ITEM 3. LEGAL PROCEEDINGS
RIGCO North America, L.L.C. v. Schlumberger Technology Corporation, et al., Cause No. 99-38082. On July 26, 1999, RIGCO sued Schlumberger Technology Corporation ("STC") and Schlumberger, Canada Ltd. ("SCL") seeking over $51 million in damages in connection with the defendants' charters of the FPS Laffit Pincay and the FPS Bill Shoemaker. RIGCO's suit alleges causes of action for gross negligence, breach of contract, negligence, fraud, and negligent misrepresentation arising from Defendants' management, operation and marketing of both rigs as well as STC's agreement to renovate the Bill Shoemaker. Both defendants have answered in the case, but no trial date is set at this time. The suit is proceeding in state district court in Harris County, Texas.
In re RIGCO North America, L.L.C., et al.; In the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division; Case Nos. 99-22401-C-11 through 99-22404-C-11 (Jointly Administered under Case No. 99-22401-C-11). On August 9, 1999, RIGCO North America, L.L.C., FPS VI, L.L.C., FPS III, Inc., and FPS V, Inc. (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Code. The Debtors are operating their businesses and managing their property as debtors-in-possession. The Debtors have obtained interim authority for the use of cash collateral through an agreement between the Debtors and the secured creditors, which agreement is scheduled to expire on October 31, 1999.
RIGCO North America, L.L.C. v. Schlumberger Technology Corporation and Schlumberger Canada Ltd.; In the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division; Adversary No. 99-2154-C. On September 3, 1999, RIGCO North America, L.L.C. filed a complaint against Schlumberger Technology Corporation and Schlumberger Canada Ltd. to avoid a preferential transfer or transfers pursuant to 11 U.S.C. Section 547 and to recover the property transferred or its value pursuant to 11 U.S.C. Section 550. The Defendants have not yet answered the complaint. On September 21, 1999, the Court entered a Comprehensive Discovery, Mediation and Scheduling Order.
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
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of August 31, 1999, there were approximately 160 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 or the OTC Bulletin Board for the periods indicated. On May 13, 1999, the Company's common stock was delisted from the Nasdaq National Market and began trading on the OTC Bulletin Board. 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, 1999:
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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, Leviathan 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. Leviathan 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 could have been exchanged for 0.4 Exchange Warrants. Each full Exchange Warrant entitled the holder thereof to purchase one share of common stock at $6.53 per share. The Exchange Warrants expired 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 common and preferred stock is traded on the OTC Bulletin Board Service.
(f) 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").
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 Sections 4(2) and 3(a)(9) 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, 1999, 1998 and 1997 and at June 30, 1999 and 1998 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 1996 and at June 30, 1997 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 Pipeline Partners' pipeline project, all of the historical business and operations of Tatham Offshore prior to August 14, 1998 have been transferred to DeepTech and Leviathan. Management believes that 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, 1999, 1998 and 1997. Effective June 25, 1998, Tatham Offshore acquired DeepFlex which, through its subsidiaries, owns the Laffit Pincay and the Bill Shoemaker. On August 14, 1998, Tatham Offshore transferred all of its remaining oil and gas properties to Leviathan 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 Pipeline Partners' pipeline project, all of the historical business and operations of Tatham Offshore prior to August 14, 1998 have been transferred to DeepTech and Leviathan. Management believes that 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, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998
Revenue from drilling services totaled $39.8 million for the year ended June 30, 1999, $37.6 million of which was generated by the Bill Shoemaker and $2.2 million by the Laffit Pincay. Revenue from 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.
Operating expenses for the year ended June 30, 1999 totaled $22.2 million and were attributable to the management fee and direct operating expenses for the Rigs. During this period, the Bill Shoemaker's operating expenses totaled $13.6 million and the Laffit Pincay's operating expenses totaled $8.6 million. Operating expense for the Laffit Pincay during this period included the costs necessary to maintain the rig in a warm-stacked mode, awaiting a drilling contract. Operating expense for the Rigs for the period from June 25, 1998 through June 30, 1998 totaled $0.4 million.
Depreciation expense totaled $5.7 million for the period ended June 30, 1999. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $3.8 million and $1.9 million, respectively. Depreciation expense relating to the Rigs during the period ended June 30, 1998 totaled $91,000.
General and administrative expense totaled $6.9 million for the year ended June 30, 1999 as compared to $0.2 million for the year ended June 30, 1998. General and administrative costs attributable to discontinued operations totaled $0.3 million for the year ended June 30, 1999 as compared to $4.9 million for the year ended June 30, 1998. In connection with the Merger, the management agreement between the Company and DeepTech was terminated on August 14, 1998 and the Company hired a management team and support personnel required to conduct its contract drilling services business and implement its Atlantic Canada strategy. General and administrative expense for the year ended June 30, 1999 includes staff and overhead costs for the operation of the marine services and Atlantic Canada businesses whereas general and administrative costs for the year ended June 30, 1998 include costs relative to the Atlantic Canada business only.
Operating income for the year ended June 30, 1999 totaled $4.9 million as compared to an operating loss of $0.7 million for the year ended June 30, 1998. The change was due to the items discussed above.
Interest and other income totaled $1.0 million for the year ended June 30, 1999 as compared with $0.2 million for the year ended June 30, 1998 and included interest income from available cash and other income in 1999 of $618,000 related to a settlement with El Paso under certain merger related agreements. See -- "Liquidity and Capital Resources."
Interest expense for the year ended June 30, 1999 totaled $14.1 million. For the year ended June 30, 1999, interest expense relating to the Credit Facility (as defined herein) totaled $7.7 million. Interest expense relating to borrowings from Tatham Brothers, Thomas P. Tatham and related affiliates totaled $6.5 million, including $4.4 million in interest and $2.1 million related to debt issue costs.
As a result of transferring all of its oil and gas properties in the Gulf to DeepTech and Leviathan in connection with the Merger, the Company discontinued its oil and gas operations effective August 14, 1998 and had a $0.2 million loss from discontinued operations for the year ended June 30, 1999 as compared with a net loss from discontinued operations of $4.3 million for the year ended June 30, 1998. During the period from July 1, 1998 through August 14, 1998, the Company sold 479 million cubic feet ("MMcf") of natural gas and 1,200 barrels of oil at average prices of $1.86 per thousand cubic feet ("Mcf") of natural gas and $7.13 per barrel of oil, respectively. During the year ended June 30, 1998, the Company 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.
Tatham Offshore eliminated all of its Senior Preferred Stock and the associated preferred stock dividends in arrears and cancelled 653,365 shares of its Series A Preferred Stock in connection with the Merger. Tatham Offshore's remaining preferred stock dividends totaled $3.1 million for the year ended June 30, 1999 as compared with $3.8 million for the year ended June 30, 1998. After taking preferred stock dividends into account, the Company's net loss allocable to common shareholders for the year ended June 30, 1999 was $11.5 million, or $0.43 per share, as compared with a net loss allocable to common shareholders for the year ended June 30, 1998 of $8.6 million, or $0.50 per share.
YEAR ENDED JUNE 30, 1998 COMPARED WITH YEAR ENDED JUNE 30, 1997
Revenue from drilling services totaled $0.7 million for the year ended June 30, 1998 and represented revenue from the Rigs for the period June 25, 1998 through June 30, 1998. No drilling service revenue was recorded by the Company for the year ended June 30, 1997 since the Company did not own the Rigs during that period.
Operating expenses for the year ended June 30, 1998 totaled $0.4 million and were attributable to the management fee and direct operating expenses for the Rigs for the period June 25, 1998 through June 30, 1998. No operating expense for the Rigs was recorded by the Company for the year ended June 30, 1997 since the Company did not own the Rigs during that period.
Depreciation expense totaled $91,000 for the year ended June 30, 1998. No depreciation expense relating to the Rigs was recorded during the year ended June 30, 1997 since the Company did not own the Rigs during that period.
General and administrative expense totaled $0.9 million for the year ended June 30, 1998 as compared to $0.7 million for the year ended June 30, 1997. General and administrative costs attributable to discontinued operations totaled $4.9 million and $4.1 million for the years ended June 30, 1998 and 1997, respectively. General and administrative expense includes staff and overhead costs allocated to the Company under a management agreement with DeepTech of $4.4 million and $3.3 million for the years ended June 30, 1998 and 1997, respectively. In connection with the Merger, the management agreement between the Company and DeepTech was terminated on August 14, 1998. General and administrative expense for the year ended June 30, 1998 includes staff and overhead costs for the operation of the marine services and Atlantic Canada businesses whereas general and administrative costs for the year ended June 30, 1997 include costs relative to the Atlantic Canada business only.
Operating loss for the year ended June 30, 1998 totaled $0.5 million as compared to an operating loss of $0.2 million for the year ended June 30, 1997. The change was due to the items discussed above.
Interest and other income totaled $0.2 million for the year ended June 30, 1998 as compared with $0.6 million for the year ended June 30, 1997.
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."
Subsequent to transferring all of its oil and gas properties in the Gulf to DeepTech and Leviathan in connection with the Merger, the Company reported a net loss from discontinued operations of $4.3 million for the year ended June 30, 1998 as compared with a net loss from discontinued operations of $47.8 million for the year ended June 30, 1997. During the year ended June 30, 1998, the Company sold 4,532 MMcf of natural gas and 16,295 barrels of oil at average prices of $2.34 per Mcf of natural gas and $16.24 per barrel of oil, respectively. During the year ended June 30, 1997, the Company sold 7,180 MMcf of natural gas and 170,000 barrels of oil at average prices of $2.36 per Mcf and $22.35 per barrel, respectively.
Tatham Offshore's preferred stock dividends totaled $3.8 million for the year ended June 30, 1998 as compared with $3.9 million for the year ended June 30, 1997. After taking preferred stock dividends into account, the Company's net loss allocable to common shareholders for the year ended June 30, 1998 was $8.6 million, or $0.50 per share, as compared with a net loss allocable to common shareholders for the year ended June 30, 1997 of $51.9 million, or $19.47 per share. The net loss per share calculation for both periods has been adjusted to reflect the one-for-ten reverse stock split that was completed in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Merger and related transactions completed on or before August 14, 1998, the Company's exploration and production activities generated and utilized substantially all of the operating cash flow. Prospectively, the Company's contract drilling activities are expected to generate substantially all of the operating cash flow, at least during the near term. See "-- Liquidity Outlook."
Sources of Cash. Effective with the Merger transactions, the Company transferred all of its oil and gas properties in the Gulf to DeepTech and Leviathan. The Company expects to be dependent upon cash on hand and cash generated from its drilling services operations to pay its operating expenses 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.
On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc. filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing"). RIGCO owns a 100% interest in the Bill Shoemaker and a 25% undivided interest in the Laffit Pincay. FPS VI owns a 75% undivided interest in the Laffit Pincay. FPS III, Inc. and FPS V, Inc. are the owners of RIGCO and FPS VI with FPS III, Inc. owning a 50% interest in RIGCO and FPS V, Inc. owning a 50% interest in RIGCO and a 100% interest in FPS VI. The proceedings of RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc. have been consolidated for administrative purposes. As a result of the Bankruptcy Filing, the Rigs are being managed by the Company's subsidiaries as debtors-in-possession. Under the provisions of the Bankruptcy Code, the debtors-in-possession have the exclusive right, for 120 days following the date of the Bankruptcy Filing, to file a plan of reorganization with the Bankruptcy Court. The syndicate of lenders under the Credit Facility have a secured interest in substantially all of the assets of RIGCO and FPS VI. Any cash received by RIGCO and FPS VI becomes additional collateral for the secured lenders (the "Cash Collateral") under the Credit Facility. RIGCO and FPS VI as debtors-in-possession have been granted temporary permission by the Bankruptcy Court for limited use of the Cash Collateral to pay operating and maintenance costs for the Rigs and to pay certain limited general and administrative costs of Tatham Offshore. If either of the Rigs is not employed for any extended period of time, the absence of associated revenues may have a material adverse effect on the Company, including limiting the Company's ability to raise capital from external sources. The Laffit Pincay has not been employed since mid-August 1998 and it is uncertain as to when and at what rates it will be employed in the future. The Bill Shoemaker is currently under contract to Husky Oil Operations Limited under an agreement that provides for two firm wells with options to drill up to seven additional wells at pre-determined rates. Husky Oil Operations Limited exercised one of its options for an additional well the drilling and testing of which should be completed in October 1999. Husky Oil Operations has declined to exercise any of its additional well options under this agreement. As of this date, the Company has not entered into a drilling contract for the Bill Shoemaker subsequent to the Husky Oil Operations Limited agreement. See "-- Uses of Cash" and "-- Liquidity Outlook."
In August 1998, both El Paso Energy and the Company were required to post letters of credit in connection with certain Merger related agreements. In March 1999, the Company entered into an agreement with El Paso Energy under which (i) each company was released of its obligation to maintain letters of credit in favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii) the Company released its rights to certain potential pre-merger tax attributes of the DeepTech group. As a result of this agreement, the Company's $6.1 million cash collateral which secured its letter of credit in favor of El Paso Energy was released and became available for general corporate purposes.
On June 30, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Thomas P. Tatham. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Any loans bear interest at the prime rate plus 3% and are due on September 30, 1999. On June 30, 1999, RIGCO borrowed $439,062 under this agreement.
Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility with Tatham Investment Corp. The revolving draw facility provides for loans, at the lenders' sole discretion, by Tatham Investment Corp. to the Company in amounts up to $5.0 million. The revolving draw facility bears interest at the rate of 15% per annum and is payable upon demand by the lender. Through September 15, 1999, the Company has borrowed $2.6 million under this facility. The Company has agreed to pledge all of its equity ownership in certain wholly-owned subsidiaries of the Company as well as a certain promissory note issued by Tatham Offshore Canada, Limited.
Uses of Cash. The Company expects that its primary uses of cash, as permitted by the Bankruptcy Court, will consist of (i) interest payments on the Credit Facility, (ii) amounts necessary to fund capital expenditures related to the Rigs that are not funded by customers, (iii) amounts necessary to staff and maintain the Rigs while they are not under contract, and (iv) amounts necessary to pay general and administrative and other operational expenses.
In addition, the Company will use available cash from non-rig related borrowings to fund the pursuit of its business strategy in Atlantic Canada. Such uses will include funding initial expenditures related to the North Atlantic Pipeline Partners' pipeline project, the remainder of the Company's Atlantic Canada strategy and any of the Company's other potential capital expenditures.
Oil prices declined substantially during 1998, which has caused a significant decline in the demand for drilling rigs. Although oil prices have strengthened in recent months, the demand for drilling rigs has not improved significantly. The Laffit Pincay does not have a current drilling contract and was warm-stacked in Grand Isle Block 71, offshore Louisiana from mid-August 1998 through early February 1999. In early February 1999, the Laffit Pincay was relocated to a shipyard in Pascagoula, Mississippi pending the completion of engineering studies and obtaining financing necessary to upgrade the rig to enable it to drill in a dynamic position mode in water depths up to 5,000 feet. In addition to the Laffit Pincay, there are several similarly equipped semisubmersibles currently deployed in the Gulf that do not have current drilling contracts or commitments. Cash costs to warm-stack the Laffit Pincay in Grand Isle Block 71 were approximately $600,000 per month. Cash costs to maintain the Laffit Pincay in the shipyard pending the upgrade are approximately $250,000 per month.
Following the completion of the Husky Oil Operation Limited contract, the Bill Shoemaker will be stacked in a facility in Newfoundland, Canada pending additional contract drilling commitments in Canada or other suitable locations worldwide. The costs to stack the Bill Shoemaker in Canada are approximately $300,000 per month.
North Atlantic Pipeline Partners is the sponsor of a proposal to construct a natural gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire. As of June 30, 1999, Tatham Offshore Canada Limited, the Canadian representative of North Atlantic Pipeline Partners, has incurred $12.6 million in developmental costs in connection with such project and related infrastructure projects. The Company anticipates that the ultimate capital costs of the pipeline and related projects, if approved, could be in excess of several billion dollars. The Company plans to obtain debt and equity financing and/or secure joint venture partners to satisfy the capital requirements for the Atlantic Canada projects, as required.
Liquidity Outlook. The Company intends to fund its immediate cash requirements with cash on hand, cash from its drilling services operations as authorized from time to time by the Bankruptcy Court, and loans under the revolving draw facility with Tatham Investment Corp. At June 30, 1999, the Company had $0.5 million of cash and cash equivalents. As of June 30, 1999, Tatham Offshore and its subsidiaries owed a total of $102.9 million in debt, accrued interest and other accounts payable.
On September 30, 1996, RIGCO entered into a $65 million senior secured credit facility with a syndicate of lenders (as amended, the "Credit Facility"). Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of other rig related indebtedness. In April 1997, the Credit Facility was amended to provide for an additional $12 million to fund the remaining refurbishments and upgrades to the Bill Shoemaker. The Credit Facility (i) matured on April 30, 1999, (ii) provides for interest at the prime rate plus 3% per annum (10 3/4% at June 30, 1999), payable quarterly, (iii) is secured by the two semisubmersible drilling rigs and all of the related assets, (iv) required a quarterly principal payment of excess cash flow as defined in the credit agreement with a minimum principal amortization of $250,000 per quarter beginning on December 31, 1996 and ending on September 30, 1998, (v) provided the lenders warrants to acquire a 5% minority equity interest in the subsidiaries which own the Rigs, and (vi) is subject to customary conditions and covenants, including the maintenance of a minimum level of working capital. As of June 30, 1999, amounts outstanding under the Credit Facility totaled $58.1 million in principal and $3.4 million in accrued interest. On September 25, 1998, the parties to the Credit Facility amended the agreement to (i) extend the maturity date from September 30, 1998 to March 31, 1999, (ii) waive all principal payments until the maturity date, and (iii) extend the expiration date on the warrants issued to the lenders under the original Credit Facility to March 31, 1999. RIGCO paid a total of 0.5% of the outstanding principal balance to the lenders in connection with the amendment.
On March 31, 1999, the parties to the Credit Facility amended the agreement to (i) extend the maturity to April 30, 1999, (ii) waive all principal and interest payments until the maturity date and (iii) extend the expiration date on the warrants issued to the lenders under the original Credit Facility to April 30, 1999. RIGCO paid a total of $100,000 to the lenders in connection with the amendment and agreed to increase the interest rate on the outstanding principal to the default rate under the Credit Facility (the prime rate plus 5% per annum, which equaled 12 3/4% at June 30, 1999) for the period of the extension. RIGCO did not make the principal payment or interest payment due on April 30, 1999, is presently in default under the terms of the Credit Facility, and has filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code.
Effective January 25, 1998, Sedco Forex entered into a one-year contract with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. The Company was notified by Sedco Forex that as of November 18, 1998 Shell would cease using the Bill Shoemaker to conduct drilling operations in the Gulf. The Company has been paid for drilling services performed by the Bill Shoemaker for Shell through November 18, 1998 but has not been paid for any period since that time. On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreement for the Bill Shoemaker. On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in Harris County, Texas, alleging more than $51 million in actual damages against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively, "Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's marketing, manning, management and operation of the Bill Shoemaker and Laffit Pincay pursuant to certain charter, make-ready and other agreements and arrangements. The allegations include claims of gross negligence, breach of contract, fraud, negligent misrepresentation and negligence. RIGCO is seeking an unspecified amount of exemplary damages. RIGCO and FPS VI have alleged in bankruptcy court proceedings that the manner in which Schlumberger performed its duties with respect to the Bill Shoemaker and Laffit Pincay during the course of the management and charter agreements resulted in RIGCO's financial difficulties and caused it to default on its secured debt obligations.
Following the early release of the rig by Shell, the Bill Shoemaker was towed to a shipyard in Galveston, Texas where it underwent significant unanticipated refurbishments in preparation for mobilization to the Grand Banks area in Atlantic Canada. Capital costs, including crew costs while in the shipyard, for the make-ready totaled approximately $8.5 million. Following the make-ready, the Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada to conduct a two-well program (with three options permitting up to seven additional wells) at predetermined rates for Husky Oil Operations Limited. In connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO secured a letter of credit for $6.5 million to secure payment to Sedco Forex. The letter of credit was secured with funds provided by Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company. In exchange for providing the funds to secure the letter of credit, the Company paid a fee of $500,000 to Mr. Tatham. The Company has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day from February 15, 1999 until such funds are returned. The liquidated damages payment would be in the form of a promissory note
bearing interest at the rate of 18% per annum. All of the funds securing the letter of credit were drawn by Sedco Forex for payments under the make-ready agreement.
Management believes that revenue from the Bill Shoemaker contracts will provide sufficient liquidity to permit the Company to pay (i) its operating expenses on both the Bill Shoemaker and the Laffit Pincay and (ii) its rig related general and administrative costs while receiving payments pursuant to the Husky Oil Operations Limited agreement. The Company currently does not have a replacement drilling agreement for the Bill Shoemaker. The Company will be dependent on cash reserves generated from the Husky Oil Operations Limited agreement, or funds from new financing arrangements, to fund its ongoing cash requirements until such time as additional contract drilling services are secured for either the Bill Shoemaker or the Laffit Pincay. Any additional capital expenditures for either of the rigs will need to be funded by customers or other third party sources.
On March 23, 1999, RIGCO assumed the management and operational responsibility for the Laffit Pincay. The Laffit Pincay is currently stacked in a shipyard in Pascagoula, Mississippi. The Company is in the process of completing engineering studies and obtaining cost estimates to upgrade the rig to enable it to drill in a dynamic position mode in water depths up to 5,000 feet. The Company believes that the Laffit Pincay, upgraded for dynamic positioned drilling, would make an ideal candidate for drilling opportunities offshore Brazil and West Africa. Although there can be no assurances, the Company anticipates that with an acceptable long-term contract, the capital requirements for the upgrade could be secured with either United States or Canadian government guarantees. Although the engineering studies and cost estimates are not complete, preliminary estimates indicate that the upgrades will cost approximately $90-$100 million and could be completed within a twelve month period. The Company is currently marketing the Laffit Pincay to obtain a long-term drilling contract to support the capital requirements for the upgrade. In addition, the Company continues to market the Laffit Pincay for drilling services in the Gulf and FPS opportunities offshore Brazil and Atlantic Canada.
In connection with the Merger, the Company entered into a $22.9 million short-term financing arrangement with Tatham Brothers (as amended, the "Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the Redemption Agreement with Leviathan, (ii) pay $1.4 million to DeepTech in connection with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the Short-Term Facility. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The Short-Term Facility accrued interest at the rate of 12% per annum and was due on January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to refinance the original $22.9 million principal plus $1.1 million of accrued interest into a new short-term loan which bears interest at the rate of 15% per annum and was due March 31, 1999. In connection with the refinancing, the Company paid Tatham Brothers a fee of $1.0 million in the form of a 15% subordinated convertible note (the "Subordinated Convertible Note"). The Subordinated Convertible Note bears interest at the rate of 15% per annum and is due on August 15, 2001. Tatham Brothers may convert the principal amount of the Subordinated Convertible Note and accrued unpaid interest into shares of Common Stock of the Company based on the average market price for the five trading days prior to the end of the previous calendar quarter. The Short-Term Facility is secured by a pledge of DeepFlex of its interest in certain payment-in-kind Subordinated Promissory Notes issued by RIGCO and FPS V, Inc., both subsidiaries of the Company, which had an outstanding balance of approximately $78.9 million at June 30, 1999. On March 31, 1999, the Company and Tatham Brothers extended the Short-Term Facility until April 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required to pay $24.1 million in principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make payment of such amount; as a result, an Event of Default has occurred and is continuing under the Short-Term Facility.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain improvements to the Rigs. The loan bears interest at the prime rate per annum and is due on September 30, 1999 or on demand. The loan from Tatham Brothers to DeepFlex, plus accrued interest, was included in the amount payable under the short-term financing arrangement discussed above.
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 including upstream exploration and production activities and the acquisition of oil and gas concessions or license interests. The Company has incurred approximately $12.6 million in costs associated with its Atlantic Canada strategy.
The ability of the Company to satisfy its future capital needs with respect to its planned Atlantic Canada strategy, particularly its ability to obtain regulatory approval and financing for the North Atlantic Pipeline Partners' pipeline project, will depend upon its ability to raise substantial amounts of additional capital and to implement its business strategy successfully. With respect to the Company's Atlantic Canada strategy, (i) the Company does not currently possess the capital necessary to implement its business strategy completely and there can be no assurances that the Company will be able to obtain sufficient capital for any or all of the projects, (ii) there can be no assurances that these projects and other opportunities will prove to be economical or that they will occur, and (iii) many of these projects will require governmental approvals, almost all of which the Company has yet to receive. Moreover, if there are developments that the Company determines to be indicative of a lack of reasonable opportunity to realize benefits for the Company's stockholders, then the Company will pursue other opportunities, wherever located, as the Company determines to be in the Company's best interests. The Company or its Canadian subsidiaries may seek to obtain additional equity capital to assist in the funding of the ongoing day-to-day operations of its planned Atlantic Canada strategy.
Since the Nasdaq National Market has delisted Tatham Offshore's common stock, the holders thereof will suffer a decrease in marketability of their shares and the liquidity of their investment in Tatham Offshore's common stock and its preferred stocks which are convertible into common stock. This potential decrease in the marketability and liquidity of the Company's common and preferred stock may have a material adverse effect on Tatham Offshore's ability to access equity markets in the future. See Item 1. "Consolidated Financial Statements -- Notes to the Consolidated Financial Statements -- Note 7 -- Commitments and Contingencies."
Tatham Offshore has never declared or paid dividends on its common or preferred stock. Tatham Offshore expects to retain all available earnings generated by its operations for the growth and development of its business.
YEAR 2000. The year 2000 issue is the result of computer programs that were written using two digits rather than four to define the year. The Company believes that substantially all of its information technology software and equipment are year 2000 compliant and that this problem will have no affect on the Company's internal operations. The Company believes that the costs relating to the assessment of the year 2000 issue will be de minimus. Although the Company intends to interact only with those third parties that have year 2000 compliant computer systems, it is impossible for the Company to monitor all such systems. The Company has initiated discussions with the operator of the Bill Shoemaker and has initiated external IT and Non-IT system reviews. Based on initial discussions and reviews, the Company believes that there will be no disruption in the operation of its drilling rigs as a result of the year 2000 issue. Currently, the Company has no information concerning the year 2000 compliance status of its customers and vendors. In the event the Company or the various companies on which we principally rely experience year 2000 compliance problems, adverse consequences could include the interruption of drilling services aboard the Rigs, delays in shipments of materials and supplies required to operate the Rigs, delays in transferring personnel to and from the Rigs, and delays in receiving funds from customers or in making payments to suppliers. There can be no assurances that such systems will not have a material adverse impact on the Company's business and operations. The Company has not yet developed a contingency plan for year 2000 issues to address worst-case business interruptions. However, once all of the identification and reviews of system issues are completed, the Company will develop a contingency plan to mitigate the risk of business interruptions, if any.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. Such statements are typically punctuated by words or phrases such as "anticipate," "estimate," "project," "should,"
"may," "management believes," and words or phrases of similar import. Although management believes that such statements and expressions are reasonable and made in good faith, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the key factors that may have a direct bearing on the Company's results of operations and financial condition are: (i) competitive practices in the industry in which the Company competes, (ii) the impact of current and future laws and government regulations affecting the industry in general and the Company's operations in particular, (iii) environmental liabilities to which the Company may become subject in the future that are not covered by an indemnity or insurance, (iv) the impact of oil and natural gas price fluctuations and (v) significant changes from expectations of capital expenditures and operating expenses and unanticipated project delays. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
ITEM 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 was due on April 30, 1999 along with the final interest payment. On June 30, 1999, the Credit Facility had principal balance of $58,148,000 and an interest rate based on the prime rate plus 3% (10 3/4% at June 30, 1999) and a default interest rate based on the prime rate plus 5% (12 3/4% at June 30, 1999). A 1 1/2% increase in interest rates could result in a $900,000 annual increase in interest expense on the existing principal balance.
On April 3, 1997, RIGCO entered into an interest rate cap agreement with Citibank, N.A., which covered $36.5 million of the debt and provided a maximum fixed effective interest rate of 11.74% and which terminated on September 30, 1998.
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
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following table sets forth certain information as of August 31, 1999, regarding the executive officers and directors of Tatham Offshore. Each executive officer named in the following table has been elected to serve until his successor is duly appointed or elected or until his earlier removal or resignation from office.
There is no family relationship among any of the executive officers of directors of Tatham Offshore, and no arrangement or understanding exists between any executive officer or director of Tatham Offshore and any other person pursuant to which he or she was or is to be selected as an officer or director.
Thomas P. Tatham has served as Chairman of the Board and a Director of the Company since its inception in 1988. In addition, Mr. Tatham served as Chairman of the Board, Chief Executive Officer and a Director of DeepTech International Inc. ("DeepTech") and Chairman of the Board of Leviathan Gas Pipeline Company ("Leviathan"), affiliates of Tatham Offshore, since October 1989 and February 1989, respectively, through August 14, 1998. In addition, Mr. Tatham served as Chief Executive Officer of Leviathan from February 1989 until June 1995. Mr. Tatham sold all of his interests in DeepTech and Leviathan to El Paso Energy in August 1998. Mr. Tatham has over 29 years experience in the oil and gas industry. He founded Mid American Oil Company in 1970 and served as Chairman of the Board and Chief Executive Officer until he sold his interest therein to Centex Corporation in 1979. In 1979, Mr. Tatham founded Tatham Corporation to acquire Sugar Bowl Gas Corporation ("Sugar Bowl"), the second largest intrastate pipeline system in Louisiana. He served as
Chairman of the Board of Tatham Corporation from 1979 to December 1983, at which time it sold the assets of Sugar Bowl to a joint venture between MidCon Corp. and Texas Oil and Gas, Inc. From 1984 to 1988, Mr. Tatham pursued personal investments in various industries, including the oil and gas industry. Mr. Tatham served as a director of J. Ray McDermott, S.A. from its inception in February 1995 through August 1997.
Dennis A. Kunetka has served as Senior Vice President - Corporate Finance of the Company since October 1993 and as Chief Financial Officer and Secretary since January 1998. Mr. Kunetka served as Senior Vice President - Corporate Finance and Investor Relations of DeepTech and Leviathan from August 1993 through August 14, 1998. Prior to joining DeepTech, Mr. Kunetka served as Vice President and Controller of United Gas Pipe Line Company and its parent company, United Gas Holding Corporation. Prior to joining United in 1984, Mr. Kunetka spent 11 years with Getty Oil Company in various tax, financial and regulatory positions. Mr. Kunetka holds B.B.A. and M.S.A. degrees from the University of Houston, a J.D. degree from South Texas College of Law and is a certified public accountant.
Harvey O. Fleisher has served as Senior Vice President of Marine Services of the Company since August 1998. Mr. Fleisher has served as Executive Vice President of DeepFlex since April 1995. From June 1988 to April 1995, Mr. Fleisher held various engineering and operations positions with DeepTech entities. Mr. Fleisher has over 27 years experience in the offshore oil and gas industry primarily in the floating drilling and production areas. Prior to joining DeepTech in 1988, Mr. Fleisher worked for two years as an independent consultant and 14 years with Sonat Offshore Drilling, Inc. (formerly The Offshore Company). Mr. Fleisher is a Registered Professional Engineer and holds M.S. and B.S. degrees in Industrial Engineering from Texas A&M University.
Ira Gervais has served as Senior Vice President of Operations of RIGCO North America, L.L.C. since April 1999. Prior to joining the Company, Mr. Gervais was employed with Sedco Forex, a division of Schlumberger Technology Corporation, and was in charge of rig operations. Mr. Gervais has over 25 years of experience in the offshore oil and gas industry and held various positions throughout the world in engineering, operations, and rig management until his recent retirement from Schlumberger. During his tenure with Schlumberger, Mr. Gervais was also assigned to many Research and Engineering projects and new rig building projects for Sedco. Prior to joining Sedco, Mr. Gervais worked for eight years for Avondale shipyards in various ship and rig building projects. Mr. Gervais holds a B.S. degree from the University of Texas at Arlington and an ASEE from Delgado Junior College. Mr. Gervais also holds a Liberian Chief Engineers Marine license and is a certified DNV Quality Lead Auditor.
Philip German has served as Vice President - Engineering of Tatham Offshore Canada Limited since August 1998. From July 1997 through August 1998, Mr. German served as a consultant to the Company. From July 1995 through July 1997, Mr. German served as the Chief Pipeline Engineer for Intec Engineering, Inc. From June 1990 through July 1995, Mr. German served as Vice President of J.P. Kenny Inc. of Houston. From 1981 through 1990, Mr. German was associated with J.P. Kenny and Partners, Ltd., London. Mr. German has been actively involved in offshore pipeline and onshore pipeline and facilities projects in the U.K., Norway, Australia, North Africa, East Africa and China. In addition to his work with engineering companies, Mr. German has also spent extended periods acting on behalf of oil and gas companies, most notably Statoil and Conoco. Mr. German holds a Bachelor of Science degree in Mechanical Engineering from Thames Polytechnic, London.
Kenneth L. Hamilton has served as Vice President - Treasurer and Assistant Secretary of the Company since August 1998. Mr. Hamilton served as Corporate Tax Director of DeepTech from August 1997 through August 14, 1998. Prior to joining DeepTech, Mr. Hamilton was a shareholder in Verne Sanders & Associates, a certified public accounting firm for 11 years. Mr. Hamilton served as Vice President-Controller of Tatham Corporation from 1981 to 1986 and as Tax Manager with Price Waterhouse LLP in Houston from 1974 to 1981. Mr. Hamilton holds a B.A. degree from the University of Texas at El Paso and is a certified public accountant.
Dennis J. Lubojacky has served as Vice President - Controller and Financial Planning of the Company since August 1998. Mr. Lubojacky served as Controller of DeepFlex from August 1996 through August 1998. Prior to joining DeepTech, Mr. Lubojacky worked for two years as an independent consultant after serving as Vice President - Controller for Nabors Yemen Ltd. from 1991 to 1994. Mr. Lubojacky has over 24 years of experience in the oil and gas industry, primarily with offshore and onshore drilling contractors in various accounting and financial management positions. Mr. Lubojacky holds a B.B.A. degree from Sam Houston State University and is a certified public accountant.
Kenneth E. Beeney has served as a Director of the Company since August 1993. In addition, Mr. Beeney served as Vice President - Chief Geophysicist of the Company from August 1993 through August 14, 1998. Since August 17, 1998, Mr. Beeney has served as Exploration Manager - Deepwater for Pennzoil Exploration and Production. Mr. Beeney has 16 years of exploration experience, with a primary focus in the Gulf of Mexico. Prior to joining Tatham Offshore in 1989, Mr. Beeney worked for Tenneco Oil Company for eight years and Anadarko Petroleum Corporation on a variety of exploration assignments. Mr. Beeney received a B.S. in Geophysics from the Colorado School of Mines.
James G. Niven has served as a Director of the Company since June 1994 and as a General Partner of Pioneer Associates, a venture capital investment company, since 1982. Mr. Niven has been a Senior Vice President of Sotheby's Inc. since November 1996 and is currently a Director of The Lynton Group, Inc. and HealthPlan Services, Inc. He served as Chairman of the Board of Global Natural Resources from 1989 to 1995 and is a member of the Board of Managers of Memorial Sloan-Kettering Cancer Center, and a Trustee of the Museum of Modern Art, and the National Center for Learning Disabilities, Inc.
Roger B. Vincent, Sr. has served as a Director of the Company since January 1996. Mr. Vincent is President of Springwell Corporation, a corporate finance advisory firm located in New York. Prior to founding Springwell, Mr. Vincent spent 18 years with Bankers Trust Company where he was a Managing Director of the firm as well as in charge of the firm's Client Group. Mr. Vincent is a director of AmeriGas Propane, Inc., a general partner of AmeriGas Partners, L.P. (NYSE listed), a Trustee of the GCG Trust of the Golden American Life Insurance Company (a subsidiary of the ING Group) and a member of the Policy Committee of Atlantic Asset Management Partners, L.L.C. Mr. Vincent is a graduate of Yale University and Harvard Business School.
Don W. Wilson has served as Director of Tatham Offshore, Inc. since December 1998 and is currently President and Chief Operating Officer of Odyssea Marine, Inc. From January 1998 through September 1998, Mr. Wilson served as President and Chief Operating Officer of Prime Natural Resources, Inc. Mr. Wilson served as President and Chief Executive Officer of FW Oil Interests, Inc. from 1996 through 1997. During 1995, Mr. Wilson served as Executive Vice President of J. Ray McDermott, S.A. From 1993 to 1995, Mr. Wilson served as President of O.P.I. International, Inc., prior to its merger with J. Ray McDermott, S.A. From 1975 through 1993, Mr. Wilson was employed by Brown & Root, Inc., and served in various operational and managerial positions. During his employment with Brown & Root, Inc., Mr. Wilson was Vice President of Global Operations from 1990 to 1993. Mr. Wilson has been involved in the construction of most of the world's large diameter hostile environment offshore pipeline projects. Presently, along with Mr. Wilson's position with Odyssea Marine, Inc., he is Chairman of the Board of Grant Geophysical, Inc. and director of Prime Natural Resources, Inc.
OTHER DIRECTORS AND OFFICERS DURING FISCAL YEAR 1999
Phillip G. Clarke, age 64, served as a Director of the Company from March 1995 through December 1998. Mr. Clarke has worked in the oil and gas industry for 40 years. He was initially employed by Texaco, Inc. for approximately eight years, serving in various engineering positions. In 1965, Mr. Clarke was employed by Placid Oil Company ("Placid") where he accumulated an additional 30 years of diversified experience. In 1977, Mr. Clarke was made Vice President of Operations for Placid's world-wide activities and held that position until his retirement in 1995. Following his retirement, Mr. Clarke continued his oil industry activity by joining several associates in forming Rising Star Energy, LLC, a Dallas, Texas based independent energy company where he is currently employed. Mr. Clarke received a B.S. degree in Mechanical Engineering from Oklahoma State University. Mr. Clarke did not stand for reelection as a director in December 1998.
Antoine Gautreaux, Jr., age 46, served as a Director of the Company from October 1996 through August 1998, as Chief Operating Officer of the Company from July 1996 through August 1998, and as Senior Vice President - Operations from September 1995 to July 1996. Prior to joining DeepTech, Mr. Gautreaux was employed by Placid Oil Company ("Placid") for 21 years in various capacities, including Manager of Drilling and Production. Mr. Gautreaux received a B.S. degree from Nicholls State University. Mr. Gautreaux resigned his office and directorship of the Company effective August 14, 1998, in connection with the Merger.
Edward J. Gibbon, Jr., age 53, served as Vice President - Reservoir Engineering of the Company from September 1995 through August 1998. Mr. Gibbon served as Vice President - Reservoir Engineering of Deepwater Production Systems, Inc. ("Deepwater Systems"), an affiliate of the Company, from September 1993 through August 1998. Prior thereto, Mr. Gibbon served as the President of IDM Engineering, Inc., a company he founded, which specialized in reservoir engineering studies and economic evaluations. Mr. Gibbon received a degree in Petroleum Engineering from the Colorado School of Mines. Mr. Gibbon resigned his office with the Company effective August 14, 1998 in connection with the Merger.
Eric Lynn Hill, age 53, served as a Director of the Company from November 1997 through August 1998. From January 1997 to January 1998, Mr. Hill served as Chief Financial Officer and Secretary of the Company. Since January 1998, Mr. Hill has served as Vice President of Finance and Administration of Seagull Egypt Ltd. Prior to joining DeepTech, Mr. Hill served as Senior Vice President - Finance, Administration and Secretary - Treasurer of Global Natural Resources, Inc. from July 1988 to March 1997. Mr. Hill has over 28 years of experience in finance and auditing in energy related companies and in public accounting. Mr. Hill received a B.B.A. degree from the University of North Texas and is a certified public accountant. Mr. Hill resigned his directorship of the Company effective August 14, 1998, in connection with the Merger.
Jeffrey K. Lucas, age 43, served as Vice President - Land Manager of the Company from June 1991 through August 1998. Mr. Lucas has worked in the oil industry for 18 years. Prior to joining the Company, Mr. Lucas served in various capacities, including Division Landman, in the Land Department of Tenneco Oil from 1979 to 1989 and was primarily responsible for negotiating lease acquisitions in the Rocky Mountain area and the Gulf. Mr. Lucas received a B.S. in Mineral Land Management from the University of Colorado. Mr. Lucas resigned his office with the Company effective August 14, 1998 in connection with the Merger.
Edward L. Moses, Jr., age 63, served as Senior Vice President - Engineering and Production of DeepTech from 1992 through August 1998, as Managing Director and a Director of Deepwater Systems from August 1993 through August 1998, and as a Director of the Company from November 1997 through August 1998. From 1991 to 1992, he served as Senior Vice President and a Director of the Company. From 1989 to 1991, Mr. Moses served as Vice President - Engineering of the Company. Mr. Moses has worked for over 30 years in the oil and gas industry. Prior to joining DeepTech, he worked for 12 years as an independent consultant in the oil and gas industry. Prior thereto, he spent 18 years working for Superior Oil Company where he served as Manager of International Drilling Operations. Mr. Moses has a B.S. in Petroleum Engineering from Texas A&M University. Mr. Moses resigned his office and directorship of the Company effective August 14, 1998, in connection with the Merger.
Clyde E. Nath, age 65, served as a Director of the Company from March 1995 through December 1998. Mr. Nath worked in the oil and gas industry for 40 years with Kerr-McGee Corp., holding various positions in Kerr-McGee's Exploration and Production Division throughout his career. From 1985 until his retirement in December 1994, Mr. Nath was Vice President of Exploration for the Gulf of Mexico Region of Kerr-McGee's Exploration and Production Division. Mr. Nath holds a Bachelor's degree in Geology from Oklahoma City University. He is a member of the American Association of Petroleum Geologists, the Houston Geological Society and American Petroleum Institute. Mr. Nath did not stand for reelection as a director in December 1998.
Jonathan D. Pollock, age 36, is a Portfolio Manager of Stonington Management Corp. which performs administrative services for Elliott Associates, L.P. and Westgate International, L.P. Mr. Pollock is responsible for the firm's oil and gas investments and has served as a Director of the Company from October 1996 through December 1998. Mr. Pollock has been with Stonington Management Corp. since 1989. Prior to joining Stonington Management Corp., Mr. Pollock was employed by Greenleaf Partners, an investment banking firm. Mr. Pollock has served as a director of Horizon Offshore, Inc. since June 1997, and of Grant Geophysical, Inc. since September 1997. Elliott Associates, L.P. and Westgate International, L.P. are each deemed to beneficially own more than 5% of the Common Stock of the Company. See "--Security Ownership of Certain Beneficial Owners and Management." Stonington Management Corp. is under common control with Manchester Securities Corp. which is a NASD member broker-dealer. Mr. Pollock did not stand for reelection as a director in December 1998.
Diana J. Walters, age 36, served as a Director of the Company from September 1995 through December 1998. Ms. Walters is a Vice President of Donaldson, Lufkin & Jenrette Securities Corporation in their metals and mining group and is a NASD broker dealer. Prior to joining DLJ, Ms. Walters served as a Vice President of PaineWebber, Inc. in their energy group from December 1996 through February 1999. Prior to joining PaineWebber, Ms. Walters served as Vice President - Corporate Finance and Planning of Tatham Offshore from October 1993 through September 1995 and as Chief Financial Officer of Tatham Offshore from September 1995 through November 1996. Prior to joining Tatham Offshore, she served as a Vice President in the Natural Resources Group of Internationale Nederlanden Bank (ING Bank) from 1990 to 1993 financing independent oil and gas companies and as an Assistant Vice President in the Natural Resources Department at The Chase Manhattan Bank (formerly Manufacturers Hanover Trust Company) from 1986 to 1990 financing interstate and intrastate pipeline companies. Ms. Walters received a B.A. degree and an M.A. degree in Energy and Mineral Resources from the University of Texas at Austin. Ms. Walters did not stand for reelection as a director in December 1998.
SUMMARY COMPENSATION TABLE
Through August 14, 1998, the executive officers of the Company were compensated by DeepTech and did not receive compensation from the Company for their services as such. Accordingly, DeepTech provided these personnel and other resources to the Company pursuant to a management agreement during that period. Effective August 14, 1998, DeepTech was acquired by an affiliate of El Paso Natural Gas Company and divested all equity ownership in Tatham Offshore through a rights offering. Under the management agreement, the Company was charged an annual management fee in exchange for operational, financial, accounting and administrative services. The management fee was intended to reimburse DeepTech for the estimated costs of the services provided to each affiliate. The management agreement was amended effective July 1, 1997 to provide for an annual management fee equal to 26% of DeepTech's overhead expenses. During the year ended June 30, 1998, the Company was charged $4,375,000 under its management agreement. The management agreement between DeepTech and the Company was terminated in connection with the merger of DeepTech and El Paso. Effective August 14, 1998, Tatham Offshore hired a management team and support personnel to implement its business strategy. The Company's executive officer compensation program is administered and reviewed by the Incentive Plan Compensation Committee.
The following table sets forth the compensation paid by DeepTech to the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers for the period July 1, 1998 through August 14, 1998 plus compensation paid by the Company for the period August 15, 1998 through June 30, 1999 (collectively, the "Named Officers"). The compensation set forth in the table represents amounts paid to the Named Officers for their services rendered in all capacities to DeepTech and its subsidiaries for the fiscal years ended June 30, 1998 and 1997 and a portion of the fiscal year ended June 30, 1999. Therefore, the amounts shown do not reflect amounts earned solely as compensation for services to the Company. As noted below, in addition to serving as executive officers of the Company, each of Messrs. Tatham, Fleisher and Kunetka also served as officers of DeepTech and one or more of its affiliates for the indicated periods prior to August 14, 1998.
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(1) Other Annual Compensation excludes the aggregate value of perquisites when such value is less than the lesser of $50,000 or 10% of total annual Salary and Bonus for each Named Officer.
(2) Mr. Tatham also served as Chairman of the Board and Chief Executive Officer of DeepTech and Chairman of the Board of Leviathan until August 14, 1998.
(3) Effective July 1, 1996, the Compensation Committee of DeepTech's Board of Directors established a compensation plan for Mr. Tatham for the years ended June 30, 1997 and 1998. Under the compensation plan, Mr. Tatham received a base salary of $1,000,000 per annum plus $1,400,000 per annum to be credited against incentive bonuses as they are earned. The base salary and bonus are payable at the rate of $200,000 per month. The Compensation Committee of DeepTech's Board of Directors detailed certain performance goals for DeepTech and its subsidiaries and affiliates, including the Company, and Mr. Tatham which would allow him to earn the incentive bonus payments over the two year period. Mr. Tatham has not received a salary or bonus from the Company since August 14, 1998, the effective date of the Merger and related transactions.
(4) Excludes options to acquire 1,100,000 shares of DeepTech common stock that were granted to Mr. Tatham during the fiscal year ended June 30, 1997 related to matters other than for executive compensation and unrelated to the operations of DeepTech or the Company.
(5) Represents the excess of the fair market value of DeepTech options over the exercise price on the date such options were exercised.
(6) Mr. Kunetka also served as Senior Vice President - Corporate Finance and Investor Relations for DeepTech and Leviathan until August 14, 1998.
(7) Includes amounts paid by DeepTech from July 1, 1998 through August 14, 1998 and amounts paid by the Company from August 15, 1998 through June 30, 1999.
(8) Includes an option to purchase 100,000 shares of Common Stock and the grant of 50,000 shares of restricted Series A 12% Cumulative Convertible Preferred Stock under Tatham Offshore's Incentive Plan.
(9) Amounts paid by DeepTech.
(10) Mr. Fleisher also served as Executive Vice President of DeepFlex Production Services.
(11) Mr. German joined the Company on August 15, 1999.
(12) Mr. Hamilton served as Corporate Tax Director of DeepTech from August 1997 to August 14, 1998.
(13) Options granted under Tatham Offshore's Incentive Plan to purchase Common Stock.
The following table sets forth certain information detailing option grants made to the Named Officers under the Incentive Plan with respect to shares of Tatham Offshore Common Stock during the fiscal year ended June 30, 1999. Each of the options listed below were issued pursuant to the Company's Incentive Plan.
OPTION EXERCISES AND YEAR-END VALUE TABLES
The following table sets forth certain information regarding the outstanding options and warrants to purchase Tatham Offshore Common Stock held by the Named Officers at June 30, 1999.
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(1) Options granted pursuant to Tatham Offshore's Incentive Plan on January 15, 1998 which vest 25% each year beginning January 15, 1999.
(2) Options granted pursuant to Tatham Offshore's Incentive Plan on December 31, 1998 which vest 33-1/3% each year beginning December 31, 2001.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors determines the compensation of the executive officers named in the Summary Compensation Table. The Compensation Committee has furnished the following report on executive compensation.
COMPENSATION PHILOSOPHY
As members of the Compensation Committee, it is our duty to administer the executive compensation program for the Company. The Compensation Committee is responsible for establishing appropriate compensation goals for the executive officers of the Company, evaluating the performance of such executive officers in meeting such goals and making recommendations to the Board of Directors with regard to executive compensation.
The Company's compensation philosophy is to ensure that executive compensation be directly linked to continuous improvements in corporate performance, achievement of specific operations, financial and strategic objectives and increases in stockholder value. The Compensation Committee regularly reviews the compensation packages of the Company's executive officers, taking into account factors which it considers relevant, such as business conditions within and outside the industry, the Company's financial performance, the market composition for executives of similar background and experience and the performance of the executive officer under consideration. The particular elements of the Company's compensation programs for executive officers are described below.
COMPENSATION STRUCTURE
The executive base compensation for the executive officers of the Company named in the Summary Compensation Table is intended to be competitive with that paid in comparable situated industries, taking into account the scope of responsibilities and internal relationships. The goals of the Compensation Committee in establishing the Company's executive compensation program are:
(1) To fairly compensate the executive officers of the Company and its subsidiaries for their contributions to the Company's short-term and long-term performance. The elements of the Company's executive compensation program are (a) annual base salaries, (b) annual bonuses and (c) equity incentives.
(2) To allow the Company to attract, motivate and retain the management personnel necessary to the Company's success by providing an executive compensation program comparable to that offered by companies with which the Company competes for management personnel.
Individual's base salaries are determined by the Compensation Committee based on the scope of the executive's responsibilities, a subjective evaluation of the executive's performance and the length of time the executive has been in the position.
EXECUTIVE COMPENSATION DEDUCTIBILITY
It is the Company's intent that amounts paid pursuant to the Company's compensation plans will generally be deductible compensation expenses. The Compensation Committee does not currently anticipate that the amount of compensation paid to executive officers will exceed the amounts specified as deductible pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
James G. Niven Roger B. Vincent
INCENTIVE PLAN
In 1995, Tatham Offshore adopted the Incentive Plan. The Incentive Plan was effected to provide Tatham Offshore with the ability of making a variety of awards pursuant to the Incentive Plan including stock options, restricted stock and stock value equivalent awards.
Under the Incentive Plan, Tatham Offshore may grant to employees, consultants or agents of Tatham Offshore or any of its parents or subsidiaries one or more options (each, a "Stock Option") to purchase shares of Common Stock as hereinafter set forth. Stock Options granted under the Incentive Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422(b) of the Code, or options that do not qualify as Incentive Stock Options ("Non-Qualified Stock Options"). Pursuant to the Incentive Plan, Tatham Offshore may grant awards of Common Stock subject to restrictions on sale or other disposition of such shares ("Restricted Stock Grant"), and such other requirements as the Compensation Committee deems appropriate including the requirement that such shares be forfeited upon termination of employment for certain reasons within a specified period of time. Pursuant to the Incentive Plan, Tatham Offshore may also grant rights to
receive an amount equal to the fair market value of shares of Common Stock or rights to receive an amount equal to any appreciation or increase in the fair market value of Common Stock over a specified period of time (SARs). Stock Options, Restricted Stock Grants and SARs are referred to collectively herein as "Awards."
Except with respect to outstanding Awards, and unless sooner terminated by action of Tatham Offshore's Board of Directors or the committee thereof charged with administration of the Incentive Plan, the Incentive Plan will terminate on December 31, 2005. The maximum number of shares of Common Stock with respect to which Awards may be granted under the Incentive Plan is 4,000,000.
The Board of Directors may terminate or suspend the Incentive Plan (or any portion thereof) at any time with respect to any shares for which Awards have not previously been granted and remain outstanding. The Board of Directors has the right to alter or amend the Incentive Plan or any part thereof from time to time; provided, however, that no change in any Award theretofore granted may be made which would materially adversely affect the rights and obligations of the holder of any such Award without the written consent of such Incentive Plan participant; and provided, further, that the Board of Directors may not, without stockholder approval as required under the Incentive Plan, (i) materially increase the number of shares of Common Stock which may be issued under the Incentive Plan (other than in connection with adjustments permitted by the Incentive Plan), (ii) materially modify the requirements as to eligibility for participation in the Incentive Plan, (iii) materially increase the benefits accruing to participants under the Incentive Plan, or (iv) extend the termination date of the Incentive Plan. In addition, no amendment, suspension or termination can be adopted which would disqualify the Incentive Plan from (i) the exemption provided by Rule 16b-3, promulgated under the Exchange Act, or any successor rule or regulation to such Rule 16b-3, as such rule is applicable from time to time, or (ii) the benefits provided under Section 422 of the Code, or any successor thereto.
The Incentive Plan is not subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended, or the qualification requirements of Section 401 of the Code.
The Incentive Plan is to be administered by the Compensation Committee. Each member of the Compensation Committee is a disinterested person within the meaning of Rule 16b-3 of the Exchange Act and qualifies as an "outside director", as such term is used for the purposes of Section 162(m) of the Code and any rules and regulations promulgated thereunder.
Subject to the provisions of the Incentive Plan, the Compensation Committee has sole authority to select the individuals who are to be granted Awards from among those persons who are eligible and to determine the restrictions, terms and conditions of each Award granted under the Incentive Plan (subject to the terms of the Incentive Plan). The Compensation Committee is authorized to interpret the Incentive Plan and may, from time to time, adopt, amend or rescind rules and regulations relating to the implementation, administration and maintenance of the Incentive Plan.
A total of 702,500 Awards issued pursuant to the Incentive Plan are currently outstanding.
DIRECTOR PLAN
In 1995, Tatham Offshore adopted the Director Plan. The purpose of the Director Plan is to allow Tatham Offshore to attract the best available individuals to serve as outside directors of Tatham Offshore.
All non-employee directors of Tatham Offshore are eligible to participate in the Director Plan. The Director Plan provides for both automatic one time grants of Stock Options to Tatham Offshore's non-employee directors and for the issuance and exercise of Stock Options in lieu of standard cash director compensation upon the election of non-employee directors. All Stock Options granted under the Director Plan are Non-Qualified Stock Options.
Except with respect to outstanding Stock Options, and unless sooner terminated by action of the Board of Directors, the Director Plan will terminate on December 31, 2005. The maximum number of shares of Common
Stock with respect to which Stock Options may be granted under the Director Plan is 1,000,000, subject to adjustments for stock splits, stock dividends and certain other changes in capitalization.
Under the Director Plan, grants of Stock Options to purchase 30,000 shares of Common Stock were automatically made to all non-employee directors of Tatham Offshore provided that such non-employee directors had not already received stock options to purchase 30,000 shares of Common Stock in connection with their service as a director of Tatham Offshore. In addition, after the effective date of the Director Plan, any newly elected non-employee director will automatically receive Stock Options to purchase 30,000 shares of Common Stock. The exercise price for the Stock Options to purchase 30,000 shares of Common Stock will be 100% of the fair market value of the Common Stock on the later to occur of (i) the effectiveness of the Director Plan, or (ii) the election of a participant as a Director of Tatham Offshore. The Stock Options issued pursuant to these provisions can be immediately exercisable and, unless terminated sooner in accordance with the Director Plan, shall expire on a date which is ten (10) years after the date of grant of the option.
In connection with his agreement to serve on the Board of Directors, Mr. Niven was originally granted stock options to purchase 30,000 shares of Common Stock of Tatham Offshore at $10.00 per share, the initial public offering price. The stock options vested at the rate of 10,000 per year beginning June 30, 1995 and were subject to shareholder approval. During the year ended June 30, 1996, these stock options were canceled and Mr. Niven was granted Stock Options to purchase 30,000 shares of Common Stock at $0.8125 per share pursuant to the Director Plan which included 10,000 Stock Options, which vested immediately, and 10,000 Stock Options, which vested annually on June 30, 1996 and 1997. In connection with his appointment to the Board, Mr. Vincent was issued Stock Options to purchase 30,000 shares of Common Stock at $0.8125 per share pursuant to the Director Plan. These Stock Options vested at the rate of 10,000 per year beginning January 31, 1997.
In connection with his election to the Board of Directors in October 1996, Mr. Pollock was issued Stock Options to purchase 30,000 shares of Common Stock at $0.8125 per share. In her new role as a non-employee director on the Board of Directors, in October 1996, Ms. Walters was issued Stock Options to purchase 30,000 shares of Common Stock at $0.8125 per share. The Stock Options issued to Mr. Pollock and Ms. Walters vest at the rate of 10,000 per year beginning October 21, 1997. On January 15, 1998, E. Lynn Hill, a director of the Company, was awarded options to purchase 15,000 shares of Common Stock at $3.00 per share which vested immediately. Effective with the one-for-ten reverse stock split on November 13, 1997, each of the then outstanding options issued under the Director Plan were adjusted to reflect the reverse stock split.
The Board of Directors may terminate or suspend the Director Plan (or any portion thereof) at any time with respect to any shares for which Stock Options have not previously been granted and remain outstanding. The Board of Directors has the right to alter or amend the Director Plan or any part thereof from time to time; provided, however, that no change in any Stock Option theretofore granted may be made which would materially adversely affect the rights and obligations of the holder of any such Stock Option without the written consent of such Director Plan participant; and provided, further, that the Board of Directors may not, without stockholder approval as required under the Director Plan, (i) materially increase the number of shares of Common Stock which may be issued under the Director Plan (other than in connection with adjustments permitted by the Director Plan), (ii) materially modify the requirements as to eligibility for participation in the Director Plan, (iii) materially increase the benefits accruing to participants under the Director Plan, or (iv) extend the termination date of the Director Plan. In addition, no amendment, suspension or termination may be adopted which would disqualify the Director Plan from (i) the exemption provided by Rule 16b-3, promulgated under the Exchange Act, or any successor rule or regulation to such Rule 16b-3, as such rule is applicable from time to time, or (ii) the benefits provided under Section 422 of the Code, or any successor thereto.
ADDITIONAL DIRECTOR OPTIONS
On December 31, 1998, each of Messrs. Beeney, Niven, Vincent and Wilson, the current outside directors of the Company, were granted options to purchase 100,000 shares of the Company's Common Stock for $0.40625 per share, the trading price for the Company's Common Stock on that date. The options vest 33-1/3% each year beginning December 31, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 31, 1999 the beneficial ownership of the outstanding Common Stock of Tatham Offshore by (i) each person who is known to Tatham Offshore to beneficially own more than 5% of the outstanding Common Stock of Tatham Offshore, (ii) each director and director nominee of Tatham Offshore, (iii) each executive officer named in the Summary Compensation Table (see "Executive Compensation") and (iv) all executive officers and directors of Tatham Offshore as a group.
---------------- *Less than 1%.
(1) Shares of Common Stock that are not outstanding but that may be acquired by a person upon exercise of options or warrants within 60 days of the above date are deemed outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by such person. However, such shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person.
(2) Shares of Series A 12% Convertible Exchangeable Preferred Stock ("Series A Preferred Stock"), Series B 8% Convertible Exchangeable Preferred Stock ("Series B Preferred Stock") and Series C 4% Convertible Exchangeable Preferred Stock ("Series C Preferred Stock") held by each named person are assumed converted into shares of Common Stock for the purpose of computing the number of shares of Common Stock beneficially owned by such person. See "--Certain Relationships and Related Transactions--Convertible Exchangeable Preferred Stock."
(3) Includes 15,620 shares of Common Stock assumed acquired as a result of conversion of 50,000 shares of Series A Preferred Stock into Common Stock.
(4) Includes options to purchase 25,000 shares of Common Stock. Also includes 15,620 shares of Common Stock assumed acquired as a result of conversion of 50,000 shares of Series A Preferred Stock into Common Stock.
(5) Includes options to purchase 3,000 shares of Common Stock.
(6) Includes 480,346 shares assumed acquired as a result of conversion of 1,537,600 shares of Series A Preferred Stock into Common Stock. Also includes 1,768 shares assumed acquired as a result of conversion of 21,000 shares of Series C Preferred Stock into Common Stock. Mr. Tatham owns 8.9% of the Series A Preferred Stock outstanding.
(7) Includes 312 shares assumed acquired as a result of conversion of 1,000 shares of Series A Preferred Stock into Common Stock. Also includes options to purchase 3,000 shares of Common Stock.
(8) Includes 1,079,481 shares of Common Stock assumed acquired as a result of conversion of 3,455,444 shares of Series A Preferred Stock. Tatham Brothers Securities, LLC owns 20.1% of the Series A Preferred Stock outstanding.
(9) The total number of shares credited to each of Elliott Associates, a Delaware limited partnership, Westgate International, L.P., a Cayman Islands Limited Partnership ("Westgate") and Martley International, Inc., a Delaware corporation ("Martley") as beneficial ownership interest includes (a) 1,620,664 shares beneficially owned by Elliott Associates ("Elliott Shares") and (b) 265,540 shares beneficially owned by Westgate ("Westgate Shares"). The Westgate Shares are credited to Martley because Westgate and Martley share the power to vote, direct the vote of, and to dispose or direct the disposition of the Westgate Shares. The Westgate Shares are credited to Elliott Associates, the Elliott Shares credited to Westgate, and the Elliott Shares credited to Martley as a result of Elliott Associates, Martley and Westgate's actions as a shareholder group under Rule 13D-3 of the Exchange Act. The Elliott Shares include 1,620,664 shares that may be acquired by Elliott Associates by conversion of 5,187,784 shares of Series A Preferred Stock owned by Elliott Associates into Common Stock; the Westgate Shares include 265,540 shares of Common Stock that may be acquired by Westgate as a result of the conversion of 850,000 shares of Series A Preferred Stock owned by Westgate into Common Stock. Each of Elliott Associates, Westgate and Martley beneficially owns 35.1% of the Series A Preferred Stock outstanding.
(10) Includes 72,517 share of Common Stock assumed acquired as a result of conversion of 232,128 shares of Series A Preferred Stock.
(11) Includes 552,511 shares of Common Stock assumed acquired as a result of conversion of 1,768,600 shares of Series A Preferred Stock. Also includes 1,768 shares of Common Stock assumed acquired as a result of conversion of 21,000 shares of Series C Preferred Stock. Also includes options to purchase 31,000 shares of Common Stock. The executive officers and directors as a group beneficially own 103% of the Series A Preferred Stock outstanding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between or among the Company, Leviathan, DeepTech and certain other related parties is summarized in the Company's "Notes to Consolidated Financial Statements -- Note 2 -- DeepTech Merger and Related Transactions", "-- Note 4 -- Property and Equipment --", "-- Note 5 -- Indebtedness --", "-- Note 7 -- Related Party Transactions --" and "-- Note 11 -- Subsequent Events" located elsewhere in this Annual Report.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Tatham Offshore's officers and directors, and persons who beneficially own more than 10% of Common Stock ("10% Stockholders"), to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("the Commission") and the regulations of the Securities and Exchange Commission require such officers, directors and 10% Stockholders to furnish the Company with copies of all such reports that they file. Based solely upon a review of the Forms 3, 4 and 5 and amendments thereto provided to the Company, and certain written representations furnished to the Company, the Company believes that, during the fiscal year ended June 30, 1998, its executive officers, directors and greater than 10% beneficial owners complied with all applicable filing requirements, except that Tatham Brothers, LLC and its members failed to timely file a Form 3 in August of 1998 and Mr. Thomas P. Tatham failed to timely file a Form 4 in August of 1998 to report their respective acquisitions of beneficial ownership of Company stock on August 18, 1998. To rectify these delinquent filings, Tatham Brothers Securities, LLC, as the designated filer for a "group," for purposes of Section 13(d) of the Exchange Act, filed a Form 5 in August of 1999 on behalf of itself and the delinquent filers listed above.
COMPARATIVE STOCK PERFORMANCE
As required by applicable rules of the Commission, the performance graph was prepared based upon the following assumptions:
1. $100 was invested in Common Stock, the Standard & Poor's 500 Stock Index (the "S&P 500 Index") and the Dow Jones Oil -- Secondary Index (the "Peer Group") on July 1, 1994.
2. Dividends are reinvested on the ex-dividend dates.
COMPARATIVE TOTAL RETURNS
TATHAM OFFSHORE, INC., THE S&P 500 INDEX AND THE PEER GROUP (PERFORMANCE RESULTS FOR THE FIVE YEAR PERIOD ENDING JUNE 30, 1999)
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
Exhibit Number Description
3.1 Restated Certificate of Incorporation of Tatham Offshore (filed as exhibit 3.1 in Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference).
3.2 By-laws of Tatham Offshore (filed as exhibit 3.2 in Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference).
3.3 Certificate of Amendment of Certificate of Incorporation of Tatham Offshore (filed as Exhibit 3.1 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, Commission File No. 0-22892 and incorporated herein by reference).
3.4 Certificate of Amendment of Certificate of Incorporation of Tatham Offshore (filed as Exhibit 3.2 to Tatham Offshore's Registration Statement on Form S-1 Commission File No. 333-49859 and incorporated herein by reference).
4.1 Certificate of Designation Establishing the Series A Convertible Exchangeable Preferred Stock of Tatham Offshore (filed as Exhibit 4.1 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Commission File No. 0-22892 and incorporated herein by reference).
4.2 Certificate of Designation Establishing the Series B Convertible Exchangeable Preferred Stock (filed as Exhibit 4.2 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Commission File No. 0-22892 and incorporated herein by reference).
4.3 Certificate of Designation Establishing the Series C Convertible Exchangeable Preferred Stock (filed as Exhibit 4.3 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Commission File No. 0-22892 and incorporated herein by reference).
4.4 Certificate of Designation Establishing the Mandatory Redeemable Preferred Stock (filed as Exhibit 4.4 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Commission File No. 0-22892 and incorporated herein by reference).
4.5 Certificate of Designation Establishing the Series B Convertible Preferred Stock (filed as Exhibit 4.1 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, Commission File No. 0-22892 and incorporated herein by reference).
4.6 Warrant Agreement relating to the warrants entitling the holder thereof to purchase shares of Convertible Exchangeable Preferred Stock (filed as Exhibit 4.5 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Commission File No. 0-22892 and incorporated herein by reference).
4.7 Exchange Warrant Agreement relating to the warrants entitling the holder thereof to purchase shares of Tatham Offshore's Common Stock (filed as Exhibit 4.6 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Commission File No. 0-22892 and incorporated herein by reference).
10.1 Registration Rights Agreement dated March 21, 1994, between Tatham Offshore and First Interstate Bank of Texas, N.A., as Trustee (filed as Exhibit 10.17 to DeepTech's Registration Statement on Form S-1, Commission File No. 33-76999, and incorporated herein by reference).
10.2 Farmout Agreement, dated October 1, 1994, between Tatham Offshore, F-W Oil Interests, Inc., O.P.I. International, Inc., and J. Ray McDermott Properties, Inc. (filed as Exhibit 10.48 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File No. 0-23934 and incorporated herein by reference).
10.3 Agreement dated July 2, 1993 and amended on December 6, 1993 between Fina Oil and Chemical Company and Petrofina Delaware, Incorporated and Tatham Offshore covering Viosca Knoll Blocks 772/773, 774, 817, 818 and 861 (filed as Exhibit 10.20 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.4 Unit Agreement for Outer Continental Shelf Exploration, Development and Production Operations for the Ewing Bank Blocks 871, 914, 915, 916, 958 and 959, Ewing Bank Area, Offshore Louisiana, dated May 13, 1988 by and among Mobil-X, Sohio, Kerr-McGee and Kerr-McGee Federal Limited Partnership I-1981 (filed as Exhibit 10.22 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.5 Unit Agreement for Outer Continental Shelf Exploration, Development and Production Operations for the Viosca Knoll Blocks 772, 773, 774, 817, 818 and 861, Viosca Knoll Area Offshore Louisiana, dated July 7, 1993 by and among Tatham Offshore, Petrofina Delaware, Incorporated and Fina Oil & Chemical Company (filed as Exhibit 10.23 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.6 DeepTech Registration Rights Agreement by and between Tatham Offshore and DeepTech (filed as Exhibit 10.25 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.7 Indemnification Agreement dated as of October 16, 1993 between Tatham Offshore and its directors (filed as Exhibit 10.26 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.8 Subordinated Convertible Note Purchase Agreement between Tatham Offshore and DeepTech, as amended (filed as exhibit 10.30 in Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference).
10.9 11 3/4% Subordinated Convertible Promissory Note made payable by the Company to the order oF the holder thereof (filed as exhibit 10.31 in Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference).
10.10 Form of Stock Option Agreement by and between the Optionee and Tatham Offshore (filed as exhibit 10.35 in Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, and incorporated herein by reference).
10.11 Agreement for Purchase and Sale by and between Tatham Offshore, Inc., as Seller, and Flextrend Development Company, L.L.C., as Buyer, dated June 30, 1995 (filed as Exhibit 6(a) to the Leviathan Gas Pipeline Partners, L.P. Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, Commission File Number 1-11680 and incorporated herein by reference).
10.12 Production Payment Agreement dated as of September 19, 1995 by Tatham Offshore in favor of F-W Oil Interests, Inc. (filed as Exhibit 10.91 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File No. 0-23934 and incorporated herein by reference).
10.13 Production Payment Agreement dated as of September 19, 1995 by Tatham Offshore in favor of J. Ray McDermott Properties, Inc. (filed as Exhibit 10.92 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File No. 0-23934 and incorporated herein by reference).
10.14 Tatham Offshore, Inc. Employee Equity Incentive Plan (filed as Exhibit 10.47 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference).
10.15 Tatham Offshore, Inc. Non-Employee Director Stock Option Plan (filed as Exhibit 10.48 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, and incorporated herein by reference).
10.16 Master Drilling Agreement and Drilling Order between Tatham Offshore, Inc. and Sedco Forex Division, Schlumberger Technology Corporation dated September 19, 1996 (filed as Exhibit 10.50 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, and incorporated herein by reference).
10.17 Redemption Agreement dated February 27, 1998 between Tatham Offshore, Inc. and Flextrend Development Company, L.L.C.(filed as Exhibit 10.1 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, Commission File No. 0-22892 and incorporated herein by reference).
10.18 Purchase Commitment Agreement dated February 27, 1998 by and between Tatham Offshore, Inc. and Tatham Brothers, LLC (filed as Exhibit 10.2 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, Commission File No. 0-22892 and incorporated herein by reference).
10.19 Master Agreement, dated as of November 29, 1995, by and among Highwood Partners, L.P., DeepTech International Inc., DeepFlex Production Services, Inc., FPS III, Inc. and Deepwater Drillers, L.L.C. (filed as Exhibit 10.1 to DeepTech's Current Report on Form 8-K dated May 2, 1996 and incorporated herein by reference).
10.20 Limited Liability Company Agreement of Deepwater Drillers, L.L.C. (filed as Exhibit 10.2 to DeepTech's Current Report on Form 8-K dated May 2, 1996 and incorporated herein by reference).
10.21 First Amended and Restated Drilling Make-Ready Agreement dated November 29, 1996 between RIGCO North America, L.L.C. and Schlumberger Technology Corporation (Sedco Forex Division) (filed as Exhibit 10.1 to DeepTech's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, Commission File No. 0-23934 and incorporated herein by reference).
10.22 Contribution and Distribution Agreement dated February 27, 1998, between DeepTech International Inc., Tatham Offshore, Inc., DeepFlex Production Services, Inc., and El Paso Natural Gas Company (filed as Exhibit 10.26 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 333-49859 and incorporated herein by reference).
10.23 Standby Agreement dated February 27, 1998, between DeepTech International Inc., Tatham Offshore, Inc., Thomas P. Tatham, Tatham Brothers, LLC, and El Paso Natural Gas Company (filed as Exhibit 10.27 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 333-49859 and incorporated herein by reference).
10.24 Form of Tax Sharing Agreement among Tatham Offshore, Inc., DeepTech International Inc. and DeepFlex Production Services, Inc. (filed as Exhibit 10.28 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 333-49859 and incorporated herein by reference).
10.25 First Amended and Restated Charter between RIGCO North America, L.L.C. and Sedco Forex Division, Schlumberger Technology Corporation dated November 29, 1996 (filed as Exhibit 10.25 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.26 Second Amended and Restated Charter between RIGCO North America, L.L.C. and Sedco Forex Division, Schlumberger Technology Corporation dated August 14, 1997 (filed as Exhibit 10.26 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.27 Credit Agreement, dated September 30, 1996 among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent, Arranger, Collateral and Documentation Agent and Administrative Agent, and the banks and other financial institutions from time to time party thereto (filed as Exhibit 10.3 to DeepTech's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, Commission File Number 0-23934 and incorporated herein by reference).
10.28 Global Amendment and Assignment and Acceptance dated October 9, 1996 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktrengesellschaft, as Administrative Agent. (filed as Exhibit 10.28 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.29 Second Amendment dated as of April 23, 1997 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktiengesellschaft, as Administrative Agent (filed as Exhibit 10.40 to DeepTech's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997, Commission File No. 0-23934 and incorporated herein by reference).
10.30 Third Amendment dated May 13, 1997 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktrengesellschaft, as Administrative Agent (filed as Exhibit 10.30 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.31 Fourth Amendment dated July 31, 1997 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktrengesellschaft, as Administrative Agent (filed as Exhibit 10.31 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.32 Fifth Amendment dated June 16, 1998 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktrengesellschaft, as Administrative Agent (filed as Exhibit 10.32 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.33 Sixth Amendment dated September 25, 1998 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktrengesellschaft, as Administrative Agent (filed as Exhibit 10.33 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.34 Management Agreement dated June 16, 1998 between DeepFlex Production Services, Inc. and RIGCO North America, L.L.C. (filed as Exhibit 10.34 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.35 Restructuring Agreement dated September 22, 1997, between DeepTech and Tatham Offshore (filed as Exhibit 10.35 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and incorporated herein by reference).
10.36 Amended and Restated Management Agreement, effective as of July 1, 1992, between DeepTech and Tatham Offshore (filed as Exhibit 10.1 to Amendment No. 4 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference.)
10.37 First Amendment to Amended and Restated Management Agreement, dated as of January 1, 1995, between DeepTech and Tatham Offshore (filed as Exhibit 10.71 to DeepTech's Registration Statement on Form S-1, Commission File No. 33-88688, and incorporated herein by reference).
10.38 Fourth Amendment to First Amended and Restated Management Agreement dated as of May 1, 1997 between DeepTech and Tatham Offshore (filed as Exhibit 10.6 to DeepTech's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997, Commission File No. 0-23934, and incorporated herein by reference).
10.39 Letter Agreement dated March 22, 1995 between Tatham Offshore and Ewing Bank Gathering Company, L.L.C. amending the Gathering Agreement dated July 1, 1992 (filed as Exhibit 10.44 to DeepTech's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, Commission File No. 0-23934 and incorporated herein by reference).
10.40 Gas Purchase Agreement dated July 26, 1993 between Offshore Marketing and Tatham Offshore (filed as Exhibit 10.17 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.41 Condensate Purchase Agreement dated July 26, 1993 between Offshore Marketing and Tatham Offshore (filed as Exhibit 10.18 to Tatham Offshore's Registration Statement on Form S-1, Commission File No. 33-70120, and incorporated herein by reference).
10.42 Credit Agreement, dated as of February 16, 1996 among DeepFlex Production Services, Inc., Citicorp USA, Inc., as Administrative Agent, and the several lenders from time to time parties thereto (filed as Exhibit 10.3 to DeepTech's Current Report on Form 8-K dated May 2, 1996 and incorporated herein by reference).
10.43 Fourth Amendment to Management Agreement between DeepTech International Inc. and DeepFlex Production Services, Inc. dated as of May 1, 1997 (filed as Exhibit 10.38 to DeepTech's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997, Commission File No. 0-23934 and incorporated herein by reference).
10.44 First Amendment to Management Agreement between RIGCO North America, L.L.C. and DeepTech dated as of May 1, 1997 (filed as Exhibit 10.39 to DeepTech's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997, Commission File No. 0-23934 and incorporated herein by reference).
10.45 Promissory Note from Tatham Offshore, Inc. to Tatham Brothers, LLC for $22,889,102 dated August 14, 1998 (filed as Exhibit 10.45 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, Commission File No. 0-22892 and incorporated herein by reference).
10.46 Promissory Note from Tatham Offshore, Inc. to Tatham Brothers, LLC in the amount of $24,097,107 dated January 15, 1999 (filed as Exhibit 10.46 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-22892 and incorporated herein by reference).
10.47 Convertible Subordinated Note from Tatham Offshore, Inc. to Tatham Brothers, LLC in the amount of $1,000,000 dated January 15, 1999 (filed as Exhibit 10.47 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, Commission File No. 0-22892 and incorporated herein by reference).
10.48* Seventh Amendment dated March 30, 1999 to the Credit Agreement among RIGCO North America, L.L.C., Lehman Commercial Paper, Inc., as Advisor, Syndication Agent and Arranger, Hibernia National Bank, as Collateral and Documentation Agent and BHF-Bank Aktrengesellschaft, as Administrative Agent.
10.49* Promissory Note from RIGCO North America, L.L.C. to Tatham Investment Corp. dated June 30, 1999 for the lesser of (i) $750,000 and (ii) the total unpaid principal amount of all loans made thereunder, with interest.
10.50* Revolving Demand Promissory Note from Tatham Offshore, Inc. to Tatham Investment Corp. dated July 1, 1999 for the lesser of (i) $5,000,000 and (ii) the aggregate unpaid principal amount of all loans made thereunder, with interest.
21.1* List of Subsidiaries of Tatham Offshore, Inc.
23.1* Consent of Independent Accountants, PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (included on the signature page on this Annual Report on Form 10-K).
27.1* Financial Data Schedules. - --------------
* Filed herewith
(b) Reports on Form 8-K
None.
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 attorney-in-fact to sign on his 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 First Amendment to the 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 27, 1999
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/ James G. Niven - ------------------------------------------- ------------------------------- Thomas P. Tatham, Chairman of the Board James G. Niven, Director and Chief Executive Officer September 27, 1999 September 27, 1999
/s/Dennis A. Kunetka /s/ Roger B. Vincent, Sr. - ------------------------------------------- ------------------------------- Dennis A. Kunetka, Chief Financial Officer, Roger B. Vincent, Sr., Director Senior Vice President and Secretary September 27, 1999 (Principal Accounting Officer) September 27, 1999
/s/Kenneth E. Beeney /s/ Don W. Wilson - ------------------------------------------- ------------------------------- Kenneth E. Beeney, Director Don W. Wilson, Director September 27, 1999 September 27, 1999
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 sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Tatham Offshore, Inc. and its subsidiaries (the Company) at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 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.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 5 and 11 to the consolidated financial statements, as of April 30, 1999 a wholly-owned subsidiary of the Company was in default under the terms of its senior secured credit facility and on August 9, 1999, four wholly-owned subsidiaries of the Company filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 11. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas September 27, 1999
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. In connection with the merger of DeepTech with a subsidiary of El Paso Energy Corporation ("El Paso Energy") and related transactions completed on or before August 14, 1998, (i) Tatham Offshore transferred its ownership of Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation and former wholly-owned subsidiary of Tatham Offshore which held interests in Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to DeepTech, (ii) Tatham Offshore conveyed its remaining oil and gas properties to Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), (iii) DeepTech contributed all of the outstanding shares of capital stock of DeepFlex Production Services, Inc. ("DeepFlex") to Tatham Offshore and (iv) DeepTech divested itself of its equity ownership interest in Tatham Offshore. DeepFlex, a Delaware corporation and wholly-owned subsidiary of Tatham Offshore, was formed in January 1995 and, through its subsidiaries, focuses on the acquisition and deployment of semisubmersible drilling rigs for contract drilling. RIGCO North America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, own interests in the FPS Laffit Pincay (the "Laffit Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together with the Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling rigs.
Pursuant to management and charter agreements, Sedco Forex Division of Schlumberger Technology Corporation ("Sedco Forex") has marketed, managed, and operated the Rigs. On January 22, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreements for the Laffit Pincay. Effective March 23, 1999, RIGCO took over the marketing, management and operational responsibilities for the Laffit Pincay. On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreement for the Bill Shoemaker. Under the Bill Shoemaker management and charter agreement, Sedco Forex will continue to man and operate the rig through the conclusion of its current drilling contract with Husky Oil Operations Limited. At the conclusion of the current Husky Oil Operations Limited drilling contract, RIGCO will assume the marketing, management and operational responsibilities for the Bill Shoemaker.
Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore, pursues certain opportunities offshore eastern Canada and is the Canadian representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic Pipeline Partners"). North Atlantic Pipeline Partners is the sponsor of a proposal to construct a natural gas pipeline and related infrastructure in the Grand Banks area offshore Newfoundland and Nova Scotia to the eastern seaboard of the United States. Through June 30, 1999, Tatham Offshore Canada Limited has incurred $12,565,000 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.
As described in Note 11, on August 9, 1999, RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc., wholly-owned subsidiaries of DeepFlex, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing").
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").
NOTE 2 - DEEPTECH MERGER AND RELATED TRANSACTIONS:
On August 14, 1998, DeepTech merged with a subsidiary of El Paso (the "Merger"). 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. In addition, Tatham Offshore agreed to transfer all of its remaining assets located in
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Gulf to Leviathan, a former affiliate. As such, all of the Company's oil and gas operations in the Gulf are reflected as discontinued operations in the financial statements. Further, DeepTech divested itself of its equity ownership interest in Tatham Offshore by offering all of the shares of Tatham Offshore common stock and Series A Preferred Stock held by DeepTech to the stockholders of DeepTech in a Rights Offering (discussed below).
On July 16, 1998, the Securities and Exchange Commission declared effective Tatham Offshore's Registration Statement on Form S-1 relating to the offering of rights to the DeepTech stockholders to purchase DeepTech's 28,073,450 shares of Tatham Offshore common stock and 4,670,957 shares of Tatham Offshore's Series A Preferred Stock (the "Rights Offering"). As a result of the Rights Offering, unaffiliated parties purchased 3,378,693 shares of common stock and 562,148 shares of Series A Preferred Stock. Tatham Brothers Securities, LLC ("TB Securities"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of Tatham Offshore and DeepFlex, purchased 20,768,011 shares of common stock and 3,455,444 shares of Series A Preferred Stock which resulted in DeepTech receiving net proceeds from the Rights Offering of $75.0 million. In exchange for committing to purchase a specified portion of the stock underlying any unexercised rights, TB Securities received a fee of $6.9 million. In connection with the Rights Offering, Tatham Offshore purchased and cancelled all of the shares of Common Stock and Series A Preferred Stock that were not acquired by the holders of rights or TB Securities in the Rights Offering, 3,926,746 shares of Common Stock and 653,365 shares of Series A Preferred Stock, respectively, and the proceeds from such purchase by Tatham Offshore were contributed by DeepTech to Tatham Offshore. DeepTech no longer owns any of Tatham Offshore's capital stock as a result of the Rights Offering.
Following the asset restructuring, Tatham Offshore's marine services business includes the operation of two semisubmersible drilling rigs, the Bill Shoemaker and the Laffit Pincay, currently owned by wholly-owned subsidiaries of DeepFlex. In addition, Tatham Offshore will continue to pursue energy related opportunities in Atlantic Canada, including the North Atlantic pipeline project, related gas processing facilities, a facility for the generation of electricity and other related investments.
Release of Tax Letter of Credit
In August 1998, both El Paso Energy and the Company were required to post letters of credit in connection with certain Merger related agreements. In March 1999, the Company entered into an agreement with El Paso Energy under which (i) each company was released of its obligation to maintain letters of credit in favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii) the Company released its rights to certain potential pre-merger tax attributes of the DeepTech group. As a result of this agreement, the Company's $6.1 million cash collateral which secured its letter of credit in favor of El Paso Energy was released and became available for general corporate purposes.
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 one-for-ten 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 an original maturity of three months or less are considered to be cash equivalents. The Company's restricted cash is cash held in deposit to collateralize a letter of credit issued to the Canada-Newfoundland Offshore Petroleum Board for an exploration license commitment, offshore Newfoundland.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. Repair and maintenance costs are charged to expense as incurred; additions, improvements and replacements are capitalized.
Effective July 1, 1996, the Company adopted Statement of Financial Account Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". SFAS No. 121 required recognition of impairment losses on long-lived assets (including semisubmersible drilling rigs) 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. Implementation of SFAS No. 121 did not have a material adverse effect on the Company's financial condition or results of operations.
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.
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
Deferred costs primarily consist of costs related to advisory, legal and other direct project costs of pending transactions. At June 30, 1999 and 1998, the Company had capitalized $12,565,000 and $11,529,000, respectively, of development costs related to its sponsorship of North Atlantic Pipeline Partners' proposal to construct a pipeline offshore eastern Canada as discussed in Note 1.
Revenue Recognition
Revenue from oil and gas sales was 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.
Discontinued Operations
Discontinued operations represent Tatham Offshore's oil and gas exploration and development business transferred to DeepTech and Leviathan as discussed in Note 2. These operations were accounted for using the successful efforts method of accounting. Net sales from discontinued oil and gas operations were $0.9 million, $10.9 million and $20.7 million for fiscal years 1999, 1998 and 1997, respectively. General and administrative expenses were allocated to discontinued operations based on the percentage of employees' time related to the discontinued operations and were $0.3 million, $4.9 million and $4.1 million for fiscal years 1999, 1998 and 1997, respectively. Interest expense for years 1998 and 1997 was allocated 100% to discontinued operations.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings per Share
During 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 2 and its convertible production payment related to 25% of the net operating cash flow from Viosca Knoll Block 817.
Basic net loss per share equals diluted net loss per share for the years ended June 30, 1999, 1998 and 1997.
Concentration of Credit Risk
The primary market for the Company's services is the offshore oil and gas industry, and the Company's customers consist primarily of major oil companies and independent oil and gas producers. The Company performs ongoing credit evaluations of its customers and generally does not require material collateral. The Company maintains reserves for potential credit losses when necessary.
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 or during the years ended June 30, 1999, 1998 and 1997.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in Other Comprehensive Income pending recognition in earnings. SFAS 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of SFAS No. 133", is effective for fiscal years beginning after June 15, 2000. The Company believes adoption will not have a material effect on its results of operations, cash flows or financial position.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Certain amounts in prior years have been reclassified to conform to the current year's presentation.
The Company utilized an off-balance sheet financial instrument to manage the interest rate associated with its borrowings. An interest rate cap was used to lock in a maximum rate, but enabled the Company to otherwise pay lower market rates. The cost of the interest rate cap was amortized to interest expense over the life of the cap, and the unamortized cost was included in other assets. The interest rate cap expired on September 30, 1998.
NOTE 4 - PROPERTY AND EQUIPMENT:
SEMISUBMERSIBLE DRILLING RIGS
At June 30, 1999, capitalized costs and related accumulated depreciation of semisubmersible drilling rigs totaled $146,487,000 and $12,204,000. At June 30, 1998, capitalized costs and related accumulated depreciation of semisubmersible drilling rigs totaled $135,754,000 and $6,493,000. The Company owns 100% of the FPS Laffit Pincay and the FPS Bill Shoemaker through its wholly owned subsidiaries.
The FPS Bill Shoemaker is currently operated under management and charter agreements with Sedco Forex. 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 - DISCONTINUED OPERATIONS
All of the Company's oil and gas properties were transferred as of August 14, 1998 (as discussed in Note 2) and are reflected as discontinued operations in the statement of operations. The following reflects historical information.
Capitalized Costs
Costs Incurred in Oil and Gas Acquisition, Exploration and Development Activities
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Results of Operations for Oil and Gas Producing Activities
Sale of Properties to Leviathan
On June 30, 1995, Leviathan entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with Tatham Offshore. Pursuant to the Purchase and Sale Agreement, Leviathan 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 additional $15,000,000 on August 15, 1995. Leviathan was entitled to retain all of the revenue attributable to the Assigned Properties until it 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 Leviathan 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, Leviathan 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).
Effective December 10, 1996, Leviathan 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. Leviathan 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. Leviathan'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 was 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
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
made during the year. As part of the Redemption Agreement, this property was transferred to Leviathan effective August 14, 1998.
Transportation and Processing Agreements
General. In December 1993, Tatham Offshore entered into a master gas dedication arrangement with Leviathan (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 Leviathan for transportation. In exchange, Leviathan 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, Leviathan 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 Leviathan, Tatham Offshore dedicated all natural gas and crude oil produced from eight of its Ewing Bank leases for gathering and redelivery by Leviathan 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 operating expenses on the accompanying consolidated statement of operations included commodity fees of $1,493,000 for the year ended June 30, 1997, related to the Ewing Bank Agreement. In March 1996, Leviathan settled all remaining unpaid demand charge obligations under this agreement in exchange for certain consideration as discussed below.
Ship Shoal. Tatham Offshore and Leviathan also entered into a gathering and processing agreement (the "Ship Shoal Agreement") pursuant to which Leviathan constructed a gathering line from Tatham Offshore's Ship Shoal Block 331 lease to interconnect with a third-party pipeline at Leviathan'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 Leviathan demand charges and to dedicate all production from its Ship Shoal 331 lease and eight additional surrounding leases for gathering and processing by Leviathan for additional commodity fees. Production and operating expenses on the accompanying consolidated statement of operations included commodity fees of $638,000 for the year ended June 30, 1997, related to the Ship Shoal Agreement. In March 1996, Leviathan 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 Leviathan 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 Leviathan for its Ship Shoal property were prepaid in full. In exchange, Tatham Offshore (i) issued to Leviathan 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 Leviathan certain rights to use and acquire the Ship Shoal Block 331 platform. Leviathan had 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 did not interfere with lease operations or other activities of Tatham Offshore. In addition, Leviathan had a right of first refusal relative to a sale of the platform. The agreement with Leviathan resulted in a reduction in demand charge payments of $7,800,000 for the year ended June 30, 1997. See "Impairment, Abandonment and Other" discussion below. This agreement was transferred to Leviathan on August 14, 1998 as part of the Redemption Agreement.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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.
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, a subsidiary of DeepFlex, entered into a $65 million senior secured credit facility with a syndicate of lenders (as amended, the "Credit Facility"). Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of other rig related indebtedness. In April 1997, the Credit Facility was amended to provide for an additional $12 million to fund the remaining refurbishments and upgrades to the Bill Shoemaker. The Credit Facility (i) matured on April 30, 1999, (ii) provides for interest at the prime rate plus 3% per annum (10 3/4% at June 30, 1999), payable quarterly, (iii) is secured by the two semisubmersible drilling rigs and all of the related assets, (iv) required a quarterly principal payment of excess cash flow as defined in the credit agreement with a minimum principal amortization of $250,000 per quarter beginning on December 31, 1996 and ending on September 30, 1998, (v) provided the lenders warrants to acquire a 5% minority equity interest in the subsidiaries which own the Rigs, and (vi) is subject to customary conditions and covenants, including the maintenance of a minimum level of working capital. As of June 30, 1999, amounts outstanding under the Credit Facility totaled $58.1 million in principal and $3.4 million in accrued interest. The $3.4 million of accrued interest is included in accounts payable and accrued liabilities on the consolidated balance sheet. On September 25, 1998, the parties to the Credit Facility amended the agreement to (i) extend the maturity date from September 30, 1998 to March 31, 1999, (ii) waive all principal payments until the maturity date, and (iii) extend the expiration date on the warrants issued to the lenders under the original Credit Facility to March 31, 1999. RIGCO paid a total of 0.5% of the outstanding principal balance to the lenders in connection with the amendment.
On March 31, 1999, the parties to the Credit Facility amended the agreement to (i) extend the maturity to April 30, 1999, (ii) waive all principal and interest payments until the maturity date and (iii) extend the expiration date on the warrants issued to the lenders under the original Credit Facility to April 30, 1999. RIGCO paid a total of $100,000 to the lenders in connection with the amendment and agreed to increase the interest rate on the outstanding principal balance by 2% for the period of the extension, the default rate under the Credit Facility (12 3/4% at June 30, 1999).
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RIGCO did not make the principal payment or interest payment due on April 30, 1999 and is presently in default under the terms of the Credit Facility. By letter dated May 3, 1999, the administrative agent for the lenders advised RIGCO that the loan was in default and that the Lenders would not exercise their rights, remedies, powers and privileges under the Credit Facility and other related loan documents at that time, but that they reserve the right to do so at any time they deem appropriate. See Note 11 - Subsequent Events.
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. The interest rate cap expired on September 30, 1998.
Long-Term Debt - Affiliates
In connection with the Merger, the Company entered into a $22.9 million short-term financing arrangement with Tatham Brothers (as amended, the "Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the Redemption Agreement with Leviathan, (ii) pay $1.4 million to DeepTech in connection with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the Short-Term Facility. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The Short-Term Facility accrued interest at the rate of 12% per annum and was due on January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to refinance the original $22.9 million principal plus $1.1 million of accrued interest into a new short-term loan which bears interest at the rate of 15% per annum and was due March 31, 1999. In connection with the refinancing, the Company paid Tatham Brothers a fee of $1.0 million in the form of a 15% subordinated convertible note (the "Subordinated Convertible Note"). The Subordinated Convertible Note bears interest at the rate of 15% per annum and is due on August 15, 2001. Tatham Brothers may convert the principal amount of the Subordinated Convertible Note and accrued unpaid interest into shares of Common Stock of the Company based on the average market price for the five trading days prior to the end of the previous calendar quarter. The Short-Term Facility is secured by a pledge of DeepFlex of its interest in certain payment-in-kind Subordinated Promissory Notes issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of the Company, which had an outstanding balance of approximately $78.9 million at June 30, 1999. On March 31, 1999, the Company and Tatham Brothers extended the Short-Term Facility until April 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required to pay $24.1 million in principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make payment of such amount; as a result, an Event of Default has occurred and is continuing under the Short-Term Facility. As of June 30, 1999, the principal balance and accrued interest under the Short-Term Facility and Subordinated Convertible Note totaled $26.1 million and are included in long-term debt to affiliates currently payable on the consolidated balance sheet.
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 and $7,040,000 for the years ended June 30, 1998 and 1997, respectively.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other - Affiliates
On June 30, 1999, RIGCO borrowed $439,062 from Tatham Investment Corporation, an affiliate of Mr. Tatham. Proceeds were used for working capital requirements. This borrowing matures on September 30, 1999, and bears interest at the prime rate plus 3% per annum. This borrowing is included in long-term debt to affiliates currently payable on the consolidated balance sheet.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain improvements to the Rigs. The loan bears interest at LIBOR plus 2% and is due on September 30, 1999 or upon demand. The loan from Tatham Brothers to DeepFlex, plus accrued interest, is included in the amount payable under "--Long-Term Debt-Affiliates" as discussed above.
NOTE 6 - STOCKHOLDERS' EQUITY:
The following table summarizes Tatham Offshore's outstanding equity:
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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"). 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. Leviathan held all outstanding shares. In connection with the Redemption Agreement, the Senior Preferred Stock and all related unpaid dividends were 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 was convertible into Series A Preferred Stock using a conversion ratio equal to (i) the liquidation preference amount plus accumulated unpaid dividends divided by (ii) $0.9375, the closing price of the Series A Preferred Stock on February 27, 1998. (e) At any time until December 31, 1998, each share could have been exchanged for 0.4 Exchange Warrants. Each full Exchange Warrant entitled the holder thereof to purchase one share of Tatham Offshore common stock at $6.53 per share. The Exchange Warrants expired 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.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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.
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.
Warrants to Acquire Subsidiary Stock
In connection with the Credit Facility, the lenders were granted warrants to acquire a 5% minority equity interest in the subsidiaries which own the Rigs. On April 30, 1999, the warrants expired unexercised.
Stock Compensation Plans
On August 28, 1995, Tatham Offshore filed a registration statement on Form S-8 with the Commission for the registration of 4,000,000 shares of common stock authorized for issuance upon exercise of options under Tatham Offshore's Equity Incentive Plan (the "Incentive Plan") and 1,000,000 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. Options granted pursuant to the Director Option Plan and the Incentive Plan vest 33 1/3% each year beginning December 31, 1999 and December 31, 2001, respectively. Both plans terminate December 31, 2005. In January 1998, Tatham Offshore issued 100,000 options under the Incentive Plan. During the year ended June 30, 1999, Tatham Offshore issued 600,000 options and 280,000 shares of restricted Series A Preferred Stock under the Incentive Plan. During the years ended June 30, 1999, 1998 and 1997, Tatham Offshore issued 400,000 options, 15,000 options and 9,000 options, respectively, pursuant to the Director Option Plan. All options issued under the Option Plans were issued at the current market price of the underlying stock at the date of grant. Options outstanding under the Option Plans at June 30, 1999 totaled 1,117,500 of which 40,500 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, all of which have expired unexercised.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 loss and loss per share would have been adjusted to the pro forma amounts presented below:
The following table summarizes the Option Plans:
The following table summarizes information about stock options outstanding at June 30, 1999:
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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:
Tatham Offshore issued 79,000 stock appreciation rights pursuant to the Incentive Plan during the year ended June 30, 1997.
NOTE 7 - RELATED PARTY TRANSACTIONS:
Management Agreement
The management agreement between Tatham Offshore and DeepTech provided for an annual management fee which was intended to reimburse DeepTech for the estimated costs of its operational, financial, accounting and administrative services provided to the Company. Effective July 1, 1997, the management agreement was amended to provide for an annual management fee of 26% of DeepTech's overhead expenses. During the twelve months ended June 30, 1999, DeepTech charged Tatham Offshore $310,000 under this agreement. The management agreement was terminated August 14, 1998 and Tatham Offshore hired and employed its management and support personnel directly.
Long-Term Debt to Affiliates
In connection with the Merger, the Company entered into the Short-Term Facility to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the Redemption Agreement with Leviathan, (ii) pay $1.4 million to DeepTech in connection with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the Short-Term Facility. Tatham Brothers is an affiliate of Mr. Thomas P. Tatham and the parent company of TB Securities. The original terms of the Short-Term Facility provided for an interest rate of 12% per annum and was due on January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to refinance the original $22.9 million principal plus $1.1 million accrued interest into a new short-term loan which bears interest at the rate of 15% per annum and was due March 31, 1999. In connection with the refinancing, the Company paid Tatham Brothers a fee of $1.0 million in the form of a 15% subordinated convertible note (the "Subordinated Convertible Note"). The Subordinated Convertible Note bears interest at the rate of 15% per annum and is due on August 15, 2001. Tatham Brothers may convert the principal amount of the Subordinated Convertible Note and accrued unpaid interest into shares of Common Stock of the Company based on the average market price for the five trading days prior to the end of the previous calendar quarter. The Short-Term Facility is secured by a pledge of DeepFlex of its interest in certain payment-in-kind Subordinated Promissory Notes issued by RIGCO North America, L.L.C. and FPS V, Inc., both subsidiaries of the Company, which had an outstanding balance of approximately $78.9 million at June 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required to pay $24.1 million in principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make payment of such amounts; as a result, an Event of Default has occurred and is continuing under the Short-Term Facility.
The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998, was executed in connection with the Merger and related transactions and is by and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso. Pursuant to the Standby Agreement, to the extent that any of the Company's Common Stock or Series A Preferred Stock was not subscribed for by holders of DeepTech common stock in the Rights Offering, Tatham Brothers committed to purchase such number of unsubscribed shares in order for DeepTech to receive net proceeds
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
from the Rights Offering of not less than $75 million (the "Standby Commitment"). In addition, Tatham Brothers had the right to purchase any shares which DeepTech held after the Rights Offering and the satisfaction of the Standby Commitment. Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the Standby Commitment, which guarantee was backed by a letter of credit from NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the Standby Commitment, under the terms of a Repayment Agreement between Mr. Tatham and Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr. Tatham an option to purchase up to a one-third membership interest in Tatham Brothers for $1,000 through the issuance of new membership units, and (ii) Mr. Tatham had the right, but not the obligation, to lend to Tatham Brothers all sums necessary for Tatham Brothers to fulfill its obligations under the Standby Commitment. In exchange for certain consideration, Tatham Brothers assigned all of its rights and interest under the Standby Agreement and the Standby Commitment to TB Securities.
Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by and between Tatham Brothers and Tatham Offshore, in consideration of the Standby Commitment, the Company paid Tatham Brothers a fee of $6.9 million, which amount was included in the amount payable under the Short-Term Facility.
Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from NationsBank, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain improvements to the Rigs. The loan bears interest at LIBOR plus 2% and is due on September 30, 1999 or upon demand. The loan from Tatham Brothers to DeepFlex, plus accrued interest, was included in the amount payable under the Short-Term Facility discussed above.
In connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO secured a $6.5 million letter of credit in January 1999 to secure payment to Sedco Forex, and the funds used to secure such letter of credit were provided by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company. The $6.5 million in collateral funds plus accrued liquidated damages totaling $1.3 million are included in accounts payable to affiliates on the consolidated balance sheet. In exchange for providing the funds to secure the letter of credit, the Company paid a fee of $500,000 to Mr. Tatham. The Company has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day from February 15, 1999 until such funds are returned. The liquidated damages payment would be in the form of a promissory note bearing interest at the rate of 18% per annum. On February 10, 1999, Tatham Offshore issued two promissory notes, each in the original principal amount of $1.1 million, to Tatham Brothers and a foundation associated with Mr. Thomas P. Tatham, respectively, to secure funds to purchase new anchor chains in connection with the Bill Shoemaker make-ready. Effective with the purchase of the anchor chains, RIGCO and Tatham Offshore entered into an agreement whereby RIGCO has the option to either lease or purchase the anchor chains from Tatham Offshore. In April 1999, Tatham Offshore Canada Limited purchased the two promissory notes for their principal amount plus accrued interest. See Notes 1 and 2 for additional related party transactions completed in connection with the Merger.
Tatham Aviation, Inc. ("Tatham Aviation"), whose sole shareholder is Thomas P. Tatham, has provided the Company use of a corporate aircraft. The agreement between the Company and Tatham Aviation provides for the Company's reimbursement of operating costs, insurance and carrying costs in exchange for the use of the corporate aircraft. During the twelve months ended June 30, 1999, the Company paid Tatham Aviation $2.4 million under this agreement.
Leviathan Gas Pipeline Partners, L.P.
Leviathan charged Tatham Offshore $197,500, $1,827,000 and $1,995,000 for the years ended June 30, 1999, 1998, 1997, 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, 1999, 1998, and 1997, 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.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Dover Technology, Inc. ("Dover"), a 50%-owned subsidiary of DeepTech, charged Tatham Offshore $160,000 for the year ended June 30, 1997 for services related to the acquisition, development, exploration or evaluation of oil and gas properties.
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 LIBOR plus 2% per annum and is due on September 30, 1999 or on demand. Mr. Tatham is also a co-guarantor of this loan.
NOTE 8 - INCOME TAXES:
The Company's deferred income tax liabilities (assets) at June 30, 1999 and 1998 consist of net operating loss ("NOL") carryforwards and the tax effect of temporary 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 $47,679,000 and $45,531,000 at June 30, 1999 and 1998, respectively, were provided against the net deferred tax assets. At June 30, 1999, the Company had approximately $140,231,000 of regular tax NOL carryforwards and approximately $139,043,000 of alternative 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 Stock Market, Inc. ("Nasdaq") listing criteria requires, among other things, that a company listed on the Nasdaq National Market maintain a closing bid price greater than or equal to $1.00 and that the company's common stock must maintain a market value of public float greater than or equal to $5,000,000. The Company was notified by Nasdaq that unless the Company was able to demonstrate compliance with the $1.00 minimum bid price requirement and the $5,000,000 market value of public stock requirement by May 12, 1999, the Company's common stock would be delisted from the Nasdaq National Market at the opening of business on May 13, 1999. The Company's common stock bid price had not closed at a bid price greater than or equal to $1.00 in recent months and the market value of the Company's common stock held by individuals and entities which qualify under the definition of public float did not equal or exceed $5,000,000 at the current trading level of the common stock. As a result, effective May 13, 1999, the Company's common stock was no longer listed on the Nasdaq National Market and began trading in the over the counter market.
Effective January 25, 1998, Sedco Forex entered into a one-year contract with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. The Company was notified by Sedco Forex that as of November 18, 1998, Shell would cease using the Bill Shoemaker to conduct drilling operations in the Gulf. The Company has been paid for drilling services performed by the Bill Shoemaker for Shell through November 18, 1998 but has not been paid for any period since that time. At June 30, 1999, the Company had recorded an $8.6 million account receivable from Sedco Forex related to the unpaid portion of the Shell contract. On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreement for the Bill Shoemaker. As discussed in Note 11, on July 26, 1999, RIGCO filed a petition alleging more than $51 million in actual damages against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively, "Schlumberger").
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
NOTE 10 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS:
Supplemental Disclosures of Noncash Investing and Financing Activities
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As discussed in Note 2, Tatham Offshore conveyed its remaining oil and gas assets to Leviathan per the Redemption Agreement. The assets and liabilities conveyed were as follows (in thousands):
NOTE 11 - SUBSEQUENT EVENTS:
Bankruptcy Filing by Subsidiaries
On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc., wholly-owned subsidiaries of DeepFlex, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing"). RIGCO owns a 100% interest in the Bill Shoemaker and a 25% undivided interest in the Laffit Pincay. FPS VI owns a 75% undivided interest in the Laffit Pincay. FPS III, Inc. and FPS V, Inc. are the owners of RIGCO and FPS VI with FPS III, Inc. owning a 50% interest in RIGCO and FPS V, Inc. owning a 50% interest in RIGCO and a 100% interest in FPS VI. The proceedings of RIGCO, FPS VI, FPS III, Inc. and FPS V, Inc. have been consolidated for administrative purposes. As a result of the Bankruptcy Filing, the Rigs are being managed by the Company's rig related subsidiaries as debtors-in-possession. Under the provisions of the Bankruptcy Code, the debtors-in-possession have the exclusive right, for 120 days following the date of the Bankruptcy Filing, to file a plan of reorganization with the Bankruptcy Court. Management intends to file such a plan. The syndicate of lenders under the Credit Facility have a secured interest in substantially all of the assets of RIGCO and FPS VI.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Following is the combined balance sheet and statement of operations at June 30, 1999 and the year then ended for the companies under the Bankruptcy Filing.
COMBINED BALANCE SHEET (In thousands)
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999 (IN THOUSANDS)
Lawsuit Against Schlumberger Technology Corporation
On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in Harris County, Texas, alleging more than $51 million in actual damages against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively, "Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's marketing, manning, management and operation of the Shoemaker and Pincay pursuant to certain charter, make-ready and other agreements and arrangements. The allegations include claims of gross negligence, breach of contract, fraud, negligent misrepresentation and negligence. RIGCO is seeking an unspecified amount of exemplary damages. RIGCO has alleged in bankruptcy court proceedings that the manner in which Schlumberger performed its duties with respect to the Bill Shoemaker and Laffit Pincay during the course of the management and charter agreements resulted in RIGCO's financial difficulties and caused it to default on its secured debt obligations.
NOTE 12 - SEGMENT INFORMATION:
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 establishes 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 Statement did not have an effect on the Company's results of operations or financial position but did affect the disclosure of segment information.
The Company currently operates in two segments, the offshore contract drilling business and the pursuit of an integrated energy related investment strategy in Atlantic Canada. The accounting policies of the reportable segments are the same as those described in Note 3.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summarized financial information of the Company's reportable segments for the years ended June 30, 1999, 1998 and 1997 is shown in the following table. The "Other" column includes results of oil and gas operations and corporate related items.
(1) In connection with the merger of DeepTech into El Paso and related transactions, $5.7 million of oil and gas properties were transferred to DeepTech and Leviathan. (2) In connection with the merger of DeepTech into El Paso and related transactions, $30.7 million of oil and gas properties were transferred to DeepTech and Leviathan.
Following is a summary of revenues and identifiable assets by geographic areas for offshore contract drilling segments. Revenues are attributed to countries based on the location of service provided.
In fiscal year 1999, Shell accounted for $22.9 million and Husky Oil Operations Limited accounted for $14.7 million of drilling services revenue. No other customer accounted for more than 10 percent of consolidated revenue in 1999.
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - 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 1999, 1998 and 1997. On August 14, 1998 all of the Company's oil and gas operations were transferred to Leviathan (See Note 2). 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. (b) In connection with the transfer of all the operating oil and gas properties to Leviathan.
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
TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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 were 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 were 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 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. (2) In connection with the transfer of all of the Company's oil and gas properties to Leviathan.
EXHIBIT INDEX