<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 SEPTEMBER 30, 2000
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.)
FIVE POST OAK PARK
4400 POST OAK PARKWAY, SUITE 1550
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 621-3996
(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, 2000, THERE WERE OUTSTANDING 26,079,625 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 September 30, 2000 (unaudited)
and June 30, 2000.........................................................................3
Unaudited Consolidated Statement of Operations for the Three Months
Ended September 30, 2000 and 1999, respectively...........................................4
Unaudited Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 2000 and 1999.........................................................5
Consolidated Statement of Stockholders' Equity for the
Three Months Ended September 30, 2000 (unaudited).........................................6
Notes to Consolidated Financial Statements...................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................14
PART II. OTHER INFORMATION.....................................................................18
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>
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,
2000 2000
(unaudited)
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,913 $ 1,731
Accounts receivable 10 10
Notes receivable 199 2,069
Prepaid expenses 29 11
------------- -------------
Total current assets 2,151 3,821
------------- -------------
Property and equipment:
Aviation equipment 12,725 --
Real estate 449 449
------------- -------------
13,174 449
Less - accumulated depreciation 318 --
------------- -------------
Property and equipment, net 12,856 449
------------- -------------
Restricted cash 270 170
Deferred costs 14,380 14,253
Equity investment 3,321 3,986
------------- -------------
Total assets $ 32,978 $ 22,679
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,264 $ 908
Accounts payable to affiliates 6,742 6,040
Long-term debt currently payable 16,226 4,350
Long-term debt to affiliate currently payable 32,225 31,028
------------- -------------
Total current liabilities 56,457 42,326
------------- -------------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit) (Note 6):
Preferred stock, $0.01 par value, 110,000,000 shares authorized as of
September 30, 2000 and June 30, 2000, respectively, 17,554,210 and
17,554,210 shares issued and outstanding
at September 30, 2000 and June 30, 2000, respectively 176 176
Common stock, $0.01 par value, 250,000,000 shares authorized
as of September 30, 2000 and June 30, 2000, respectively,
26,079,625 and 26,079,625 shares issued and outstanding
as of September 30, 2000 and June 30, 2000, respectively 261 261
Additional paid-in capital 186,217 186,217
Accumulated deficit (210,133) (206,301)
------------- -------------
(23,479) (19,647)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 32,978 $ 22,679
============= =============
</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,
----------------------------
2000 1999
<S> <C> <C>
Revenue
$ -- $ --
----------- -----------
-- --
----------- -----------
Costs and expenses:
Depreciation 318 21
General and administrative expenses 934 448
----------- -----------
1,252 469
----------- -----------
Operating loss (1,252) (469)
Interest and other income 35 36
Interest expense and other financing costs (435) --
Interest expense and other financing costs - affiliates (1,347) (1,452)
----------- ------------
Net loss from continuing operations (2,999) (1,885)
Discontinued operations (Note 1)
Loss from equity investment (833) (158)
----------- -----------
Net loss (3,832) (2,043)
Preferred stock dividends (776) (776)
----------- -----------
Net loss allocable to common shareholders $ (4,608) $ (2,819)
=========== ===========
Weighted average number of shares 26,080 26,075
=========== ===========
Basic and diluted loss per common share
from continuing operations (Note 5) $ (0.15) $ (0.10)
========== ===========
Basic and diluted loss per common share
from discontinued operations (Note 5) $ (0.03) $ (0.01)
========== ===========
Basic and diluted loss per common share (Note 5) $ (0.18) $ (0.11)
========== ===========
</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,
----------------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,832) $ (2,043)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 318 21
Noncash interest expense 1,443 1,396
Loss from equity investment 833 158
Other (167) --
Changes in operating working capital (net of effect of
deconsolidating and conveyance):
(Increase) decrease in accounts receivable 2,053 (1)
(Increase) decrease in receivable from affiliates -- (384)
Increase in notes receivable -- --
(Increase) decrease in prepaid expenses 11 (14)
Increase (decrease) in accounts payable and accrued liabilities 54 (208)
Increase (decrease) in accounts payable to affiliates (50) (238)
------------ -----------
Net cash provided by (used in) operating activities 663 (1,313)
----------- -----------
Cash flows from investing activities:
Deferred costs (127) (331)
Cash received on acquisition of subsidiaries 8 --
Reduction in cash from deconsolidating Rig Subsidiaries -- (382)
----------- -----------
Net cash used in investing activities (119) (713)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to affiliate -- 2,551
Repayment of notes payable to affiliate (262) --
Increase in restricted cash (100) --
----------- -----------
Net cash provided by financing activities 362 2,551
----------- -----------
Net increase (decrease) in cash and cash equivalents 182 525
Cash and cash equivalents at beginning of period 1,731 486
----------- -----------
Cash and cash equivalents at end of period $ 1,913 $ 1,011
=========== ===========
</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, 2000 17,554 $ 176 26,080 $ 261 $186,217 (206,301) $(19,647)
Net loss for the three months ended
September 30, 2000 (unaudited) -- -- -- -- -- (3,832) (3,832)
--------- --------- --------- --------- -------- --------- --------
Balance, September 30, 2000 (unaudited) 17,554 $ 176 26,080 $ 261 $186,217 $(210,133) $(23,479)
========= ========= ========= ========= ======== ========= ========
</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
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware
corporation, is currently pursuing, through its subsidiaries, energy related
opportunities in Atlantic Canada, including substantial natural gas gathering
and transmission facilities and related energy infrastructure (see "Bankruptcy
Filing by Subsidiaries and Discontinued Operations" below). DeepFlex Production
Services, Inc. ("DeepFlex"), a Delaware corporation and wholly-owned subsidiary
of Tatham Offshore, was formed in January 1995 and, through its subsidiaries,
focused 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, owned interests in the FPS
Laffit Pincay (the "Laffit Pincay") and the FPS Bill Shoemaker (the "Bill
Shoemaker", together with the Laffit Pincay, the "Rigs"), both second generation
semisubmersible drilling rigs.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore,
pursues certain opportunities offshore eastern Canada and is the Canadian
representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic
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. Through September 30, 2000, Tatham Offshore Canada Limited
has incurred approximately $14.4 million in costs associated with the North
Atlantic project and related infrastructure projects. Such costs include
engineering, survey, legal, regulatory and other costs associated with the
project.
Effective July 1, 2000, the Company acquired 100% of the stock of Tatham
Aviation Services, Inc. ("Tatham Aviation") from Thomas P. Tatham, Chief
Executive Officer and Chairman of the Board of the Company. Tatham Aviation owns
a Gulfstream III aircraft and a charter certificate. At the acquisition date,
Tatham Aviation had an outstanding note payable of $11.7 million which was
secured by the aircraft.
Effective July 1, 2000, North Atlantic Pipeline Partners acquired 85% of the
stock of RIGCO Canada Limited and changed its name to Newfoundland LNG Limited
("Newfoundland LNG").
Bankruptcy Filing by Subsidiaries and Discontinued Operations
On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. ("FPS III") and FPS V, Inc.
("FPS V") (collectively, the "Rig Subsidiaries"), wholly-owned subsidiaries of
DeepFlex, filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Filing"). At the time of the Bankruptcy Filing,
RIGCO owned a 100% interest in the Bill Shoemaker and a 25% undivided interest
in the Laffit Pincay and FPS VI owned 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 of the Rig Subsidiaries were
administered jointly. As a result of the Bankruptcy Filing, the Rigs were
managed by the Company's rig related subsidiaries as debtors-in-possession. The
syndicate of lenders under RIGCO's September 30, 1996 Credit Facility (the
"Credit Facility") had a secured interest in substantially all of the assets of
RIGCO and FPS VI.
On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay
to Odin Millennium Partnership Ltd. for $28.5 million in cash. On June 28, 2000,
RIGCO sold all of its interest in the Bill Shoemaker to Fred Olsen Energy ASA
for $43.6 million in cash. The secured lenders under the Credit Facility and the
DIP Loan were paid a total of $64.6 million in final payment of all principal,
interest and expenses associated with the Credit Facility and DIP Loan from the
rig sales proceeds.
On September 25, 2000, the Rig Subsidiaries filed a motion to dismiss the
Chapter 11 proceedings with the United States Bankruptcy Court. On October 16,
2000, the order dismissing the Chapter 11 proceedings became final pending
certification by the debtors that they have complied with the terms of the
order. The dismissal of the Chapter 11 proceedings allowed the Rig Subsidiaries
to pay in full their uncontested pre-petition unaffiliated unsecured creditors
and all administrative expenses associated with the Chapter 11 proceedings. Any
funds remaining are available to be paid to the affiliated unsecured creditors
on a pro rata basis. Additionally, the affiliated unsecured creditors would
share, on a pro rata basis, any proceeds recovered by RIGCO in its action
against Sedco Forex (see Note 6).
7
<PAGE> 8
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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. Tatham Offshore's remaining 50% or more owned subsidiaries
controlled by the Company are included in the accompanying consolidated
financial statements.
In order to pay its secured creditors, RIGCO and FPS VI sold all of their
interests in the Laffit Pincay and the Bill Shoemaker. Since all operating
assets of RIGCO were sold, Tatham Offshore's Rig Subsidiaries are being
presented as discontinued operations (see Note 3).
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, 2000.
Presented below are unaudited pro forma combined condensed financial statements
for the quarter ended September 30, 2000, as though the order dismissing the
Chapter 11 proceedings had been completed by the end of the quarter.
<TABLE>
<CAPTION>
Proforma Combined
Condensed Balance Sheet
September 30, 2000
(unaudited)
<S> <C>
Cash $ 5,505
Accounts receivable 7,724
Other current assets 158
Property and equipment, net 12,856
Restricted cash 270
Deferred costs 14,380
-----------
Total assets $ 40,893
===========
Accounts payable and accrued liabilities $ 2,436
Accounts payable to affiliates 13,145
Long-term debt currently payable 16,226
Long-term debt to affiliates currently payable 32,565
-----------
Total liabilities 64,372
Stockholders' equity (deficit) (23,479)
-----------
Total liabilities and stockholders' equity (deficit) $ 40,893
===========
</TABLE>
<TABLE>
<CAPTION>
Proforma Combined
Condensed Statement
of Operations
Three Months Ended
September 30, 2000
(unaudited)
<S> <C>
Revenue $ --
-----------
Depreciation 318
General and administrative 1,794
-----------
2,112
-----------
Operating loss (2,112)
Interest and other income 63
Interest and other financing costs (435)
Interest and other financing costs - affiliates (1,347)
-----------
Net loss $ (3,831)
===========
</TABLE>
NOTE 2 - RELATED PARTY TRANSACTIONS:
Long-Term Debt - Affiliates
In connection with the merger of DeepTech International Inc. ("DeepTech") with a
subsidiary of El Paso Energy Corporation ("El Paso") completed on August 14,
1998, (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 a redemption agreement with Leviathan Gas
Pipeline Partners, L.P., (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 a 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,
Chairman of the Board and Chief Executive Officer of the Company, 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 $81.1 million at
September 30, 2000. 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, which
totaled $32.2 million at September 30, 2000 and $31.0 million at June 30, 2000,
are included in long-term debt to affiliate currently payable on the
consolidated balance sheet.
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 Energy.
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
8
<PAGE> 9
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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.
Committed Draw Facility
On June 30, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the
Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed
to loan up to $750,000 to RIGCO for working capital purposes. Loans under this
agreement bear interest at the prime rate plus 3% (on June 30, 2000, the
interest rate under this facility was 12.5%) and were due on September 30, 1999.
As of the date of the Bankruptcy Filing, and as of September 30, 2000, Tatham
Investment Corp. had an unsecured claim of $338,303 under this agreement.
RIGCO Make-ready Letter of Credit
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.
RIGCO 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. RIGCO
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 with damages unrelated to the Shell contract, in suit against Schlumberger
Technology Corporation, Schlumberger Canada, Ltd., Sedco Forex Corporation and
Sedco Forex Canada Limited (collectively "Sedco Forex") 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 and
conducted a three-well program 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 Mr. Thomas
P. Tatham. In exchange for providing the funds to secure the letter of credit,
RIGCO paid a fee of $500,000 to Mr. Tatham. RIGCO also 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. As of the date of
the Bankruptcy Filing, and as of September 30, 2000, Mr. Tatham had an unsecured
claim of $8,240,000 for the funds securing the letter of credit plus liquidated
damages.
All of the funds securing the letter of credit were drawn by Sedco Forex for
payments under the make-ready agreement.
Tatham Offshore - Tatham Investment Corp. Facility
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 June 30,
2000, the Company has borrowed $4.2 million under this facility, which is
included in accounts payable to affiliates on the consolidated balance sheet.
Through September
9
<PAGE> 10
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
30, 2000, the Company has borrowed $4.0 million under this facility, which 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 as security under this revolving draw facility.
Other
Tatham Offshore was a guarantor of $5.0 million of a $6.4 million loan from Bank
of America, N.A. to Tatham Brothers. The $5.0 million guaranteed by Tatham
Offshore was originally loaned to DeepFlex to fund certain improvements to the
Rigs. The interest rate under the Tatham Brothers loan from Bank of America was
6.5% per annum and was due on September 30, 2000 or upon demand. On September
27, 2000, Tatham Brothers repaid the Bank of America loan in full, releasing
Tatham Offshore as a guarantor. The loan from Tatham Brothers to DeepFlex, plus
accrued interest, is included in the amount payable under "--Long-Term
Debt--Affiliates" as discussed above.
In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0 million
from an unrelated party. The loan is evidenced by a demand note bearing interest
at a rate of 15% per annum. The loan, plus accrued interest, is included in
long-term debt currently payable on the consolidated balance sheet.
Tatham Aviation Services, Inc.
Effective July 1, 2000, the Company acquired 100% of the stock of Tatham
Aviation from Thomas P. Tatham. Tatham Aviation owns a Gulfstream III aircraft
and a charter certificate. During the three months ended September 30, 1999, the
Company paid Tatham Aviation $365,000 for aircraft charters.
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
operated their businesses and managed 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.
10
<PAGE> 11
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-----------------------------
2000 1999
<S> <C> <C>
Revenue:
Drilling services $ -- $ 9,629
Costs and expenses:
Drilling operating expenses -- 5,021
Depreciation -- 1,454
General and administrative expenses
and management fee 861 860
--------- ---------
861 7,335
--------- ---------
Operating income (861) 2,294
Interest income 28 7
Interest expense and other financing costs -- (2,055)
Interest expense and other financing costs - affiliates -- (404)
--------- ---------
Net loss $ (833) $ (158)
========= =========
</TABLE>
NOTE 4 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity as of
September 30, 2000:
<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 17,178,626(a) $1.50 per share 12% $ 13,228,000 (b)(c)
Series B Preferred Stock 54,379 $1.00 per share 8% $ 22,000 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 24,000 (b)(c)
Common Stock 26,079,625(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 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:
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, 2000, RIGCO had recorded a $7.4 million account
receivable from
11
<PAGE> 12
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 in the 165th Judicial District Court in
Harris County, Texas, against Schlumberger Technology Corporation and
Schlumberger Canada, Ltd. (collectively, "Schlumberger") for claims arising out
of Schlumberger's Sedco Forex Division's marketing, manning, management and
operation of the Shoemaker and Pincay pursuant to certain charter, make-ready
and other agreements and arrangements. Earlier this year, RIGCO joined the
newly-formed corporations Sedco Forex Corporation and Sedco Forex Canada Limited
as defendants in this suit. The allegations include claims of gross negligence,
breach of contract, fraud, negligent misrepresentation and negligence. RIGCO is
seeking approximately $51 million in actual damages plus an unspecified amount
of exemplary damages. RIGCO has alleged in this suit as well as in bankruptcy
court proceedings that the manner in which Sedco Forex 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.
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 Company's results of operations, cash flows or
financial position.
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
Three Months Ended September 30,
--------------------------------
2000 1999
(in thousands)
Interest $ 245 $ --
Taxes $ -- $ --
The following noncash transactions related to the acquisition of Tatham Aviation
have been excluded from the statement of cash flows for the quarter ended
September 30, 2000 as follows:
Increase in accounts payable $ (184)
Increase in prepaid expenses (28)
Additions to property and equipment (12,725)
Increase in accounts payble and
accrued liabilities 301
Increase in accounts payable to
affiliates 917
Assumption of notes payable 11,726
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):
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)
=========
12
<PAGE> 13
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 8 - SEGMENT INFORMATION:
The Company previously operated 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.
Operations for the drilling segment are included in the financial statements as
income (loss) from discontinued operations. For the three months ended September
30, 2000, operations for the drilling segment were included in the financial
statements on the equity method of accounting (see Note 3). The Canadian
Investment Strategy segment had no revenues and incurred $0.2 million in general
and administrative expenses for the three months ended September 30, 2000.
13
<PAGE> 14
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, 2000.
GENERAL
Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware
corporation, is currently pursuing, through its subsidiaries, energy related
opportunities in Atlantic Canada, including substantial natural gas gathering
and transmission facilities and related energy infrastructure. The Company has
focused its business plan primarily on an integrated frontier investment
strategy targeting Atlantic Canada. The Company's contract drilling services
business is 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, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Depreciation expense totaled $318,000 for the three months ended September 30,
2000 and related to depreciation on the aircraft owned by Tatham Aviation.
Depreciation expense totaled $21,000 for the three months ended September 30,
1999 and related to certain anchor chains owned by the Company prior to the sale
of the Bill Shoemaker in June 2000.
General and administrative expense totaled $0.9 million for the three months
ended September 30, 2000 as compared to $0.5 million for the three months ended
September 30, 1999. The increase in general and administrative costs resulted
primarily from an increase in travel related costs in connection with the
Company's Atlantic Canada strategy.
The operating loss for the three months ended September 30, 2000 totaled $1.3
million as compared to an operating loss of $0.5 million, primarily as a result
of increased general and administrative expenses.
Interest and other income for the three months ended September 30, 2000 totaled
$35,000 and included interest income from available cash. Interest income and
other for the three months ended September 30, 1999 totaled $36,000 and included
interest income from available cash.
Interest and other financing costs for the three months ended September 30, 2000
totaled $435,000 and included interest related to the aircraft and other third
party debt. Interest expense and other financing costs to affiliates for the
three months ended September 30, 2000 totaled $1.3 million and related to
borrowings from Tatham Brothers and Tatham Investment Corp. For the three months
ended September 30, 1999, interest expense and other financing costs to
affiliates totaled $1.5 million and related to borrowings from Tatham Brothers.
Net loss from continuing operations for the three months ended September 30,
2000 and 1999 totaled $3.0 million and $1.9 million, respectively. The change
was due to the items discussed above.
Since the Company's only drilling assets were sold during the year ended June
30, 2000, the operations of the drilling subsidiaries are being presented as
discontinued operations. During the three months ended September 30, 1999, the
Bill Shoemaker was under contract and generated $9.6 million in revenue.
Operating expenses 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. 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 expense for the Laffit Pincay during this period were
primarily the costs to maintain the rig in a warm-stacked mode. Depreciation
expense for the three months ended September 30, 1999 totaled $1.5 million.
Depreciation expense for this period included $1.0 million and $0.5 million for
the Bill Shoemaker and Laffit Pincay, respectively. General and administrative
expense relating to the Rigs for the three months ended September 30, 2000
totaled $0.9 million as compared to $0.9 million for the three months ended
September 30, 1999. The operating loss relating to the Rigs for the three months
ended
14
<PAGE> 15
September 30, 2000 totaled $0.9 million as compared to operating income of
$2.3 million for the three months ended September 30, 1999. The change was due
to the items discussed above. Interest income relating to the Rigs totaled
$28,000 for the three months ended September 30, 2000 as compared to $7,000 for
the three months ended September 30, 1999. Interest expense relating to the Rigs
for the three months ended September 30, 1999 totaled $2.1 million and related
to interest incurred related to the Credit Facility. Interest expense to
affiliates relating to the Rigs totaled $0.4 million for the three months ended
September 30, 1999 and related to liquidated damages due to Thomas P. Tatham
under the Shoemaker make-ready collateral agreement.
The net loss from discontinued drilling operations for the three months ended
September 30, 2000 totaled $0.8 million as compared to a net loss from
discontinued drilling operations for the three months ended September 30, 1999
of $1.2 million.
Tatham Offshore's preferred stock dividends totaled $0.8 million for the three
months ended September 30, 2000 as compared to $0.8 million for the three months
ended September 30, 1999. After taking preferred stock dividends into account,
the Company's net loss allocable to common shareholders for the three months
ended September 30, 2000 was $4.5 million as compared with a net loss allocable
to common shareholders for the three months ended September 30, 1999 of $2.8
million. Basic and diluted loss per common share from continuing operations for
the three months ended September 30, 2000 was $0.15 per share as compared with
$0.10 per share for the three months ended September 30, 1999. Basic and diluted
loss per common share from discontinued operations for the three months ended
September 30, 2000 was $0.03 per share as compared with $0.01 per share for the
three months ended September 30, 1999. Basic and diluted loss per common share
for the three months ended September 30, 2000 totaled $0.18 per share compared
with $0.11 per share for the three months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. The Company has no current cash flow from operations. The
Company expects to be dependent upon cash on hand 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 or generated by the Rig
Subsidiaries is subject to claims of affiliated creditors. See "-- Liquidity
Outlook." 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.
In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0 million
from an unrelated party. The $4.0 million loan is evidenced by a demand note
bearing interest at the rate of 15% per annum.
On July 1, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the
Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed
to loan up to $750,000 to RIGCO for working capital purposes. Loans under this
agreement bear interest at the prime rate plus 3% (on June 30, 2000, the
interest rate under this facility was 12.5%) and were due on September 30, 1999.
As of the date of the Bankruptcy Filing, and as of June 30, 2000, 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, 2000, the Company had borrowed $4.1 million under this facility.
The Company 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
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 Pipeline Partners' pipeline
project, the remainder of the Company's Atlantic Canada strategy and any of the
Company's other potential capital expenditures.
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 June 30, 2000, Tatham Offshore Canada
15
<PAGE> 16
Limited, the Canadian representative of North Atlantic Pipeline Partners, had
incurred $14.4 million in developmental costs related to regulatory approval and
pipeline infrastructure design 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 and loans under the revolving draw facility with Tatham
Investment Corp. At September 30, 2000, Tatham Offshore had $1.9 million of cash
and cash equivalents. In addition, RIGCO had $3.6 million of cash and cash
equivalents at September 30, 2000. The use of cash held by the Rig Subsidiaries
is subject to claims of affiliated creditors. In order 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 joint venture arrangements.
Drilling Operations
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.
RIGCO 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. RIGCO
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 with damages unrelated to the Shell contract, in the Harris County
Litigation against Schlumberger Technology Corporation, Schlumberger Canada,
Ltd., Sedco Forex Corporation, and Sedco Forex Canada Limited (collectively
"Sedco Forex") discussed hereafter.
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.
Subsidiary Bankruptcy Court Proceedings
On or about February 9, 2000, RIGCO, FPS III, FPS VI and FPS V, as
debtors-in-possession, and the secured lenders under the Credit Facility filed a
Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate
Protection with the Bankruptcy Court (the "February 2000 Stipulation"). In
February 2000, RIGCO made a $2.0 million payment to the secured lenders as
provided in the February 9, 2000 stipulation. The secured lenders allowed
continued use of the cash collateral through April 14, 2000 and limited use of
cash collateral for payroll through May 15, 2000. On May 1, 2000, RIGCO and FPS
VI sold all of their interest in the Laffit Pincay to Odin Millennium
Partnership Ltd. for $28.5 million in cash. Expenses associated with the sale
totaled $0.3 million and $175,000 of the net proceeds is being held by RIGCO, in
a separate debtor-in-possession bank account, pending the resolution of a
maritime lien claim by one of RIGCO's pre-petition creditors. The balance of the
proceeds from the sale of the Laffit Pincay, $28.0 million, was paid to RIGCO's
secured lenders in partial payment of their secured claim under the Credit
Facility.
On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred
Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale
totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established
separate debtor-in-possession bank accounts for (i) $2.0 million to secure
payment to Tatham Offshore for their interest in four of the anchor chains
located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses
incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested
claims of unaffiliated unsecured creditors. The secured lenders under the Credit
Facility and the DIP Loan received a total of $36.6 million in final payment of
all principal, interest and expenses associated with the Credit Facility and DIP
Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0 million to Tatham
Offshore for Tatham Offshore's interest in the four anchor chains on June 29,
2000. The remaining $3.5 million was available to RIGCO as debtor-in-possession
pending the approval of the Bankruptcy Court of RIGCO's plan of reorganization
or a dismissal of the Chapter 11 proceedings.
16
<PAGE> 17
On September 25, 2000, the Rig Subsidiaries filed a motion to dismiss the
Chapter 11 proceedings with the United States Bankruptcy Court. Effective
October 16, 2000, the Chapter 11 proceedings were dismissed pending
certification by the debtors that they have complied with the terms of the
order. The dismissal of the Chapter 11 proceedings allowed the Rig Subsidiaries
to pay in full their uncontested pre-petition unaffiliated unsecured creditors.
Any funds remaining are subject to claims of the affiliated unsecured creditors
on a pro rata basis. As of September 30, 2000, the Rig Subsidiaries have $3.6
million in cash and cash equivalents and were obligated to pay $1.0 million in
administrative claims and pre-petition unaffiliated unsecured creditor claims.
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. The Company believes that the Atlantic
Canada region offers significant investment opportunities and the Company plans
to 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 $14.4 million in costs associated with
its Atlantic Canada strategy.
The ability of the Company to satisfy its future capital needs with respect to
its planned Atlantic Canada strategy, particularly its ability to obtain
regulatory approval and financing for the North Atlantic 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.
Other
Tatham Offshore has never declared or paid dividends on its common or preferred
stock. Tatham Offshore expects to retain all available earnings generated by its
operations for the growth and development of its business.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance that
such expectations will prove to have been correct. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Among the key factors that may have a direct bearing on the
Company's results of operations and financial condition are: (i) competitive
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.
17
<PAGE> 18
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 and Schlumberger, Canada Ltd. (collectively,
"Schlumberger") 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 Schlumberger Technology
Corporation's agreement to renovate the Bill Shoemaker. In early 2000,
Defendants notified RIGCO that some or all of the assets subject to
this suit were transferred due to merger to two new corporations, Sedco
Forex Corporation ("SFC") and Sedco Forex Canada Limited ("SFCL").
RIGCO has joined SFC and SFCL as defendants in the pending action.
Discovery has begun and is scheduled to continue through April 2001.
Trial is currently set for May 2001. RIGCO is seeking approximately $51
million in actual damages plus an unspecified amount of exemplary
damages.
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 have
been operating their businesses and managing their property as
debtors-in-possession. On September 25, 2000, the Rig Subsidiaries
filed a motion to dismiss the Chapter 11 proceedings with the United
States Bankruptcy Court. On October 16, 2000, the dismissal order
became final pending certification by the debtors that they have
complied with the terms of the order and the Rig Subsidiaries paid
their uncontested pre-petition unaffiliated unsecured creditors in
full. Any funds remaining are subject to claims of the affiliated
unsecured creditors on a pro rata basis.
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 STC and SCL 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. The Court-ordered
mediation was unsuccessful, and the parties are in the process of
conducting discovery. As with the Harris County Litigation, RIGCO
received notice that SFC and SFCL were the transferees of some or all
of the assets subject to the preference action. RIGCO subsequently
joined SFC and SFCL in the preference action. The Motion to Dismiss the
main Chapter 11 case also will dismiss this action.
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
In August 1998, the Company entered into a financing arrangement with
Tatham Brothers, LLC ("Tatham Brothers") to provide funds for various
requirements (the "Tatham Brothers Facility"). Tatham Brothers is an
affiliate of Thomas P. Tatham, Chairman of the Board and Chief
Executive Officer of the Company. 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
18
<PAGE> 19
$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 Tatham Brothers 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 $81.1
million at September 30, 2000. On March 31, 1999, the Company and
Tatham Brothers extended the Tatham Brothers Facility until April 30,
1999. Pursuant to the terms of the Tatham Brothers 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 Tatham Brothers Facility. The default
interest rate under the Tatham Brothers Facility is 19% per annum.
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
27.1 Financial Data Schedule
99.4 Dismissal Order Dated October 6, 2000
19
<PAGE> 20
27.2 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 14, 2000 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
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
99.4 Dismissal Order Dated 10/16/00
