<PAGE> 1
================================================================================
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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
COMMISSION FILE NO. 0-22892
TATHAM OFFSHORE, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0269967
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
600 Travis
Suite 7400
Houston, Texas 77002
(Address of Principal Executive Offices, including Zip Code)
(713) 224-7400
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing Requirements for the past 90 days. Yes X No
--- ---
As of November 1, 1999, there were outstanding 26,074,590 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> <C>
PART I. FINANCIAL INFORMATION...................................................................3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1999 (unaudited) and June 30, 1999............3
Unaudited Consolidated Statement of Operations for the Three Months
Ended September 30, 1999 and 1998, respectively...........................................4
Unaudited Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1999 and 1998.........................................................5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Three Months Ended September 30, 1999 (unaudited).........................................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS............................................................................19
PART II. OTHER INFORMATION......................................................................20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES.......................................................................................22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,011 $ 486
Accounts receivable 43 16,076
Prepaid expenses 26 168
------------- -------------
Total current assets 1,080 16,730
------------- -------------
Property and equipment 2,019 146,487
Less - accumulated depreciation 71 12,204
------------- -------------
Property and equipment, net 1,948 134,283
------------- -------------
Restricted cash 170 170
Deferred costs 12,922 12,591
Equity investments (Note 3) 76,114 --
------------- -------------
Total assets $ 92,234 $ 163,774
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,486 $ 10,102
Accounts payable to affiliates 4,392 8,082
Long-term debt currently payable -- 58,148
Long-term debt to affiliate currently payable 27,476 26,519
------------- -------------
Total current liabilities 33,354 102,851
------------- -------------
Commitments and contingencies (Note 6)
Stockholders' equity (Note 4):
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of September 30, 1999 and June 30, 1999,
17,578,946 and 17,579,717 shares issued and outstanding
at September 30, 1999 and June 30, 1999, respectively 176 176
Common stock, $0.01 par value, 250,000,000 shares
authorized as of September 30, 1999 and June 30, 1999,
26,074,590 and 26,074,321 shares issued and outstanding
as of September 30, 1999 and June 30, 1999, respectively 261 261
Additional paid-in capital 186,217 186,217
Accumulated deficit (127,774) (125,731)
------------- -------------
58,880 60,923
------------- -------------
Total liabilities and stockholders' equity $ 92,234 $ 163,774
============= =============
</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
Ended September 30,
----------------------
1999 1998
<S> <C> <C>
Revenue:
Drilling services $ -- $ 12,100
-------- --------
-- 12,100
Costs and expenses:
Drilling operating expenses -- 7,543
Depreciation 21 1,383
Loss from equity investments (Note 3) 158 --
Management fee -- 155
General and administrative expenses 448 1,173
-------- --------
627 10,254
-------- --------
Operating income (loss) (627) 1,846
Interest and other income 36 32
Interest and other financing costs -- (2,329)
Interest expense and other financing costs - affiliates (1,452) (560)
-------- --------
Net loss from continuing operations (2,043) (1,011)
Discontinued operations (Note 1)
Loss from oil and gas operations -- (221)
-------- --------
Net loss (2,043) (1,232)
Preferred stock dividends (776) (764)
-------- --------
Net loss allocable to common shareholders $ (2,819) $ (1,996)
======== ========
Weighted average number of shares 26,075 28,080
======== ========
Basic and diluted loss per common share
from continuing operations (Note 5) $ (0.11) $ (0.06)
======== ========
Basic and diluted loss per common share
from discontinued operations (Note 5) $ 0.00 $ (0.01)
======== ========
Basic and diluted loss per common share (Note 5) $ (0.11) $ (0.07)
======== ========
</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>
Three Months
Ended September 30,
----------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,043) $ (1,232)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 21 1,641
Amortization of debt issue costs -- 742
Noncash interest expense 1,396 444
Loss from equity investments 158 --
Changes in operating working capital (net of effect of conveyance):
(Increase) decrease in accounts receivable (1) 522
(Increase) decrease in receivable from affiliates (384) 488
(Increase) decrease in prepaid expenses (14) 2
Decrease in accounts payable and accrued liabilities (208) (1,515)
Decrease in accounts payable to affiliates (238) (2,832)
-------- --------
Net cash used in operating activities (1,313) (1,740)
-------- --------
Cash flows from investing activities:
Additions to semisubmersible drilling rigs -- (628)
Deferred costs (331) (217)
Reduction in cash from deconsolidating rig subsidiaries (382) --
Conveyance of oil and gas properties -- (1,605)
-------- --------
Net cash used in investing activities (713) (2,450)
-------- --------
Cash flows from financing activities:
Repayment of notes payable -- (1,008)
Proceeds from notes payable to affiliate 2,551 10,890
Increase in restricted cash -- (6,100)
Debt issue costs -- (713)
-------- --------
Net cash provided by financing activities 2,551 3,069
-------- --------
Net increase (decrease) in cash and cash equivalents 525 (1,121)
Cash and cash equivalents at beginning of year 486 2,689
-------- --------
Cash and cash equivalents at end of period $ 1,011 $ 1,568
======== ========
</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, 1999 17,580 $ 176 26,074 $ 261 $ 186,217 $ (125,731) $ 60,923
Conversion of Series A Preferred Stock
into common stock (1) -- 1 -- -- -- --
Net loss for the three months ended
September 30, 1999 (unaudited) -- -- -- -- -- (2,043) (2,043)
--------- --------- --------- --------- ---------- ----------- ---------
Balance, September 30, 1999 (unaudited) 17,579 $ 176 26,075 $ 261 $ 186,217 $(127,774) $ 58,880
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware
corporation, provides offshore contract drilling services to the oil and gas
industry and is currently pursuing, through its 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"). Prior to August 14, 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
(the "Merger"), (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 held interests in Ewing Bank
Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to DeepTech, (ii)
Tatham Offshore conveyed its remaining oil and gas properties to Leviathan Gas
Pipeline Partners, L.P. ("Leviathan"), (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 pursuant to a spin-off transaction
effected by a Rights Offering (the "Rights Offering"). DeepFlex, a Delaware
corporation and wholly-owned subsidiary of Tatham Offshore, was formed in
January 1995 and, through its subsidiaries, focuses on the acquisition and
deployment of semisubmersible drilling rigs for contract drilling. RIGCO North
America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned
subsidiaries of DeepFlex, own interests in the FPS Laffit Pincay (the "Laffit
Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together with the
Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling
rigs.
Pursuant to management and charter agreements, Sedco Forex Division of
Schlumberger Technology Corporation ("Sedco Forex") has marketed, managed, and
operated the Rigs. On January 22, 1999, RIGCO gave Sedco Forex a written
termination notice of the management and charter agreements for the Laffit
Pincay. Effective March 23, 1999, RIGCO took over the marketing, management and
operational responsibilities for the Laffit Pincay. On April 20, 1999, RIGCO
gave Sedco Forex a written termination notice of the management and charter
agreement for the Bill Shoemaker. Under the Bill Shoemaker management and
charter agreement, Sedco Forex continued to man and operate the rig through the
conclusion of its drilling contract with Husky Oil Operations Limited. At the
conclusion of the Husky Oil Operations Limited drilling contract in mid-November
1999, RIGCO assumed the marketing, management and operational responsibilities
for the Bill Shoemaker.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
Pipeline Partners"). North Atlantic Pipeline Partners is the sponsor of a
proposal to construct a natural gas pipeline and related infrastructure in the
Grand Banks area offshore Newfoundland and Nova Scotia to the eastern seaboard
of the United States.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the period covered by such statements. These interim
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999.
Bankruptcy Filing by Subsidiaries
On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. ("FPS III") and FPS V, Inc.
("FPS V" and, together with RIGCO, FPS III and FPS VI, the "Rig Subsidiaries"),
wholly-owned subsidiaries of DeepFlex, filed voluntary petitions under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Filing"). RIGCO owns a
100% interest in the Bill Shoemaker and a 25% undivided interest in the Laffit
Pincay. FPS VI owns a 75% undivided interest in the Laffit Pincay. FPS III and
FPS V are the owners of RIGCO and FPS VI with FPS III owning a 50% interest in
RIGCO and FPS V owning a 50% interest in RIGCO and a 100% interest in FPS VI.
The bankruptcy proceedings
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
of the Rig Subsidiaries are administered jointly. As a result of the Bankruptcy
Filing, the Rigs are being managed by the Company's rig related subsidiaries as
debtors-in-possession. The syndicate of lenders under the Credit Facility have a
secured interest in substantially all of the assets of RIGCO and FPS VI.
As a result of the Bankruptcy Filing, financial statements presented after the
date of the Bankruptcy Filing reflect the investment in and advances to and the
results of operations of the Rig Subsidiaries on the equity method of
accounting. (See Note 3) Tatham Offshore's remaining 50% or more owned
subsidiaries controlled by the Company are included in the accompanying
consolidated financial statements.
Discontinued Operations
Discontinued operations represent Tatham Offshore's oil and gas exploration and
development business transferred to DeepTech and Leviathan as discussed above.
These operations were accounted for using the successful efforts method of
accounting. Net sales from discontinued oil and gas operations were $0.9 million
for the period from July 1, 1998 through August 14, 1998. General and
administrative expenses were allocated to discontinued operations based on the
percentage of employees' time related to the discontinued operations and were
$0.3 million for the period from July 1, 1998 through August 14, 1998. Interest
expense for the period from July 1, 1998 through August 14, 1998 was allocated
100% to discontinued operations.
NOTE 2 - 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 three months ended September 30, 1998, DeepTech charged
Tatham Offshore $310,000 under this agreement. The management agreement was
terminated August 14, 1998.
Notes Payable to Affiliates
In connection with the Merger, the Company entered into a short-term financing
arrangement with Tatham Brothers, LLC ("Tatham Brothers") (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 Leviathan, (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 Tatham
Brothers Securities, LLC ("TB Securities") with respect to obligations under the
Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax
liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi)
pay fees and expenses associated with the Short-Term Facility. Tatham Brothers
is an affiliate of Mr. Thomas P. Tatham and the parent company of TB Securities.
The original terms of the Short-Term Facility provided for an interest rate of
12% per annum with principal and accrued interest due on January 15, 1999. On
January 15, 1999, the Company and Tatham Brothers agreed to refinance the
original $22.9 million principal plus $1.1 million accrued interest into a new
short-term loan which bears interest at the rate of 15% per annum and was due
March 31, 1999. In connection with the refinancing, the Company paid Tatham
Brothers a fee of $1.0 million in the form of a 15% subordinated convertible
note (the "Subordinated Convertible Note"). The Subordinated Convertible Note
bears interest at the rate of 15% per annum and is due on August 15, 2001.
Tatham Brothers may convert the principal amount of the Subordinated Convertible
Note and accrued unpaid interest into shares of Common Stock of the Company
based on the average market price for the five trading days prior to the end of
the previous calendar quarter. The Short-Term Facility is secured by a pledge of
DeepFlex of its interest in certain payment-in-kind Subordinated Promissory
Notes issued by RIGCO and FPS V, both subsidiaries of the Company, which had an
outstanding balance of approximately $80.3 million at September 30, 1999. On
March 31, 1999, the Company and Tatham Brothers extended the Short-Term Facility
until April 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham
Offshore was required to pay $24.1 million in principal and $0.3 million in
interest on April 30, 1999. Tatham Offshore did not make payment of such
amounts; as a result, an event of default has occurred and is continuing under
the Short-Term Facility. The default interest rate under the Short-Term Facility
is 19% per annum. The principal balance and accrued interest under the
Short-Term Facility and Subordinated Convertible Note are included in long-term
debt currently payable on the consolidated balance sheet.
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank
of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to
fund certain improvements to the Rigs. The loan bears interest at LIBOR plus 2%
and is due on November 30, 1999 or upon demand. The loan from Tatham Brothers to
DeepFlex, plus accrued interest, was included in the amount payable under the
Short-Term Facility discussed above.
In connection with the Bill Shoemaker make-ready agreement with Sedco Forex,
RIGCO secured a $6.5 million letter of credit in January 1999 to secure payment
to Sedco Forex, and the funds used to secure such letter of credit were provided
by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of
the Company. The $6.5 million in collateral funds plus accrued liquidated
damages totaling $1.7 million are included in the accounts of RIGCO. In exchange
for providing the funds to secure the letter of credit, RIGCO paid a fee of
$500,000 to Mr. Tatham. RIGCO has agreed to pay Mr. Tatham, as liquidated
damages, $10,000 per day from February 15, 1999 until such funds are returned.
The liquidated damages payment would be in the form of a promissory note bearing
interest at the rate of 18% per annum.
Tatham Aviation, Inc. ("Tatham Aviation"), whose sole shareholder is Thomas P.
Tatham, has provided the Company use of a corporate aircraft. The agreement
between the Company and Tatham Aviation provides for the Company's reimbursement
of operating costs, insurance and carrying costs in exchange for the use of the
corporate aircraft. During the three months ended September 30, 1999, the
Company paid Tatham Aviation $365,000 under this agreement.
On February 10, 1999, Tatham Offshore issued two promissory notes, each in the
original principal amount of $1.1 million, to Tatham Brothers and a foundation
associated with Mr. Thomas P. Tatham, respectively, to secure funds to purchase
new anchor chains in connection with the Bill Shoemaker make-ready. Effective
with the purchase of the anchor chains, RIGCO and Tatham Offshore entered into
an agreement whereby RIGCO has the option to either lease or purchase the anchor
chains from Tatham Offshore. In April 1999, Tatham Offshore Canada Limited
purchased the two promissory notes for their principal amount plus accrued
interest.
On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Thomas P. Tatham. Tatham Investment
Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Any
loans bear interest at the prime rate plus 3% (on September 30, 1999, the
interest rate under this facility was 11.25%) and were due on September 30,
1999. As of the date of the Bankruptcy Filing, Tatham Investment Corp. had an
unsecured claim of $338,303 under this agreement.
Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility
with Tatham Investment Corp. The revolving draw facility provides for loans, at
the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in
amounts up to $5.0 million. The revolving draw facility bears interest at the
rate of 15% per annum and
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
is payable upon demand by the lender. Through September 30, 1999, the Company
has borrowed $2.6 million under this facility which along with accrued interest
of $55,000 is included in accounts payable to affiliates on the consolidated
balance sheet. The Company has pledged all of its equity ownership in certain
wholly-owned subsidiaries of the Company as well as a certain promissory note
issued by Tatham Offshore Canada, Limited.
Other
Leviathan charged Tatham Offshore $197,500 for the three months ended September
30, 1998 for commodity and platform access fees associated with the Viosca Knoll
817 lease in accordance with certain agreements between the parties.
During the three months ended September 30, 1998, Tatham Offshore sold all of
its production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an
80%-owned subsidiary of DeepTech. Under its agreement with Offshore Marketing,
the Company paid fees equal to 2% of the sales value of crude oil and condensate
and $0.015 per dekatherm of natural gas for selling the Company's production.
NOTE 3 - EQUITY INVESTMENTS:
On August 9, 1999, the Rig Subsidiaries, wholly-owned indirect subsidiaries of
Tatham Offshore, filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code. As a result of the Bankruptcy Filing, the Rig Subsidiaries are
operating their businesses and managing their property as debtors-in-possession.
Financial statements presented after the date of the Bankruptcy Filing reflect
the investment in and advances to and the results of operations of the Rig
Subsidiaries under the equity method of accounting. At September 30, 1999, the
combined assets of the Rig Subsidiaries totaled $146.7 million. Excluding
deferred income taxes, the Rig Subsidiaries had $151.0 million of total debt and
other liabilities at September 30, 1999 including $62.3 million of secured debt
under the Credit Facility. Substantially all of the remaining debt and other
liabilities are owed to affiliates of the Rig Subsidiaries. The following is
summarized combined income statement information for the subsidiaries included
in the Bankruptcy Filing. The following is summarized combined income statement
information for the subsidiaries included in the Bankruptcy Filing.
COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenue:
Drilling services $ 9,629
Costs and expenses:
Drilling operating expenses 5,021
Depreciation 1,454
General and administrative expenses
and management fee 860
-----------
7,335
-----------
Operating income 2,294
Interest income 7
Interest expense and other financing costs (2,055)
Interest expense and other financing costs - affiliates (1,445)
-----------
Net loss $ (1,199)
===========
</TABLE>
10
<PAGE> 11
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
September 30, 1999:
<TABLE>
<CAPTION>
Conversion/
Shares Liquidation Dividend Dividends Exchange
Equity Outstanding Preference Rate In Arrears Features
<S> <C> <C> <C> <C> <C>
Series A Preferred Stock 17,183,362(a) $1.50 per share 12% $ 10,136,000 (b)(c)
Series B Preferred Stock 74,379 $1.00 per share 8% $ 18,000 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 18,000 (b)(c)
Common Stock 26,074,590(a) N/A -- -- --
</TABLE>
- -----------------------
(a) In connection with the Rights Offering, Tatham Offshore purchased all of
the shares of Common Stock and Series A Preferred Stock that were not
acquired by the holders of Rights or TB Securities in the Rights Offering,
3,926,746 and 653,365, respectively, and the proceeds from such purchase
by Tatham Offshore were contributed by DeepTech to Tatham Offshore.
(b) 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.
NOTE 5 - EARNINGS PER SHARE:
Basic earnings per share ("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.
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.
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 was notified by Sedco Forex that as of November 18, 1998, Shell
would cease using the Bill Shoemaker to conduct drilling operations in the
Gulf. The Company has been paid for drilling services performed by the Bill
Shoemaker for Shell through November 18, 1998 but has not been paid for any
period since that time. At September 30, 1999, the Company had recorded a
$7.4 million account receivable from Sedco Forex related to the unpaid portion
of the Shell contract. On April 20, 1999, RIGCO gave Sedco Forex a written
termination notice of the management and charter agreement for the Bill
Shoemaker. On July 26, 1999, RIGCO filed a petition alleging more than
$51 million in actual damages against Schlumberger Technology Corporation
and Schlumberger Canada, Ltd.
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.
NOTE 7 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Cash paid, net of amounts capitalized
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
(in thousands)
<S> <C> <C>
Interest $ -- $ 1,700
Taxes $ -- $ --
</TABLE>
11
<PAGE> 12
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Supplemental Disclosures of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
(in thousands)
<S> <C> <C>
Debt issued to refinance accounts payable
to affiliates $ -- $ 5,153
Senior Preferred Stock redeemed under
the Redemption Agreement $ -- $ 7,500
Debt issued to finance Rights Offering $ -- $ 6,923
</TABLE>
As discussed in Note 1, the Company has reflected the investment in and advances
to and the results of operations of the Rig Subsidiaries on the equity method of
accounting. The assets, liabilities and accumulated deficit of the Rig
Subsidiaries at June 30, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 382
Accounts receivable 16,034
Prepaid expenses 156
Semisubmersible drilling rigs, net 132,314
Accounts payable and accrued liabilities (8,408)
Accounts payable to affiliates (6,003)
Notes payable to affiliates (79,357)
Current portion of note payable (58,148)
Deferred income taxes (10,238)
---------
Accumulated deficit $ (13,268)
=========
</TABLE>
NOTE 8 - SEGMENT INFORMATION:
The Company currently operates two business segments, the offshore contract
drilling business and the pursuit of an integrated energy related investment
strategy in Atlantic Canada. The Company is required to report summarized
financial results for operating segments and related disclosures about products
and services, geographic areas and major customers. Primary disclosure
requirements include total segment revenues, total segment profit or loss and
total segment assets.
For the three months ended September 30, 1999, operations for the drilling
segment are included in the financial statements on the equity method of
accounting (see Note 3). For the three months ended September 30, 1998, the
drilling segment revenues totaled $12.1 million and the drilling segment profit
totaled $3.2 million. The Canadian Investment Strategy segment had no revenues
and all costs were capitalized for the three months ended September 30, 1999 and
1998.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Item 1.
"Consolidated Financial Statements" and is intended to assist in the
understanding of the Company's financial condition and results of operations for
the three months ended September 30, 1999.
GENERAL
Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware
corporation, provides offshore contract drilling services to the oil and gas
industry and is currently pursuing, through its 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 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
Leviathan, and (ii) acquired from DeepTech ownership of DeepFlex which, through
its subsidiaries, owns 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. As a result of the Bankruptcy Filing as discussed
below, financial statements presented after the date of the Bankruptcy Filing
reflect the investment in and advances to and the results of operation of the
Rig Subsidiaries on the equity method of accounting.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenue from drilling services totaled $9.6 million for the three months ended
September 30, 1999 and is reflected in equity earnings. All of the revenue for
the three months ended September 30, 1999 was generated by the Bill Shoemaker.
Revenue from drilling services totaled $12.1 million for the three months ended
September 30, 1998. During this period, the Bill Shoemaker generated a total of
$10.0 million in revenue and the Laffit Pincay generated a total of $2.1 million
in revenue.
Operating expenses for the Rigs for the three months ended September 30, 1999
totaled $5.0 million and were attributable to the management fee and direct
operating expenses for the Rigs. Operating expenses for the Rigs for the three
months ended September 30, 1999 were reflected in equity earnings. During this
period, the Bill Shoemaker's operating expenses totaled $4.3 million and the
Laffit Pincay's operating expenses totaled $0.7 million. Operating expenses for
the Laffit Pincay during this period included the costs necessary to maintain
the rig in a warm-stacked mode. Operating expenses for the three months ended
September 30, 1998 totaled $7.5 million and were attributable to the management
fee and direct operating expenses for the Rigs. During this period, the Bill
Shoemaker's operating expenses totaled $3.8 million and the Laffit Pincay's
operating expenses totaled $3.7 million.
Depreciation expense for the Rigs totaled $1.5 million for the three months
ended September 30, 1999 and is reflected in equity earnings. Depreciation
expense for the Bill Shoemaker and the Laffit Pincay totaled $1.0 million and
$0.5 million, respectively. Depreciation expense totaled $1.4 million for the
three months ended September 30, 1998. Depreciation expense for the Bill
Shoemaker and the Laffit Pincay totaled $0.9 million and $0.5 million,
respectively.
General and administrative expense totaled $0.5 million for the three months
ended September 30, 1999. In addition, general and administrative expense
relating to the Rigs totaled $0.9 million and is reflected in equity earnings.
General and administrative expense totaled $1.3 million for the three months
ended September 30, 1998. General and administrative expense includes staff and
overhead costs allocated to the Company under a management agreement with
DeepTech of $0.2 million for the three months ended September 30, 1998. 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 three months ended September 30, 1998 includes staff and overhead costs
for the operation of the marine services and Atlantic Canada businesses. General
and
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<PAGE> 14
administrative costs attributable to discontinued operations totaled $0.3
million for the three months ended September 30, 1998.
Operating loss for the three months ended September 30, 1999 totaled $0.6
million as compared to operating income of $1.8 million for the three months
ended September 30, 1998. The change was due to the items discussed above.
Interest income and other for the three months ended September 30, 1999 and 1998
totaled $36,000 and $32,000, respectively, and primarily included interest
income from available cash.
Interest expense for the three months ended September 30, 1999 totaled $1.5
million and related to borrowings from Tatham Brothers. In addition, interest
expense incurred by RIGCO under the Credit Facility totaled $2.1 million and is
included in equity earnings. The Rig Subsidiaries also incurred interest expense
to affiliated entities of $0.4 million which is included in equity earnings.
As a result of transferring all of its oil and gas properties in the Gulf to
DeepTech and Leviathan in connection with the Merger, the Company reported a net
loss from discontinued operations of $0.2 million for the three months ended
September 30, 1998. 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.
Tatham Offshore eliminated all of its Senior Preferred Stock and the associated
preferred stock dividends in arrears as a result of certain Merger related
agreements and repurchased and cancelled 653,365 shares of its Series A
Preferred Stock in connection with the Rights Offering. Tatham Offshore's
remaining preferred stock dividends totaled $0.8 million for the three months
ended September 30, 1999 as compared with $0.8 million for the three months
ended September 30, 1998. After taking preferred stock dividends into account,
the Company's net loss allocable to common shareholders for the three months
ended September 30, 1999 was $2.8 million, or $0.11 per share, as compared with
a net loss allocable to common shareholders for the three months ended September
30, 1998 of $2.0 million, or $0.07 per share.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Merger and related transactions completed on or before August 14,
1998, the Company's exploration and production activities generated and utilized
substantially all of the operating cash flow. Prospectively, the Company's
contract drilling activities are expected to generate 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 Leviathan. The
Company expects to be dependent upon cash on hand, cash generated from its
drilling services operations and loans under a revolving draw facility with
Tatham Investment Corp. to pay its operating expenses and satisfy its other
obligations. The use of cash held by or generated from operations of the Rig
Subsidiaries is subject to approval of the Bankruptcy Court. 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.
On August 9, 1999, RIGCO, FPS VI, FPS III and FPS V (the "Rig Subsidiaries")
filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Filing"). RIGCO owns a 100% interest in the Bill Shoemaker and
a 25% undivided interest in the Laffit Pincay. FPS VI owns a 75% undivided
interest in the Laffit Pincay. FPS III and FPS V are the owners of RIGCO and FPS
VI with FPS III owning a 50% interest in RIGCO and FPS V owning a 50% interest
in RIGCO and a 100% interest in FPS VI. The proceedings of the Rig Subsidiaries
are administered jointly. As a result of the Bankruptcy Filing, the Rigs are
being managed by the Company's subsidiaries as debtors-in-possession. Under the
provisions of the Bankruptcy Code, the debtors-in-possession have the exclusive
right, for 120 days following the date of the Bankruptcy Filing, to file a plan
of reorganization with the Bankruptcy Court. The syndicate of lenders under the
Credit Facility have a secured interest in substantially all of the assets of
RIGCO and FPS VI. Any cash received by RIGCO and FPS VI becomes additional
collateral for the secured lenders (the "Cash Collateral") under the Credit
Facility. RIGCO and FPS VI as debtors-in-possession have been granted temporary
permission by the Bankruptcy Court for limited use of the Cash
14
<PAGE> 15
Collateral to pay operating and maintenance costs for the Rigs and to pay
certain limited general and administrative costs of Tatham Offshore.
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 day-rates it will be employed in the future. On
October 23, 1999, the Bill Shoemaker completed a three well contract for Husky
Oil Operations Limited. RIGCO has bid on additional day rate drilling contracts
for Husky Oil Operations Limited for the year 2000; however; as of this date,
RIGCO has not entered into a drilling contract for the Bill Shoemaker subsequent
to the three wells drilled for Husky Oil Operations Limited. See "-- Uses of
Cash" and "-- Liquidity Outlook."
In August 1998, both El Paso Energy and the Company were required to post
letters of credit in connection with certain Merger related agreements. In
March 1999, the Company entered into an agreement with El Paso Energy under
which (i) each company was released of its obligation to maintain letters of
credit in favor of one another, (ii) El Paso Energy paid the Company $618,000
and (iii) the Company released its rights to certain potential pre-merger tax
attributes of the DeepTech group. As a result of this agreement, the Company's
$6.1 million cash collateral which secured its letter of credit in favor of
El Paso Energy was released and became available for general corporate purposes.
On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Thomas P. Tatham. Tatham Investment
Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Any
loans bear interest at the prime rate plus 3% (on September 30, 1999, the
interest rate under this facility was 11.25%) and were due on September 30,
1999. As of the date of the Bankruptcy Filing, Tatham Investment Corp. had an
unsecured claim of $338,303 under this agreement.
Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility
with Tatham Investment Corp. The revolving draw facility provides for loans, at
the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in
amounts up to $5.0 million. The revolving draw facility bears interest at the
rate of 15% per annum and is payable upon demand by the lender. Through
September 30, 1999, the Company has borrowed $2.6 million under this facility.
The Company has pledged all of its equity ownership in certain wholly-owned
subsidiaries of the Company as well as a certain promissory note issued by
Tatham Offshore Canada, Limited.
Uses of Cash. The Company expects that its primary uses of cash will consist of
(i) payments on the Credit Facility, (ii) amounts necessary to fund capital
expenditures related to the Rigs that are not funded by customers, (iii) amounts
necessary to staff and maintain the Rigs while they are not under contract, and
(iv) amounts necessary to pay general and administrative and other operational
expenses. The use of cash held by the Rig Subsidiaries requires approval by the
Bankruptcy Court. The Rig Subsidiaries have approval of the Bankruptcy Court for
limited use of such cash through early January 2000.
In addition, the Company will use available cash from non-rig related borrowings
to fund the pursuit of its business strategy in Atlantic Canada. Such uses will
include funding initial expenditures related to the North Atlantic Pipeline
Partners' pipeline project, the remainder of the Company's Atlantic Canada
strategy and any of the Company's other potential capital expenditures.
Oil prices declined substantially during 1998, which has caused a significant
decline in the demand for drilling rigs. Although oil prices have strengthened
in recent months, the demand for drilling rigs has not improved significantly.
The Laffit Pincay does not have a current drilling contract and was warm-stacked
in Grand Isle Block 71, offshore Louisiana from mid-August 1998 through early
February 1999. In early February 1999, the Laffit Pincay was relocated to a
shipyard in Pascagoula, Mississippi pending the completion of engineering
studies and obtaining financing necessary to perform certain upgrades to the
rig. In addition to the Laffit Pincay, there are several similarly equipped
semisubmersibles owned by competitors currently deployed in the Gulf that do not
have current drilling contracts or commitments. Cash costs to warm-stack the
Laffit Pincay in Grand Isle Block 71 were approximately $600,000 per month. Cash
costs to maintain the Laffit Pincay in the shipyard pending the upgrade are
approximately $250,000 per month.
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<PAGE> 16
Following the completion of the Husky Oil Operation Limited contract, in
mid-November 1999, the Bill Shoemaker was warm-stacked in a facility in
Newfoundland, Canada pending additional contract drilling commitments in Canada
or other suitable locations worldwide. The costs to stack the Bill Shoemaker in
Canada are approximately $300,000 per month.
North Atlantic Pipeline 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 September 30, 1999, Tatham Offshore Canada Limited, the
Canadian representative of North Atlantic Pipeline Partners, has incurred $12.9
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 obtain debt and equity financing and/or
secure joint venture partners 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, cash from its drilling services operations as authorized from
time to time by the Bankruptcy Court, and loans under the revolving draw
facility with Tatham Investment Corp. At September 30, 1999, Tatham Offshore had
$1.0 million of cash and cash equivalents. In addition, RIGCO had $5.9 million
of cash and cash equivalents at September 30, 1999. However, to meet its
debt obligations and future capital needs with respect to Atlantic Canada, the
Company will need to raise substantial capital (equity, debt or both) or enter
into other arrangements.
Drilling Operations
On September 30, 1996, RIGCO 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) originally matured
on September 30, 1998, (ii) provides for interest at the prime rate plus 3% per
annum (11 1/4% at September 30, 1999), payable quarterly, and (iii) is secured
by the two semisubmersible drilling rigs and all of the related assets. 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. RIGCO paid a total of 0.5% of the outstanding
principal balance to the lenders in connection with the amendment.
On March 31, 1999, the parties to the Credit Facility amended the agreement to
(i) extend the maturity to April 30, 1999, (ii) waive all principal and interest
payments until the maturity date and (iii) extend the expiration date on the
warrants issued to the lenders under the original Credit Facility to April 30,
1999. RIGCO paid a total of $100,000 to the lenders in connection with the
amendment and agreed to increase the interest rate on the outstanding principal
to the default rate under the Credit Facility (the prime rate plus 5% per annum,
which equaled 13 1/4% at September 30, 1999) for the period of the extension.
RIGCO did not make the principal payment or interest payment due on April 30,
1999, is presently in default under the terms of the Credit Facility, and has
filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code. As of
the date of the Bankruptcy Filing, amounts outstanding under the Credit Facility
totaled $58.1 million in principal and $4.1 million in accrued interest.
On March 23, 1999, RIGCO assumed the management and operational responsibility
for the Laffit Pincay. The Laffit Pincay is currently stacked in a shipyard in
Pascagoula, Mississippi. RIGCO is in the process of completing engineering
studies and obtaining cost estimates to upgrade the rig to either (i) enable it
to drill in a dynamic position mode in water depths up to 5,000 feet or (ii) be
converted to a floating production system. The Company believes that the Laffit
Pincay, with appropriate upgrades, would make an ideal candidate for drilling
opportunities offshore Brazil and West Africa or as a floating production
system. Although there can be no assurances, the Company anticipates that with
an acceptable long-term contract, the capital requirements for the upgrade could
be secured with either United States or Canadian government guarantees. RIGCO is
currently marketing the Laffit Pincay to obtain a long-term drilling contract to
support the capital requirements for the appropriate upgrade.
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 was notified by Sedco Forex that as of November 18, 1998, Shell would
cease using the Bill Shoemaker to conduct drilling operations in the Gulf. The
Company has been paid for drilling services performed by the Bill Shoemaker for
Shell through November 18, 1998, but has not been paid for any period since that
time. RIGCO is seeking to recover its damages resulting from this early
termination, along
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<PAGE> 17
with damages unrelated to the Shell contract, in the suit against Schlumberger
Technology Corporation and Schlumberger Canada, Ltd. (collectively
"Schlumberger") discussed hereafter.
Following the early release of the rig by Shell, the Bill Shoemaker was towed to
a shipyard in Galveston, Texas where it underwent significant unanticipated
refurbishments in preparation for mobilization to the Grand Banks area in
Atlantic Canada. Capital costs, including crew costs while in the shipyard, for
the make-ready totaled approximately $8.5 million. Following the make-ready, the
Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada to
conduct a two-well program (with three options permitting up to seven additional
wells) at predetermined rates for Husky Oil Operations Limited. In connection
with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO obtained 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, RIGCO paid a fee of $500,000 to Mr.
Tatham. RIGCO has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per
day from February 15, 1999 until such funds are returned. The liquidated damages
payment would be in the form of a promissory note bearing interest at the rate
of 18% per annum. All of the funds securing the letter of credit were drawn by
Sedco Forex for payments under the make-ready agreement.
On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the
management and charter agreement for the Bill Shoemaker. As the Company
currently does not have a replacement drilling agreement for the Bill Shoemaker,
the Company will be dependent on cash reserves generated from the Husky Oil
Operations Limited agreement, or funds from new financing arrangements, to fund
its ongoing cash requirements until such time as additional contract drilling
services are secured for either the Bill Shoemaker or the Laffit Pincay. Any
additional capital expenditures for either of the Rigs will need to be funded by
customers or other third party sources.
On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in
Harris County, Texas, seeking both actual and exemplary damages from
Schlumberger for claims arising out of Schlumberger's Sedco Forex Division's
marketing, manning, management and operation of the Bill Shoemaker and Laffit
Pincay pursuant to certain charter, make-ready and other agreements and
arrangements. The allegations include claims of gross negligence, breach of
contract, fraud, negligent misrepresentation and negligence. Additionally, RIGCO
and FPS VI have alleged in bankruptcy court proceedings that the manner in which
Schlumberger performed its duties with respect to the Bill Shoemaker and Laffit
Pincay during the course of the management and charter agreements resulted in
RIGCO's financial difficulties and caused it to default on its secured debt
obligations.
Atlantic Canada
The Company has refocused 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
including upstream exploration and production activities and the acquisition of
oil and gas concessions or license interests. The Company has incurred
approximately $12.9 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 Pipeline 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. The Company or its Canadian subsidiaries may seek to obtain
additional equity capital to assist in the funding of the ongoing day-to-day
operations of its planned Atlantic Canada strategy.
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<PAGE> 18
Other
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
Leviathan, (ii) pay $1.4 million to DeepTech in connection with the management
agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9
million to TB Securities with respect to obligations under the Rights Offering,
(iv) fund a $7.5 million letter of credit for potential tax liabilities, (v)
refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and
expenses associated with the Short-Term Facility. Tatham Brothers is an
affiliate of Thomas P. Tatham and the parent company of TB Securities. The
Short-Term Facility accrued interest at the rate of 12% per annum and was due on
January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to
refinance the original $22.9 million principal plus $1.1 million of accrued
interest into a new short-term loan which bears interest at the rate of 15% per
annum and was due March 31, 1999. In connection with the refinancing, the
Company paid Tatham Brothers a fee of $1.0 million in the form of a 15%
subordinated convertible note (the "Subordinated Convertible Note"). The
Subordinated Convertible Note bears interest at the rate of 15% per annum and is
due on August 15, 2001. Tatham Brothers may convert the principal amount of the
Subordinated Convertible Note and accrued unpaid interest into shares of Common
Stock of the Company based on the average market price for the five trading days
prior to the end of the previous calendar quarter. The Short-Term Facility is
secured by a pledge of DeepFlex of its interest in certain payment-in-kind
Subordinated Promissory Notes issued by RIGCO and FPS V, both subsidiaries of
the Company, which had an outstanding balance of approximately $80.3 million at
September 30, 1999. On March 31, 1999, the Company and Tatham Brothers extended
the Short-Term Facility until April 30, 1999. Pursuant to the terms of the
Short-Term Facility, Tatham Offshore was required to pay $24.1 million in
principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did
not make payment of such amount; as a result, an Event of Default has occurred
and is continuing under the Short-Term Facility.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank
of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to
fund certain improvements to the Rigs. The loan bears interest at LIBOR plus 2%
and is due on November 30, 1999 or on demand. The loan from Tatham Brothers to
DeepFlex, plus accrued interest, was included in the amount payable under the
short-term financing arrangement discussed above.
Since the Nasdaq National Market has delisted Tatham Offshore's common stock,
the holders thereof will suffer a decrease in marketability of their shares and
the liquidity of their investment in Tatham Offshore's common stock and its
preferred stocks which are convertible into common stock. This potential
decrease in the marketability and liquidity of the Company's common and
preferred stock may have a material adverse effect on Tatham Offshore's ability
to access equity markets in the future.
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 costs relating to the assessment of the
year 2000 issue have, to date, been 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 had discussions with the operator of the Bill Shoemaker and has
performed external IT and Non-IT system reviews. Based on discussions and
reviews, the Company believes that there will be no disruption in the operation
of either 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. In the event the Company or the various companies on
which we principally rely experience year 2000 compliance problems, adverse
consequences could include the interruption of drilling services aboard the
Rigs, delays in shipments of materials and supplies required to operate the
Rigs, delays in transferring personnel to and from the Rigs, and delays in
receiving funds from customers or in making payments to suppliers. There can be
no assurances that such systems will not have a material adverse impact on the
Company's business and operations. Since the Laffit Pincay and the Bill
Shoemaker are anticipated to be warm-stacked at December 31,
18
<PAGE> 19
1999, management has not deemed it necessary to develop a contingency plan for
worst case year 2000 business interruptions.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
practices in the industry in which the Company competes, (ii) the impact of
current and future laws and government regulations affecting the industry in
general and the Company's operations in particular, (iii) environmental
liabilities to which the Company may become subject in the future that are not
covered by an indemnity or insurance, (iv) the impact of oil and natural gas
price fluctuations and (v) significant changes from expectations of capital
expenditures and operating expenses and unanticipated project delays. The
Company disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to some market risk due to the floating interest rate
under the RIGCO Credit Facility. Under the RIGCO Credit Facility, the remaining
principal was due on April 30, 1999 along with the final interest payment. On
September 30, 1999, the Credit Facility had principal balance of $58,148,000 and
an interest rate based on the prime rate plus 3% (11 1/4% at September 30, 1999)
and a default interest rate based on the prime rate plus 5% (13 1/4% at
September 30, 1999). A 1 1/2% increase in interest rates could result in a
$900,000 annual increase in interest expense on the existing principal balance.
On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Thomas P. Tatham. Tatham Investment
Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Any
loans bear interest at the prime rate plus 3% (on September 30, 1999, the
interest rate was 11.25%) and were due on September 30, 1999.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with
Citibank, N.A., which covered $36.5 million of the debt and provided a maximum
fixed effective interest rate of 11.74% and which terminated on September 30,
1998.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
RIGCO North America, L.L.C. v. Schlumberger Technology Corporation, et
al., Cause No. 99-38082. On July 26, 1999, RIGCO sued Schlumberger
Technology Corporation ("STC") and Schlumberger, Canada Ltd. ("SCL")
seeking over $51 million in damages in connection with the defendants'
charters of the FPS Laffit Pincay and the FPS Bill Shoemaker. RIGCO's
suit alleges causes of action for gross negligence, breach of contract,
negligence, fraud, and negligent misrepresentation arising from
Defendants' management, operation and marketing of both rigs as well as
STC's agreement to renovate the Bill Shoemaker. Both defendants have
answered in the case, but no trial date is set at this time. The suit
is proceeding in state district court in Harris County, Texas.
In re RIGCO North America, L.L.C., et al.; In the United States
Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division; Case Nos. 99-22401-C-11 through 99-22404-C-11 (Jointly
Administered Under Case No. 99-22401-C-11). On August 9, 1999, RIGCO
North America, L.L.C., FPS VI, L.L.C., FPS III, Inc., and FPS V, Inc.
(collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11, Title 11 of the United States Code. The Debtors are
operating their businesses and managing their property as
debtors-in-possession. The Debtors have obtained interim authority for
the use of cash collateral through an agreement between the Debtors and
the secured creditors, which agreement is scheduled to expire in early
January 2000.
RIGCO North America, L.L.C. v. Schlumberger Technology Corporation and
Schlumberger Canada Ltd.; In the United States Bankruptcy Court for the
Southern District of Texas, Corpus Christi Division; Adversary No.
99-2154-C. On September 3, 1999, RIGCO North America, L.L.C. filed a
complaint against Schlumberger Technology Corporation and Schlumberger
Canada Ltd. to avoid a preferential transfer or transfers pursuant to
11 U.S.C. Section 547 and to recover the property transferred or its
value pursuant to 11 U.S.C. Section 550. The Defendants have answered
the complaint. On September 21, 1999, the Court entered a Comprehensive
Discovery, Mediation and Scheduling Order requiring, among other
things, non-binding mediation. Non-binding mediation is tentatively
scheduled for early December 1999.
The Company is involved in certain legal proceedings which have arisen
in the ordinary course of business. Management believes that the
outcome of such proceedings will not have a material adverse effect on
the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
RIGCO and FPS VI, significant subsidiaries of the Company, are party to
a Credit Agreement dated as of September 30, 1996 (as amended,
supplemented or otherwise modified from time to time, the "Credit
Facility") with BHF-Bank Aktiengesellschaft, as administrative agent
("BHF"), Lehman Commercial Paper Inc., Hibernia National Bank, and
certain other banks and financial institutions (collectively, the
"Lenders").
Pursuant to the terms of the Credit Agreement, RIGCO and FPS VI were
required to pay $60.3 million, all amounts owing under the Credit
Agreement, on April 30, 1999. RIGCO and FPS VI did not make payment of
such amounts; as a result, an Event of Default has occurred and is
continuing under the Credit Agreement.
By letter dated May 3, 1999, BHF, on behalf of the Lenders, advised
RIGCO and FPS VI that the Lenders would not exercise their rights,
remedies, powers and privileges under the Credit Agreement and the
other related loan documents at that time, but that they reserve the
right to do so at any time they deem appropriate.
On August 9, 1999, RIGCO and FPS VI filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code.
20
<PAGE> 21
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
27 Financial Data Schedule
21
<PAGE> 22
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: November 15, 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)
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Statement
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TATHAM
OFFSHORE, INC. AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS AT SEPTEMBER 30,
1999 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,011
<SECURITIES> 0
<RECEIVABLES> 43
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,080
<PP&E> 2,019
<DEPRECIATION> 71
<TOTAL-ASSETS> 92,234
<CURRENT-LIABILITIES> 33,354
<BONDS> 0
0
176
<COMMON> 261
<OTHER-SE> 58,443
<TOTAL-LIABILITY-AND-EQUITY> 92,234
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,452
<INCOME-PRETAX> (2,043)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,819)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
