10-Q/A 1 e10-qa.txt TATHAM OFFSHORE, INC. - AMENDMENT - MARCH 31, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NO. 0-22892 TATHAM OFFSHORE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0269967 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) FIVE POST OAK PARK 4400 POST OAK PARKWAY, SUITE 1550 HOUSTON, TEXAS 77027 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (713) 621-3996 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF MAY 15, 2000, THERE WERE OUTSTANDING 26,078,548 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT. ================================================================================ 2 TATHAM OFFSHORE, INC. AND SUBSIDIARIES INTRODUCTION This Form 10-Q/A is being filed to reflect the reduction in carrying value of the FPS Bill Shoemaker (the "Bill Shoemaker"). On May 31, 2000, RIGCO North America, L.L.C. ("RIGCO"), the owner of the Bill Shoemaker, received an offer to purchase the Bill Shoemaker from Fred Olson ASA for $43.6 million. The offer was accepted by RIGCO and subsequently approved by the Bankruptcy Court on June 5, 2000. The sale closed on June 28, 2000. Loss from Discontinued Operations reflects an additional $45.6 million reserve for depreciation to adjust the carrying value of the Bill Shoemaker to the amount received upon its sale. This results in an increase in the net loss per common share of $1.75 for the three months ended March 31, 2000. The Company also has restated its Management's Discussion and Analysis of Financial Condition and Results of Operations to reflect these changes. 2 3 TATHAM OFFSHORE, INC. AND SUBSIDIARIES TABLE OF CONTENTS

3 4 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except share data)

The accompanying notes are an integral part of this financial statement. 4 5 TATHAM OFFSHORE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts)

The accompanying notes are an integral part of this financial statement. 5 6 TATHAM OFFSHORE, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)

Supplemental disclosures to the Statement of Cash Flows - see Note 7. The accompanying notes are an integral part of this financial statement. 6 7 TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)

The accompanying notes are an integral part of this financial statement. 7 8 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: This Form 10-Q/A is being filed to reflect the reduction in carrying value of the FPS Bill Shoemaker (the "Bill Shoemaker"). On May 31, 2000, RIGCO North America, L.L.C. ("RIGCO"), the owner of the Bill Shoemaker, received an offer to purchase the Bill Shoemaker from Fred Olson ASA for $43.6 million. The offer was accepted by RIGCO and subsequently approved by the Bankruptcy Court on June 5, 2000. The sale closed on June 28, 2000. Loss from Discontinued Operations reflects an additional $45.6 million reserve for depreciation to adjust the carrying value of the Bill Shoemaker to the amount received upon its sale. This results in an increase in the net loss per common share of $1.75 for the three months ended March 31, 2000. Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware corporation, is currently pursuing, through its subsidiaries, energy related opportunities in Atlantic Canada, including substantial natural gas gathering and transmission facilities and related energy infrastructure (see "Bankruptcy Filing by Subsidiaries" and "Discontinued Operations" below). Historically, Tatham Offshore was engaged in the development, exploration and production of oil and gas reserves located primarily offshore the United States in the Gulf of Mexico (the "Gulf"). Prior to August 14, 1998, Tatham Offshore was an approximately 94%-owned subsidiary of DeepTech International Inc. ("DeepTech"), a diversified energy company. In connection with the merger of DeepTech with a subsidiary of El Paso Energy Corporation ("El Paso Energy") and related transactions completed on or before August 14, 1998 (the "Merger"), (i) Tatham Offshore transferred its ownership of Tatham Offshore Development, Inc. ("Tatham Development"), a Delaware corporation and former wholly-owned subsidiary of Tatham Offshore which held interests in Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence prospect, to DeepTech, (ii) Tatham Offshore conveyed its remaining oil and gas properties to Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), (iii) DeepTech contributed all of the outstanding shares of capital stock of DeepFlex Production Services, Inc. ("DeepFlex") to Tatham Offshore and (iv) DeepTech divested itself of its equity ownership interest in Tatham Offshore pursuant to a spin-off transaction effected by a Rights Offering (the "Rights Offering"). DeepFlex, a Delaware corporation and wholly-owned subsidiary of Tatham Offshore, was formed in January 1995 and, through its subsidiaries, focused on the acquisition and deployment of semisubmersible drilling rigs for contract drilling. RIGCO and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, owned interests in the FPS Laffit Pincay (the "Laffit Pincay") and the Bill Shoemaker (together with the Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling rigs. Pursuant to management and charter agreements, Sedco Forex Division of Schlumberger Technology Corporation ("Sedco Forex") has marketed, managed, and operated the Rigs. On two occasions, Sedco Forex assigned its responsibilities under the Bill Shoemaker management and charter agreement to an affiliate, Sedco Canada Limited ("SCL"), while the Bill Shoemaker was operating in Canada. On January 22, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreements for the Laffit Pincay. Effective March 23, 1999, RIGCO took over the marketing, management and operational responsibilities for the Laffit Pincay. On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreement for the Bill Shoemaker. Under the Bill Shoemaker management and charter agreement, SCL continued to man and operate the rig through the conclusion of its drilling contract with Husky Oil Operations Limited. At the conclusion of the Husky Oil Operations Limited drilling contract on November 15, 1999, RIGCO assumed the marketing, management and operational responsibilities for the Bill Shoemaker. Tatham Offshore Canada Limited, a wholly-owned subsidiary of Tatham Offshore, pursues certain opportunities offshore eastern Canada and is the Canadian representative of North Atlantic Pipeline Partners, L.P. ("North Atlantic Pipeline Partners"). North Atlantic Pipeline Partners is the sponsor of a proposal to construct a natural gas pipeline and related infrastructure in the Grand Banks area offshore Newfoundland and Nova Scotia to the eastern seaboard of the United States. The accompanying consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results of operations for the period covered by such statements. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. 8 9 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Bankruptcy Filing by Subsidiaries On August 9, 1999, RIGCO, FPS VI, FPS III, Inc. ("FPS III") and FPS V, Inc. ("FPS V") (collectively, the "Rig Subsidiaries"), wholly-owned subsidiaries of DeepFlex, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing"). At the time of the Bankruptcy Filing, RIGCO owned a 100% interest in the Bill Shoemaker and a 25% undivided interest in the Laffit Pincay and FPS VI owned a 75% undivided interest in the Laffit Pincay. FPS III and FPS V are the owners of RIGCO and FPS VI with FPS III owning a 50% interest in RIGCO and FPS V owning a 50% interest in RIGCO and a 100% interest in FPS VI. The bankruptcy proceedings of the Rig Subsidiaries are administered jointly. As a result of the Bankruptcy Filing, the Rigs were managed by the Company's rig related subsidiaries as debtors-in-possession. The syndicate of lenders under the Credit Facility had a secured interest in substantially all of the assets of RIGCO and FPS VI. On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses associated with the sale totaled $0.3 million and $175,000 of the net proceeds is being held by RIGCO, in a separate debtor-in-possession bank account, pending the resolution of a maritime lien claim by one of RIGCO's pre-petition creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0 million, was paid to RIGCO's secured lenders in partial payment of their secured claim under the Credit Facility. Loss from discontinued operations includes an impairment provision of $13.3 million related to the sale of this rig. On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established separate debtor-in-possession bank accounts for (i) $2.0 million to secure payment to Tatham Offshore for their interest in four of the anchor chains located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested claims of unaffiliated unsecured creditors. The secured lenders under the Credit Facility and the DIP Loan (See "Liquidity and Capital Resources") received a total of $36.6 million in final payment of all principal, interest and expenses associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest in the four anchor chains on June 29, 2000. Loss from discontinued operations includes an impairment provision of $45.6 million related to the sale of this rig. As a result of the Bankruptcy Filing, financial statements presented after the date of the Bankruptcy Filing reflect the investment in and advances to and the results of operations of the Rig Subsidiaries on the equity method of accounting (see "Discontinued Operations" below and Note 3). Tatham Offshore's remaining 50% or more owned subsidiaries controlled by the Company are included in the accompanying consolidated financial statements. Discontinued Operations Drilling Rig Operations As of May 15, 2000, RIGCO was negotiating a short-term loan (the "DIP Loan") which would provide RIGCO with cash to fund its operations through June 30, 2000. Effective May 25, 2000, certain of the secured lenders and RIGCO entered into the DIP Loan agreement which, among other things, required RIGCO to have a binding contract for the sale of the Bill Shoemaker by May 31, 2000 with a minimum bid of $37.5 million. As a result, all operating assets of RIGCO will be liquidated, resulting in Tatham Offshore's Rig Subsidiaries being presented as discontinued operations. Revenue from drilling services for the three months ended March 31, 1999 totaled $6.1 million. The Laffit Pincay and Bill Shoemaker were both stacked without a drilling contract for the three months ended March 31, 2000 and therefore did not generate any revenue from drilling services for this period. Operating expenses for the Rigs for the three months ended March 31, 2000 totaled $2.0 million compared to operating expenses for the three months ended March 31, 1999 of $4.5 million. Depreciation expense for the Rigs totaled $60.3 million for the three months ended March 31, 2000 and included an impairment provision of $13.3 million for the Laffit Pincay and $45.6 million for the Bill Shoemaker. Depreciation expense for the three months ended March 31, 1999 totaled $1.5 million. General and administrative expense relating to the rigs for the three months ended March 31, 2000 totaled $0.8 million as compared with $1.3 million for the three months ended March 31, 1999. 9 10 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Revenue from drilling services for the nine months ended March 31, 2000 totaled $13.3 million as compared to revenue from drilling services for the nine months ended March 31, 1999 of $28.4 million. Operating expenses for the Rigs for the nine months ended March 31, 2000 totaled $10.2 million compared to operating expenses for the three months ended March 31, 1999 of $16.5 million. Depreciation expense for the Rigs totaled $63.2 million for the nine months ended March 31, 2000 and included an impairment provision of $13.3 million for the Laffit Pincay and $45.6 million for the Bill Shoemaker. Depreciation expense for the nine months ended March 31, 1999 totaled $4.2 million. General and administrative expense relating to the rigs for the nine months ended March 31, 2000 totaled $2.8 million as compared to $1.9 million for the nine months ended March 31, 1999. Oil and Gas Operations Discontinued operations in 1999 represent Tatham Offshore's oil and gas exploration and development business transferred to DeepTech and Leviathan as discussed above. These operations were accounted for using the successful efforts method of accounting. Net sales from discontinued oil and gas operations were $0.9 million for the period from July 1, 1998 through August 14, 1998. General and administrative expenses were allocated to discontinued operations based on the percentage of employees' time related to the discontinued operations and were $0.3 million for the period from July 1, 1998 through August 14, 1998. Interest expense for the period from July 1, 1998 through August 14, 1998 was allocated 100% to discontinued operations. NOTE 2 - RELATED PARTY TRANSACTIONS: Management Agreement The management agreement between Tatham Offshore and DeepTech provided for an annual management fee which was intended to reimburse DeepTech for the estimated costs of its operational, financial, accounting and administrative services provided to the Company. Effective July 1, 1997, the management agreement was amended to provide for an annual management fee of 26% of DeepTech's overhead expenses. During the nine months ended March 31, 1999, DeepTech charged Tatham Offshore $310,000 under this agreement. The management agreement was terminated August 14, 1998. Notes Payable to Affiliates In connection with the Merger, the Company entered into a short-term financing arrangement with Tatham Brothers, LLC ("Tatham Brothers") (the "Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the redemption agreement with Leviathan, (ii) pay $1.4 million to DeepTech in connection with the management agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to Tatham Brothers Securities, LLC ("TB Securities") with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the Short-Term Facility. Tatham Brothers is an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company, and the parent company of TB Securities. The original terms of the Short-Term Facility provided for an interest rate of 12% per annum with principal and accrued interest due on January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to refinance the original $22.9 million principal plus $1.1 million accrued interest into a new short-term loan which bears interest at the rate of 15% per annum and was due March 31, 1999. In connection with the refinancing, the Company paid Tatham Brothers a fee of $1.0 million in the form of a 15% subordinated convertible note (the "Subordinated Convertible Note"). The Subordinated Convertible Note bears interest at the rate of 15% per annum and is due on August 15, 2001. Tatham Brothers may convert the principal amount of the Subordinated Convertible Note and accrued unpaid interest into shares of Common Stock of the Company based on the average market price for the five trading days prior to the end of the previous calendar quarter. The Short-Term Facility is secured by a pledge of DeepFlex of its interest in certain payment-in-kind Subordinated Promissory Notes issued by RIGCO and FPS V, both subsidiaries of the Company, which had an outstanding balance of approximately $80.8 million at March 31, 2000. On March 31, 1999, the Company and Tatham Brothers extended the Short-Term Facility until April 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required to pay $24.1 million in principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make payment of such amounts; as a result, an event of default has occurred and is continuing under the Short-Term Facility. The default interest rate under the Short-Term Facility is 19% per annum. The principal balance and accrued interest under the Short-Term Facility and Subordinated Convertible Note are included in long-term debt to affiliate currently payable on the consolidated balance sheet. 10 11 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998, was executed in connection with the Merger and related transactions and is by and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso Energy. Pursuant to the Standby Agreement, to the extent that any of the Company's Common Stock or Series A Preferred Stock was not subscribed for by holders of DeepTech common stock in the Rights Offering, Tatham Brothers committed to purchase such number of unsubscribed shares in order for DeepTech to receive net proceeds from the Rights Offering of not less than $75 million (the "Standby Commitment"). In addition, Tatham Brothers had the right to purchase any shares which DeepTech held after the Rights Offering and the satisfaction of the Standby Commitment. Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the Standby Commitment, which guarantee was backed by a letter of credit from NationsBank, N.A. In consideration of Mr. Tatham's guarantee of the Standby Commitment, under the terms of a Repayment Agreement between Mr. Tatham and Tatham Brothers, dated February 27, 1998, (i) Tatham Brothers granted to Mr. Tatham an option to purchase up to a one-third membership interest in Tatham Brothers for $1,000 through the issuance of new membership units, and (ii) Mr. Tatham had the right, but not the obligation, to lend to Tatham Brothers all sums necessary for Tatham Brothers to fulfill its obligations under the Standby Commitment. In exchange for certain consideration, Tatham Brothers assigned all of its rights and interest under the Standby Agreement and the Standby Commitment to TB Securities. Pursuant to the Purchase Commitment Agreement, dated as of February 27, 1998 by and between Tatham Brothers and Tatham Offshore, in consideration of the Standby Commitment, the Company paid Tatham Brothers a fee of $6.9 million, which amount was included in the amount payable under the Short-Term Facility. Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain improvements to the Rigs. The loan bore interest at LIBOR plus 2% and was due on November 30, 1999 or upon demand. On December 1, 1999, Tatham Brothers made a principal reduction of $2.6 million and extended the note until September 30, 2000 or upon demand. Effective February 1, 2000, the loan bears interest at the rate of 6.5% per annum. The loan from Tatham Brothers to DeepFlex, plus accrued interest, was included in the amount payable under the Short-Term Facility discussed above. In connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO obtained a $6.5 million letter of credit in January 1999 to secure payment to Sedco Forex, and the funds used to secure such letter of credit were provided by Mr. Thomas P. Tatham. The $6.5 million in collateral funds plus accrued liquidated damages totaling $1.7 million are included in the accounts of RIGCO. In exchange for providing the funds to secure the letter of credit, RIGCO paid a fee of $500,000 to Mr. Tatham. RIGCO has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day from February 15, 1999 until such funds are returned. The liquidated damages payment would be in the form of a promissory note bearing interest at the rate of 18% per annum. Tatham Aviation Services, Inc. ("Tatham Aviation"), whose sole shareholder is Mr. Thomas P. Tatham, has provided the Company use of a corporate aircraft. The agreement between the Company and Tatham Aviation provides for the Company's reimbursement of operating costs, insurance and carrying costs in exchange for the use of the corporate aircraft. During the nine months ended March 31, 2000, the Company paid Tatham Aviation $992,000 under this agreement. On February 10, 1999, Tatham Offshore issued two promissory notes, each in the original principal amount of $1.1 million, to Tatham Brothers and a foundation associated with Mr. Thomas P. Tatham, respectively, to secure funds to purchase new anchor chains in connection with the Bill Shoemaker make-ready. Effective with the purchase of the anchor chains, RIGCO and Tatham Offshore entered into an agreement whereby RIGCO has the option to either lease or purchase the anchor chains from Tatham Offshore. In April 1999, Tatham Offshore Canada Limited purchased the two promissory notes for their principal amount plus accrued interest. On June 30, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Mr. Thomas P. Tatham. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Loans under this agreement bear interest at the prime rate plus 3% (on December 31, 1999, the interest rate under this facility was 11.5%) and were due on September 30, 1999. As of the date of the Bankruptcy Filing, Tatham Investment Corp. had an unsecured claim of $338,303 under this agreement. 11 12 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility with Tatham Investment Corp. The revolving draw facility provides for loans, at the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in amounts up to $5.0 million. The revolving draw facility bears interest at the rate of 15% per annum and is payable upon demand by the lender. Through March 31, 2000, the Company has borrowed $4.2 million under this facility which along with accrued interest of $347,302 is included in accounts payable to affiliates on the consolidated balance sheet. The Company has pledged all of its equity ownership in certain wholly-owned subsidiaries of the Company as well as a certain promissory note issued by Tatham Offshore Canada, Limited as security under this revolving draw facility. Other Leviathan charged Tatham Offshore $197,500 for the period from July 1, 1998 through August 14, 1998 for commodity and platform access fees associated with the Viosca Knoll 817 lease in accordance with certain agreements between the parties. During the period from July 1, 1998 through August 14, 1998, Tatham Offshore sold all of its production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of DeepTech. Under its agreement with Offshore Marketing, the Company paid fees equal to 2% of the sales value of crude oil and condensate and $0.015 per dekatherm of natural gas for selling the Company's production. NOTE 3 - EQUITY INVESTMENTS: On August 9, 1999, the Rig Subsidiaries, wholly-owned indirect subsidiaries of Tatham Offshore, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. As a result of the Bankruptcy Filing, the Rig Subsidiaries operated their businesses and managed their property as debtors-in-possession. Financial statements presented after the date of the Bankruptcy Filing reflect the investment in and advances to and the results of operations of the Rig Subsidiaries under the equity method of accounting. As discussed in Note 1, the Laffit Pincay was sold on May 1, 2000 and the Bill Shoemaker was sold on June 28, 2000. As such, the Company's equity in earnings of the Rig Subsidiaries is reflected as a discontinued operation on the Consolidated Statement of Operations. At March 31, 2000, the combined assets of the Rig Subsidiaries totaled $77.4 million. Excluding deferred income taxes, the Rig Subsidiaries had $151.1 million of total debt and other liabilities at March 31, 2000 including $62.3 million of secured debt under the Credit Facility. Substantially all of the remaining debt and other liabilities are owed to affiliates of the Rig Subsidiaries. The following is summarized combined income statement information for the subsidiaries included in the Bankruptcy Filing. 12 13 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS)

On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay to Odin Millennium Partnership Ltd. for $28.5 million in cash. On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred Olsen Energy ASA for $43,560,000 in cash. (See Note 1 - "Bankruptcy Filing by Subsidiaries") NOTE 4 - STOCKHOLDERS' EQUITY: The following table summarizes Tatham Offshore's outstanding equity as of March 31, 2000:

---------- (a) In connection with the Rights Offering, Tatham Offshore purchased all of the shares of Common Stock and Series A Preferred Stock that were not acquired by the holders of Rights or TB Securities in the Rights Offering, 3,926,746 and 653,365, respectively, and the proceeds from such purchase by Tatham Offshore were contributed by DeepTech to Tatham Offshore. (b) At any time, the holder of any shares may convert the liquidation value and unpaid dividends into shares of Tatham Offshore common stock at $6.53 per share. (c) Redeemable at the option of Tatham Offshore on or after July 1, 1997. NOTE 5 - EARNINGS PER SHARE: Basic earnings per share ("EPS") excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. 13 14 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 6 - COMMITMENTS AND CONTINGENCIES: In the ordinary course of business, the Company is subject to various laws and regulations. In the opinion of management, compliance with existing laws and regulations will not materially affect the financial position or operations of the Company. Various legal actions have arisen in the ordinary course of business. Management believes that the outcome of such proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company. Effective January 25, 1998, Sedco Forex entered into a one-year contract with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell would cease using the Bill Shoemaker to conduct drilling operations in the Gulf. RIGCO has been paid for drilling services performed by the Bill Shoemaker for Shell through November 18, 1998 but has not been paid for any period since that time. At March 31, 2000, RIGCO had recorded a $7.5 million account receivable from Sedco Forex related to the unpaid portion of the Shell contract. On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreement for the Bill Shoemaker. On July 26, 1999, RIGCO filed a petition alleging more than $51 million in actual damages against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. The Company anticipates substantial future capital expenditures associated with the development and implementation of the North Atlantic pipeline project and related opportunities in Atlantic Canada. Realization of the potential of the North Atlantic pipeline project and related opportunities in Atlantic Canada is dependent upon the ability of the Company to obtain sufficient additional capital or project financing. NOTE 7 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS: Cash paid, net of amounts capitalized

Supplemental Disclosures of Noncash Investing and Financing Activities

14 15 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) As discussed in Note 1, the Company has reflected the investment in and advances to and the results of operations of the Rig Subsidiaries on the equity method of accounting. The assets, liabilities and accumulated deficit of the Rig Subsidiaries at June 30, 1999 were as follows (in thousands): Cash $ 382 Accounts receivable 16,034 Prepaid expenses 156 Semisubmersible drilling rigs, net 132,314 Accounts payable and accrued liabilities (8,408) Accounts payable to affiliates (6,003) Notes payable to affiliates (79,357) Current portion of note payable (58,148) Deferred income taxes (10,238) --------- Accumulated deficit $ (13,268) =========

NOTE 8 - SEGMENT INFORMATION: The Company previously operated two business segments, the offshore contract drilling business and the pursuit of an integrated energy related investment strategy in Atlantic Canada. The Company is required to report summarized financial results for operating segments and related disclosures about products and services, geographic areas and major customers. Primary disclosure requirements include total segment revenues, total segment profit or loss and total segment assets. Operations for the drilling segment are included in the financial statements as income (loss) from discontinued operations. For the three and nine months ended March 31, 2000, operations for the drilling segment were included in the financial statements on the equity method of accounting (see Note 3). For the three months ended March 31, 1999, the drilling segment revenues totaled $6.1 million and the drilling segment profit totaled $0.1 million. For the nine months ended March 31, 1999, the drilling segment revenues totaled $28.3 million and the drilling segment profit totaled $7.7 million. The Canadian Investment Strategy segment had no revenues and all costs were capitalized for the three and nine months ended March 31, 2000 and 1999. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto included in Item 1. "Consolidated Financial Statements" and is intended to assist in the understanding of the Company's financial condition and results of operations for the three and nine months ended March 31, 2000, as restated. GENERAL Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware corporation, is currently pursuing, through its subsidiaries, energy related opportunities in Atlantic Canada, including substantial natural gas gathering and transmission facilities and related energy infrastructure. Historically, Tatham Offshore has been in the oil and gas exploration and development business, primarily in the Gulf. The Company has refocused its business from the oil and gas exploration and production business in the Gulf to an integrated frontier investment strategy targeting Atlantic Canada. Accordingly, in connection with DeepTech's merger (the "Merger") with a subsidiary of El Paso Energy completed on August 14, 1998, Tatham Offshore (i) transferred its ownership of Tatham Development, which owns oil and gas producing properties, to DeepTech and its remaining oil and gas properties to Leviathan, and (ii) acquired from DeepTech ownership of DeepFlex which, through its subsidiaries, owned the Laffit Pincay and the Bill Shoemaker. The Company's contract drilling services business and its oil and gas operations in the Gulf are reflected as discontinued operations in the financial statements. As a result of the Bankruptcy Filing as discussed below, financial statements presented after the date of the Bankruptcy Filing reflect the investment in and advances to and the results of operation of the Rig Subsidiaries on the equity method of accounting. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1999 The Laffit Pincay and Bill Shoemaker were both stacked without a drilling contract for the three months ended March 31, 2000 and therefore did not generate any revenue from drilling services for the period. Revenue from drilling services included in discontinued operations totaled $6.1 million for the three months ended March 31, 1999, all of which was generated by the Bill Shoemaker. Operating expenses for the Rigs for the three months ended March 31, 2000 totaled $2.0 million and were attributable to direct operating expenses for the Rigs. Operating expenses for the Rigs for the three month periods ended March 31, 2000 and March 31, 1999 were reflected in discontinued operations. During this period, the Bill Shoemaker's operating expenses totaled $0.8 million and the Laffit Pincay's operating expenses totaled $1.2 million. Operating expenses for the Laffit Pincay and Bill Shoemaker during this period included the costs necessary to maintain the rigs in a warm-stacked mode. Operating expenses for the three months ended March 31, 1999 totaled $4.5 million and were attributable to the management fee and direct operating expenses for the Rigs. During this period, the Bill Shoemaker's operating expenses totaled $2.4 million and the Laffit Pincay's operating expenses totaled $2.1 million. Operating expense for the Laffit Pincay during this period included the costs necessary to maintain the rig in a warm-stacked mode. The reduction in operating expense for both rigs from $4.5 million for the three month period ending March 31, 1999 to $2.0 million for the three month period ending March 31, 2000 was due to reduced crew requirements and the elimination of management fees payable to Sedco Forex as a result of the termination of the Sedco Forex management agreements. Depreciation expense for the Rigs totaled $60.3 million for the three months ended March 31, 2000 and is reflected in discontinued operations. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $46.6 million and $13.7 million, respectively. Depreciation expense for the Laffit Pincay includes an impairment provision of $13.3 million related to the sale of the rig. Depreciation expense for the Bill Shoemaker includes an impairment provision of $45.6 million related to the sale of the rig. Depreciation expense totaled $1.5 million for the three months ended March 31, 1999 and is included in discontinued operations. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $1.0 million and $0.5 million, respectively. General and administrative expense totaled $163,000 for the three months ended March 31, 2000 and includes staff and overhead costs for the Atlantic Canada business. In addition, general and administrative expense relating to the Rigs totaled $0.8 million and is reflected in discontinued operations. General and administrative expense totaled 16 17 $0.6 million for the three months ended March 31, 1999. General and administrative expense for the three months ended March 31, 1999 included staff and overhead costs for the operation of the marine services and Atlantic Canada businesses. In addition, general and administrative expenses related to the rigs totaled $1.3 million and is included in discontinued operations. Operating loss from continuing operations for the three months ended March 31, 2000 totaled $0.2 million as compared to operating loss from continuing operations of $0.6 million for the three months ended March 31, 1999. The change was due to the items discussed above. Interest income and other for the three months ended March 31, 2000 and 1999 totaled $0.1 million and $0.8 million, respectively, and primarily included interest income from available cash. Interest expense and other financing costs to affiliates for the three months ended March 31, 2000 and 1999 totaled $1.6 million and $4.7 million, respectively, and related to borrowings from Tatham Brothers. Interest expense incurred by RIGCO under the Credit Facility for the three months ended March 31, 2000 totaled $2.3 million and is included in discontinued operations. Interest expense incurred by RIGCO under the Credit Facility for the three months ended March 31, 1999 totaled $1.7 million. Losses from discontinued operations for the three months ended March 31, 2000 totaled $65.4 million as compared to a gain from discontinued operations of $0.1 million for the three months ended March 31, 1999. Tatham Offshore eliminated all of its Senior Preferred Stock and the associated preferred stock dividends in arrears as a result of certain Merger related agreements and repurchased and cancelled 653,365 shares of its Series A Preferred Stock in connection with the Rights Offering. Tatham Offshore's remaining preferred stock dividends totaled $0.8 million for the three months ended March 31, 2000 as compared with $0.8 million for the three months ended March 31, 1999. After taking preferred stock dividends into account, the Company's net loss allocable to common shareholders for the three months ended March 31, 2000 was $67.8 million, or $2.57 per share, as compared with a net loss allocable to common shareholders for the three months ended March 31, 1999 of $6.5 million, or $0.25 per share. NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1999 Revenue from drilling services totaled $13.3 million for the nine months ended March 31, 2000 and is reflected in discontinued operations. All of the revenue for the nine months ended March 31, 2000 was generated by the Bill Shoemaker. During this period the Bill Shoemaker was under contract for the period from July 1, 1999 through November 15, 1999. Revenue from drilling services totaled $28.4 million for the nine months ended March 31, 1999 and is reflected in discontinued operations. The Bill Shoemaker generated a total of $26.3 million in revenue and the Laffit Pincay generated a total of $2.1 million in revenue. The reduction in revenue from $28.4 million for the nine months ended March 31, 1999 to $13.3 million for the nine months ended March 31, 2000 was due to a lower average day rate in effect during 1999 as well as the lower utilization rate. The Laffit Pincay did not have a drilling contract during the nine months ended March 31, 2000 and had only one short term drilling contract during the nine months ended March 31, 1999. Operating expenses for the Rigs for the nine months ended March 31, 2000 totaled $10.2 million and were attributable to the management fee and direct operating expenses for the Rigs. Operating expenses for the Rigs for the nine month periods ended March 31, 2000 and March 31, 1999 were reflected in discontinued operations. During this period, the Bill Shoemaker's operating expenses totaled $7.5 million and the Laffit Pincay's operating expenses totaled $2.7 million. Operating expenses for the Laffit Pincay during this period included the costs necessary to maintain the rig in a warm-stacked mode. Operating expenses for the nine months ended March 31, 1999 totaled $16.5 million and were attributable to the management fee and direct operating expenses for the Rigs. During this period, the Bill Shoemaker's operating expenses totaled $8.4 million and the Laffit Pincay's operating expenses totaled $8.1 million. Operating expense for the Laffit Pincay during this period included the costs necessary to maintain the rig in a warm-stacked mode. The reduction in operating expense for the Laffit Pincay from $8.1 million for the nine month period ending March 31, 1999 to $2.7 million for the nine month period ending March 31, 2000 was due to reduced crew requirements and the elimination of management fees payable to Sedco Forex as a result of the termination of the Sedco Forex management agreement on March 23, 1999. 17 18 Depreciation expense for the Rigs totaled $63.3 million for the nine months ended March 31, 2000 and is reflected in discontinued operations. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $48.5 million and $14.7 million, respectively. Depreciation expense for the Laffit Pincay includes an impairment provision of $13.3 million related to the sale of the rig. Depreciation expense for the Bill Shoemaker includes an impairment provision of $45.6 million related to the sale of the rig. Depreciation expense totaled $4.2 million for the nine months ended March 31, 1999. Depreciation expense for the Bill Shoemaker and the Laffit Pincay totaled $2.7 million and $1.5 million, respectively. General and administrative expense totaled $657,000 for the nine months ended March 31, 2000. In addition, general and administrative expense relating to the Rigs totaled $2.8 million and is reflected in discontinued operations. General and administrative expense totaled $3.0 million for the nine months ended March 31, 1999. General and administrative expense includes staff and overhead costs allocated to the Company under a management agreement with DeepTech of $0.2 million for the nine months ended March 31, 1999. In addition, general and administrative expense relating to the rigs totaled $1.9 million and is included in discontinued operations. In connection with the Merger, the management agreement between the Company and DeepTech was terminated on August 14, 1998. General and administrative expense for the nine months ended March 31, 1999 included staff and overhead costs for the operation of the marine services and Atlantic Canada businesses. General and administrative costs attributable to discontinued operations totaled $0.3 million for the nine months ended March 31, 1999. Net loss from continuing operations for the nine months ended March 31, 2000 totaled $4.9 million as compared to net loss from continuing operations of $12.7 million for the nine months ended March 31, 1999. The change was due to the items discussed above. Interest income and other for the nine months ended March 31, 2000 and 1999 totaled $183,000 and $0.9 million, respectively, and included interest income from available cash and other income in 1999 of $618,000 related to a settlement with El Paso under certain merger related agreements. Interest expense and other financing costs to affiliates for the nine months ended March 31, 2000 and 1999 totaled $4.4 million and $10.3 million, respectively, and related to borrowings from Tatham Brothers. The Rig Subsidiaries also incurred interest expense to affiliated entities of $1.4 million for the nine months ended March 31, 2000 which is included in equity earnings. Interest expense incurred by RIGCO under the Credit Facility for the nine months ended March 31, 2000 totaled $6.5 million and is included in equity earnings. Interest expense incurred by RIGCO under the Credit Facility for the nine months ended March 31, 1999 totaled $5.7 million. On or before August 14, 1998, the Company transferred all of its oil and gas properties in the Gulf to DeepTech and Leviathan in connection with the Merger. For the nine months ended March 31, 2000, the Company reported earnings from discontinued operations of its oil and gas operations of $336,000 due to the reversal of oil and gas expense accruals. The Company reported a net loss from discontinued operations of its oil and gas operations of $0.2 million for the nine months ended March 31, 1999. During the period from July 1, 1998 through August 14, 1998, the Company sold 479 million cubic feet of natural gas and 1,200 barrels of oil at average prices of $1.86 per thousand cubic feet of natural gas and $7.13 per barrel of oil, respectively. Losses from discontinued operations of the drilling service operations for the nine months ended March 31, 2000 totaled $69.6 million as compared to a gain from drilling operations of $5.8 million for the nine months ended March 31, 1999. The changes were due to the items discussed above. Tatham Offshore eliminated all of its Senior Preferred Stock and the associated preferred stock dividends in arrears as a result of certain Merger related agreements and repurchased and cancelled 653,365 shares of its Series A Preferred Stock in connection with the Rights Offering. Tatham Offshore's remaining preferred stock dividends totaled $2.3 million for the nine months ended March 31, 2000 as compared with $2.3 million for the nine months ended March 31, 1999. After taking preferred stock dividends into account, the Company's net loss allocable to common shareholders for the nine months ended March 31, 2000 was $76.5 million, or $2.84 per share, as compared with a net loss allocable to common shareholders for the nine months ended March 31, 1999 of $9.4 million, or $0.35 per share. 18 19 LIQUIDITY AND CAPITAL RESOURCES Sources of Cash. The Company expects to be dependent upon cash on hand and loans under a revolving draw facility with Tatham Investment Corp. to pay its operating expenses and satisfy its other obligations. The use of cash held or generated by the Rig Subsidiaries is subject to approval of the Bankruptcy Court. As described below, the Company will need to raise substantial capital (equity, debt or both) or enter into other arrangements to allow the Company to implement its business strategy in Atlantic Canada. On August 9, 1999, RIGCO, FPS VI, FPS III and FPS V (the "Rig Subsidiaries") filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Filing"). At the time of the Bankruptcy Filing, RIGCO owned a 100% interest in the Bill Shoemaker and a 25% undivided interest in the Laffit Pincay and FPS VI owned a 75% undivided interest in the Laffit Pincay. FPS III and FPS V are the owners of RIGCO and FPS VI with FPS III owning a 50% interest in RIGCO and FPS V owning a 50% interest in RIGCO and a 100% interest in FPS VI. The proceedings of the Rig Subsidiaries are administered jointly. As a result of the Bankruptcy Filing, the Rigs were managed by the Company's subsidiaries as debtors-in-possession. The syndicate of lenders under the Credit Facility had a secured interest in substantially all of the assets of RIGCO and FPS VI. Any cash received by RIGCO and FPS VI was considered collateral for the secured lenders (the "Cash Collateral") under the Credit Facility. RIGCO and FPS VI as debtors-in-possession were granted temporary permission by the Bankruptcy Court for limited use of the Cash Collateral to pay operating and maintenance costs for the Rigs and to pay certain limited general and administrative costs of Tatham Offshore. As of May 15, 2000, RIGCO's cash reserves were substantially depleted and RIGCO required additional cash to continue to pay all obligations, including payroll, operating and maintenance expenses, interest obligations, legal expenses, lease obligations and general and administrative expenses to Tatham Offshore. RIGCO and the secured lenders negotiated a short-term loan (the "DIP Loan") which provided RIGCO with cash to fund its operations through June 30, 2000. Effective May 25, 2000, RIGCO and the secured lenders entered into the DIP Loan agreement which provided a short-term loan of up to $2.3 million. On May 31, 2000, RIGCO borrowed $1.5 million under this facility. The DIP Loan plus accrued interest was repaid from proceeds from the sale of the Bill Shoemaker on June 28, 2000. See "--Liquidity Outlook." On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses associated with the sale totaled $0.3 million and $175,000 of the net proceeds is being held by RIGCO, in a separate debtor-in-possession bank account, pending the resolution of a maritime lien claim by one of RIGCO's pre-petition creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0 million, was paid to RIGCO's secured lenders in partial payment of their secured claim under the Credit Facility. On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established separate debtor-in-possession bank accounts for (i) $2.0 million to secure payment to Tatham Offshore for their interest in four of the anchor chains located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested claims of unaffiliated unsecured creditors. The secured lenders under the Credit Facility and the DIP Loan received a total of $36.6 million in final payment of all principal, interest and expenses associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest in the four anchor chains on June 29, 2000. Loss from discontinued operations includes an impairment provision of $45.6 million related to the sale of this rig. In August 1998, both El Paso Energy and the Company were required to post letters of credit in connection with certain Merger related agreements. In March 1999, the Company entered into an agreement with El Paso Energy under which (i) each company was released of its obligation to maintain letters of credit in favor of one another, (ii) El Paso Energy paid the Company $618,000 and (iii) the Company released its rights to certain potential pre-merger tax attributes of the DeepTech group. As a result of this agreement, the Company's $6.1 million cash collateral which secured its letter of credit in favor of El Paso Energy was released and became available for general corporate purposes. 19 20 On July 1, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Mr. Thomas P. Tatham. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Loans under this agreement bear interest at the prime rate plus 3% (on March 31, 2000, the interest rate under this facility was 12.0%) and were due on September 30, 1999. As of the date of the Bankruptcy Filing, Tatham Investment Corp. had an unsecured claim of $338,303 under this agreement. Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility with Tatham Investment Corp. The revolving draw facility provides for loans, at the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in amounts up to $5.0 million. The revolving draw facility bears interest at the rate of 15% per annum and is payable upon demand by the lender. Through March 31, 2000, the Company has borrowed $4.2 million under this facility. The Company has pledged all of its equity ownership in certain wholly-owned subsidiaries of the Company as well as a certain promissory note issued by Tatham Offshore Canada, Limited. In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0 million from an unrelated party. The $4.0 million loan is evidenced by a demand note bearing interest at the rate of 15% per annum. Uses of Cash. The Company expects that its primary uses of cash will consist of (i) amounts necessary to staff and maintain the Bill Shoemaker through the date of its sale, and (ii) amounts necessary to pay general and administrative and other operational expenses. The use of cash held by the Rig Subsidiaries required approval by the Bankruptcy Court. As a result of an agreement with the secured lenders, the Rig Subsidiaries had interim use of such cash through April 14, 2000 and limited use for payroll through May 15, 2000. See "--Liquidity Outlook". On June 28, 2000, the secured lenders claims were paid and they no longer had a lien on the Rig Subsidiaries' cash. Effective June 28, 2000, the Rig Subsidiaries, as debtors-in-possession, had use of their cash assets to satisfy their cash requirements, subject to certain amounts segregated by Bankruptcy Court orders. Following the completion of the Husky Oil Operation Limited contract, in mid-November 1999, the Bill Shoemaker was warm-stacked in a facility in Newfoundland, Canada pending additional contract drilling commitments or the sale of the rig. The costs to stack the Bill Shoemaker in Canada were approximately $300,000 per month. In addition, the Company will use available cash from non-rig related borrowings to fund the pursuit of its business strategy in Atlantic Canada. Such uses will include funding initial expenditures related to the North Atlantic Pipeline Partners' pipeline project, the remainder of the Company's Atlantic Canada strategy and any of the Company's other potential capital expenditures. North Atlantic Pipeline Partners is the sponsor of a proposal to construct a natural gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire. As of March 31, 2000, Tatham Offshore Canada Limited, the Canadian representative of North Atlantic Pipeline Partners, has incurred $14.5 million in developmental costs in connection with such project and related infrastructure projects. The Company anticipates that the ultimate capital costs of the pipeline and related projects, if approved, could be in excess of several billion dollars. The Company plans to obtain debt and equity financing and/or secure joint venture partners to satisfy the capital requirements for the Atlantic Canada projects, as required. Liquidity Outlook. The Company intends to fund its immediate cash requirements with cash on hand and loans under the revolving draw facility with Tatham Investment Corp. At March 31, 2000, Tatham Offshore had $2.0 million of cash and cash equivalents. In addition, RIGCO had $0.6 million of cash and cash equivalents at March 31, 2000. The use of cash held by or generated from operations of the Rig Subsidiaries is subject to approval of the Bankruptcy Court. However, to meet its debt obligations and future capital needs with respect to Atlantic Canada, the Company will need to raise substantial capital (equity, debt or both) or enter into other arrangements including the sale of the Bill Shoemaker. Drilling Operations On September 30, 1996, RIGCO entered into a $65 million senior secured credit facility with a syndicate of lenders (as amended, the "Credit Facility"). Proceeds from the Credit Facility were used to acquire the Bill Shoemaker, to fund significant upgrades to the Bill Shoemaker, and to retire $30.3 million of other rig related indebtedness. In April 1997, the Credit Facility was amended to provide for an additional $12 million to fund the remaining refurbishments and upgrades to the Bill Shoemaker. The Credit Facility (i) originally matured on September 30, 20 21 1998, (ii) provided for interest at the prime rate plus 3% per annum (9.0% at March 31, 2000), payable quarterly, and (iii) was secured by the two semisubmersible drilling rigs and all of the related assets. On September 25, 1998, the parties to the Credit Facility amended the agreement to (i) extend the maturity date from September 30, 1998 to March 31, 1999, (ii) waive all principal payments until the maturity date, and (iii) extend the expiration date on the warrants issued to the lenders under the original Credit Facility to March 31, 1999. RIGCO paid a total of 0.5% of the outstanding principal balance to the lenders in connection with the amendment. On March 31, 1999, the parties to the Credit Facility amended the agreement to (i) extend the maturity to April 30, 1999, (ii) waive all principal and interest payments until the maturity date and (iii) extend the expiration date on the warrants issued to the lenders under the original Credit Facility to April 30, 1999. RIGCO paid a total of $100,000 to the lenders in connection with the amendment and agreed to increase the interest rate on the outstanding principal to the default rate under the Credit Facility (the prime rate plus 5% per annum, which equaled 14% at March 31, 2000) for the period of the extension. RIGCO did not make the principal payment or interest payment due on April 30, 1999 and subsequently filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code. As of the date of the Bankruptcy Filing, amounts outstanding under the Credit Facility totaled $58.1 million in principal and $4.1 million in accrued interest. See "-- Subsidiary Bankruptcy Court Proceedings". Effective January 25, 1998, Sedco Forex entered into a one-year contract with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell would cease using the Bill Shoemaker to conduct drilling operations in the Gulf. RIGCO has been paid for drilling services performed by the Bill Shoemaker for Shell through November 18, 1998, but has not been paid for any period since that time. RIGCO is seeking to recover its damages resulting from this early termination, along with damages unrelated to the Shell contract, in the suit against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively "Schlumberger") discussed hereafter. Following the early release of the rig by Shell, the Bill Shoemaker was towed to a shipyard in Galveston, Texas where it underwent significant unanticipated refurbishments in preparation for mobilization to the Grand Banks area in Atlantic Canada. Capital costs, including crew costs while in the shipyard, for the make-ready totaled approximately $8.5 million. Following the make-ready, the Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada to conduct a two-well program (with three options permitting up to seven additional wells) at predetermined rates for Husky Oil Operations Limited. In connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO obtained a letter of credit for $6.5 million to secure payment to Sedco Forex. The letter of credit was secured with funds provided by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company. In exchange for providing the funds to secure the letter of credit, RIGCO paid a fee of $500,000 to Mr. Tatham. RIGCO has agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day from February 15, 1999 until such funds are returned. The liquidated damages payment would be in the form of a promissory note bearing interest at the rate of 18% per annum. All of the funds securing the letter of credit were drawn by Sedco Forex for payments under the make-ready agreement. On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in Harris County, Texas, seeking both actual and exemplary damages from Schlumberger for claims arising out of Schlumberger's Sedco Forex Division's marketing, manning, management and operation of the Bill Shoemaker and Laffit Pincay pursuant to certain charter, make-ready and other agreements and arrangements. The allegations include claims of gross negligence, breach of contract, fraud, negligent misrepresentation and negligence. Additionally, RIGCO and FPS VI have alleged in bankruptcy court proceedings that the manner in which Schlumberger performed its duties with respect to the Bill Shoemaker and Laffit Pincay during the course of the management and charter agreements resulted in RIGCO's financial difficulties and caused it to default on its secured debt obligations. Subsidiary Bankruptcy Court Proceedings On or about February 9, 2000, RIGCO, FPS III, FPS IV and FPS V, as debtors-in-possession, and the secured lenders under the Credit Facility filed a Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection with the Bankruptcy Court (the "February 2000 Stipulation"). The February 2000 Stipulation provides that (i) the debtors-in-possession will accept an offer to purchase the Laffit Pincay at the best commercial offer above a stated minimum, (ii) within five business days of the acceptance of the offer, debtors-in-possession will file with the Bankruptcy Court a motion seeking approval of reasonable and customary proposed bankruptcy sale procedures including the establishment of an overbid period and approval of topping fees, (iii) within five 21 22 business days of the acceptance of the offer, debtors-in-possession shall retain a certain broker to market the Laffit Pincay, (iv) the debtors-in-possession will enter into a definitive Purchase Agreement which is acceptable to the secured lenders for the sale of the Laffit Pincay within 21 days after the acceptance of the offer and shall file a motion seeking approval of the proposed sale pursuant to the terms of the Purchase Agreement with the Bankruptcy Court, (v) the debtors-in-possession will use their best efforts to obtain a hearing on the proposed sales procedures on February 17, 2000, a hearing on the proposed sale on March 20, 2000 and the closing of the sale of the Laffit Pincay on or before March 31, 2000, (vi) the terms of the Purchase Agreement or any subsequent purchase agreement approved by the Bankruptcy Court shall provide that the sale of the Laffit Pincay will close on or before March 31, 2000, assuming all conditions precedent to the closing have been satisfied, (vii) upon the sale of the Laffit Pincay, the secured lenders would receive all of the net proceeds from the sale after deduction of customary and reasonable expenses, costs and fees associated with the sale, (viii) on or before March 31, 2000, the debtors-in-possession will accept an offer to purchase the Bill Shoemaker for an amount exceeding all remaining amounts owing to the secured lenders and that the sale of the Bill Shoemaker will close no later than June 30, 2000, (ix) if the debtors-in-possession fulfill the conditions for the sale of the Bill Shoemaker as set forth in (viii) above, some or all of the secured lenders will make a post-petition loan to RIGCO up to $1.6 million (the "DIP Loan"), (x) proceeds from the sale of the Bill Shoemaker will be used to first pay off the obligations under the DIP Loan and second to pay off all secured obligations owed to the secured lenders under the Credit Facility, (xi) upon approval of the Bankruptcy Court of the February 2000 Stipulation, the debtors-in-possession will pay the secured lenders $2.0 million in partial payment of the secured lenders' claim and (xii) debtors-in-possession will be allowed continued use of the cash collateral through March 31, 2000 in accordance with an agreed budget. In February 2000, RIGCO made a $2.0 million payment to the secured lenders as provided in the February 9, 2000 stipulation. The secured lenders allowed continued use of the cash collateral through April 14, 2000 and limited use of cash collateral for payroll through May 15, 2000. On May 1, 2000, RIGCO and FPS VI sold all of their interest in the Laffit Pincay to Odin Millennium Partnership Ltd. for $28.5 million in cash. Expenses associated with the sale totaled $0.3 million and $175,000 of the net proceeds is being held by RIGCO, in a separate debtor-in-possession bank account, pending the resolution of a maritime lien claim by one of RIGCO's pre-petition creditors. The balance of the proceeds from the sale of the Laffit Pincay, $28.0 million, was paid to RIGCO's secured lenders in partial payment of their secured claim under the Credit Facility. Loss from discontinued operations includes an impairment provision of $13.3 million related to the sale of this rig. On June 28, 2000, RIGCO sold all of its interest in the Bill Shoemaker to Fred Olsen Energy ASA for $43.6 million in cash. Expenses associated with the sale totaled $0.4 million. By order of the Bankruptcy Court, RIGCO established separate debtor-in-possession bank accounts for (i) $2.0 million to secure payment to Tatham Offshore for their interest in four of the anchor chains located on the Bill Shoemaker, (ii) $0.6 million for administrative expenses incurred in the Bankruptcy proceedings and (iii) $0.4 million for uncontested claims of unaffiliated unsecured creditors. The secured lenders under the Credit Facility and the DIP Loan received a total of $36.6 million in final payment of all principal, interest and expenses associated with the Credit Facility and DIP Loan. Pursuant to a Bankruptcy Court Order, RIGCO paid $2.0 million to Tatham Offshore for Tatham Offshore's interest in the four anchor chains on June 29, 2000. The remaining $3.5 million is available to RIGCO as debtor-in-possession pending the approval of the Bankruptcy Court of RIGCO's plan of reorganization. Atlantic Canada The Company has refocused its business from the development, exploration and production of oil and gas in the Gulf to an integrated frontier investment strategy targeting Atlantic Canada. The Company believes that the Atlantic Canada region offers significant investment opportunities and the Company plans to diversify its business to include the North Atlantic pipeline project, related gas processing facilities, a facility for the generation of electricity and other related investments including upstream exploration and production activities and the acquisition of oil and gas concessions or license interests. The Company has incurred approximately $14.5 million in costs associated with its Atlantic Canada strategy. The ability of the Company to satisfy its future capital needs with respect to its planned Atlantic Canada strategy, particularly its ability to obtain regulatory approval and financing for the North Atlantic Pipeline Partners' pipeline project, will depend upon its ability to raise substantial amounts of additional capital and to implement its business strategy successfully. With respect to the Company's Atlantic Canada strategy, (i) the Company does not currently possess the capital necessary to implement its business strategy completely and there can be no assurances that the 22 23 Company will be able to obtain sufficient capital for any or all of the projects, (ii) there can be no assurances that these projects and other opportunities will prove to be economical or that they will occur, and (iii) many of these projects will require governmental approvals, almost all of which the Company has yet to receive. Moreover, if there are developments that the Company determines to be indicative of a lack of reasonable opportunity to realize benefits for the Company's stockholders, then the Company will pursue other opportunities, wherever located, as the Company determines to be in the Company's best interests. The Company or its Canadian subsidiaries may seek to obtain additional equity capital to assist in the funding of the ongoing day-to-day operations of its planned Atlantic Canada strategy. Other In connection with the Merger, the Company entered into a $22.9 million short-term financing arrangement with Tatham Brothers (as amended, the "Short-Term Facility") to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the redemption agreement with Leviathan, (ii) pay $1.4 million to DeepTech in connection with the management agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the Short-Term Facility. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The Short-Term Facility accrued interest at the rate of 12% per annum and was due on January 15, 1999. On January 15, 1999, the Company and Tatham Brothers agreed to refinance the original $22.9 million principal plus $1.1 million of accrued interest into a new short-term loan which bears interest at the rate of 15% per annum and was due March 31, 1999. In connection with the refinancing, the Company paid Tatham Brothers a fee of $1.0 million in the form of a 15% subordinated convertible note (the "Subordinated Convertible Note"). The Subordinated Convertible Note bears interest at the rate of 15% per annum and is due on August 15, 2001. Tatham Brothers may convert the principal amount of the Subordinated Convertible Note and accrued unpaid interest into shares of Common Stock of the Company based on the average market price for the five trading days prior to the end of the previous calendar quarter. The Short-Term Facility is secured by a pledge of DeepFlex of its interest in certain payment-in-kind Subordinated Promissory Notes issued by RIGCO and FPS V, both subsidiaries of the Company, which had an outstanding balance of approximately $80.8 million at March 31, 2000. On March 31, 1999, the Company and Tatham Brothers extended the Short-Term Facility until April 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required to pay $24.1 million in principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make payment of such amount; as a result, an Event of Default has occurred and is continuing under the Short-Term Facility. Tatham Offshore is a guarantor of $5.0 million of a $9.0 million loan from Bank of America, N.A. to Tatham Brothers, which proceeds were loaned to DeepFlex to fund certain improvements to the Rigs. The loan bore interest at LIBOR plus 2% and was due on November 30, 1999 or upon demand. On December 1, 1999, Tatham Brothers made a principal reduction of $2.6 million and extended the note until September 30, 2000 or upon demand. Effective February 1, 2000, the loan bears interest at the rate of 6.5% per annum. The loan from Tatham Brothers to DeepFlex, plus accrued interest, was included in the amount payable under the Short-Term Facility discussed above. Since the Nasdaq National Market has delisted Tatham Offshore's common stock, the holders thereof have suffered a decrease in marketability of their shares and the liquidity of their investment in Tatham Offshore's common stock and its preferred stocks which are convertible into common stock. This decrease in the marketability and liquidity of the Company's common and preferred stock may have a material adverse effect on Tatham Offshore's ability to access equity markets in the future. Tatham Offshore has never declared or paid dividends on its common or preferred stock. Tatham Offshore expects to retain all available earnings generated by its operations for the growth and development of its business. UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION This quarterly report contains certain forward looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. Such statements are typically punctuated by words or phrases such as "anticipate," "estimate," "project," "should," "may," "management believes," and words or phrases of similar import. Although management believes that such statements and expressions are reasonable and made in good faith, it can give no assurance that such expectations will prove to have 23 24 been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the key factors that may have a direct bearing on the Company's results of operations and financial condition are: (i) competitive practices in the industry in which the Company competes, (ii) the impact of current and future laws and government regulations affecting the industry in general and the Company's operations in particular, (iii) environmental liabilities to which the Company may become subject in the future that are not covered by an indemnity or insurance, (iv) the impact of oil and natural gas price fluctuations and (v) significant changes from expectations of capital expenditures and operating expenses and unanticipated project delays. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS On June 30, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Mr. Thomas P. Tatham. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Any loans bear interest at the prime rate plus 3% (on March 31, 2000, the interest rate was 12.0%) and were due on September 30, 1999. 24 25 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS RIGCO North America, L.L.C. v. Schlumberger Technology Corporation, et al., Cause No. 99-38082. On July 26, 1999, RIGCO sued Schlumberger Technology Corporation ("STC") and Schlumberger, Canada Ltd. ("SCL") seeking over $51 million in damages in connection with the defendants' charters of the FPS Laffit Pincay and the FPS Bill Shoemaker. RIGCO's suit alleges causes of action for gross negligence, breach of contract, negligence, fraud, and negligent misrepresentation arising from Defendants' management, operation and marketing of both rigs as well as STC's agreement to renovate the Bill Shoemaker. In early 2000, Defendants notified RIGCO that some or all of the assets subject to this suit were transferred due to merger to two new corporations, Sedco Forex Corporation ("SFC") and Sedco Forex Canada Limited ("SFCL"). RIGCO has joined SFC and SFCL as defendants in the pending action. SFC and SFCL only recently filed a joint answer in the action. Discovery has begun and is scheduled to continue through April 2001. Trial is currently set for May 2001. In re RIGCO North America, L.L.C., et al.; In the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division; Case Nos. 99-22401-C-11 through 99-22404-C-11 (Jointly Administered Under Case No. 99-22401-C-11). On August 9, 1999, RIGCO North America, L.L.C., FPS VI, L.L.C., FPS III, Inc., and FPS V, Inc. (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Code. The Debtors are operating their businesses and managing their property as debtors-in-possession. RIGCO North America, L.L.C. v. Schlumberger Technology Corporation and Schlumberger Canada Ltd.; In the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division; Adversary No. 99-2154-C. On September 3, 1999, RIGCO North America, L.L.C. filed a complaint against STC and SCL to avoid a preferential transfer or transfers pursuant to 11 U.S.C. Section 547 and to recover the property transferred or its value pursuant to 11 U.S.C. Section 550. The Defendants have answered the complaint. On September 21, 1999, the Court entered a Comprehensive Discovery, Mediation and Scheduling Order requiring, among other things, non-binding mediation. The Court-ordered mediation was unsuccessful, and the parties are in the process of conducting discovery. As with the action proceeding in state court against STC and SCL, RIGCO received notice that SFC and SFCL were the transferrees of some or all of the assets subject to the preference action. RIGCO has now joined SFC and SFCL in the preference action. SFC and SFCL answered in May 2000. Discovery is expected to continue through early October 2000. Trial is set for January 2001. The Company is involved in certain legal proceedings which have arisen in the ordinary course of business. Management believes that the outcome of such proceedings will not have a material adverse effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES RIGCO and FPS VI, significant subsidiaries of the Company, are party to a Credit Agreement dated as of September 30, 1996 (as amended, supplemented or otherwise modified from time to time, the "Credit Facility") with BHF-Bank Aktiengesellschaft, as administrative agent ("BHF"), Lehman Commercial Paper Inc., Hibernia National Bank, and certain other banks and financial institutions (collectively, the "Lenders"). Pursuant to the terms of the Credit Agreement, RIGCO and FPS VI were required to pay $60.3 million, all amounts owing under the Credit Agreement, on April 30, 1999. RIGCO and FPS VI did not make payment of such amounts; as a result, an Event of Default has occurred and is continuing under the Credit Agreement. 25 26 By letter dated May 3, 1999, BHF, on behalf of the Lenders, advised RIGCO and FPS VI that the Lenders would not exercise their rights, remedies, powers and privileges under the Credit Agreement and the other related loan documents at that time, but that they reserve the right to do so at any time they deem appropriate. On August 9, 1999, RIGCO and FPS VI filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. On June 28, 2000, RIGCO paid all remaining principal, interest and expenses under the Credit Facility from proceeds from the sale of the Bill Shoemaker. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27.1 Financial Data Schedule 99.1* Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection (filed as Exhibit 99.1 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, and incorporated herein by reference). 99.2* Supplement to Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection. 99.3* Second Supplement to Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection. * previously filed with March 31, 2000 Form 10-Q. 26 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TATHAM OFFSHORE, INC. Date: August 7, 2000 By: /s/ DENNIS A. KUNETKA ------------------------------------------- Dennis A. Kunetka Chief Financial Officer and Secretary (Signing on behalf of the Registrant and as Principal Accounting Officer) 27 28 EXHIBIT INDEX

TATHAM OFFSHORE INC 10-Q/A