155
------------ -----------
Total current liabilities 2,584 1,540
Long-term debt to affiliate -- 60,000
Other noncurrent liabilities 7,150 7,663
------------ -----------
9,734 69,203
------------ -----------
Stockholders' equity (deficit) (Note 3):
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of December 31, 1997 and June 30, 1997,
24,335,255 shares and 24,343,931 shares issued and outstanding
at December 31, 1997 and June 30, 1997, respectively 243 243
Common stock, $0.01 par value, 250,000,000 shares authorized
as of December 31, 1997 and June 30, 1997, 29,464,532
shares and 2,735,573 shares issued and outstanding
at December 31, 1997 and June 30, 1997, respectively 295 274
Additional paid-in capital 146,177 84,225
Accumulated deficit (114,948) (112,438)
------------ -----------
31,767 (27,696)
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 41,501 $ 41,507
============ ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
--------------------------- --------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 3,374 $ 5,803 $ 7,159 $ 10,302
----------- ----------- ----------- -----------
Costs and expenses:
Production and operating expenses 1,430 1,480 3,099 3,427
Exploration expenses -- 212 25 328
Depreciation, depletion and amortization 554 1,185 2,039 2,140
Management fee 1,039 825 2,095 1,551
General and administrative expenses 493 504 869 990
----------- ----------- ----------- -----------
3,516 4,206 8,127 8,436
----------- ----------- ----------- -----------
Operating (loss) income (142) 1,597 (968) 1,866
Interest income 75 92 178 246
Interest expense - affiliate (8) (2,121) (1,720) (4,238)
----------- ----------- ----------- -----------
Net loss (75) (432) (2,510) (2,126)
Preferred stock dividends (982) (977) (1,965) (1,974)
----------- ----------- ----------- -----------
Net loss available to common shareholders $ (1,057) $ (1,409) $ (4,475) $ (4,100)
=========== =========== =========== ===========
Weighted average number of shares outstanding 7,128 2,652 4,934 2,622
=========== =========== =========== ===========
Basic and diluted loss per common share (Note 4) $ (0.15) $ (0.53) $ (0.91) $ (1.56)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months
Ended December 31,
----------------------------------
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,510) $ (2,126)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 2,039 2,140
Costs and expenses settled by issuance of common stock 263 --
Noncash interest expense related to conversion of debt
into common stock 1,709 --
Other -- 1,103
Changes in operating working capital:
Decrease in accounts receivable from joint
venture partners 12 467
Decrease (increase) in receivable from affiliates 576 (1,504)
(Increase) decrease in prepaid expenses (116) 30
Increase (decrease) in accounts payable and accrued
liabilities 1,001 (1,777)
Increase (decrease) in accounts payable to affiliates 43 (2,481)
------------- -------------
Net cash provided by (used in) operating activities 3,017 (4,148)
------------- -------------
Cash flows from investing activities:
Additions to oil and gas properties (339) (2,812)
Deferred costs (7,646) --
-------------- ------------
Net cash used in investing activities (7,985) (2,812)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Series A Preferred Stock -- 12,242
Proceeds from issuance of Series B Preferred Stock -- 74
Proceeds from issuance of Series C Preferred Stock -- 1,018
------------- -------------
Net cash provided by financing activities -- 13,334
------------- -------------
Net (decrease) increase in cash and cash equivalents (4,968) 6,374
Cash and cash equivalents at beginning of year 7,887 4,764
------------- -------------
Cash and cash equivalents at end of period $ 2,919 $ 11,138
============= =============
Supplemental disclosures to the statement of cash flows - see Note 6.
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ---------------------- Additional
Number of Number of paid-in Accumulated
Shares Par Value Shares Par Value capital deficit Total
--------- ----------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 24,344 $ 243 27,356 $ 274 $ 84,225 $ (112,438) $ (27,696)
Reverse stock split (unaudited) -- -- (24,620) (246) 246 -- --
Conversion of debt into common
stock (unaudited) -- -- 26,667 266 61,443 -- 61,709
Issuance of common stock
(unaudited) -- -- 60 1 263 -- 264
Conversion of Series A Preferred
Stock into common stock
(unaudited) (9) -- 2 -- -- -- --
Net loss for the six months
ended December 31, 1997
(unaudited) -- -- -- -- -- (2,510) (2,510)
---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, December 31, 1997
(unaudited) 24,335 $ 243 29,465 $ 295 $ 146,177 $ (114,948) $ 31,767
========== ========== ========== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is an
independent energy company engaged in the development, exploration and
production of oil and gas reserves located primarily offshore the United States
in the Gulf of Mexico (the "Gulf"). In addition, Tatham Offshore is currently
pursuing energy related opportunities in eastern Canada, including the
development of offshore pipeline infrastructure. Tatham Offshore is an
approximately 94%-owned subsidiary of DeepTech International Inc. ("DeepTech"),
a diversified energy company, which, through its affiliates, is engaged in
offshore contract drilling services and the acquisition, development,
production, processing, gathering, transportation and marketing of, and the
exploration for, oil and gas located offshore in the Gulf and offshore eastern
Canada.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic").
North Atlantic is the sponsor of a proposal to construct a natural gas pipeline
offshore Newfoundland and Nova Scotia to the eastern seaboard of the United
States. Through December 31, 1997, Tatham Offshore Canada Limited has incurred
approximately $9.0 million in pre-development costs associated with the North
Atlantic project. Such costs include engineering, survey, legal, regulatory and
other costs associated with the project.
In 1996, Tatham Offshore formed a wholly-owned subsidiary, Tatham Offshore
Development Company, Inc. ("Tatham Offshore Development"), a Delaware
corporation, to hold certain of Tatham Offshore's oil and gas leases.
The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company").
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the period covered by such statements. These interim
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1997. All number of shares of
Tatham Offshore common stock and per share disclosures have been restated to
reflect a ten-for-one common share reverse stock split approved by the Board of
Directors of Tatham Offshore on November 13, 1997 for the shareholders of record
as of the close of business on November 24, 1997. See Note 5.
NOTE 2 - RELATED PARTY TRANSACTIONS:
Management Agreement
The management agreement between Tatham Offshore and DeepTech provides for an
annual management fee which is intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the six months ended December 31, 1997, DeepTech charged Tatham
Offshore $2.1 million under this agreement.
Notes Payable to DeepTech
As of June 30, 1997, Tatham Offshore had $60.0 million aggregate principal
amount of Subordinated Convertible Promissory Notes (the "Subordinated Notes")
outstanding, all of which were held by DeepTech. Interest expense related to the
Subordinated Notes totaled $1.7 million from July 1, 1997 through September 18,
1997, the date on which the DeepTech Board of Directors approved the
Restructuring Agreement discussed below.
In September 1997, DeepTech and Tatham Offshore entered into an option agreement
to restructure the Subordinated Notes (the "Restructuring Agreement"). Under the
Restructuring Agreement, DeepTech agreed to forgive the next two scheduled
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
interest payments under the Subordinated Notes. In exchange, DeepTech received
three restructuring options from Tatham Offshore and agreed to restructure the
Subordinated Notes by consummating one of the following transactions: (i) to
convert all of the principal amount outstanding under the Subordinated Notes
into shares of Tatham Offshore common stock at the market price at the time the
option is exercised; (ii) to purchase shares of 6% Senior Preferred Stock of
Tatham Offshore with a liquidation value of $60 million, the proceeds from which
would be used to prepay the Tatham Offshore Subordinated Notes; or (iii) to
purchase all of the outstanding capital stock of Tatham Offshore Development for
$60 million, the proceeds from which would be used to prepay the outstanding
balance of the Subordinated Notes. DeepTech was required to select one of the
above restructuring transactions on or before December 31, 1997.
On December 17, 1997, DeepTech's Board of Directors elected to exercise the
common stock option under the Restructuring Agreement. Under this option,
DeepTech converted the Subordinated Notes into 26,666,667 shares of Tatham
Offshore common stock at a conversion rate of $2.25 per share, the average
closing price of Tatham Offshore common stock for the ten trading days
immediately preceding the exercise of the option. As a result of the conversion
of the Subordinated Notes, Tatham Offshore eliminated all of its outstanding
debt.
NOTE 3 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity as of
December 31, 1997:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Senior Preferred Stock (a) 7,500 $1,000 per share 9% $ 1,293,750 (e)
Series A Preferred Stock (b) 17,923,837 $1.50 per share 12% $ 4,839,436 (f)(g)
Series B Preferred Stock 74,379 $1.00 per share 8% $ 7,438 (f)(g)
Series C Preferred Stock (c) 1,338,162 $0.50 per share 4% $ 26,763 (f)(g)
Mandatory Redeemable
Preferred Stock (d) 4,991,377 $0.50 per share -- $ -- (g)(h)
Common Stock (Note 5) 29,464,532 -- -- $ -- --
</TABLE>
- ----------------------
(a) Each share of the Senior Preferred Stock is senior to all other classes
of Tatham Offshore preferred and common stock in the case of liquidation,
dissolution or winding up of Tatham Offshore. Leviathan Gas Pipeline
Partners, L.P. (the "Partnership"), an affiliate of the Company, holds
all outstanding shares.
(b) DeepFlex Production Services, Inc. ("DeepFlex Services"), a wholly-owned
subsidiary of DeepTech, holds 4,670,957 shares of the outstanding Series
A Preferred Stock.
(c) DeepFlex Services holds 1,016,957 shares of the outstanding Series C
Preferred Stock. (See discussion below.)
(d) DeepFlex Services holds 4,312,086 shares of the outstanding Mandatory
Redeemable Preferred Stock. (See discussion below.)
(e) The Partnership has made an irrevocable offer to the Company to sell all
or any portion of the Senior Preferred Stock to the Company or its
designee at a price equal to $1,000 per share, plus interest thereon at
9% per annum less the sum of any dividends paid thereon. In the event the
Company does not purchase the Senior Preferred Stock on or before
September 30, 1998, then, for a period of 90 days thereafter, the Senior
Preferred Stock shall be convertible into Series A Preferred Stock. The
conversion ratio shall be equal to (i) the liquidation preference amount
plus accumulated unpaid dividends divided by (ii) the arithmetic average
of the closing prices for the 20 trading days following October 1, 1998
of the Series A Preferred Stock.
(f) At any time until December 31, 1998, each share may be exchanged for 0.4
Exchange Warrants. Each full Exchange Warrant entitles the holder thereof
to purchase one share of Tatham Offshore common stock at $6.53 per share.
The Exchange Warrants expire on July 1, 1999. Alternatively, at any time,
the holder of any shares may convert the liquidation value and accrued
and unpaid dividends into shares of Tatham Offshore common stock at $6.53
per share. Through December 31, 1997, a total of 793,193 shares of Series
A Preferred Stock had been converted into 187,833 shares of Tatham
Offshore common stock.
(g) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(See discussion below.)
(h) Tatham Offshore is required to redeem the shares at a redemption price
of $0.50 per share if the Company redeems any shares of Series A, B
or C Preferred Stock. Tatham Offshore is also required to redeem
the shares at a redemption price of $0.50 per share from net proceeds
from the sale of Tatham Offshore common stock pursuant to the exercise
of Exchange Warrants, subject to certain conditions.
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In February 1998, DeepFlex Services exchanged its 1,016,957 shares of Tatham
Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately
converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per
share for a total of $2.7 million in proceeds to Tatham Offshore. Tatham
Offshore used $2.5 million of 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.
NOTE 4 - EARNINGS PER SHARE:
During the three months ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share". SFAS
No. 128 establishes new guidelines for computing earnings per share ("EPS") and
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. Basic EPS excludes dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects potential
dilution and is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding during
the period increased by the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. All
prior period EPS data has been restated to conform with the provisions of SFAS
No. 128.
The Company excluded from its computation of diluted EPS the effect of
antidilutive securities related to its outstanding convertible exchangeable
preferred stocks discussed in Note 3 and its convertible production payment
related to 25% of the net operating cash flow from Viosca Knoll Block 817.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
The Nasdaq National Market
On October 7, 1997, Tatham Offshore received notification from The Nasdaq Stock
Market, Inc. ("Nasdaq") that because the Company had reported losses from
operations and/or net losses in three of the past four fiscal years and had a
net tangible asset value of less than $4.0 million as of June 30, 1997, Tatham
Offshore no longer met the listing requirements for continued inclusion on The
Nasdaq National Market. On October 20, 1997, Tatham Offshore responded to
Nasdaq's notification by detailing the pro forma effect of each of the three
options under the Restructuring Agreement with DeepTech. Under each option, the
Company's pro forma net tangible asset value was in excess of $4.0 million as of
December 31, 1997, the date on which DeepTech was required to exercise one of
the three options. On January 14, 1998, Nasdaq granted Tatham Offshore an
exception to the net tangible assets requirement as a result of DeepTech's
election under the Restructuring Agreement thus allowing Tatham Offshore to
remain listed on The Nasdaq National Market.
On October 22, 1997, Tatham Offshore received a notification from Nasdaq that
because Tatham Offshore failed to maintain a closing bid price greater than or
equal to $1.00 per share of its common stock for the last ten consecutive trade
dates, Tatham Offshore no longer met the listing requirements for continued
inclusion on The Nasdaq National Market. On November 13, 1997, the shareholders
of Tatham Offshore approved the Board of Directors to effect a reverse stock
split of up to ten-for-one. On November 13, 1997, the Board of Directors of
Tatham Offshore approved a ten-for-one reverse stock split of Tatham Offshore's
common stock for the shareholders of record at the close of business on November
24, 1997 which allowed the bid price of Tatham Offshore's common stock to be in
excess of the Nasdaq minimum price requirement.
The Nasdaq listing criteria also requires a company listed on The Nasdaq
National Market to have a minimum dollar value associated with the public float
of its listed stock. The current public float requirement is $1.0 million,
however, on February 23, 1998, the Nasdaq minimum public float requirement will
increase to $5.0 million. Based upon recent closing prices of Tatham Offshore's
common stock, Tatham Offshore believes that the dollar value of its public float
is approximately $4.5 million to $5.5 million. If Tatham Offshore's public float
does not exceed $5.0 million on February 23, 1998, Tatham Offshore will have
until May 26, 1998 to meet the minimum public float requirement. In the event
Tatham Offshore is unable to comply with the new public float requirement by May
26, 1998, Tatham Offshore's common stock will immediately be delisted from The
Nasdaq National Market. In the event that The Nasdaq National Market delists
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Tatham Offshore's common stock, the holders thereof could suffer a decrease in
marketability of their shares and the liquidity of their investment in Tatham
Offshore's common stock and its preferred stocks which are convertible into
common stock, which may have a material adverse effect on the market value of
Tatham Offshore's common stock. Tatham Offshore is currently reviewing options
which, if implemented, could allow it to continue to meet the Nasdaq minimum
public float requirement.
Other
In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or operations of
the Company. Various legal actions have arisen in the ordinary course of
business. Management believes that the outcome of such proceedings will not have
a material adverse effect on the consolidated financial position or results of
operations of the Company.
The Company anticipates substantial future capital expenditures associated with
the full development of its oil and gas properties and the North Atlantic
pipeline project. Realization of the full potential of the Company's properties
and the North Atlantic pipeline project is dependent upon the ability to obtain
sufficient additional capital or project financing.
NOTE 6 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
Six Months Ended December 31,
---------------------------------
1997 1996
(in thousands)
Interest $ 9 $ 4,238
Taxes $ -- $ --
Supplemental disclosures of noncash investing and financing activities
Six Months Ended December 31,
-------------------------------
1997 1996
(in thousands)
Conversion of long-term debt to
common stock $ 60,000 $ --
Conversion of preferred stock to
common stock $ 13 $ 799
Assignment of oil and gas properties and
abandonment obligations $ 1,200 $ --
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in this
quarterly report and is intended to assist in the understanding of the Company's
financial condition and results of operations for the three and six months ended
December 31, 1997.
GENERAL
Tatham Offshore is an independent energy company engaged in the development,
exploration and production of oil and gas reserves located primarily in the
flextrend and deepwater areas of the Gulf. In addition, Tatham Offshore is
currently pursuing energy related opportunities in eastern Canada, including the
development of offshore pipeline infrastructure.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1996
Revenue from oil and gas sales totaled $3.4 million for the three months ended
December 31, 1997 as compared with $5.8 million for the three months ended
December 31, 1996. During the three months ended December 31, 1997, the Company
sold 1,184 million cubic feet ("MMcf") of gas and 4,164 barrels of oil at
average prices of $2.79 per thousand cubic feet ("Mcf") and $17.10 per barrel,
respectively. During the same period in 1996, the Company sold 1,803 MMcf of gas
and 47,000 barrels of oil at average prices of $2.57 per Mcf and $24.57 per
barrel, respectively. The decrease in oil and gas sales is primarily a result of
the cessation of oil and gas production from the Company's Ewing Bank 914 #2
well which was shut-in in May 1997, lower oil prices and decreased gas
production from the Company's Viosca Knoll Block 817 lease, slightly offset by
higher gas prices.
Production and operating expenses for the three months ended December 31, 1997
totaled $1.4 million as compared with $1.5 million for the same period in 1996.
The decrease of $0.1 million is primarily comprised of a decrease of $0.5
million in the cost of transportation services and production, operating and
workover expenses offset by an increase of $0.4 million related to a production
payment equal to 25% of the net operating cash flow from the Company's working
interest in Viosca Knoll Block 817.
Exploration expenses totaled $0.2 million for the three months ended December
31, 1996. Exploration expenses primarily included delay rentals and minimum
royalties.
Depreciation, depletion and amortization totaled $0.6 million for the three
months ended December 31, 1997 as compared with $1.2 million for the three
months ended December 31, 1996. The decrease is primarily a result of a $0.8
million net reduction in abandonment expense as a result of the Company
assigning its working interest in Ship Shoal Block 331 to a third party for the
assumption of the abandonment obligations offset by additional abandonment
accruals of $0.2 million related to Viosca Knoll Blocks 817 and 818.
General and administrative expenses, including the management fee allocated from
DeepTech, for the three months ended December 31, 1997 totaled $1.5 million as
compared with $1.3 million for the same period in 1996. The increase reflected
an increase in staff and overhead expenses allocated to the Company under its
management agreement with DeepTech. Tatham Offshore amended its management
agreement with DeepTech effective July 1, 1997 to provide for a 26% overhead
allocation as compared to a 24% overhead allocation during the three months
ended December 31, 1996.
Operating loss for the three months ended December 31, 1997 was $0.1 million as
compared with operating income of $1.6 million for the three months ended
December 31, 1996. The change was due to the items discussed above.
Interest income totaled $0.1 million for the three months ended December 31,
1997 and 1996 and included interest income from available cash.
11
<PAGE> 12
Interest expense for the three months ended December 31, 1996 totaled $2.1
million and primarily relates to interest under the Subordinated Notes. See Item
1. "Consolidated Financial Statements -- Note 2 -- Related Party Transactions --
Notes Payable to DeepTech."
After taking into account $1.0 million of preferred stock dividends in arrears,
the Company's net loss available to common shareholders for the three months
ended December 31, 1997 was $1.1 million, or $0.15 per share, as compared with
net loss available to common shareholders for the three months ended December
31, 1996 of $1.4 million, or $0.53 per share, after taking into account $1.0
million of preferred stock dividends in arrears. The weighted average shares
outstanding for purposes of calculating loss per share for the three months
ended December 31, 1997 and 1996 were 7,127,550 shares and 2,652,180 shares,
respectively. See Item 1. "Consolidated Financial Statements -- Note 4 --
Earnings Per Share."
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1996
Revenue from oil and gas sales totaled $7.2 million for the six months ended
December 31, 1997 as compared with $10.3 million for the six months ended
December 31, 1996. During the six months ended December 31, 1997, the Company
sold 2,723 MMcf of gas and 13,019 barrels of oil at average prices of $2.55 per
Mcf and $17.40 per barrel, respectively. During the same period in 1996, the
Company sold 3,279 MMcf of gas and 108,000 barrels of oil at average prices of
$2.38 per Mcf and $23.05 per barrel, respectively. The decrease in oil and gas
sales is primarily a result of the cessation of oil and gas production from the
Company's Ewing Bank 914 #2 well which was shut-in in May 1997, lower oil prices
and decreased gas production from the Company's Viosca Knoll Block 817 lease,
slightly offset by higher gas prices.
Production and operating expenses for the six months ended December 31, 1997
totaled $3.1 million as compared with $3.4 million for the same period in 1996.
The decrease of $0.3 million is primarily comprised of a decrease of $1.3
million in the cost of transportation services and production, operating and
workover expenses offset by an increase of $1.0 million related to a production
payment equal to 25% of the net operating cash flow from the Company's working
interest in Viosca Knoll Block 817.
Exploration expenses for the six months ended December 31, 1997 totaled $25,000
as compared with $0.3 million for the six months ended December 31, 1996.
Exploration expenses primarily included delay rentals and minimum royalties.
Depreciation, depletion and amortization totaled $2.0 million for the six months
ended December 31, 1997 as compared with $2.1 million for the six months ended
December 31, 1996. The decrease is primarily a result of a $0.8 million net
reduction in abandonment expense as a result of the Company assigning its
working interest in Ship Shoal Block 331 to a third party for the assumption of
the abandonment obligations offset by additional depletion at Viosca Knoll Block
817 and West Delta Block 35 of $0.5 million and abandonment accruals related to
Viosca Knoll Blocks 817 and 818 of $0.2 million.
General and administrative expenses, including the management fee allocated from
DeepTech, for the six months ended December 31, 1997 totaled $3.0 million as
compared with $2.5 million for the same period in 1996. The increase reflected
an increase in staff and overhead expenses allocated to the Company under its
management agreement with DeepTech of $0.6 million offset by a decrease in
direct general and administrative expenses of $0.1 million. Tatham Offshore
amended its management agreement with DeepTech effective July 1, 1997 to provide
for a 26% overhead allocation as compared to a 24% overhead allocation during
the six months ended December 31, 1996.
Operating loss for the six months ended December 31, 1997 was $1.0 million as
compared with operating income of $1.9 million for the six months ended December
31, 1996. The change was due to the items discussed above.
Interest income totaled $0.2 million for the six months ended December 31,
1997 and 1996 and included interest income from available cash.
Interest expense for the six months ended December 31, 1997 totaled $1.7 million
as compared with $4.2 million for the six months ended December 31, 1996 and
primarily relates to interest under the Subordinated Notes. See Item 1.
"Consolidated Financial Statements -- Note 2 -- Related Party Transactions --
Notes Payable to DeepTech."
12
<PAGE> 13
After taking into account $2.0 million of preferred stock dividends in arrears,
the Company's net loss available to common shareholders for the six months ended
December 31, 1997 was $4.5 million, or $0.91 per share, as compared with net
loss available to common shareholders for the six months ended December 31, 1996
of $4.1 million, or $1.56 per share, after taking into account $2.0 million of
preferred stock dividends in arrears. The weighted average shares outstanding
for the purposes of calculating loss per share for the six months ended December
31, 1997 and 1996 were 4,934,170 shares and 2,622,472 shares, respectively. See
Item 1. "Consolidated Financial Statements -- Note 4 -- Earnings Per Share."
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. The Company intends to satisfy its immediate capital
requirements and other working capital needs primarily from cash on hand and
cash generated from continuing operations. At December 31, 1997, the Company had
$2.9 million of cash and cash equivalents. However, as described below, the
Company will need to raise substantial capital (equity, debt or both) or enter
into other arrangements (such as drilling and development commitments) to
develop its current inventory of properties and prospects to allow the Company
to generate operating cash flow to fund on-going activities and operations.
Cash from continuing operations is derived primarily from production from the
Company's working interest in Viosca Knoll Block 817 which is currently
producing a total of approximately 55 MMcf of gas per day. The Company's current
25% working interest in the Viosca Knoll Block 817 is subject to a production
payment equal to 25% of the net operating cash flow from such working interest.
For the six months ended December 31, 1997, the Company's net revenue from this
property was reduced by $1.0 million of production payment obligations.
Tatham Offshore also has producing wells at its West Delta Block 35 which
contribute to cash from continuing operations. The Company owns a 38% working
interest in West Delta Block 35 which is currently producing at a rate of
approximately 7 MMcf of gas and 44 barrels of oil per day.
In February 1998, DeepFlex Services exchanged its 1,016,957 shares of Tatham
Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately
converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per
share for a total of $2.7 million in proceeds to Tatham Offshore. Tatham
Offshore used $2.5 million of 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.
The Company anticipates that declining revenue from currently producing
properties will need to be replaced by revenue from other sources.
Uses of Cash. The Company's primary uses of cash consist of (i) expenses
associated with operating its producing properties, including its leasehold
abandonment liabilities, (ii) capital expenditures necessary to fund its portion
of the development costs attributable to its working interests, (iii) platform
access fees and processing and commodity charges payable to the Partnership,
(iv) payments due under the management agreement with DeepTech and (v)
expenditures related to the North Atlantic pipeline project.
Tatham Offshore is obligated to pay to the Partnership commodity charges, based
on the volume of oil and gas transported or processed, under certain
transportation agreements. The Company is also obligated to pay to the
Partnership $1.6 million in platform access fees annually relative to its 25%
working interest in its Viosca Knoll Block 817.
The management fee agreement between Tatham Offshore and DeepTech provides for
an annual management fee which is intended to reimburse DeepTech for the
estimated costs of its operational, financial, accounting and administrative
services provided to Tatham Offshore. Effective July 1, 1997, the management
agreement was amended to provide for an annual management fee of 26% of
DeepTech's overhead expenses. For the six months ended December 31, 1997,
DeepTech charged Tatham Offshore $2.1 million in management fees pursuant to
this agreement.
13
<PAGE> 14
North Atlantic is the sponsor of a proposal to construct a natural gas pipeline
from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire. As of
December 31, 1997, Tatham Offshore Canada Limited, the Canadian representative
of North Atlantic, has incurred $9.0 million of pre-developmental costs in
connection with such project. The Company anticipates that pre-developmental
costs associated with the North Atlantic pipeline project could ultimately reach
approximately $10.0 million by the spring of 1998 and the ultimate capital costs
of the project, if approved, could reach $3.0 billion to $3.5 billion. During
October 1997, North Atlantic filed applications with the Federal Energy
Regulatory Commission and its Canadian counterpart, the National Energy Board,
for approval of its proposed subsea pipeline. Action by the Canadian and United
States regulatory authorities on North Atlantic's pipeline proposal is expected
to occur by mid 1998.
Liquidity Outlook. In order to improve liquidity and partially address its
capital requirements, Tatham Offshore entered into the Restructuring Agreement
with DeepTech in September 1997.
Under the Restructuring Agreement, DeepTech agreed to forgive the next two
scheduled interest payments under the Subordinated Notes. In exchange, DeepTech
received three restructuring options from Tatham Offshore and agreed to
restructure the Subordinated Notes by consummating one of the following
transactions: (i) to convert all of the principal amount outstanding under the
Subordinated Notes into shares of Tatham Offshore common stock at the market
price at the time the option is exercised; (ii) to purchase shares of 6% Senior
Preferred Stock of Tatham Offshore with a liquidation preference value of $60
million, the proceeds from which would be used to prepay the outstanding balance
of the Subordinated Notes; or (iii) to purchase all of the outstanding capital
stock of Tatham Offshore Development for $60 million, the proceeds from which
would be used to prepay the outstanding balance of the Subordinated Notes.
DeepTech was required to select one of the above restructuring transactions on
or before December 31, 1997. On December 17, 1997, DeepTech's Board of Directors
elected to exercise the common stock option under the Restructuring Agreement.
Under this option, DeepTech converted the Subordinated Notes into 26,666,667
shares of Tatham Offshore common stock at a conversion rate of $2.25 per share,
the average of the closing price for the ten trading days immediately preceding
the exercise of the option. As a result of the conversion of the Subordinated
Notes, Tatham Offshore eliminated all of its outstanding debt.
The Company currently intends to fund its immediate cash requirements with cash
on hand and cash from continuing operations. The Company generated approximately
$1.1 million in positive operating cash flow for the six months ended December
31, 1997.
The ability of the Company to satisfy its future capital needs will depend upon
its ability to raise additional capital and to successfully implement its
business strategy, particularly its ability to obtain regulatory approval and
financing for its North Atlantic pipeline project. Tatham Offshore anticipates
that the new pipeline will be constructed and owned by a consortium of Canadian
and United States companies once regulatory approval is obtained. In addition,
the Company believes that since the royalty abatement has been granted, the
resulting improved economics for Ewing Bank Blocks 958, 959, 1002 and 1003 (the
Sunday Silence project) should be sufficient to obtain development financing or
an industry farmout arrangement. There can be no assurance, however, that Tatham
Offshore will be able to obtain regulatory approval, joint venture partners or
adequate financing for these projects.
Tatham Offshore has never declared or paid dividends on its common or preferred
stock. Tatham Offshore expects to retain all available earnings generated by its
operations for the growth and development of its business.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
14
<PAGE> 15
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations, (v) the production rates and reserve estimates associated
with the Company's producing oil and gas properties and (vi) significant changes
from expectations of capital expenditures and operating expenses and
unanticipated project delays. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on November 13,
1997. At the Annual Meeting, the stockholders (i) elected eleven
directors to hold office until the next annual meeting of stockholders
and until their respective successors are duly elected and qualified,
(ii) ratified the Board of Directors' appointment of Price Waterhouse
LLP as the Company's independent accountants for the fiscal year ending
June 30, 1998, (iii) ratified the Board of Directors' approval of the
Restructuring Agreement with DeepTech and (iv) authorized the Board of
Directors to effect a reverse split of Tatham Offshore common stock of
up to ten-for-one and the related amendment to Tatham Offshore's
Certificate of Incorporation. The votes were cast as follows:
(i) Elect Directors
FOR WITHHELD
--- --------
Thomas P. Tatham 14,801,708 2,141,998
Kenneth E. Benney 15,852,235 1,091,471
Phillip G. Clarke 14,804,008 2,139,698
Antoine Gautreaux, Jr. 15,850,535 1,093,171
E. Lynn Hill 15,850,535 1,093,171
Edward L. Moses 15,852,235 1,091,471
Clyde E. Nath 15,852,235 1,091,471
James G. Niven 15,852,235 1,091,471
Jonathan D. Pollock 15,852,235 1,091,471
Roger B. Vincent, Sr. 15,852,235 1,091,471
Diana J. Walters 15,852,235 1,091,471
(ii) Ratify Selection of Independent Accountants
FOR AGAINST ABSTAIN
--- ------- -------
14,386,745 2,077,998 1,000
(iii) Ratify Restructuring Agreement with DeepTech
FOR AGAINST ABSTAIN
--- ------- -------
12,677,655 2,076,998 2,700
16
<PAGE> 17
(iv) Authorize Reverse Stock Split and Related Amendment to
Certificate of Incorporation
FOR AGAINST ABSTAIN
--- ------- -------
15,389,604 1,074,868 1,271
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore, Inc.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with
Securities and Exchange Commission on December 31, 1997.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TATHAM OFFSHORE, INC.
Date: February 17, 1998 By: /s/ DENNIS A. KUNETKA
---------------------
Dennis A. Kunetka
Chief Financial Officer and Secretary
(Signing on behalf of the Registrant
and as Principal Accounting Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
Exhibit
Number
-------
3.1 Certificate of Amendment of Certificate
of Incorporation of Tatham Offshore, Inc.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TATHAM OFFSHORE, INC.
Tatham Offshore, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware ("DGCL"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, by vote in
meetings held on August 20, and November 13, 1997 adopted the following
resolution amending the Certificate of Incorporation of the Corporation subject
to approval by the stockholders of the Corporation:
RESOLVED, that the Certificate of Incorporation of the Corporation be
amended and restated in its entirety by inserting this Section D in its entirety
into Article IV after Section C of Article IV:
"D. (1) All shares of the Corporation outstanding on November 24, 1997,
will be reduced to one-tenth of their current amount such that every 10
shares will be worth one share.
(2) The Corporation may, but shall not be required, to issue
fractions of a share. If it does not issue fractions of a share, it
shall (1) arrange for the disposition of fractional interests by those
entitled thereto, (2) pay in cash the fair value of fractions of a
share as of the time when those entitled to receive such fractions are
determined or (3) issue scrip or warrants in registered form or in
bearer form which shall entitle the holder to receive a full share upon
the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall entitle the holder to exercise
voting rights, to receive dividends thereon and to participate in any
of the assets of the Corporation in the event of liquidation. The Board
may cause scrip or warrants to be issued subject to the conditions that
they shall become void if not exchanged for certificates representing
the full shares of uncertificated full shares before a specified date,
or subject to the conditions that the shares for which scrip or
warrants are exchangeable may be sold by the Corporation and the
proceeds thereof distributed to the holders of scrip or warrants, or
subject to any other conditions, which the Board may impose."
SECOND: That said amendment was submitted at the annual meeting on
November 13, 1997 (the "Annual Meeting") to the holders of the issued and
outstanding shares of stock entitled to vote thereon, pursuant to Section 242 of
the DGCL.
<PAGE> 2
THIRD: That said amendment was adopted at the Annual Meeting by at
least a majority of the stockholders entitled to vote thereon in accordance with
the provisions of Section 242 of the DGCL.
FOURTH: That this Certificate of Amendment of the Certificate of
Incorporation of the Corporation shall be effective upon filing with the
Secretary of State of the State of Delaware.
<PAGE> 3
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of
the Corporation, the 14th day of November, 1997.
TATHAM OFFSHORE, INC.
/s/ Thomas P. Tatham
------------------------------------
Thomas P. Tatham
Chairman of the Board and
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains Summary Financial Information extracted from (a) Tatham
Offshore, Inc. and subsidiaries consolidated financial statements at December
31, 1997 included in its Form 10-Q for the period ended December 31, 1997, and
is qualified in its entirety by reference to such (b) Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,919
<SECURITIES> 0
<RECEIVABLES> 963
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,998
<PP&E> 51,906
<DEPRECIATION> 23,366
<TOTAL-ASSETS> 41,501
<CURRENT-LIABILITIES> 2,584
<BONDS> 0
0
243
<COMMON> 295
<OTHER-SE> 31,229
<TOTAL-LIABILITY-AND-EQUITY> 41,501
<SALES> 7,159
<TOTAL-REVENUES> 7,159
<CGS> 3,099
<TOTAL-COSTS> 3,124
<OTHER-EXPENSES> 2,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,720
<INCOME-PRETAX> (2,510)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,510)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
