<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 0-22892
TATHAM OFFSHORE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0269967
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TRAVIS
SUITE 7400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 224-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT
THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
AS OF FEBRUARY 10, 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 December 31, 1998 (unaudited) and June 30, 1998.............3
Unaudited Consolidated Statement of Operations for the Three and Six Months
Ended December 31, 1998 and 1997, respectively............................................4
Unaudited Consolidated Statement of Cash Flows for the Six Months
Ended December 31, 1998 and 1997..........................................................5
Consolidated Statement of Stockholders' Equity for the Six Months
Ended December 31, 1998 (unaudited).......................................................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS............................................................................18
PART II. OTHER INFORMATION.....................................................................19
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 ......................................................................................20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 915 $ 2,689
Accounts receivable 4,375 2,957
Receivable from affiliates -- 514
Prepaid expenses 152 167
------------ ------------
Total current assets 5,442 6,327
------------ ------------
Property and equipment:
Semisubmersible drilling rigs 141,849 135,754
Oil and gas properties, at cost, using successful efforts method -- 26,762
------------ ------------
141,849 162,516
Less - accumulated depreciation, depletion, amortization and impairment 9,267 27,532
------------ ------------
Property and equipment, net 132,582 134,984
------------ ------------
Restricted cash 6,270 --
Deferred costs 11,862 11,529
Debt issue costs, net 158 578
------------ ------------
Total assets $ 156,314 $ 153,418
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 6,171 $ 3,812
Notes payable to affiliates 23,981 11,374
Long term debt currently payable 58,148 59,156
------------ ------------
Total current liabilities 88,300 74,342
Other noncurrent liabilities -- 3,416
------------ ------------
88,300 77,758
------------ ------------
Minority interests in consolidated subsidiary 250 250
------------ ------------
Stockholders' equity (Note 4):
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of December 31, 1998 and June 30, 1998,
17,299,717 and 17,960,732 shares issued and outstanding
at December 31, 1998 and June 30, 1998, respectively 173 180
Common stock, $0.01 par value, 250,000,000 shares
authorized as of December 31, 1998 and June 30, 1998,
26,074,321 and 30,001,026 shares issued and outstanding
as of December 31, 1998 and June 30, 1998, respectively 261 300
Additional paid-in capital 185,944 192,179
Accumulated deficit (118,614) (117,249)
------------ ------------
67,764 75,410
------------ ------------
Total liabilities and stockholders' equity $ 156,314 $ 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 Six Months
Ended December 31, Ended December 31,
-------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Drilling services $ 10,177 $ -- $ 22,277 $ --
---------- ---------- ---------- ----------
10,177 -- 22,277 --
---------- ---------- ---------- ----------
Costs and expenses:
Drilling operating expenses 4,386 -- 11,929 --
Depreciation 1,390 -- 2,773 --
Management fee -- 50 155 314
General and administrative expenses 1,867 38 3,040 131
---------- ---------- ---------- ----------
7,643 88 17,897 445
---------- ---------- ---------- ----------
Operating income (loss) 2,534 (88) 4,380 (445)
Interest income 17 76 49 178
Interest and other financing costs (1,732) -- (4,061) --
Interest expense and other financing costs - affiliates (952) -- (1,512) --
---------- ---------- ---------- ----------
Net loss from continuing operations (133) (12) (1,144) (267)
Discontinued operations (Note 2)
Loss from oil and gas operations -- (63) (221) (2,243)
---------- ---------- ---------- ----------
Net loss (133) (75) (1,365) (2,510)
Preferred stock dividends (764) (982) (1,528) (1,965)
---------- ---------- ---------- ----------
Net loss allocable to common shareholders $ (897) $ (1,057) $ (2,893) $ (4,475)
========== ========== ========== ==========
Weighted average number of shares 26,074 7,128 27,077 4,934
========== ========== ========== ==========
Basic and diluted loss per common share
from continuing operations (Note 5) $ (0.03) $ (0.14) $ (0.10) $ (0.45)
========== ========== ========== ==========
Basic and diluted loss per common share
from discontinued operations (Note 5) $ 0.00 $ (0.01) $ (0.01) $ (0.46)
========== ========== ========== ==========
Basic and diluted loss per common share (Note 5) $ (0.03) $ (0.15) $ (0.11) $ (0.91)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Ended December 31,
--------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,365) $ (2,510)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,031 2,039
Amortization of debt issue costs 1,134 --
Costs and expenses settled by issuance of common stock -- 263
Noncash interest expense 1,164 1,709
Changes in operating working capital:
Decrease (increase) in accounts receivable (1,418) 12
Decrease in receivable from affiliates 488 576
(Increase) decrease in prepaid expenses 15 (116)
Increase (decrease) in accounts payable and accrued liabilities 3,114 1,001
Increase (decrease) in accounts payable to affiliates (2,803) 43
---------- ----------
Net cash provided by operating activities 3,360 3,017
---------- ----------
Cash flows from investing activities:
Additions to oil and gas properties -- (339)
Additions to semisubmersible drilling rigs (6,095) --
Deferred costs (333) (7,646)
Conveyance of oil and gas properties (1,605) --
---------- ----------
Net cash used in investing activities (8,033) (7,985)
---------- ----------
Cash flows from financing activities:
Repayment of notes payable (1,008) --
Proceeds from notes payable to affiliate 10,890 --
Increase in restricted cash (6,270) --
Debt issue costs (713) --
---------- ----------
Net cash provided by financing activities 2,899 --
---------- ----------
Net decrease in cash and cash equivalents (1,774) (4,968)
Cash and cash equivalents at beginning of year 2,689 7,887
---------- ----------
Cash and cash equivalents at end of period $ 915 $ 2,919
========== ==========
</TABLE>
Supplemental disclosures to the Statement of Cash Flows - see Note 7.
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ---------------------- Additional
Number of Number of paid-in Accumulated
Shares Par value Shares Par value capital deficit Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 17,961 $ 180 30,001 $ 300 $ 192,179 $(117,249) $ 75,410
Merger related transaction (See Note 2)
(unaudited) (661) (7) (3,927) (39) (6,235) -- (6,281)
Net loss for the six months ended
December 31, 1998 (unaudited) -- -- -- -- -- (1,365) (1,365)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1998 (unaudited) 17,300 $ 173 26,074 $ 261 185,944 $(118,614) $ 67,764
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION:
Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is a
diversified energy company currently pursuing, through its operating
subsidiaries, energy related opportunities in Atlantic Canada, including
offshore contract drilling services, substantial natural gas gathering and
transmission facilities and related energy infrastructure. Historically, Tatham
Offshore was engaged in the development, exploration and production of oil and
gas reserves located primarily offshore the United States in the Gulf of Mexico
(the "Gulf"). As of June 30, 1998, Tatham Offshore was an approximately
94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified
energy company. In connection with the merger of DeepTech with a subsidiary of
El Paso Energy Corporation ("El Paso Energy") and related transactions completed
on or before August 14, 1998, (i) Tatham Offshore transferred its ownership of
Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation
and former wholly-owned subsidiary of Tatham Offshore which holds interests in
the Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to
DeepTech, (ii) Tatham Offshore conveyed its remaining oil and gas properties to
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), (iii) DeepTech
contributed all of the outstanding shares of capital stock of DeepFlex
Production Services, Inc. ("DeepFlex") to Tatham Offshore and (iv) DeepTech
divested itself of its equity ownership interest in Tatham Offshore. DeepFlex, a
Delaware corporation and wholly-owned subsidiary of Tatham Offshore, was formed
in January 1995 and, through its subsidiaries, focuses on the acquisition and
deployment of semisubmersible drilling rigs for contract drilling. RIGCO North
America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned
subsidiaries of DeepFlex, own interests in the FPS Laffit Pincay (the "Laffit
Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together with the
Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling
rigs. Pursuant to management and charter agreements, Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex") markets, manages, mans and
operates the Bill Shoemaker. On January 22, 1999, RIGCO gave Sedco Forex a
written termination notice of the management and charter agreements for the
Laffit Pincay.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
Partners"). North Atlantic Partners is the sponsor of a proposal to construct a
natural gas pipeline offshore Newfoundland and Nova Scotia to the eastern
seaboard of the United States.
The accompanying consolidated financial statements include the accounts of
Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham
Offshore (collectively referred to as the "Company").
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the period covered by such statements. These interim
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1998.
NOTE 2 - RECENT EVENTS:
On February 27, 1998, DeepTech entered into an Agreement and Plan of Merger (the
"Merger Agreement") with El Paso Natural Gas Company ("El Paso") and El Paso
Acquisition Company ("El Paso Acquisition"), a wholly-owned subsidiary of El
Paso, pursuant to which DeepTech would merge (the "Merger") with El Paso, or
under certain circumstances, with El Paso Acquisition. Subsequently, DeepTech,
El Paso and El Paso Acquisition executed Amendment No. 1 to the Merger Agreement
(the "Amended Merger Agreement") with El Paso Energy to reflect El Paso's
reorganization of its corporate structure. The holders of a majority of
DeepTech's common stock approved the Amended Merger Agreement on July 19, 1998.
Pursuant to the Amended Merger Agreement, DeepTech merged with El Paso
Acquisition on August 14, 1998.
As a result of the Merger and related transactions, some of the assets of Tatham
Offshore and DeepTech were restructured so that DeepFlex became a wholly-owned
subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in
the Sunday Silence prospect to DeepTech. Pursuant to the Redemption Agreement
(discussed below), Tatham Offshore agreed to transfer all of its remaining
assets located in the Gulf to the
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Partnership, a former affiliate. As such, all of the Company's oil and gas
operations in the Gulf are reflected as discontinued operations in the financial
statements. Further, DeepTech divested itself of its equity ownership interest
in Tatham Offshore by offering all of the shares of Tatham Offshore common stock
and Series A Preferred Stock held by DeepTech to the stockholders of DeepTech in
a Rights Offering (discussed below).
On August 14, 1998, Tatham Offshore transferred its remaining assets located in
the Gulf to the Partnership in exchange for Tatham Offshore's Series B 9%
Convertible Preferred Stock (the "Senior Preferred Stock") which was owned by
the Partnership (the "Redemption Agreement"). Under the terms of the Redemption
Agreement, the Partnership exchanged 7,500 shares of Senior Preferred Stock and
all related accrued and unpaid dividends due to the Partnership as of the date
of the exchange for 100% of Tatham Offshore's right, title and interest in and
to Viosca Knoll Blocks 772, 773, 774, 817, 818 and 861 (subject to an existing
production payment obligation), West Delta Block 35, Ewing Bank Blocks 871, 914,
915 and 916 and the platform located on Ship Shoal Block 331. At the closing,
Tatham Offshore paid the Partnership $1,605,000, the amount related to the net
cash generated from such properties from January 1, 1998 through August 14,
1998. In addition, the Partnership assumed all abandonment and restoration
obligations associated with the platform and leases. At the closing of the
Redemption Agreement on August 14, 1998, the management fees charged to Tatham
Offshore by DeepTech were reduced by 50% effective retroactively to January 1,
1998 and the balance of $1,405,000 owed to DeepTech was paid. As of August 14,
1998, DeepTech no longer operates Tatham Offshore under a management agreement.
Tatham Offshore has hired a management team and support personnel required to
conduct its contract drilling services business and implement its Atlantic
Canada strategy.
On July 16, 1998, the Commission declared effective Tatham Offshore's
Registration Statement on Form S-1 relating to the offering of rights to the
DeepTech stockholders to purchase DeepTech's 28,073,450 shares of Tatham
Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A
Preferred Stock (the "Rights Offering"). As a result of the Rights Offering,
unaffiliated parties purchased 3,378,693 shares of common stock and 562,148
shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB
Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and
Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011
shares of common stock and 3,455,444 shares of Series A Preferred Stock which
resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0
million. In exchange for committing to purchase a specified portion of the stock
underlying any unexercised Rights, TB Securities received a fee of $6.9 million.
In connection with the Rights Offering, Tatham Offshore purchased and cancelled
all of the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 shares and 653,365 shares, respectively, and the proceeds from such
purchase by Tatham Offshore were contributed by DeepTech to Tatham Offshore.
DeepTech no longer owns any of Tatham Offshore's capital stock as a result of
the Rights Offering.
Following the asset restructuring, Tatham Offshore's marine services business
includes the operation of two semisubmersible drilling rigs, the FPS Bill
Shoemaker and the FPS Laffit Pincay, currently owned by DeepFlex. In addition,
Tatham Offshore will continue to pursue energy related opportunities in Atlantic
Canada, including the North Atlantic pipeline project, related gas processing
facilities, a facility for the generation of electricity and other related
investments.
See Note 3 and Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussion of additional recent events.
NOTE 3 - RELATED PARTY TRANSACTIONS:
Management Agreement
The management agreement between Tatham Offshore and DeepTech provided for an
annual management fee which was intended to reimburse DeepTech for the estimated
costs of its operational, financial, accounting and administrative services
provided to the Company. Effective July 1, 1997, the management agreement was
amended to provide for an annual management fee of 26% of DeepTech's overhead
expenses. During the six months ended December 31, 1998, DeepTech charged Tatham
Offshore $310,000 under this agreement. The management agreement was terminated
August 14, 1998.
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Notes Payable to Affiliates
Tatham Offshore is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, LLC ("Tatham Brothers"), which proceeds were loaned to DeepFlex
to fund certain improvements to the Rigs. The loan bears interest at the prime
rate plus 1 1/2% per annum and is due on March 31, 1999. The loan from Tatham
Brothers to DeepFlex, plus accrued interest, was included in the amount payable
under the short term financing arrangement discussed below.
In connection with the Merger, the Company entered into a $22.9 million short
term financing arrangement with Tatham Brothers (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 bears
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 accrued interest into a new
short term loan which bears interest at the rate of 15% per annum and is 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 a certain payment-in-kind Subordinated Promissory
Note issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of
the Company, which has a current outstanding balance of approximately $72.4
million. The Company anticipates that it will refinance the Short Term Facility
with Tatham Brothers upon its maturity or pay off the facility with proceeds
from the refinancing of the Credit Facility (as defined below).
The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998,
was executed in connection with the Merger and related transactions and is by
and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso. Pursuant
to the Standby Agreement, to the extent that any of the Company's Common Stock
or Series A Preferred Stock was not subscribed for by holders of DeepTech common
stock in the Rights Offering, Tatham Brothers committed to purchase such number
of unsubscribed shares in order for DeepTech to receive net proceeds from the
Rights Offering of not less than $75 million (the "Standby Commitment"). In
addition, Tatham Brothers had the right to purchase any shares which DeepTech
held after the Rights Offering and the satisfaction of the Standby Commitment.
Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the
Standby Commitment, which guarantee was backed by a letter of credit from
NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the Standby
Commitment, under the terms of a Repayment Agreement between Mr. Tatham and
Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr.
Tatham an option to purchase up to a one-third membership interest in Tatham
Brothers for $1,000 through the issuance of new membership units, and (ii) Mr.
Tatham had the right, but not the obligation, to lend to Tatham Brothers all
sums necessary for Tatham Brothers to fulfill its obligations under the Standby
Commitment. 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.
In connection with the Bill Shoemaker make-ready agreement with Sedco Forex, the
Company 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
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." See Notes 1 and 2 for additional related party
transactions completed in connection with the Merger.
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity as of
December 31, 1998:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding(a) Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Series A Preferred Stock(b) 16,904,133(d) $1.50 per share 12% $ 7,606,860 (b)(c)
Series B Preferred Stock 74,379 $1.00 per share 8% $ 13,388 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 12,848 (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.
NOTE 5 - 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 6 - COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company is subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect the financial position or operations of
the Company. Various legal actions have arisen in the ordinary course of
business. Management believes that the outcome of such proceedings will not have
a material adverse effect on the consolidated financial position or results of
operations of the Company.
The Company anticipates substantial future capital expenditures associated with
the development and implementation of the North Atlantic pipeline project and
related opportunities in Atlantic Canada. Realization of the potential of the
North Atlantic pipeline project and related opportunities in Atlantic Canada is
dependent upon the ability of the Company to obtain sufficient additional
capital or project financing.
10
<PAGE> 11
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
(in thousands)
<S> <C> <C>
Interest $ 3,303 $ 9
Taxes $ -- $ --
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
(in thousands)
<S> <C> <C>
Debt issued to refinance accounts payable
to affiliates $ 5,153 $ --
Senior Preferred Stock redeemed under
the Redemption Agreement $ 7,500 $ --
Debt issued to finance Rights Offering $ 6,923 $ --
Conversion of long term debt to common stock $ -- $ 60,000
Conversion of preferred stock to common stock $ -- $ 13
Assignment of oil and gas properties and
abandonment obligations $ -- $ 1,200
</TABLE>
As discussed in Note 2, Tatham conveyed its remaining oil and gas assets to the
Partnership per the Redemption Agreement. The assets and liabilities conveyed
were as follows (in thousands):
<TABLE>
<S> <C>
Cash $ (1,605)
Oil and gas properties, net (5,466)
Accounts payable 755
Accounts payable to DeepTech 1,062
Accounts payable to the Partnership 2,480
Other noncurrent liabilities 3,416
---------
Increase in paid in capital $ 642
=========
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Item 1.
"Consolidated Financial Statements" and is intended to assist in the
understanding of the Company's financial condition and results of operations for
the three and six months ended December 31, 1998.
GENERAL
Tatham Offshore is an independent energy company currently pursuing energy
related opportunities in Atlantic Canada, including offshore contract drilling
services, the North Atlantic pipeline project, related gas processing
facilities, a facility for the generation of electricity and other related
investments. Historically, Tatham Offshore has been in the oil and gas
exploration and development business, primarily in the Gulf. The Company has
refocused its business from the oil and gas exploration and production business
in the Gulf to an integrated frontier investment strategy targeting Atlantic
Canada with an initial emphasis on the offshore contract drilling business.
Accordingly, in connection with DeepTech's merger (the "Merger") with a
subsidiary of El Paso completed on August 14, 1998, Tatham Offshore (i)
transferred its ownership of Tatham Development, which owns oil and gas
producing properties, to DeepTech and its remaining oil and gas properties to
the Partnership, and (ii) acquired from DeepTech ownership of DeepFlex and,
therefore the 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 DECEMBER 31, 1998 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1997
Revenue from drilling services totaled $10.2 million for the three months ended
December 31, 1998, 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 December 31, 1997 since the Company did not own the Rigs
during that period.
Operating expenses for the three months ended December 31, 1998 totaled $4.4
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 $2.3 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 December 31, 1997 since the Company did not
own the Rigs during that period.
Depreciation expense totaled $1.4 million for the period ended December 31,
1998. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled
$0.9 million and $0.5 million, respectively. No depreciation expense relating to
the Rigs was recorded during the period ended December 31, 1997 since the
Company did not own the Rigs during that period.
General and administrative expense totaled $1.9 million for the three months
ended December 31, 1998 as compared to $0.1 million for the three months ended
December 31, 1997. General and administrative costs attributable to discontinued
operations totaled $1.4 million for the three months ended December 31, 1997.
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
12
<PAGE> 13
three months ended December 31, 1998 includes staff and overhead costs for the
operation of the marine services and Atlantic Canada businesses whereas general
and administrative costs for the three months ended December 31, 1997 include
costs relative to the Atlantic Canada business only.
Operating income for the three months ended December 31, 1998 totaled $2.5
million as compared to an operating loss of $0.1 million for the three months
ended December 31, 1997. The change was due to the items discussed above.
Interest income totaled $17,000 for the three months ended December 31, 1998 as
compared with $76,000 for the three months ended December 31, 1997 and included
interest income from available cash.
Interest expense for the three months ended December 31, 1998 totaled $2.7
million. For the three months ended December 31, 1998, interest expense relating
to the Credit Facility (as defined herein) totaled $1.7 million and interest
expense relating to borrowings from Tatham Brothers totaled $1.0 million.
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 December
31, 1998 as compared with a net loss from discontinued operations of $0.1
million for the three month period ended December 31, 1997. During the three
months ended December 31, 1997, the Company sold 1,184 million cubic feet
("MMcf") of natural gas and 4,164 barrels of oil at average prices of $2.79 per
thousand cubic feet ("Mcf") of natural gas and $17.10 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
December 31, 1998 as compared with $1.0 million for the three months ended
December 31, 1997. After taking preferred stock dividends into account, the
Company's net loss allocable to common shareholders for the three months ended
December 31, 1998 was $0.9 million, or $0.03 per share, as compared with a net
loss allocable to common shareholders for the three months ended December 31,
1997 of $1.1 million, or $0.15 per share. The net loss per share calculation for
the period ended December 31, 1997 has been adjusted to reflect the one-for-ten
reverse stock split that was completed in November 1997.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH SIX MONTHS ENDED DECEMBER 31,
1997
Revenue from drilling services totaled $22.3 million for the six months ended
December 31, 1998. During this period, the Bill Shoemaker generated a total of
$20.2 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 six months ended December 31, 1998. No drilling service revenue was recorded
by the Company for the period ended December 31, 1997 since the Company did not
own the Rigs during that period.
Operating expenses for the six months ended December 31, 1998 totaled $11.9
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 $6.0 million and the Laffit Pincay's operating expenses totaled
$5.9 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 December 31, 1997 since the Company did not
own the Rigs during that period.
Depreciation expense totaled $2.8 million for the period ended December 31,
1998. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled
$1.8 million and $1.0 million, respectively. No depreciation expense relating to
the Rigs was recorded during the period ended December 31, 1997 since the
Company did not own the Rigs during that period.
General and administrative expense totaled $3.2 million for the six months
ended December 31, 1998 as compared to $0.4 million for the six months ended
December 31, 1997. General and administrative costs attributable to discontinued
operations totaled $0.3 million and $2.5 million for the six months ended
December 31, 1998 and 1997, respectively. General and administrative expense
includes staff and overhead costs allocated to the Company
13
<PAGE> 14
under a management agreement with DeepTech of $0.2 million and $0.5 million for
the six months ended September 30, 1998 and 1997, respectively. In connection
with the Merger, the management agreement between the Company and DeepTech was
terminated on August 14, 1998. General and administrative expense for the six
months ended December 31, 1998 includes staff and overhead costs for the
operation of the marine services and Atlantic Canada businesses whereas general
and administrative costs for the six months ended December 31, 1997 include
costs relative to the Atlantic Canada business only.
Operating income for the six months ended December 31, 1998 totaled $4.4 million
as compared to an operating loss of $0.4 million for the six months ended
December 31, 1997. The change was due to the items discussed above.
Interest income totaled $49,000 for the six months ended December 31, 1998 as
compared with $178,000 for the six months ended December 31, 1997 and included
interest income from available cash.
Interest expense for the six months ended December 31, 1998 totaled $5.6
million. For the six months ended December 31, 1998, interest expense relating
to the Credit Facility (as defined herein) totaled $4.1 million and interest
expense relating to borrowings from Tatham Brothers totaled $1.5 million. For
the six months ended December 31, 1997, $1.7 million of interest expense related
to borrowings under the Subordinated Notes held by DeepTech is included in the
loss from discontinued operations.
As a result of transferring all of its oil and gas properties in the Gulf to
DeepTech and the Partnership in connection with the Merger, the Company reported
a net loss from discontinued operations of $0.2 million for the six months ended
December 31, 1998 as compared with a net loss from discontinued operations of
$2.2 million for the six month period ended December 31, 1997. During the period
from July 1, 1998 through August 14, 1998, the Company sold 479 million cubic
feet ("MMcf") of natural gas and 1,200 barrels of oil at average prices of $1.86
per thousand cubic feet ("Mcf") of natural gas and $7.13 per barrel of oil,
respectively. During the six months ended December 31, 1997, the Company sold
2,723 MMcf of natural gas and 13,019 barrels of oil at average prices of $2.55
per Mcf and $17.40 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 $1.5 million for the six months ended December
31, 1998 as compared with $2.0 million for the six months ended December 31,
1997. After taking preferred stock dividends into account, the Company's net
loss allocable to common shareholders for the six months ended December 31, 1998
was $2.9 million, or $0.11 per share, as compared with a net loss allocable to
common shareholders for the six months ended December 31, 1997 of $4.5 million,
or $0.91 per share. The net loss per share calculation for the period ended
December 31, 1997 has been adjusted to reflect the one-for-ten reverse stock
split that was completed in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's exploration and production activities have generated
and utilized substantially all of the operating cash flow. Prospectively, the
Company's contract drilling activities are expected to generate and utilize
substantially all of the operating cash flow, at least during the near term. See
"-- Liquidity Outlook."
Sources of Cash. Effective with the Merger transactions, the Company transferred
all of its oil and gas properties in the Gulf to DeepTech and the Partnership.
The Company expects to be dependent upon cash on hand and cash generated from
its drilling services operations to pay its operating expenses, service its debt
and satisfy its other obligations. However, as described below, the Company will
need to raise substantial capital (equity, debt or both) or enter into other
arrangements to allow the Company to implement its business strategy in Atlantic
Canada. If either of the Rigs is not employed for any extended period of time,
the absence of associated revenues may have a material adverse effect on the
Company, including limiting the Company's ability to raise capital from external
sources. The Laffit Pincay has not been employed since mid-August 1998 and it is
uncertain as to when and at what rates it will be employed in the future.
See "-- Uses of Cash" and "-- Liquidity Outlook."
Uses of Cash. The Company expects that its primary uses of cash will consist of
(i) scheduled interest payments on the Credit Facility (as defined below), (ii)
amounts necessary to fund capital expenditures related to the Rigs that are not
funded by customers, (iii) amounts necessary to staff and maintain the Rigs
while they are not under contract,
14
<PAGE> 15
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.
At the current interest rate of 10 3/4%, scheduled interest payments on the
Credit Facility are approximately $1.6 million per quarter. In addition, both
the Credit Facility and Short Term Facility mature on March 31, 1999, which will
require the refinancing of principal payments of $58.1 million and $24.0
million, respectively.
Oil prices have declined substantially since the first quarter of 1998, which
has caused a significant decline in the demand for drilling rigs. 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 $100,000 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 December 31, 1998, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Partners, has incurred $11.9 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 December
31, 1998, the Company had $0.9 million of cash and cash equivalents. In
addition, the Company has $6.1 million in restricted cash that has been posted
to secure a letter of credit of a like amount. Both El Paso Energy and the
Company were required to post letters of credit in connection with certain
Merger related agreements.
On September 30, 1996, a subsidiary of DeepFlex entered into a $65 million
senior secured credit facility with a syndicate of lenders (as amended, the
"Credit Facility"). Proceeds from the Credit Facility were used to acquire the
Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to
retire $30.3 million of other rig related indebtedness. In April 1997, the
Credit Facility was amended to provide for an additional $12 million to fund the
remaining refurbishments and upgrades to the Bill Shoemaker. The Credit Facility
(i) matures on March 31, 1999, (ii) bears interest at the prime rate plus 3% per
annum (10 3/4% at December 31, 1998), payable quarterly, (iii) is secured by the
two semisubmersible drilling rigs and all of the related assets, (iv) required a
quarterly principal payment of excess cash flow as defined in the credit
agreement with a minimum principal amortization of $250,000 per quarter
beginning on December 31, 1996 and ending on September 30, 1998, (v) provided
the Lenders warrants to acquire a 5% minority equity interest in the
subsidiaries which own the Rigs, and (vi) is subject to customary conditions and
covenants, including the maintenance of a minimum level of working capital. As
of December 31, 1998, amounts outstanding under the Credit Facility totaled
$58.1 million. On September 25, 1998, the parties to the Credit Facility amended
the agreement to (i) extend the maturity date 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. The Company paid a total of 0.5% of
the outstanding principal balance to the lenders in connection with the
amendment. Management believes it will be able to refinance the Credit Facility
upon its maturity.
Tatham Offshore is a guarantor of a $5.0 million loan from NationsBank, N.A. to
Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain
improvements to the Rigs. The loan bears interest at the prime rate plus 1 1/2%
per annum and is due on March 31, 1999. The loan from Tatham Brothers to
DeepFlex, plus accrued interest, was included in the amount payable under the
short term financing arrangement discussed below.
15
<PAGE> 16
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 is 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 a certain payment-in-kind Subordinated Promissory
Note issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of
the Company, which has a current outstanding balance of approximately $72.4
million. The Company anticipates that it will refinance the Short Term Facility
with Tatham Brothers upon its maturity or pay off the facility with proceeds
from the refinancing of the Credit Facility discussed above. See Part II - Item
2. "Changes in Securities and Use of Proceeds."
On September 15, 1998, a draw of $1.4 million was made on the above-mentioned
letter of credit by DeepTech to fund certain tax liabilities incurred in
connection with the Merger.
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 is currently under negotiations with Sedco Forex to obtain payment
for the remaining portion of the Shell contract. Following the early release of
the rig by Shell, the Bill Shoemaker was towed to a shipyard in Galveston, Texas
where it has been undergoing routine maintenance and 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 will total
approximately $8.5 million. The Company anticipates that the make-ready will be
complete by February 15, 1999 and that the Bill Shoemaker will be mobilized to
the Grand Banks area in Atlantic Canada to conduct a two-well program (with
three options permitting up to seven additional wells) at predetermined rates
for Husky Oil Operations Limited. In connection with the Bill Shoemaker
make-ready agreement with Sedco Forex, the Company 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 has agreed to pay a fee of $500,000 to Mr.
Tatham. In addition, if the funds securing the letter of credit are not returned
to Mr. Tatham by February 15, 1999, the Company has agreed to pay Mr. Tatham, as
liquidated damages, $10,000 per day until such funds are returned. The
liquidated damages payment, if made, would be in the form of a promissory note
bearing interest at the rate of 18% per annum. The Company anticipates that all
of the funds securing the letter of credit will be 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, (ii) its general and administrative costs and (iii) its cash
interest expense requirements under the Credit Facility. Until such time as the
Laffit Pincay is generating operating revenue, additional capital expenditures
will need to be funded by customers or other third party sources. In addition,
the Company will need to refinance the principal balances due on March 31, 1999
on the Credit Facility and Short Term Facility.
On January 22, 1999, RIGCO gave Sedco Forex a written termination notice of the
management and charter agreements 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
16
<PAGE> 17
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.
The Company is refocusing its business from the development, exploration and
production of oil and gas in the Gulf to an integrated frontier investment
strategy targeting Atlantic Canada with initial emphasis on the offshore
contract drilling business. The Company believes that the Atlantic Canada region
offers significant investment opportunities and the Company plans to expand the
number of drilling rigs it will own as well as diversify its business to include
the North Atlantic pipeline project, related gas processing facilities, a
facility for the generation of electricity and other related investments. The
Company has incurred approximately $11.9 million in costs associated with its
Atlantic Canada strategy.
The ability of the Company to satisfy its future capital needs with respect to
its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic Partners pipeline
project, will depend upon its ability to raise substantial amounts of additional
capital and to implement its business strategy successfully. With respect to the
Company's Atlantic Canada strategy, (i) the Company does not currently possess
the capital necessary to implement its business strategy completely and there
can be no assurances that the Company will be able to obtain sufficient capital
for any or all of the projects, (ii) there can be no assurances that these
projects and other opportunities will prove to be economical or that they will
occur, and (iii) many of these projects will require governmental approvals,
almost all of which the Company has yet to receive. Moreover, if there are
developments that the Company determines to be indicative of a lack of
reasonable opportunity to realize benefits for the Company's stockholders, then
the Company will pursue other opportunities, wherever located, as the Company
determines to be in the Company's best interests.
Tatham Offshore has never declared or paid dividends on its common or preferred
stock. Tatham Offshore expects to retain all available earnings generated by its
operations for the growth and development of its business.
YEAR 2000. The year 2000 issue is the result of computer programs that were
written using two digits rather than four to define the year. The Company
believes that substantially all of its information technology software and
equipment are year 2000 compliant and that this problem will have no affect on
the Company's internal operations. The Company believes that the costs relating
to the assessment of the year 2000 issue will be de minimus. Although the
Company intends to interact only with those third parties that have year 2000
compliant computer systems, it is impossible for the Company to monitor all such
systems. The Company has initiated discussions with the operator of the Bill
Shoemaker and Laffit Pincay and based on initial discussions, believes that
there will be no disruption in the operation of its drilling rigs as a result of
the year 2000 issue. Currently, the Company has no information concerning the
year 2000 compliance status of its customers and vendors. There can be no
assurances that such systems will not have a material adverse impact on the
Company's business and operations.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management 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.
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<PAGE> 18
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." Under the Credit Facility, the remaining principal
is due on March 31, 1999 along with the final interest payment. On December 31,
1998, the Credit Facility had a principal balance of $58,148,000 and an interest
rate based on the prime rate plus 3% (10 3/4% at December 31, 1998). A 1 1/2%
increase in interest rates could result in a $875,000 annual increase in
interest expense on the existing principal balance.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with
Citibank, N.A., which covered $36.5 million of the principal amount under the
Credit Facility and provided a maximum fixed effective interest rate of 11.74%.
This cap agreement terminated on September 30, 1998. 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.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 15, 1999, the Company issued a subordinated convertible
promissory note (the "Subordinated Convertible Note") to the order of
Tatham Brothers in the principal amount of $1.0 million as a fee
payable in connection with the renewal, extension, rearrangement and
replacement of the $22.9 million short term loan made by Tatham
Brothers to the Company in connection with the Merger. 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 a
number of shares of Common Stock equal to (i) the principal amount
being converted plus interest accrued thereon, divided by (ii) the
greater of (a) the average closing price of the 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 such
common stock after January 15, 1999). Based on the Company's
understanding that Tatham Bothers is an "accredited investor" within
the meaning of Section 501(a) of Regulation D, the Convertible
Subordinated Note was issued without registration under the Securities
Act in reliance on the exemption provided by Section 4(2) of the
Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.46 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.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TATHAM OFFSHORE, INC.
Date: February 12, 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)
20
<PAGE> 21
EXHIBIT INDEX
<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
</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.
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.
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<PAGE> 2
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
indebtedneess of Maker to Payee under this Note; (b) the failure to pay or
perform any other obligation, liability or idebtedness 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 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.
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<PAGE> 3
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;
(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),
3
<PAGE> 4
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 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
4
<PAGE> 5
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.]
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<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.
(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.
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<PAGE> 2
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 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:
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<PAGE> 3
(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 shal be amended, waived or varied without the prior written consent
of all of the Senior Lenders.
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.
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<PAGE> 4
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 preceeding the last
calendar day of the calendar quarter immediately preceeding 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 immeditaely 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 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.
4
<PAGE> 5
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.
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):
5
<PAGE> 6
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 (A) TATHAM
OFFSHORE, INC. AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS AT DECEMBER 31,
1998 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 915
<SECURITIES> 0
<RECEIVABLES> 4,375
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,442
<PP&E> 141,849
<DEPRECIATION> 9,267
<TOTAL-ASSETS> 156,314
<CURRENT-LIABILITIES> 88,300
<BONDS> 0
0
173
<COMMON> 261
<OTHER-SE> 67,330
<TOTAL-LIABILITY-AND-EQUITY> 156,314
<SALES> 22,277
<TOTAL-REVENUES> 22,277
<CGS> 11,929
<TOTAL-COSTS> 11,929
<OTHER-EXPENSES> 2,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,573
<INCOME-PRETAX> (1,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,672)
<DISCONTINUED> (221)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,893)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
