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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER. 0-22892
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TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS STREET
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 224-7400
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SERIES A 12% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES B 8% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
SERIES C 4% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
EXCHANGE WARRANTS
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K/A OR ANY
AMENDMENT TO THIS FORM 10-K/A. X
---
AS OF SEPTEMBER 15, 1998, THERE WERE OUTSTANDING 26,074,280 SHARES OF COMMON
STOCK OF THE REGISTRANT. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE VOTING
STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES WAS AN ESTIMATED $7.9 MILLION.
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TATHAM OFFSHORE, INC. AND SUBSIDIARIES
FIRST AMENDMENT TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1998
INDEX
<TABLE>
<S> <C> <C>
PART I.....................................................................................................1
Items 1 & 2. Business and Properties..................................................................1
Item 3. Legal Proceedings.......................................................................15
Item 4. Submission of Matters to a Vote of Security Holders.....................................15
PART II...................................................................................................16
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................16
Item 6. Selected Financial Data.................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...............................24
Item 8. Financial Statements and Supplementary Data.............................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................25
PART III..................................................................................................26
Item 10. Directors and Executive Officers of the Registrant......................................26
Item 11. Executive Compensation..................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................26
Item 13. Certain Relationships and Related Transactions..........................................26
PART IV...................................................................................................42
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................42
</TABLE>
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The following text is qualified in its entirety by reference to the more
detailed information and consolidated financial statements (including the notes
thereto) appearing elsewhere in this Annual Report on Form 10-K/A (the "Annual
Report"). Unless otherwise indicated, (i) all current and prospective
information in this Annual Report gives effect to the Merger (as defined) and
related transactions completed on or before August 14, 1998, including the sale
of certain of Tatham Offshore's existing assets, the related retirement of
certain amounts of Tatham Offshore's Preferred Stock, the contribution to Tatham
Offshore of two semisubmersible drilling rigs, and the assumption of certain
debt, (ii) all references to "Tatham Offshore" are to Tatham Offshore, Inc. and
its subsidiaries, (iii) all references to the "Company" are to Tatham Offshore,
Inc. and its subsidiaries and DeepFlex Production Services, Inc. and its
subsidiaries ("DeepFlex"), and (iv) all financial information and per share data
in this Annual Report gives effect to the one for ten reverse stock split Tatham
Offshore completed on November 24, 1997.
Historically, Tatham Offshore has been in the oil and gas exploration and
development business, primarily in the Gulf of Mexico (the "Gulf"). The Company
is refocusing its business from the oil and gas exploration and production
business in the Gulf to an integrated frontier investment strategy targeting
Atlantic Canada with an initial emphasis on the offshore contract drilling
business. Accordingly, in connection with DeepTech International Inc.'s
("DeepTech") merger (the "Merger") with a subsidiary of El Paso Energy
Corporation ("El Paso") completed on August 14, 1998, Tatham Offshore (i)
transferred its ownership of Tatham Offshore Development, Inc. ("Tatham
Development"), which owns oil and gas producing properties, to DeepTech and its
remaining oil and gas properties to Leviathan Gas Pipeline Partners, L.P. (the
"Partnership"), a New York Stock Exchange-listed master limited partnership in
which DeepTech owned an effective 23.2% interest on August 14, 1998, and (ii)
acquired from DeepTech ownership of DeepFlex and therefore the FPS Laffit Pincay
(the "Pincay") and the FPS Bill Shoemaker (the "Shoemaker" and, together with
the Pincay, the "Rigs"). For a description of certain items used herein relating
to the oil and gas industry, see Items 1 & 2. "Business and Properties --
Certain Definitions."
PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
OVERVIEW
Tatham Offshore, a Delaware corporation and an independent energy company
founded in 1989, provides offshore contract drilling services to the oil and gas
industry in the Gulf and Atlantic Canada and is currently pursuing an integrated
energy related investment strategy in Atlantic Canada. Through August 14, 1998,
Tatham Offshore had been engaged in the development, exploration and production
of oil and gas reserves located primarily in the Gulf focusing principally on
the flextrend and deepwater areas.
RECENT EVENTS
On February 27, 1998, DeepTech entered into an Agreement and Plan of Merger
(the "Merger Agreement") with El Paso and El Paso Acquisition Company ("El Paso
Acquisition"), a wholly-owned subsidiary of El Paso, pursuant to which DeepTech
would merge with El Paso, or under certain circumstances, with El Paso
Acquisition. On August 14, 1998, DeepTech merged with El Paso Acquisition.
As a result of the Merger and related transactions, some of the assets of
Tatham Offshore and DeepTech were restructured so that DeepFlex became a
wholly-owned subsidiary of Tatham Offshore and Tatham Offshore transferred its
working interests in the Ewing Bank Blocks 958, 959, 1002 and 1003 (the "Sunday
Silence Project") to DeepTech. Pursuant to the Redemption Agreement (discussed
below), Tatham Offshore transferred all of its remaining assets located in the
Gulf to the Partnership. Further, DeepTech divested itself of its equity
ownership interest in Tatham Offshore by offering all of the shares of Tatham
Offshore common stock, par value $.01 ("Common Stock"), and Series A 12%
Convertible Exchangeable Preferred Stock ("Series A Preferred Stock") held by
DeepTech to the stockholders of DeepTech in a Rights Offering (discussed below).
Following the asset restructuring, the Company's marine services business
includes the operation of two semisubmersible drilling rigs, the Shoemaker and
the Pincay. In addition, the Company will continue to pursue energy related
opportunities in Atlantic Canada, including the North Atlantic pipeline project,
related gas processing facilities, a facility for the generation of electricity
and other related investments.
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The material terms of the Merger, the Redemption Agreement and other
related agreements as they relate to the Company and its subsidiaries are as
follows:
(a) DeepTech sold to the Company approximately $8 million of debt
DeepFlex owed to DeepTech in exchange for Tatham Offshore
conveying to DeepTech all of the outstanding shares of capital
stock of Tatham Development, which owns the Sunday Silence
project, and cancellation of its reversionary interests in certain
oil and gas properties.
(b) In satisfaction of $12 million of debt owed by DeepFlex to
DeepTech, DeepFlex delivered to DeepTech all of the Tatham
Offshore Common and Series A Preferred Stock held by DeepFlex.
(c) The balance of the DeepFlex indebtedness to DeepTech was
contributed to the capital of DeepFlex.
(d) DeepTech contributed all of the outstanding shares of capital
stock of DeepFlex, which owns the Rigs, to Tatham Offshore. As a
result of this contribution by DeepTech, Tatham Offshore, through
DeepFlex, assumed $64,406,000 of third-party and affiliate debt.
(e) Tatham Offshore transferred its remaining assets located in the
Gulf to the Partnership in exchange for 7,500 shares of Preferred
Stock owned by the Partnership (the "Redemption Agreement"). In
addition, the Partnership assumed all abandonment and restoration
obligations associated with the platform and leases. At the
closing of the Merger, Tatham Offshore paid (i) the Partnership
$1.6 million, the amount equal to the net cash generated from such
properties from January 1, 1998 through August 14, 1998, and (ii)
DeepTech $1.5 million, being 50% of the management fees charged to
Tatham Offshore from January 1, 1998 through the closing date.
(f) On July 16, 1998, the Securities and Exchange Commission (the
"Commission") declared effective Tatham Offshore's Registration
Statement on Form S-1 relating to the offering of rights to the
DeepTech stockholders to purchase DeepTech's 28,073,450 shares of
Tatham Offshore Common Stock and 4,670,957 shares of Tatham
Offshore's Series A Preferred Stock (the "Rights Offering"). As a
result of the Rights Offering, unaffiliated parties purchased
3,378,693 shares of Common Stock and 562,148 shares of Series A
Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of
the Board and Chief Executive Officer of Tatham Offshore and
DeepFlex, purchased 20,768,011 shares of Common Stock
(approximately 79.6%) and 3,455,440 shares of Series A Preferred
Stock (approximately 20%) which resulted in DeepTech receiving
net proceeds from the Rights Offering of $75.0 million. In
exchange for committing to purchase a specified portion of the
stock underlying any unexercised Rights, TB Securities received a
fee of $6.9 million. To the extent any shares held by DeepTech
were not acquired by the holders of Rights or TB Securities,
Tatham Offshore purchased such shares and DeepTech contributed
the proceeds from such purchase to Tatham Offshore. DeepTech no
longer owns any of Tatham Offshore's capital stock.
(g) Because the management agreement between DeepTech and Tatham
Offshore was terminated in connection with the Merger, Tatham
Offshore has hired a management team and support personnel to
implement its Atlantic Canada strategy and oversee its contract
drilling services business. See "-- Contract Drilling Services --
Rig Management."
CONTRACT DRILLING SERVICES
GENERAL
The Company entered the offshore contract drilling service business through
the acquisition of DeepFlex in connection with the Merger. DeepFlex is engaged
in the contract drilling of offshore oil and gas wells in the Gulf and offshore
eastern Canada. DeepFlex owns two second generation semisubmersible drilling
rigs, the Pincay and the Shoemaker. Pursuant to management and charter
agreements, Sedco Forex Division of Schlumberger Technology Corporation ("Sedco
Forex") markets, manages, mans and operates the Rigs.
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DESCRIPTION OF THE RIGS
Semisubmersible rigs are floating platforms that consist of an upper
working and living deck resting on vertical columns connected to lower hull
members. These rigs operate in a "semisubmerged" position, remaining afloat, off
bottom in a position in which the lower hull is from about 55 to 90 feet below
the water line and the upper deck protrudes well above the surface. The Rigs are
positioned by chain mooring lines with anchors on the sea floor and remain
stable for drilling in the semisubmerged floating position due in part to their
wave transparency characteristics at the water line. The Rigs are able to change
draft through a water ballasting system that permits them to be submerged to a
predetermined depth so that a portion of the hulls are below the water surface
during drilling operations.
FPS Bill Shoemaker. The Shoemaker is a self-propelled, twin pontoon, eight
column, second generation semisubmersible drilling rig of Aker H-3 design. It
can drill to depths of 25,000 feet, in water depths of up to 1,500 feet and has
a drilling variable load of approximately 3,850 short tons, a VARCO TDS-4S
top-drive drilling system, a 10,000 psi blow-out prevention system, 2,000 barrel
mud pits and eight 80,000 pound riser tensioners. This rig was built in 1976 and
was extensively refurbished, repaired, renovated and upgraded in 1997 at a cost
of approximately $56 million. The upgrades included installing a new heliport,
mud booster line, third mud pump, a third level of personnel accommodations and
a new electrical "SCR" system. In addition, the Shoemaker underwent a complete
winterization program in this upgrade, and, as a result, is again able to
operate year-round in harsh environments, such as the North Sea, offshore
Newfoundland and eastern Canada, where it has operated in the past.
FPS Laffit Pincay. The Pincay is a second generation semisubmersible
drilling rig of Penrod/Reineke design. The Pincay is capable of drilling to
depths of 25,000 feet, in water depths of up to 1,200 feet and has a drilling
variable load of approximately 2,000 short tons, a 10,000 psi blow-out
prevention system, 1,600 barrel mud pits and six 80,000 pound riser tensioners.
This rig was built in 1976 and was refurbished, upgraded and renovated in 1996
with the installation of a VARCO TDS-3S top-drive system and a new electrical
"SCR" system.
Subject to market conditions and obtaining the necessary capital, part of
the Company's strategy is to increase the size and capability of its fleet of
rigs, including building the fifth-generation, state-of-the-art drilling rig
described under "-- Business Strategy."
RIG MANAGEMENT
Sedco Forex has managed and operated the Pincay and the Shoemaker since
1995 and 1996, respectively. Under the charter agreements pursuant to which
Sedco Forex manages the Rigs, Sedco Forex is responsible for not only managing,
maintaining and operating the Rigs, but also for marketing the Rigs worldwide
and thereby increasing their utilization rates. Although Sedco Forex has the
right to negotiate drilling contracts with respect to each Rig, the Company has
the sole right to approve any drilling contracts, the working location of the
Rigs and certain other matters.
Under the charter agreements, Sedco Forex is paid a monthly fee for the
management of each Rig which is comprised of a fixed amount and a variable
amount based on performance. The total amount to be paid to Sedco Forex under
each of these agreements is dependent on the drilling rates received for the
Rigs, the costs of operating and maintaining the Rigs and the utilization rates
of the Rigs, among other things. The charter agreements for the Pincay and the
Shoemaker have five-year terms, subject to mutual termination rights. If either
or both agreements are not renewed or extended by mutual agreement, the Company
believes that it can find, within a reasonable period of time, an alternative
company to manage and operate the Rigs for a reasonable fee.
DRILLING CONTRACTS
Most drilling contracts are structured on a dayrate, footage or turnkey
basis. They usually extend over a period covering either the drilling of a
single well, a group of wells (a "well-to-well contract") or a stated term (a
"term contract") and are terminable if the drilling unit is destroyed or lost,
drilling operations are suspended for a specified time because of a breakdown of
major equipment or other events occur which are beyond either party's control.
In many instances, the customer may extend the contract term upon exercising
options to drill additional wells at fixed or mutually agreed upon terms. Most
of the Company's drilling contracts are obtained through
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competitive bids or negotiations with customers and their terms and conditions
vary depending on the specific facts and circumstances.
To date, the Company has entered only into dayrate contracts, although the
Company may enter into non-dayrate contracts in the future, depending on market
conditions, profit potential and risk exposure, among other things.
A dayrate drilling contract generally provides for a basic drilling rate
based on a fixed rate per day. Under such a contract, the customer usually bears
a major portion of out-of-pocket costs of drilling and assumes most of the risk
associated with drilling operations such as risk of blowout, loss of hole, stuck
drill stem, machinery breakdowns, abnormal drilling conditions and risks
associated with subcontractors' services, supplies and personnel. In contrast,
the risks to the contractor on non-dayrate contracts could be substantially
greater than on a dayrate drilling contract because the contractor may, and
often does, assume more of those risks associated with drilling operations
generally assumed by the operator in a dayrate contract.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. During periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts since such contracts provide
them the flexibility to profit from increasing dayrates. In contrast, during
such periods, customers with reasonably definite drilling programs typically
prefer longer-term contracts to maintain prices at the lowest level possible.
FPS Bill Shoemaker. After completion of the upgrade and refurbishment in
July 1997, the Shoemaker was mobilized to the Grand Banks area offshore
Newfoundland where it completed drilling an exploratory well for Amoco Canada
Petroleum Company Ltd. in the West Bonne Bay Field. The Shoemaker is currently
under contract to Shell Offshore Inc. ("Shell") in the Gulf of Mexico. The
contract with Shell extends through at least January 1999. Sedco Forex has
entered into a contract for the mobilization of the Shoemaker to the Grand Banks
area in Atlantic Canada to conduct a two-well (with three options permitting up
to seven additional wells) program at predetermined rates for Husky Oil
Operations Limited. Husky has agreed to mobilize the Shoemaker immediately
following the termination of the contract with Shell. During the year ended June
30, 1998, the Shoemaker generated $39.3 million in revenue.
FPS Laffit Pincay. Following the completion of a refurbishment and upgrade
program in February 1996, the Pincay was placed under contract with the
Partnership to complete a previously drilled well and drill a new well in Garden
Banks Block 117. Following the completion of the well for the Partnership, the
Pincay was committed to Phillips Petroleum Company to drill one well at Garden
Banks Block 70 in the Gulf with options to drill and/or complete three
additional wells at various Gulf locations. This contract was completed in late
September 1997 after Phillips drilled one of its "option" wells. Pennzoil
Exploration and Production Company entered into an agreement to drill two wells
following the completion of the two Phillips wells. Pennzoil drilled one of its
wells with the Pincay. Following the termination of the Pennzoil agreement in
March 1998, the Pincay was taken out of service for approximately six weeks to
complete scheduled maintenance and certain upgrades. From April 23, 1998 through
July 18, 1998, the Pincay was not under contract due to the softening of market
conditions for similar rigs in the Gulf. From July 19, 1998 through August 11,
1998, the Pincay was under contract with Ocean Energy, Inc. to conduct a one
well program. From August 12, 1998 to date, the Pincay has not been under
contract. Sedco Forex and the Company are currently marketing the Pincay for use
in the Gulf and evaluating international locations for possible deployment.
During the year ended June 30, 1998, the Pincay generated $22.2 million in
revenue. However, no assurance can be made as to when and for what term the
Pincay will be under contract in the future. See "-- Competition" and " --
Industry Conditions."
CUSTOMERS
The Company provides offshore drilling services to a market that is
comprised of major and independent oil and gas companies. During the year ended
June 30, 1998, the Rigs were deployed to several companies as discussed above,
through contracts with Sedco Forex. Management believes the Company will
continue to enhance its client base through its arrangement with Sedco Forex and
through continued services to its current customers. The inability of the
Company and Sedco Forex to attract customers for the Rigs would, and the loss of
any customer could, have a material adverse impact on the Company's operations
for such period of time as may be required to find other users, if any, for the
Rigs.
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COMPETITION
The contract drilling industry is an intensely competitive industry where
no one competitor is dominant. The Company's ability to continue to generate
business is dependent primarily on the level of domestic oil and gas exploration
and development activity and, in part on its ability to adapt to new technology
and drilling techniques as they become available. The Company, through Sedco
Forex, competes with numerous other drilling contractors, some of whom are
substantially larger than the Company and possess appreciably greater financial
and other resources.
During the last three years, there have been several business
consolidations that have reduced the drilling industry's fragmented nature.
Although this has decreased the total number of competitors, the Company
believes that competition for drilling contracts will remain intense in the
foreseeable future. Companies generally compete on the basis of price, workforce
experience, equipment suitability and availability, reputation, expertise,
technology and financial capability. While competition is primarily on a
regional basis, rigs can be moved from one region to another, as well as between
water depths, in response to changes in levels of drilling activity, subject to
crew availability and mobilization expenses.
Moreover, increases in dayrates during 1997 and early 1998 and prospects
for the offshore contract drilling industry as a whole has led to increased rig
activation, enhancement and construction programs by the Company's competitors.
Furthermore, the Company understands that there are currently numerous new rigs
on order at various shipyards worldwide. A significant increase in the supply of
technologically-advanced rigs capable of drilling in deepwater, including
drillships, may have an adverse effect on the average operating rates and
utilization levels for the Rigs. In addition, there is a general shortage in the
industry of drill pipe and other equipment, and, therefore, the cost and time
required to obtain replacement drill pipe and other equipment are substantially
greater than in prior periods and both are currently escalating.
Increases in worldwide drilling demand during the past two years and the
corresponding increase in the number of offshore rigs working has resulted in a
shortage of qualified rig personnel in the industry. To date, the Company
understands that Sedco Forex has not experienced significant problems with
personnel in the Rigs' areas of operation; however, if Sedco Forex is unable to
continue to attract and retain sufficient qualified personnel, its operations
could be adversely affected and its ability to keep the Rigs operating could be
impaired. A Sedco Forex shortage of personnel could also result in wage
increases which could, without offsetting increases in revenue, adversely affect
the Company's profitability and cash flow.
INDUSTRY CONDITIONS
The demand for offshore drilling services, and thus the Company's revenues
and earnings, are directly affected by the worldwide level of oil and gas
exploration and development activity. From the mid-1980s through the early
1990s, demand for offshore drilling rigs was declining or flat, and the industry
fleet of offshore drilling rigs was reduced. In recent years, demand for
offshore rigs has improved, but the supply of rigs is only now beginning to
increase. The industry has emphasized upgrading and refurbishing existing rigs,
due to the high capital costs and long lead times associated with new
construction. In the last year, several competitors have announced new-build
deepwater drillships and semisubmersible rigs in response to increased demand
for rigs with deepwater capabilities.
Technological advances such as extended reach drilling, multilateral
drilling techniques and new offshore development and production applications
have reduced the costs of developing oil and gas fields. As a result, previously
uneconomic discoveries, particularly in deeper water, have become viable, and
the industry has placed increasing emphasis on exploiting existing resources
using new applications. The development of three-dimensional seismic surveys has
reduced exploration risks, thus placing increased emphasis on selective
exploratory drilling. However, oil prices have declined substantially during
1998, which has caused drilling budgets to decline. Although temporary downturns
in oil prices do not generally have an impact on the demand for deepwater
drilling rigs, such declines have caused dayrates to decline. In addition to the
Pincay, there are several similarly equipped semisubmersibles currently deployed
in the Gulf that do not have current drilling contracts or commitments.
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DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the services and expertise provided to
it by the Company's Chairman of the Board and Chief Executive Officer, Mr.
Thomas P. Tatham, the loss of which could substantially impair the Company's
operations. The Company has not entered into an employment contract with Mr.
Tatham, nor has it obtained "key man" life insurance on his life.
YEAR 2000
While the Company believes that all of its software and equipment is year
2000 compliant, it is substantially dependent on vendor compliance. In addition
to its own computer systems, in connection with its business activities, the
Company interacts with suppliers, customers, creditors and financial service
organizations which use computer systems. Although the Company intends to
interact only with those third parties that have year 2000 compliant computer
systems, it is impossible for the Company to monitor all such systems. There can
be no assurances that such third party systems are year 2000 compliant. If not,
such lack of compliance may have an adverse material impact on the Company's
business and operations. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Year 2000."
MAINTENANCE
The Rigs require continuous and significant maintenance to remain
operational, competitive and economically efficient. In addition to daily
repairs and maintenance and planned monthly or annual maintenance, which may
constitute as much as 15% to 20% of the aggregate operating expenditures of a
properly maintained rig, semisubmersible rigs require periodic major
maintenance, reworking and refurbishment, and replacement of major drilling
equipment, power generation equipment, mooring systems and drill pipe. Because
such major maintenance results in significant expenditures as well as the loss
of revenue associated with the required downtime, it usually is scheduled over a
rolling five year period and coordinated with other necessary operations and,
where possible, business cycles. Both Rigs have recently completed a total
maintenance and refurbishment program, including recent repairs and certain
upgrades to the Pincay. See "-- Description of Rigs."
Notwithstanding the age of its Rigs, the Company believes that it will be
feasible to continue to upgrade them. However, there can be no assurance as to
if, when or to what extent upgrades will continue to be made to such Rigs,
particularly in view of current rates that would be foregone by removing a rig
from service for upgrade. If such upgrades are undertaken, there can be no
assurance that the upgrades can be completed in a cost-effective manner or that
there will be adequate demand for the Rigs' services.
ATLANTIC CANADA STRATEGY
As its principal focus, the Company intends to pursue an integrated
investment strategy in Atlantic Canada by leveraging initially on the cash flow
from, and utilization of, the Rigs. The Company believes that the Atlantic
Canada region offers significant investment opportunities. The Company's plans
include expanding its drilling rig fleet's cold weather, hostile environment
capabilities as well as diversifying its business to include substantial natural
gas gathering and transmission facilities, related gas processing facilities, a
facility for the generation of electricity and other related investments. In
Atlantic Canada, as with any frontier region, there will be substantial risks
associated with investments in such projects. Further, if recent declines in the
price of crude oil are sustained for some period, the pace of development within
the area could be affected and materially extend the time frame for the projects
discussed herein to commence or become operational. However, the Company
believes that by using an integrated investment approach related to the
development of the region's hydrocarbon reserves, the potential for investment
returns is maximized. The Company is contemplating pursuing the development of
the projects described below. Each of these projects is in a preliminary,
conceptual phase. In addition, (i) the Company does not currently possess the
capital necessary to implement its business strategy completely and there can be
no assurances that the Company will be able to obtain sufficient capital for any
or all of the projects, (ii) there can be no assurances that these projects and
other opportunities will prove to be economic or that they will occur, and (iii)
many of these projects will require governmental approvals, almost all of which
the Company has yet to receive. Moreover, if there are developments that the
Company determines to be indicative of a lack of reasonable opportunity to
realize benefits for the Company's stockholders, then the Company will pursue
other opportunities, wherever located.
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Special Multipurpose, New Build Semisubmersible. As part of its strategy to
enhance the number, size and capability of its available rigs, the Company has
entered into a nonbinding Memorandum of Understanding with Friede-Goldman Inc.
regarding the construction of a fifth-generation, state-of-the-art drilling rig
(the "Planned Rig"). The Planned Rig, which is still in the design phase and
estimated to cost approximately $300 million, would be Canadian built and
flagged and would be able to drill throughout the region to depths of 25,000
feet in water depths of up to 5,000 feet. The Planned Rig's characteristics
would make it suitable for use to develop any known proven or potential oil and
gas reserves in Atlantic Canada. In addition, the Planned Rig would have heavy
lift capability, enabling it to install subsea transmission, gathering and
production systems, and provide repair and maintenance capability for such
systems as well as allowing it to repair and maintain the pipeline system
proposed by North Atlantic Pipeline Partners, L.P. ("North Atlantic Partners").
The Planned Rig's high (5,500 short tons) deckload capacity will enable it to
inventory drilling equipment and other stores to better facilitate uninterrupted
drilling operations. These additional capabilities should expand the market for
the Planned Rig and enhance its competitiveness compared to lesser equipped
rigs.
Demand for the Planned Rig could be adversely impacted, however, by an
extended period of depressed crude oil prices, as is currently the case in North
America and worldwide. If these events were determined to render the Planned Rig
uneconomic, the Company would reconsider whether to commence construction of the
Planned Rig until conditions improved. In addition, the Company currently does
not have the financial resources to construct the Planned Rig. No assurances can
be given that the Company will be able to raise the necessary capital at
satisfactory rates to fund such construction.
Pipeline Activities. During 1997, Tatham Offshore Canada Limited, a
wholly-owned subsidiary of the Company, was formed to pursue business
opportunities in the Atlantic Canada region. In addition, the Company has caused
to be formed two limited partnerships, one in Canada and one in the United
States and both known collectively as North Atlantic Partners to construct and
operate an offshore natural gas pipeline from the Grand Banks area offshore
Newfoundland to the east coast of the United States with land falls in both
Newfoundland and Nova Scotia. The General Partner of North Atlantic Partners
(Canada) has filed an application with Canada's National Energy Board, and North
Atlantic Partners (U.S.) has filed an application with the Federal Energy
Regulatory Commission in the United States for authority to build a three-phase,
1,500 mile natural gas pipeline that would serve the growing hydrocarbon
industry offshore Atlantic Canada.
Because another pipeline has been given regulatory authority and is planned
to begin construction this year, North Atlantic Partners is also assessing
redesigning and downsizing the first phase of the pipeline to reduce the capital
cost of that phase of the pipeline to approximately $600 million. As redesigned,
the initial phase of the pipeline project would be approximately 375 miles long
and would originate in the Jeanne D'Arc Basin of the Grand Banks area and extend
to a point near Argentia, Newfoundland.
To date, North Atlantic Partners has obtained nonbinding letters of intent
for the use of its system to deliver gas to the United States which total
approximately 500 MMcf per day. The Company believes that there is significant
reserve potential from the areas offshore Atlantic Canada and as that reserve
potential is developed, a second pipeline into the United States will be
required to meet increased demand for natural gas increases on the east coast of
the United States. The timing of increased drilling activity and the development
of the Atlantic Canada reserve potential is dependent upon major and independent
producers. As development drilling in the area continues, the Company will be
better able to assess the timing and construction requirements for a second
pipeline into the United States.
Gas Processing Facility. The natural gas that will be produced in the Grand
Banks area and potentially be transported through the North Atlantic Partners
pipeline system is expected to contain significant quantities of natural gas
liquids ("NGLs"), such as ethane, propane, butanes and natural gasoline. These
NGLs can be recovered from the natural gas stream through processing. The
Company is investigating the possibility of developing a gas processing plant in
the Argentia area to use the natural gas from the Grand Banks area. The Company
estimates that a processing plant to process the natural gas would cost
approximately $110 million and would be able to initially process up to 400 MMcf
of gas per day, with the ability to be upgraded to process additional natural
gas at a cost of approximately $75 million for each additional 400 MMcf per day.
In addition, the Company is evaluating opportunities to maximize economic value
from potential processing operations with petrochemical producers and with other
potential users of NGLs. The successful development of any such processing
project would be dependent
7
<PAGE> 10
on the construction of the pipeline system proposed by the North Atlantic
Partners. The Company currently does not possess the capital necessary to
construct a gas processing plant and there can be no assurances that the Company
will be able to raise sufficient capital resources at attractive rates to
construct such a facility.
Power Generation Facility. To develop a market for the Grand Banks area
natural gas, in addition to a gas processing plant, the Company has examined the
feasibility of building a gas fired power generating plant in the Argentia area
at a cost of approximately $600 million for 1100 megawatts of combined cycle
power generation. Electrical generation in Newfoundland is currently not gas
fired, relying instead in large part, on less efficient, transported fuel oil.
The successful development of any such power generation project would be
dependent on the construction of the pipeline system and gas processing facility
discussed above.
Hydrocarbon Marketing Company. As part of its activities in the region, the
Company has formed North Atlantic Hydrocarbons Marketing, Inc. ("North Atlantic
Marketing") to buy natural gas and NGLs contained in the natural gas stream in
the production. North Atlantic Marketing would assume the marketing risk related
to the natural gas stream, purchasing the natural gas and entrained liquids from
producers and finding a market for those hydrocarbons.
Oil and Gas Development. Significant oil and gas exploration and production
opportunities also exist throughout the region. The Company is actively seeking
to acquire working interests for proven and probable reserves in Atlantic Canada
and has had independent studies undertaken of the prospective reserves in the
region. Those studies indicate that the region is one of the largest potential
gas regions in North America. Unlike other international opportunities, the
Company does not consider political instability as a significant risk factor
with respect to Canadian opportunities.
On September 18, 1998, Tatham Offshore Canada was informed by the
Canada-Newfoundland Offshore Petroleum Board that it was the successful bidder
on an exploration license offshore Newfoundland. The exploration license is
located on the Grand Banks and contains approximately 175,000 acres. The Company
has agreed to spend approximately $1,000,000 over the next five years in
qualified exploration expenditures in the defined area.
Other Opportunities. Among other potential businesses the Company may
enter, the Company is currently evaluating the feasibility of (i) an industrial
gas distribution system, (ii) an ice management system designed to manage and
reduce the risk of potential damage to its proposed offshore pipelines and
subsea facilities owned by other parties, operated through the Company's
subsidiary, Berg Masters Limited, (iii) a large diameter steel pipe rolling
mill, (iv) methanol production, and (v) other opportunities related to or
located in Atlantic Canada. There can be no assurances that such opportunities
will prove economical, be financeable or will occur.
OIL AND GAS PROPERTIES
GENERAL
As of June 30, 1998, Tatham Offshore owned interests in oil and gas leases
in the Gulf covering approximately 31,809 gross (22,598 net) acres. See " --Oil
and Gas Reserves" for an estimate of Tatham Offshore's total proved developed
reserves of oil and gas and a discussion of the assumptions used in, and
inherent difficulties relating to, estimating reserves. However, all of these
leases were under contract to be transferred, and were transferred, in
transactions which closed on or before August 14, 1998.
DESCRIPTION OF SIGNIFICANT PROPERTIES
The following is a description of the significant properties that Tatham
Offshore held until August 14, 1998, the date the Merger and related
transactions were completed. See " -- Recent Events".
Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property that
is comprised of 5,760 gross (1,440 net) acres located 40 miles off the coast of
Louisiana in approximately 650 feet of water. Tatham Offshore owned a 25%
working interest (the "Subject Interest") in the Viosca Knoll Block 817 acreage,
which interest is burdened by a convertible production payment described below.
See "-- Reversionary Interests." From the inception of production in December
1995 through June 30, 1998, the Viosca Knoll Block 817 project has produced 12.4
Bcf of gas and 22,527 barrels of oil, net to Tatham Offshore's 25% working
interest. Gas production from Viosca Knoll Block 817 is dedicated to the
Partnership for gathering through the Viosca Knoll system.
8
<PAGE> 11
Under the convertible production payment, the holders are entitled in the
aggregate to 25% of the proceeds from the production attributable to the Subject
Interest (after deducting all leasehold operating expenses, including platform
access and processing fees) until the holders have received the aggregate sum of
$16.0 million. At the option of the holders, the unpaid portion of the
production payment may be converted into Tatham Offshore common stock at any
time until September 2000. In March 1998, Mr. Tatham acquired one-half of this
convertible production payment. At June 30, 1998, the unpaid portion of the
convertible production payment obligation totaled $11.3 million.
West Delta Block 35. West Delta Block 35, a producing field located 10
miles off the coast of Louisiana in approximately 60 feet of water, was acquired
by Tatham Offshore in 1992 to drill for and produce remaining reserves in a
fault block of an abandoned field. In late 1992, Tatham Offshore farmed-out the
property and retained a 38% working interest in West Delta Block 35. The West
Delta Block 35 field commenced production in July 1993. From the inception of
production through June 30, 1998, the West Delta 35 field has produced 3.5 Bcf
of gas and 36,873 barrels of oil, net to Tatham Offshore's interest.
Ewing Bank Blocks 958, 959, 1002 and 1003. Tatham Development owns a 100%
working interest in Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday
Silence Project, a recently discovered and currently undeveloped field that is
comprised of 20,160 gross acres located approximately six miles south of Ewing
Bank Blocks 914 and 915 (discussed below) in water depths ranging from 1,400 to
1,600 feet. In July 1994, Tatham Offshore completed the drilling of an
exploratory well, the Ewing Bank 958 #1. Logs and sidewall cores indicate that
the Ewing Bank 958 #1 well contains approximately 380 feet of oil and gas pay.
The Ewing Bank 958 #1 well, which was drilled to a total measured depth of
17,600 feet, identified pay zones in the Pliocene aged formations lying
primarily at measured depths between 10,000 and 15,000 feet. Tatham Offshore
completed drilling a second well at Ewing Bank Block 1003 in September 1994 to
delineate the field. During October 1994, the Ewing Bank 1003 #1 delineation
well was flow-tested at a rate of approximately 8,700 barrels of oil and 5.4
MMcf of gas per day.
In June 1997, the United States Department of the Interior, Minerals
Management Service notified Tatham Offshore that its application for deepwater
royalty relief for the Sunday Silence Project had been approved under a federal
law enacted in November 1995. The royalty relief provides for the abatement of
federal royalty on the first 52.5 million barrels of oil equivalent produced
from the Sunday Silence Project.
In connection with the Merger and related transactions, Tatham Offshore
conveyed to DeepTech all of its outstanding shares of capital stock of Tatham
Development as discussed in " -- Recent Events".
Ewing Bank Blocks 914 and 915. Tatham Offshore owned a 100% working
interest in each of Ewing Bank Blocks 914 and 915, which are both located in a
water depth of approximately 1,000 feet. From the inception of production
through June 30, 1998, the Ewing Bank 914 #2 well produced a total of 1.2
million barrels of oil and condensate and 3.4 Bcf of gas. In May 1997, the Ewing
Bank 914 #2 well was shut-in as a result of a downhole mechanical problem and in
May 1998, Tatham Offshore completed abandonment procedures on the Ewing Bank 914
#2 and the Ewing Bank 915 #4 wells.
Ship Shoal Block 331. Ship Shoal Block 331 is located 75 miles off the
coast of Louisiana in approximately 370 feet of water. Tatham Offshore held a
100% working interest in the 5,278 gross acres lease. In December 1997, Tatham
Offshore assigned its interests and related abandonment obligations in Ship
Shoal Block 331 to a third party. Prior to the production problems, the Ship
Shoal Block 331 project produced 88 MMcf of gas and 41,875 barrels of oil.
Reversionary Interests. Tatham Offshore canceled 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 in connection with the Merger and related
transactions discussed in " -- Recent Events".
Ship Shoal Block 331 Platform. Tatham Offshore owned 100% of a multipurpose
platform located in Ship Shoal Block 331. The Ship Shoal 331 Platform is located
adjacent to the Partnership's platform at Ship Shoal Block 332 which serves as
the junction platform connecting two pipeline systems in which the Partnership
owns an approximate 25.7% interest. The Ship Shoal 331 Platform was conveyed to
the Partnership in connection with the Merger and related transactions discussed
in "-- Recent Events."
CUSTOMERS AND CONTRACTS
Ewing Bank Gathering Agreement. In 1992, the Partnership, DeepTech and
Tatham Offshore entered into the Ewing Bank Gathering Agreement (the "Ewing Bank
Agreement"). Pursuant to the Ewing Bank Agreement and the Master Gas Dedication
Agreement (as discussed below), all existing and future oil and gas production
from Tatham Offshore's leaseholds in the Ewing Bank project area is dedicated to
the Partnership for transportation.
9
<PAGE> 12
Master Gas Dedication Agreement. In December 1993, the Partnership and
Tatham Offshore entered into the Master Gas Dedication Agreement pursuant to
which Tatham Offshore dedicated to the Partnership transportation of all future
production, if any, from Tatham Offshore's Viosca Knoll Block 817, Garden Banks
Block 72, Garden Banks Block 117 and Ship Shoal Block 331 project areas and, in
certain cases, additional acreage contained in adjoining areas of mutual
interest. In exchange, the Partnership agreed to install certain pipeline
facilities necessary to transport production from these areas and to provide
transportation services with respect to such production.
Marketing Agreements. Tatham Offshore and Offshore Gas Marketing, Inc.
("Offshore Marketing"), a subsidiary of DeepTech, have entered into agreements
whereby Offshore Marketing has agreed to purchase all of the gas, oil and
condensate produced by Tatham Offshore. The agreement provides Offshore
Marketing fees equal to 2% of the sales value of crude oil and condensate and
$0.015 per dekatherm of natural gas for selling Tatham Offshore's production.
During the year ended June 30, 1998, Tatham Offshore's sales to Offshore
Marketing totaled $10.8 million.
All of the foregoing agreements were either terminated or assigned to
DeepTech or the Partnership in connection with the Merger and related
transactions.
OIL AND GAS RESERVES
Estimates of Tatham Offshore's oil and gas reserves as of June 30, 1998
have been made by the Company's reserve engineers. As of June 30, 1998, the
Company estimated that the aggregate of Tatham Offshore's proved developed
reserves totaled 62,300 barrels of oil and 7,684 MMcf of gas. Estimated proved
reserves totaled 41,900 barrels of oil and 5,989 MMcf of gas for Viosca Knoll
Block 817 and 20,400 barrels of oil and 1,695 MMcf of gas for West Delta Block
35.
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs and
future plugging and abandonment costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different sites, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of Tatham Offshore's reserves is based
upon volumetric calculations.
The estimated future net cash flows and the present value of estimated
future net cash flows discounted at 10% per annum, from the production and sale
of the proved developed reserves attributable to the Company's interest in oil
and gas properties as of June 30, 1998, as determined by the Company's reserve
engineers in accordance with the requirements of applicable accounting standards
before income taxes totaled $3.5 million and $3.4 million, respectively. In
preparing such estimates, the Company used prices of $12.28 per barrel of oil
and $1.76 per Mcf of gas as of June 30,1998. All of Tatham Offshore's reserves
at June 30, 1998 were classified as proved developed reserves.
In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the estimated discounted future net revenue from
estimated proved reserves are based on prices and costs at fiscal year end
unless future prices or costs are contractually determined at such date. Actual
future prices and costs may be materially higher or lower. Actual future net
revenue also will be affected by factors such as actual production, supply and
demand for oil and gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs.
In accordance with the methodology approved by the Commission, specific
assumptions were applied in the computation of the reserve evaluation estimates.
Under this methodology, future net cash flows are determined by reducing
estimated future gross cash flows to Tatham Offshore for oil and natural gas
sales by the estimated costs to develop and produce the underlying reserves,
including future capital expenditures, operating costs, transportation costs,
royalty and overriding royalty burdens, production payments and net profits
interest expense on certain of Tatham Offshore's properties.
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<PAGE> 13
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present value of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions of
future oil and natural gas prices and timing of production, which may prove to
be inaccurate. In addition, the calculations of estimated net revenue do not
take into account the effect of certain cash outlays, including, among other
things, general and administrative costs, interest expense and dividends. The
present value of future net cash flows shown above should not be construed as
the current market value as of June 30, 1998, or any prior date, of the
estimated oil and natural gas reserves attributable to Tatham Offshore's
properties.
PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth certain information regarding the production
volumes of, average unit prices received for and average production costs for
Tatham Offshore's sale of oil and gas for the periods indicated:
<TABLE>
<CAPTION>
Natural Gas (MMcf) Oil and Condensate (Mbbl)
Year Ended June 30, Year Ended June 30,
---------------------------- -------------------------
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net production................ 4,532 7,180 3,274 16 170 418
Average sales price........... $2.34 $2.36 $2.51 $16.24 $22.35 $18.83
Average production costs (1).. $1.13 $1.03 $1.50 $ 6.79 $ 6.19 $19.86
</TABLE>
--------------
(1) The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but
generally include demand and commodity charges under transportation
agreements, platform access and processing fees, maintenance and
repair, labor and utilities costs.
The relationship between Tatham Offshore's average prices and its average
production costs depicted by the table above is not necessarily indicative of
future results of operations expected by Tatham Offshore.
ACREAGE
The following table sets forth the developed and undeveloped oil and gas
acreage in which Tatham Offshore held an interest as of June 30, 1998.
Undeveloped acreage is considered to be those lease acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves. A substantial portion of Tatham Offshore's acreage is
undeveloped. Gross acres in the following table refer to the combined number of
acres in which a working interest is owned directly by Tatham Offshore. The
number of net acres is the sum of the fractional ownership of working interests
owned directly by Tatham Offshore in the gross acres.
<TABLE>
<CAPTION>
Gross Net
------ ------
<S> <C> <C>
Developed acreage....................... 3,912 1,482
Undeveloped acreage..................... 27,897 21,116
------ ------
Total acreage....................... 31,809 22,598
</TABLE>
OIL AND GAS DRILLING ACTIVITY
The following table sets forth the gross and net number of productive, dry
and total exploratory wells and development wells that Tatham Offshore drilled
in each of the years ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY
Natural Gas.............................. -- -- -- -- -- --
Oil...................................... -- -- -- -- -- --
Dry...................................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total............................ -- -- -- -- -- --
===== ===== ===== ===== ===== =====
DEVELOPMENT
Natural Gas.............................. -- -- 4.00 1.00 3.00 .75
Oil...................................... -- -- -- -- 1.00 .25
Dry...................................... -- -- -- -- 1.00 .25
----- ----- ----- ----- ----- -----
Total............................ -- -- 4.00 1.00 5.00 1.25
===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE> 14
The following table sets forth Tatham Offshore's ownership in producing
wells at June 30, 1998:
<TABLE>
<CAPTION>
GROSS NET
------ --------
<S> <C> <C>
Natural Gas 8 2.13
Oil 2 .63
------ --------
10 2.76
====== ========
</TABLE>
REGULATION
The oil and gas industry is extensively regulated by federal, state and
provincial authorities in the United States and Canada. Further, numerous
departments and agencies, both federal and state, have issued rules and
regulations binding on the oil and gas industry and its individual members, some
of which carry substantial penalties for the failure to comply. Legislation
affecting the oil and gas industry is under constant review and statutes are
constantly being adopted, expanded or amended. This regulatory burden increases
the oil and gas industry's cost of doing business.
In particular, the drilling industry is dependent on the demand for
services from the oil and gas exploration industry and, accordingly, is affected
by changing tax laws, price controls and other laws relating to the energy
business. The Company's business is affected generally by political developments
and by federal, state, provincial, local and foreign laws, rules and regulations
which may relate directly to the oil and gas industry. The adoption of laws,
rules and regulations, both domestic and foreign, which curtail exploration and
development drilling for oil and gas for economic, environmental or other policy
reasons may adversely affect the Company's operations by limiting available
drilling and production opportunities. The Company's foreign operations are
subject to political, economic, environmental and other uncertainties associated
with foreign operations, as well as the additional risks of fluctuating currency
values and exchange controls. Governments may from time to time suspend or
curtail drilling operations or leasing activities when such operations are
considered to be detrimental to the environment or to jeopardize public safety.
ENVIRONMENTAL
General. The Company's operations are subject to extensive federal, state
and local statutory and regulatory requirements relating to environmental
affairs, health and safety, waste management and chemical products. In recent
years, these requirements have become increasingly stringent and in certain
circumstances, they impose "strict liability" on a company, rendering it liable
for environmental damage without regard to negligence or fault on the part of
such company. To the Company's knowledge, its operations are in substantial
compliance, and are expected to continue to comply in all material respects,
with applicable environmental laws, regulations and ordinances.
It is possible, however, that future developments, such as stricter
environmental laws, regulations or enforcement policies could affect the
handling, manufacture, use, emission or disposal of substances or wastes by the
Company. In addition, some risk of environmental costs and liabilities is
inherent in the Company's operations and products as it is with other companies
engaged in similar or related businesses, and there can be no assurance that
material costs and liabilities, including substantial fines and criminal
sanctions for violation of environmental laws and regulations, will not be
incurred by the Company. Furthermore, the Company will likely be required to
increase its expenditures during the next several years to comply with higher
industry and regulatory safety standards. However, such expenditures cannot be
accurately estimated at this time.
Solid Waste. The Company's operations may generate or transport both
hazardous and nonhazardous solid wastes that are subject to the requirements of
the federal Resource Conservation and Recovery Act ("RCRA"), as amended, 42
U.S.C. Section 6901 et. seq., and its regulations, and comparable state statutes
and regulations. Further, it is possible that some wastes that are currently
classified as nonhazardous, via exemption or otherwise, perhaps including wastes
currently generated during exploration, development and production operations
may, in the future be designated as "hazardous wastes," which are subject to
more rigorous and costly treatment, storage, transportation and disposal
requirements. Such changes in the regulations may result in additional
expenditures or operating expenses by the Company. As recently as August 8,
1998, the Environmental Protection Agency ("EPA") added four petroleum refining
wastes to the list of RCRA hazardous wastes. While the full impact of the rule
has yet to be determined, the rule may, as of February 1999, impose increased
expenditures and operating expenses on the Company, which may take on increased
obligations relating to the treatment, storage, transportation and disposal of
certain petroleum refining wastes that previously were not regulated as
hazardous wastes.
Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Sub-Section 9601 et. seq.,
and comparable state statutes, also known as "Superfund" laws, impose liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that cause or contribute to the
12
<PAGE> 15
release or threatened release of a "hazardous substance" into the environment.
These persons include the current owner or operator of a site, the past owner or
operator of a site, and companies that transport, dispose of or arrange for the
disposal of the hazardous substances found at the site. CERCLA also authorizes
the EPA or state agency and, in some cases third parties, to take actions in
response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur. Despite
the "petroleum exclusion" of Section 101(14) that currently encompasses natural
gas, the Company may nonetheless generate or transport "hazardous substances"
within the meaning of CERCLA, or comparable state statutes, in the course of its
ordinary operations. In addition, certain petroleum refining wastes that
previously were not regulated as hazardous wastes may now fall within the
definition of CERCLA hazardous substance. Thus, the Company may be responsible
under CERCLA or the state equivalents for all or part of the costs required to
clean up sites where a release of a hazardous substance has occurred.
Air. Tatham Offshore's operations may be subject to the Clean Air Act
("CAA"), 42 U.S.C. Section 7401-7642, et. seq., and comparable state statutes.
The 1990 CAA amendments and accompanying regulations, state or federal, may
impose certain pollution control requirements with respect to air emissions from
operations, particularly in instances where a company constructs a new facility
or modifies an existing facility. The Company may also be required to incur
certain capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emission-related issues. However, the Company
does not believe its operations will be materially adversely affected by any
such requirements.
Water. The Federal Water Pollution Control Act ("FWPCA"), or Clean Water
Act, 33 U.S.C. Section 1311 et. seq., imposes strict controls against the
unauthorized discharge of produced waters and other oil and gas wastes into
navigable waters. The FWPCA provides for civil and criminal penalties for any
unauthorized discharges of oil and other hazardous substances in reportable
quantities and, along with the Oil Pollution Act of 1990 ("OPA"), 33 U.S.C.
Sections 2701-2761, imposes substantial potential liability for the costs of
removal, remediation and damages. Similarly, the OPA imposes liability for the
discharge of oil into or upon navigable waters or adjoining shorelines. Among
other things, the OPA raises liability limits, narrows defenses to liability and
provides more instances in which a responsible party is subject to unlimited
liability. One provision of the OPA requires that offshore facilities establish
and maintain evidence of financial responsibility of $150 million. State laws
for the control of water pollution also provide varying civil and criminal
penalties and liabilities in the case of an unauthorized discharge of petroleum,
its derivatives or other hazardous substances into state waters. Further, the
Coastal Zone Management Act ("CZMA"), 16 U.S.C. Sections 1451-1464,
authorizes state implementation and development of programs containing
management measures for the control of nonpoint source pollution to restore and
protect coastal waters. State and federal wetlands presentation programs may
also impose certain restrictions on dredge and fill and development activities.
Endangered Species. The Endangered Species Act ("ESA"), 7 U.S.C. Section
136, seeks to ensure that activities do not jeopardize endangered or threatened
plant and animal species, nor destroy or modify the critical habitat of such
species. Under the ESA, certain exploration and production operations, as well
as actions by federal agencies or funded by federal agencies, must not
significantly impair or jeopardize the species or its habitat. The ESA provides
for criminal penalties for willful violations of the Act. Other statutes which
provide protection to animal and plant species and thus may apply to the
Company's operations are the Marine Mammal Protection Act of 1972, 16 U.S.C.
Sections 1361 to 1421h, the Marine Protection and Sanctuaries Act, the Fish
and Wildlife Coordination Act, the Fishery Conservation and Management Act and
the Migratory Bird Treaty Act. The National Historic Preservation Act, 16 U.S.C.
Section 470, may impose similar requirements.
Communication of Hazards. The Occupational Safety and Health Act ("OSHA"),
as amended, 29 U.S.C. Section 651 et. seq., the Emergency Planning and Community
Right-to-Know Act ("EPCRA"), as amended, 42 U.S.C. Section 11001 et. seq., and
comparable state statutes require the Company to organize and disseminate
information to employees, state and local organizations, and the public about
the hazardous materials used in its operations and its emergency planning.
OPERATIONAL HAZARDS AND INSURANCE
Tatham Offshore's exploration, production and development and drilling
operations are subject to the usual hazards incident to the drilling and
production of natural gas and crude oil, such as blowouts, cratering,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
pollution, releases of toxic gas and other environmental hazards and risks.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damages and
suspension of operations. In addition, a pipeline may experience damage as a
result of an accident or other natural disaster. To mitigate the impact of
repair costs associated with such an accident or disaster, the Company maintains
insurance of various types that it considers to be adequate to cover its
operations. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. The Company's insurance does not cover every
potential risk associated with the drilling and production of oil and natural
gas, but is consistent with insurance coverage generally available to the
industry. The Company's insurance policies do not provide coverage for losses or
liabilities relating to pollution, except for sudden and accidental occurrences.
13
<PAGE> 16
The occurrence of a significant event not fully insured or indemnified
against, or the failure of a party to meet its indemnification obligations,
could materially and adversely affect the Company's operations and financial
condition. The Company believes that it is adequately insured for public
liability and property damage to others with respect to its operation. However,
no assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
INTERNATIONAL OPERATIONS AND RISKS
The Company conducts some of its operations outside the United States.
Risks associated with operating in international markets include foreign
exchange restrictions and currency fluctuations, foreign taxation, changing
political conditions and foreign and domestic monetary policies, expropriation,
nationalization, nullification, modifications or renegotiation of contracts, war
and civil disturbances or other risks that may limit or disrupt markets. The
ability of the Company to compete in the international markets may also be
adversely affected by foreign government regulations that favor or require the
awarding of such contracts to local contractors, or by regulations requiring
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. No predictions can be made as to what foreign
government regulations may be enacted in the future that could be applicable to
the Company's operations.
EMPLOYEES
As of August 14, 1998, Tatham Offshore had fifteen employees. Prior to such
date, all individuals, including executive officers, necessary to meet the
financial, geological, engineering and other technical and administrative
requirements of the Company were provided by DeepTech pursuant to a management
agreement with Tatham Offshore (the "Management Agreement"), or affiliates of
DeepTech pursuant to service contracts. The Management Agreement, as amended,
provided for an annual management fee of 26% of DeepTech's overhead expenses.
For the year ended June 30, 1998, DeepTech charged Tatham Offshore $4.4 million
pursuant to such Management Agreement. The Management Agreement was terminated
on August 14, 1998. See " -- Recent Events".
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This Annual Report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations, (v) the production rates and reserve estimates associated
with the Company's producing oil and gas properties and (vi) significant changes
from expectations of capital expenditures and operating expenses and
unanticipated project delays. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
CERTAIN DEFINITIONS
The following are abbreviations and words commonly used in the oil and gas
industry and in this Annual Report.
"bbl" or "barrel" means barrels, a standard measure of volume for oil,
condensate and natural gas liquids which equals 42 U.S. gallons.
"Bcf" means billion cubic feet (or thousand MMcf).
"development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"exploratory well" means a well drilled to find commercially productive
hydrocarbons in an unproved area or to extend significantly a known oil or
natural gas reservoir.
14
<PAGE> 17
"farm-in" or "farm-out" refers to an agreement whereunder the owner of a
working interest in an oil and gas lease delivers the contractual right to earn
the working interest or a portion thereof to another party who desires to drill
on the leased acreage. Generally, the assignee is required to drill one or more
wells in order to earn a working interest in the acreage. The assignor usually
retains a royalty or a working interest after payout in the lease. The assignor
is said to have "farmed-out" the acreage. The assignee is said to have
"farmed-in" the acreage.
"gross" oil and natural gas wells or gross acres are the total number of
wells or acres, respectively, in which the Company has an interest, without
regard to the size of that interest.
"Mbbl" means thousand barrels.
"Mcf" means thousand cubic feet, a standard measure of volume for gas.
"MMbtu" means million British Thermal Units, a unit of heat measure with
one btu being the amount of heat needed to raise the temperature of one pound of
water one degree Fahrenheit.
"MMcf" means million cubic feet.
"net" oil and natural gas wells or "net" acres or "net" production or
reserves are the total gross number of wells or acres, respectively, in which
the Company has an interest multiplied times the Company's working interest in
such wells or acres.
"OCS" means Outer Continental Shelf, an area offshore the United States
over which the federal government has jurisdiction, which extends from the end
of state territorial waters (three to twelve nautical miles offshore, depending
on the state) to 200 nautical miles from shore. The term OCS as used herein
includes not only those areas on the Shelf itself, but those areas in the
flextrend and the deepwater, to a limit of 200 nautical miles, as well.
"royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually carved from the leasehold interest
pursuant to an assignment to a third party reserved by an owner of the leasehold
in connection with a transfer of the leasehold to a subsequent owner.
"working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.
In this Annual Report, natural gas volumes are stated at the legal pressure
base of the state or area in which the reserves are located and at 60 degrees
Fahrenheit.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings which have arisen in
the ordinary course of business. Management believes that the outcome of such
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 28, 1998, DeepTech, the holder of a majority of the Company's
outstanding voting stock at the time, executed a written consent approving the
sale of substantially all of the Company's oil and gas assets in the Gulf and an
amendment to the Company's Certificate of Incorporation. The amendment was
approved to reflect the fact that DeepTech will no longer own any shares of the
Company's stock. Prior to the amendment, DeepTech was excluded from the category
of "Related Persons," as that term is defined in the Certificate's Article II.
The amendment removed DeepTech from the list of persons or entities not to be
included in the definition of "Related Persons." Following the amendment, if
DeepTech were to acquire 10% or more of the Company's voting stock, any merger
or consolidation with DeepTech would require 75% of the outstanding voting stock
to approve such a combination.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of August 31, 1998, there were approximately 162 holders of record of
the common stock. The following table sets forth the high and low sales prices
for the common stock as quoted on The Nasdaq National Market for the periods
indicated. In addition, the table is adjusted for the one for ten reverse common
stock split Tatham Offshore effected on November 24, 1997.
<TABLE>
<CAPTION>
Common Stock Price Range
------------------------
High Low
<S> <C> <C>
YEAR ENDED JUNE 30, 1997
First Quarter ..................................... 13 3/4 7 1/2
Second Quarter .................................... 9 3/8 4 3/8
Third Quarter ..................................... 9 3/8 5
Fourth Quarter .................................... 7 1/2 5
YEAR ENDED JUNE 30, 1998
First Quarter ..................................... 6 7/8 2 13/16
Second Quarter .................................... 5 5/8 2 1/2
Third Quarter ..................................... 4 7/8 3
Fourth Quarter .................................... 4 1/4 3
PERIOD FROM JULY 1, 1998 THROUGH AUGUST 31, 1998 .... 3 3/4 2 5/8
</TABLE>
Tatham Offshore has never declared or paid cash dividends on its common or
preferred stock. The Company intends to retain any future earnings to fund
growth and does not anticipate paying any cash dividends on its stock in the
foreseeable future. The payment of future dividends, if any, will be determined
by the Board of Directors in light of conditions then-existing, including the
Company's operating results, financial condition, capital requirements, general
business conditions and other factors the Board of Directors deems relevant. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
The following table summarizes the Company's outstanding equity at June 30,
1998:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Accrued Exchange
Equity Outstanding Preference Rate Dividends Features Symbol
------ ----------- ---------------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Senior Preferred Stock (a) 7,500 (a) $1,000 per share 9% $ 1,631,000 (a) N/A
Series A Preferred Stock (b) 17,557,648 (g) $ 1.50 per share 12% $ 6,321,000 (c)(d) TOFFL (e)
Series B Preferred Stock 74,379 $ 1.00 per share 8% $ 10,000 (c)(d) TOFFO (e)
Series C Preferred Stock (c) 321,205 $ 0.50 per share 4% $ 10,000 (c)(d) TOFFN (e)
Common Stock (b) 30,001,026 (g) N/A -- $ -- -- TOFF (f)
</TABLE>
- ----------------------
(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible
Preferred Stock and replaced this stock with Series B 9% Senior Convertible
Preferred Stock ("Senior Preferred Stock"). In connection with the
Redemption Agreement, the Partnership returned to Tatham Offshore the
Senior Preferred Stock on August 14, 1998 in exchange for certain assets.
Tatham Offshore then eliminated the Senior Preferred Stock. Each share of
the Senior Preferred Stock was senior to all other classes of Tatham
Offshore preferred and common stock in the case of liquidation, dissolution
or winding up of Tatham Offshore. The Partnership held all outstanding
shares. The Senior Preferred Stock was convertible into Series A Preferred
Stock using a conversion ratio equal to (i) the liquidation preference
amount plus accumulated unpaid dividends divided by (ii) $0.9375.
(b) As of June 30, 1998, DeepTech held 28,073,450 shares and 4,670,957 shares
of outstanding common stock and Series A Preferred Stock, respectively. On
August 14, 1998, DeepTech divested itself of this equity ownership through
the Rights Offering.
(c) 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 common stock at $6.53
per share. The Exchange Warrants expire on July 1, 1999. Alternatively, at
any time, the holder of any shares may convert the liquidation value and
unpaid dividends into shares of common stock at $6.53 per share.
(d) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(e) The preferred stock is traded on the OTC Bulletin Board Service.
(f) The common stock is traded on The Nasdaq Stock Market's National Market.
(g) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase by
Tatham Offshore were contributed by DeepTech to Tatham Offshore.
16
<PAGE> 19
RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to sales and other issuances by Tatham
Offshore within the past three fiscal years of Tatham Offshore securities, the
sales or issuances of which were not registered pursuant to the Securities Act
of 1933 (the "Securities Act").
In September 1995, Tatham Offshore issued two industry partners warrants to
acquire an aggregate of up to 2,000,000 shares of its common stock at an
exercise price of $8.00 per share as partial consideration for the acquisition
of a 25% working interest in Viosca Knoll Block 817 and an approximate 12.5%
working interest in the remainder of the Viosca Knoll Block 817 unit. The
warrants are exercisable for a period of five years through conversion of the
unpaid balance of a $16 million production payment payable issued in connection
with the acquisition of such working interests which is payable out of 25% of
the net cash flow from the working interests so acquired. Such transaction was
completed without registration under the Securities Act in reliance on the
exemption provided by Section 4(2) of the Securities Act.
In November 1995 and May 1996, the Company issued 12,094 shares and 12,423
shares, respectively, of its common stock in connection with the mandatory
arrangement of certain senior executives of DeepTech and received a $360,000
credit against its management fees payable to DeepTech. Such transactions were
completed without registration under the Securities Act in reliance on the
exemption provided by Section 4(2) of the Securities Act.
In June 1996, in connection with its Non-Employee Director Compensation
Plan, Tatham Offshore issued its common stock to the following persons in the
following amounts: 6,378 shares to James G. Niven, 1,820 shares to E. Garrett
Bewkes, 5,678 shares to Humbert B. Powell, 6,378 shares to Philip G. Clarke and
5,458 shares to Clyde E. Nath. Such transactions were completed without
registration under the Securities Act in reliance on the exemption provided by
Section 4(2) of the Securities Act.
In February 1996, Tatham Offshore issued 7,500 shares of its 9% Senior
Convertible Preferred Stock to Leviathan Gas Pipeline Partners, L.P. as partial
consideration for the satisfaction of certain demand charge obligations. Such
transaction was completed without registration under the Securities Act in
reliance on the exemptions provided by Section 4(2) of the Securities Act. In
March 1998, Tatham Offshore eliminated its 9% Senior Convertible Preferred Stock
and replaced this stock with Series B 9% Senior Convertible Preferred Stock.
Such transaction was completed without registration under the Securities Act in
reliance on the exemption provided by Section 4(2) of the Securities Act.
Tatham Offshore, Inc. issued a total of 90,000 shares of its common stock
to Offshore Drilling Consultants, Inc. from September 1997 through March 1998 as
compensation for consulting services related to its Atlantic Canada project.
Prior to January 1998, Offshore Drilling Consultants, Inc. was known as F-W Oil
Interests, Inc. Such transactions were completed without registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of the
Securities Act.
In December 1997, Tatham Offshore issued 26,666,667 shares of its common
stock to DeepTech in exchange for $60 million of Subordinated Convertible
Promissory Notes held by DeepTech. Such transaction was completed without
registration under the Securities Act in reliance on the exemption provided by
Section 4(2) of the Securities Act.
17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company for each of the
three years ended June 30, 1998, 1997 and 1996 and at June 30, 1998 and 1997
have been derived from the consolidated financial statements and notes thereto
which are included elsewhere in this Annual Report. The selected financial data
at and for each of the two years ended June 30, 1995 and 1994 and at June 30,
1996 have been derived from the historical financial statements of the Company.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and the notes thereto which
are included elsewhere in this Annual Report.
The following selected financial data is included in this Annual Report due
to the requirements of the Securities Exchange Act. With the exception of the
North Atlantic Partners pipeline project, all of the historical business and
operations of Tatham Offshore has been transferred to DeepTech and the
Partnership who has also assumed all future liability related to these assets
and operations as part of the Reorganization Transaction. Such information,
although important for an understanding of Tatham Offshore's historical
financial results and business, is of little relevance to the Company's business
and operations on a going forward basis.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Oil and gas sales ..................................... $ 10,868 $ 20,723 $ 16,070 $ 8,054 $ 12,146
Drilling services ..................................... 672 -- -- -- --
-------- -------- -------- -------- --------
Total revenue ................................ 11,540 20,723 16,070 8,054 12,146
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production and operating expenses ..................... 5,666 8,465 13,203 13,745 8,509
Exploration expenses .................................. 149 542 637 11,459 3,067
Depreciation, depletion and amortization .............. 3,047 5,364 1,758 1,210 983
Impairment, abandonment and other ..................... -- 41,674 8,000 -- --
Management fee ........................................ 4,375 3,279 4,436 4,967 3,377
General and administrative expenses ................... 1,371 1,567 1,839 2,145 1,496
-------- -------- -------- -------- --------
Total operating costs ........................ 14,608 60,891 29,873 33,526 17,432
-------- -------- -------- -------- --------
Operating loss ........................................ (3,068) (40,168) (13,803) (25,472) (5,286)
Gain on sale of oil and gas properties ................ -- -- 22,641 1,496 --
Interest income ....................................... 223 571 113 836 431
Interest and other financing costs .................... (1,966) (8,374) (8,161) (11,631) (3,935)
-------- -------- -------- -------- --------
Net (loss) income ..................................... $ (4,811) $(47,971) $ 790 $(34,771) $ (8,790)
======== ======== ======== ======== ========
Net (loss) income available to common stockholders .... $ (8,581) $(51,891) $ 509 $(34,771) $ (9,925)
======== ======== ======== ======== ========
Basic net (loss) income per common share .............. $ (0.50) $ (19.47) $ 0.20 $ (13.91) $ (4.50)
======== ======== ======== ======== ========
Diluted net (loss) income per common share ............ $ (0.50) $ (19.47) $ 0.09 $ (13.91) $ (4.50)
======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Semisubmersible drilling rigs, net . $129,260 $ -- $ -- $ -- $ --
Oil and gas properties, net . . . . . 5,724 30,752 64,900 70,829 46,453
Total assets . . . . . . . . . . . . 153,418 42,485 97,130 94,720 99,291
Notes payable . . . . . . . . . . . 64,156 -- -- -- --
Long term debt . . . . . . . . . . . -- 60,000 60,000 60,000 60,000
Stockholders' equity (deficit) . . . 75,410 (27,696) 18,862 (20,020) 14,751
</TABLE>
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto located elsewhere in
this Annual Report and the information set forth under the heading "Selected
Financial Data." This discussion is intended to assist in the understanding of
Tatham Offshore's financial position and results of operations for each of the
years ended June 30, 1998, 1997 and 1996. Effective June 25, 1998, Tatham
Offshore acquired DeepFlex which owns the Pincay and the Shoemaker. On August
14, 1998, Tatham Offshore transferred all of its remaining oil and gas
properties to the Partnership in connection with the Merger and related
transactions.
The following discussion of results of operations is included in this
Annual Report due to the requirements of the Securities Act. With the exception
of the North Atlantic Partners pipeline project, all of the historical business
and operations of Tatham Offshore has been transferred to DeepTech and the
Partnership who has also assumed all future liability related to these assets
and operations as part of the Reorganization Transaction. Such information,
although important for an understanding of Tatham Offshore's historical
financial results and business, is of little relevance to the Company's business
and operations on a going forward basis.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997
Revenue from oil and gas sales totaled $10.9 million for the year ended
June 30, 1998 as compared with $20.7 million for the year ended June 30, 1997.
During the year ended June 30, 1998, Tatham Offshore sold 4,532 MMcf of gas and
16,295 barrels of oil at average prices of $2.34 per Mcf and $16.24 per barrel,
respectively. During the same period in 1997, Tatham Offshore sold 7,180 MMcf of
gas and 170,000 barrels of oil at average prices of $2.36 per Mcf and $22.35 per
barrel, respectively. The decrease in oil and gas sales was primarily a result
of the cessation of oil and gas production in May 1997 from Tatham Offshore's
Ewing Bank 914 #2 well, decreased gas production from Tatham Offshore's Viosca
Knoll Block 817 lease and substantially lower realized oil prices.
Drilling services totaled $0.7 million for the year ended June 30, 1998 and
represented revenue from contract drilling services provided by the Rigs from
June 25, 1998 through June 30, 1998.
Production and operating expenses for the year ended June 30, 1998 totaled
$5.7 million as compared with $8.5 million for the same period in 1997. The
decrease of $2.8 million was primarily comprised of a decrease of $3.0 million
in transportation, production, operating and workover expenses related to the
cessation of oil and gas production in May 1997 from Tatham Offshore's Ewing
Bank 914 #2 well, a decrease of $0.2 million related to a production payment
and an increase of $0.4 million related to the operations of the Rigs.
Exploration expenses for the year ended June 30, 1998 totaled $0.1 million
as compared with $0.5 million for the year ended June 30, 1997. Exploration
expenses primarily included delay rentals and minimum royalties.
Depreciation, depletion and amortization totaled $3.0 million for the year
ended June 30, 1998 as compared with $5.4 million for the year ended June 30,
1997. The decrease of $2.4 million is primarily a result of a $0.8 million net
reduction in abandonment expense as a result of Tatham Offshore assigning its
working interest in Ship Shoal Block 331 to a third party for the assumption of
the abandonment obligations, lower depletion at Viosca Knoll Block 817 and West
Delta Block 35 of $1.3 million, lower abandonment accruals related to West Delta
Block 35 and Viosca Knoll Blocks 817 and 818 of $0.4 million, and offset by $0.1
million related to the Rigs.
Impairment, abandonment and other for the year ended June 30, 1997 totaled
$41.7 million. Impairment, abandonment and other for the year ended June 30,
1997 consisted of a charge to reserve Tatham Offshore's investment in its Ewing
Bank 914 #2 well, certain adjacent leases and Ship Shoal Block 331 property, to
accrue Tatham Offshore's abandonment obligations associated with the Ewing Bank
914 #2 and 915 #4 wells and the Ship Shoal Block 331 property and to expense
Tatham Offshore's net prepaid demand charges related to obligations under
certain transportation agreements. See "Note 4 -- Oil and Gas Properties" on
pages F-12 through F-15. No impairment abandonment and other charges were
recorded during the year ended June 30, 1998.
General and administrative expenses, including the management fee allocated
from DeepTech, for the year ended June 30, 1998 totaled $5.7 million as compared
with $4.8 million for the same period in 1997. The increase reflected an
increase in staff and overhead expenses, attributable to the Canadian
activities, allocated to Tatham
20
<PAGE> 23
Offshore under the Management Agreement of $1.1 million offset by a decrease in
direct general and administrative expenses of $0.2 million. Tatham Offshore
amended its Management Agreement effective July 1, 1997 to provide for a 26%
overhead allocation as compared to a 24% overhead allocation during the year
ended June 30, 1997. Effective August 14, 1998, the Management Agreement was
terminated and the Company directly employed its management, operational and
financial staff.
Operating loss for the year ended June 30, 1998 was $3.1 million as
compared with an operating loss of $40.2 million for the year ended June 30,
1997. The change was due to the items discussed above.
Interest income totaled $0.2 million for the year ended June 30, 1998 as
compared with $0.6 million for the same period in 1997 and included interest
income from available cash.
Interest expense for the year ended June 30, 1998 totaled $1.9 million as
compared with $8.4 million for the year ended June 30, 1997 and primarily
related to interest under the $60 million principal amount of Subordinated
Convertible Promissory Notes (the "Subordinated Notes") held by DeepTech, which
were converted into shares of Tatham Offshore common stock in December 1997. See
"-- Liquidity Outlook."
After taking into account $3.8 million of preferred stock dividends in
arrears, the Company's net loss available to common stockholders for the year
ended June 30, 1998 was $8.6 million, or $0.50 per share, as compared with net
loss available to common stockholders for the year ended June 30, 1997 of $51.9
million, or $19.47 per share, after taking into account $3.9 million of
preferred stock dividends in arrears. The weighted average shares outstanding
for the purposes of calculating loss per share for the years ended June 30, 1998
and 1997 were 17,299,739 shares and 2,665,084 shares, respectively.
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
Revenue from oil and gas sales totaled $20.7 million for the year ended
June 30, 1997 as compared with $16.1 million for the year ended June 30, 1996.
During the year ended June 30, 1997, the Company sold 7,180 MMcf of gas and
170,000 barrels of oil and condensate at average prices of $2.36 per Mcf and
$22.35 per barrel, respectively. During the year ended June 30, 1996, the
Company sold 3,274 MMcf of gas and 418,000 barrels of oil and condensate at
average prices of $2.51 per Mcf and $18.83 per barrel, respectively. The
increase is primarily due to increased production from the Viosca Knoll Block
817 project and higher oil prices partially offset by lower oil and gas
production from the Ewing Bank 914 #2 well and lower gas prices.
Production and operating expenses for the year ended June 30, 1997 totaled
$8.5 million as compared with $13.2 million for the year ended June 30, 1996.
The decrease of $4.7 million is comprised of (i) a decrease of $4.0 million in
the cost of transportation services primarily related to lower oil production
and the restructuring of certain transportation agreements with the Partnership,
(ii) a decrease of $2.0 million in workover and repair expenses, (iii) a
decrease of $0.2 million in operating costs primarily related to the Viosca
Knoll Block 817 project and (iv) an increase of $1.5 million related to a
production payment. During the year ended June 30, 1996, the Company incurred
$2.3 million of workover and repair expenses related to the Ewing Bank 914 #2
well.
Exploration expenses for the year ended June 30, 1997 totaled $0.5 million
as compared with $0.6 million for the year ended June 30, 1996. Exploration
expenses for both periods included delay rentals, minimum royalties and costs
incurred under an amended technology services agreement with an affiliate of
DeepTech.
Depreciation, depletion and amortization totaled $5.4 million for the year
ended June 30, 1997 as compared with $1.8 million for the year ended June 30,
1996. The increase is primarily attributable to the initiation of production
from the first well at Viosca Knoll Block 817 in December 1995 and from an
additional seven wells during calendar 1996.
Impairment, abandonment and other for the year ended June 30, 1997 totaled
$41.7 million as compared with $8.0 million for the year ended June 30, 1996.
Impairment, abandonment and other for the year ended June 30, 1997 consisted of
a charge to reserve the Company's investment in its Ewing Bank 914 #2 well,
certain adjacent leases and Ship Shoal Block 331 property, to fully accrue the
Company's abandonment obligations associated with the Ewing Bank 914 #2 and 915
#4 wells and the Ship Shoal Block 331 property and to expense the Company's net
prepaid demand charges related to obligations under certain transportation
agreements. See "Notes to Consolidated Financial Statements -- Note 4 --
Property and Equipment -- Oil and Gas Properties -- Impairment, Abandonment and
Other" located on page F-14 through F-15. In connection with the Company's
assessment of its Ship Shoal Block 331 property and its decision to seek a sale
of all or a
21
<PAGE> 24
portion of such property, or a joint venture partner, the Company reduced its
investment in its Ship Shoal Block 331 property by $8.0 million during the year
ended June 30, 1996.
General and administrative expenses, including the management fee allocated
from DeepTech, for the year ended June 30, 1997 totaled $4.8 million as compared
with $6.3 million for the year ended June 30, 1996. The decrease of $1.5 million
reflected a decrease in direct general and administrative expenses of $0.3
million and a decrease in staff and overhead expenses allocated to the Company
under its Management Agreement with DeepTech of $1.2 million. As a result of
DeepTech's reduction of services provided to Tatham Offshore, the Company
amended its Management Agreement effective July 1, 1996 to provide for a 24%
overhead allocation as compared to an effective 31.6% overhead allocation during
the year ended June 30, 1996.
Operating loss for the year ended June 30, 1997 totaled $40.2 million as
compared with an operating loss of $13.8 million for the year ended June 30,
1996. The change in operating loss was due to the items discussed above.
During the year ended June 30, 1996, the Company recognized a $22.6 million
gain related to the sale of its working interest in certain properties to the
Partnership as a result of the Company waiving its options to prepay the
then-existing Payout Amount and receive a reassignment of its working interests.
Interest expense, net of interest income, for the year ended June 30, 1997
totaled $7.8 million as compared with $8.0 million for the year ended June 30,
1996. For the years ended June 30, 1997 and 1996, interest expense of $7.1
million was attributable to interest payable to DeepTech under the Subordinated
Notes.
After considering $3.9 million in preferred dividends in arrears, Tatham
Offshore's net loss available to common stockholders for the year ended June 30,
1997 was $51.9 million as compared with net income available to common
stockholders for the year ended June 30, 1996 of $0.5 million after considering
$0.3 million in preferred dividends in arrears.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's exploration and production activities have
generated and utilized substantially all of the operating cash flow.
Prospectively, the Company's contract drilling activities are expected to
generate and utilize substantially all of the operating cash flow, at least
during the near term. See "-- Liquidity Outlook."
Sources of Cash. Historically, the Company's cash from operations was
generated by the sale of the Company's interest in oil and gas production.
Prospectively, the Company expects to be dependent upon cash on hand and cash
generated from its drilling services operations to pay its operating expenses,
service its debt and satisfy its other obligations. However, as described below,
the Company will need to raise substantial capital (equity, debt or both) or
enter into other arrangements to allow the Company to implement its business
strategy in Atlantic Canada. If either of the Rigs is not employed for any
extended period of time, the absence of associated revenues may have a material
adverse effect on the Company, including limiting the Company's ability to raise
capital from external sources.
Cash from operations during the year ended June 30, 1998 was derived
primarily from production from Tatham Offshore's working interest in Viosca
Knoll Block 817. Tatham Offshore's 25% working interest in Viosca Knoll Block
817 was subject to a production payment equal to 25% of the net operating cash
flow from such working interest. As of August 14, 1998, the Company had (i)
disposed of all of its oil and gas operations, (ii) acquired and commenced
operating the Rigs and (iii) begun aggressively implementing its Canada
strategy.
In February 1998, DeepFlex exchanged its 1,016,957 shares of 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. DeepFlex conveyed the
406,783 shares of common stock to DeepTech in March 1998.
Uses of Cash. Prospectively, the Company expects that its primary uses of
cash will consist of (i) scheduled interest payments on the Credit Facility,
(ii) amounts necessary to fund capital expenditures related to the Rigs that
22
<PAGE> 25
are not funded by customers, and (iii) amounts necessary to pay general and
administrative and other operational expenses. In addition, the Company will use
available cash to fund the pursuit of its business strategy in Atlantic Canada.
Such uses will include funding the North Atlantic Partners pipeline project, the
Planned Rig, the remainder of the Company's Atlantic Canada strategy and any of
the Company's other potential capital expenditures.
During the year ended June 30, 1998, the Company's primary uses of cash
consisted 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 its Atlantic Canada
projects.
North Atlantic Partners is the sponsor of a proposal to construct a natural
gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New
Hampshire. As of June 30, 1998, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Partners, has incurred $11.5 million in
developmental costs in connection with such project and related infrastructure
projects. The Company anticipates that the ultimate capital costs of the
project, if approved, could be in excess of several billion dollars. See Items 1
and 2. "Business and Properties -- Atlantic Canada Strategy."
In order to improve liquidity and partially address its capital
requirements during the year ended June 30, 1998, Tatham Offshore entered into
an option agreement to restructure the Subordinated Notes held by DeepTech. On
December 17, 1997, DeepTech converted the Subordinated Notes into 26,666,667
shares of 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 then existing outstanding debt.
Liquidity Outlook. The Company intends to fund its immediate cash
requirements with cash on hand and cash from its drilling services operations.
At June 30, 1998, the Company had $2.7 million of cash and cash equivalents.
On September 30, 1996, a subsidiary of DeepFlex entered into a $65 million
senior secured credit facility with a syndicate of lenders (as amended, the
"Credit Facility"). Proceeds from the Credit Facility were used to acquire the
Shoemaker, to fund significant upgrades to the Shoemaker, and to retire $30.3
million of other rig related indebtedness. In April 1997, the Credit Facility
was amended to provide for an additional $12 million to fund the remaining
refurbishments and upgrades to the Shoemaker. The Credit Facility (i) matures on
March 31, 1999, (ii) bears interest at the prime rate plus 3% per annum (11.5%
at June 30, 1998), payable quarterly, (iii) is secured by the two
semisubmersible drilling rigs and all of the related assets, (iv) required a
quarterly principal payment of excess flow as defined in the credit agreement
with a minimum principal amortization of $250,000 per quarter beginning on
December 31, 1996 and ending on September 30, 1998, (v) provided the Lenders
warrants to acquire a 5% minority equity interest in the subsidiaries which own
the Rigs, and (vi) is subject to customary conditions and covenants, including
the maintenance of a minimum level of working capital. As of June 30, 1998,
amounts outstanding under the Credit Facility totaled $59.2 million. Management
believes it will be able to refinance the Credit Facility upon its maturity.
In connection with the Merger, the Company entered into a short term
financing arrangement with Tatham Brothers, LLC ("Tatham Brothers") to provide
for funds to (i) satisfy approximately $1.6 million of cash requirements with
respect to the Redemption Agreement with the Partnership, (ii) pay $1.4 million
to DeepTech in connection with the Management Agreement between Tatham Offshore
and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect
to obligations under the Rights Offering, (iv) fund a $7.5 million letter of
credit for potential tax liabilities, (v) refinance $5.1 million in existing
loans to DeepFlex and (vi) pay fees and expenses associated with the short term
financing. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent
company of TB Securities. The short term financing bears interest at the rate of
12% per annum and is due on January 15, 1999. It is secured by a pledge of
DeepFlex of its interest in a certain payment-in-kind Subordinated Promissory
Note issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries
of the Company, which has a current outstanding balance of approximately $70.0
million. The Company anticipates that it will
23
<PAGE> 26
refinance the short term financing with Tatham Brothers upon its maturity or pay
off the facility with proceeds from the refinancing of the Credit Facility
discussed above.
On September 15, 1998, a draw of $1.4 million was made on the
above-mentioned letter of credit by DeepTech to fund certain tax liabilities
incurred in connection with the Merger.
The Company is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, which proceeds were used to fund certain improvements to the
Rigs. The loan bears interest at the rate of Prime plus 1 1/2% per annum and is
due on January 19, 1999 or on demand.
The Company is refocusing its business from the development, exploration and
production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada with initial emphasis on the offshore
contract drilling business. The Company believes that the Atlantic Canada region
offers significant investment opportunities and the Company plans to expand the
number of drilling rigs it will own as well as diversify its business to include
the North Atlantic pipeline project, related gas processing facilities, a
facility for the generation of electricity and other related investments.
The ability of the Company to satisfy its future capital needs with respect
to its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic Partners pipeline
project, will depend upon its ability to raise substantial amounts of additional
capital and to implement its business strategy successfully. With respect to the
Company's strategy described under "Business -- Business Strategy", (i) the
Company does not currently possess the capital necessary to implement its
business strategy completely and there can be no assurances that the Company
will be able to obtain sufficient capital for any or all of the projects, (ii)
there can be no assurances that these projects and other opportunities will
prove to be economical or that they will occur, and (iii) many of these projects
will require governmental approvals, almost all of which the Company has yet to
receive. Moreover, if there are developments that the Company determines to be
indicative of a lack of reasonable opportunity to realize benefits for the
Company's stockholders, then the Company will pursue other opportunities,
wherever located, as the Company determines to be in the Company's best
interests.
Tatham Offshore has never declared or paid dividends on its common or
preferred stock. Tatham Offshore expects to retain all available earnings
generated by its operations for the growth and development of its business.
Year 2000. The year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the year. The Company
believes that all of its software and equipment are year 2000 compliant and that
this problem will have no affect on the Company's internal operations. Although
the company intends to interact only with those third parties that have year
2000 compliant computer systems, it is impossible for the Company to monitor all
such systems. Currently, the Company has no information concerning the year 2000
compliance status of its customers and vendors. There can be no assurances that
such systems will not have a material adverse impact on the Company's business
and operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to some market risk due to the floating interest
rate under the RIGCO Credit Facility. See "-- Note 5 -- Indebtedness." Under the
RIGCO Credit Facility, the remaining principal is due on March 31, 1999 along
with the final interest payment. On June 30, 1998, the Credit Facility had
principal balance of $59,156,000 and an interest rate based on the prime rate
plus 3% (11 1/2% at June 30, 1998). A 1 1/2% increase in interest rates could
result in a $900,000 annual increase in interest expense on the existing
principal balance.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with
Citibank, N.A., which covered $36.5 million of the debt and provided a maximum
fixed effective interest rate of 11.74% and which terminates on September 30,
1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are
included in this Annual Report as set forth in Item 14(a) hereof.
24
<PAGE> 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE> 28
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The following table sets forth certain information as of October 15,
1998 regarding the executive officers and directors of Tatham Offshore. Each
executive officer named in the following table has been elected to serve until
his successor is duly appointed or elected or until his earlier removal or
resignation from office.
There is no family relationship among any of the executive officers or
directors of Tatham Offshore, and no arrangement or understanding exists between
any executive officer or director of Tatham Offshore and any other person
pursuant to which he or she was or is to be selected as an officer or director.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Thomas P. Tatham 53 Chairman of the Board,
Chief Executive Officer
Dennis A. Kunetka 49 Chief Financial Officer,
Senior Vice President and Secretary
Harvey O. Fleisher 52 Senior Vice President - Marine Services
Philip German 45 Vice President - Engineering
Tatham Offshore Canada Limited
Kenneth L. Hamilton 51 Vice President, Treasurer
and Assistant Secretary
Dennis J. Lubojacky 45 Vice President - Controller
and Financial Planning
Kenneth E. Beeney 39 Director
Phillip G. Clarke 63 Director
Clyde E. Nath 64 Director
James G. Niven 52 Director
Jonathan D. Pollock 35 Director
Roger B. Vincent, Sr. 53 Director
Diana J. Walters 35 Director
</TABLE>
26
<PAGE> 29
Thomas P. Tatham has served as Chairman of the Board and a Director of
the Company since its inception in 1988. In addition, Mr. Tatham served as
Chairman of the Board, Chief Executive Officer and a Director of DeepTech
International Inc. ("DeepTech") and Chairman of the Board of Leviathan Gas
Pipeline Company ("Leviathan"), affiliates of Tatham Offshore, since October
1989 and February 1989, respectively, through August 14, 1998. In addition, Mr.
Tatham served as Chief Executive Officer of Leviathan from February 1989 until
June 1995. Mr. Tatham sold all of his interests in DeepTech and Leviathan to El
Paso Energy in August 1998. Mr. Tatham has over 28 years experience in the oil
and gas industry. He founded Mid American Oil Company in 1970 and served as
Chairman of the Board and Chief Executive Officer until he sold his interest
therein to Centex Corporation in 1979. In 1979, Mr. Tatham founded Tatham
Corporation to acquire Sugar Bowl Gas Corporation ("Sugar Bowl"), the second
largest intrastate pipeline system in Louisiana. He served as Chairman of the
Board of Tatham Corporation from 1979 to December 1983, at which time it sold
the assets of Sugar Bowl to a joint venture between MidCon Corp. and Texas Oil
and Gas, Inc. From 1984 to 1988, Mr. Tatham pursued personal investments in
various industries, including the oil and gas industry. Mr. Tatham served as a
director of J. Ray McDermott, S.A. from its inception in February 1995 through
August 1997.
Dennis A. Kunetka has served as Senior Vice President -- Corporate
Finance of the Company since October 1993 and as Chief Financial Officer and
Secretary since January 1998. Mr. Kunetka served as Senior Vice President --
Corporate Finance and Investor Relations of DeepTech and Leviathan from August
1993 through August 14, 1998. Prior to joining DeepTech, Mr. Kunetka served as
Vice President and Controller of United Gas Pipe Line Company and its parent
company, United Gas Holding Corporation. Prior to joining United in 1984, Mr.
Kunetka spent 11 years with Getty Oil Company in various tax, financial and
regulatory positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the
University of Houston, a J.D. degree from South Texas College of Law and is a
certified public accountant.
Harvey O. Fleisher has served as Senior Vice President of Marine
Services of the Company since August 1998. Mr. Fleisher has served as Executive
Vice President of DeepFlex since April 1995. From June 1988 to April 1995, Mr.
Fleisher held various engineering and operations positions with DeepTech
entities. Mr. Fleisher has over 25 years experience in the offshore oil and gas
industry primarily in the floating drilling and production areas. Prior to
joining DeepTech in 1988, Mr. Fleisher worked for two years as an independent
consultant and 14 years with Sonat Offshore Drilling, Inc. (formerly The
Offshore Company). Mr. Fleisher is a Registered Professional Engineer and holds
M.S. and B.S. degrees in Industrial Engineering from Texas A&M University.
Philip German has served as Vice President -- Engineering of Tatham
Offshore Canada Limited since August 1998. From July 1997 through August 1998,
Mr. German served as a consultant to the Company. From July 1995 through
July 1997, Mr. German served as the Chief Pipeline Engineer for Intec
Engineering, Inc. From June 1990 through July 1995, Mr. German served as Vice
President of J. P. Kenny Inc. of Houston. From 1981 through 1990, Mr. German was
associated with J.P. Kenny and Partners, Ltd., London. Mr. German has been
actively involved in offshore pipeline and onshore pipeline and facilities
projects in the U.K., Norway, Australia, North Africa, East Africa and China. In
addition to his work with engineering companies, Mr. German has also spent
extended periods acting on behalf of oil and gas companies, most notably Statoil
and Conoco. Mr. German holds a Bachelor of Science (degree) in Mechanical
Engineering from Thames Polytechnic, London.
Kenneth L. Hamilton has served as Vice President -- Treasurer and
Assistant Secretary of the Company since August 1998. Mr. Hamilton served as
Corporate Tax Director of DeepTech from August 1997 through August 14, 1998.
Prior to joining DeepTech, Mr. Hamilton was a shareholder in Verne Sanders &
Associates, a certified public accounting firm for 11 years. Mr. Hamilton served
as Vice President-Controller of Tatham Corporation from 1981 to 1986 and as Tax
Manager with Price Waterhouse LLP in Houston from 1974 to 1981. Mr. Hamilton
holds a B.A. degree from the University of Texas at El Paso and is a certified
public accountant.
Dennis J. Lubojacky has served as Vice President -- Controller and
Financial Planning of the Company since August 1998. Mr. Lubojacky served as
Controller of DeepFlex from August 1996 through August 1998. Prior to joining
DeepTech, Mr. Lubojacky worked for two years as an independent consultant after
serving as Vice President -- Controller for Nabors Yemen Ltd. from 1991 to 1994.
Mr. Lubojacky has over 23 years of experience in the oil and gas industry,
primarily with offshore and onshore drilling contractors in various accounting
and financial management positions. Mr. Lubojacky holds a B.B.A. degree from Sam
Houston State University and is a certified public accountant.
27
<PAGE> 30
Kenneth E. Beeney has served as a Director of the Company since August
1993. In addition, Mr. Beeney served as Vice President - Chief Geophysicist of
the Company from August 1993 through August 14, 1998. Since August 17, 1998, Mr.
Beeney has served as Exploration Manager - Deepwater for Pennzoil Exploration
and Production. Mr. Beeney has 16 years of exploration experience, with a
primary focus in the Gulf of Mexico. Prior to joining Tatham Offshore in 1989,
Mr. Beeney worked for Tenneco Oil Company for eight years and Anadarko Petroleum
Corporation on a variety of exploration assignments. Mr. Beeney received a B.S.
in Geophysics from the Colorado School of Mines.
Phillip G. Clarke has served as a Director of the Company since March
1995. Mr. Clarke has worked in the oil and gas industry for 40 years. He was
initially employed by Texaco, Inc. for approximately eight years, serving in
various engineering positions. In 1965, Mr. Clarke was employed by Placid Oil
Company ("Placid") where he accumulated an additional 30 years of diversified
experience. In 1977, Mr. Clarke was made Vice President of Operations for
Placid's world-wide activities and held that position until his retirement in
1995. Following his retirement, Mr. Clarke continued his oil industry activity
by joining several associates in forming Rising Star Energy, LLC, a Dallas,
Texas based independent energy company where he is currently employed. Mr.
Clarke received a B.S. degree in Mechanical Engineering from Oklahoma State
University.
Clyde E. Nath has served as a Director of the Company since March 1995.
Mr. Nath worked in the oil and gas industry for 40 years with Kerr-McGee Corp.,
holding various positions in Kerr-McGee's Exploration and Production Division
throughout his career. From 1985 until his retirement in December 1994, Mr. Nath
was Vice President of Exploration for the Gulf of Mexico Region of Kerr-McGee's
Exploration and Production Division. Mr. Nath holds a Bachelor's degree in
Geology from Oklahoma City University. He is a member of the American
Association of Petroleum Geologists, the Houston Geological Society and American
Petroleum Institute.
James G. Niven has served as a Director of the Company since June 1994
and as a General Partner of Pioneer Associates, a venture capital investment
company, since 1982. Mr. Niven has been a Senior Vice President of Sotheby's
Inc. since November 1996 and is currently a Director of The Lynton Group, Inc.
and HealthPlan Services, Inc. He served as Chairman of the Board of Global
Natural Resources from 1989 to 1995 and is a member of the Board of Managers of
Memorial Sloan-Kettering Cancer Center, and a Trustee of the Museum of Modern
Art, and the National Center for Learning Disabilities, Inc.
Jonathan D. Pollock is a Portfolio Manager of Stonington Management
Corp. which performs administrative services for Elliott Associates, L.P. and
Westgate International, L.P. Mr. Pollock is responsible for the firm's oil and
gas investments and has served as a Director of the Company since October 1996.
Mr. Pollock has been with Stonington Management Corp. since 1989. Prior to
joining Stonington Management Corp., Mr. Pollock was employed by Greenleaf
Partners, an investment banking firm. Mr. Pollock has served as a director of
Horizon Offshore, Inc. since June 1997, and of Grant Geophysical, Inc. since
September 1997. Elliott Associates, L.P. and Westgate International, L.P. are
each deemed to beneficially own more than 5% of the Common Stock of the Company.
See "--Security Ownership of Certain Beneficial Owners and Management."
Stonington Management Corp. is under common control with Manchester Securities
Corp. which is a NASD member broker-dealer.
Roger B. Vincent, Sr. has served as a Director of the Company since
January 1996. Mr. Vincent is President of Springwell Corporation, a corporate
finance advisory firm located in New York. Prior to founding Springwell, Mr.
Vincent spent 18 years with Bankers Trust Company where he was a Managing
Director of the firm as well as in charge of the firm's Client Group. Mr.
Vincent is a director of AmeriGas Propane, Inc., a general partner of AmeriGas
Partners, L.P. (NYSE listed), a Trustee of the GCG Trust of the Golden American
Life Insurance Company (a subsidiary of the ING Group) and a member of the
Policy Committee of Atlantic Asset Management Partners, L.L.C. Mr. Vincent is a
graduate of Yale University and Harvard Business School.
Diana J. Walters has served as a Director of the Company since
September 1995. Ms. Walters is a Vice President of PaineWebber, Inc. in their
energy group and is a NASD broker-dealer. Prior to joining PaineWebber, Ms.
Walters served as Vice President - Corporate Finance and Planning of Tatham
Offshore from October 1993 through September 1995 and as Chief Financial Officer
of Tatham Offshore from September 1995 through November 1996. Prior to joining
Tatham Offshore, she served as a Vice President in the Natural Resources Group
of Internationale Nederlanden Bank (ING Bank) from 1990 to 1993 financing
independent oil and gas companies and as an Assistant Vice President in the
Natural Resources Department at The Chase
28
<PAGE> 31
Manhattan Bank (formerly Manufacturers Hanover Trust Company) from 1986 to 1990
financing interstate and intrastate pipeline companies. Ms. Walters received a
B.A. degree and an M.A. degree in Energy and Mineral Resources from the
University of Texas at Austin.
OTHER DIRECTORS AND OFFICERS DURING FISCAL YEAR 1998
Antoine Gautreaux, Jr., age 45, has served as a Director of the Company
since October 1996, Chief Operating Officer of the Company since July 1996 and
as Senior Vice President - Operations from September 1995 to July 1996. Prior to
joining DeepTech, Mr. Gautreaux was employed by Placid Oil Company ("Placid")
for 21 years in various capacities, including Manager of Drilling and
Production. Mr. Gautreaux received a B.S. degree from Nicholls State University.
Mr. Gautreaux resigned his office and directorship of the Company effective
August 14, 1998, in connection with the Merger.
Edward J. Gibbon, Jr., age 52, served as Vice President - Reservoir
Engineering of the Company since September 1995. Mr. Gibbon has served as Vice
President - Reservoir Engineering of Deepwater Production Systems, Inc.
("Deepwater Systems"), an affiliate of the Company, since September 1993. Prior
thereto, Mr. Gibbon served as the President of IDM Engineering, Inc., a company
he founded, which specialized in reservoir engineering studies and economic
evaluations. Mr. Gibbon received a degree in Petroleum Engineering from the
Colorado School of Mines. Mr. Gibbon resigned his office with the Company
effective August 14, 1998 in connection with the Merger.
Eric Lynn Hill, age 52, has served as a Director of the Company since
November 1997. From January 1997 to January 1998, Mr. Hill served as Chief
Financial Officer and Secretary of the Company. Since January 1998, Mr. Hill has
served as Vice President of Finance and Administration of Seagull Egypt Ltd.
Prior to joining DeepTech, Mr. Hill served as Senior Vice President - Finance,
Administration and Secretary - Treasurer of Global Natural Resources, Inc. from
July 1988 to March 1997. Mr. Hill has over 28 years of experience in finance and
auditing in energy related companies and in public accounting. Mr. Hill received
a B.B.A. degree from the University of North Texas and is a certified public
accountant. Mr. Hill resigned his directorship of the Company effective
August 14, 1998, in connection with the Merger.
Jeffrey K. Lucas, age 42, served as Vice President - Land Manager of
the Company since June 1991. Mr. Lucas has worked in the oil industry for 18
years. Prior to joining the Company, Mr. Lucas served in various capacities,
including Division Landman, in the Land Department of Tenneco Oil from 1979 to
1989 and was primarily responsible for negotiating lease acquisitions in the
Rocky Mountain area and the Gulf. Mr. Lucas received a B.S. in Mineral Land
Management from the University of Colorado. Mr. Lucas resigned his office with
the Company effective August 14, 1998 in connection with the Merger.
Edward L. Moses, Jr., age 62, has served as Senior Vice President -
Engineering and Production of DeepTech since 1992, Managing Director and a
Director of Deepwater Systems since August 1993 and a Director of the Company
since November 1997. From 1991 to 1992, he served as Senior Vice President and a
Director of the Company. From 1989 to 1991, Mr. Moses served as Vice President -
Engineering of the Company. Mr. Moses has worked for over 30 years in the oil
and gas industry. Prior to joining DeepTech, he worked for 12 years as an
independent consultant in the oil and gas industry. Prior thereto, he spent 18
years working for Superior Oil Company where he served as Manager of
International Drilling Operations. Mr. Moses has a B.S. in Petroleum Engineering
from Texas A&M University. Mr. Moses resigned his office and directorship
of the Company effective August 14, 1998, in connection with the Merger.
29
<PAGE> 32
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Through August 14, 1998, the executive officers of the Company were
compensated by DeepTech and did not receive compensation from the Company for
their services as such. Effective August 14, 1998, DeepTech was acquired by an
affiliate of El Paso Natural Gas Company and divested all equity ownership in
Tatham Offshore through a rights offering. DeepTech had entered into management
agreements with each of its subsidiaries, including the Company, pursuant to
which each affiliate was charged an annual management fee in exchange for
operational, financial, accounting and administrative services. The management
fee was intended to reimburse DeepTech for the estimated costs of the services
provided to each affiliate. The management agreement was amended effective July
1, 1997 to provide for an annual management fee equal to 26% of DeepTech's
overhead expenses. During the year ended June 30, 1998, the Company was charged
$4,375,000 under its management agreement. The management agreement between
DeepTech and the Company was terminated in connection with the merger of
DeepTech and El Paso. Effective August 14, 1998, Tatham Offshore hired a
management team and support personnel to implement its business strategy. The
Company's executive officer compensation program is administered and reviewed by
the Incentive Plan Compensation Committee.
The following table sets forth the compensation paid by DeepTech to the
Company's Chief Executive Officer and each of the Company's five other most
highly compensated executive officers for the fiscal year ended June 30, 1998
(collectively, the "Named Officers"). The compensation set forth in the table
represents amounts paid to the Named Officers for their services rendered
in all capacities to DeepTech and its subsidiaries for the fiscal years
ended June 30, 1998, 1997 and 1996. Therefore, the amounts shown do not reflect
amounts earned solely as compensation for services to the Company. During the
fiscal year ended June 30, 1998, each of Messrs. Tatham and Kunetka spent less
than a majority of his time performing services for the Company. During the same
period, Messrs. Gautreaux, Beeney, Gibbon and Lucas spent a majority of their
time performing services for the Company. As noted below, in addition to serving
as executive officers of the Company, each of Messrs. Tatham and Kunetka also
served as officers of DeepTech and one or more of its affiliates.
30
<PAGE> 33
ANNUAL COMPENSATION BY DEEPTECH
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
NAME/PRINCIPAL OTHER ANNUAL AWARDS ALL OTHER
POSITION WITH FISCAL SALARY(1) BONUS(1) COMPENSATION(2) OPTIONS COMPENSATION
TATHAM OFFSHORE YEAR ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Tatham (3) ........ 1998 $1,000,000(4) -- $1,400,000(4) -- $272,500 (14)
Chief Executive Officer 1997 $1,000,000(4) -- $1,400,000(4) --(5) --
1996 $2,731,750(6) $ 600,000(6) $ 39,178(7) 300,000(8)(9) --
Antoine Gautreaux, Jr.(10) .. 1998 $ 200,000 -- -- -- $759,375 (14)
Chief Operating Officer 1997 $ 200,000 -- -- 10,000(11) --
1996 $ 162,500 -- -- 75,000(9) --
Dennis A. Kunetka (12) ...... 1998 $ 161,450 -- -- 100,000(13) --
Chief Financial Officer 1997 $ 140,000 -- -- -- --
1996 $ 120,000 -- -- 30,000(9) --
Kenneth E. Beeney (10) ...... 1998 $ 140,000 -- -- $668,250 (14)
Vice President - 1997 $ 140,000 -- -- 10,000(11) --
Chief Geophysicist 1996 $ 110,000 -- -- 75,000(9) --
Edward J. Gibbon, Jr. (10) .. 1998 $ 125,000 -- -- $506,250 (14)
Vice President - 1997 $ 125,000 -- -- 10,000(11) --
Reservoir Engineering 1996 $ 106,660 -- -- 50,000(9) --
Jeffrey K. Lucas (10) ....... 1998 $ 110,000 -- -- $506,250 (14)
Vice President - 1997 $ 110,000 -- -- 7,000(11) --
Land Manager 1996 $ 95,000 -- -- 50,000(9) --
</TABLE>
- -------------------------------
(1) Includes the aggregate market value of Common Stock and DeepTech common
stock issued as a result of the exercise of options granted pursuant to
the Deferred Compensation Arrangement (as defined herein) for salary
and bonuses. The aggregate market value is calculated based on the last
reported sales prices of the Common Stock and/or the DeepTech common
stock on the dates of exercise of the options.
(2) Other Annual Compensation excludes the aggregate value of perquisites
when such value is less than the lesser of $50,000 or 10% of total
annual Salary and Bonus for each Named Officer.
(3) Mr. Tatham also served as Chairman of the Board and Chief Executive
Officer of DeepTech and Chairman of the Board of Leviathan. During the
fiscal year ended June 30, 1998, Mr. Tatham spent less than a majority
of his time performing services for the Company.
(4) Effective July 1, 1996, the Compensation Committee of DeepTech's Board
of Directors established a compensation plan for Mr. Tatham for the
years ended June 30, 1997 and 1998. Under the compensation plan, Mr.
Tatham is to receive a base salary of $1,000,000 per annum plus
$1,400,000 per annum to be credited against incentive bonuses as they
are earned. The base salary and bonus are payable at the rate of
$200,000 per month. The Compensation Committee of DeepTech's Board of
Directors detailed certain performance goals for DeepTech and its
subsidiaries and affiliates, including the Company, and Mr. Tatham
which would allow him to earn the incentive bonus payments over the two
year period. The performance goals are structured to reward Mr. Tatham
for enhancing shareholder value through increased earnings per share
and by obtaining financing for key projects.
(5) Excludes options to acquire 1,100,000 shares of DeepTech common stock
that were granted to Mr. Tatham during the fiscal year ended June 30,
1997 related to matters other than for executive compensation and
unrelated to the operations of DeepTech or the Company.
(6) Mr. Tatham's salary and bonus for the fiscal year ended June 30, 1996
were settled through the issuance of options pursuant to the Deferred
Compensation Arrangement. Under the Deferred Compensation Arrangement,
for each $1.00 of salary deferred, Mr. Tatham was entitled to apply
$3.00 to the exercise price of options to acquire Common Stock or
DeepTech common stock under the Company's Incentive Plan or DeepTech's
equity incentive plan, respectively. Through June 30, 1996, Mr. Tatham
had exercised options to acquire 600,125 shares of DeepTech common
stock in full settlement of his salary for the fiscal year ended June
30, 1996. In addition, Mr. Tatham was awarded a bonus during the fiscal
year ended June 30, 1996 unrelated to the Company's operations. This
bonus was settled pursuant to the Deferred Compensation Arrangement in
September 1995 when Mr. Tatham exercised options to purchase 150,000
shares of DeepTech common stock. The aggregate market value of the
750,125 shares of DeepTech common stock issued, calculated based on the
last reported sales price on the dates of exercise, was $3,331,750.
31
<PAGE> 34
(7) Represents dues for club memberships.
(8) Excludes options to acquire 1,666,666 shares of DeepTech common stock
that were granted by DeepTech to Mr. Tatham during the fiscal year
ended June 30, 1996 related to matters other than for executive
compensation and unrelated to the operations of DeepTech or the
Company.
(9) Options to acquire DeepTech common stock granted pursuant to DeepTech's
equity incentive plan.
(10) Each of these executive officers spent the majority of his time
performing services for the Company during the fiscal year ended June
30, 1998.
(11) Represents options issued to purchase shares of Common Stock pursuant
to the Company's Incentive Plan as adjusted for the one-for-ten reverse
stock split effective November 13, 1997.
(12) Mr. Kunetka also served as Senior Vice President - Corporate Finance
and Investor Relations for DeepTech and Leviathan. During the fiscal
year ended June 30, 1998, Mr. Kunetka spent less than a majority of his
time performing services for the Company.
(13) Represents options issued to purchase shares of Common Stock pursuant
to the Company's Incentive Plan.
(14) Represents the excess of the fair market value of DeepTech options over
the exercise price on the date such options were exercised.
The following table sets forth certain information detailing option
grants made to the Named Officers under the Incentive Plan with respect to
shares of Tatham Offshore Common Stock during the fiscal year ended June 30,
1998. Each of the options listed below were issued pursuant to the Company's
Incentive Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF TATHAM OFFSHORE PERCENT OF POTENTIAL REALIZABLE VALUE AT
COMMON STOCK TOTAL OPTIONS EXERCISE ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS GRANTED IN OR BASE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED FISCAL YEAR PRICE DATE OPTION TERM
($/SHARE) 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Dennis A. Kunetka 100,000 100% $3.00 1/15/08 $188,668 $478,123
</TABLE>
32
<PAGE> 35
OPTION EXERCISES AND YEAR-END VALUE TABLES
The following table sets forth certain information regarding the
outstanding options and warrants to purchase DeepTech common stock held by the
Named Officers at June 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Thomas P. Tatham 2,168,749 (1) -- (2) -- / -- -- / --
100,000 $272,500 -- / -- -- / --
Antoine Gautreaux, Jr. 75,000 $759,375 -- / -- -- / --
Dennis A. Kunetka -- -- 15,000 / 15,000(3) $150,000 / $150,000
Kenneth E. Beeney 75,000 $747,000 -- / -- -- / --
Edward J. Gibbon, Jr. 50,000 $506,250 -- / -- -- / --
Jeffrey K. Lucas 50,000 $506,250 -- / -- -- / --
</TABLE>
- --------------
(1) Options exercised to purchase DeepTech common stock were acquired by Mr.
Tatham related to matters other than executive compensation and unrelated
to the operations of DeepTech or the Company.
(2) On February 26, 1998, Mr. Tatham exercised 1,343,749 warrants and 825,000
warrants to purchase a like amount of shares of Common Stock at $4.50 per
share and $10.00 per share, respectively. On February 26, 1998, the Common
Stock closed at $12.875 per share on NASDAQ.
(3) Represents options issued pursuant to DeepTech's equity incentive plan and
unvested as of June 30, 1998, which options vest 25% annually beginning
November 14, 1996. As a result of El Paso's acquisition of DeepTech, these
options vested on August 14, 1998.
The following table sets forth certain information regarding the
outstanding options and warrants to purchase Tatham Offshore Common Stock held
by the Named Officers at June 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED ON VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Antoine Gautreaux, Jr. -- -- 25,000(1) /10,000(2) -- /--
Dennis A. Kunetka -- -- -- /100,000(3) -- /--
Kenneth E. Beeney -- -- -- /10,000(2) -- /--
Edward J. Gibbon, Jr. -- -- -- /10,000(2) -- /--
Jeffrey K. Lucas -- -- -- / 7,000(2) -- /--
</TABLE>
- --------------
(1) Options granted pursuant to Tatham Offshore's Incentive Plan which are 100%
vested.
(2) SARs granted pursuant to Tatham Offshore's Incentive Plan on October 21,
1996 which vest 1/3 each year beginning three years from the date of grant.
(3) Options granted pursuant to Tatham Offshore's Incentive Plan on January 15,
1998 which vest 25% each year beginning January 15, 1999.
33
<PAGE> 36
REPORT ON EXECUTIVE COMPENSATION
The Investment Plan Compensation Committee of the Board of Directors
determines the compensation of the executive officers named in the Summary
Compensation Table. The Investment Plan Compensation Committee has furnished the
following report on executive compensation.
COMPENSATION PHILOSOPHY
As members of the Investment Plan Compensation Committee, it is our
duty to administer the executive compensation program for the Company. The
Investment Plan Compensation Committee is responsible for establishing
appropriate compensation goals for the executive officers of the Company,
evaluating the performance of such executive officers in meeting such goals and
making recommendations to the Board of Directors with regard to executive
compensation.
The Company's compensation philosophy is to ensure that executive
compensation be directly linked to continuous improvements in corporate
performance, achievement of specific operations, financial and strategic
objectives and increases in stockholder value. The Investment Plan Compensation
Committee regularly reviews the compensation packages of the Company's executive
officers, taking into account factors which it considers relevant, such as
business conditions within and outside the industry, the Company's financial
performance, the market composition for executives of similar background and
experience and the performance of the executive officer under consideration. The
particular elements of the Company's compensation programs for executive
officers are described below.
COMPENSATION STRUCTURE
The executive base compensation for the executive officers of the
Company named in the Summary Compensation Table is intended to be competitive
with that paid in comparable situated industries, taking into account the scope
of responsibilities and internal relationships. The goals of the Investment Plan
Compensation Committee in establishing the Company's executive compensation
program are:
(1) To fairly compensate the executive officers of the
Company and its subsidiaries for their contributions
to the Company's short-term and long-term
performance. The elements of the Company's executive
compensation program are (a) annual base salaries,
(b) annual bonuses and (c) equity incentives.
(2) To allow the Company to attract, motivate and retain
the management personnel necessary to the Company's
success by providing an executive compensation
program comparable to that offered by companies with
which the Company competes for management personnel.
Individual's base salaries are determined by the Investment Plan
Compensation Committee based on the scope of the executive's responsibilities, a
subjective evaluation of the executive's performance and the length of time the
executive has been in the position.
34
<PAGE> 37
EXECUTIVE COMPENSATION DEDUCTIBILITY
It is the Company's intent that amounts paid pursuant to the Company's
compensation plans will generally be deductible compensation expenses. The
Investment Plan Compensation Committee does not currently anticipate that the
amount of compensation paid to executive officers will exceed the amounts
specified as deductible pursuant to Section 162(m) of the Internal Revenue Code
of 1986, as amended.
INVESTMENT PLAN COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Phillip G. Clarke
James G. Niven
Roger B. Vincent
INCENTIVE PLAN
In 1995, Tatham Offshore adopted the Incentive Plan. The Incentive Plan
was effected to provide Tatham Offshore with the ability of making a variety of
awards pursuant to the Incentive Plan including stock options, restricted stock
and stock value equivalent awards.
Under the Incentive Plan, Tatham Offshore may grant to employees,
consultants or agents of Tatham Offshore or any of its parents or subsidiaries
one or more options (each, a "Stock Option") to purchase shares of Common Stock
as hereinafter set forth. Stock Options granted under the Incentive Plan may be
either incentive stock options ("Incentive Stock Options") within the meaning of
Section 422(b) of the Code, or options that do not qualify as Incentive Stock
Options ("Non-Qualified Stock Options"). Pursuant to the Incentive Plan, Tatham
Offshore may grant awards of Common Stock subject to restrictions on sale or
other disposition of such shares ("Restricted Stock Grant"), and such other
requirements as the Incentive Plan Compensation Committee deems appropriate
including the requirement that such shares be forfeited upon termination of
employment for certain reasons within a specified period of time. Pursuant to
the Incentive Plan, Tatham Offshore may also grant rights to receive an amount
equal to the fair market value of shares of Common Stock or rights to receive an
amount equal to any appreciation or increase in the fair market value of Common
Stock over a specified period of time (SARs). Stock Options, Restricted Stock
Grants and SARs are referred to collectively herein as "Awards."
Except with respect to outstanding Awards, and unless sooner terminated
by action of Tatham Offshore's Board of Directors or the committee thereof
charged with administration of the Incentive Plan, the Incentive Plan will
terminate on December 31, 2005. The maximum number of shares of Common Stock
with respect to which Awards may be granted under the Incentive Plan is
4,000,000.
The Board of Directors may terminate or suspend the Incentive Plan (or
any portion thereof) at any time with respect to any shares for which Awards
have not previously been granted and remain outstanding. The Board of Directors
has the right to alter or amend the Incentive Plan or any part thereof from time
to time; provided, however, that no change in any Award theretofore granted may
be made which would materially adversely affect the rights and obligations of
the holder of any such Award without the written consent of such Incentive Plan
participant; and provided, further, that the Board of Directors may not, without
stockholder approval as required under the Incentive Plan, (i) materially
increase the number of shares of Common Stock which may be issued under the
Incentive Plan (other than in connection with adjustments permitted by the
Incentive Plan), (ii) materially modify the requirements as to eligibility for
participation in the Incentive Plan, (iii) materially increase the benefits
accruing to participants under the Incentive Plan, or (iv) extend the
termination date of the Incentive Plan. In addition, no amendment, suspension or
termination can be adopted which would disqualify the Incentive Plan from (i)
the exemption provided by Rule 16b-3, promulgated under the Exchange Act, or any
successor rule or regulation to such Rule 16b-3, as such rule is applicable from
time to time, or (ii) the benefits provided under Section 422 of the Code, or
any successor thereto.
The Incentive Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974, as amended, or the qualification
requirements of Section 401 of the Code.
35
<PAGE> 38
The Incentive Plan is to be administered by the Incentive Plan
Compensation Committee. Each member of the Incentive Plan Compensation Committee
is a disinterested person within the meaning of Rule 16b-3 of the Exchange Act
and qualifies as an "outside director", as such term is used for the purposes of
Section 162(m) of the Code and any rules and regulations promulgated thereunder.
Subject to the provisions of the Incentive Plan, the Incentive Plan
Compensation Committee has sole authority to select the individuals who are to
be granted Awards from among those persons who are eligible and to determine the
restrictions, terms and conditions of each Award granted under the Incentive
Plan (subject to the terms of the Incentive Plan). The Incentive Plan
Compensation Committee is authorized to interpret the Incentive Plan and may,
from time to time, adopt, amend or rescind rules and regulations relating to the
implementation, administration and maintenance of the Incentive Plan.
Effective with the one-for-ten reverse stock split on November 13,
1997, each of the then outstanding Awards were adjusted to reflect the reverse
stock split. A total of 181,500 Awards issued pursuant to the Incentive Plan are
currently outstanding.
DIRECTOR PLAN
In 1995, Tatham Offshore adopted the Director Plan. The purpose of the
Director Plan is to allow Tatham Offshore to attract the best available
individuals to serve as outside directors of Tatham Offshore.
All non-employee directors of Tatham Offshore are eligible to
participate in the Director Plan. The Director Plan provides for both automatic
one time grants of Stock Options to Tatham Offshore's non-employee directors and
for the issuance and exercise of Stock Options in lieu of standard cash director
compensation upon the election of non-employee directors. All Stock Options
granted under the Director Plan are Non-Qualified Stock Options.
Except with respect to outstanding Stock Options, and unless sooner
terminated by action of the Board of Directors, the Director Plan will terminate
on December 31, 2005. The maximum number of shares of Common Stock with respect
to which Stock Options may be granted under the Director Plan is 1,000,000,
subject to adjustments for stock splits, stock dividends and certain other
changes in capitalization.
Under the Director Plan, grants of Stock Options to purchase 30,000
shares of Common Stock were automatically made to all non-employee directors of
Tatham Offshore provided that such non-employee directors had not already
received stock options to purchase 30,000 shares of Common Stock in connection
with their service as a director of Tatham Offshore. In addition, after the
effective date of the Director Plan, any newly elected non-employee director
will automatically receive Stock Options to purchase 30,000 shares of Common
Stock. The exercise price for the Stock Options to purchase 30,000 shares of
Common Stock will be 100% of the fair market value of the Common Stock on the
later to occur of (i) the effectiveness of the Director Plan, or (ii) the
election of a participant as a Director of Tatham Offshore. The Stock Options
issued pursuant to these provisions can be immediately exercisable and, unless
terminated sooner in accordance with the Director Plan, shall expire on a date
which is ten (10) years after the date of grant of the option.
In connection with their agreements to serve on the Board of Directors,
each of Messrs. Niven and Powell were originally granted stock options to
purchase 30,000 shares of Common Stock of Tatham Offshore at $10.00 per share,
the initial public offering price. Each of these stock options vested at the
rate of 10,000 per year beginning June 30, 1995 and were subject to shareholder
approval. During the year ended June 30, 1996, these stock options were canceled
and Messrs. Niven and Powell were granted Stock Options to purchase 30,000
shares of Common Stock at $0.8125 per share pursuant to the Director Plan which
included 10,000 Stock Options each, which vested immediately, and 10,000 Stock
Options each, which vested annually on June 30, 1996 and 1997. In connection
with his appointment to the Board, Mr. Vincent was issued Stock Options to
purchase 30,000 shares of Common Stock at $0.8125 per share pursuant to the
Director Plan. These Stock Options vest at the rate of 10,000 per year beginning
January 31, 1997.
In connection with his election to the Board of Directors in October
1996, Mr. Pollock was issued Stock Options to purchase 30,000 shares of Common
Stock at $0.8125 per share. In her new role as a non-employee director on the
Board of Directors, in October 1996, Ms. Walters was issued Stock Options to
purchase 30,000 shares of Common Stock at $0.8125 per share. The Stock Options
issued to Mr. Pollock and
36
<PAGE> 39
Ms. Walters vest at the rate of 10,000 per year beginning October 21, 1997. On
January 15, 1998, E. Lynn Hill, a director of the Company, was awarded options
to purchase 15,000 shares of Common Stock at $3.00 per share which vested
immediately. Effective with the one-for-ten reverse stock split on November 13,
1997, each of the then outstanding options issued under the Director Plan were
adjusted to reflect the reverse stock split.
The Board of Directors may terminate or suspend the Director Plan (or
any portion thereof) at any time with respect to any shares for which Stock
Options have not previously been granted and remain outstanding. The Board of
Directors has the right to alter or amend the Director Plan or any part thereof
from time to time; provided, however, that no change in any Stock Option
theretofore granted may be made which would materially adversely affect the
rights and obligations of the holder of any such Stock Option without the
written consent of such Director Plan participant; and provided, further, that
the Board of Directors may not, without stockholder approval as required under
the Director Plan, (i) materially increase the number of shares of Common Stock
which may be issued under the Director Plan (other than in connection with
adjustments permitted by the Director Plan), (ii) materially modify the
requirements as to eligibility for participation in the Director Plan, (iii)
materially increase the benefits accruing to participants under the Director
Plan, or (iv) extend the termination date of the Director Plan. In addition, no
amendment, suspension or termination may be adopted which would disqualify the
Director Plan from (i) the exemption provided by Rule 16b-3, promulgated under
the Exchange Act, or any successor rule or regulation to such Rule 16b-3, as
such rule is applicable from time to time, or (ii) the benefits provided under
Section 422 of the Code, or any successor thereto.
37
<PAGE> 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 15, 1998 the beneficial ownership
of the outstanding Common Stock of Tatham Offshore by (i) each person who is
known to Tatham Offshore to beneficially own more than 5% of the outstanding
Common Stock of Tatham Offshore, (ii) each director and director nominee of
Tatham Offshore, (iii) each executive officer named in the Summary Compensation
Table (see "Executive Compensation") and (iv) all executive officers and
directors of Tatham Offshore as a group.
<TABLE>
<CAPTION>
SHARES OF CLASS BENEFICIALLY OWNED(1)
-------------------------------------
TATHAM OFFSHORE
-------------------------------------
COMMON STOCK(2)
-------------------------------------
NUMBER PERCENT
-------------- ---------------------
<S> <C> <C>
Kenneth E. Beeney ................. 8,500 *
Phillip G. Clarke ................. 6,378 *
Antoine Gautreaux, Jr ............. 25,000(3) *
Edward J. Gibbon, Jr .............. 115 *
Dennis A. Kunetka ................. 1,250 *
Jeffrey K. Lucas .................. 10,000 *
Clyde E. Nath ..................... 8,458(4) *
James G. Niven .................... 9,378(5) *
Jonathan D. Pollock ............... 2,000(6)(9) *
Thomas P. Tatham .................. 617,974(7) 2.3%
7500 Chase Tower
Houston, Texas 77002
Roger B. Vincent, Sr .............. 3,385(8) *
Diana J. Walters .................. 4,500(9) *
Tatham Brothers Securities, LLC ... 21,752,121(10) 80.4%(13)
7500 Chase Tower
Houston, Texas 77002
Elliott Associates, L.P. .......... 1,719,561(11) 6.2%
712 5th Avenue, 36th Floor
New York, New York 10019
Martley International, L.P. ....... 1,719,561(11) 6.2%
1086 Teaneck Road
Teaneck, New Jersey 07666
Westgate International, L.P. ...... 1,719,561(11) 6.2%
c/o Midland Bank Trust
Corporation (Cayman) Limited
P.O. Box 1109, Mary Street
Grand Cayman, Cayman Islands
British West Indies
Lehman Commercial Paper, Inc ...... 1,461,253 5.6%
3 World Financial Center
9th Floor
New York, New York 10285
Executive officers and directors
as a group (16 persons) ......... 740,574(12) 2.8%
</TABLE>
- ----------------
*Less than 1%.
38
<PAGE> 41
(1) Shares of Common Stock that are not outstanding but that may be
acquired by a person upon exercise of options or warrants within 60
days of the above date are deemed outstanding for the purpose of
computing the percentage of outstanding shares beneficially owned by
such person. However, such shares are not deemed to be outstanding for
the purpose of computing the percentage of outstanding shares
beneficially owned by any other person.
(2) Shares of Series A 12% Convertible Exchangeable Preferred Stock
("Series A Preferred Stock"), Series B 8% Convertible Exchangeable
Preferred Stock ("Series B Preferred Stock") and Series C 4%
Convertible Exchangeable Preferred Stock ("Series C Preferred Stock")
held by each named person are assumed converted into shares of Common
Stock for the purpose of computing the number of shares of Common Stock
beneficially owned by such person. Alternatively, each share of Series
A, B and C Preferred Stock may be exchanged for four exchange warrants
which are each exercisable to purchase one share of Common Stock at
$6.53 per share. See "--Certain Relationships and Related
Transactions--Convertible Exchangeable Preferred Stock."
(3) Includes options to purchase 25,000 shares of Common Stock.
(4) Includes options to purchase 3,000 shares of Common Stock.
(5) Includes options to purchase 3,000 shares of Common Stock.
(6) Mr. Pollock is Portfolio Manager of Elliott Associates whose beneficial
ownership of securities is shown elsewhere in this table. See footnote
10.
(7) Includes 437,909 shares assumed acquired as a result of conversion of
1,537,600 shares of Series A Preferred Stock into Common Stock. Also
includes 1,705 shares assumed acquired as a result of conversion of
21,000 shares of Series C Preferred Stock into Common Stock. Mr. Tatham
owns 9.1% of the Series A Preferred Stock outstanding.
(8) Includes 285 shares assumed acquired as a result of conversion of 1,000
shares of Series A Preferred Stock, which is less than 1% of the Series
A Preferred Stock outstanding, into Common Stock. Also includes options
to purchase 2,000 shares of Common Stock.
(9) Includes options to purchase 2,000 shares of Common Stock.
(10) Includes 984,110 shares of Common Stock assumed acquired as a result of
conversion of 3,455,444 shares of Series A Preferred Stock. Tatham
Brothers Securities, LLC owns 20.4% of the Series A Preferred Stock
outstanding.
(11) The total number of shares credited to each of Elliott Associates, a
Delaware limited partnership, Westgate International, L.P., a Cayman
Islands Limited Partnership ("Westgate") and Martley International,
Inc., a Delaware corporation ("Martley") as beneficial ownership
interest includes (a) 1,477,481 shares beneficially owned by Elliott
Associates ("Elliott Shares") and (b) 242,080 shares beneficially
owned by Westgate ("Westgate Shares"). The Westgate Shares are credited
to Martley because Westgate and Martley share the power to vote, direct
the vote of, and to dispose or direct the disposition of the Westgate
Shares. The Westgate Shares are credited to Elliott Associates, the
Elliott Shares credited to Westgate, and the Elliott Shares credited to
Martley as a result of Elliott Associates, Martley and Westgate's
actions as a shareholder group under Rule 13D-3 of the Exchange Act.
The Elliott Shares include 1,477,481 shares that may be acquired by
Elliott Associates by conversion of 5,187,784 shares of Series A
Preferred Stock owned by Elliott Associates into Common Stock; the
Westgate Shares include 242,080 shares of Common Stock that may be
acquired by Westgate as a result of the conversion of 850,000 shares of
Series A Preferred Stock owned by Westgate into Common Stock. Each of
Elliott Associates, Westgate and Martley beneficially owns 35.7% of the
Series A Preferred Stock outstanding.
(12) Includes 455,367 shares of Common Stock assumed acquired as a result of
conversion of 1,598,900 shares of Series A Preferred Stock. Also
includes 1,705 shares of Common Stock assumed acquired
39
<PAGE> 42
as a result of conversion of 21,000 shares of Series C Preferred Stock.
Also includes options to purchase 38,000 shares of Common Stock. The
executive officers and directors as a group beneficially own 9.5% of
the Series A Preferred Stock outstanding.
(13) Pursuant to a Pledge and Security Agreement dated as of August 14,
1998, Tatham Brothers, LLC pledged to Thomas P. Tatham all of the
outstanding membership interests in Tatham Brothers Securities, LLC, as
security for amounts owed by Tatham Brothers, LLC to Thomas P. Tatham
pursuant to a promissory note dated August 14, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions
between or among the Company, the Partnership, DeepTech and certain other
related parties is summarized in the Company's "Notes to Consolidated Financial
Statements -- Note 2 -- Recent Events", "-- Note 4 -- Oil and Gas Properties
- --", "-- Note 7 -- Related Party Transactions --" and "-- Note 11 -- Subsequent
Events" located elsewhere in this Annual Report.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Tatham Offshore's officers
and directors, and persons who beneficially own more than 10% of Common Stock
("10% Stockholders"), to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("the Commission") and the regulations of
the Securities and Exchange Commission require such officers, directors and 10%
Stockholders to furnish the Company with copies of all such reports that they
file. Based solely upon a review of the Forms 3, 4 and 5 and amendments thereto
provided to the Company, and certain written representations furnished to the
Company, the Company believes that, during the fiscal year ended June 30, 1998,
its executive officers, directors and greater than 10% beneficial owners
complied with all applicable filing requirements.
40
<PAGE> 43
COMPARATIVE STOCK PERFORMANCE
As required by applicable rules of the Commission, the performance
graph was prepared based upon the following assumptions:
1. $100 was invested in Common Stock, the Standard & Poor's 500 Stock
Index (the "S&P 500 Index") and the Dow Jones Oil -- Secondary
Index (the "Peer Group") on February 9, 1994 (the date the Common
Stock commenced trading on The Nasdaq National Market).
2. Dividends are reinvested on the ex-dividend dates.
COMPARATIVE TOTAL RETURNS
TATHAM OFFSHORE, INC., THE S&P 500 INDEX AND THE PEER GROUP
(PERFORMANCE RESULTS FEBRUARY 9, 1994 TO JUNE 30, 1998)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
9-FEB-94 30-JUN-94 30-JUN-95 30-JUN-96 30-JUNE-97 30-JUN-98
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TATHAM OFFSHORE 100.00 153.75 35.00 8.75 5.67 3.00
----------------------------------------------------------------------------------------
S&P 500 INDEX 100.00 94.90 119.64 150.75 203.05 264.30
----------------------------------------------------------------------------------------
PEER GROUP 100.00 98.42 101.25 117.37 126.76 129.64
----------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. Financial Statements
As to financial statements and supplementary information, reference is
made to "Index to Consolidated Financial Statements" on page F-1 of
this Annual Report.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report.
3. (a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Tatham Offshore
(filed as exhibit 3.1 in Tatham Offshore's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
and incorporated herein by reference).
3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).
3.3 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.1 to Tatham
Offshore's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, Commission File No. 0-22892 and
incorporated herein by reference).
3.4 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.2 to Tatham
Offshore's Registration Statement on Form S-1 Commission
File No. 333-49859 and incorporated herein by reference).
4.1 Certificate of Designation Establishing the Series A
Convertible Exchangeable Preferred Stock of Tatham
Offshore (filed as Exhibit 4.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).
4.2 Certificate of Designation Establishing the Series B
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.2 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).
4.3 Certificate of Designation Establishing the Series C
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.3 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).
4.4 Certificate of Designation Establishing the Mandatory
Redeemable Preferred Stock (filed as Exhibit 4.4 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).
4.5 Certificate of Designation Establishing the Series B
Convertible Preferred Stock (filed as Exhibit 4.1 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, Commission File No.
0-22892 and incorporated herein by reference).
</TABLE>
42
<PAGE> 45
<TABLE>
<S> <C>
4.6 Warrant Agreement relating to the warrants entitling the
holder thereof to purchase shares of Convertible
Exchangeable Preferred Stock (filed as Exhibit 4.5 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).
4.7 Exchange Warrant Agreement relating to the warrants
entitling the holder thereof to purchase shares of
Tatham Offshore's Common Stock (filed as Exhibit 4.6 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).
10.1 Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank of
Texas, N.A., as Trustee (filed as Exhibit 10.17 to
DeepTech's Registration Statement on Form S-1,
Commission File No. 33-76999, and incorporated herein by
reference).
10.2 Farmout Agreement, dated October 1, 1994, between Tatham
Offshore, F-W Oil Interests, Inc., O.P.I. International,
Inc., and J. Ray McDermott Properties, Inc. (filed as
Exhibit 10.48 to DeepTech's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, Commission File
No. 0-23934 and incorporated herein by reference).
10.3 Agreement dated July 2, 1993 and amended on December 6,
1993 between Fina Oil and Chemical Company and Petrofina
Delaware, Incorporated and Tatham Offshore covering
Viosca Knoll Blocks 772/773, 774, 817, 818 and 861
(filed as Exhibit 10.20 to Tatham Offshore's
Registration Statement on Form S-1, Commission File No.
33-70120, and incorporated herein by reference).
10.4 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Ewing Bank
Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area,
Offshore Louisiana, dated May 13, 1988 by and among
Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal
Limited Partnership I-1981 (filed as Exhibit 10.22 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).
10.5 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Viosca
Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca
Knoll Area Offshore Louisiana, dated July 7, 1993 by and
among Tatham Offshore, Petrofina Delaware, Incorporated
and Fina Oil & Chemical Company (filed as Exhibit 10.23
to Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).
10.6 DeepTech Registration Rights Agreement by and between
Tatham Offshore and DeepTech (filed as Exhibit 10.25 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).
10.7 Indemnification Agreement dated as of October 16, 1993
between Tatham Offshore and its directors (filed as
Exhibit 10.26 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).
10.8 Subordinated Convertible Note Purchase Agreement between
Tatham Offshore and DeepTech, as amended (filed as
exhibit 10.30 in Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1994, and
incorporated herein by reference).
10.9 11 3/4% Subordinated Convertible Promissory Note made
payable by the Company to the order of the holder
thereof (filed as exhibit 10.31 in Tatham Offshore's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1994, and incorporated herein by reference).
10.10 Form of Stock Option Agreement by and between the
Optionee and Tatham Offshore (filed as exhibit 10.35 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).
</TABLE>
43
<PAGE> 46
<TABLE>
<S> <C>
10.11 Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).
10.12 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of F-W Oil Interests,
Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).
10.13 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.92 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, Commission File No. 0-23934 and
incorporated herein by reference).
10.14 Tatham Offshore, Inc. Employee Equity Incentive Plan
(filed as Exhibit 10.47 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).
10.15 Tatham Offshore, Inc. Non-Employee Director Stock Option
Plan (filed as Exhibit 10.48 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).
10.16 Master Drilling Agreement and Drilling Order between
Tatham Offshore, Inc. and Sedco Forex Division,
Schlumberger Technology Corporation dated September 19,
1996 (filed as Exhibit 10.50 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated herein by reference).
10.17 Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C. (filed as Exhibit 10.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).
10.18 Purchase Commitment Agreement dated February 27, 1998 by
and between Tatham Offshore, Inc. and Tatham Brothers,
LLC (filed as Exhibit 10.2 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).
10.19 Master Agreement, dated as of November 29, 1995, by and
among Highwood Partners, L.P., DeepTech International
Inc., DeepFlex Production Services, Inc., FPS III, Inc.
and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.20 Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).
10.21 First Amended and Restated Drilling Make-Ready Agreement
dated November 29, 1996 between RIGCO North America,
L.L.C. and Schlumberger Technology Corporation (Sedco
Forex Division) (filed as Exhibit 10.1 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File No. 0-23934 and
incorporated herein by reference).
10.22 Contribution and Distribution Agreement dated February
27, 1998, between DeepTech International Inc., Tatham
Offshore, Inc., DeepFlex Production Services, Inc., and
El Paso Natural Gas Company (filed as Exhibit 10.26 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).
</TABLE>
44
<PAGE> 47
<TABLE>
<S> <C>
10.23 Standby Agreement dated February 27, 1998, between
DeepTech International Inc., Tatham Offshore, Inc.,
Thomas P. Tatham, Tatham Brothers, LLC, and El Paso
Natural Gas Company (filed as Exhibit 10.27 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).
10.24 Form of Tax Sharing Agreement among Tatham Offshore,
Inc., DeepTech International Inc. and DeepFlex
Production Services, Inc. (filed as Exhibit 10.28 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein
by reference).
10.25** First Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated November 29, 1996.
10.26** Second Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated August 14, 1997.
10.27 Credit Agreement, dated September 30, 1996 among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent, Arranger, Collateral and
Documentation Agent and Administrative Agent, and the
banks and other financial institutions from time to time
party thereto (filed as Exhibit 10.3 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).
10.28** Global Amendment and Assignment and Acceptance dated
October 9, 1996 to the Credit Agreement among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent and Arranger, Hibernia
National Bank, as Collateral and Documentation Agent and
BHF-Bank Aktrengesellschaft, as Administrative Agent.
10.29 Second Amendment dated as of April 23, 1997 to the
Credit Agreement among RIGCO North America, L.L.C.,
Lehman Commercial Paper, Inc., as Advisor, Syndication
Agent and Arranger, Hibernia National Bank, as
Collateral and Documentation Agent and BHF-Bank
Aktiengesellschaft, as Administrative Agent (filed as
Exhibit 10.40 to DeepTech's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1997 Commission File
No. 0-23934 and incorporated herein by reference).
10.30** Third Amendment dated May 13, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.31** Fourth Amendment dated July 31, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.32** Fifth Amendment dated June 16, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.33** Sixth Amendment dated September 25, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.34** Management Agreement dated June 16, 1998 between
DeepFlex Production Services, Inc. and RIGCO North
America, L.L.C.
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C>
10.35** Restructuring Agreement dated September 22, 1997,
between DeepTech and Tatham Offshore.
10.36 Amended and Restated Management Agreement, effective as
of July 1, 1992, between DeepTech and Tatham Offshore
(filed as Exhibit 10.1 to Amendment No. 4 to Tatham
Offshore's Registration Statement on Form S-1, Commission
File No. 33-70120, and incorporated herein by
reference.)
10.37 First Amendment to Amended and Restated Management
Agreement, dated as of January 1, 1995, between DeepTech
and Tatham Offshore (filed as Exhibit 10.71 to
DeepTech's Registration Statement on Form S-1, Commission
File No. 33-88688, and incorporated herein by reference).
10.38 Fourth Amendment to First Amended and Restated Management
Agreement dated as of May 1, 1997 between DeepTech and
Tatham Offshore (filed as Exhibit 10.6 to DeepTech's
Annual Report on Form 10-K/A for the fiscal year ended
June 30, 1997, Commission File No. 0-23934, and
incorporated herein by reference).
10.39 Letter Agreement dated March 22, 1995 between Tatham
Offshore and Ewing Bank Gathering Company, L.L.C.
amending the Gathering Agreement dated July 1, 1992
(filed as Exhibit 10.44 to DeepTech's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).
10.40 Gas Purchase Agreement dated July 26, 1993 between
Offshore Marketing and Tatham Offshore (filed as Exhibit
10.17 to Tatham Offshore's Registration Statement on
Form S-1, Commission File No. 33-70120, and incorporated
herein by reference).
10.41 Condensate Purchase Agreement dated July 26, 1993
between Offshore Marketing and Tatham Offshore (filed
as Exhibit 10.18 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).
10.42 Credit Agreement, dated as of February 16, 1996 among
DeepFlex Production Services, Inc., Citicorp USA, Inc.,
as Administrative Agent, and the several lenders from
time to time parties thereto (filed as Exhibit 10.3 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.43 Fourth Amendment to Management Agreement Between
DeepTech International Inc. and DeepFlex Production
Services, Inc. dated as of May 1, 1997 (filed as Exhibit
10.38 to DeepTech's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1997, Commission File No.
0-23934 and incorporated herein by reference).
10.44 First Amendment to Management Agreement between
RIGCO North America, L.L.C. and DeepTech dated as of May
1, 1997 (filed as Exhibit 10.39 to DeepTech's Annual
Report on Form 10-K/A for the fiscal year ended June 30,
1997, Commission File No. 0-23934 and incorporated
herein by reference).
21.1 ** List of Subsidiaries of Tatham Offshore, Inc.
23.1 * Consent of Independent Accountants,
PricewaterhouseCoopers LLP.
24.1 Power of Attorney filed with Annual Report on
Form 10-K.
</TABLE>
- --------------------------
* Filed herewith
** Previously filed
(b) Reports on Form 8-K.
None.
46
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this First Amendment to the
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TATHAM OFFSHORE, INC.
(Registrant)
By: /s/ DENNIS A. KUNETKA
-------------------------------------------------
Dennis A. Kunetka
Chief Financial Officer, Senior Vice President
and Secretary
October 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.
* *
- ------------------------------------------- ----------------------------------
Thomas P. Tatham, Chairman of the Board Kenneth E. Beeney, Director
and Chief Executive Officer October 23, 1998
October 23, 1998
/s/ DENNIS A. KUNETKA *
- ------------------------------------------- ----------------------------------
Dennis A. Kunetka, Chief Financial Officer, Jonathan D. Pollock, Director
Senior Vice President and Secretary October 23, 1998
(Principal Accounting Officer)
October 23, 1998
* *
- ------------------------------------------- ----------------------------------
Clyde E. Nath, Director Diana J. Walters, Director
October 23, 1998 October 23, 1998
* *
- ------------------------------------------- ----------------------------------
Phillip G. Clarke, Director Roger B. Vincent, Sr., Director
October 23, 1998 October 23, 1998
*
- -------------------------------------------
James G. Niven, Director
October 23, 1998
*By: /s/ DENNIS A. KUNETKA
---------------------------------------
Dennis A. Kunetka
Attorney-in-Fact
47
<PAGE> 50
<PAGE> 51
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................................... F-2
Consolidated Balance Sheet as of June 30, 1998 and 1997................................... F-3
Consolidated Statement of Operations for the Years Ended
June 30, 1998, 1997 and 1996......................................................... F-4
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996......................................................... F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996................................................... F-6
Notes to Consolidated Financial Statements................................................ F-7
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Tatham Offshore, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Tatham
Offshore, Inc. and its subsidiaries at June 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 28, 1998
F-2
<PAGE> 53
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,689 $ 7,887
Accounts receivable 2,957 201
Receivable from affiliates 514 1,350
Prepaid expenses 167 --
------------ ------------
Total current assets 6,327 9,438
------------ ------------
Property and equipment:
Semisubmersible drilling rigs 135,754 --
Oil and gas properties, at cost, using successful efforts method 26,762 81,081
------------ ------------
162,516 81,081
Less - accumulated depreciation, depletion, amortization and impairment 27,532 50,329
------------ ------------
Property and equipment, net 134,984 30,752
------------ ------------
Deferred costs 11,529 1,317
Debt issue costs, net 578 --
------------ ------------
Total assets $ 153,418 $ 41,507
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 3,812 $ 1,385
Accounts payable to affiliates 11,374 155
Long term debt currently payable 59,156 --
------------ ------------
Total current liabilities 74,342 1,540
Long-term debt to affiliate -- 60,000
Other noncurrent liabilities 3,416 7,663
------------ ------------
77,758 69,203
------------ ------------
Minority interests in consolidated subsidiary 250 --
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit) (Note 6):
Preferred stock, $0.01 par value, 110,000,000 shares authorized as of June
30, 1998 and 1997, 17,960,732 and 24,343,931 shares issued and
outstanding at June 30, 1998
and 1997, respectively 180 243
Common stock, $0.01 par value, 250,000,000 shares authorized
as of June 30, 1998 and 1997, respectively, 30,001,026 and
2,735,573 shares issued and outstanding as of June 30, 1998
and 1997, respectively 300 274
Additional paid-in capital 192,179 84,225
Accumulated deficit (117,249) (112,438)
------------ ------------
75,410 (27,696)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 153,418 $ 41,507
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 54
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Revenue:
Oil and gas sales to affiliates $ 10,764 $ 20,543 $ 15,904
Oil and gas sales 104 180 166
Drilling services 672 -- --
------------ ------------ ------------
11,540 20,723 16,070
------------ ------------ ------------
Costs and expenses:
Production and operating expenses 5,238 8,465 13,203
Drilling operating expenses 428 -- --
Exploration expenses 149 542 637
Depreciation, depletion and amortization 3,047 5,364 1,758
Impairment, abandonment and other -- 41,674 8,000
Management fee 4,375 3,279 4,436
General and administrative expenses 1,371 1,567 1,839
------------ ------------ ------------
14,608 60,891 29,873
------------ ------------ ------------
Operating loss (3,068) (40,168) (13,803)
Interest income 223 571 113
Gain on sale of oil and gas properties -- -- 22,641
Interest and other financing costs (165) -- (255)
Interest expense - affiliates (1,801) (8,374) (7,906)
------------ ------------ ------------
Net (loss) income $ (4,811) $ (47,971) $ 790
============ ============ ============
Net (loss) income available to common shareholders $ (8,581) $ (51,891) $ 509
============ ============ ============
Weighted average number of shares outstanding (Note 3) 17,300 2,665 2,509
============ ============ ============
Basic net (loss) income per common share (Note 3) $ (0.50) $ (19.47) $ 0.20
============ ============ ============
Diluted net (loss) income per common share (Note 3) $ (0.50) $ (19.47) $ 0.09
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 55
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,811) $ (47,971) $ 790
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 3,047 5,364 1,758
Impairment, abandonment and other -- 41,674 8,000
Amortization of debt issue costs 39 -- --
Costs and expenses settled by issuance of common stock 389 -- --
Gain on sale of oil and gas properties -- -- (22,641)
Noncash interest expense related to conversion of debt into
common stock 1,709 -- --
Other -- 2,377 1,889
Changes in operating working capital (net of effect of conveyance):
(Increase) decrease in accounts receivable (668) 518 2,743
Decrease (increase) in receivable from affiliates 837 (382) 303
(Increase) decrease in prepaid expenses (116) 29 175
Increase (decrease) in accounts payable and accrued liabilities (3,369) (3,221) (7,809)
Increase (decrease) in accounts payable to affiliates 4,819 (2,946) 7,208
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,876 (4,558) (7,584)
------------ ------------ ------------
Cash flows from investing activities:
Additions to oil and gas properties (352) (2,923) (9,143)
Deferred costs (10,212) (1,317) --
Cash received from conveyance of DeepFlex to Tatham Offshore
(Notes 2 and 10) 3,580 -- --
Proceeds from deferred income related to the Assigned Properties -- -- 15,000
------------ ------------ ------------
Net cash (used in) provided by investing activities (6,984) (4,240) 5,857
------------ ------------ ------------
Cash flows from financing activities:
Repayment of notes payable (250) -- (10,468)
Proceeds from notes payable to affiliate -- -- 8,000
Repayment of notes payable to affiliate -- (1,734) (8,000)
Proceeds from the issuance of common stock related to the
exercise of Exchange Warrants 2,656 -- --
Redemption of Mandatory Redeemable Preferred Stock (2,496) -- --
Proceeds of offering of Warrants, net of underwriting fees,
commissions and offering costs -- -- 11,291
Proceeds from issuance of Series A Preferred Stock -- 12,242 1,804
Proceeds from issuance of Series B Preferred Stock -- 74 --
Proceeds from issuance of Series C Preferred Stock -- 1,339 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (90) 11,921 2,627
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (5,198) 3,123 900
Cash and cash equivalents at beginning of year 7,887 4,764 3,864
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,689 $ 7,887 $ 4,764
============ ============ ============
</TABLE>
Supplemental disclosures to the statement of cash flows - see Note 10.
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 56
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Warrants
outstanding
to purchase shares
Preferred Stock Common Stock of Convertible
---------------------- ---------------------- Exchangeable Additional
Number of Number of Preferred paid-in Accumulated
Shares Par value Shares Par value Stock capital deficit Total
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 -- $ -- 25,000 $ 250 $ -- $ 44,987 $ (65,257) $ (20,020)
Offering of
Warrants, net -- -- -- -- 11,291 -- -- 11,291
Issuance of Senior
Preferred Stock 8 -- -- -- -- 7,500 -- 7,500
Issuance of Series
A Preferred Stock 18,717 187 -- -- (8,408) 26,939 -- 18,718
Issuance of common
stock -- -- 500 5 -- 578 -- 583
Net income for the
year ended
June 30, 1996 -- -- -- -- -- -- 790 790
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1996 18,725 187 25,500 255 2,883 80,004 (64,467) 18,862
Issuance of Series
B Preferred Stock 74 1 -- -- (34) 107 -- 74
Issuance of Series
C Preferred Stock 1,338 13 -- -- (602) 1,928 -- 1,339
Conversion of
Warrants into
Mandatory Redeemable
Preferred Stock 4,991 50 -- -- (2,247) 2,197 -- --
Conversion of
Series A Preferred
Stock into Common Stock (784) (8) 1,856 19 -- (11) -- --
Net loss for the
year ended June
30, 1997 -- -- -- -- -- -- (47,971) (47,971)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 24,344 243 27,356 274 -- 84,225 (112,438) (27,696)
Reverse stock split
(Note 3) -- -- (24,620) (246) -- 246 -- --
Conversion of debt
into common stock -- -- 26,667 266 -- 61,443 -- 61,709
Contribution by
DeepTech of all of the
outstanding capital
stock of DeepFlex
(Notes 2 and 10) -- -- -- -- -- 59,279 -- 59,279
Conveyance of all
of the outstanding
capital stock of Tatham
Development to DeepTech
(Notes 2 and 10) -- -- -- -- -- (13,620) -- (13,620)
Issuance of common stock -- -- 90 1 -- 388 -- 389
Conversion of
Series A Preferred Stock
into common stock (375) (3) 101 1 -- 2 -- --
Conversion of
Series C Preferred
Stock into Exchange
Warrants (1,017) (10) -- -- 1,474 (1,464) -- --
Issuance of common
stock related to
the exercise of
Exchange Warrants -- -- 407 4 (1,474) 4,126 -- 2,656
Redemption of
Mandatory
Redeemable
Preferred Stock (4,991) (50) -- -- -- (2,446) -- (2,496)
Net loss for the
year ended June
30, 1998 -- -- -- -- -- -- (4,811) (4,811)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1998 17,961 $ 180 30,001 $ 300 $ -- $ 192,179 $(117,249) $ 75,410
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 57
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is a
diversified energy company currently pursuing, through its operating
subsidiaries, energy related opportunities in Atlantic Canada, including
offshore contract drilling services, substantial natural gas gathering and
transmission facilities and related energy infrastructure. Historically, Tatham
Offshore was engaged in the development, exploration and production of oil and
gas reserves located primarily offshore the United States in the Gulf of Mexico
(the "Gulf"). As of June 30, 1998, Tatham Offshore was an approximately
94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified
energy company, which, through its affiliates, was 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. See Note 2.
On June 25, 1998, DeepTech contributed all of the outstanding shares of capital
stock of DeepFlex Production Services, Inc. ("DeepFlex") to Tatham Offshore as
discussed in Note 2. DeepFlex, a Delaware corporation and wholly-owned
subsidiary of Tatham Offshore, was formed in January 1995 and through its
subsidiaries, focuses on the acquisition and deployment of semisubmersible
drilling rigs for contract drilling. RIGCO North America, L.L.C. ("RIGCO") and
FPS VI, Inc. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, own interests in
the FPS Laffit Pincay and the FPS Bill Shoemaker, both second generation
semisubmersible drilling rigs.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
Partners"). North Atlantic Partners is the sponsor of a proposal to construct a
natural gas pipeline offshore Newfoundland and Nova Scotia to the eastern
seaboard of the United States. Through June 30, 1998, Tatham Offshore Canada
Limited has incurred $11,529,000 in costs associated with the North Atlantic
project and related infrastructure projects. Such costs include engineering,
survey, legal, regulatory and other costs associated with the project.
Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation
and a wholly-owned subsidiary of Tatham Offshore through June 24, 1998, holds
interests in the Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence
prospect. See Note 2.
NOTE 2 - RECENT EVENTS:
On February 27, 1998, DeepTech entered into an Agreement and Plan of Merger (the
"Merger Agreement") with El Paso Natural Gas Company ("El Paso") and El Paso
Acquisition Company ("El Paso Acquisition"), a wholly-owned subsidiary of El
Paso, pursuant to which DeepTech would merge (the "Merger") with El Paso, or
under certain circumstances, with El Paso Acquisition. Subsequently, DeepTech,
El Paso and El Paso Acquisition executed Amendment No. 1 to the Merger Agreement
(the "Amended Merger Agreement") with El Paso Energy Corporation ("El Paso
Corporation") to reflect El Paso's reorganization of its corporate structure.
The holders of a majority of DeepTech's common stock approved the Amended Merger
Agreement on July 19, 1998. Pursuant to the Amended Merger Agreement, DeepTech
merged with El Paso Acquisition on August 14, 1998.
As a result of the Merger and related transactions, some of the assets of Tatham
Offshore and DeepTech were restructured so that DeepFlex became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech. Pursuant to the Redemption Agreement
(discussed below), Tatham Offshore agreed to transfer all of its remaining
assets located in the Gulf to Leviathan Gas Pipeline Partners, L.P. (the
"Partnership"), an affiliate. Further, DeepTech divested itself of its equity
ownership interest in Tatham Offshore by offering all of the shares of Tatham
Offshore common stock and Series A Preferred Stock (Note 6) held by DeepTech to
the stockholders of DeepTech in a Rights Offering (discussed below).
Following the asset restructuring, Tatham Offshore's marine services business
includes the operation of two semisubmersible drilling rigs, the FPS Bill
Shoemaker and the FPS Laffit Pincay, currently owned by DeepFlex. In addition,
Tatham Offshore will continue to pursue energy related opportunities in Atlantic
Canada, including the
F-7
<PAGE> 58
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
North Atlantic pipeline project, related gas processing facilities, a facility
for the generation of electricity and other related investments. The material
terms of the Merger and the transactions contemplated by the Amended Merger
Agreement, Redemption Agreement (discussed below) and other agreements as these
agreements relate to Tatham Offshore and its subsidiaries are as follows:
(a) As discussed in Note 1, DeepTech contributed all of the outstanding
shares of capital stock of DeepFlex to Tatham Offshore on June 25,
1998. As a result of this contribution by DeepTech, Tatham Offshore,
through DeepFlex, assumed certain indebtedness due to DeepTech (see
(b) below) and $64,406,000 of third-party and affiliate debt (Note 5).
(b) On June 25, 1998, Tatham Offshore conveyed to DeepTech all of the
outstanding shares of capital stock of Tatham Development and canceled
its reversionary interests in certain oil and gas properties (Note 4)
in payment of the indebtedness owed to DeepTech discussed in (a)
above.
(c) On August 14, 1998, Tatham Offshore transferred its remaining assets
located in the Gulf to the Partnership in consideration of the
redemption by Tatham Offshore of its Senior Preferred Stock (discussed
in Note 6) currently owned by the Partnership (the "Redemption
Agreement"). Specifically, under the terms of the Redemption Agreement
and subject to the satisfaction of certain conditions to closing, the
Partnership exchanged 7,500 shares of Senior Preferred Stock and all
related accrued and unpaid dividends due to the Partnership as of the
date of the exchange for 100% of Tatham Offshore's right, title and
interest in and to Viosca Knoll Blocks 772, 773, 774, 817, 818 and 861
(subject to an existing production payment obligation), West Delta
Block 35, Ewing Bank Blocks 871, 914, 915 and 916 and the platform
located on Ship Shoal Block 331. At the closing, Tatham Offshore paid
the Partnership $1,605,000, the amount equal to the net cash generated
from such properties from January 1, 1998 through August 14, 1998. In
addition, the Partnership assumed all abandonment and restoration
obligations associated with the platform and leases. At the closing of
the Redemption Agreement on August 14, 1998, the management fees
charged to Tatham Offshore by DeepTech were reduced by 50% effective
retroactively to January 1, 1998 and the balance of $1,405,000 owed to
DeepTech was paid. See (e) below.
(d) On July 16, 1998, the Commission declared effective Tatham Offshore's
Registration Statement on Form S-1 relating to the offering of rights
to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares
of Tatham Offshore common stock and 4,670,957 shares of Tatham
Offshore's Series A Preferred Stock (the "Rights Offering"). As a
result of the Rights Offering, unaffiliated parties purchased
3,378,693 shares of common stock and 562,148 shares of Series A
Preferred Stock. Tatham Brothers Securities, LLC ("TB Securities"), an
affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief
Executive Officer of Tatham Offshore and DeepFlex, purchased
20,768,011 shares of common stock and 3,455,440 shares of Series A
Preferred Stock which resulted in DeepTech receiving net proceeds from
the Rights Offering of $75.0 million. Under a firm underwriting
agreement, Tatham Brothers received a fee of $6.9 million as an
underwriting fee. To the extent any shares held by DeepTech remained
unsubscribed, Tatham Offshore purchased such shares and DeepTech
contributed the proceeds from such purchase to Tatham Offshore.
DeepTech no longer owns any of Tatham Offshore's capital stock as a
result of the Rights Offering.
(e) As of August 14, 1998, the closing of the Merger, DeepTech no longer
operates Tatham Offshore under its management agreement discussed in
Note 7. Tatham Offshore has hired a management team and support
personnel required to conduct its contract drilling services business
and implement its Atlantic Canada strategy.
F-8
<PAGE> 59
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company"). All of Tatham Offshore's
subsidiaries are currently 100% owned. All significant intercompany balances and
transactions have been eliminated in consolidation. 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.
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.
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.
Oil and gas properties
The Company accounts for its oil and gas exploration and production activities
using the successful efforts method of accounting. Under this method, costs of
successful exploratory wells, development wells and acquisitions of mineral
leasehold interests are capitalized. Production, exploratory dry hole and other
exploration costs, including geological and geophysical costs and delay rentals,
are expensed as incurred. Unproved properties are assessed periodically and any
impairment in value is recognized currently as impairment, abandonment and other
expense. Upon discovery of proved reserves, the costs of unproved properties are
transferred to proved properties.
Depreciation, depletion and amortization of the capitalized costs of producing
oil and gas properties, consisting principally of tangible and intangible costs
incurred in developing a property and costs of productive leasehold interests,
are computed on the unit-of-production method. Unit-of-production rates are
based on annual estimates of remaining proved developed reserves or proved
reserves, as appropriate, for each property. Estimated dismantlement,
restoration and abandonment costs and estimated residual salvage values are
taken into account in determining depreciation provisions. Other noncurrent
liabilities at June 30, 1998 and 1997 include $3,416,000 and $7,663,000,
respectively, of accrued dismantlement, restoration and abandonment costs.
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", effective July 1, 1996. SFAS No. 121 requires recognition of
impairment losses on long-lived assets (including proved properties, wells,
equipment and related facilities) if the carrying amount of such assets, grouped
at the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows from other assets, exceeds the estimated
undiscounted future cash flows of such assets. Measurement of any impairment
loss is based on the fair value of the assets. Prior to the adoption of SFAS No.
121, the Company recorded impairments to the extent that the net
F-9
<PAGE> 60
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
book value of oil and gas properties, on an overall basis, exceeded the
estimated undiscounted future net revenue of proved oil and gas reserves, net of
income taxes. Implementation of SFAS No. 121 did not have a material effect on
the Company's financial position or results of operations. See Note 4.
Repair and maintenance costs are charged to expense as incurred; additions,
improvements and replacements are capitalized.
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.
Deferred costs
The Company capitalizes costs related to advisory, legal and other direct
project costs of pending transactions as deferred costs. At June 30, 1998 and
1997, the Company had capitalized $11,529,000 and $1,317,000, respectively, of
development costs related to its sponsorship of North Atlantic Partners'
proposal to construct a pipeline offshore eastern Canada as discussed in Note 1.
Revenue recognition
Revenue from oil and gas sales is recognized upon delivery in the period of
production. Revenue from drilling services is recognized in the period rendered.
The Company's drilling services revenues are generated from contract drilling
services related to its two semisubmersible drilling rigs.
Income taxes
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities.
Earnings per share
During the three months ended December 31, 1997, Tatham Offshore adopted SFAS
No. 128, "Earnings per Share". SFAS No. 128 establishes new guidelines for
computing earnings per share ("EPS") and requires dual presentation of basic and
diluted EPS for entities with complex capital structures. Basic EPS excludes
dilution and is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects potential dilution and is computed by dividing
net income (loss) available to common shareholders by the weighted average
number of common shares outstanding during the period increased by the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. All prior period EPS data has been
restated to conform with the provisions of SFAS No. 128.
Tatham Offshore excluded from its computation of diluted EPS the effect of
antidilutive securities related to its outstanding convertible exchangeable
preferred stocks discussed in Note 4 and its convertible production payment
related to 25% of the net operating cash flow from Viosca Knoll Block 817.
F-10
<PAGE> 61
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Basic net loss per share equals diluted net loss per share for the years ended
June 30, 1998 and 1997. The following is a reconciliation of the numerators and
the denominators of the basic and diluted per share computations for the year
ended June 30, 1996.
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income $ 509,000 2,508,824 $ 0.20
========
EFFECT OF DILUTIVE SECURITIES
Conversion of preferred stock and related accrued dividends 281,000 6,169,449
--------- ---------
DILUTED EPS
Net income $ 790,000 8,678,273 $ 0.09
========= ========= ========
</TABLE>
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions, including those related to oil and gas reserves and potential
environmental liabilities, that affect the reported amounts of certain assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the related reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. Management believes that its estimates are reasonable.
Other
The fair values of the financial instruments included in the Company's assets
and liabilities approximate their carrying values.
Tatham Offshore adopted SFAS No. 123, "Accounting for Stock Based Compensation",
effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the fair
value method of accounting for their stock-based compensation plans, the Company
has elected to continue to utilize the intrinsic value method under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The
adoption of SFAS No. 123 did not have a material adverse effect on the Company's
financial position or results of operations at adoption and during the years
ended June 30, 1998, 1997 and 1996.
The Financial Accounting Standards Board recently issued statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which is
effective for the Company's financial statements as of and for the year ending
June 30, 1999. This Statement requires reporting of summarized financial results
for operating segments as well as established standards for related disclosures
about products and services, geographic areas and major customers. Primary
disclosure requirements include total segment revenues, total segment profit or
loss and total segment assets. The Company has not yet completed its evaluation
of the impact of this Statement on its financial statements.
Certain amounts in prior years have been reclassified to conform to the current
year's presentation.
The Company utilizes an off-balance sheet financial instrument to manage the
interest rate associated with its borrowings. An interest rate cap is used to
lock in a maximum rate if rates rise, but enables the Company to otherwise pay
lower market rates. The cost of the interest rate cap is amortized to interest
expense over the life of the cap, and the unamortized cost is included in other
assets.
NOTE 4 - PROPERTY AND EQUIPMENT:
SEMISUBMERSIBLE DRILLING RIGS
At June 30, 1998, capitalized costs and related accumulated depreciation of
semisubmersible drilling rigs totaled $135,754,000 and $6,494,000, respectively,
and relate to the contribution by DeepTech of all of the outstanding capital
stock of DeepFlex to Tatham Offshore on June 25, 1998 (Notes 1 and 2). As a
result, through RIGCO and FPS VI, the Company owns the FPS Laffit Pincay and the
FPS Bill Shoemaker.
F-11
<PAGE> 62
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
OIL AND GAS PROPERTIES
Capitalized Costs
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
(In thousands)
<S> <C> <C>
Proved properties $ 4,099 $ 5,446
Unproved properties -- 2,143
Wells, equipment and related facilities 22,663 73,492
------------ ------------
Total capitalized costs 26,762 81,081
Accumulated depreciation, depletion
amortization and impairment (21,038) (50,329)
------------ ------------
Net capitalized costs $ 5,724 $ 30,752
============ ============
</TABLE>
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Activities
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Acquisition of proved properties $ -- $ -- $ 2,373
Exploration 149 542 637
Development 353 2,923 8,799
------------ ------------ ------------
Total costs incurred $ 502 $ 3,465 $ 11,809
============ ============ ============
</TABLE>
Results of Operations for Oil and Gas Producing Activities
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Oil and gas sales $ 10,868 $ 20,723 $ 16,070
Production and operating expenses (5,238) (8,465) (13,203)
Exploration expenses (149) (542) (637)
Depreciation, depletion and amortization (4,099) (5,364) (1,758)
Impairment, abandonment and other -- (41,674) (8,000)
------------ ------------ ------------
Results of operations from oil and gas producing
activities (excluding corporate overhead,
interest costs and income tax benefits) $ 1,382 $ (35,322) $ (7,528)
============ ============ ============
</TABLE>
Sale of Properties to the Partnership
On June 30, 1995, the Partnership entered into a purchase and sale agreement
(the "Purchase and Sale Agreement") with Tatham Offshore. Pursuant to the
Purchase and Sale Agreement, the Partnership acquired, subject to certain
reversionary interests, a 75% working interest in Viosca Knoll Block 817, a 50%
working interest in Garden Banks Block 72 and a 50% working interest in Garden
Banks Block 117 (the "Assigned Properties") from Tatham Offshore for
$30,000,000. Tatham Offshore received $15,000,000 at closing and an
F-12
<PAGE> 63
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
additional $15,000,000 on August 15, 1995. The Partnership was entitled to
retain all of the revenue attributable to the Assigned Properties until it has
received net revenue equal to the Payout Amount (as defined below), whereupon
Tatham Offshore was entitled to receive a reassignment of the Assigned
Properties, subject to reduction and conditions as discussed below. Prior to
December 10, 1996, "Payout Amount" was defined as an amount equal to all costs
incurred by Flextrend Development with respect to the Assigned Properties
(including the $30,000,000 acquisition cost paid to Tatham Offshore) plus
interest thereon at a rate of 15% per annum. Effective February 1, 1996, the
Partnership entered into an agreement with Tatham Offshore regarding the
restructuring of certain transportation agreements that increased the amount
recoverable from the Payout Amount by $7,500,000 plus interest (see "Impairment,
Abandonment and Other" discussion below). During the year ended June 30, 1996,
Tatham Offshore waived its options to prepay the then-existing Payout Amount and
receive a reassignment of its working interests and recognized $22,641,000 as a
gain on the sale of oil and gas properties.
Effective December 10, 1996, the Partnership exercised its option to permanently
retain 50% of the acquired working interest in the Assigned Properties in
exchange for forgiving 50% of the then-existing Payout Amount exclusive of the
$7,500,000 plus interest added to the Payout Amount in connection with the
restructuring of certain transportation agreements discussed above. The
Partnership remained obligated to fund any further development costs
attributable to Tatham Offshore's portion of the working interests, with such
costs to be added to the Payout Amount. The Partnership's election to retain 50%
of the acquired working interest in the Assigned Properties reduced the Payout
Amount from $94,020,000 to $50,760,000. Subsequent to December 10, 1996, only
50% of the development and operating costs attributable to the Assigned
Properties were added to the Payout Amount and 50% of the net revenue from the
Assigned Properties reduce the Payout Amount. See "Impairment, Abandonment and
Other" discussion below and Note 2. As a result of the Merger and related
transactions, the reversionary interests were cancelled.
Viosca Knoll Block 817
In September 1995, Tatham Offshore reacquired an aggregate 25% working interest
in Viosca Knoll Block 817 and an approximate 12.5% working interest in the
remainder of Viosca Knoll Blocks 772/773, 774, 818 and 861 (collectively, the
"Viosca Knoll Properties") from two industry partners for a total of $16,000,000
in convertible production payments payable from 25% of the net cash flow from
the Viosca Knoll Properties so acquired. The estimated net present value of the
convertible production payments payable of $2,000,000 was recorded as oil and
gas properties on the date of acquisition. The unpaid portion of the production
payments is convertible into Tatham Offshore common stock at any time during the
first five years at $8.00 per share. At June 30, 1998, the unpaid portion of the
production payment obligation totaled $11,299,000. For the years ended June 30,
1998 and 1997, production and operating expenses include $1,236,000 and
$1,465,000, respectively, of production payments made during the year. As part
of the Redemption Agreement, this property was transferred to the Partnership
effective August 14, 1998.
Transportation and Processing Agreements
General. In December 1993, Tatham Offshore entered into a master gas dedication
arrangement with the Partnership (the "Master Dedication Agreement"). Under the
Master Dedication Agreement, Tatham Offshore dedicated all production from its
Garden Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain
adjoining areas of mutual interest to the Partnership for transportation. In
exchange, the Partnership agreed to install the pipeline facilities necessary to
transport production from the areas and certain related facilities and to
provide transportation services with respect to such production. Tatham Offshore
agreed to pay certain fees for transportation services and facilities access
provided under the Master Dedication Agreement. Pursuant to the terms of the
Purchase and Sale Agreement, the Partnership assumed all of Tatham Offshore's
obligations under the Master Dedication Agreement and certain ancillary
agreements with respect to the Assigned Properties.
Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing Bank
Agreement") among Tatham Offshore, DeepTech, and a subsidiary of the
Partnership, Tatham Offshore dedicated all natural gas and crude oil produced
from eight of its Ewing Bank leases for gathering and redelivery by the
Partnership and was obligated to pay a demand rate as well as a commodity charge
equal to 4% of the market price of production actually transported. Tatham
Offshore's Ewing Bank 914 #2 well commenced production in August 1993.
Production and
F-13
<PAGE> 64
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
operating expenses on the accompanying consolidated statement of operations
included demand and commodity fees of $1,493,000 and $5,090,000 for the years
ended June 30, 1997 and 1996, respectively, related to the Ewing Bank Agreement.
In March 1996, the Partnership settled all remaining unpaid demand charge
obligations under this agreement in exchange for certain consideration as
discussed below.
Ship Shoal. Tatham Offshore and the Partnership also entered into a gathering
and processing agreement (the "Ship Shoal Agreement") pursuant to which the
Partnership constructed a gathering line from Tatham Offshore's Ship Shoal Block
331 lease to interconnect with a third-party pipeline at the Partnership's
processing facilities located on its Ship Shoal Block 332 platform. Pursuant to
the terms of the Ship Shoal Agreement, and in consideration for constructing the
interconnect, refurbishing the platform and providing access to the processing
facilities, Tatham Offshore was required to pay the Partnership demand charges
and has dedicated all production from its Ship Shoal 331 lease and eight
additional surrounding leases for gathering and processing by the Partnership
for additional commodity fees. Production and operating expenses on the
accompanying consolidated statement of operations include demand and commodity
fees of $638,000 and $997,000 for the years ended June 30, 1997 and 1996,
respectively, related to the Ship Shoal Agreement. In March 1996, the
Partnership settled all remaining unpaid demand charge obligations under this
agreement in exchange for certain consideration as discussed below.
Transportation Agreements Settled. Effective February 1, 1996, Tatham Offshore
entered into an agreement with the Partnership to prepay its remaining demand
charge obligations under the Ewing Bank and Ship Shoal Agreements. Under the
agreement, Tatham Offshore's demand charge obligations relative to the Ewing
Bank Gathering System and the pipeline facilities constructed by the Partnership
for its Ship Shoal property have been prepaid in full. In exchange, Tatham
Offshore (i) issued to the Partnership 7,500 shares of Senior Preferred Stock
(as defined in Note 6) with a liquidation preference of $1,000 per share, (ii)
added the sum of $7,500,000 to the Payout Amount under the Purchase and Sale
Agreement and (iii) granted to the Partnership certain rights to use and acquire
the Ship Shoal Block 331 platform. The Partnership has the right to utilize the
Ship Shoal Block 331 platform and related facilities at a rental rate of $1.00
per annum for such period as the platform is owned by Tatham Offshore and
located on the Ship Shoal Block 331, provided such use does not interfere with
lease operations or other activities of Tatham Offshore. In addition, the
Partnership has a right of first refusal relative to a sale of the platform. The
agreement with the Partnership resulted in a reduction in demand charge payments
of $7,800,000 and $4,100,000 for the years ended June 30, 1997 and 1996,
respectively. Tatham Offshore remains obligated to pay the commodity charges
under these agreements. See "Impairment, Abandonment and Other" discussion
below. This agreement was transferred to the Partnership on August 14, 1998 as
part of the Redemption Agreement.
Impairment, Abandonment and Other
In May 1997, Tatham Offshore shut-in the Ewing Bank 914 #2 well as a result of a
downhole mechanical problem. Although Tatham Offshore was evaluating potential
workover and recompletion alternatives for this well, the Company, at June 30,
1997, reserved its remaining investment in the Ewing Bank 914 #2 well and
certain adjacent leases and accrued additional costs associated with the
abandonment of this well and the Ewing Bank 915 #4 well. In May 1998, Tatham
Offshore completed abandonment procedures on these wells.
Problems resulting from the completion of three wellbores at Ship Shoal Block
331 have resulted in only a minimal amount of production from the property and
Tatham Offshore decided not to pursue further recompletion operations. As a
result of this decision, at June 30, 1997, Tatham Offshore reserved its
remaining investment in its Ship Shoal Block 331 and accrued costs associated
with the abandonment of the platform and wells. In December 1997, Tatham
Offshore assigned its Ship Shoal Block 331 lease and related abandonment
obligations to a third party.
F-14
<PAGE> 65
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In summary, impairment, abandonment and other on the accompanying consolidated
statement of operations includes the following items related to the Ewing Bank
and Ship Shoal properties discussed above.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Reserve investments in oil and gas properties $ -- $ 32,389 $ 8,000
Accrue abandonment costs -- 6,622 --
Expense prepaid demand charges, net -- 2,663 --
------------ ------------ ------------
$ -- $ 41,674 $ 8,000
============ ============ ============
</TABLE>
NOTE 5 - INDEBTEDNESS:
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 certain other
rig related indebtedness. 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
March 31, 1999, (ii) bears interest at the prime rate plus 3% per annum (11.5%
at June 30, 1998), 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 ending September 30, 1998 and (v) is subject
to customary conditions and covenants, including the maintenance of a minimum
level of working capital. As of June 30, 1998, amounts outstanding under the
RIGCO Credit Facility totaled $59,156,000. 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 $151,000 for the period
from June 25, 1998 through June 30, 1998. 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. Management believes it will be
able to refinance the Credit Facility upon its maturity.
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.
Long-term debt - affiliates
As of June 30, 1997, Tatham Offshore had $60,000,000 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 $1,709,000 from July 1, 1997 through September 18,
1997, the date on which the DeepTech Board of Directors approved entering into
an option agreement to restructure the Subordinated Notes (the "Restructuring
Agreement"). Pursuant to the Restructuring Agreement, DeepTech forgave the
scheduled interest payments due in September and December 1997 under the
Subordinated Notes and on December 17, 1997, 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 then existing outstanding debt.
The Subordinated Notes bore interest at a rate of 11 3/4% per annum, payable
quarterly. Effective July 1, 1997, the interest rate increased to 13% per annum.
Interest expense related to this borrowing totaled $1,709,000, $7,040,000 and
$7,060,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
F-15
<PAGE> 66
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other
On May 15, 1998, DeepFlex borrowed $5,000,000 from Tatham Brothers, L.L.C., an
affiliate of Mr. Tatham. Proceeds from the borrowing were used to fund certain
upgrades and routine maintenance on the FPS Laffit Pincay. This borrowing
matures on January 15, 1999, bears interest at 12% per annum, payable at
maturity and is secured by the Subordinated Promissory Note dated September 30,
1996 issued by RIGCO North America, L.L.C. payable to DeepFlex. Interest expense
totaled $10,000 for the period from June 25, 1998 through June 30, 1998.
(See Note 11)
Interest expense related to other third party debt totaled $256,000 for the year
ended June 30, 1996.
NOTE 6 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity:
<TABLE>
<CAPTION>
Dividends In Arrears
Shares Outstanding at June 30, June 30, Conversion/
------------------------------ Liquidation Dividend ----------------------- Exchange
Equity 1998 1997 Preference Rate 1998 1997 Features
<S> <C> <C> <C> <C> <C> <C> <C>
Senior Preferred Stock (a) 7,500 7,500 $1,000 per share 9% $1,631,000(a) $ 956,000 (a) (d)
Series A Preferred
Stock (b) 17,557,648(h) 17,932,513 $1.50 per share 12% 6,321,000 3,228,000 (e)(f)
Series B Preferred Stock 74,379 74,379 $1.00 per share 8% 10,000 4,000 (e)(f)
Series C Preferred Stock 321,205 1,338,162(c) $0.50 per share 4% 10,000 13,000 (e)(f)
Mandatory Redeemable
Preferred Stock -- 4,991,377(c) $0.50 per share -- -- -- (g)
Common Stock 30,001,026(h) 27,355,727 N/A -- -- -- --
</TABLE>
- ----------
(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible
Preferred Stock and replaced this stock with Series B 9% Senior Convertible
Preferred Stock ("Senior Preferred Stock"). Each share of the Senior
Preferred Stock is senior to all other classes of Tatham Offshore preferred
and common stock in the case of liquidation, dissolution or winding up of
Tatham Offshore. The Partnership holds all outstanding shares. In
connection with the Redemption Agreement, the Senior Preferred Stock and
all related unpaid dividends will be redeemed in full. See Note 2.
(b) DeepFlex held 4,670,957 shares of the outstanding Series A Preferred Stock
at June 30, 1997. In March 1998, DeepFlex conveyed its 4,670,957 shares of
Series A Preferred Stock to DeepTech. See Note 2.
(c) DeepFlex held 1,016,957 and 4,312,086 shares of the outstanding Series C
Preferred Stock and Mandatory Redeemable Preferred Stock, respectively, at
June 30, 1997. In February 1998, DeepFlex 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 $2,656,000 in proceeds to Tatham
Offshore. Tatham Offshore used $2,496,000 of proceeds to redeem all of its
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 conveyed the 406,783 shares of common stock
to DeepTech in March 1998. See Note 2.
(d) The Senior Preferred Stock shall be convertible into Series A Preferred
Stock using a conversion ratio equal to (i) the liquidation preference
amount plus accumulated unpaid dividends divided by (ii) $0.9375, the
closing price of the Series A Preferred Stock on February 27, 1998.
(e) At any time until December 31, 1998, each share may be exchanged for 0.4
Exchange Warrants. Each full Exchange Warrant entitles the holder thereof
to purchase one share of Tatham Offshore common stock at $6.53 per share.
The Exchange Warrants expire on July 1, 1999. Alternatively, at any time,
the holder of any shares may convert the liquidation value and unpaid
dividends into shares of Tatham Offshore common stock at $6.53 per share.
(f) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(g) Tatham Offshore was required to redeem at a redemption price of $0.50 per
share if Tatham Offshore redeems any shares of Series A, B or C Preferred
Stock. Tatham Offshore was also required to redeem at a redemption price of
$0.50 per share from net proceeds from the sale of common stock pursuant to
the exercise of Exchange Warrants, subject to certain conditions. See (c)
above.
(h) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase by
Tatham Offshore were contributed by DeepTech to Tatham Offshore.
Common Stock
Effective February 1996, an amendment to Tatham Offshore's Restated Certificate
of Incorporation increased the number of authorized shares of Tatham Offshore's
common stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000
shares and the number of shares of preferred stock, $0.01 par value per share,
from 10,000,000 shares to 110,000,000 shares. This increase in authorized
capital was necessary in order for Tatham Offshore to effect the rights
offering, as discussed below.
F-16
<PAGE> 67
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the year ended June 30, 1998, Tatham Offshore issued 90,000 shares of
common stock to a consultant for services rendered in connection with the
Company's activities in Atlantic Canada. During the year ended June 30, 1996,
Tatham Offshore issued 245,182 shares of common stock to certain management
personnel of DeepTech in connection with DeepTech's deferred compensation
arrangement discussed in Note 7.
Preferred Stock
Tatham Offshore filed a registration statement (the "Offering") with the
Securities and Exchange Commission (the "Commission") which was declared
effective on December 26, 1995, relating to the granting to all holders of
Tatham Offshore's common stock, on the record date, December 26, 1995, rights
(the "Rights") to purchase up to 25,120,948 warrants (the "Warrants"). Each
Right entitled the holder to subscribe to purchase one Warrant at the purchase
price of $.50 per Warrant. In February 1996, Tatham Offshore issued 25,120,948
Warrants and received $12,560,000 in gross proceeds ($11,291,000 in net
proceeds) pursuant to the exercise of Rights. A total of 20,129,571 Warrants
were exercised to purchase 18,717,030 shares, 74,379 shares and 1,338,162 shares
of Series A, B and C Preferred Stock, respectively, at $1.00 per share which
generated an additional $15,459,000 in proceeds to Tatham Offshore. The
remaining 4,991,377 Warrants outstanding on January 1, 1997 were automatically
converted into an equal number of shares of Mandatory Redeemable Preferred
Stock.
In February 1998, DeepFlex 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 $2,656,000 in proceeds to Tatham Offshore. Tatham Offshore used
$2,496,000 of proceeds to redeem all of its 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 conveyed the
406,783 shares of common stock to DeepTech in March 1998.
Stock Compensation Plans
On August 28, 1995, Tatham Offshore filed a registration statement on Form S-8
with the Commission for the registration of 400,000 shares of common stock
authorized for issuance upon exercise of options under Tatham Offshore's Equity
Incentive Plan (the "Incentive Plan") and 100,000 shares of common stock
authorized for issuance upon exercise of options under Tatham Offshore's
Non-Employee Director Stock Option Plan (the "Director Option Plan" and
collectively with the Incentive Plan, the "Option Plans"). The Incentive Plan,
as amended, provides Tatham Offshore the ability to issue a variety of awards
pursuant to the plan including stock options, restricted stock, stock
appreciation rights and stock value equivalent awards. In January 1998, Tatham
Offshore issued 100,000 options under the Incentive Plan. In June 1996, Tatham
Offshore issued 25,514 shares of common stock to outside directors pursuant to
the exercise of options granted under the Director Option Plan in settlement of
directors' fees and meeting attendance fees for the year ended June 30, 1996.
During the years ended June 30, 1998, 1997 and 1996, Tatham Offshore issued
15,000 options, 9,000 options and 13,000 options, respectively, pursuant to the
Director Option Plan. Options outstanding under the Option Plans at June 30,
1998 totaled 136,500 of which 31,500 options were exercisable. In addition,
Tatham Offshore issued 79,000 stock appreciation rights pursuant to the
Incentive Plan during the year ended June 30, 1997.
Tatham applies APB Opinion No. 25 and related interpretations in accounting
for its option plans, under which no compensation cost has been recognized.
Had compensation costs for the Option Plan been determined consistent with the
methodology prescribed under SFAS No. 123, the Company's net income (loss) and
earnings (losses) per share would have been adjusted to the pro forma amounts
presented below:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C> <C>
Net (loss) income As presented $ (8,581) $ (51,891) $ 509
Pro forma (8,918) (51,891) 509
(Losses) earnings per share As presented $ (0.50) $ (19.47) $ .020
Pro forma (0.52) (19.47) .020
</TABLE>
The following table summarizes the Option Plans:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Price
Outstanding at beginning of year 24,500 $ 13.90 15,500 $ 17.30 11,500 $ 92.40
Granted 115,000 3.00 9,000 8.10 38,514 11.20
Exercised -- -- -- -- (25,514) 13.70
Canceled (3,000) 13.90 -- -- (9,000) 100.00
------- -------- ------ ------- ------ --------
Outstanding at end of year 136,500 4.72 24,500 13.90 15,500 17.30
======= ======== ====== ======= ======= ========
Options exercisable at year at
June 30, 31,500 8.72 9,500 23.10 5,500 34.00
======= ======== ====== ======= ======= ========
Weighted average fair value of
options granted during the year $ 2.93 $ 7.90 $ 6.70
======== ======= ========
</TABLE>
The fair value at each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
Volatility 132% 129% 112%
Risk-free interest rate 5.5% 6.5% 5.8%
Dividend yield 0% 0% 0%
Expected life 10 years 10 years 10 years
</TABLE>
In June 1996, the Company issued 255,138 shares of common stock to outside
directors pursuant to the exercise of options granted under the Director Option
Plan in settlement of directors' fees and meeting attendance fees for the year
ended June 30, 1996. In addition, Tatham Offshore issued 790,000 stock
appreciation rights pursuant to the Incentive Plan during the year ended June
30, 1997.
NOTE 7 - RELATED PARTY TRANSACTIONS:
DeepTech
The management agreement between Tatham Offshore and DeepTech provides for an
annual management fee which was intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective November 1, 1995, July 1, 1996 and July 1,
1997, the Company amended its management agreement with DeepTech to provide for
an annual management fee of 27.4%, 24% and 26%, respectively, of DeepTech's
overhead. During the years ended June 30, 1998, 1997 and 1996, DeepTech charged
Tatham Offshore $4,375,000, $3,279,000 and $4,436,000, respectively, under the
management agreement. The Company believes these amounts are representative of
what costs would have been on a stand alone basis for these services. The
management agreement was terminated upon the closing of the Merger. See Note 2.
DeepTech also entered into a management agreement with DeepFlex which was
intended to reimburse DeepTech for the estimated costs of its operational,
financial, accounting and administrative services. The management fee was
intended to reimburse DeepTech for the estimated costs of services provided to
DeepFlex. Effective July 1, 1996, the management agreement was amended to
provide for an annual management fee of 18% of DeepTech's unreimbursed overhead.
For the years ended June 30, 1998 and 1997, DeepFlex incurred $3,029,000 and
$2,458,000, respectively, under this management agreement. The Company believes
these amounts are representative of what costs would have been on a stand-alone
basis for these services. The management agreement was terminated upon the
closing of the Merger.
F-17
<PAGE> 68
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In October 1995, DeepFlex entered into a bridge loan agreement (the "Bridge
Loan") with Tatham Offshore whereby DeepFlex agreed to make $12,500,000 of
interim bridge financing available to fund a portion of the Company's working
capital and capital requirements. Tatham Offshore borrowed a total of $8,000,000
under the Bridge Loan which accrued interest at a rate of 15% per annum.
Interest expense related to borrowings under the Bridge Loan totaled $210,000
for the year ended June 30, 1996. On January 31, 1996, DeepFlex subscribed for
the purchase of 10,000,000 Warrants, pursuant to the exercise of Rights which
had been assigned from DeepTech, at a cost of $5,000,000, which was paid through
the forgiveness of $5,000,000 of principal and interest due under the Bridge
Loan. In February 1996, Tatham Offshore used Offering proceeds to repay in full
the remaining principal and accrued interest outstanding under the Bridge Loan.
On June 30, 1996, DeepFlex exercised 4,670,957 of its 10,000,000 Warrants to
purchase an equal number of shares of Series A Preferred Stock at $1.00 per
share by offsetting the then outstanding payable to DeepTech for costs allocated
under the management agreement by $4,670,957.
On November 1, 1995, Tatham Offshore converted $1,734,000 of its accounts
payable to an affiliate into an unsecured promissory note payable to DeepTech
(the "Affiliate Note"). The Affiliate Note bore interest at 14.5% per annum,
payable quarterly, and the principal was payable to DeepTech in six monthly
installments which began on January 31, 1997. Interest expense related to the
Affiliate Note totaled $202,000 and $170,000 for the years ended June 30, 1997
and 1996, respectively.
Under a convertible production payment, the holders of such production payments
are entitled in the aggregate to 25% of the proceeds from the production
attributable to a 25% working interest in Viosca Knoll Block 817 (after
deducting all leasehold operating expenses, including platform access and
processing fees) until the holders have received the aggregate sum of $16.0
million. At the option of the holders, the unpaid portion of the production
payment may be converted into Tatham Offshore common stock at any time until
September 2000. In March 1998, Mr. Tatham acquired one-half of this convertible
production payment. At June 30, 1998, the unpaid portion of the convertible
production payment obligation totaled $11.3 million.
Effective July 1, 1995, DeepTech established three deferred compensation
arrangements: (i) a mandatory arrangement for DeepTech's Chief Executive Officer
(the "DeepTech CEO"), (ii) a mandatory arrangement for certain senior executives
of DeepTech and (iii) an optional arrangement for all other employees of
DeepTech. Pursuant to the terms of each arrangement, participants deferred all
or a portion of their cash salary until no later than July 1, 1996. During each
month in the deferral period, each participant was entitled to receive options
to purchase a number of shares of either DeepTech or Tatham Offshore or
Preference Units of the Partnership equal to a percentage (ranging from 100% to
300% of their cash salary) divided by the lesser of the closing price on June
30, 1995 (DeepTech - $4.00, Tatham Offshore - $3.50 and the Partnership -
$11.875) or the average closing price for the applicable month. Options were
exercisable only by cancellation of the participant's cash salary. Each
participant earned credits equal to a multiple, based on the option elected, of
their deferred cash salary. Any participant except the DeepTech CEO could have
received all or a portion of their salary in cash if they did not elect to
exercise any options. To the extent that Tatham Offshore issued its common stock
pursuant to the exercise of options granted under these arrangements, it
received an offsetting credit against its management fees payable to DeepTech.
In November 1995, DeepTech terminated the deferred compensation arrangement for
all but three employees of DeepTech. In November 1995 and June 1996, Tatham
Offshore issued 12,095 shares and 12,423 shares, respectively, of its common
stock in connection with the mandatory arrangement for certain senior executives
of DeepTech and received a $360,000 credit against its management fees payable
to DeepTech.
The Partnership
Tatham Offshore Canada Limited ("Tatham Offshore Canada"), a wholly-owned
subsidiary of Tatham Offshore, is the Canadian representative of North Atlantic
Pipeline Partners, L.P. ("North Atlantic Partners"), the sponsor of a proposal
to build an approximately 2,500 kilometer pipeline from offshore Newfoundland
and Nova Scotia to the eastern seaboard of the United States. The Partnership
has entered into a letter agreement with Tatham Offshore Canada regarding
participation in the North Atlantic pipeline project. Under such agreement,
Tatham Offshore Canada is responsible for the development costs of the project.
Such agreement contains certain termination rights, contemplates the
negotiation, execution and delivery of definitive agreements and provides that
the Partnership
F-18
<PAGE> 69
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
would hold a pro rata partnership interest of up to 20% in North Atlantic
Partners. The Partnership has no financial commitment to the project until and
unless an application is approved by the appropriate Canadian and United States
regulatory authorities. In the event the Partnership was to terminate its
participation in North Atlantic Partners after the date North Atlantic Partners
receives regulatory approval of an application but prior to the in-service date
of the first phase of the North Atlantic pipeline, the Partnership, under
certain conditions, would be obligated to pay Tatham Offshore Canada an amount
equal to 150% of the Partnership's pro rata share of the "success fee" earned by
Tatham Offshore Canada related to the first phase of construction. For a period
of one year after the effective date of the Merger discussed in Note 2, the
Partnership shall have the right to terminate this agreement without incurring
the liability for the above-mentioned "success fee". Tatham Offshore Canada is
seeking additional participants on the same basis as that offered to the
Partnership.
The Partnership charged Tatham Offshore $1,827,000, $1,995,000 and $1,722,000
for the years ended June 30, 1998, 1997 and 1996, respectively, for commodity
and platform access fees associated with the Viosca Knoll 817 lease in
accordance with certain agreements between the parties. Commodity charges are
based on the volume of oil and gas transported or processed.
Other
During the years ended June 30, 1998, 1997 and 1996, Tatham Offshore sold 99% of
its production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an
80%-owned subsidiary of DeepTech. Through October 1995, the sales prices were
based upon contractually agreed-upon posted prices. In November 1995, Tatham
Offshore renegotiated its agreement with Offshore Marketing to provide Offshore
Marketing fees equal to 2% of the sales value of crude oil and condensate and
$0.015 per dekatherm of natural gas for selling the Company's production.
Dover Technology, Inc. ("Dover"), a 50%-owned subsidiary of DeepTech, charged
Tatham Offshore $160,000 and $601,000 for the years ended June 30, 1997 and
1996, respectively, for services related to the acquisition, development,
exploration or evaluation of oil and gas properties. Tatham Offshore's payable
to Dover for these services in the amount of $1,734,000 at November 1, 1995 was
converted into the Affiliate Note.
During the year ended June 30, 1996, the Company forgave a $90,000 advance to an
officer of DeepTech who is also a stockholder of Tatham Offshore in exchange for
consulting fees rendered by the officer/stockholder to Tatham Offshore.
The Company is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, which proceeds were used to fund certain improvements to the
Rigs. The loan bears interest at the rate of Prime plus 1 1/2% per annum and is
due on January 19, 1999 or on demand. Mr. Tatham is also a co-guarantor of this
loan.
The Standby Agreement (the "Standby Agreement"), dated as of February 27,
1998, was executed in connection with the Merger and related transactions and is
by and among the Company, DeepTech, Mr. Tatham and El Paso. Pursuant to the
Standby Agreement, to the extent that any of the Company's Common Stock or
Series A Preferred Stock was not subscribed for by holders of DeepTech common
stock in the Rights Offering, Tatham Brothers committed to purchase such number
of unsubscribed shares in order for DeepTech to receive net proceeds from the
Rights Offering of not less than $75 million (the "Standby Commitment"). In
addition, Tatham Brothers had the right to purchase any shares which DeepTech
held after the Rights Offering and the satisfaction of the Standby Commitment.
Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the
Standby Commitment, which guarantee is backed by a letter of credit from
NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the Standby
Commitment, under the terms of a Repayment Agreement between Mr. Tatham and
Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr.
Tatham an option to purchase up to a one-third membership interest in Tatham
Brothers for $1,000 through the issuance of new membership units, and (ii) Mr.
Tatham had the right, but not the obligation, to lend to Tatham Brothers all
sums necessary for Tatham Brothers to fulfill its obligations under the Standby
Commitment.
Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by
and between Tatham Brothers and the Company, in consideration of the Standby
Commitment, the Company agreed to pay to Tatham Brothers a fee ranging from $5.8
million to $7.5 million depending upon the date of closing of the Rights
Offering. Such fee was payable by the Company in cash, or at Tatham Brothers'
election in shares of Common Stock. In connection with the Standby Commitment,
the Company has agreed to grant Tatham Brothers certain registration rights with
respect to such shares, including three demand registrations and unlimited
piggyback registration rights for five years. The terms of the Purchase
Commitment Agreement were negotiated by Tatham Brothers and the Company and were
approved by the Company's Conflict Committee and Board of Directors.
NOTE 8 - INCOME TAXES:
The Company's deferred income tax liabilities (assets) at June 30, 1998 and 1997
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,
----------------------------
1998 1997
(in thousands)
<S> <C> <C>
Oil and gas properties $ -0- $ 702
------------ ------------
Gross deferred liability -0- 702
------------ ------------
NOL carryforwards (45,531) (38,315)
------------ ------------
Gross deferred asset (45,531) (38,315)
------------ ------------
Net deferred tax asset (45,531) (37,613)
Valuation allowances 45,531 37,613
------------ ------------
$ -- $ --
============ ============
</TABLE>
Because of the Company's cumulative losses, valuation allowances of $45,531,000
and $37,613,000 at June 30, 1998 and 1997, respectively, were provided against
the net deferred tax assets. At June 30, 1998, the Company had approximately
$133,915,000 of regular tax NOL carryforwards and approximately $132,599,000 of
alternative
F-19
<PAGE> 70
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
minimum tax NOL carryforwards. These losses begin to expire in the year 2005.
Substantial changes in a company's ownership can result in an annual limitation
on the utilization of federal income tax NOL carryforwards.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
The Nasdaq National Market
The Nasdaq Stock Market, Inc. ("Nasdaq") listing criteria requires a company
listed on The Nasdaq National Market to have a minimum dollar value associated
with the public float of its listed stock. On February 23, 1998, the Nasdaq
minimum public float requirement increased from $1.0 million to $5.0 million.
Pursuant to an exception granted by Nasdaq, Tatham Offshore had until May 26,
1998 to meet the minimum public float requirement. Since the market value of
Tatham Offshore's public float (i) had exceeded $5 million from time to time
since February 23, 1998 and (ii) is expected to be well in excess of $5 million
when the Rights Offering is consummated, Tatham Offshore had requested that
Nasdaq either (i) agree that the public float requirement has been met or (ii)
agree to extend the exception period until the earlier to occur of September 30,
1998 or the date on which the Rights Offering is consummated. On May 27, 1998,
Nasdaq notified Tatham Offshore that the Nasdaq Listing Qualifications Panel
(the "Nasdaq Panel") had determined to continue Tatham Offshore's listing since
Tatham Offshore's public float exceeded the current requirement, and based on
the Nasdaq Panel's decision, Tatham Offshore continued to be listed on the
Nasdaq National Market.
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 development and implementation of the North Atlantic pipeline project and
related opportunities in Atlantic Canada. Realization of the potential of the
North Atlantic pipeline project and related opportunities in Atlantic Canada is
dependent upon the ability of the Company to obtain sufficient additional
capital or project financing.
F-20
<PAGE> 71
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Cash paid for interest, net of
amounts capitalized $ 1,707 $ 7,249 $ 7,693
</TABLE>
Supplemental disclosures of noncash investing and financing activities
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Conversion of long-term debt to
common stock $ 60,000 $ -- $ --
Conversion of preferred stock to
common stock 540 1,129 --
Assignment of oil and gas properties and
abandonment obligations to a third party 1,200 -- --
Conveyance of Tatham Development to DeepTech (Notes 1 and 2):
Conveyance of oil and gas properties 22,079 -- --
Exchange of DeepFlex indebtedness (8,000) -- --
Decrease in paid in capital (13,620) -- --
Reduction in other current assets 116 -- --
Reduction in abandonment obligations (400) -- --
Reduction in accounts payable (175) -- --
Additions to oil and gas properties -- -- (2,000)
Increase in accounts payable and accrued liabilities -- -- 2,000
Stock subscriptions receivable -- -- (12,242)
Issuance of Series A Preferred Stock -- -- 16,913
Payable to affiliate -- -- (4,671)
</TABLE>
As discussed in Notes 1 and 2, DeepTech contributed 100% of the outstanding
capital stock of DeepFlex to Tatham Offshore on June 25, 1998. The assets and
liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 3,580
Accounts receivable 2,088
Other current assets 168
Semisubmersible drilling rigs, net 129,351
Other noncurrent assets 617
Accounts payable (3,869)
RIGCO Credit Facility (59,406)
Affiliate debt (5,000)
Notes payable to DeepTech (8,000)
Minority interest liability (250)
-----------
Increase in paid in capital $ 59,279
===========
</TABLE>
F-21
<PAGE> 72
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 - SUBSEQUENT EVENTS:
In connection with the Merger, the Company entered into a short term financing
arrangement with Tatham Brothers to provide for funds to (i) satisfy
approximately $1.6 million of cash requirements with respect to the Redemption
Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in connection
with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay
approximately $6.9 million to TB Securities with respect to obligations under
the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax
liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi)
pay fees and expenses associated with the short term financing. Tatham Brothers
is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The
short term financing bears interest at the rate of 12% per annum and is due on
January 15, 1999. It is secured by a pledge of DeepFlex of its interest in a
certain payment-in-kind Subordinated Promissory Notes issued by RIGCO North
America, L.L.C. and FPS V, Inc., both subsidiaries of the Company, which has a
current outstanding balance of approximately $70.0 million. The Company
anticipates that it will refinance the short term financing with Tatham Brothers
upon its maturity or pay off the facility with proceeds from the refinancing of
the Credit Facility.
NOTE 12 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
Oil and gas reserves
The following table represents the Company's net interest in estimated
quantities of developed and undeveloped reserves of crude oil, condensate and
natural gas and changes in such quantities at fiscal year end 1998, 1997 and
1996. Estimates of the Company's reserves at June 30, 1998 have been made by the
Company's reserve engineers. Estimates of the Company's reserves at June 30,
1997 and 1996 have been made by the independent engineering consulting firm,
Ryder Scott Company Petroleum Engineers. Net proved reserves are the estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are proved reserve volumes that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved undeveloped reserves are proved reserve volumes that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
significant expenditure is required for recompletion.
Estimates of reserve quantities are based on sound geological and engineering
principles, but, by their very nature, are still estimates that are subject to
substantial upward or downward revision as additional information regarding
producing fields and technology becomes available.
<TABLE>
<CAPTION>
Oil/Condensate Natural gas
(barrels) (MCF)
------------ ------------
(In thousands)
<S> <C> <C>
Proved reserves - June 30, 1995 5,887 34,331
Revisions of previous estimates (168) (3,902)
Purchase of reserves in place -- 17,160
Extensions, discoveries and other additions 398 8,427
Production (418) (1,035)
------------ ------------
Proved reserves -- June 30, 1996 5,699 54,981
Revisions of previous estimates (a) (5,440) (36,049)
Extensions, discoveries and other additions 36 540
Production (170) (7,180)
------------ ------------
Proved reserves -- June 30, 1997 125 12,292
Revisions of previous estimates (47) (77)
Extensions, discoveries and other additions -- --
Production (16) (4,532)
------------ ------------
Proved reserves -- June 30, 1998 62 7,683
============ ============
Proved developed reserves -- June 30, 1996 3,388 35,274
============ ============
Proved developed reserves -- June 30, 1997 125 12,292
============ ============
Proved developed reserves -- June 30, 1998 62 7,683
============ ============
</TABLE>
- ------------------
(a) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels
of oil and 24,369 MMcf of gas as a result of the assignment of the working
interests in Ship Shoal Block 331 and (ii) the elimination of 2.1 million
barrels of oil and 3,178 MMcf of gas as a result of the abandonment of the
Ewing Bank Block 914 #2 well.
In general, estimates of economically recoverable oil and natural gas reserves
and of the future net revenue therefrom are based upon a number of variable
factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs and
future plugging and abandonment costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at
F-22
<PAGE> 73
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
different sites, may vary substantially. The meaningfulness of such estimates is
highly dependent upon the assumptions upon which they are based.
Furthermore, Tatham Offshore's wells have only been producing for a short period
of time and, accordingly, estimates of future production are based on this
limited history. Estimates with respect to proved reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of Tatham Offshore's reserves is based
upon volumetric calculations.
Future net cash flows
The standardized measure of discounted future net cash flows relating to the
Company's proved oil and gas reserves is calculated and presented in accordance
with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
Accordingly, future cash inflows were determined by applying year-end oil and
gas prices to the Company's estimated share of future production from proved oil
and gas reserves. The average prices utilized in the calculation of the
standardized measure of discounted future net cash flows at June 30, 1998 were
$12.28 per barrel of oil and $1.76 per MCF of gas. Future production and
development costs were computed by applying year-end costs to future years.
Future income taxes were derived by applying year-end statutory tax rates to the
estimated net future cash flows taking into consideration the Company's NOL
carryforwards. A prescribed 10% discount factor was applied to the future net
cash flows.
In the Company's opinion, this standardized measure is not a representative
measure of fair market value, and the standardized measure presented for the
Company's proved oil and gas reserves is not representative of the reserve
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Future cash inflows $ 14,267 $ 31,512 $ 240,358
Future production costs 9,174 16,750 74,996
Future development costs 1,546 2,096 44,624
Future income tax expenses -- -- 431
------------ ------------ ------------
Future net cash flows 3,547 12,666 120,307
Annual discount at 10% rate 138 1,623 30,313
------------ ------------ ------------
Standardized measure of discounted future
net cash flows $ 3,409 $ 11,043 $ 89,994
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------
Proved Proved
Developed Undeveloped Total
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Undiscounted estimated future net cash flows
from proved reserves before income taxes $ 3,547 $ -- $ 3,547
============ ============ ============
Present value of future net cash flows from
proved reserves before income taxes,
discounted at 10% $ 3,409 $ -- $ 3,409
============ ============ ============
</TABLE>
F-23
<PAGE> 74
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following are the principal sources of change in the standardized measure
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Beginning of year $ 11,043 $ 89,994 $ 45,006 (1)
Sales and transfers of oil and gas produced,
net of production costs (5,699) (13,771) (8,678)
Net changes in prices and production costs (3,198) (35,355) 26,798
Extensions, discoveries and improved
recovery, less related costs -- 627 3,746
Changes in estimated future development costs 502 28,959 2,587
Previously estimated development costs
incurred during the year 5 2,976 1,987
Revisions of previous quantity estimates (198) (47,259)(2) (3,198)
Purchase of reserves in place -- -- 18,200
Sales of reserves in place -- -- --
Net change in income taxes -- -- --
Accretion of discount 1,104 8,999 4,501
Changes in production rates, timing and other (150) (24,127) (955)
------------ ------------ ------------
End of year $ 3,409 $ 11,043 $ 89,994
============ ============ ============
</TABLE>
- ----------
(1) The standardized measure calculations at June 30, 1995 exclude the
Company's obligations to pay demand charges to an affiliate relative to its
Ewing Bank and Ship Shoal properties. These demand charges were prepaid in
full during the year ended June 30, 1996. See Note 4.
(2) The revisions of previous estimates of proved reserves from June 30, 1996
to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels
of oil and 24,369 MMcf of gas as a result of the assignment of the working
interests in Ship Shoal Block 331 and (ii) the elimination of 2.1 million
barrels of oil and 3,178 MMcf of gas as a result of the abandonment of the
Ewing Bank Block 914 #2 well.
F-24
<PAGE> 75
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of Tatham Offshore
(filed as exhibit 3.1 in Tatham Offshore's Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
and incorporated herein by reference).
3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).
3.3 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.1 to Tatham
Offshore's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, Commission File No. 0-22892 and
incorporated herein by reference).
3.4 Certificate of Amendment of Certificate of Incorporation
of Tatham Offshore (filed as Exhibit 3.2 to Tatham
Offshore's Registration Statement on Form S-1 Commission
File No. 333-49859 and incorporated herein by
reference).
4.1 Certificate of Designation Establishing the Series A
Convertible Exchangeable Preferred Stock of Tatham
Offshore (filed as Exhibit 4.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995, Commission File No. 0-22892 and
incorporated herein by reference).
4.2 Certificate of Designation Establishing the Series B
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.2 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).
4.3 Certificate of Designation Establishing the Series C
Convertible Exchangeable Preferred Stock (filed as
Exhibit 4.3 to Tatham Offshore's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995,
Commission File No. 0-22892 and incorporated herein by
reference).
4.4 Certificate of Designation Establishing the Mandatory
Redeemable Preferred Stock (filed as Exhibit 4.4 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).
4.5 Certificate of Designation Establishing the Series B
Convertible Preferred Stock (filed as Exhibit 4.1 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, Commission File No.
0-22892 and incorporated herein by reference).
</TABLE>
<PAGE> 76
<TABLE>
<S> <C>
4.6 Warrant Agreement relating to the warrants entitling the
holder thereof to purchase shares of Convertible
Exchangeable Preferred Stock (filed as Exhibit 4.5 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).
4.7 Exchange Warrant Agreement relating to the warrants
entitling the holder thereof to purchase shares of
Tatham Offshore's Common Stock (filed as Exhibit 4.6 to
Tatham Offshore's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995, Commission File No.
0-22892 and incorporated herein by reference).
10.1 Registration Rights Agreement dated March 21, 1994,
between Tatham Offshore and First Interstate Bank of
Texas, N.A., as Trustee (filed as Exhibit 10.17 to
DeepTech's Registration Statement on Form S-1,
Commission File No. 33-76999, and incorporated herein by
reference).
10.2 Farmout Agreement, dated October 1, 1994, between Tatham
Offshore, F-W Oil Interests, Inc., O.P.I. International,
Inc., and J. Ray McDermott Properties, Inc. (filed as
Exhibit 10.48 to DeepTech's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995, Commission File
No. 0-23934 and incorporated herein by reference).
10.3 Agreement dated July 2, 1993 and amended on December 6,
1993 between Fina Oil and Chemical Company and Petrofina
Delaware, Incorporated and Tatham Offshore covering
Viosca Knoll Blocks 772/773, 774, 817, 818 and 861
(filed as Exhibit 10.20 to Tatham Offshore's
Registration Statement on Form S-1, Commission File No.
33-70120, and incorporated herein by reference).
10.4 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Ewing Bank
Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area,
Offshore Louisiana, dated May 13, 1988 by and among
Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal
Limited Partnership I-1981 (filed as Exhibit 10.22 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).
10.5 Unit Agreement for Outer Continental Shelf Exploration,
Development and Production Operations for the Viosca
Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca
Knoll Area Offshore Louisiana, dated July 7, 1993 by and
among Tatham Offshore, Petrofina Delaware, Incorporated
and Fina Oil & Chemical Company (filed as Exhibit 10.23
to Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).
10.6 DeepTech Registration Rights Agreement by and between
Tatham Offshore and DeepTech (filed as Exhibit 10.25 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 33-70120, and incorporated herein by
reference).
10.7 Indemnification Agreement dated as of October 16, 1993
between Tatham Offshore and its directors (filed as
Exhibit 10.26 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).
10.8 Subordinated Convertible Note Purchase Agreement between
Tatham Offshore and DeepTech, as amended (filed as
exhibit 10.30 in Tatham Offshore's Annual Report on Form
10-K for the fiscal year ended June 30, 1994, and
incorporated herein by reference).
10.9 11 3/4% Subordinated Convertible Promissory Note made
payable by the Company to the order of the holder
thereof (filed as exhibit 10.31 in Tatham Offshore's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1994, and incorporated herein by reference).
10.10 Form of Stock Option Agreement by and between the
Optionee and Tatham Offshore (filed as exhibit 10.35 in
Tatham Offshore's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein
by reference).
</TABLE>
<PAGE> 77
<TABLE>
<S> <C>
10.11 Agreement for Purchase and Sale by and between Tatham
Offshore, Inc., as Seller, and Flextrend Development
Company, L.L.C., as Buyer, dated June 30, 1995 (filed as
Exhibit 6(a) to the Leviathan Gas Pipeline Partners,
L.P. Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, Commission File Number 1-11680 and
incorporated herein by reference).
10.12 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of F-W Oil Interests,
Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).
10.13 Production Payment Agreement dated as of September 19,
1995 by Tatham Offshore in favor of J. Ray McDermott
Properties, Inc. (filed as Exhibit 10.92 to DeepTech's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, Commission File No. 0-23934 and
incorporated herein by reference).
10.14 Tatham Offshore, Inc. Employee Equity Incentive Plan
(filed as Exhibit 10.47 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).
10.15 Tatham Offshore, Inc. Non-Employee Director Stock Option
Plan (filed as Exhibit 10.48 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1995, and incorporated herein by reference).
10.16 Master Drilling Agreement and Drilling Order between
Tatham Offshore, Inc. and Sedco Forex Division,
Schlumberger Technology Corporation dated September 19,
1996 (filed as Exhibit 10.50 to Tatham Offshore's Annual
Report on Form 10-K for the fiscal year ended June 30,
1996, and incorporated herein by reference).
10.17 Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C. (filed as Exhibit 10.1 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).
10.18 Purchase Commitment Agreement dated February 27, 1998 by
and between Tatham Offshore, Inc. and Tatham Brothers,
LLC (filed as Exhibit 10.2 to Tatham Offshore's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Commission File No. 0-22892 and
incorporated herein by reference).
10.19 Master Agreement, dated as of November 29, 1995, by and
among Highwood Partners, L.P., DeepTech International
Inc., DeepFlex Production Services, Inc., FPS III, Inc.
and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.20 Limited Liability Company Agreement of Deepwater
Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's
Current Report on Form 8-K dated May 2, 1996 and
incorporated herein by reference).
10.21 First Amended and Restated Drilling Make-Ready Agreement
dated November 29, 1996 between RIGCO North America,
L.L.C. and Schlumberger Technology Corporation (Sedco
Forex Division) (filed as Exhibit 10.1 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File No. 0-23934 and
incorporated herein by reference).
10.22 Contribution and Distribution Agreement dated February
27, 1998, between DeepTech International Inc., Tatham
Offshore, Inc., DeepFlex Production Services, Inc., and
El Paso Natural Gas Company (filed as Exhibit 10.26 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).
</TABLE>
<PAGE> 78
<TABLE>
<S> <C>
10.23 Standby Agreement dated February 27, 1998, between
DeepTech International Inc., Tatham Offshore, Inc.,
Thomas P. Tatham, Tatham Brothers, LLC, and El Paso
Natural Gas Company (filed as Exhibit 10.27 to Tatham
Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein by
reference).
10.24 Form of Tax Sharing Agreement among Tatham Offshore,
Inc., DeepTech International Inc. and DeepFlex
Production Services, Inc. (filed as Exhibit 10.28 to
Tatham Offshore's Registration Statement on Form S-1,
Commission File No. 333-49859 and incorporated herein
by reference).
10.25** First Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated November 29, 1996.
10.26** Second Amended and Restated Charter between RIGCO North
America, L.L.C. and Sedco Forex Division, Schlumberger
Technology Corporation dated August 14, 1997.
10.27 Credit Agreement, dated September 30, 1996 among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent, Arranger, Collateral and
Documentation Agent and Administrative Agent, and the
banks and other financial institutions from time to time
party thereto (filed as Exhibit 10.3 to DeepTech's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996, Commission File Number 0-23934 and
incorporated herein by reference).
10.28** Global Amendment and Assignment and Acceptance dated
October 9, 1996 to the Credit Agreement among RIGCO
North America, L.L.C., Lehman Commercial Paper, Inc., as
Advisor, Syndication Agent and Arranger, Hibernia
National Bank, as Collateral and Documentation Agent and
BHF-Bank Aktrengesellschaft, as Administrative Agent.
10.29 Second Amendment dated as of April 23, 1997 to the
Credit Agreement among RIGCO North America, L.L.C.,
Lehman Commercial Paper, Inc., as Advisor, Syndication
Agent and Arranger, Hibernia National Bank, as
Collateral and Documentation Agent and BHF-Bank
Aktiengesellschaft, as Administrative Agent (filed as
Exhibit 10.40 to DeepTech's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1997 Commission File
No. 0-23934 and incorporated herein by reference).
10.30** Third Amendment dated May 13, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.31** Fourth Amendment dated July 31, 1997 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.32** Fifth Amendment dated June 16, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.33** Sixth Amendment dated September 25, 1998 to the Credit
Agreement among RIGCO North America, L.L.C., Lehman
Commercial Paper, Inc., as Advisor, Syndication Agent
and Arranger, Hibernia National Bank, as Collateral and
Documentation Agent and BHF-Bank Aktrengesellschaft, as
Administrative Agent.
10.34** Management Agreement dated June 16, 1998 between
DeepFlex Production Services, Inc. and RIGCO North
America, L.L.C.
</TABLE>
<PAGE> 79
<TABLE>
<S> <C>
10.35** Restructuring Agreement dated September 22, 1997,
between DeepTech and Tatham Offshore.
10.36 Amended and Restated Management Agreement, effective as
of July 1, 1992, between DeepTech and Tatham Offshore
(filed as Exhibit 10.1 to Amendment No. 4 to Tatham
Offshore's Registration Statement on Form S-1, Commission
File No. 33-70120, and incorporated herein by
reference.)
10.37 First Amendment to Amended and Restated Management
Agreement, dated as of January 1, 1995, between DeepTech
and Tatham Offshore (filed as Exhibit 10.71 to
DeepTech's Registration Statement on Form S-1, Commission
File No. 33-88688, and incorporated herein by reference).
10.38 Fourth Amendment to First Amended and Restated Management
Agreement dated as of May 1, 1997 between DeepTech and
Tatham Offshore (filed as Exhibit 10.6 to DeepTech's
Annual Report on Form 10-K/A for the fiscal year ended
June 30, 1997, Commission File No. 0-23934, and
incorporated herein by reference).
10.39 Letter Agreement dated March 22, 1995 between Tatham
Offshore and Ewing Bank Gathering Company, L.L.C.
amending the Gathering Agreement dated July 1, 1992
(filed as Exhibit 10.44 to DeepTech's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995,
Commission File No. 0-23934 and incorporated herein by
reference).
10.40 Gas Purchase Agreement dated July 26, 1993 between
Offshore Marketing and Tatham Offshore (filed as Exhibit
10.17 to Tatham Offshore's Registration Statement on
Form S-1, Commission File No. 33-70120, and incorporated
herein by reference).
10.41 Condensate Purchase Agreement dated July 26, 1993
between Offshore Marketing and Tatham Offshore (filed
as Exhibit 10.18 to Tatham Offshore's Registration
Statement on Form S-1, Commission File No. 33-70120, and
incorporated herein by reference).
10.42 Credit Agreement, dated as of February 16, 1996 among
DeepFlex Production Services, Inc., Citicorp USA, Inc.,
as Administrative Agent, and the several lenders from
time to time parties thereto (filed as Exhibit 10.3 to
DeepTech's Current Report on Form 8-K dated May 2, 1996
and incorporated herein by reference).
10.43 Fourth Amendment to Management Agreement Between
DeepTech International Inc. and DeepFlex Production
Services, Inc. dated as of May 1, 1997 (filed as Exhibit
10.38 to DeepTech's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1997, Commission File No.
0-23934 and incorporated herein by reference).
10.44 First Amendment to Management Agreement between
RIGCO North America, L.L.C. and DeepTech dated as of May
1, 1997 (filed as Exhibit 10.39 to DeepTech's Annual
Report on Form 10-K/A for the fiscal year ended June 30,
1997, Commission File No. 0-23934 and incorporated
herein by reference).
21.1 ** List of Subsidiaries of Tatham Offshore, Inc.
23.1 * Consent of Independent Accountants,
PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on the signature pages on
this Annual Report on Form 10-K/A).
</TABLE>
- --------------------------
* Filed herewith
** Previously filed
(b) Reports on Form 8-K.
None.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (33-96274) of our report dated September 28, 1998
relating to the financial statements of Tatham Offshore, Inc. for the year
ended June 30, 1998 appearing on page F-2 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
September 28, 1998
