ITEM 3. LEGAL PROCEEDINGS
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 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 28, 1998, DeepTech, the holder of a majority of the Company's outstanding voting stock at the time, executed a written consent approving the sale of substantially all of the Company's oil and gas assets in the Gulf and an amendment to the Company's Certificate of Incorporation. The amendment was approved to reflect the fact that DeepTech will no longer own any shares of the Company's stock. Prior to the amendment, DeepTech was excluded from the category of "Related Persons," as that term is defined in the Certificate's Article II. The amendment removed DeepTech from the list of persons or entities not to be included in the definition of "Related Persons." Following the amendment, if DeepTech were to acquire 10% or more of the Company's voting stock, any merger or consolidation with DeepTech would require 75% of the outstanding voting stock to approve such a combination.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of August 31, 1998, there were approximately 162 holders of record of the common stock. The following table sets forth the high and low sales prices for the common stock as quoted on The Nasdaq National Market for the periods indicated. In addition, the table is adjusted for the one for ten reverse common stock split Tatham Offshore effected on November 24, 1997.
Tatham Offshore has never declared or paid cash dividends on its common or preferred stock. The Company intends to retain any future earnings to fund growth and does not anticipate paying any cash dividends on its stock in the foreseeable future. The payment of future dividends, if any, will be determined by the Board of Directors in light of conditions then-existing, including the Company's operating results, financial condition, capital requirements, general business conditions and other factors the Board of Directors deems relevant. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
The following table summarizes the Company's outstanding equity at June 30, 1998:
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(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible Preferred Stock and replaced this stock with Series B 9% Senior Convertible Preferred Stock ("Senior Preferred Stock"). In connection with the Redemption Agreement, the Partnership returned to Tatham Offshore the Senior Preferred Stock on August 14, 1998 in exchange for certain assets. Tatham Offshore then eliminated the Senior Preferred Stock. Each share of the Senior Preferred Stock was senior to all other classes of Tatham Offshore preferred and common stock in the case of liquidation, dissolution or winding up of Tatham Offshore. The Partnership held all outstanding shares. The Senior Preferred Stock was convertible into Series A Preferred Stock using a conversion ratio equal to (i) the liquidation preference amount plus accumulated unpaid dividends divided by (ii) $0.9375.
(b) As of June 30, 1998, DeepTech held 28,073,450 shares and 4,670,957 shares of outstanding common stock and Series A Preferred Stock, respectively. On August 14, 1998, DeepTech divested itself of this equity ownership through the Rights Offering.
(c) At any time until December 31, 1998, each share may be exchanged for 0.4 Exchange Warrants. Each full Exchange Warrant entitles the holder thereof to purchase one share of common stock at $6.53 per share. The Exchange Warrants expire on July 1, 1999. Alternatively, at any time, the holder of any shares may convert the liquidation value and unpaid dividends into shares of common stock at $6.53 per share.
(d) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(e) The preferred stock is traded on the OTC Bulletin Board Service.
(f) The common stock is traded on The Nasdaq Stock Market's National Market.
(g) 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.
RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to sales and other issuances by Tatham Offshore within the past three fiscal years of Tatham Offshore securities, the sales or issuances of which were not registered pursuant to the Securities Act of 1933 (the "Securities Act").
In September 1995, Tatham Offshore issued two industry partners warrants to acquire an aggregate of up to 2,000,000 shares of its common stock at an exercise price of $8.00 per share as partial consideration for the acquisition of a 25% working interest in Viosca Knoll Block 817 and an approximate 12.5% working interest in the remainder of the Viosca Knoll Block 817 unit. The warrants are exercisable for a period of five years through conversion of the unpaid balance of a $16 million production payment payable issued in connection with the acquisition of such working interests which is payable out of 25% of the net cash flow from the working interests so acquired. Such transaction was completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.
In November 1995 and May 1996, the Company issued 12,094 shares and 12,423 shares, respectively, of its common stock in connection with the mandatory arrangement of certain senior executives of DeepTech and received a $360,000 credit against its management fees payable to DeepTech. Such transactions were completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.
In June 1996, in connection with its Non-Employee Director Compensation Plan, Tatham Offshore issued its common stock to the following persons in the following amounts: 6,378 shares to James G. Niven, 1,820 shares to E. Garrett Bewkes, 5,678 shares to Humbert B. Powell, 6,378 shares to Philip G. Clarke and 5,458 shares to Clyde E. Nath. Such transactions were completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.
In February 1996, Tatham Offshore issued 7,500 shares of its 9% Senior Convertible Preferred Stock to Leviathan Gas Pipeline Partners, L.P. as partial consideration for the satisfaction of certain demand charge obligations. Such transaction was completed without registration under the Securities Act in reliance on the exemptions provided by Section 4(2) of the Securities Act. In March 1998, Tatham Offshore eliminated its 9% Senior Convertible Preferred Stock and replaced this stock with Series B 9% Senior Convertible Preferred Stock. Such transaction was completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.
Tatham Offshore, Inc. issued a total of 90,000 shares of its common stock to Offshore Drilling Consultants, Inc. from September 1997 through March 1998 as compensation for consulting services related to its Atlantic Canada project. Prior to January 1998, Offshore Drilling Consultants, Inc. was known as F-W Oil Interests, Inc. Such transactions were completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.
In December 1997, Tatham Offshore issued 26,666,667 shares of its common stock to DeepTech in exchange for $60 million of Subordinated Convertible Promissory Notes held by DeepTech. Such transaction was completed without registration under the Securities Act in reliance on the exemption provided by Section 4(2) of the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company for each of the three years ended June 30, 1998, 1997 and 1996 and at June 30, 1998 and 1997 have been derived from the consolidated financial statements and notes thereto which are included elsewhere in this Annual Report. The selected financial data at and for each of the two years ended June 30, 1995 and 1994 and at June 30, 1996 have been derived from the historical financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and the notes thereto which are included elsewhere in this Annual Report.
The following selected financial data is included in this Annual Report due to the requirements of the Securities Exchange Act. With the exception of the North Atlantic Partners pipeline project, all of the historical business and operations of Tatham Offshore has been transferred to DeepTech and the Partnership who has also assumed all future liability related to these assets and operations as part of the Reorganization Transaction. Such information, although important for an understanding of Tatham Offshore's historical financial results and business, is of little relevance to the Company's business and operations on a going forward basis.
ITEM 7.
ITEM 7. 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 the notes thereto located elsewhere in this Annual Report and the information set forth under the heading "Selected Financial Data." This discussion is intended to assist in the understanding of Tatham Offshore's financial position and results of operations for each of the years ended June 30, 1998, 1997 and 1996. Effective June 25, 1998, Tatham Offshore acquired DeepFlex which owns the Pincay and the Shoemaker. On August 14, 1998, Tatham Offshore transferred all of its remaining oil and gas properties to the Partnership in connection with the Merger and related transactions.
The following discussion of results of operations is included in this Annual Report due to the requirements of the Securities Act. With the exception of the North Atlantic Partners pipeline project, all of the historical business and operations of Tatham Offshore has been transferred to DeepTech and the Partnership who has also assumed all future liability related to these assets and operations as part of the Reorganization Transaction. Such information, although important for an understanding of Tatham Offshore's historical financial results and business, is of little relevance to the Company's business and operations on a going forward basis.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997
Revenue from oil and gas sales totaled $10.9 million for the year ended June 30, 1998 as compared with $20.7 million for the year ended June 30, 1997. During the year ended June 30, 1998, Tatham Offshore sold 4,532 MMcf of gas and 16,295 barrels of oil at average prices of $2.34 per Mcf and $16.24 per barrel, respectively. During the same period in 1997, Tatham Offshore sold 7,180 MMcf of gas and 170,000 barrels of oil at average prices of $2.36 per Mcf and $22.35 per barrel, respectively. The decrease in oil and gas sales was primarily a result of the cessation of oil and gas production in May 1997 from Tatham Offshore's Ewing Bank 914 #2 well, decreased gas production from Tatham Offshore's Viosca Knoll Block 817 lease and substantially lower realized oil prices.
Drilling services totaled $0.7 million for the year ended June 30, 1998 and represented revenue from contract drilling services provided by the Rigs from June 25, 1998 through June 30, 1998.
Production and operating expenses for the year ended June 30, 1998 totaled $5.7 million as compared with $8.5 million for the same period in 1997. The decrease of $2.8 million was primarily comprised of a decrease of $3.0 million in transportation, production, operating and workover expenses related to the cessation of oil and gas production in May 1997 from Tatham Offshore's Ewing Bank 914 #2 well, a decrease of $0.2 million related to a production payment and an increase of $0.4 million related to the operations of the Rigs.
Exploration expenses for the year ended June 30, 1998 totaled $0.1 million as compared with $0.5 million for the year ended June 30, 1997. Exploration expenses primarily included delay rentals and minimum royalties.
Depreciation, depletion and amortization totaled $3.0 million for the year ended June 30, 1998 as compared with $5.4 million for the year ended June 30, 1997. The decrease of $2.4 million is primarily a result of a $0.8 million net reduction in abandonment expense as a result of Tatham Offshore assigning its working interest in Ship Shoal Block 331 to a third party for the assumption of the abandonment obligations, lower depletion at Viosca Knoll Block 817 and West Delta Block 35 of $1.3 million, lower abandonment accruals related to West Delta Block 35 and Viosca Knoll Blocks 817 and 818 of $0.4 million, and offset by $0.1 million related to the Rigs.
Impairment, abandonment and other for the year ended June 30, 1997 totaled $41.7 million. Impairment, abandonment and other for the year ended June 30, 1997 consisted of a charge to reserve Tatham Offshore's investment in its Ewing Bank 914 #2 well, certain adjacent leases and Ship Shoal Block 331 property, to accrue Tatham Offshore's abandonment obligations associated with the Ewing Bank 914 #2 and 915 #4 wells and the Ship Shoal Block 331 property and to expense Tatham Offshore's net prepaid demand charges related to obligations under certain transportation agreements. See "Note 4 -- Oil and Gas Properties" on pages through. No impairment abandonment and other charges were recorded during the year ended June 30, 1998.
General and administrative expenses, including the management fee allocated from DeepTech, for the year ended June 30, 1998 totaled $5.7 million as compared with $4.8 million for the same period in 1997. The increase reflected an increase in staff and overhead expenses, attributable to the Canadian activities, allocated to Tatham
Offshore under the Management Agreement of $1.1 million offset by a decrease in direct general and administrative expenses of $0.2 million. Tatham Offshore amended its Management Agreement effective July 1, 1997 to provide for a 26% overhead allocation as compared to a 24% overhead allocation during the year ended June 30, 1997. Effective August 14, 1998, the Management Agreement was terminated and the Company directly employed its management, operational and financial staff.
Operating loss for the year ended June 30, 1998 was $3.1 million as compared with an operating loss of $40.2 million for the year ended June 30, 1997. The change was due to the items discussed above.
Interest income totaled $0.2 million for the year ended June 30, 1998 as compared with $0.6 million for the same period in 1997 and included interest income from available cash.
Interest expense for the year ended June 30, 1998 totaled $1.9 million as compared with $8.4 million for the year ended June 30, 1997 and primarily related to interest under the $60 million principal amount of Subordinated Convertible Promissory Notes (the "Subordinated Notes") held by DeepTech, which were converted into shares of Tatham Offshore common stock in December 1997. See "-- Liquidity Outlook."
After taking into account $3.8 million of preferred stock dividends in arrears, the Company's net loss available to common stockholders for the year ended June 30, 1998 was $8.6 million, or $0.50 per share, as compared with net loss available to common stockholders for the year ended June 30, 1997 of $51.9 million, or $19.47 per share, after taking into account $3.9 million of preferred stock dividends in arrears. The weighted average shares outstanding for the purposes of calculating loss per share for the years ended June 30, 1998 and 1997 were 17,299,739 shares and 2,665,084 shares, respectively.
YEAR ENDED JUNE 30, 1997 COMPARED WITH YEAR ENDED JUNE 30, 1996
Revenue from oil and gas sales totaled $20.7 million for the year ended June 30, 1997 as compared with $16.1 million for the year ended June 30, 1996. During the year ended June 30, 1997, the Company sold 7,180 MMcf of gas and 170,000 barrels of oil and condensate at average prices of $2.36 per Mcf and $22.35 per barrel, respectively. During the year ended June 30, 1996, the Company sold 3,274 MMcf of gas and 418,000 barrels of oil and condensate at average prices of $2.51 per Mcf and $18.83 per barrel, respectively. The increase is primarily due to increased production from the Viosca Knoll Block 817 project and higher oil prices partially offset by lower oil and gas production from the Ewing Bank 914 #2 well and lower gas prices.
Production and operating expenses for the year ended June 30, 1997 totaled $8.5 million as compared with $13.2 million for the year ended June 30, 1996. The decrease of $4.7 million is comprised of (i) a decrease of $4.0 million in the cost of transportation services primarily related to lower oil production and the restructuring of certain transportation agreements with the Partnership, (ii) a decrease of $2.0 million in workover and repair expenses, (iii) a decrease of $0.2 million in operating costs primarily related to the Viosca Knoll Block 817 project and (iv) an increase of $1.5 million related to a production payment. During the year ended June 30, 1996, the Company incurred $2.3 million of workover and repair expenses related to the Ewing Bank 914 #2 well.
Exploration expenses for the year ended June 30, 1997 totaled $0.5 million as compared with $0.6 million for the year ended June 30, 1996. Exploration expenses for both periods included delay rentals, minimum royalties and costs incurred under an amended technology services agreement with an affiliate of DeepTech.
Depreciation, depletion and amortization totaled $5.4 million for the year ended June 30, 1997 as compared with $1.8 million for the year ended June 30, 1996. The increase is primarily attributable to the initiation of production from the first well at Viosca Knoll Block 817 in December 1995 and from an additional seven wells during calendar 1996.
Impairment, abandonment and other for the year ended June 30, 1997 totaled $41.7 million as compared with $8.0 million for the year ended June 30, 1996. Impairment, abandonment and other for the year ended June 30, 1997 consisted of a charge to reserve the Company's investment in its Ewing Bank 914 #2 well, certain adjacent leases and Ship Shoal Block 331 property, to fully accrue the Company's abandonment obligations associated with the Ewing Bank 914 #2 and 915 #4 wells and the Ship Shoal Block 331 property and to expense the Company's net prepaid demand charges related to obligations under certain transportation agreements. See "Notes to Consolidated Financial Statements -- Note 4 -- Property and Equipment -- Oil and Gas Properties -- Impairment, Abandonment and Other" located on page through. In connection with the Company's assessment of its Ship Shoal Block 331 property and its decision to seek a sale of all or a
portion of such property, or a joint venture partner, the Company reduced its investment in its Ship Shoal Block 331 property by $8.0 million during the year ended June 30, 1996.
General and administrative expenses, including the management fee allocated from DeepTech, for the year ended June 30, 1997 totaled $4.8 million as compared with $6.3 million for the year ended June 30, 1996. The decrease of $1.5 million reflected a decrease in direct general and administrative expenses of $0.3 million and a decrease in staff and overhead expenses allocated to the Company under its Management Agreement with DeepTech of $1.2 million. As a result of DeepTech's reduction of services provided to Tatham Offshore, the Company amended its Management Agreement effective July 1, 1996 to provide for a 24% overhead allocation as compared to an effective 31.6% overhead allocation during the year ended June 30, 1996.
Operating loss for the year ended June 30, 1997 totaled $40.2 million as compared with an operating loss of $13.8 million for the year ended June 30, 1996. The change in operating loss was due to the items discussed above.
During the year ended June 30, 1996, the Company recognized a $22.6 million gain related to the sale of its working interest in certain properties to the Partnership as a result of the Company waiving its options to prepay the then-existing Payout Amount and receive a reassignment of its working interests.
Interest expense, net of interest income, for the year ended June 30, 1997 totaled $7.8 million as compared with $8.0 million for the year ended June 30, 1996. For the years ended June 30, 1997 and 1996, interest expense of $7.1 million was attributable to interest payable to DeepTech under the Subordinated Notes.
After considering $3.9 million in preferred dividends in arrears, Tatham Offshore's net loss available to common stockholders for the year ended June 30, 1997 was $51.9 million as compared with net income available to common stockholders for the year ended June 30, 1996 of $0.5 million after considering $0.3 million in preferred dividends in arrears.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's exploration and production activities have generated and utilized substantially all of the operating cash flow. Prospectively, the Company's contract drilling activities are expected to generate and utilize substantially all of the operating cash flow, at least during the near term. See "-- Liquidity Outlook."
Sources of Cash. Historically, the Company's cash from operations was generated by the sale of the Company's interest in oil and gas production. Prospectively, the Company expects to be dependent upon cash on hand and cash generated from its drilling services operations to pay its operating expenses, service its debt and satisfy its other obligations. However, as described below, the Company will need to raise substantial capital (equity, debt or both) or enter into other arrangements to allow the Company to implement its business strategy in Atlantic Canada. If either of the Rigs is not employed for any extended period of time, the absence of associated revenues may have a material adverse effect on the Company, including limiting the Company's ability to raise capital from external sources.
Cash from operations during the year ended June 30, 1998 was derived primarily from production from Tatham Offshore's working interest in Viosca Knoll Block 817. Tatham Offshore's 25% working interest in Viosca Knoll Block 817 was subject to a production payment equal to 25% of the net operating cash flow from such working interest. As of August 14, 1998, the Company had (i) disposed of all of its oil and gas operations, (ii) acquired and commenced operating the Rigs and (iii) begun aggressively implementing its Canada strategy.
In February 1998, DeepFlex exchanged its 1,016,957 shares of Series C Preferred Stock for 406,783 Exchange Warrants and immediately converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per share for a total of $2.7 million in proceeds to Tatham Offshore. Tatham Offshore used $2.5 million of proceeds to redeem all of the 4,991,377 shares of Mandatory Redeemable Preferred Stock outstanding at $0.50 per share as required under the terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex conveyed the 406,783 shares of common stock to DeepTech in March 1998.
Uses of Cash. Prospectively, the Company expects that its primary uses of cash will consist of (i) scheduled interest payments on the Credit Facility, (ii) amounts necessary to fund capital expenditures related to the Rigs that
are not funded by customers, and (iii) 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 the North Atlantic Partners pipeline project, the Planned Rig, the remainder of the Company's Atlantic Canada strategy and any of the Company's other potential capital expenditures.
During the year ended June 30, 1998, the Company's primary uses of cash consisted of (i) expenses associated with operating its producing properties, including its leasehold abandonment liabilities, (ii) capital expenditures necessary to fund its portion of the development costs attributable to its working interests, (iii) platform access fees and processing and commodity charges payable to the Partnership, (iv) payments due under the Management Agreement with DeepTech and (v) expenditures related to its Atlantic Canada projects.
North Atlantic Partners is the sponsor of a proposal to construct a natural gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire. As of June 30, 1998, Tatham Offshore Canada Limited, the Canadian representative of North Atlantic Partners, has incurred $11.5 million in developmental costs in connection with such project and related infrastructure projects. The Company anticipates that the ultimate capital costs of the project, if approved, could be in excess of several billion dollars. See Items 1 and 2. "Business and Properties -- Atlantic Canada Strategy."
In order to improve liquidity and partially address its capital requirements during the year ended June 30, 1998, Tatham Offshore entered into an option agreement to restructure the Subordinated Notes held by DeepTech. On December 17, 1997, DeepTech converted the Subordinated Notes into 26,666,667 shares of Common Stock at a conversion rate of $2.25 per share, the average of the closing price for the ten trading days immediately preceding the exercise of the option. As a result of the conversion of the Subordinated Notes, Tatham Offshore eliminated all of its then existing outstanding debt.
Liquidity Outlook. The Company intends to fund its immediate cash requirements with cash on hand and cash from its drilling services operations. At June 30, 1998, the Company had $2.7 million of cash and cash equivalents.
On September 30, 1996, a subsidiary of DeepFlex entered into a $65 million senior secured credit facility with a syndicate of lenders (as amended, the "Credit Facility"). Proceeds from the Credit Facility were used to acquire the Shoemaker, to fund significant upgrades to the 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 Shoemaker. The Credit Facility (i) matures on March 31, 1999, (ii) bears interest at the prime rate plus 3% per annum (11.5% at June 30, 1998), payable quarterly, (iii) is secured by the two semisubmersible drilling rigs and all of the related assets, (iv) required a quarterly principal payment of excess flow as defined in the credit agreement with a minimum principal amortization of $250,000 per quarter beginning on December 31, 1996 and ending on September 30, 1998, (v) provided the Lenders warrants to acquire a 5% minority equity interest in the subsidiaries which own the Rigs, and (vi) is subject to customary conditions and covenants, including the maintenance of a minimum level of working capital. As of June 30, 1998, amounts outstanding under the Credit Facility totaled $59.2 million. Management believes it will be able to refinance the Credit Facility upon its maturity.
In connection with the Merger, the Company entered into a short term financing arrangement with Tatham Brothers, LLC ("Tatham Brothers") to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the Redemption Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in connection with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the short term financing. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The short term financing bears interest at the rate of 12% per annum and is due on January 15, 1999. It is secured by a pledge of DeepFlex of its interest in a certain payment-in-kind Subordinated Promissory Note issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of the Company, which has a current outstanding balance of approximately $70.0 million. The Company anticipates that it will
refinance the short term financing with Tatham Brothers upon its maturity or pay off the facility with proceeds from the refinancing of the Credit Facility discussed above.
On September 15, 1998, a draw of $1.4 million was made on the above-mentioned letter of credit by DeepTech to fund certain tax liabilities incurred in connection with the Merger.
The Company is a guarantor of a $5.0 million loan from NationsBank, N.A. to Tatham Brothers, which proceeds were used to fund certain improvements to the Rigs. The loan bears interest at the rate of Prime plus 1 1/2% per annum and is due on January 19, 1999 or on demand.
The Company is refocusing its business from the development, exploration and production of oil and gas in the Gulf to an integrated frontier investment strategy targeting Atlantic Canada with initial emphasis on the offshore contract drilling business. The Company believes that the Atlantic Canada region offers significant investment opportunities and the Company plans to expand the number of drilling rigs it will own as well as diversify its business to include the North Atlantic pipeline project, related gas processing facilities, a facility for the generation of electricity and other related investments.
The ability of the Company to satisfy its future capital needs with respect to its planned Atlantic Canada strategy, particularly its ability to obtain regulatory approval and financing for the North Atlantic Partners pipeline project, will depend upon its ability to raise substantial amounts of additional capital and to implement its business strategy successfully. With respect to the Company's strategy described under "Business -- Business Strategy", (i) the Company does not currently possess the capital necessary to implement its business strategy completely and there can be no assurances that the Company will be able to obtain sufficient capital for any or all of the projects, (ii) there can be no assurances that these projects and other opportunities will prove to be economical or that they will occur, and (iii) many of these projects will require governmental approvals, almost all of which the Company has yet to receive. Moreover, if there are developments that the Company determines to be indicative of a lack of reasonable opportunity to realize benefits for the Company's stockholders, then the Company will pursue other opportunities, wherever located, as the Company determines to be in the Company's best interests.
Tatham Offshore has never declared or paid dividends on its common or preferred stock. Tatham Offshore expects to retain all available earnings generated by its operations for the growth and development of its business.
Year 2000. The year 2000 issue is the result of computer programs that were written using two digits rather than four to define the year. The Company believes that all of its software and equipment are year 2000 compliant and that this problem will have no affect on the Company's internal operations. Although the company intends to interact only with those third parties that have year 2000 compliant computer systems, it is impossible for the Company to monitor all such systems. Currently, the Company has no information concerning the year 2000 compliance status of its customers and vendors. There can be no assurances that such systems will not have a material adverse impact on the Company's business and operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to some market risk due to the floating interest rate under the RIGCO Credit Facility. See "-- Note 5 -- Indebtedness." Under the RIGCO Credit Facility, the remaining principal is due on March 31, 1999 along with the final interest payment. On June 30, 1998, the Credit Facility had principal balance of $59,156,000 and an interest rate based on the prime rate plus 3% (11 1/2% at June 30, 1998). A 1 1/2% increase in interest rates could result in a $900,000 annual increase in interest expense on the existing principal balance.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with Citibank, N.A., which covered $36.5 million of the debt and provided a maximum fixed effective interest rate of 11.74% and which terminates on September 30, 1998.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required hereunder are included in this Annual Report as set forth in Item 14(a) hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of Directors" in the Company's definitive proxy statement (the "Proxy Statement") relating to the 1998 annual stockholders meeting (the "Annual Meeting"), is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Election of Directors -- Executive Compensation" in the Proxy Statement relating to the Annual Meeting is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Election of Directors -- Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between or among the Company, the Partnership, DeepTech and certain other related parties is summarized in the Company's "Notes to Consolidated Financial Statements -- Note 2 -- Recent Events", "-- Note 4 -- Oil and Gas Properties --", "-- Note 7 -- Related Party Transactions and "-- Note 11 - -- Subsequent Events --" located elsewhere in this Annual Report.
The information appearing under the captions "Election of Directors -- Certain Relationships and Related Transactions", "-- Equity Incentive Plan", and "-- Non Employee Director Stock Option Plan" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or incorporated by reference:
1. Financial Statements
As to financial statements and supplementary information, reference is made to "Index to Consolidated Financial Statements" on page of this Annual Report.
2. Financial Statement Schedules
None. All financial statement schedules are omitted because the information is not required, is not material or is otherwise included in the consolidated financial statements or notes thereto included elsewhere in this Annual Report.
3. (a) Exhibits
- -------------------------- * Filed herewith
(b) Reports on Form 8-K.
None.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints Thomas P. Tatham and Dennis A. Kunetka and each of them, any one of whom may act without the joinder of the others, as his or her attorney-in-fact to sign on his or her behalf and in the capacity stated below and to file all amendments to this Annual Report, which amendment or amendments may make such changes and additions thereto as such attorney-in-fact may deem necessary or appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TATHAM OFFSHORE, INC. (Registrant)
By: /s/ THOMAS P. TATHAM ------------------------------------------------- Thomas P. Tatham Chairman of the Board and Chief Executive Officer September 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date(s) indicated.
/s/ THOMAS P. TATHAM /s/ KENNETH E. BEENEY - ------------------------------------------- ---------------------------------- Thomas P. Tatham, Chairman of the Board Kenneth E. Beeney, Director and Chief Executive Officer September 28, 1998 September 28, 1998
/s/ DENNIS A. KUNETKA /s/ JONATHAN D. POLLOCK - ------------------------------------------- ---------------------------------- Dennis A. Kunetka, Chief Financial Officer, Jonathan D. Pollock, Director Senior Vice President and Secretary September 28, 1998 (Principal Accounting Officer) September 28, 1998
/s/ CLYDE E. NATH /s/ DIANA J. WALTERs - ------------------------------------------- ---------------------------------- Clyde E. Nath, Director Diana J. Walters, Director September 28, 1998 September 28, 1998
/s/ PHILLIP G. CLARKE /s/ ROGER B. VINCENT, SR. - ------------------------------------------- ---------------------------------- Phillip G. Clarke, Director Roger B. Vincent, Sr., Director September 28, 1998 September 28, 1998
/s/ JAMES G. NIVEN - ------------------------------------------- James G. Niven, Director September 28, 1998
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Tatham Offshore, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Tatham Offshore, Inc. and its subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas September 28, 1998
TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except share data)
The accompanying notes are an integral part of this financial statement.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts)
The accompanying notes are an integral part of this financial statement.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Supplemental disclosures to the statement of cash flows - see Note 10.
The accompanying notes are an integral part of this financial statement.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)
The accompanying notes are an integral part of this financial statement.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
Tatham Offshore, Inc. ("Tatham Offshore"), a Delaware corporation, is a diversified energy company currently pursuing, through its operating subsidiaries, energy related opportunities in Atlantic Canada, including offshore contract drilling services, substantial natural gas gathering and transmission facilities and related energy infrastructure. Historically, Tatham Offshore was engaged in the development, exploration and production of oil and gas reserves located primarily offshore the United States in the Gulf of Mexico (the "Gulf"). As of June 30, 1998, Tatham Offshore was an approximately 94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified energy company, which, through its affiliates, was engaged in offshore contract drilling services and the acquisition, development, production, processing, gathering, transportation and marketing of, and the exploration for, oil and gas located offshore in the Gulf and offshore eastern Canada. See Note 2.
On June 25, 1998, DeepTech contributed all of the outstanding shares of capital stock of DeepFlex Production Services, Inc. ("DeepFlex") to Tatham Offshore as discussed in Note 2. DeepFlex, a Delaware corporation and wholly-owned subsidiary of Tatham Offshore, was formed in January 1995 and through its subsidiaries, focuses on the acquisition and deployment of semisubmersible drilling rigs for contract drilling. RIGCO North America, L.L.C. ("RIGCO") and FPS VI, Inc. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, own interests in the FPS Laffit Pincay and the FPS Bill Shoemaker, 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 Partners"). North Atlantic Partners is the sponsor of a proposal to construct a natural gas pipeline offshore Newfoundland and Nova Scotia to the eastern seaboard of the United States. Through June 30, 1998, Tatham Offshore Canada Limited has incurred $11,529,000 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.
Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation and a wholly-owned subsidiary of Tatham Offshore through June 24, 1998, holds interests in the Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect. See Note 2.
NOTE 2 - RECENT EVENTS:
On February 27, 1998, DeepTech entered into an Agreement and Plan of Merger (the "Merger Agreement") with El Paso Natural Gas Company ("El Paso") and El Paso Acquisition Company ("El Paso Acquisition"), a wholly-owned subsidiary of El Paso, pursuant to which DeepTech would merge (the "Merger") with El Paso, or under certain circumstances, with El Paso Acquisition. Subsequently, DeepTech, El Paso and El Paso Acquisition executed Amendment No. 1 to the Merger Agreement (the "Amended Merger Agreement") with El Paso Energy Corporation ("El Paso Corporation") to reflect El Paso's reorganization of its corporate structure. The holders of a majority of DeepTech's common stock approved the Amended Merger Agreement on July 19, 1998. Pursuant to the Amended Merger Agreement, DeepTech merged with El Paso Acquisition on August 14, 1998.
As a result of the Merger and related transactions, some of the assets of Tatham Offshore and DeepTech were restructured so that DeepFlex became a wholly-owned subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in the Sunday Silence prospect to DeepTech. Pursuant to the Redemption Agreement (discussed below), Tatham Offshore agreed to transfer all of its remaining assets located in the Gulf to Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), an affiliate. Further, DeepTech divested itself of its equity ownership interest in Tatham Offshore by offering all of the shares of Tatham Offshore common stock and Series A Preferred Stock (Note 6) held by DeepTech to the stockholders of DeepTech in a Rights Offering (discussed below).
Following the asset restructuring, Tatham Offshore's marine services business includes the operation of two semisubmersible drilling rigs, the FPS Bill Shoemaker and the FPS Laffit Pincay, currently owned by DeepFlex. In addition, Tatham Offshore will continue to pursue energy related opportunities in Atlantic Canada, including the
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
North Atlantic pipeline project, related gas processing facilities, a facility for the generation of electricity and other related investments. The material terms of the Merger and the transactions contemplated by the Amended Merger Agreement, Redemption Agreement (discussed below) and other agreements as these agreements relate to Tatham Offshore and its subsidiaries are as follows:
(a) As discussed in Note 1, DeepTech contributed all of the outstanding shares of capital stock of DeepFlex to Tatham Offshore on June 25, 1998. As a result of this contribution by DeepTech, Tatham Offshore, through DeepFlex, assumed certain indebtedness due to DeepTech (see (b) below) and $64,406,000 of third-party and affiliate debt (Note 5).
(b) On June 25, 1998, Tatham Offshore conveyed to DeepTech all of the outstanding shares of capital stock of Tatham Development and canceled its reversionary interests in certain oil and gas properties (Note 4) in payment of the indebtedness owed to DeepTech discussed in (a) above.
(c) On August 14, 1998, Tatham Offshore transferred its remaining assets located in the Gulf to the Partnership in consideration of the redemption by Tatham Offshore of its Senior Preferred Stock (discussed in Note 6) currently owned by the Partnership (the "Redemption Agreement"). Specifically, under the terms of the Redemption Agreement and subject to the satisfaction of certain conditions to closing, the Partnership exchanged 7,500 shares of Senior Preferred Stock and all related accrued and unpaid dividends due to the Partnership as of the date of the exchange for 100% of Tatham Offshore's right, title and interest in and to Viosca Knoll Blocks 772, 773, 774, 817, 818 and 861 (subject to an existing production payment obligation), West Delta Block 35, Ewing Bank Blocks 871, 914, 915 and 916 and the platform located on Ship Shoal Block 331. At the closing, Tatham Offshore paid the Partnership $1,605,000, the amount equal to the net cash generated from such properties from January 1, 1998 through August 14, 1998. In addition, the Partnership assumed all abandonment and restoration obligations associated with the platform and leases. At the closing of the Redemption Agreement on August 14, 1998, the management fees charged to Tatham Offshore by DeepTech were reduced by 50% effective retroactively to January 1, 1998 and the balance of $1,405,000 owed to DeepTech was paid. See (e) below.
(d) On July 16, 1998, the Commission declared effective Tatham Offshore's Registration Statement on Form S-1 relating to the offering of rights to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares of Tatham Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A Preferred Stock (the "Rights Offering"). As a result of the Rights Offering, unaffiliated parties purchased 3,378,693 shares of common stock and 562,148 shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011 shares of common stock and 3,455,440 shares of Series A Preferred Stock which resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0 million. Under a firm underwriting agreement, Tatham Brothers received a fee of $6.9 million as an underwriting fee. To the extent any shares held by DeepTech remained unsubscribed, Tatham Offshore purchased such shares and DeepTech contributed the proceeds from such purchase to Tatham Offshore. DeepTech no longer owns any of Tatham Offshore's capital stock as a result of the Rights Offering.
(e) As of August 14, 1998, the closing of the Merger, DeepTech no longer operates Tatham Offshore under its management agreement discussed in Note 7. Tatham Offshore has hired a management team and support personnel required to conduct its contract drilling services business and implement its Atlantic Canada strategy.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham Offshore (collectively referred to as the "Company"). All of Tatham Offshore's subsidiaries are currently 100% owned. All significant intercompany balances and transactions have been eliminated in consolidation. All number of shares of Tatham Offshore common stock and per share disclosures have been restated to reflect a ten-for-one common share reverse stock split approved by the Board of Directors of Tatham Offshore on November 13, 1997 for the shareholders of record as of the close of business on November 24, 1997.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Semisubmersible drilling rigs
The cost of the semisubmersible drilling rigs is capitalized and depreciated using the straight-line method over the drilling rigs' estimated useful lives of 25 years.
Impairment losses on long-lived assets (including the semisubmersible drilling rigs) are recognized if the carrying amount of such assets, grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows from other assets, exceeds the estimated undiscounted future cash flows of such assets. Measurement of any impairment loss is based on the fair value of the assets.
Capitalization of interest
Interest and other financing costs are capitalized in connection with construction projects as part of the cost of the asset and amortized over the related asset's estimated useful life.
Oil and gas properties
The Company accounts for its oil and gas exploration and production activities using the successful efforts method of accounting. Under this method, costs of successful exploratory wells, development wells and acquisitions of mineral leasehold interests are capitalized. Production, exploratory dry hole and other exploration costs, including geological and geophysical costs and delay rentals, are expensed as incurred. Unproved properties are assessed periodically and any impairment in value is recognized currently as impairment, abandonment and other expense. Upon discovery of proved reserves, the costs of unproved properties are transferred to proved properties.
Depreciation, depletion and amortization of the capitalized costs of producing oil and gas properties, consisting principally of tangible and intangible costs incurred in developing a property and costs of productive leasehold interests, are computed on the unit-of-production method. Unit-of-production rates are based on annual estimates of remaining proved developed reserves or proved reserves, as appropriate, for each property. Estimated dismantlement, restoration and abandonment costs and estimated residual salvage values are taken into account in determining depreciation provisions. Other noncurrent liabilities at June 30, 1998 and 1997 include $3,416,000 and $7,663,000, respectively, of accrued dismantlement, restoration and abandonment costs.
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective July 1, 1996. SFAS No. 121 requires recognition of impairment losses on long-lived assets (including proved properties, wells, equipment and related facilities) if the carrying amount of such assets, grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows from other assets, exceeds the estimated undiscounted future cash flows of such assets. Measurement of any impairment loss is based on the fair value of the assets. Prior to the adoption of SFAS No. 121, the Company recorded impairments to the extent that the net
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
book value of oil and gas properties, on an overall basis, exceeded the estimated undiscounted future net revenue of proved oil and gas reserves, net of income taxes. Implementation of SFAS No. 121 did not have a material effect on the Company's financial position or results of operations. See Note 4.
Repair and maintenance costs are charged to expense as incurred; additions, improvements and replacements are capitalized.
Debt issue costs
Debt issue costs are capitalized and amortized over the life of the related indebtedness. Any unamortized debt issue costs are expensed at the time the related indebtedness is repaid or otherwise terminated.
Deferred costs
The Company capitalizes costs related to advisory, legal and other direct project costs of pending transactions as deferred costs. At June 30, 1998 and 1997, the Company had capitalized $11,529,000 and $1,317,000, respectively, of development costs related to its sponsorship of North Atlantic Partners' proposal to construct a pipeline offshore eastern Canada as discussed in Note 1.
Revenue recognition
Revenue from oil and gas sales is recognized upon delivery in the period of production. Revenue from drilling services is recognized in the period rendered. The Company's drilling services revenues are generated from contract drilling services related to its two semisubmersible drilling rigs.
Income taxes
The Company utilizes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities.
Earnings per share
During the three months ended December 31, 1997, Tatham Offshore adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes new guidelines for computing earnings per share ("EPS") and requires dual presentation of basic and diluted EPS for entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. All prior period EPS data has been restated to conform with the provisions of SFAS No. 128.
Tatham Offshore excluded from its computation of diluted EPS the effect of antidilutive securities related to its outstanding convertible exchangeable preferred stocks discussed in Note 4 and its convertible production payment related to 25% of the net operating cash flow from Viosca Knoll Block 817.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Basic net loss per share equals diluted net loss per share for the years ended June 30, 1998 and 1997. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for the year ended June 30, 1996.
Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, including those related to oil and gas reserves and potential environmental liabilities, that affect the reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the related reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Management believes that its estimates are reasonable.
Other
The fair values of the financial instruments included in the Company's assets and liabilities approximate their carrying values.
Tatham Offshore adopted SFAS No. 123, "Accounting for Stock Based Compensation", effective July 1, 1996. While SFAS No. 123 encourages entities to adopt the fair value method of accounting for their stock-based compensation plans, the Company has elected to continue to utilize the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The adoption of SFAS No. 123 did not have a material adverse effect on the Company's financial position or results of operations at adoption and during the years ended June 30, 1998, 1997 and 1996.
The Financial Accounting Standards Board recently issued statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for the Company's financial statements as of and for the year ending June 30, 1999. This Statement requires reporting of summarized financial results for operating segments as well as established standards for 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. The Company has not yet completed its evaluation of the impact of this Statement on its financial statements.
Certain amounts in prior years have been reclassified to conform to the current year's presentation.
The Company utilizes an off-balance sheet financial instrument to manage the interest rate associated with its borrowings. An interest rate cap is used to lock in a maximum rate if rates rise, but enables the Company to otherwise pay lower market rates. The cost of the interest rate cap is amortized to interest expense over the life of the cap, and the unamortized cost is included in other assets.
NOTE 4 - PROPERTY AND EQUIPMENT:
SEMISUBMERSIBLE DRILLING RIGS
At June 30, 1998, capitalized costs and related accumulated depreciation of semisubmersible drilling rigs totaled $135,754,000 and $6,494,000, respectively, and relate to the contribution by DeepTech of all of the outstanding capital stock of DeepFlex to Tatham Offshore on June 25, 1998 (Notes 1 and 2). As a result, through RIGCO and FPS VI, the Company owns the FPS Laffit Pincay and the FPS Bill Shoemaker.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Both the FPS Laffit Pincay and the FPS Bill Shoemaker are currently operated under management and charter agreements with Sedco Forex Division ("Sedco Forex") of Schlumberger Technology Corporation. Sedco Forex is responsible for all aspects of operating and marketing of the drilling rigs, subject to agreed budgets and certain authorizations for new contracts. The agreements with Sedco Forex provide them with a management fee and the recoupment of their actual operating costs.
OIL AND GAS PROPERTIES
Capitalized Costs
Costs Incurred in Oil and Gas Acquisition, Exploration and Development Activities
Results of Operations for Oil and Gas Producing Activities
Sale of Properties to the Partnership
On June 30, 1995, the Partnership entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with Tatham Offshore. Pursuant to the Purchase and Sale Agreement, the Partnership acquired, subject to certain reversionary interests, a 75% working interest in Viosca Knoll Block 817, a 50% working interest in Garden Banks Block 72 and a 50% working interest in Garden Banks Block 117 (the "Assigned Properties") from Tatham Offshore for $30,000,000. Tatham Offshore received $15,000,000 at closing and an
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
additional $15,000,000 on August 15, 1995. The Partnership was entitled to retain all of the revenue attributable to the Assigned Properties until it has received net revenue equal to the Payout Amount (as defined below), whereupon Tatham Offshore was entitled to receive a reassignment of the Assigned Properties, subject to reduction and conditions as discussed below. Prior to December 10, 1996, "Payout Amount" was defined as an amount equal to all costs incurred by Flextrend Development with respect to the Assigned Properties (including the $30,000,000 acquisition cost paid to Tatham Offshore) plus interest thereon at a rate of 15% per annum. Effective February 1, 1996, the Partnership entered into an agreement with Tatham Offshore regarding the restructuring of certain transportation agreements that increased the amount recoverable from the Payout Amount by $7,500,000 plus interest (see "Impairment, Abandonment and Other" discussion below). During the year ended June 30, 1996, Tatham Offshore waived its options to prepay the then-existing Payout Amount and receive a reassignment of its working interests and recognized $22,641,000 as a gain on the sale of oil and gas properties.
Effective December 10, 1996, the Partnership exercised its option to permanently retain 50% of the acquired working interest in the Assigned Properties in exchange for forgiving 50% of the then-existing Payout Amount exclusive of the $7,500,000 plus interest added to the Payout Amount in connection with the restructuring of certain transportation agreements discussed above. The Partnership remained obligated to fund any further development costs attributable to Tatham Offshore's portion of the working interests, with such costs to be added to the Payout Amount. The Partnership's election to retain 50% of the acquired working interest in the Assigned Properties reduced the Payout Amount from $94,020,000 to $50,760,000. Subsequent to December 10, 1996, only 50% of the development and operating costs attributable to the Assigned Properties were added to the Payout Amount and 50% of the net revenue from the Assigned Properties reduce the Payout Amount. See "Impairment, Abandonment and Other" discussion below and Note 2. As a result of the Merger and related transactions, the reversionary interests were cancelled.
Viosca Knoll Block 817
In September 1995, Tatham Offshore reacquired an aggregate 25% working interest in Viosca Knoll Block 817 and an approximate 12.5% working interest in the remainder of Viosca Knoll Blocks 772/773, 774, 818 and 861 (collectively, the "Viosca Knoll Properties") from two industry partners for a total of $16,000,000 in convertible production payments payable from 25% of the net cash flow from the Viosca Knoll Properties so acquired. The estimated net present value of the convertible production payments payable of $2,000,000 was recorded as oil and gas properties on the date of acquisition. The unpaid portion of the production payments is convertible into Tatham Offshore common stock at any time during the first five years at $8.00 per share. At June 30, 1998, the unpaid portion of the production payment obligation totaled $11,299,000. For the years ended June 30, 1998 and 1997, production and operating expenses include $1,236,000 and $1,465,000, respectively, of production payments made during the year. As part of the Redemption Agreement, this property was transferred to the Partnership effective August 14, 1998.
Transportation and Processing Agreements
General. In December 1993, Tatham Offshore entered into a master gas dedication arrangement with the Partnership (the "Master Dedication Agreement"). Under the Master Dedication Agreement, Tatham Offshore dedicated all production from its Garden Banks, Viosca Knoll, Ewing Bank and Ship Shoal leases as well as certain adjoining areas of mutual interest to the Partnership for transportation. In exchange, the Partnership agreed to install the pipeline facilities necessary to transport production from the areas and certain related facilities and to provide transportation services with respect to such production. Tatham Offshore agreed to pay certain fees for transportation services and facilities access provided under the Master Dedication Agreement. Pursuant to the terms of the Purchase and Sale Agreement, the Partnership assumed all of Tatham Offshore's obligations under the Master Dedication Agreement and certain ancillary agreements with respect to the Assigned Properties.
Ewing Bank Gathering System. Pursuant to a gathering agreement (the "Ewing Bank Agreement") among Tatham Offshore, DeepTech, and a subsidiary of the Partnership, Tatham Offshore dedicated all natural gas and crude oil produced from eight of its Ewing Bank leases for gathering and redelivery by the Partnership and was obligated to pay a demand rate as well as a commodity charge equal to 4% of the market price of production actually transported. Tatham Offshore's Ewing Bank 914 #2 well commenced production in August 1993. Production and
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
operating expenses on the accompanying consolidated statement of operations included demand and commodity fees of $1,493,000 and $5,090,000 for the years ended June 30, 1997 and 1996, respectively, related to the Ewing Bank Agreement. In March 1996, the Partnership settled all remaining unpaid demand charge obligations under this agreement in exchange for certain consideration as discussed below.
Ship Shoal. Tatham Offshore and the Partnership also entered into a gathering and processing agreement (the "Ship Shoal Agreement") pursuant to which the Partnership constructed a gathering line from Tatham Offshore's Ship Shoal Block 331 lease to interconnect with a third-party pipeline at the Partnership's processing facilities located on its Ship Shoal Block 332 platform. Pursuant to the terms of the Ship Shoal Agreement, and in consideration for constructing the interconnect, refurbishing the platform and providing access to the processing facilities, Tatham Offshore was required to pay the Partnership demand charges and has dedicated all production from its Ship Shoal 331 lease and eight additional surrounding leases for gathering and processing by the Partnership for additional commodity fees. Production and operating expenses on the accompanying consolidated statement of operations include demand and commodity fees of $638,000 and $997,000 for the years ended June 30, 1997 and 1996, respectively, related to the Ship Shoal Agreement. In March 1996, the Partnership settled all remaining unpaid demand charge obligations under this agreement in exchange for certain consideration as discussed below.
Transportation Agreements Settled. Effective February 1, 1996, Tatham Offshore entered into an agreement with the Partnership to prepay its remaining demand charge obligations under the Ewing Bank and Ship Shoal Agreements. Under the agreement, Tatham Offshore's demand charge obligations relative to the Ewing Bank Gathering System and the pipeline facilities constructed by the Partnership for its Ship Shoal property have been prepaid in full. In exchange, Tatham Offshore (i) issued to the Partnership 7,500 shares of Senior Preferred Stock (as defined in Note 6) with a liquidation preference of $1,000 per share, (ii) added the sum of $7,500,000 to the Payout Amount under the Purchase and Sale Agreement and (iii) granted to the Partnership certain rights to use and acquire the Ship Shoal Block 331 platform. The Partnership has the right to utilize the Ship Shoal Block 331 platform and related facilities at a rental rate of $1.00 per annum for such period as the platform is owned by Tatham Offshore and located on the Ship Shoal Block 331, provided such use does not interfere with lease operations or other activities of Tatham Offshore. In addition, the Partnership has a right of first refusal relative to a sale of the platform. The agreement with the Partnership resulted in a reduction in demand charge payments of $7,800,000 and $4,100,000 for the years ended June 30, 1997 and 1996, respectively. Tatham Offshore remains obligated to pay the commodity charges under these agreements. See "Impairment, Abandonment and Other" discussion below. This agreement was transferred to the Partnership on August 14, 1998 as part of the Redemption Agreement.
Impairment, Abandonment and Other
In May 1997, Tatham Offshore shut-in the Ewing Bank 914 #2 well as a result of a downhole mechanical problem. Although Tatham Offshore was evaluating potential workover and recompletion alternatives for this well, the Company, at June 30, 1997, reserved its remaining investment in the Ewing Bank 914 #2 well and certain adjacent leases and accrued additional costs associated with the abandonment of this well and the Ewing Bank 915 #4 well. In May 1998, Tatham Offshore completed abandonment procedures on these wells.
Problems resulting from the completion of three wellbores at Ship Shoal Block 331 have resulted in only a minimal amount of production from the property and Tatham Offshore decided not to pursue further recompletion operations. As a result of this decision, at June 30, 1997, Tatham Offshore reserved its remaining investment in its Ship Shoal Block 331 and accrued costs associated with the abandonment of the platform and wells. In December 1997, Tatham Offshore assigned its Ship Shoal Block 331 lease and related abandonment obligations to a third party.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In summary, impairment, abandonment and other on the accompanying consolidated statement of operations includes the following items related to the Ewing Bank and Ship Shoal properties discussed above.
NOTE 5 - INDEBTEDNESS:
RIGCO Credit Facility
On September 30, 1996, RIGCO entered into a $65 million senior secured credit facility with a syndicate of lenders (the "RIGCO Credit Facility"). Proceeds from the RIGCO Credit Facility were used to acquire the FPS Bill Shoemaker, to fund significant upgrades to the FPS Bill Shoemaker, and to retire certain other rig related indebtedness. In April 1997, the RIGCO Credit Facility was amended to provide for an additional $12,000,000 to fund the remaining refurbishments and upgrades to the FPS Bill Shoemaker. The RIGCO Credit Facility was amended in July 1997 to revise certain covenants. The RIGCO Credit Facility (i) matures on March 31, 1999, (ii) bears interest at the prime rate plus 3% per annum (11.5% at June 30, 1998), payable quarterly, (iii) is secured by all tangible and intangible assets of RIGCO including the two semisubmersible drilling rigs, (iv) requires a quarterly principal payment of excess cash flow as defined in the credit agreement with a minimum principal amortization of $250,000 per quarter beginning on December 31, 1996 and ending September 30, 1998 and (v) is subject to customary conditions and covenants, including the maintenance of a minimum level of working capital. As of June 30, 1998, amounts outstanding under the RIGCO Credit Facility totaled $59,156,000. Debt issue costs related to the RIGCO Credit Facility of $4,400,000 were capitalized and are being amortized over the two-year life of the credit facility. Interest incurred and amortization of debt issue costs related to the RIGCO Credit Facility totaled $151,000 for the period from June 25, 1998 through June 30, 1998. In connection with providing the RIGCO Credit Facility, lending syndicate members were issued warrants to purchase an aggregate of 5% of RIGCO's outstanding equity. Management believes it will be able to refinance the Credit Facility upon its maturity.
As required by the RIGCO Credit Facility, RIGCO purchased an interest rate cap from a financial institution which established a maximum rate of 11.74% per annum on $36.5 million of outstanding principal for the remaining term of the credit facility.
Long-term debt - affiliates
As of June 30, 1997, Tatham Offshore had $60,000,000 aggregate principal amount of Subordinated Convertible Promissory Notes (the "Subordinated Notes") outstanding, all of which were held by DeepTech. Interest expense related to the Subordinated Notes totaled $1,709,000 from July 1, 1997 through September 18, 1997, the date on which the DeepTech Board of Directors approved entering into an option agreement to restructure the Subordinated Notes (the "Restructuring Agreement"). Pursuant to the Restructuring Agreement, DeepTech forgave the scheduled interest payments due in September and December 1997 under the Subordinated Notes and on December 17, 1997, converted the Subordinated Notes into 26,666,667 shares of Tatham Offshore common stock at a conversion rate of $2.25 per share, the average closing price of Tatham Offshore common stock for the ten trading days immediately preceding the exercise of the option. As a result of the conversion of the Subordinated Notes, Tatham Offshore eliminated all of its then existing outstanding debt.
The Subordinated Notes bore interest at a rate of 11 3/4% per annum, payable quarterly. Effective July 1, 1997, the interest rate increased to 13% per annum. Interest expense related to this borrowing totaled $1,709,000, $7,040,000 and $7,060,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other
On May 15, 1998, DeepFlex borrowed $5,000,000 from Tatham Brothers, L.L.C., an affiliate of Mr. Tatham. Proceeds from the borrowing were used to fund certain upgrades and routine maintenance on the FPS Laffit Pincay. This borrowing matures on January 15, 1999, bears interest at 12% per annum, payable at maturity and is secured by the Subordinated Promissory Note dated September 30, 1996 issued by RIGCO North America, L.L.C. payable to DeepFlex. Interest expense totaled $10,000 for the period from June 25, 1998 through June 30, 1998. (See Note 11)
Interest expense related to other third party debt totaled $256,000 for the year ended June 30, 1996.
NOTE 6 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity:
- ----------
(a) In March 1998, Tatham Offshore eliminated its 9% Senior Convertible Preferred Stock and replaced this stock with Series B 9% Senior Convertible Preferred Stock ("Senior Preferred Stock"). Each share of the Senior Preferred Stock is senior to all other classes of Tatham Offshore preferred and common stock in the case of liquidation, dissolution or winding up of Tatham Offshore. The Partnership holds all outstanding shares. In connection with the Redemption Agreement, the Senior Preferred Stock and all related unpaid dividends will be redeemed in full. See Note 2.
(b) DeepFlex held 4,670,957 shares of the outstanding Series A Preferred Stock at June 30, 1997. In March 1998, DeepFlex conveyed its 4,670,957 shares of Series A Preferred Stock to DeepTech. See Note 2.
(c) DeepFlex held 1,016,957 and 4,312,086 shares of the outstanding Series C Preferred Stock and Mandatory Redeemable Preferred Stock, respectively, at June 30, 1997. In February 1998, DeepFlex exchanged its 1,016,957 shares of Tatham Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per share for a total of $2,656,000 in proceeds to Tatham Offshore. Tatham Offshore used $2,496,000 of proceeds to redeem all of its 4,991,377 shares of Mandatory Redeemable Preferred Stock outstanding at $0.50 per share as required under the terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex conveyed the 406,783 shares of common stock to DeepTech in March 1998. See Note 2.
(d) The Senior Preferred Stock shall be convertible into Series A Preferred Stock using a conversion ratio equal to (i) the liquidation preference amount plus accumulated unpaid dividends divided by (ii) $0.9375, the closing price of the Series A Preferred Stock on February 27, 1998.
(e) At any time until December 31, 1998, each share may be exchanged for 0.4 Exchange Warrants. Each full Exchange Warrant entitles the holder thereof to purchase one share of Tatham Offshore common stock at $6.53 per share. The Exchange Warrants expire on July 1, 1999. Alternatively, at any time, the holder of any shares may convert the liquidation value and unpaid dividends into shares of Tatham Offshore common stock at $6.53 per share.
(f) Redeemable at the option of Tatham Offshore on or after July 1, 1997.
(g) Tatham Offshore was required to redeem at a redemption price of $0.50 per share if Tatham Offshore redeems any shares of Series A, B or C Preferred Stock. Tatham Offshore was also required to redeem at a redemption price of $0.50 per share from net proceeds from the sale of common stock pursuant to the exercise of Exchange Warrants, subject to certain conditions. See (c) above.
(h) 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.
Common Stock
Effective February 1996, an amendment to Tatham Offshore's Restated Certificate of Incorporation increased the number of authorized shares of Tatham Offshore's common stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000 shares and the number of shares of preferred stock, $0.01 par value per share, from 10,000,000 shares to 110,000,000 shares. This increase in authorized capital was necessary in order for Tatham Offshore to effect the rights offering, as discussed below.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the year ended June 30, 1998, Tatham Offshore issued 90,000 shares of common stock to a consultant for services rendered in connection with the Company's activities in Atlantic Canada. During the year ended June 30, 1996, Tatham Offshore issued 245,182 shares of common stock to certain management personnel of DeepTech in connection with DeepTech's deferred compensation arrangement discussed in Note 7.
Preferred Stock
Tatham Offshore filed a registration statement (the "Offering") with the Securities and Exchange Commission (the "Commission") which was declared effective on December 26, 1995, relating to the granting to all holders of Tatham Offshore's common stock, on the record date, December 26, 1995, rights (the "Rights") to purchase up to 25,120,948 warrants (the "Warrants"). Each Right entitled the holder to subscribe to purchase one Warrant at the purchase price of $.50 per Warrant. In February 1996, Tatham Offshore issued 25,120,948 Warrants and received $12,560,000 in gross proceeds ($11,291,000 in net proceeds) pursuant to the exercise of Rights. A total of 20,129,571 Warrants were exercised to purchase 18,717,030 shares, 74,379 shares and 1,338,162 shares of Series A, B and C Preferred Stock, respectively, at $1.00 per share which generated an additional $15,459,000 in proceeds to Tatham Offshore. The remaining 4,991,377 Warrants outstanding on January 1, 1997 were automatically converted into an equal number of shares of Mandatory Redeemable Preferred Stock.
In February 1998, DeepFlex exchanged its 1,016,957 shares of Tatham Offshore Series C Preferred Stock for 406,783 Exchange Warrants and immediately converted the Exchange Warrants into 406,783 shares of common stock at $6.53 per share for a total of $2,656,000 in proceeds to Tatham Offshore. Tatham Offshore used $2,496,000 of proceeds to redeem all of its 4,991,377 shares of Mandatory Redeemable Preferred Stock outstanding at $0.50 per share as required under the terms of the Mandatory Redeemable Preferred Stock issue. DeepFlex conveyed the 406,783 shares of common stock to DeepTech in March 1998.
Stock Compensation Plans
On August 28, 1995, Tatham Offshore filed a registration statement on Form S-8 with the Commission for the registration of 400,000 shares of common stock authorized for issuance upon exercise of options under Tatham Offshore's Equity Incentive Plan (the "Incentive Plan") and 100,000 shares of common stock authorized for issuance upon exercise of options under Tatham Offshore's Non-Employee Director Stock Option Plan (the "Director Option Plan" and collectively with the Incentive Plan, the "Option Plans"). The Incentive Plan, as amended, provides Tatham Offshore the ability to issue a variety of awards pursuant to the plan including stock options, restricted stock, stock appreciation rights and stock value equivalent awards. In January 1998, Tatham Offshore issued 100,000 options under the Incentive Plan. In June 1996, Tatham Offshore issued 25,514 shares of common stock to outside directors pursuant to the exercise of options granted under the Director Option Plan in settlement of directors' fees and meeting attendance fees for the year ended June 30, 1996. During the years ended June 30, 1998, 1997 and 1996, Tatham Offshore issued 15,000 options, 9,000 options and 13,000 options, respectively, pursuant to the Director Option Plan. Options outstanding under the Option Plans at June 30, 1998 totaled 136,500 of which 31,500 options were exercisable. In addition, Tatham Offshore issued 79,000 stock appreciation rights pursuant to the Incentive Plan during the year ended June 30, 1997.
Tatham applies APB Opinion No. 25 and related interpretations in accounting for its option plans, under which no compensation cost has been recognized. Had compensation costs for the Option Plan been determined consistent with the methodology prescribed under SFAS No. 123, the Company's net income (loss) and earnings (losses) per share would have been adjusted to the pro forma amounts presented below:
The following table summarizes the Option Plans:
The fair value at each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
In June 1996, the Company issued 255,138 shares of common stock to outside directors pursuant to the exercise of options granted under the Director Option Plan in settlement of directors' fees and meeting attendance fees for the year ended June 30, 1996. In addition, Tatham Offshore issued 790,000 stock appreciation rights pursuant to the Incentive Plan during the year ended June 30, 1997.
NOTE 7 - RELATED PARTY TRANSACTIONS:
DeepTech
The management agreement between Tatham Offshore and DeepTech provides 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 November 1, 1995, July 1, 1996 and July 1, 1997, the Company amended its management agreement with DeepTech to provide for an annual management fee of 27.4%, 24% and 26%, respectively, of DeepTech's overhead. During the years ended June 30, 1998, 1997 and 1996, DeepTech charged Tatham Offshore $4,375,000, $3,279,000 and $4,436,000, respectively, under the management agreement. The Company believes these amounts are representative of what costs would have been on a stand alone basis for these services. The management agreement was terminated upon the closing of the Merger. See Note 2.
DeepTech also entered into a management agreement with DeepFlex which was intended to reimburse DeepTech for the estimated costs of its operational, financial, accounting and administrative services. The management fee was intended to reimburse DeepTech for the estimated costs of services provided to DeepFlex. Effective July 1, 1996, the management agreement was amended to provide for an annual management fee of 18% of DeepTech's unreimbursed overhead. For the years ended June 30, 1998 and 1997, DeepFlex incurred $3,029,000 and $2,458,000, respectively, under this management agreement. The Company believes these amounts are representative of what costs would have been on a stand-alone basis for these services. The management agreement was terminated upon the closing of the Merger.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In October 1995, DeepFlex entered into a bridge loan agreement (the "Bridge Loan") with Tatham Offshore whereby DeepFlex agreed to make $12,500,000 of interim bridge financing available to fund a portion of the Company's working capital and capital requirements. Tatham Offshore borrowed a total of $8,000,000 under the Bridge Loan which accrued interest at a rate of 15% per annum. Interest expense related to borrowings under the Bridge Loan totaled $210,000 for the year ended June 30, 1996. On January 31, 1996, DeepFlex subscribed for the purchase of 10,000,000 Warrants, pursuant to the exercise of Rights which had been assigned from DeepTech, at a cost of $5,000,000, which was paid through the forgiveness of $5,000,000 of principal and interest due under the Bridge Loan. In February 1996, Tatham Offshore used Offering proceeds to repay in full the remaining principal and accrued interest outstanding under the Bridge Loan.
On June 30, 1996, DeepFlex exercised 4,670,957 of its 10,000,000 Warrants to purchase an equal number of shares of Series A Preferred Stock at $1.00 per share by offsetting the then outstanding payable to DeepTech for costs allocated under the management agreement by $4,670,957.
On November 1, 1995, Tatham Offshore converted $1,734,000 of its accounts payable to an affiliate into an unsecured promissory note payable to DeepTech (the "Affiliate Note"). The Affiliate Note bore interest at 14.5% per annum, payable quarterly, and the principal was payable to DeepTech in six monthly installments which began on January 31, 1997. Interest expense related to the Affiliate Note totaled $202,000 and $170,000 for the years ended June 30, 1997 and 1996, respectively.
Under a convertible production payment, the holders of such production payments are entitled in the aggregate to 25% of the proceeds from the production attributable to a 25% working interest in Viosca Knoll Block 817 (after deducting all leasehold operating expenses, including platform access and processing fees) until the holders have received the aggregate sum of $16.0 million. At the option of the holders, the unpaid portion of the production payment may be converted into Tatham Offshore common stock at any time until September 2000. In March 1998, Mr. Tatham acquired one-half of this convertible production payment. At June 30, 1998, the unpaid portion of the convertible production payment obligation totaled $11.3 million.
Effective July 1, 1995, DeepTech established three deferred compensation arrangements: (i) a mandatory arrangement for DeepTech's Chief Executive Officer (the "DeepTech CEO"), (ii) a mandatory arrangement for certain senior executives of DeepTech and (iii) an optional arrangement for all other employees of DeepTech. Pursuant to the terms of each arrangement, participants deferred all or a portion of their cash salary until no later than July 1, 1996. During each month in the deferral period, each participant was entitled to receive options to purchase a number of shares of either DeepTech or Tatham Offshore or Preference Units of the Partnership equal to a percentage (ranging from 100% to 300% of their cash salary) divided by the lesser of the closing price on June 30, 1995 (DeepTech - $4.00, Tatham Offshore - $3.50 and the Partnership - $11.875) or the average closing price for the applicable month. Options were exercisable only by cancellation of the participant's cash salary. Each participant earned credits equal to a multiple, based on the option elected, of their deferred cash salary. Any participant except the DeepTech CEO could have received all or a portion of their salary in cash if they did not elect to exercise any options. To the extent that Tatham Offshore issued its common stock pursuant to the exercise of options granted under these arrangements, it received an offsetting credit against its management fees payable to DeepTech. In November 1995, DeepTech terminated the deferred compensation arrangement for all but three employees of DeepTech. In November 1995 and June 1996, Tatham Offshore issued 12,095 shares and 12,423 shares, respectively, of its common stock in connection with the mandatory arrangement for certain senior executives of DeepTech and received a $360,000 credit against its management fees payable to DeepTech.
The Partnership
Tatham Offshore Canada Limited ("Tatham Offshore Canada"), a wholly-owned subsidiary of Tatham Offshore, is the Canadian representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic Partners"), the sponsor of a proposal to build an approximately 2,500 kilometer pipeline from offshore Newfoundland and Nova Scotia to the eastern seaboard of the United States. The Partnership has entered into a letter agreement with Tatham Offshore Canada regarding participation in the North Atlantic pipeline project. Under such agreement, Tatham Offshore Canada is responsible for the development costs of the project. Such agreement contains certain termination rights, contemplates the negotiation, execution and delivery of definitive agreements and provides that the Partnership
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
would hold a pro rata partnership interest of up to 20% in North Atlantic Partners. The Partnership has no financial commitment to the project until and unless an application is approved by the appropriate Canadian and United States regulatory authorities. In the event the Partnership was to terminate its participation in North Atlantic Partners after the date North Atlantic Partners receives regulatory approval of an application but prior to the in-service date of the first phase of the North Atlantic pipeline, the Partnership, under certain conditions, would be obligated to pay Tatham Offshore Canada an amount equal to 150% of the Partnership's pro rata share of the "success fee" earned by Tatham Offshore Canada related to the first phase of construction. For a period of one year after the effective date of the Merger discussed in Note 2, the Partnership shall have the right to terminate this agreement without incurring the liability for the above-mentioned "success fee". Tatham Offshore Canada is seeking additional participants on the same basis as that offered to the Partnership.
The Partnership charged Tatham Offshore $1,827,000, $1,995,000 and $1,722,000 for the years ended June 30, 1998, 1997 and 1996, respectively, for commodity and platform access fees associated with the Viosca Knoll 817 lease in accordance with certain agreements between the parties. Commodity charges are based on the volume of oil and gas transported or processed.
Other
During the years ended June 30, 1998, 1997 and 1996, Tatham Offshore sold 99% of its production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of DeepTech. Through October 1995, the sales prices were based upon contractually agreed-upon posted prices. In November 1995, Tatham Offshore renegotiated its agreement with Offshore Marketing to provide Offshore Marketing 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.
Dover Technology, Inc. ("Dover"), a 50%-owned subsidiary of DeepTech, charged Tatham Offshore $160,000 and $601,000 for the years ended June 30, 1997 and 1996, respectively, for services related to the acquisition, development, exploration or evaluation of oil and gas properties. Tatham Offshore's payable to Dover for these services in the amount of $1,734,000 at November 1, 1995 was converted into the Affiliate Note.
During the year ended June 30, 1996, the Company forgave a $90,000 advance to an officer of DeepTech who is also a stockholder of Tatham Offshore in exchange for consulting fees rendered by the officer/stockholder to Tatham Offshore.
The Company is a guarantor of a $5.0 million loan from NationsBank, N.A. to Tatham Brothers, which proceeds were used to fund certain improvements to the Rigs. The loan bears interest at the rate of Prime plus 1 1/2% per annum and is due on January 19, 1999 or on demand. Mr. Tatham is also a co-guarantor of this loan.
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 the Company, DeepTech, Mr. Tatham and El Paso. Pursuant to the Standby Agreement, to the extent that any of the Company's Common Stock or Series A Preferred Stock was not subscribed for by holders of DeepTech common stock in the Rights Offering, Tatham Brothers committed to purchase such number of unsubscribed shares in order for DeepTech to receive net proceeds from the Rights Offering of not less than $75 million (the "Standby Commitment"). In addition, Tatham Brothers had the right to purchase any shares which DeepTech held after the Rights Offering and the satisfaction of the Standby Commitment. Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the Standby Commitment, which guarantee is 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.
Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by and between Tatham Brothers and the Company, in consideration of the Standby Commitment, the Company agreed to pay to Tatham Brothers a fee ranging from $5.8 million to $7.5 million depending upon the date of closing of the Rights Offering. Such fee was payable by the Company in cash, or at Tatham Brothers' election in shares of Common Stock. In connection with the Standby Commitment, the Company has agreed to grant Tatham Brothers certain registration rights with respect to such shares, including three demand registrations and unlimited piggyback registration rights for five years. The terms of the Purchase Commitment Agreement were negotiated by Tatham Brothers and the Company and were approved by the Company's Conflict Committee and Board of Directors.
NOTE 8 - INCOME TAXES:
The Company's deferred income tax liabilities (assets) at June 30, 1998 and 1997 consist of net operating loss ("NOL") carryforwards and the tax effect of timing differences between financial and tax reporting related to the recognition of certain amounts as follows:
Because of the Company's cumulative losses, valuation allowances of $45,531,000 and $37,613,000 at June 30, 1998 and 1997, respectively, were provided against the net deferred tax assets. At June 30, 1998, the Company had approximately $133,915,000 of regular tax NOL carryforwards and approximately $132,599,000 of alternative
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
minimum tax NOL carryforwards. These losses begin to expire in the year 2005. Substantial changes in a company's ownership can result in an annual limitation on the utilization of federal income tax NOL carryforwards.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
The Nasdaq National Market
The Nasdaq Stock Market, Inc. ("Nasdaq") listing criteria requires a company listed on The Nasdaq National Market to have a minimum dollar value associated with the public float of its listed stock. On February 23, 1998, the Nasdaq minimum public float requirement increased from $1.0 million to $5.0 million. Pursuant to an exception granted by Nasdaq, Tatham Offshore had until May 26, 1998 to meet the minimum public float requirement. Since the market value of Tatham Offshore's public float (i) had exceeded $5 million from time to time since February 23, 1998 and (ii) is expected to be well in excess of $5 million when the Rights Offering is consummated, Tatham Offshore had requested that Nasdaq either (i) agree that the public float requirement has been met or (ii) agree to extend the exception period until the earlier to occur of September 30, 1998 or the date on which the Rights Offering is consummated. On May 27, 1998, Nasdaq notified Tatham Offshore that the Nasdaq Listing Qualifications Panel (the "Nasdaq Panel") had determined to continue Tatham Offshore's listing since Tatham Offshore's public float exceeded the current requirement, and based on the Nasdaq Panel's decision, Tatham Offshore continued to be listed on the Nasdaq National Market.
Other
In the ordinary course of business, the Company is subject to various laws and regulations. In the opinion of management, compliance with existing laws and regulations will not materially affect the financial position or operations of the Company. Various legal actions have arisen in the ordinary course of business. Management believes that the outcome of such proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
The Company anticipates substantial future capital expenditures associated with the development and implementation of the North Atlantic pipeline project and related opportunities in Atlantic Canada. Realization of the potential of the North Atlantic pipeline project and related opportunities in Atlantic Canada is dependent upon the ability of the Company to obtain sufficient additional capital or project financing.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Supplemental disclosures of noncash investing and financing activities
As discussed in Notes 1 and 2, DeepTech contributed 100% of the outstanding capital stock of DeepFlex to Tatham Offshore on June 25, 1998. The assets and liabilities assumed were as follows (in thousands):
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 - SUBSEQUENT EVENTS:
In connection with the Merger, the Company entered into a short term financing arrangement with Tatham Brothers to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the Redemption Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in connection with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the short term financing. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The short term financing bears interest at the rate of 12% per annum and is due on January 15, 1999. It is secured by a pledge of DeepFlex of its interest in a certain payment-in-kind Subordinated Promissory Notes issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of the Company, which has a current outstanding balance of approximately $70.0 million. The Company anticipates that it will refinance the short term financing with Tatham Brothers upon its maturity or pay off the facility with proceeds from the refinancing of the Credit Facility.
NOTE 12 - SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
Oil and gas reserves
The following table represents the Company's net interest in estimated quantities of developed and undeveloped reserves of crude oil, condensate and natural gas and changes in such quantities at fiscal year end 1998, 1997 and 1996. Estimates of the Company's reserves at June 30, 1998 have been made by the Company's reserve engineers. Estimates of the Company's reserves at June 30, 1997 and 1996 have been made by the independent engineering consulting firm, Ryder Scott Company Petroleum Engineers. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompletion.
Estimates of reserve quantities are based on sound geological and engineering principles, but, by their very nature, are still estimates that are subject to substantial upward or downward revision as additional information regarding producing fields and technology becomes available.
- ------------------ (a) The revisions of previous estimates of proved reserves from June 30, 1996 to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels of oil and 24,369 MMcf of gas as a result of the assignment of the working interests in Ship Shoal Block 331 and (ii) the elimination of 2.1 million barrels of oil and 3,178 MMcf of gas as a result of the abandonment of the Ewing Bank Block 914 #2 well.
In general, estimates of economically recoverable oil and natural gas reserves and of the future net revenue therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices, future operating costs and future plugging and abandonment costs, all of which may vary considerably from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom, prepared by different engineers or by the same engineers at
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
different sites, may vary substantially. The meaningfulness of such estimates is highly dependent upon the assumptions upon which they are based.
Furthermore, Tatham Offshore's wells have only been producing for a short period of time and, accordingly, estimates of future production are based on this limited history. Estimates with respect to proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than upon actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations, which may be substantial, in the estimated reserves. A significant portion of Tatham Offshore's reserves is based upon volumetric calculations.
Future net cash flows
The standardized measure of discounted future net cash flows relating to the Company's proved oil and gas reserves is calculated and presented in accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." Accordingly, future cash inflows were determined by applying year-end oil and gas prices to the Company's estimated share of future production from proved oil and gas reserves. The average prices utilized in the calculation of the standardized measure of discounted future net cash flows at June 30, 1998 were $12.28 per barrel of oil and $1.76 per MCF of gas. Future production and development costs were computed by applying year-end costs to future years. Future income taxes were derived by applying year-end statutory tax rates to the estimated net future cash flows taking into consideration the Company's NOL carryforwards. A prescribed 10% discount factor was applied to the future net cash flows.
In the Company's opinion, this standardized measure is not a representative measure of fair market value, and the standardized measure presented for the Company's proved oil and gas reserves is not representative of the reserve value. The standardized measure is intended only to assist financial statement users in making comparisons between companies.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following are the principal sources of change in the standardized measure (in thousands):
- ---------- (1) The standardized measure calculations at June 30, 1995 exclude the Company's obligations to pay demand charges to an affiliate relative to its Ewing Bank and Ship Shoal properties. These demand charges were prepaid in full during the year ended June 30, 1996. See Note 4.
(2) The revisions of previous estimates of proved reserves from June 30, 1996 to June 30, 1997 were caused by (i) the elimination of 3.2 million barrels of oil and 24,369 MMcf of gas as a result of the assignment of the working interests in Ship Shoal Block 331 and (ii) the elimination of 2.1 million barrels of oil and 3,178 MMcf of gas as a result of the abandonment of the Ewing Bank Block 914 #2 well.
INDEX TO EXHIBITS
- -------------------------- * Filed herewith
(b) Reports on Form 8-K.
None.