TATHAM OFFSHORE INC, 10-Q/A, 2000-08-07

TATHAM OFFSHORE INC
10-Q/A, 2000-08-07
OIL & GAS FIELD EXPLORATION SERVICES

Previous: REAL GOODS TRADING CORP, 10QSB, EX-27, 2000-08-07

Next: TATHAM OFFSHORE INC, 10-Q/A, EX-27.1, 2000-08-07

<PAGE> 1
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

[ ] 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 MAY 15, 2000, THERE WERE OUTSTANDING 26,078,548 SHARES OF COMMON
STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT.

================================================================================
<PAGE> 2

TATHAM OFFSHORE, INC. AND SUBSIDIARIES

INTRODUCTION

This Form 10-Q/A is being filed to reflect the reduction in carrying value of
the FPS Bill Shoemaker (the "Bill Shoemaker"). On May 31, 2000, RIGCO North
America, L.L.C. ("RIGCO"), the owner of the Bill Shoemaker, received an offer to
purchase the Bill Shoemaker from Fred Olson ASA for $43.6 million. The offer was
accepted by RIGCO and subsequently approved by the Bankruptcy Court on June 5,
2000. The sale closed on June 28, 2000. Loss from Discontinued Operations
reflects an additional $45.6 million reserve for depreciation to adjust the
carrying value of the Bill Shoemaker to the amount received upon its sale. This
results in an increase in the net loss per common share of $1.75 for the three
months ended March 31, 2000. The Company also has restated its Management's
Discussion and Analysis of Financial Condition and Results of Operations to
reflect these changes.

2
<PAGE> 3

TATHAM OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION...................................................................4

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 2000 (restated) (unaudited)
and June 30, 1999........................................................................4
Unaudited Consolidated Statement of Operations for the Three and Nine Months
Ended March 31, 2000 (restated) and 1999, respectively....................................5
Unaudited Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 2000 (restated) and 1999..................................................6
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended March 31, 2000 (restated) (unaudited)...................................7
Notes to Consolidated Financial Statements...................................................8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS............................................................................24

PART II. OTHER INFORMATION.....................................................................25

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 ......................................................................................27
</TABLE>

3
<PAGE> 4

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

<TABLE>
<CAPTION>
March 31,
2000
(restated) June 30,
ASSETS (unaudited) 1999
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,954 $ 486
Accounts receivable 10 16,076
Notes receivable 2,076 --
Prepaid expenses 31 168
--------- ---------
Total current assets 4,071 16,730
--------- ---------

Property and equipment 2,374 146,487
Less - accumulated depreciation 114 12,204
--------- ---------
Property and equipment, net 2,260 134,283
--------- ---------

Restricted cash 170 170
Deferred costs 14,472 12,591
Equity investments (Note 3) 7,185 --
--------- ---------
Total assets $ 28,158 $ 163,774
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 920 $ 10,102
Accounts payable to affiliates 6,344 8,082
Demand note 4,203 --
Long-term debt currently payable -- 58,148
Long-term debt to affiliate currently payable 29,909 26,519
--------- ---------
Total current liabilities 41,376 102,851
--------- ---------

Commitments and contingencies (Note 6)

Stockholders' equity (Note 4):
Preferred stock, $0.01 par value, 110,000,000 shares
authorized as of March 31, 2000 and June 30, 1999,
17,558,828 and 17,579,717 shares issued and outstanding
at March 31, 2000 and June 30, 1999, respectively 176 176
Common stock, $0.01 par value, 250,000,000 shares
authorized as of March 31, 2000 and June 30, 1999,
26,078,548 and 26,074,321 shares issued and outstanding
as of March 31, 2000 and June 30, 1999, respectively 261 261
Additional paid-in capital 186,217 186,217
Accumulated deficit (199,872) (125,731)
--------- ---------
(13,218) 60,923
--------- ---------
Total liabilities and stockholders' equity $ 28,158 $ 163,774
========= =========
</TABLE>

The accompanying notes are an integral part of this financial statement.

4
<PAGE> 5

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
---------------------- ----------------------
2000 1999 2000 1999
(restated) (restated)
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
-------- -------- -------- --------
-- -- -- --
-------- -------- -------- --------

Costs and expenses:
Depreciation 21 21 64 64
Management fee -- -- -- 155
General and administrative expenses 163 627 657 3,037
-------- -------- -------- --------
184 648 721 3,256
-------- -------- -------- --------

Operating income (loss) (184) (648) (721) (3,256)

Interest and other income 132 844 183 893
Interest expense and other financing costs (203) (1,693) (203) (5,754)
Interest expense and other financing costs - affiliates (1,366) (3,059) (4,176) (4,571)
-------- -------- -------- --------

Net loss from continuing operations (1,621) (4,556) (4,917) (12,688)

Discontinued operations (Note 1)
Gain (loss) from oil and gas operations -- -- 336 (221)
Gain (loss) from drilling operations (65,396) (1,186) (69,560) 5,802
-------- -------- -------- --------
Total discontinued operations (65,396) (1,186) (69,224) 5,581
-------- -------- -------- --------

Net loss (67,017) (5,742) (74,141) (7,107)

Preferred stock dividends (776) (763) (2,329) (2,291)
-------- -------- -------- --------

Net loss allocable to common shareholders $(67,793) $ (6,505) $(76,470) $ (9,398)
======== ======== ======== ========

Weighted average number of shares 26,075 26,074 26,075 26,748
======== ======== ======== ========

Basic and diluted loss per common share
from continuing operations (Note 5) $ (0.09) $ (0.20) $ (0.28) $ (0.56)
======== ======== ======== ========

Basic and diluted gain (loss) per common share
from discontinued operations (Note 5) $ (2.51) $ (0.05) $ (2.65) $ 0.21
======== ======== ======== ========

Basic and diluted loss per common share $ (2.60) $ (0.25) $ (2.93) $ (0.35)
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of this financial statement.

5
<PAGE> 6

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Nine Months
Ended March 31,
----------------------
2000 1999
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(74,141) $ (7,107)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 64 4,491
Amortization of debt issue costs -- 3,079
Noncash interest expense 4,379 2,471
Loss from equity investment 69,560 --
Changes in operating working capital (net of effect of deconsolidating):
(Increase) decrease in accounts receivable 32 (6,500)
(Increase) decrease in receivable from affiliates (857) 488
Increase in notes receivable (2,076) --
Increase in prepaid expenses (19) (34)
Increase (decrease) in accounts payable and accrued liabilities (774) 3,806
Decrease in accounts payable to affiliates (185) (2,807)
-------- --------
Net cash used in operating activities (4,017) (2,113)
-------- --------

Cash flows from investing activities:
Additions to property and equipment (355) (10,374)
Deferred costs (1,882) (860)
Reduction in cash from deconsolidating rig subsidiaries (382) --
Conveyance of oil and gas properties -- (1,605)
-------- --------
Net cash used in investing activities (2,619) (12,839)
-------- --------

Cash flows from financing activities:
Repayment of notes payable -- (1,008)
Repayment of notes payable to affiliate -- (2,250)
Proceeds from demand note 4,000 --
Proceeds from notes payable to affiliate 4,104 20,640
Increase in restricted cash -- (170)
Debt issue costs -- (2,501)
-------- --------
Net cash provided by financing activities 8,104 14,711
-------- --------

Net increase (decrease) in cash and cash equivalents 1,468 (241)
Cash and cash equivalents at beginning of year 486 2,689
-------- --------
Cash and cash equivalents at end of period $ 1,954 $ 2,448
======== ========
</TABLE>

Supplemental disclosures to the Statement of Cash Flows - see Note 7.

The accompanying notes are an integral part of this financial statement.

6
<PAGE> 7

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 -- -- -- --

Conversion of Series B Preferred Stock
into common stock (20) -- 4 -- -- -- --

Net loss for the nine months ended
March 31, 2000 (restated) (unaudited) -- -- -- -- -- (74,141) (74,141)
--------- --------- --------- --------- --------- --------- ---------

Balance, March 31, 2000 (restated) (unaudited) 17,559 $ 176 26,079 $ 261 $ 186,217 $(199,872) $ (13,218)
========= ========= ========= ========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of this financial statement.

7
<PAGE> 8

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, 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). 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, focused on the acquisition and deployment of semisubmersible
drilling rigs for contract drilling. 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 Bill Shoemaker (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 two occasions, Sedco Forex assigned its responsibilities
under the Bill Shoemaker management and charter agreement to an affiliate, Sedco
Canada Limited ("SCL"), while the Bill Shoemaker was operating in Canada. 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, SCL
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 on November 15, 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.

8
<PAGE> 9

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

Bankruptcy Filing by Subsidiaries

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 are
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 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. 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. Loss from discontinued operations includes an
impairment provision of $13.3 million related to the sale of this rig.

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 (See "Liquidity and Capital Resources") 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. Loss from discontinued operations
includes an impairment provision of $45.6 million related to the sale of this
rig.

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 "Discontinued Operations" below and 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

Drilling Rig Operations

As of May 15, 2000, RIGCO was negotiating a short-term loan (the "DIP Loan")
which would provide RIGCO with cash to fund its operations through June 30,
2000. Effective May 25, 2000, certain of the secured lenders and RIGCO entered
into the DIP Loan agreement which, among other things, required RIGCO to have a
binding contract for the sale of the Bill Shoemaker by May 31, 2000 with a
minimum bid of $37.5 million. As a result, all operating assets of RIGCO will be
liquidated, resulting in Tatham Offshore's Rig Subsidiaries being presented as
discontinued operations.

Revenue from drilling services for the three months ended March 31, 1999 totaled
$6.1 million. The Laffit Pincay and Bill Shoemaker were both stacked without a
drilling contract for the three months ended March 31, 2000 and therefore did
not generate any revenue from drilling services for this period. Operating
expenses for the Rigs for the three months ended March 31, 2000 totaled $2.0
million compared to operating expenses for the three months ended March 31, 1999
of $4.5 million. Depreciation expense for the Rigs totaled $60.3 million for the
three months ended March 31, 2000 and included an impairment provision of $13.3
million for the Laffit Pincay and $45.6 million for the Bill Shoemaker.
Depreciation expense for the three months ended March 31, 1999 totaled $1.5
million. General and administrative expense relating to the rigs for the three
months ended March 31, 2000 totaled $0.8 million as compared with $1.3 million
for the three months ended March 31, 1999.

9
<PAGE> 10

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

Revenue from drilling services for the nine months ended March 31, 2000 totaled
$13.3 million as compared to revenue from drilling services for the nine months
ended March 31, 1999 of $28.4 million. Operating expenses for the Rigs for the
nine months ended March 31, 2000 totaled $10.2 million compared to operating
expenses for the three months ended March 31, 1999 of $16.5 million.
Depreciation expense for the Rigs totaled $63.2 million for the nine months
ended March 31, 2000 and included an impairment provision of $13.3 million for
the Laffit Pincay and $45.6 million for the Bill Shoemaker. Depreciation expense
for the nine months ended March 31, 1999 totaled $4.2 million. General and
administrative expense relating to the rigs for the nine months ended March 31,
2000 totaled $2.8 million as compared to $1.9 million for the nine months ended
March 31, 1999.

Oil and Gas Operations

Discontinued operations in 1999 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 nine months ended March 31, 1999, 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, 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 $80.8 million at March 31, 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 are included in long-term
debt to affiliate currently payable on the consolidated balance sheet.

10
<PAGE> 11

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 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 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 bore interest at LIBOR plus 2%
and was due on November 30, 1999 or upon demand. On December 1, 1999, Tatham
Brothers made a principal reduction of $2.6 million and extended the note until
September 30, 2000 or upon demand. Effective February 1, 2000, the loan bears
interest at the rate of 6.5% per annum. 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 obtained 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. 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 Services, Inc. ("Tatham Aviation"), whose sole shareholder is
Mr. Thomas P. Tatham, has provided the Company use of a corporate aircraft. The
agreement between the Company and Tatham Aviation provides for the Company's
reimbursement of operating costs, insurance and carrying costs in exchange for
the use of the corporate aircraft. During the nine months ended March 31, 2000,
the Company paid Tatham Aviation $992,000 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 Mr. Thomas P. Tatham. 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 December 31,
1999, the interest rate under this facility was 11.5%) 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.

11
<PAGE> 12

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

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 March
31, 2000, the Company has borrowed $4.2 million under this facility which along
with accrued interest of $347,302 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

Leviathan charged Tatham Offshore $197,500 for the period from July 1, 1998
through August 14, 1998 for commodity and platform access fees associated with
the Viosca Knoll 817 lease in accordance with certain agreements between the
parties.

During the period from July 1, 1998 through August 14, 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
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. As discussed in Note 1, the
Laffit Pincay was sold on May 1, 2000 and the Bill Shoemaker was sold on June
28, 2000. As such, the Company's equity in earnings of the Rig Subsidiaries is
reflected as a discontinued operation on the Consolidated Statement of
Operations. At March 31, 2000, the combined assets of the Rig Subsidiaries
totaled $77.4 million. Excluding deferred income taxes, the Rig Subsidiaries had
$151.1 million of total debt and other liabilities at March 31, 2000 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.

12
<PAGE> 13

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, 2000 March 31, 2000
-------------- --------------
<S> <C> <C>
Revenue:
Drilling services $ -- $ 13,341
Costs and expenses:
Drilling and other operating expenses 2,039 10,176
Depreciation and impairment 60,318 63,226
General and administrative expenses
and management fee 842 2,765
-------- --------
63,199 76,167
-------- --------

Operating loss (63,199) (62,826)
Interest and other income 91 176
Interest expense and other financing costs (2,289) (6,506)
Interest expense and other financing costs - affiliates -- (1,445)
-------- --------

Net loss $(65,397) $(70,601)
======== ========
</TABLE>

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 $43,560,000 in cash. (See Note 1 - "Bankruptcy Filing by Subsidiaries")

NOTE 4 - STOCKHOLDERS' EQUITY:

The following table summarizes Tatham Offshore's outstanding equity as of March
31, 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 17,183,244(a) $1.50 per share 12% $ 11,682,000 (b)(c)
Series B Preferred Stock 54,379 $1.00 per share 8% $ 20,000 (b)(c)
Series C Preferred Stock 321,205 $0.50 per share 4% $ 20,000 (b)(c)
Common Stock 26,078,548(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.

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.

13
<PAGE> 14

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

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.
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.
At March 31, 2000, RIGCO had recorded a $7.5 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>
Nine Months Ended March 31,
---------------------------
2000 1999
(in thousands)
<S> <C> <C>
Interest $ -- $ 3,232
Taxes $ -- $ --
</TABLE>

Supplemental Disclosures of Noncash Investing and Financing Activities

<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
2000 1999
(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>

14
<PAGE> 15

TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

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 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 and nine months ended
March 31, 2000, operations for the drilling segment were included in the
financial statements on the equity method of accounting (see Note 3). For the
three months ended March 31, 1999, the drilling segment revenues totaled $6.1
million and the drilling segment profit totaled $0.1 million. For the nine
months ended March 31, 1999, the drilling segment revenues totaled $28.3 million
and the drilling segment profit totaled $7.7 million. The Canadian Investment
Strategy segment had no revenues and all costs were capitalized for the three
and nine months ended March 31, 2000 and 1999.

15
<PAGE> 16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in Item 1.
"Consolidated Financial Statements" and is intended to assist in the
understanding of the Company's financial condition and results of operations for
the three and nine months ended March 31, 2000, as restated.

GENERAL

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999

The Laffit Pincay and Bill Shoemaker were both stacked without a drilling
contract for the three months ended March 31, 2000 and therefore did not
generate any revenue from drilling services for the period. Revenue from
drilling services included in discontinued operations totaled $6.1 million for
the three months ended March 31, 1999, all of which was generated by the Bill
Shoemaker.

Operating expenses for the Rigs for the three months ended March 31, 2000
totaled $2.0 million and were attributable to direct operating expenses for the
Rigs. Operating expenses for the Rigs for the three month periods ended March
31, 2000 and March 31, 1999 were reflected in discontinued operations. During
this period, the Bill Shoemaker's operating expenses totaled $0.8 million and
the Laffit Pincay's operating expenses totaled $1.2 million. Operating expenses
for the Laffit Pincay and Bill Shoemaker during this period included the costs
necessary to maintain the rigs in a warm-stacked mode. Operating expenses for
the three months ended March 31, 1999 totaled $4.5 million and were attributable
to the management fee and direct operating expenses for the Rigs. During this
period, the Bill Shoemaker's operating expenses totaled $2.4 million and the
Laffit Pincay's operating expenses totaled $2.1 million. Operating expense for
the Laffit Pincay during this period included the costs necessary to maintain
the rig in a warm-stacked mode. The reduction in operating expense for both rigs
from $4.5 million for the three month period ending March 31, 1999 to $2.0
million for the three month period ending March 31, 2000 was due to reduced crew
requirements and the elimination of management fees payable to Sedco Forex as a
result of the termination of the Sedco Forex management agreements.

Depreciation expense for the Rigs totaled $60.3 million for the three months
ended March 31, 2000 and is reflected in discontinued operations. Depreciation
expense for the Bill Shoemaker and the Laffit Pincay totaled $46.6 million and
$13.7 million, respectively. Depreciation expense for the Laffit Pincay includes
an impairment provision of $13.3 million related to the sale of the rig.
Depreciation expense for the Bill Shoemaker includes an impairment provision of
$45.6 million related to the sale of the rig. Depreciation expense totaled $1.5
million for the three months ended March 31, 1999 and is included in
discontinued operations. Depreciation expense for the Bill Shoemaker and the
Laffit Pincay totaled $1.0 million and $0.5 million, respectively.

General and administrative expense totaled $163,000 for the three months ended
March 31, 2000 and includes staff and overhead costs for the Atlantic Canada
business. In addition, general and administrative expense relating to the Rigs
totaled $0.8 million and is reflected in discontinued operations. General and
administrative expense totaled

16
<PAGE> 17

$0.6 million for the three months ended March 31, 1999. General and
administrative expense for the three months ended March 31, 1999 included staff
and overhead costs for the operation of the marine services and Atlantic Canada
businesses. In addition, general and administrative expenses related to the rigs
totaled $1.3 million and is included in discontinued operations.

Operating loss from continuing operations for the three months ended March 31,
2000 totaled $0.2 million as compared to operating loss from continuing
operations of $0.6 million for the three months ended March 31, 1999. The change
was due to the items discussed above.

Interest income and other for the three months ended March 31, 2000 and 1999
totaled $0.1 million and $0.8 million, respectively, and primarily included
interest income from available cash.

Interest expense and other financing costs to affiliates for the three months
ended March 31, 2000 and 1999 totaled $1.6 million and $4.7 million,
respectively, and related to borrowings from Tatham Brothers. Interest expense
incurred by RIGCO under the Credit Facility for the three months ended March 31,
2000 totaled $2.3 million and is included in discontinued operations. Interest
expense incurred by RIGCO under the Credit Facility for the three months ended
March 31, 1999 totaled $1.7 million.

Losses from discontinued operations for the three months ended March 31, 2000
totaled $65.4 million as compared to a gain from discontinued operations of $0.1
million for the three months ended March 31, 1999.

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 March 31, 2000 as compared with $0.8 million for the three months ended
March 31, 1999. After taking preferred stock dividends into account, the
Company's net loss allocable to common shareholders for the three months ended
March 31, 2000 was $67.8 million, or $2.57 per share, as compared with a net
loss allocable to common shareholders for the three months ended March 31, 1999
of $6.5 million, or $0.25 per share.

NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1999

Revenue from drilling services totaled $13.3 million for the nine months ended
March 31, 2000 and is reflected in discontinued operations. All of the revenue
for the nine months ended March 31, 2000 was generated by the Bill Shoemaker.
During this period the Bill Shoemaker was under contract for the period from
July 1, 1999 through November 15, 1999. Revenue from drilling services totaled
$28.4 million for the nine months ended March 31, 1999 and is reflected in
discontinued operations. The Bill Shoemaker generated a total of $26.3 million
in revenue and the Laffit Pincay generated a total of $2.1 million in revenue.
The reduction in revenue from $28.4 million for the nine months ended March 31,
1999 to $13.3 million for the nine months ended March 31, 2000 was due to a
lower average day rate in effect during 1999 as well as the lower utilization
rate. The Laffit Pincay did not have a drilling contract during the nine months
ended March 31, 2000 and had only one short term drilling contract during the
nine months ended March 31, 1999.

Operating expenses for the Rigs for the nine months ended March 31, 2000 totaled
$10.2 million and were attributable to the management fee and direct operating
expenses for the Rigs. Operating expenses for the Rigs for the nine month
periods ended March 31, 2000 and March 31, 1999 were reflected in discontinued
operations. During this period, the Bill Shoemaker's operating expenses totaled
$7.5 million and the Laffit Pincay's operating expenses totaled $2.7 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
nine months ended March 31, 1999 totaled $16.5 million and were attributable to
the management fee and direct operating expenses for the Rigs. During this
period, the Bill Shoemaker's operating expenses totaled $8.4 million and the
Laffit Pincay's operating expenses totaled $8.1 million. Operating expense for
the Laffit Pincay during this period included the costs necessary to maintain
the rig in a warm-stacked mode. The reduction in operating expense for the
Laffit Pincay from $8.1 million for the nine month period ending March 31, 1999
to $2.7 million for the nine month period ending March 31, 2000 was due to
reduced crew requirements and the elimination of management fees payable to
Sedco Forex as a result of the termination of the Sedco Forex management
agreement on March 23, 1999.

17
<PAGE> 18

Depreciation expense for the Rigs totaled $63.3 million for the nine months
ended March 31, 2000 and is reflected in discontinued operations. Depreciation
expense for the Bill Shoemaker and the Laffit Pincay totaled $48.5 million and
$14.7 million, respectively. Depreciation expense for the Laffit Pincay includes
an impairment provision of $13.3 million related to the sale of the rig.
Depreciation expense for the Bill Shoemaker includes an impairment provision of
$45.6 million related to the sale of the rig. Depreciation expense totaled $4.2
million for the nine months ended March 31, 1999. Depreciation expense for the
Bill Shoemaker and the Laffit Pincay totaled $2.7 million and $1.5 million,
respectively.

General and administrative expense totaled $657,000 for the nine months ended
March 31, 2000. In addition, general and administrative expense relating to the
Rigs totaled $2.8 million and is reflected in discontinued operations. General
and administrative expense totaled $3.0 million for the nine months ended March
31, 1999. 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 nine months ended March 31, 1999. In addition, general and
administrative expense relating to the rigs totaled $1.9 million and is included
in discontinued operations. In connection with the Merger, the management
agreement between the Company and DeepTech was terminated on August 14, 1998.
General and administrative expense for the nine months ended March 31, 1999
included staff and overhead costs for the operation of the marine services and
Atlantic Canada businesses. General and administrative costs attributable to
discontinued operations totaled $0.3 million for the nine months ended March 31,
1999.

Net loss from continuing operations for the nine months ended March 31, 2000
totaled $4.9 million as compared to net loss from continuing operations of $12.7
million for the nine months ended March 31, 1999. The change was due to the
items discussed above.

Interest income and other for the nine months ended March 31, 2000 and 1999
totaled $183,000 and $0.9 million, respectively, and included interest income
from available cash and other income in 1999 of $618,000 related to a settlement
with El Paso under certain merger related agreements.

Interest expense and other financing costs to affiliates for the nine months
ended March 31, 2000 and 1999 totaled $4.4 million and $10.3 million,
respectively, and related to borrowings from Tatham Brothers. The Rig
Subsidiaries also incurred interest expense to affiliated entities of $1.4
million for the nine months ended March 31, 2000 which is included in equity
earnings. Interest expense incurred by RIGCO under the Credit Facility for the
nine months ended March 31, 2000 totaled $6.5 million and is included in equity
earnings. Interest expense incurred by RIGCO under the Credit Facility for the
nine months ended March 31, 1999 totaled $5.7 million.

On or before August 14, 1998, the Company transferred all of its oil and gas
properties in the Gulf to DeepTech and Leviathan in connection with the Merger.
For the nine months ended March 31, 2000, the Company reported earnings from
discontinued operations of its oil and gas operations of $336,000 due to the
reversal of oil and gas expense accruals. The Company reported a net loss from
discontinued operations of its oil and gas operations of $0.2 million for the
nine months ended March 31, 1999. During the period from July 1, 1998 through
August 14, 1998, the Company sold 479 million cubic feet of natural gas and
1,200 barrels of oil at average prices of $1.86 per thousand cubic feet of
natural gas and $7.13 per barrel of oil, respectively.

Losses from discontinued operations of the drilling service operations for the
nine months ended March 31, 2000 totaled $69.6 million as compared to a gain
from drilling operations of $5.8 million for the nine months ended March 31,
1999. The changes were due to the items discussed above.

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 $2.3 million for the nine months
ended March 31, 2000 as compared with $2.3 million for the nine months ended
March 31, 1999. After taking preferred stock dividends into account, the
Company's net loss allocable to common shareholders for the nine months ended
March 31, 2000 was $76.5 million, or $2.84 per share, as compared with a net
loss allocable to common shareholders for the nine months ended March 31, 1999
of $9.4 million, or $0.35 per share.

18
<PAGE> 19

LIQUIDITY AND CAPITAL RESOURCES

Sources of Cash. 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 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"). 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 proceedings of the Rig Subsidiaries are administered jointly. As a result of
the Bankruptcy Filing, the Rigs were managed by the Company's subsidiaries as
debtors-in-possession. The syndicate of lenders under the Credit Facility had a
secured interest in substantially all of the assets of RIGCO and FPS VI. Any
cash received by RIGCO and FPS VI was considered collateral for the secured
lenders (the "Cash Collateral") under the Credit Facility. RIGCO and FPS VI as
debtors-in-possession were granted temporary permission by the Bankruptcy Court
for limited use of the Cash Collateral to pay operating and maintenance costs
for the Rigs and to pay certain limited general and administrative costs of
Tatham Offshore.

As of May 15, 2000, RIGCO's cash reserves were substantially depleted and RIGCO
required additional cash to continue to pay all obligations, including payroll,
operating and maintenance expenses, interest obligations, legal expenses, lease
obligations and general and administrative expenses to Tatham Offshore. RIGCO
and the secured lenders negotiated a short-term loan (the "DIP Loan") which
provided RIGCO with cash to fund its operations through June 30, 2000. Effective
May 25, 2000, RIGCO and the secured lenders entered into the DIP Loan agreement
which provided a short-term loan of up to $2.3 million. On May 31, 2000, RIGCO
borrowed $1.5 million under this facility. The DIP Loan plus accrued interest
was repaid from proceeds from the sale of the Bill Shoemaker on June 28, 2000.
See "--Liquidity Outlook."

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. Loss from discontinued operations includes an impairment provision of
$45.6 million related to the sale of this rig.

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.

19
<PAGE> 20

On July 1, 1999, RIGCO entered into a committed draw facility with Tatham
Investment Corp., which is 100% owned by Mr. Thomas P. Tatham. 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 March 31, 2000,
the interest rate under this facility was 12.0%) 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 March
31, 2000, the Company has borrowed $4.2 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.

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.

Uses of Cash. The Company expects that its primary uses of cash will consist of
(i) amounts necessary to staff and maintain the Bill Shoemaker through the date
of its sale, and (ii) amounts necessary to pay general and administrative and
other operational expenses. The use of cash held by the Rig Subsidiaries
required approval by the Bankruptcy Court. As a result of an agreement with the
secured lenders, the Rig Subsidiaries had interim use of such cash through April
14, 2000 and limited use for payroll through May 15, 2000. See "--Liquidity
Outlook". On June 28, 2000, the secured lenders claims were paid and they no
longer had a lien on the Rig Subsidiaries' cash. Effective June 28, 2000, the
Rig Subsidiaries, as debtors-in-possession, had use of their cash assets to
satisfy their cash requirements, subject to certain amounts segregated by
Bankruptcy Court orders.

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 or the
sale of the rig. The costs to stack the Bill Shoemaker in Canada were
approximately $300,000 per month.

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.

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 March 31, 2000, Tatham Offshore Canada Limited, the Canadian
representative of North Atlantic Pipeline Partners, has incurred $14.5 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 and loans under the revolving draw facility with Tatham
Investment Corp. At March 31, 2000, Tatham Offshore had $2.0 million of cash and
cash equivalents. In addition, RIGCO had $0.6 million of cash and cash
equivalents at March 31, 2000. The use of cash held by or generated from
operations of the Rig Subsidiaries is subject to approval of the Bankruptcy
Court. 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 including the sale of
the Bill Shoemaker.

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,

20
<PAGE> 21

1998, (ii) provided for interest at the prime rate plus 3% per annum (9.0% at
March 31, 2000), payable quarterly, and (iii) was 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 14% at March 31, 2000) for the period of the extension. RIGCO did
not make the principal payment or interest payment due on April 30, 1999 and
subsequently 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. See "-- Subsidiary Bankruptcy Court Proceedings".

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 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 Mr. 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 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.

Subsidiary Bankruptcy Court Proceedings

On or about February 9, 2000, RIGCO, FPS III, FPS IV 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"). The
February 2000 Stipulation provides that (i) the debtors-in-possession will
accept an offer to purchase the Laffit Pincay at the best commercial offer above
a stated minimum, (ii) within five business days of the acceptance of the offer,
debtors-in-possession will file with the Bankruptcy Court a motion seeking
approval of reasonable and customary proposed bankruptcy sale procedures
including the establishment of an overbid period and approval of topping fees,
(iii) within five

21
<PAGE> 22

business days of the acceptance of the offer, debtors-in-possession shall retain
a certain broker to market the Laffit Pincay, (iv) the debtors-in-possession
will enter into a definitive Purchase Agreement which is acceptable to the
secured lenders for the sale of the Laffit Pincay within 21 days after the
acceptance of the offer and shall file a motion seeking approval of the proposed
sale pursuant to the terms of the Purchase Agreement with the Bankruptcy Court,
(v) the debtors-in-possession will use their best efforts to obtain a hearing on
the proposed sales procedures on February 17, 2000, a hearing on the proposed
sale on March 20, 2000 and the closing of the sale of the Laffit Pincay on or
before March 31, 2000, (vi) the terms of the Purchase Agreement or any
subsequent purchase agreement approved by the Bankruptcy Court shall provide
that the sale of the Laffit Pincay will close on or before March 31, 2000,
assuming all conditions precedent to the closing have been satisfied, (vii) upon
the sale of the Laffit Pincay, the secured lenders would receive all of the net
proceeds from the sale after deduction of customary and reasonable expenses,
costs and fees associated with the sale, (viii) on or before March 31, 2000, the
debtors-in-possession will accept an offer to purchase the Bill Shoemaker for an
amount exceeding all remaining amounts owing to the secured lenders and that the
sale of the Bill Shoemaker will close no later than June 30, 2000, (ix) if the
debtors-in-possession fulfill the conditions for the sale of the Bill Shoemaker
as set forth in (viii) above, some or all of the secured lenders will make a
post-petition loan to RIGCO up to $1.6 million (the "DIP Loan"), (x) proceeds
from the sale of the Bill Shoemaker will be used to first pay off the
obligations under the DIP Loan and second to pay off all secured obligations
owed to the secured lenders under the Credit Facility, (xi) upon approval of the
Bankruptcy Court of the February 2000 Stipulation, the debtors-in-possession
will pay the secured lenders $2.0 million in partial payment of the secured
lenders' claim and (xii) debtors-in-possession will be allowed continued use of
the cash collateral through March 31, 2000 in accordance with an agreed budget.

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. Loss from discontinued operations includes an impairment provision of
$13.3 million related to the sale of this rig.

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 is available to RIGCO as debtor-in-possession
pending the approval of the Bankruptcy Court of RIGCO's plan of reorganization.

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 $14.5 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

22
<PAGE> 23

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

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 $80.8 million at
March 31, 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 amount; as a result, an Event of Default has occurred
and is continuing under the Short-Term Facility.

Since the Nasdaq National Market has delisted Tatham Offshore's common stock,
the holders thereof have suffered 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 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.

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

23
<PAGE> 24

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

24
<PAGE> 25

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. 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. SFC and SFCL only recently filed a joint answer in the action.
Discovery has begun and is scheduled to continue through April 2001.
Trial is currently set for May 2001.

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.

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 action proceeding in
state court against STC and SCL, RIGCO received notice that SFC and
SFCL were the transferrees of some or all of the assets subject to the
preference action. RIGCO has now joined SFC and SFCL in the preference
action. SFC and SFCL answered in May 2000. Discovery is expected to
continue through early October 2000. Trial is set for January 2001.

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.

25
<PAGE> 26

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. On June
28, 2000, RIGCO paid all remaining principal, interest and expenses
under the Credit Facility from proceeds from the sale of the Bill
Shoemaker.

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

99.1* Stipulation and Order Authorizing Continued Use of Cash
Collateral and Adequate Protection (filed as Exhibit 99.1 to
Tatham Offshore's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999, and incorporated herein by reference).

99.2* Supplement to Stipulation and Order Authorizing Continued Use
of Cash Collateral and Adequate Protection.

99.3* Second Supplement to Stipulation and Order Authorizing
Continued Use of Cash Collateral and Adequate Protection.

* previously filed with March 31, 2000 Form 10-Q.

26
<PAGE> 27

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: August 7, 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)

27
<PAGE> 28

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>