<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 0-22892
TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT
THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF MAY 17, 1999, THERE WERE OUTSTANDING 26,074,321 SHARES OF
COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.
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<PAGE> 2
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION...................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1999 (unaudited) and June 30, 1998................3
Unaudited Consolidated Statement of Operations for the Three and Nine Months
Ended March 31, 1999 and 1998, respectively...............................................4
Unaudited Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1999 and 1998.............................................................5
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended March 31, 1999 (unaudited)..........................................................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS............................................................................19
PART II. OTHER INFORMATION.....................................................................20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES.......................................................................................21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,448 $ 2,689
Accounts receivable 9,458 2,957
Receivable from affiliates -- 514
Prepaid expenses 201 167
--------- ---------
Total current assets 12,107 6,327
--------- ---------
Property and equipment:
Semisubmersible drilling rigs 146,127 135,754
Oil and gas properties, at cost, using successful efforts method -- 26,762
--------- ---------
146,127 162,516
Less - accumulated depreciation, depletion, amortization and impairment 10,726 27,532
--------- ---------
Property and equipment, net 135,401 134,984
--------- ---------
Restricted cash 170 --
Deferred costs 12,389 11,529
Debt issue costs, net -- 578
--------- ---------
Total assets $ 160,067 $ 153,418
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 6,863 $ 3,812
Notes payable to affiliates 32,784 11,374
Long term debt currently payable 58,148 59,156
--------- ---------
Total current liabilities 97,795 74,342
Other noncurrent liabilities -- 3,416
--------- ---------
97,795 77,758
--------- ---------
Minority interests in consolidated subsidiary 250 250
--------- ---------
Stockholders' equity (Note 5):
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of March 31, 1999 and June 30, 1998,
17,299,717 and 17,960,732 shares issued and outstanding
at March 31, 1999 and June 30, 1998, respectively 173 180
Common stock, $0.01 par value, 250,000,000 shares
authorized as of March 31, 1999 and June 30, 1998,
26,074,321 and 30,001,026 shares issued and outstanding
as of March 31, 1999 and June 30, 1998, respectively 261 300
Additional paid-in capital 185,944 192,179
Accumulated deficit (124,356) (117,249)
--------- ---------
62,022 75,410
--------- ---------
Total liabilities and stockholders' equity $ 160,067 $ 153,418
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
------------------------ ------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue:
Drilling services $ 6,067 $ -- $ 28,344 $ --
-------- -------- -------- --------
6,067 -- 28,344 --
-------- -------- -------- --------
Costs and expenses:
Drilling operating expenses 4,522 -- 16,451 --
Depreciation 1,460 -- 4,233 --
Management fee -- 182 155 496
General and administrative expenses 1,919 28 4,959 159
-------- -------- -------- --------
7,901 210 25,798 655
-------- -------- -------- --------
Operating income (loss) (1,834) (210) 2,546 (655)
Interest and other income 844 27 893 205
Interest and other financing costs (1,693) -- (5,754) --
Interest expense and other financing costs - affiliates (3,059) -- (4,571) --
-------- -------- -------- --------
Net loss from continuing operations (5,742) (183) (6,886) (450)
Discontinued operations (Note 2)
Loss from oil and gas operations -- (1,311) (221) (3,554)
-------- -------- -------- --------
Net loss (5,742) (1,494) (7,107) (4,004)
Preferred stock dividends (763) (864) (2,291) (2,829)
-------- -------- -------- --------
Net loss allocable to common shareholders $ (6,505) $ (2,358) $ (9,398) $ (6,833)
======== ======== ======== ========
Weighted average number of shares 26,074 29,742 26,748 13,083
======== ======== ======== ========
Basic and diluted loss per common share
from continuing operations (Note 6) $ (0.25) $ (0.04) $ (0.34) $ (0.25)
======== ======== ======== ========
Basic and diluted loss per common share
from discontinued operations (Note 6) $ 0.00 $ (0.04) $ (0.01) $ (0.27)
======== ======== ======== ========
Basic and diluted loss per common share (Note 6) $ (0.25) $ (0.08) $ (0.35) $ (0.52)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
---------------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,107) $ (4,004)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 4,491 3,125
Amortization of debt issue costs 3,079 --
Costs and expenses settled by issuance of common stock -- 389
Noncash interest expense 2,471 1,709
Changes in operating working capital:
Decrease (increase) in accounts receivable (6,500) (12)
Decrease in receivable from affiliates 488 647
(Increase) decrease in prepaid expenses (34) (116)
Increase (decrease) in accounts payable and accrued liabilities 3,806 631
Increase (decrease) in accounts payable to affiliates (2,807) 1,356
-------- --------
Net cash provided by (used in) operating activities (2,113) 3,725
-------- --------
Cash flows from investing activities:
Additions to oil and gas properties -- (352)
Additions to semisubmersible drilling rigs (10,374) --
Deferred costs (860) (9,111)
Conveyance of oil and gas properties (1,605) --
-------- --------
Net cash used in investing activities (12,839) (9,463)
-------- --------
Cash flows from financing activities:
Repayment of notes payable (1,008) --
Proceeds from notes payable to affiliate 20,640 --
Repayment of notes payable to affiliate (2,250) --
Increase in restricted cash (170) --
Debt issue costs (2,501) --
Proceeds from the issuance of common stock related to
the exercise of Exchange Warrants -- 2,656
Redemption of Mandatory Redeemable Preferred Stock -- (2,496)
-------- --------
Net cash provided by financing activities 14,711 160
-------- --------
Net decrease in cash and cash equivalents (241) (5,578)
Cash and cash equivalents at beginning of year 2,689 7,887
-------- --------
Cash and cash equivalents at end of period $ 2,448 $ 2,309
======== ========
</TABLE>
Supplemental disclosures to the Statement of Cash Flows - see Note 8.
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------ -------------------------- Additional
Number of Number of paid-in Accumulated
Shares Par value Shares Par value capital deficit Total
------------ --------- ------------ --------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 17,961 $ 180 30,001 $ 300 $ 192,179 $ (117,249) $ 75,410
Merger related transaction
(See Note 2) (unaudited) (661) (7) (3,927) (39) (6,235) -- (6,281)
Net loss for the nine months ended
March 31, 1999 (unaudited) -- -- -- -- -- (7,107) (7,107)
------- ------ ------- ------ --------- ---------- --------
Balance, March 31, 1999 (unaudited) 17,300 $ 173 26,074 $ 261 $ 185,944 $ (124,356) $ 62,022
======= ====== ======= ====== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION:
Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is a
diversified energy company currently pursuing, through its operating
subsidiaries, energy related opportunities in Atlantic Canada, including
offshore contract drilling services, substantial natural gas gathering and
transmission facilities and related energy infrastructure. Historically, Tatham
Offshore was engaged in the development, exploration and production of oil and
gas reserves located primarily offshore the United States in the Gulf of Mexico
(the "Gulf"). As of June 30, 1998, Tatham Offshore was an approximately
94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified
energy company. In connection with the merger of DeepTech with a subsidiary of
El Paso Energy Corporation ("El Paso Energy") and related transactions completed
on or before August 14, 1998, (i) Tatham Offshore transferred its ownership of
Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation
and former wholly-owned subsidiary of Tatham Offshore which holds interests in
Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to
DeepTech, (ii) Tatham Offshore conveyed its remaining oil and gas properties to
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), (iii) DeepTech
contributed all of the outstanding shares of capital stock of DeepFlex
Production Services, Inc. ("DeepFlex") to Tatham Offshore and (iv) DeepTech
divested itself of its equity ownership interest in Tatham Offshore. DeepFlex, a
Delaware corporation and wholly-owned subsidiary of Tatham Offshore, was formed
in January 1995 and, through its subsidiaries, focuses on the acquisition and
deployment of semisubmersible drilling rigs for contract drilling. RIGCO North
America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned
subsidiaries of DeepFlex, own interests in the FPS Laffit Pincay (the "Laffit
Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together with the
Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling
rigs.
Pursuant to management and charter agreements, Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex") has marketed, managed, and
operated the Rigs. On January 22, 1999, RIGCO gave Sedco Forex a written
termination notice of the management and charter agreements for the Laffit
Pincay. Effective March 23, 1999, RIGCO took over the marketing, management and
operational responsibilities for the Laffit Pincay. On April 20, 1999, RIGCO
gave Sedco Forex a written termination notice of the management and charter
agreement for the Bill Shoemaker. Under the Bill Shoemaker management and
charter agreement, Sedco Forex will continue to man and operate the rig through
the conclusion of its current drilling contract with Husky Oil Operations
Limited. At the conclusion of the current Husky Oil Operations Limited drilling
contract, RIGCO will assume the marketing, management and operational
responsibilities for the Bill Shoemaker.
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 and related infrastructure in the Grand Banks area offshore
Newfoundland and Nova Scotia to the eastern seaboard of the United States.
The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company").
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the period covered by such statements. These interim
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1998.
NOTE 2 - DEEPTECH MERGER AND RELATED TRANSACTIONS:
On August 14, 1998, DeepTech merged with a subsidiary of El Paso Energy (the
"Merger"). 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. In addition, Tatham
Offshore agreed to transfer all of its remaining assets located in the Gulf to
the Partnership, a former affiliate. As such, all of the Company's oil and gas
operations in the
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Gulf are reflected as discontinued operations in the financial statements.
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 held by DeepTech to the stockholders of DeepTech in a
Rights Offering (discussed below).
On July 16, 1998, the Commission declared effective Tatham Offshore's
Registration Statement on Form S-1 relating to the offering of rights to the
DeepTech stockholders to purchase DeepTech's 28,073,450 shares of Tatham
Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock (the "Rights Offering"). As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011
shares of common stock and 3,455,444 shares of Series A Preferred Stock which
resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0
million. In exchange for committing to purchase a specified portion of the stock
underlying any unexercised Rights, TB Securities received a fee of $6.9 million.
In connection with the Rights Offering, Tatham Offshore purchased and cancelled
all of the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 shares and 653,365 shares, respectively, and the proceeds from such
purchase by Tatham Offshore were contributed by DeepTech to Tatham Offshore.
DeepTech no longer owns any of Tatham Offshore's capital stock as a result of
the Rights Offering.
Following the asset restructuring, Tatham Offshore's marine services business
includes the operation of two semisubmersible drilling rigs, the Bill Shoemaker
and the Laffit Pincay, currently owned by wholly-owned subsidiaries of DeepFlex.
In addition, Tatham Offshore will continue to pursue energy related
opportunities in Atlantic Canada, including the North Atlantic pipeline project,
related gas processing facilities, a facility for the generation of electricity
and other related investments.
NOTE 3 - RECENT EVENTS:
Defaults Under Credit Facilities
On September 30, 1996, a subsidiary of DeepFlex (the "Borrower") entered into a
$65 million senior secured credit facility with a syndicate of lenders (as
amended, the "Credit Facility"). Proceeds from the Credit Facility were used to
acquire the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker,
and to retire $30.3 million of other rig related indebtedness. In April 1997,
the Credit Facility was amended to provide for an additional $12 million to fund
the remaining refurbishments and upgrades to the Bill Shoemaker. Pursuant to the
terms of the Credit Facility, the Borrower was required to pay $58.1 million in
principal and $2.2 million in accrued interest on April 30, 1999. The Borrower
did not make payment of such amounts; as a result, an Event of Default has
occurred and is continuing under the Credit Facility.
In connection with the Merger, Tatham Offshore entered into a $22.9 million
short term financing arrangement with Tatham Brothers, LLC ("Tatham Brothers")
(as amended, the "Short Term Facility"). Proceeds from the Short Term Facility
were used to refinance existing loans and provide funds necessary to satisfy
certain obligations of the Company in connection with the Merger and Rights
Offering. Pursuant to the terms of the Short Term Facility, the Borrower was
required to pay $24.1 million in principal and $0.3 million in interest on April
30, 1999. Tatham Offshore did not make payment of such amounts; as a result, an
Event of Default has occurred and is continuing under the Short Term Facility.
See "Note 4 -- Related Party Transactions -- Notes Payable to Affiliates" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional discussion of the
credit facilities of Tatham Offshore and its subsidiaries.
Nasdaq Delisting
The Company was notified by the Nasdaq Stock Market, Inc. that its common stock
did not meet certain minimum bid and public float requirements for continued
listing on the Nasdaq National Market. As a result, effective May 13, 1999, the
Company's common stock was no longer listed on the Nasdaq National Market and
began trading on the over-the-counter bulletin board.
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Release of Tax Letter of Credit
In August 1998, both El Paso Energy and the Company were required to post
letters of credit in connection with certain Merger related agreements. In March
1999, the Company entered into an agreement with El Paso Energy under which (i)
each company was released of its obligation to maintain letters of credit in
favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii)
the Company released its rights to certain potential pre-merger tax attributes
of the DeepTech group. As a result of this agreement, the Company's $6.1 million
cash collateral which secured its letter of credit in favor of El Paso Energy
was released and became available for general corporate purposes.
NOTE 4 - RELATED PARTY TRANSACTIONS
Management Agreement
The management agreement between Tatham Offshore and DeepTech provided for an
annual management fee which was intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the nine months ended March 31, 1999, DeepTech charged Tatham
Offshore $310,000 under this agreement. The management agreement was terminated
August 14, 1998 and Tatham Offshore hired and employed its management and
support personnel directly.
Notes Payable to Affiliates
In connection with the Merger, the Company entered into the Short Term Facility
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 Facility. Tatham Brothers is an affiliate of Mr. Thomas P.
Tatham and the parent company of TB Securities. The original terms of the Short
Term Facility provided for an interest rate of 12% per annum and was due on
January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to
refinance the original $22.9 million principal plus $1.1 million accrued
interest into a new short term loan which bears interest at the rate of 15% per
annum and was due March 31, 1999. In connection with the refinancing, the
Company paid Tatham Brothers a fee of $1.0 million in the form of a 15%
subordinated convertible note (the "Subordinated Convertible Note"). The
Subordinated Convertible Note bears interest at the rate of 15% per annum and is
due on August 15, 2001. Tatham Brothers may convert the principal amount of the
Subordinated Convertible Note and accrued unpaid interest into shares of Common
Stock of the Company based on the average market price for the five trading days
prior to the end of the previous calendar quarter. The Short Term Facility is
secured by a pledge of DeepFlex of its interest in 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 had an outstanding balance of
approximately $76.0 million at March 31, 1999. Pursuant to the terms of the
Short Term Facility, Tatham Offshore was required to pay $24.1 million in
principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did
not make payment of such amounts; as a result, an Event of Default has occurred
and is continuing under the Short Term Facility.
The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998,
was executed in connection with the Merger and related transactions and is by
and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso. Pursuant
to the Standby Agreement, to the extent that any of the Company's Common Stock
or Series A Preferred Stock was not subscribed for by holders of DeepTech common
stock in the Rights Offering, Tatham Brothers committed to purchase such number
of unsubscribed shares in order for DeepTech to receive net proceeds from the
Rights Offering of not less than $75 million (the "Standby Commitment"). In
addition, Tatham Brothers had the right to purchase any shares which DeepTech
held after the Rights Offering and the satisfaction of the Standby Commitment.
Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the
Standby Commitment, which guarantee was backed by a letter of credit from
NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the Standby
Commitment, under the terms of a Repayment Agreement between Mr. Tatham and
Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr.
Tatham an option to purchase up to a one-third membership interest in Tatham
Brothers for $1,000 through the issuance of new membership units,
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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. In exchange for certain consideration, Tatham Brothers
assigned all of its rights and interest under the Standby Agreement and the
Standby Commitment to TB Securities.
Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by
and between Tatham Brothers and Tatham Offshore, in consideration of the Standby
Commitment, the Company paid Tatham Brothers a fee of $6.9 million, which amount
was included in the amount payable under the Short Term Facility.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from
NationsBank, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to
fund certain improvements to the Rigs. The loan bears interest at the prime rate
per annum and is due on September 30, 1999 or upon demand. The loan from Tatham
Brothers to DeepFlex, plus accrued interest, was included in the amount payable
under the Short Term Facility discussed above.
In connection with the Bill Shoemaker make-ready agreement with Sedco Forex,
RIGCO secured a letter of credit in January 1999 to secure payment to Sedco
Forex, and the funds used to secure such letter of credit were provided by Mr.
Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the
Company. For a discussion of the repayment arrangement between the Company and
Mr. Tatham relating to such funds, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Liquidity Outlook." On February 10, 1999, Tatham Offshore issued two
promissory notes, each in the original principal amount of $1.1 million, to
Tatham Brothers and a foundation associated with Mr. Thomas P. Tatham,
respectively, to secure funds to purchase new anchor chains in connection with
the Bill Shoemaker make-ready. See Notes 1 and 2 for additional related party
transactions completed in connection with the Merger.
Tatham Aviation, Inc. ("Tatham Aviation"), whose sole shareholder is Thomas P.
Tatham, has provided the Company use of a corporate aircraft. The agreement
between the Company and Tatham Aviation provides for the Company's reimbursement
of operating costs, insurance and carrying costs in exchange for the use of the
corporate aircraft. During the nine months ended March 31, 1999, the Company
paid Tatham Aviation $1.7 million under this agreement.
NOTE 5 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity as of
September 30, 1999:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding (a) Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Series A Preferred Stock (b) 16,904,133(d) $1.50 per share 12% $ 8,113,984 (b)(c)
Series B Preferred Stock 74,379 $1.00 per share 8% $ 14,876 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 16,060 (b)(c)
Common Stock 26,074,321(d) N/A -- -- --
</TABLE>
- ----------
(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible
Preferred Stock and replaced this stock with Series B 9% Senior
Convertible Preferred Stock ("Senior Preferred Stock"). The Senior
Preferred Stock was convertible into Series A Preferred Stock using a
conversion ratio equal to (i) the liquidation preference amount plus
accumulated unpaid dividends divided by (ii) $0.9375, the closing price of
the Series A Preferred Stock on February 27, 1998. Each share of the
Senior Preferred Stock was senior to all other classes of Tatham Offshore
preferred and common stock in the case of liquidation, dissolution or
winding up of Tatham Offshore. The Partnership held all outstanding
shares. In connection with the Redemption Agreement, Tatham Offshore
transferred certain oil and gas properties to the Partnership in exchange
for the Senior Preferred Stock and all related unpaid dividends. See
Note 2.
(b) Prior to December 31, 1998, each share could have been exchanged for 0.4
Exchange Warrants. Each full Exchange Warrant entitled the holder thereof
to purchase one share of Tatham Offshore common stock at $6.53 per share.
The Exchange Warrants would have expired on July 1, 1999. No Exchange
Warrants were issued prior to the exchange deadline. Alternatively, at any
time, the holder of any shares may convert the liquidation value and
unpaid dividends into shares of Tatham Offshore common stock at $6.53 per
share.
(c) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(d) In connection with the Rights Offering, Tatham Offshore purchased and
cancelled all of the shares of Common Stock and Series A Preferred Stock
that were not acquired by the holders of Rights or TB Securities in the
Rights Offering, 3,926,746 shares and 653,365 shares, respectively, and
the proceeds from such purchase by Tatham Offshore were contributed by
DeepTech to Tatham Offshore.
10
<PAGE> 11
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6 - EARNINGS PER SHARE:
During 1997, Tatham Offshore adopted Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings per Share". SFAS No. 128 establishes new guidelines
for computing earnings per share ("EPS") and requires dual presentation of basic
and diluted EPS for entities with complex capital structures. Basic EPS excludes
dilution and is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects potential dilution and is computed by dividing
net income (loss) available to common shareholders by the weighted average
number of common shares outstanding during the period increased by the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. All prior period EPS data has been
restated to conform with the provisions of SFAS No. 128. All financial
information and per share data gives effect to the one-for-ten reverse stock
split Tatham Offshore completed on November 24, 1997.
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.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
The Nasdaq Stock Market, Inc. ("Nasdaq") listing criteria requires, among other
things, that a company listed on the Nasdaq National Market maintain a closing
bid price greater than or equal to $1.00 and that the company's common stock
must maintain a market value of public float greater than or equal to
$5,000,000. The Company has been notified by Nasdaq that unless the Company is
able to demonstrate compliance with the $1.00 minimum bid price requirement and
the $5,000,000 market value of public stock requirement by May 12, 1999, the
Company's common stock would be delisted from the Nasdaq National Market at the
opening of business on May 13, 1999. The Company's common stock bid price has
not closed at a bid price greater than or equal to $1.00 in recent months and
the market value of the Company's common stock held by individuals and entities
which qualify under the definition of public float does not equal or exceed
$5,000,000 at the current trading level of the common stock. As a result,
effective May 13, 1999, the Company's common stock was no longer listed on the
Nasdaq National Market and began trading in the over the counter market.
Effective January 25, 1998, Sedco Forex entered into a one-year contract with
Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. The
Company has been notified by Sedco Forex that as of November 18, 1998 Shell
would cease using the Bill Shoemaker to conduct drilling operations in the Gulf.
The Company has been paid for drilling services performed by the Bill Shoemaker
for Shell through October 31, 1998 but has not been paid for any period since
that time. The Company has recorded a $8.6 million account receivable from Sedco
Forex as a result of this contract dispute. The Company is currently under
negotiations with Sedco Forex to obtain payment for the remaining portion of the
Shell contract. On April 20, 1999, RIGCO gave Sedco Forex a written termination
notice of the management and charter agreement for the Bill Shoemaker.
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.
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<PAGE> 12
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 8 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1999 1998
(in thousands)
<S> <C> <C>
Interest $ 3,232 $ 9
Taxes $ -- $ --
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1999 1998
(in thousands)
<S> <C> <C>
Debt issued to refinance accounts payable
to affiliates $ 5,153 $ --
Senior Preferred Stock redeemed under
the Redemption Agreement $ 7,500 $ --
Debt issued to finance Rights Offering $ 6,923 $ --
Conversion of long term debt to common stock $ -- $ 60,000
Conversion of preferred stock to common stock $ -- $ 445
Assignment of oil and gas properties and
abandonment obligations $ -- $ 1,200
</TABLE>
As discussed in Note 2, Tatham Offshore conveyed its remaining oil and gas
assets to the Partnership per the Redemption Agreement. The assets and
liabilities conveyed were as follows (in thousands):
<TABLE>
<S> <C>
Cash $ (1,605)
Oil and gas properties, net (5,466)
Accounts payable 755
Accounts payable to DeepTech 1,062
Accounts payable to the Partnership 2,480
Other noncurrent liabilities 3,416
--------
Increase in paid in capital $ 642
========
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Item 1.
"Consolidated Financial Statements" and is intended to assist in the
understanding of the Company's financial condition and results of operations for
the three and nine months ended March 31, 1999.
GENERAL
Tatham Offshore is an independent energy company currently pursuing energy
related opportunities in Atlantic Canada, including offshore contract drilling
services, the North Atlantic pipeline project, related gas processing
facilities, a facility for the generation of electricity and other related
investments. Historically, Tatham Offshore has been in the oil and gas
exploration and development business, primarily in the Gulf. The Company has
refocused its business from the oil and gas exploration and production business
in the Gulf to an integrated frontier investment strategy targeting Atlantic
Canada with an initial emphasis on the offshore contract drilling business.
Accordingly, in connection with DeepTech's merger (the "Merger") with a
subsidiary of El Paso completed on August 14, 1998, Tatham Offshore (i)
transferred its ownership of Tatham Development, which owns oil and gas
producing properties, to DeepTech and its remaining oil and gas properties to
the Partnership, and (ii) acquired from DeepTech ownership of DeepFlex and,
therefore the second generation semisubmersibles, the Laffit Pincay and the Bill
Shoemaker. The Company's oil and gas operations in the Gulf are reflected as
discontinued operations in the financial statements.
Unless otherwise indicated, (i) all current and prospective information gives
effect to the Merger and related transactions completed on or before August 14,
1998, including the disposition of all of Tatham Offshore's exploration and
production assets located in the Gulf, the related retirement of certain amounts
of Tatham Offshore's Preferred Stock, the contribution to Tatham Offshore of two
semisubmersible drilling rigs, and the assumption of certain debt, (ii) all
references to "Tatham Offshore" are to Tatham Offshore, Inc. and its
subsidiaries, (iii) all references to the "Company" are to Tatham Offshore, Inc.
and its subsidiaries and DeepFlex Production Services, Inc. and its subsidiaries
("DeepFlex"), and (iv) all financial information and per share data gives effect
to the one-for-ten reverse stock split Tatham Offshore completed on November 24,
1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Revenue from drilling services totaled $6.1 million for the three months ended
March 31, 1999, all of which was generated by the Bill Shoemaker. The Laffit
Pincay did not have a drilling contract during this period and therefore did not
generate any revenue. No drilling service revenue was recorded by the Company
for the period ended March 31, 1998 since the Company did not own the Rigs
during that period.
Operating expenses for the three months ended March 31, 1999 totaled $4.5
million and were attributable to the management fee and direct operating
expenses for the Rigs. During this period, the Bill Shoemaker's operating
expenses totaled $2.4 million and the Laffit Pincay's operating expenses totaled
$2.1 million. Operating expense for the Laffit Pincay during this period
included the costs necessary to maintain the rig in a warm-stacked mode,
awaiting a drilling contract. No operating expense for the Rigs was recorded by
the Company for the period ended March 31, 1998 since the Company did not own
the Rigs during that period.
Depreciation expense totaled $1.5 million for the period ended March 31, 1999.
Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $1.0
million and $0.5 million, respectively. No depreciation expense relating to the
Rigs was recorded during the period ended March 31, 1998 since the Company did
not own the Rigs during that period.
General and administrative expense totaled $1.9 million for the three months
ended March 31, 1999 as compared to $0.1 million for the three months ended
March 31, 1998. General and administrative costs attributable to discontinued
operations totaled $1.2 million for the three months ended March 31, 1998. In
connection with the Merger, the management agreement between the Company and
DeepTech was terminated on August 14, 1998 and the Company hired a management
team and support personnel required to conduct its contract drilling services
business and implement its Atlantic Canada strategy. General and administrative
expense for the three months
13
<PAGE> 14
ended March 31, 1999 includes staff and overhead costs for the operation of the
marine services and Atlantic Canada businesses whereas general and
administrative costs for the three months ended March 31, 1998 include costs
relative to the Atlantic Canada business only.
Operating loss for the three months ended March 31, 1999 totaled $1.8 million as
compared to an operating loss of $0.2 million for the three months ended March
31, 1998. The change was due to the items discussed above.
Interest and other income totaled $0.8 for the three months ended March 31, 1999
as compared with $27,000 for the three months ended March 31, 1998 and included
interest income from available cash and other income in 1999 of $618,000 related
to a settlement with El Paso under certain merger related agreements. See --
"Liquidity and Capital Resources."
Interest expense for the three months ended March 31, 1999 totaled $4.7 million.
For the three months ended March 31, 1999, interest expense relating to the
Credit Facility (as defined herein) totaled $1.7 million. Interest expense
relating to borrowings from Tatham Brothers and Thomas P. Tatham totaled $3.0
million, including $1.3 million in interest and $1.7 million related to debt
issue costs.
As a result of transferring all of its oil and gas properties in the Gulf to
DeepTech and the Partnership in connection with the Merger, the Company
discontinued its oil and gas operations effective August 14, 1998 and had no
gain or loss from discontinued operations for the three months ended March 31,
1999 as compared with a net loss from discontinued operations of $1.3 million
for the three month period ended March 31, 1998. During the three months ended
March 31, 1998, the Company sold 1,016 million cubic feet ("MMcf") of natural
gas and 1,775 barrels of oil at average prices of $2.06 per thousand cubic feet
("Mcf") of natural gas and $14.28 per barrel of oil, respectively.
Tatham Offshore eliminated all of its Senior Preferred Stock and the associated
preferred stock dividends in arrears and cancelled 653,365 shares of its Series
A Preferred Stock in connection with the Merger. Tatham Offshore's remaining
preferred stock dividends totaled $0.8 million for the three months ended March
31, 1999 as compared with $0.9 million for the three months ended March 31,
1998. After taking preferred stock dividends into account, the Company's net
loss allocable to common shareholders for the three months ended March 31, 1999
was $6.5 million, or $0.25 per share, as compared with a net loss allocable to
common shareholders for the three months ended March 31, 1998 of $2.4 million,
or $0.08 per share.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1998
Revenue from drilling services totaled $28.4 million for the nine months ended
March 31, 1999. During this period, the Bill Shoemaker generated a total of
$26.3 million in revenue and the Laffit Pincay generated a total of $2.1 million
in revenue. The Laffit Pincay had only one short term drilling contract during
the nine months ended March 31, 1999. No drilling service revenue was recorded
by the Company for the period ended March 31, 1998 since the Company did not own
the Rigs during that period.
Operating expenses for the nine months ended March 31, 1999 totaled $16.5
million and were attributable to the management fee and direct operating
expenses for the Rigs. During this period, the Bill Shoemaker's operating
expenses totaled $8.4 million and the Laffit Pincay's operating expenses totaled
$8.1 million. Operating expense for the Laffit Pincay during this period
included the costs necessary to maintain the rig in a warm-stacked mode,
awaiting a drilling contract. No operating expense for the Rigs was recorded by
the Company for the period ended March 31, 1998 since the Company did not own
the Rigs during that period.
Depreciation expense totaled $4.2 million for the period ended March 31, 1999.
Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $2.7
million and $1.5 million, respectively. No depreciation expense relating to the
Rigs was recorded during the period ended March 31, 1998 since the Company did
not own the Rigs during that period.
General and administrative expense totaled $5.0 million for the nine months
ended March 31, 1999 as compared to $0.7 million for the nine months ended March
31, 1998. General and administrative costs attributable to discontinued
operations totaled $0.3 million and $3.7 million for the nine months ended March
31,
14
<PAGE> 15
1999 and 1998, respectively. General and administrative expense includes staff
and overhead costs allocated to the Company under a management agreement with
DeepTech of $0.2 million and $0.5 million for the nine months ended March 31,
1999 and 1998, respectively. In connection with the Merger, the management
agreement between the Company and DeepTech was terminated on August 14, 1998.
General and administrative expense for the nine months ended March 31, 1999
includes staff and overhead costs for the operation of the marine services and
Atlantic Canada businesses whereas general and administrative costs for the nine
months ended March 31, 1998 include costs relative to the Atlantic Canada
business only.
Operating income for the nine months ended March 31, 1999 totaled $2.5 million
as compared to an operating loss of $0.6 million for the nine months ended March
31, 1998. The change was due to the items discussed above.
Interest and other income totaled $0.9 million for the nine months ended March
31, 1999 as compared with $0.2 million for the nine months ended March 31, 1998
and included interest income from available cash and other income in 1999 of
$618,000 related to a settlement with El Paso under certain merger related
agreements.
Interest expense for the nine months ended March 31, 1999 totaled $10.3 million.
For the nine months ended March 31, 1999, interest expense relating to the
Credit Facility (as defined herein) totaled $5.7 million and interest expense
relating to borrowings from Tatham Brothers and Thomas P. Tatham totaled $4.6
million. For the nine months ended March 31, 1998, $1.7 million of interest
expense related to borrowings under the Subordinated Notes held by DeepTech is
included in the loss from discontinued operations.
Subsequent to transferring all of its oil and gas properties in the Gulf to
DeepTech and the Partnership in connection with the Merger, the Company reported
a net loss from discontinued operations of $0.2 million for the nine months
ended March 31, 1999 as compared with a net loss from discontinued operations of
$3.5 million for the nine month period ended March 31, 1998. During the period
from July 1, 1998 through August 14, 1998, the Company sold 479 MMcf of natural
gas and 1,200 barrels of oil at average prices of $1.86 per Mcf of natural gas
and $7.13 per barrel of oil, respectively. During the nine months ended March
31, 1998, the Company sold 3,739 MMcf of natural gas and 14,795 barrels of oil
at average prices of $2.41 per Mcf and $17.02 per barrel, respectively.
Tatham Offshore eliminated all of its Senior Preferred Stock and the associated
preferred stock dividends in arrears and cancelled 653,365 shares of its Series
A Preferred Stock in connection with the Merger. Tatham Offshore's remaining
preferred stock dividends totaled $2.3 million for the nine months ended March
31, 1999 as compared with $2.8 million for the nine months ended March 31, 1998.
After taking preferred stock dividends into account, the Company's net loss
allocable to common shareholders for the nine months ended March 31, 1999 was
$9.4 million, or $0.35 per share, as compared with a net loss allocable to
common shareholders for the nine months ended March 31, 1998 of $6.8 million, or
$0.52 per share. The net loss per share calculation for the period ended March
31, 1998 has been adjusted to reflect the one-for-ten reverse stock split that
was completed in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's exploration and production activities have generated
and utilized substantially all of the operating cash flow. Prospectively, the
Company's contract drilling activities are expected to generate and utilize
substantially all of the operating cash flow, at least during the near term. See
"-- Liquidity Outlook."
Sources of Cash. Effective with the Merger transactions, the Company transferred
all of its oil and gas properties in the Gulf to DeepTech and the Partnership.
The Company expects to be dependent upon cash on hand and cash generated from
its drilling services operations to pay its operating expenses and satisfy its
other obligations. However, as described below, the Company will need to raise
substantial capital (equity, debt or both) or enter into other arrangements to
allow the Company to implement its business strategy in Atlantic Canada. If
either of the Rigs is not employed for any extended period of time, the absence
of associated revenues may have a material adverse effect on the Company,
including limiting the Company's ability to raise capital from external sources.
The Laffit Pincay has not been employed since mid-August 1998 and it is
uncertain as to when and at what rates it will be employed in the future. The
Bill Shoemaker is currently under contract to Husky Oil Operations Limited under
an agreement that provides for two firm wells with options to drill up to seven
additional wells at pre-determined rates. As of this date, Husky Oil Operations
Limited has not exercised any of its options for additional wells. If the option
wells are not exercised, the drilling contract will terminate in August or
September 1999 after the drilling of the second firm well. As of this date, the
Company has not entered into a drilling contract for the Bill Shoemaker
subsequent to the Husky Oil Operations Limited agreement. See "-- Uses of Cash"
and "-- Liquidity Outlook."
15
<PAGE> 16
In August 1998, both El Paso Energy and the Company were required to post
letters of credit in connection with certain Merger related agreements. In March
1999, the Company entered into an agreement with El Paso Energy under which (i)
each company was released of its obligation to maintain letters of credit in
favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii)
the Company released its rights to certain potential pre-merger tax attributes
of the DeepTech group. As a result of this agreement, the Company's $6.1 million
cash collateral which secured its letter of credit in favor of El Paso Energy
was released and became available for general corporate purposes.
Uses of Cash. The Company expects that its primary uses of cash will consist of
(i) interest payments on the Credit Facility (as defined below), (ii) amounts
necessary to fund capital expenditures related to the Rigs that are not funded
by customers, (iii) amounts necessary to staff and maintain the Rigs while they
are not under contract, and (iv) amounts necessary to pay general and
administrative and other operational expenses. In addition, the Company will use
available cash to fund the pursuit of its business strategy in Atlantic Canada.
Such uses will include funding initial expenditures related to the North
Atlantic Partners pipeline project, the remainder of the Company's Atlantic
Canada strategy and any of the Company's other potential capital expenditures.
Oil prices declined substantially during 1998, which has caused a significant
decline in the demand for drilling rigs. Although oil prices have strengthened
in recent months, the demand for drilling rigs has not improved significantly.
The Laffit Pincay does not have a current drilling contract and was warm-stacked
in Grand Isle Block 71, offshore Louisiana from mid-August 1998 through early
February 1999. In early February 1999, the Laffit Pincay was relocated to a
shipyard in Pascagoula, Mississippi pending the completion of engineering
studies and obtaining financing necessary to upgrade the rig to enable it to
drill in a dynamic position mode in water depths up to 5,000 feet. In addition
to the Laffit Pincay, there are several similarly equipped semisubmersibles
currently deployed in the Gulf that do not have current drilling contracts or
commitments. Cash costs to warm-stack the Laffit Pincay have been approximately
$600,000 per month. Cash costs to maintain the Laffit Pincay in the shipyard
pending the upgrade are approximately $250,000 per month.
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 March 31, 1999, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Partners, has incurred $12.4 million in
developmental costs in connection with such project and related infrastructure
projects. The Company anticipates that the ultimate capital costs of the
pipeline and related projects, if approved, could be in excess of several
billion dollars. The Company plans to secure joint venture partners and obtain
debt and/or equity financing to satisfy the capital requirements for the
Atlantic Canada projects, as required.
Liquidity Outlook. The Company intends to fund its immediate cash requirements
with cash on hand and cash from its drilling services operations. At March 31,
1999, the Company had $2.4 million of cash and cash equivalents. As of March 31,
1999, Tatham Offshore and its subsidiaries owed a total of $97.8 million in
debt, accrued interest and other accounts payable.
On September 30, 1996, a subsidiary of DeepFlex (the "Borrower") entered into a
$65 million senior secured credit facility with a syndicate of lenders (as
amended, the "Credit Facility"). Proceeds from the Credit Facility were used to
acquire the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker,
and to retire $30.3 million of other rig related indebtedness. In April 1997,
the Credit Facility was amended to provide for an additional $12 million to fund
the remaining refurbishments and upgrades to the Bill Shoemaker. The Credit
Facility (i) matured on April 30, 1999, (ii) provides for interest at the prime
rate plus 3% per annum (10 3/4% at March 31, 1999), payable quarterly, (iii) is
secured by the two semisubmersible drilling rigs and all of the related assets,
(iv) required a quarterly principal payment of excess cash flow as defined in
the credit agreement with a minimum principal amortization of $250,000 per
quarter beginning on December 31, 1996 and ending on September 30, 1998, (v)
provided the Lenders warrants to acquire a 5% minority equity interest in the
subsidiaries which own the Rigs, and (vi) is subject to customary conditions and
covenants, including the maintenance of a minimum level of working capital. As
of March 31, 1999, amounts outstanding under the Credit Facility totaled $58.1
million in principal and $1.6 million in accrued interest. On September 25,
1998, the parties to the Credit Facility amended the agreement to (i) extend the
maturity date from September 30, 1998 to March 31, 1999, (ii) waive all
principal payments until the maturity date, and (iii) extend the expiration date
on the warrants issued to the lenders under the original Credit Facility to
March 31, 1999. Subsidiaries of DeepFlex paid a total of 0.5% of the outstanding
principal balance to the lenders in connection with the amendment.
16
<PAGE> 17
On March 31, 1999, the parties to the Credit Facility amended the agreement to
(i) extend the maturity to April 30, 1999, (ii) waive all principal and interest
payments until the maturity date and (iii) extend the expiration date on the
warrants issued to the lenders under the original Credit Facility to April 30,
1999. Subsidiaries of DeepFlex paid a total of $100,000 to the lenders in
connection with the amendment and agreed to increase the interest rate on the
outstanding principal balance by 2% for the period of the extension.
The Borrower did not make the principal payment or interest payment due on April
30, 1999 and is presently in default under the terms of the Credit Facility and
is under negotiations with its current Lenders under the Credit Facility. The
Borrower is attempting to negotiate an extension of the Credit Facility on terms
acceptable to both the Company and the Lenders. The Borrower is considering the
sale of either the Bill Shoemaker or the Laffit Pincay, or both, in an effort to
raise sufficient proceeds to extinguish the amounts due under the Credit
Facility in the event that an extension of the Credit Facility, or a new credit
facility, cannot be negotiated on terms acceptable to the Company. The Bill
Shoemaker and Laffit Pincay are pledged as collateral under the Credit Facility.
By letter dated May 3, 1999, the administrative agent for the Lenders advised
the Borrower that the loan was in default and that the Lenders would not
exercise their rights, remedies, powers and privileges under the Credit Facility
and other related loan documents at that time, but that they reserve the right
to do so at any time they deem appropriate. The Company is evaluating all of its
financing alternatives as well as a restructuring of the Company or its rig
related subsidiaries, or both, under the United States Bankruptcy Code.
In connection with the Merger, the Company entered into a $22.9 million short
term financing arrangement with Tatham Brothers (as amended, the "Short Term
Facility") 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 Facility. Tatham Brothers is an affiliate of Thomas P.
Tatham and the parent company of TB Securities. The Short Term Facility accrued
interest at the rate of 12% per annum and was due on January 15, 1999. On
January 15, 1999, the Company and Tatham Brothers agreed to refinance the
original $22.9 million principal plus $1.1 million of accrued interest into a
new short term loan which bears interest at the rate of 15% per annum and was
due March 31, 1999. In connection with the refinancing, the Company paid Tatham
Brothers a fee of $1.0 million in the form of a 15% subordinated convertible
note (the "Subordinated Convertible Note"). The Subordinated Convertible Note
bears interest at the rate of 15% per annum and is due on August 15, 2001.
Tatham Brothers may convert the principal amount of the Subordinated Convertible
Note and accrued unpaid interest into shares of Common Stock of the Company
based on the average market price for the five trading days prior to the end of
the previous calendar quarter. The Short Term Facility is secured by a pledge of
DeepFlex of its interest in 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 had an outstanding balance of approximately $76.0 million
at March 31, 1999. On March 31, 1999, the Company and Tatham Brothers extended
the Short Term Facility until April 30, 1999. Pursuant to the terms of the Short
Term Facility, Tatham Offshore was required to pay $24.1 million in principal
and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make
payment of such amount; as a result, an Event of Default has occurred and is
continuing under the Short Term Facility.
Effective January 25, 1998, Sedco Forex entered into a one-year contract with
Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. The
Company has been notified by Sedco Forex that as of November 18, 1998 Shell
would cease using the Bill Shoemaker to conduct drilling operations in the Gulf.
The Company has been paid for drilling services performed by the Bill Shoemaker
for Shell through October 31, 1998 but has not been paid for any period since
that time. The Company has recorded a $8.6 million account receivable from Sedco
Forex as a result of this contract dispute. The Company is currently under
negotiations with Sedco Forex to obtain payment for the remaining portion of the
Shell contract. On April 20, 1999, RIGCO gave Sedco Forex a written termination
notice of the management and charter agreement for the Bill Shoemaker.
Following the early release of the rig by Shell, the Bill Shoemaker was towed to
a shipyard in Galveston, Texas where it underwent a make-ready in preparation
for mobilization to the Grand Banks area in Atlantic Canada. Capital costs,
including crew costs while in the shipyard, for the make-ready totaled
approximately $8.5 million. Following the make-ready, the Bill Shoemaker was
mobilized to the Grand Banks area in Atlantic Canada to
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<PAGE> 18
conduct a two-well program (with three options permitting up to seven additional
wells) at predetermined rates for Husky Oil Operations Limited. In connection
with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO secured a
letter of credit for $6.5 million to secure payment to Sedco Forex. The letter
of credit was secured with funds provided by Thomas P. Tatham, Chairman of the
Board and Chief Executive Officer of the Company. In exchange for providing the
funds to secure the letter of credit, the Company paid a fee of $500,000 to Mr.
Tatham. The Company has agreed to pay Mr. Tatham, as liquidated damages, $10,000
per day from February 15, 1999 until such funds are returned. The liquidated
damages payment would be in the form of a promissory note bearing interest at
the rate of 18% per annum. All of the funds securing the letter of credit were
drawn by Sedco Forex for payments under the make-ready agreement.
Management believes that revenue from the Bill Shoemaker contracts will provide
sufficient liquidity to permit the Company to pay (i) its operating expenses on
both the Bill Shoemaker and the Laffit Pincay and (ii) its general and
administrative costs while receiving payments pursuant to the Husky Oil
Operations Limited agreement. The Company currently does not have a replacement
drilling agreement for the Bill Shoemaker. The Company will be dependent on cash
reserves generated from the Husky Oil Operations Limited agreement, or funds
from new financing arrangements, to fund its ongoing cash requirements until
such time as additional contract drilling services are secured for either the
Bill Shoemaker or the Laffit Pincay. Any additional capital expenditures for
either of the rigs will need to be funded by customers or other third party
sources.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from
NationsBank, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to
fund certain improvements to the Rigs. The loan bears interest at the prime rate
per annum and is due on September 30, 1999 or on demand. The loan from Tatham
Brothers to DeepFlex, plus accrued interest, was included in the amount payable
under the short term financing arrangement discussed above.
On March 23, 1999, RIGCO assumed the management and operational responsibility
for the Laffit Pincay. The Laffit Pincay is currently stacked in a shipyard in
Pascagoula, Mississippi. The Company is in the process of completing engineering
studies and obtaining cost estimates to upgrade the rig to enable it to drill in
a dynamic position mode in water depths up to 5,000 feet. The Company believes
that the Laffit Pincay, upgraded for dynamic positioned drilling, would make an
ideal candidate for drilling opportunities offshore Brazil and West Africa.
Although there can be no assurances, the Company anticipates that with an
acceptable long term contract, the capital requirements for the upgrade could be
secured with either United States or Canadian government guarantees. Although
the engineering studies and cost estimates are not complete, preliminary
estimates indicate that the upgrades will cost approximately $90-$100 million
and could be completed within a twelve month period. The Company is currently
marketing the Laffit Pincay to obtain a long term drilling contract to support
the capital requirements for the upgrade. In addition, the Company continues to
market the Laffit Pincay for drilling services in the Gulf.
The Company is refocusing its business from the development, exploration and
production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada with initial emphasis on the offshore
contract drilling business. The Company believes that the Atlantic Canada region
offers significant investment opportunities and the Company plans to expand the
number of drilling rigs it will own as well as diversify its business to include
the North Atlantic pipeline project, related gas processing facilities, a
facility for the generation of electricity and other related investments. The
Company has incurred approximately $12.4 million in costs associated with its
Atlantic Canada strategy.
The ability of the Company to satisfy its future capital needs with respect to
its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic Partners pipeline
project, will depend upon its ability to raise substantial amounts of additional
capital and to implement its business strategy successfully. With respect to the
Company's Atlantic Canada strategy, (i) the Company does not currently possess
the capital necessary to implement its business strategy completely and there
can be no assurances that the Company will be able to obtain sufficient capital
for any or all of the projects, (ii) there can be no assurances that these
projects and other opportunities will prove to be economical or that they will
occur, and (iii) many of these projects will require governmental approvals,
almost all of which the Company has yet to receive. Moreover, if there are
developments that the Company determines to be indicative of a lack of
reasonable opportunity to realize benefits for the Company's stockholders, then
the Company will pursue other opportunities, wherever located, as the
18
<PAGE> 19
Company determines to be in the Company's best interests. The Company is
currently seeking industry partners to assist in the funding of the ongoing
day-to-day operations of its planned Atlantic Canada strategy.
Since the Nasdaq National Market has delisted Tatham Offshore's common stock,
the holders thereof will suffer a decrease in marketability of their shares and
the liquidity of their investment in Tatham Offshore's common stock and its
preferred stocks which are convertible into common stock. This potential
decrease in the marketability and liquidity of the Company's common and
preferred stock may have a material adverse effect on Tatham Offshore's ability
to access equity markets in the future. See Item 1. "Consolidated Financial
Statements -- Notes to the Consolidated Financial Statements -- Note 7 --
Commitments and Contingencies."
Tatham Offshore has never declared or paid dividends on its common or preferred
stock. Tatham Offshore expects to retain all available earnings generated by its
operations for the growth and development of its business.
YEAR 2000. The year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the year. The Company
believes that substantially all of its information technology software and
equipment are year 2000 compliant and that this problem will have no affect on
the Company's internal operations. The Company believes that the costs relating
to the assessment of the year 2000 issue will be de minimus. Although the
Company intends to interact only with those third parties that have year 2000
compliant computer systems, it is impossible for the Company to monitor all such
systems. The Company has initiated discussions with the operator of the Bill
Shoemaker and Laffit Pincay and based on initial discussions, believes that
there will be no disruption in the operation of its drilling rigs as a result of
the year 2000 issue. Currently, the Company has no information concerning the
year 2000 compliance status of its customers and vendors. There can be no
assurances that such systems will not have a material adverse impact on the
Company's business and operations.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations and (v) significant changes from expectations of capital
expenditures and operating expenses and unanticipated project delays. The
Company disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. The Company is exposed to some
market risk due to the floating interest rate under the Credit Facility. See
"Item 2 -- Liquidity Outlook." A 1 1/2% increase in interest rates could result
in a $875,000 annual increase in interest expense on the existing principal
balance.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with
Citibank, N.A., which covered $36.5 million of the principal amount under the
Credit Facility and provided a maximum fixed effective interest rate of 11.74%.
This cap agreement terminated on September 30, 1998. Management has determined
that it is not necessary to participate in interest rate related derivative
financial instruments because it currently does not expect significant short
term increases in interest rates charged under the Credit Facility.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
RIGCO and FPS VI, significant subsidiaries of the Company, are party to
a Credit Agreement dated as of September 30, 1996 (as amended,
supplemented or otherwise modified from time to time, the "Credit
Facility") with BHF-Bank Aktiengesellschaft, as administrative agent
("BHF"), Lehman Commercial Paper Inc., Hibernia National Bank, and
certain other banks and financial institutions (collectively, the
"Lenders").
Pursuant to the terms of the Credit Agreement, RIGCO and FPS VI were
required to pay $60.3 million, all amounts owing under the Credit
Agreement, on April 30, 1999. RIGCO and FPS VI did not make payment of
such amounts; as a result, an Event of Default has occurred and is
continuing under the Credit Agreement.
By letter dated May 3, 1999, BHF, on behalf of the Lenders, advised
RIGCO and FPS VI that the Lenders would not exercise their rights,
remedies, powers and privileges under the Credit Agreement and the
other related loan documents at that time, but that they reserve the
right to do so at any time they deem appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.46 Promissory Note from Tatham Offshore, Inc. to Tatham
Brothers, LLC in the amount of $24,097,107 dated
January 15, 1999.
10.47 Convertible Subordinated Note from Tatham Offshore,
Inc. to Tatham Brothers, LLC in the amount of
$1,000,000 dated January 15, 1999.
(b) Reports on Form 8-K
None.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TATHAM OFFSHORE, INC.
Date: May 17, 1999 By: /s/ DENNIS A. KUNETKA
--------------------------------------
Dennis A. Kunetka
Chief Financial Officer and Secretary
(Signing on behalf of the Registrant
and as Principal Accounting Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.46 Promissory Note from Tatham Offshore, Inc. to Tatham Brothers, LLC in the amount
of $24,097,107 dated January 15, 1999.
10.47 Convertible Subordinated Note from Tatham Offshore, Inc. to Tatham Brothers, LLC
in the amount of $1,000,000 dated January 15, 1999.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.46
PROMISSORY NOTE
$24,097,107.00 Houston, Texas January 15, 1999
1. For value received, the undersigned, Tatham Offshore, Inc. ("Maker"), hereby
promises to pay to the order of Tatham Brothers, LLC, its successors or assigns
("Payee"), without setoff, at 200 Riverside Drive, #6E, New York, New York
10025, Attention: Mr. Glenn Tatham, or at such other place as from time to time
may be designated by the holder of this Promissory Note (this "Note"), in lawful
money of the United States of America, the principal sum of TWENTY-FOUR MILLION
NINETY-SEVEN THOUSAND ONE HUNDRED AND SEVEN DOLLARS ($24,097,107.00) (the
"Principal Amount"), with interest on the principal balance from time to time
remaining unpaid from and after the date hereof until maturity, computed from
the date of the advance at the Stated Rate hereinafter set forth, and, to the
extent permitted by law, on any overdue principal and the interest thereon, at
the Delinquent Rate hereinafter set forth.
2. Interest shall accrue on the principal balance from time to time outstanding
hereunder until maturity at a rate equal to fifteen percent (15%) per annum (the
"Stated Rate"), but in no event to exceed the Maximum Rate (hereinafter
defined). Interest shall be calculated on the basis of the actual number of days
elapsed (including the first day, but excluding the last) and computed on the
basis of a 360 day year. All past due principal and interest shall bear interest
from maturity (whether caused by acceleration or otherwise) until paid at the
Delinquent Rate as hereinafter defined.
3. Maker and Payee hereby agree that the expression "Delinquent Rate" as used
herein means the lesser of (i) the Maximum Rate or (ii) the sum of four percent
(4%) plus the Stated Rate. The expression "Maximum Rate" as used herein means
the greater of (a) the maximum rate of interest from time to time permitted
under federal laws applicable to the indebtedness evidenced hereby or (b) the
maximum rate of interest from time to time permitted under New York laws
applicable to the indebtedness evidenced hereby.
4. Maker agrees to pay promptly upon receipt of an invoice from Payee, all costs
and expenses of Payee, including, without limitation, reasonable attorneys'
fees, (i) associated with the making of the loan hereunder, and (ii) in
connection with the enforcement and collection hereof, whether or not any suit
is brought on this Note or any foreclosure or other proceeding is brought. The
provisions of this Paragraph 4 are not intended to limit in any manner Maker's
obligations to pay costs and expenses of Payee as may be elsewhere provided
herein.
5. The outstanding principal and interest balance on this Note shall be due and
payable in full on March 31, 1999.
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<PAGE> 2
6. Maker and Payee agree that Maker shall use the funds it receives pursuant to
this Note only to pay refinancing amounts (principal, interest, fees, costs and
expenses) due under that certain Promissory Note dated August 14, 1998 issued by
Maker payable to Payee in the original principal amount of $22,889,102.00 (the
"August Note") and fees, costs and expenses related to this Note and related
agreements.
7. Maker shall have the right to prepay, in full or in part, the then unpaid
principal balance on this Note (together with all accrued and unpaid interest
then due). All prepayments shall be applied first to unpaid accrued interest,
with the balance being applied to principal.
8. This Note is guaranteed by DeepFlex Production Services, Inc. ("Guarantor")
pursuant to that certain Limited Recourse Guaranty Agreement dated August 14,
1998, executed by Guarantor in favor of Payee (the "Guaranty"), and such
Guaranty is secured by that certain Pledge and Security Agreement (the "Pledge")
dated of even date therewith executed by Guarantor in favor of Payee as secured
party.
9. Except as may be otherwise provided herein or in any instrument securing the
payment of this Note, the makers, signers, sureties, and endorsers of this Note
severally waive demand, presentment, notice of dishonor, notice of intent to
accelerate payment hereof, notice of acceleration, diligence in collecting,
grace, notice, and protest, and agree to one or more extensions for any period
or periods of time and partial payments, before or after maturity, without
prejudice to the holder.
10. The following shall constitute events of default hereunder (the "Events of
Default"): (a) the failure to pay or perform any obligation, liability or
indebtedness of Maker to Payee under this Note; (b) the failure to pay or
perform any other obligation, liability or indebtedness of Maker or Guarantor or
any of their subsidiaries to any other party with a value of more than $50,000;
(c) the commencement of a proceeding against Maker or Guarantor or any of their
subsidiaries for dissolution or liquidation, the voluntary or involuntary
termination or dissolution of Maker or Guarantor or any of their subsidiaries or
the merger or consolidation of Maker or Guarantor or any of their subsidiaries
with or into another entity; (d) the insolvency of, the business failure of, the
appointment of a custodian, trustee, liquidator or receiver for or for any of
the property of, the assignment for the benefit of creditors by, or the filing
of a petition under bankruptcy, insolvency or debtor's relief law or the lifting
of a petition for any adjustment of indebtedness, composition or extension by or
against Maker or Guarantor or any of their subsidiaries; (e) the determination
by Payee that any representation or warranty made to Payee by Maker or Guarantor
in any Loan Documents (herein defined) is or was, when it was made, untrue or
materially misleading; (f) the entry of a judgment against Maker or Guarantor or
any of their subsidiaries which Payee deems to be of a material nature, in
Payee's sole discretion; (g) the seizure or forfeiture of, or the issuance of
any writ of possession, garnishment or attachment, or any turnover order for any
property of Maker or Guarantor or any of their subsidiaries; (h) the
determination by Payee that a material adverse change has occurred in the
financial condition of Maker or Guarantor or any of their subsidiaries; (i) the
failure of Maker's or any of its subsidiaries business to comply with any law or
regulation controlling its operation; (j) except to the extent covered by (e)
above or (k) below, the failure by Maker or Guarantor or any of their
subsidiaries to perform, observe, or comply with any covenant, agreement, or
term contained in this Note (including without limitation, the covenants set
forth in Paragraph 13 and the representations and warranties in Paragraph 14),
the Guaranty, the Pledge or any other document executed in connection with this
Note (collectively, the "Loan Documents") or in any other agreement with Payee
or its affiliates, and such default shall continue unremedied for a period of
thirty (30) days after receipt of written notice thereof from Payee, (k) the
failure of Maker or Guarantor or any of their subsidiaries to pay any amount
(principal, interest, fees or otherwise) when due to Payee or its affiliates,
whether payable pursuant to the Loan Documents or otherwise, (l) Maker or any of
its subsidiaries sells or otherwise disposes of any
2
<PAGE> 3
asset with either a book value or a fair market value greater than $1 million,
or (m) Payee, in its sole discretion, determines that amounts owed to Payee and
its affiliates by Maker and its affiliates are not secured by assets adequate to
cover such indebtedness.
11. Whenever there is an Event of Default under this Note (a) the entire balance
outstanding hereunder and all other obligations of Maker to Payee (however
acquired or evidenced) shall, at the option of Payee, become immediately due,
and (b) the rate of interest on the unpaid principal shall be increased to the
Delinquent Rate. The provisions herein for a Delinquent Rate and a delinquency
charge shall not be deemed to extend the time for any payment hereunder or to
constitute a "grace period" giving Maker a right to cure any default. At Payee's
option, any accrued and unpaid interest, fees or charges may, for purposes of
computing and accruing interest on a daily basis after the due date of the Note
or any installment thereof, be deemed to be a part of the principal balance, and
interest shall accrue on a daily compounded basis after such date at the
Delinquent Rate provided in this Note until the entire outstanding balance of
principal and interest is paid in full. Upon a default under this charge against
any deposit accounts of Maker (as well as any money, instruments, securities,
documents, chattel paper, credits, claims demands, income and any other
property, rights and interests of Maker), which at any time shall come into the
possession or custody or under the control of Payee or any of its agents,
affiliates or correspondents, any and all obligations due hereunder.
Additionally, Payee shall have all rights and remedies available under each of
the documents executed in connection with this Note, as well as all rights and
remedies available at law or in equity.
12. The failure at any time of Payee to exercise any of its options or any other
rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to
the exercise of any of its options or rights at a later date. All rights and
remedies of Payee shall be cumulative and may be pursued singly, successively or
together, at the option of Payee. The acceptance by Payee of any partial payment
shall not constitute a waiver of any default or of any of Payee's rights under
this Note. No waiver of any of its rights hereunder, and no modification or
amendment of this Note, shall be deemed to be made by Payee unless the same
shall be in writing, duly signed on behalf of Payee; each such waiver shall
apply only with respect to the specific instance involved, and shall in no way
impair the rights of Payee or the obligations of Maker to Payee in any other
respect at any other time.
13. Maker covenants and agrees that, so long as amounts under this Note are
outstanding:
(a) Maker shall deliver to Payee, at Payee's request from time to
time, and simultaneously with distributions of financial
reports to shareholders as required by the Securities and
Exchange Act of 1934 or the bylaws of Maker (the "Bylaws"),
copies of financial reports prepared in accordance with
generally accepted accounting principles in effect from time
to time;
(b) Promptly after Maker knows of any condition or event that
could have a material adverse impact on (i) the loan evidenced
by this Note, (ii) the collateral securing this Note pursuant
to the Guaranty and the Pledge, or (iii) the ability of Maker
or Guarantor to make payments pursuant to this Note, Maker
shall deliver a notice to Payee describing the same in
reasonable detail and the action Maker proposes to take with
respect thereto;
(c) Maker shall keep, or cause to be kept, insured by financially
sound and reputable insurers acceptable to Payee all property
of a character usually insured by persons or entities engaged
in the same or similar business against loss or damage of the
kinds and in the amounts customarily insured against by such
persons or entities and carry such other insurance as is
usually carried by such persons or entities similarly
situated;
3
<PAGE> 4
(d) Promptly after Maker knows of the occurrence of any Event of
Default, any pending or threatened litigation involving claims
in excess of $50,000, the failure to pay or perform any
obligation, liability or indebtedness of Maker or any
guarantor of Maker to Payee, whether under this Note, the
Guaranty, the Pledge or any documents executed in connection
with this Note, as and when due (whether at maturity or by
acceleration), Maker shall deliver a notice to Payee
describing the same in reasonable detail and the action Maker
proposes to take with respect thereto;
(e) Maker shall perform, and cause its subsidiaries to perform,
all of its material obligations under the Loan Documents and
all other contractual and legal obligations, as and when the
same become due;
(f) Maker, without the prior written consent of the Payee, shall
not, and shall not permit its subsidiaries to, create, assume
or incur any indebtedness greater than $2,000,000 other than
indebtedness outstanding on August 14, 1998; and
(g) Maker will not, and shall not permit its subsidiaries to,
create, incur, assume or permit to exist any lien, other than
to Payee, on any of its properties (now owned or hereafter
acquired) and other than liens existing on August 14, 1998.
14. Maker represents and warrants to Payee that the following statements are
true, correct, and complete as of the date hereof except to the extent that such
representations and warranties expressly relate to an earlier date:
(a) Maker (i) is a corporation, duly formed, validly existing, and
in good standing under the laws of State of Delaware; (ii) has
all requisite power and authority to own its assets and carry
on its business as now being conducted; and (iii) is qualified
to do business as a foreign corporation, and is in good
standing under the laws of each jurisdiction where failure to
so qualify would have a material adverse effect on the
business or financial condition of Maker;
(b) Maker has the requisite power and authority to execute,
deliver, and perform this Note;
(c) the execution, delivery and performance of this Note and the
consummation of the transactions contemplated hereby, have
been duly approved by the board of directors of Maker, and
such approval has not been rescinded, revoked or modified in
any manner;
(d) the execution, delivery and performance of this Note and any
other document to which Maker is a party shall not violate or
conflict with (i) the Bylaws, (ii) Maker's Certificate of
Incorporation, (iii) any material agreement to which Maker is
a party, or (iv) any regulations or restrictions applicable to
the business of Maker as now being conducted; and
(e) Maker possesses all permits, franchises, licenses, and
authorizations necessary to conduct its business as now
conducted except where the failure to so possess would not
cause a material adverse effect on the business or financial
condition of Maker, and is not in violation of any such
permits, franchises, licenses, or authorizations where such
violation would have a material adverse effect on the business
or financial condition of Maker.
15. All agreements between Maker and the holder hereof, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
contingency or event whatsoever, whether by reason of acceleration of the
maturity hereof or otherwise, shall the amount contracted for, charged,
received, paid or agreed to be paid to the holder hereof for the use,
forbearance, or detention of the funds evidenced hereby or otherwise, or for the
performance or payment of any covenant or obligation contained in any instrument
securing the payment hereof, exceed the maximum amount permissible
4
<PAGE> 5
under applicable law. If, from any circumstance whatsoever, interest would
otherwise be payable to the holder hereof in excess of the maximum lawful
amount, the interest payable to the holder hereof shall be reduced to the
maximum amount permitted under applicable law; and if from any circumstance the
holder hereof shall ever receive anything of value deemed interest by applicable
law in excess of the maximum lawful amount, an amount equal to any excessive
interest shall be applied to the reduction of the principal hereof and not to
the payment of interest, or if such excessive interest exceeds the unpaid
balance of principal hereof, such excess shall be refunded to Maker. All
interest paid or agreed to be paid to the holder hereof shall, to the extent
permitted by applicable law, be amortized, prorated, allocated, and spread
throughout the full period of the loan evidenced hereby until payment in full of
the principal (including the period of any renewal or extension hereof) so that
the interest hereon for such full period shall not exceed the maximum amount
permitted by applicable law. The term "applicable law" as used herein shall mean
the laws of the State of New York or the laws of the United States, whichever
laws allow the greater rate of interest, as such laws now exist or may be
changed or amended or come into effect in the future. This paragraph shall
control all agreements between the Maker and the holder hereof.
16. The unenforceability or invalidity of any provision of this Note shall not
affect the enforceability or validity of any other provision herein and the
invalidity or unenforceability of any provision of this Note or of the documents
executed in connection with this Note to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to other
persons or circumstances.
17. This Note shall be binding upon and inure to the benefit of Maker and Payee
and their respective successors, assigns, heirs and personal representatives,
provided, however, that no obligations of Maker or Payee hereunder can be
assigned without the prior written consent of Payee, which consent shall not be
unreasonably withheld.
18. Any notice required to be given under this Note shall be given in writing
and shall be deemed to be given as of the date such notice is deposited in the
mail addressed to Maker or Payee, as applicable, at the last address of Maker or
Payee, as applicable, shown on the records of Maker or Payee, as applicable.
19. THIS NOTE REPRESENTS THE FINAL AGREEMENT OF THE PARTIES HERETO AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
20. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK (WITHOUT REGARD TO ANY CONFLICT OF LAW PRINCIPLES WHICH, IF APPLIED, MIGHT
PERMIT OR REQUIRE THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION) AND THE
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO TRANSACTIONS IN
NEW YORK.
21. This note is issued in renewal, extension, rearrangement and replacement of
the August Note but is not a novation of the August Note and does not extinguish
the indebtedness evidenced by the August Note.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned has set his hand as of the date
first written above.
MAKER:
Tatham Offshore, Inc.
By:
------------------------------------
Dennis A. Kunetka
Senior Vice President and Secretary
6
<PAGE> 1
EXHIBIT 10.47
Neither this Note nor the Common Stock referenced in Section 4.1 of this Note
has been registered under the Securities Act of 1933, as amended, and neither
may be sold or transferred unless there is an effective registration statement
under such Act covering such or, in the opinion of counsel acceptable to the
Maker, such sale of transfer is exempt from the registration and prospectus
delivery requirements of such Act.
CONVERTIBLE SUBORDINATED NOTE
$1,000,000.00 January 15, 1999
For value received, Tatham Offshore, Inc. (the "MAKER"), hereby
promises to pay to the order of Tatham Brothers, LLC (the "HOLDER"), at 200
Riverside Drive, #6E, New York, New York 10025, Attention: Mr. Glenn Tatham, or
at such other place as from time to time may be designated by the Holder in
lawful money of the United States of America, the principal sum of ONE MILLION
AND NO/100 DOLLARS ($1,000,000.00), on the dates specified herein, with interest
as specified herein. Capitalized terms used herein shall have the meanings
ascribed to them in Section 5.10 hereto, or as otherwise defined herein.
This Note is subject to the following additional provisions, terms and
conditions:
ARTICLE I
BASIC TERMS
Section 1.1 Principal.
(a) Scheduled Repayment. The principal of this Note shall be due and
payable in a single payment on or before August 15, 2001 (the "MATURITY DATE").
(b) Optional Prepayment. Maker may at any time and from time to time,
upon ten (10) days prior written notice (the "PREPAYMENT NOTICE"), prepay all of
the unpaid principal balance and interest of this Note without premium or
penalty.
Section 1.2 Interest.
(a) The Maker agrees, subject to Section 5.2 hereof, to pay interest in
respect of the unpaid principal amount of this Note from the date hereof to
maturity (whether by acceleration or otherwise) at fifteen percent (15%) per
annum (the "APPLICABLE RATE").
(b) Interest on the principal of this Note shall be due and payable (i)
on the Maturity Date, (ii) upon the payment or prepayment, in full of the
principal amount of this Note, (iii) at the maturity of this Note (whether by
acceleration or otherwise), and (iv) after maturity (whether by acceleration or
otherwise), on demand.
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<PAGE> 2
(c) All computations of interest shall be made on the basis of a year
of 360 days for the actual number of days (including the first day but excluding
the last day) occurring in the period for which such interest is payable.
Section 1.3 Payments in General. Whenever any payment to be made under
this Note shall be stated to be due on a day that is not a Business Day, the due
date thereof shall be extended to the next succeeding Business Day, and, with
respect to payments of principal, interest thereon shall be payable at the
applicable rate during such extension.
ARTICLE II
SUBORDINATION
Section 2.1 Agreement to Subordinate. The Maker agrees, and the Holder
by accepting this Note agrees, that the Subordinated Debt is subordinated in
right of payment, to the extent and in the manner provided herein, to the prior
payment in full of all Senior Indebtedness, and that these subordination
provisions are for the benefit of the Senior Lenders. This Article III shall
constitute a continuing offer to all persons, corporations, partnerships,
limited liability companies, trusts and other entities who, in reliance upon
such provisions, become or continue to be Senior Lenders, and such provisions
are made for the benefit of the Senior Lenders, and the Senior Lenders are made
intended beneficiaries hereunder and they or each of them may enforce such
provisions.
Section 2.2 General Subordination Provisions. The Subordinated Debt is
hereby expressly made subordinate and junior in right of payment to the Senior
Indebtedness as follows:
(a) Permitted Subordinated Debt Payments. The Maker may make payments
or prepayments of principal or interest on account of, or repurchase, redeem or
otherwise retire (whether at the option of the Holder or otherwise) Subordinated
Debt (each, a "SUBORDINATED DEBT PAYMENT") if (i) at the time of such
Subordinated Debt Payment and immediately after giving effect thereto, (ii) no
Senior Default shall have occurred and be continuing, and (iii) no Distribution
Event shall have been initiated and be continuing.
(b) Senior Defaults. If a Senior Default has occurred and is continuing
and notice of such Senior Default has been given to the Maker or the Holder,
then no Subordinated Debt Payments may be made until such Senior Default and all
other Senior Defaults have been cured or waived.
(c) Distribution Events. If a Distribution Event has been initiated and
is continuing, then the Senior Lenders shall be entitled to receive payment in
full of the Senior Indebtedness before the Holder is entitled to receive any
Subordinated Debt Distribution (other than Reorganization Securities) on account
of the Subordinated Debt. For purposes of this Note, the term "REORGANIZATION
SECURITIES" shall mean any securities of the Maker or any other entity provided
for by a plan of reorganization or readjustment if (i) the payment thereof is
subordinate at least to the extent provided in this Article II with respect to
this Note to the payment of Senior Indebtedness, and (ii) the payment or
distribution of such securities has been authorized in a Distribution Event
under any applicable Bankruptcy Law giving effect, and stating in such order or
decree that effect is given, to the purpose and intention of the subordination
of this Note to the Senior Indebtedness.
(d) Improper Distributions Received by Holder. In the event that the
Holder shall receive any Subordinated Debt Distribution in violation of this
Article II, then such Subordinated Debt Distribution shall be held in trust for
the benefit of, and shall be promptly paid
2
<PAGE> 3
over and delivered to, the Senior Lenders for application to the payment of the
Senior Indebtedness remaining unpaid to the extent necessary to pay the Senior
Indebtedness in full after giving effect to any concurrent payments or
distributions to the Senior Lenders.
(e) No Impairment. The Senior Lenders shall have no duty or obligation
to the Holder in any manner whatsoever and may at any time and from time to time
in their sole discretion, without the consent of or notice to the Holder and
without impairing or releasing any rights of the Senior Lenders or any of the
obligations of the Holder hereunder, take any or all of the following actions:
(i) change the amount, manner, place, terms of payment or
interest rate, change or extend the time of payment of, or renew or alter, any
of the Senior Indebtedness, or amend or supplement or waive any of the terms of
any loan document related thereto;
(ii) sell, exchange, release, surrender, relend, realize upon
or otherwise deal with any manner and in any order any property (or the income,
revenues, profits or proceeds therefrom) by whomsoever at any time pledged or
mortgaged to secure, or howsoever securing, any Senior Indebtedness;
(iii) release any Person liable in any manner for the payment
or collection of the Senior Indebtedness;
(iv) exercise or refrain from exercising any rights and
remedies against the Maker or any other Person or otherwise act or refrain from
acting or, for any reason fail to file, record or otherwise perfect any security
interest in or lien on any property of the Maker or any other Person; and
(v) apply any sums received by the Senior Lenders, by
whomsoever paid and however realized, to payment of the Senior Indebtedness in
such manner as the Senior Lenders, in their sole discretion, may deem
appropriate.
Section 2.3 Notices by the Maker. The Maker shall promptly notify the
Holder of any facts known to the Maker that would cause a Subordinated Debt
Distribution to violate this Article II, but failure to give such notice shall
not impair the subordination of this Note to the Senior Indebtedness provided in
this Article II.
Section 2.4 Relative Rights. This Article defines the relative rights
of the Holder and the Senior Lenders. Nothing in this Note shall (i) impair, as
between the Maker and the Holder, the obligation of the Maker, which is absolute
and unconditional, to pay principal of and interest on this Note in accordance
with its terms, or (ii) affect the relative rights of the Holder and creditors
of the Maker other than the Senior Lenders.
Section 2.5 Subordination May Not Be Impaired by the Maker. No right of
any Senior Lender to enforce the subordination of the indebtedness evidenced by
this Note shall be impaired by any act or failure to act by the Maker or by its
failure to comply with the terms of this Note.
Section 2.6 Amendment. None of the terms, conditions or provisions of
this Article II shall be amended, waived or varied without the prior written
consent of all of the Senior Lenders.
3
<PAGE> 4
ARTICLE III
DEFAULT AND REMEDIES
Section 3.1 Events of Default. An "Event of Default" shall be deemed to
have occurred if the Maker shall fail to pay when due any principal of or
interest on this Note, or any other expense or amount payable by the Maker
hereunder, when and as the same shall become due and payable, or fail in the due
observance or performance of any other covenant, condition or agreement to be
observed or performed under the terms of this Note, or if any representations or
warranty made by the Maker shall be untrue or misleading as of the date of this
Note.
Section 3.2 Remedies. Subject to Article II and Article IV hereof, if
an Event of Default shall occur and be continuing, the Holder may declare the
entire unpaid principal balance of this Note, together with all accrued but
unpaid interest hereunder, immediately due and payable, and may proceed to
enforce payment of the same and to exercise any and all of the rights and
remedies afforded herein as well as all other rights and remedies possessed by
the Holder by law or otherwise.
ARTICLE IV
CONVERSION
Section 4.1 Conversion. The Holder shall have the following conversion
rights:
(a) Right to Convert to Common Stock. The Holder shall have the one
time right at his sole option and discretion to convert this Note and the rights
to payment hereunder or any portion thereof into the number of shares of Maker's
Common Stock equal to (i) the principal amount the Holder elects to convert
(which shall not in any event exceed the principal amount outstanding as of the
date of conversion) plus interest accrued on such amount through such date,
divided by (ii) the greater of (A) the average closing price on the NASDAQ Stock
Market of Maker's Common Stock for the five business days preceding the last
calendar day of the calendar quarter immediately preceding the calendar quarter
in which the date of conversion occurs and (B) $0.30 (as adjusted for stock
splits, combinations, reclassifications and other similar events involving the
Common Stock after the date hereof). If the Holder elects to convert only a
portion of this Note and the rights to payment hereunder, then immediately upon
such conversion, the rights provided to the Holder by this Article IV shall
automatically terminate and be of no further force and effect and the Holder
shall not have any further rights under this Article IV and the Holder shall not
have the right to covert the remaining balance of this Note and the rights to
payment hereunder or any portion thereof.
(b) Mechanics of Conversion. Before the Holder shall be entitled to
convert this Note as provided above, the Holder shall surrender the Note and
shall give notice to the Maker of the election to convert the same (the
"CONVERSION NOTICE") (the Hodler shall have the right to give the Conversion
Notice after the Holder receives a Prepayment Notice, provided that the date of
conversion provided for in the Conversion Notice is on or before the date set
for payment in the Prepayment Notice) , and shall state in such notice the name
or names in which the certificate or certificates for shares of Common Stock are
to be issued. The Maker shall, as soon as practicable thereafter, issue and
deliver to the Holder, or to the nominee or nominees of the Holder, a
certificate or certificates for the number of shares of Common Stock to which
the Holder shall be entitled as provided herein. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date of such
surrender of this Note being converted, and the person or persons
4
<PAGE> 5
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares.
(c) Reservation; Non-Issuance Covenant. Maker represents that it has
reserved for issuance an adequate number of shares of Common Stock to satisfy
the conversion contemplated hereby.
ARTICLE V
MISCELLANEOUS
Section 5.1 Headings. The Article, Section and Subsection headings
contained in this Note are for reference purposes only and shall not affect the
meaning or interpretation of this Note.
Section 5.2 Limitation on Interest. Notwithstanding any other provision
of this Note, interest on the indebtedness evidenced by this Note is expressly
limited so that in no contingency or event whatsoever, whether by acceleration
of the maturity of this Note or otherwise, shall the interest contracted for,
charged or received by the Holder exceed the maximum amount permissible under
applicable law. If from any circumstances whatsoever fulfillment of any
provisions of this Note or of any other document evidencing, securing or
pertaining to the indebtedness evidenced hereby, at the time performance of such
provision shall be due, shall involve transcending the limit of validity
prescribed by law, then, ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity, and if from any such circumstances the
Holder shall ever receive anything of value as interest or deemed interest by
applicable law under this Note or any other document evidencing, securing or
pertaining to the indebtedness evidenced hereby or otherwise an amount that
would exceed the highest lawful rate, such amount that would be excessive
interest shall be applied to the reduction of the principal amount owing under
this Note or on account of any other indebtedness of the Maker to the Holder,
and not to the payment of interest, or if such excessive interest exceeds the
unpaid balance of principal of this Note and such other indebtedness, such
excess shall be refunded to the Maker. In determining whether or not the
interest paid or payable with respect to any indebtedness of the Maker to the
Holder, under any specific contingency, exceeds the highest lawful rate, the
Maker and the Holder shall, to the maximum extent permitted by applicable law,
(a) characterize any non-principal payment as an expense, fee or premium rather
than as interest, (b) exclude voluntary prepayments and the effects thereof, (c)
amortize, prorate, allocate and spread the total amount of interest throughout
the full term of such indebtedness so that the actual rate of interest on
account of such indebtedness does not exceed the maximum amount permitted by
applicable law, and/or (d) allocate interest between portions of such
indebtedness, to the end that no such portion shall bear interest at a rate
greater than that permitted by applicable law. The terms and provisions of this
section shall control and supersede every other conflicting provision of this
Note and all other agreements between the Maker and the Holder.
Section 5.3 Governing Law. This Note and the validity and
enforceability hereof shall be governed by and construed and interpreted in
accordance with the laws of the State of New York other than the conflict of
laws rules thereof.
Section 5.4 Waivers. Except as may be otherwise provided herein, the
makers, signers, sureties, guarantors and endorsers of this Note severally waive
demand, presentment, notice of dishonor, notice of intent to demand or
accelerate payment hereof, notice of acceleration, diligence in collecting,
grace, notice, and protest, and agree to one or more extensions for any period
or periods of time and partial payments, before or after maturity, without
prejudice to the Holder.
5
<PAGE> 6
Section 5.5 No Waiver by Holder. No failure or delay on the part of the
Holder in exercising any right, power or privilege hereunder and no course of
dealing between the Maker and the Holder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, remedy, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power or privilege.
Section 5.6 Notices and Other Communications. All notices and other
communications hereunder shall be in writing and shall be given by delivery in
person, by registered or certified mail (return receipt requested and with
postage prepaid thereon) or by cable, telex or facsimile transmission to the
Maker or the Holder at the following addresses (or at such other address as
either the Maker or the Holder shall have furnished to the other in accordance
with the terms of this Section):
if to the Maker, to:
Tatham Offshore, Inc.
7500 Chase Tower
600 Travis
Houston, Texas 77002
Fax: (713) 224-7574
if to the Holder, to:
Tatham Brothers, LLC
7500 Chase Tower
600 Travis
Houston, Texas 77002
Fax: (713) 224-7574
All notices and other communications hereunder that are addressed as
provided in or pursuant to this Section shall be deemed duly and validly given
(1) if delivered in person, upon delivery, (2) if delivered by registered or
certified mail (return receipt requested and with postage paid thereon), 72
hours after being placed in a depository of the United States mails and (3) if
delivered by cable, telex or facsimile transmission, upon transmission thereof
and receipt of the appropriate answerback.
Section 5.7 Severability. In case any provision in this Note shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions in such jurisdiction shall not in
any way be affected or impaired thereby.
Section 5.8 Entire Agreement. This Note embodies the entire agreement
of the parties relating to the subject matter hereof and supersedes all prior
proposals, negotiations, agreements and understandings relating to such subject
matter.
Section 5.9 Approval of Senior Loans Required. So long as any amounts
are outstanding hereunder, Maker shall incur no indebtedness senior to this
Note, other than the Senior Indebtedness, without Holder's consent.
6
<PAGE> 7
Section 5.10 Definitions. Capitalized words and phrases used in this
Note shall have the following meanings:
(a) "BANKRUPTCY LAW" means Title 11, United States Code or any
similar federal or state law for the relief of debtors.
(b) "BUSINESS DAY" means any day except a Saturday, Sunday or
other day on which commercial banks in Houston, Texas are authorized or required
by law to close.
(c) "COMMON STOCK" means the Maker's common stock, par value
$0.01 per share.
(d) "DISTRIBUTION EVENT" means any insolvency, bankruptcy,
receivership, liquidation, reorganization or similar proceeding (whether
voluntary or involuntary) relating to the Maker or its property, or any
proceeding for voluntary liquidation, dissolution or other winding up of the
Maker, whether or not involving insolvency or bankruptcy.
(e) "EVENT OF DEFAULT" has the meaning given to such term in
Section 3.1 hereof.
(f) "NOTE" means this Convertible Subordinated Note made by
the Maker payable to the order of the Holder, together with all amendments and
supplements hereto, all substitutions and replacements herefor, and all
renewals, extensions, increases, restatements, modifications, rearrangements and
waivers hereof from time to time.
(g) "SENIOR DEFAULT" means any default or event of default
with respect to any Senior Indebtedness.
(h) "SENIOR INDEBTEDNESS" means all indebtedness of the Maker
for money borrowed or evidenced by notes, bonds, debentures or similar evidences
of indebtedness by Maker, outstanding as of the date hereof, or to a bank
chartered under the laws of the United States or the State of Texas or other
financial institution, or any renewal, extension, refinancing or replacement of
any of the foregoing.
(h) "SENIOR LENDERS" means all holders of Senior Indebtedness.
(i) "SUBORDINATED DEBT" means all obligations owing to the
Holder under this Note.
(j) "SUBORDINATED DEBT DISTRIBUTION" means any Subordinated
Debt Payment or any other distribution of assets of the Maker of any kind or
character, whether in cash, property or securities, to the Holder.
(k) "SUBORDINATED DEBT PAYMENT" has the meaning given to such
term in Section 3.2(a) hereof.
EXECUTED as of the date first written above.
TATHAM OFFSHORE, INC.
By:
----------------------------------------
Name: Dennis Kunetka
Title: Senior Vice President and Secretary
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TATHAM
OFFSHORE, INC. AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS AT MARCH 31, 1999
INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,448
<SECURITIES> 0
<RECEIVABLES> 9,458
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,107
<PP&E> 146,127
<DEPRECIATION> 10,726
<TOTAL-ASSETS> 160,067
<CURRENT-LIABILITIES> 97,795
<BONDS> 0
0
173
<COMMON> 261
<OTHER-SE> 61,588
<TOTAL-LIABILITY-AND-EQUITY> 160,067
<SALES> 28,344
<TOTAL-REVENUES> 28,344
<CGS> 16,451
<TOTAL-COSTS> 16,451
<OTHER-EXPENSES> 4,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,325
<INCOME-PRETAX> (6,886)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,177)
<DISCONTINUED> (221)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,398)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
