10-K 1 h80578e10-k.txt TATHAM OFFSHORE, INC. - JUNE 30, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER. 0-22892 ---------- TATHAM OFFSHORE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0269967 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) FIVE POST OAK PARK, SUITE 1550 4400 POST OAK PARKWAY HOUSTON, TEXAS 77027 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 621-3996 ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE SERIES A 12% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK SERIES B 8% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK SERIES C 4% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK 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 12 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 --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. --- AS OF SEPTEMBER 15, 2000, THERE WERE OUTSTANDING 26,079,625 SHARES OF COMMON STOCK OF THE REGISTRANT. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE VOTING STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES WAS AN ESTIMATED $0.3 MILLION. ================================================================================ 2 TATHAM OFFSHORE, INC. AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2000 INDEX PART I.....................................................................................................1 Items 1 & 2. Business and Properties..................................................................1 Item 3. Legal Proceedings.......................................................................16 Item 4. Submission of Matters to a Vote of Security Holders.....................................16 PART II...................................................................................................17 Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................17 Item 6. Selected Financial Data.................................................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................................20 Item 7A. Quantitative and Qualitative Disclosure About Market Risk...............................29 Item 8. Financial Statements and Supplementary Data.............................................29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................29 PART III..................................................................................................30 Item 10. Directors and Executive Officers of the Registrant......................................30 Item 11. Executive Compensation..................................................................30 Item 12. Security Ownership of Certain Beneficial Owners and Management..........................30 Item 13. Certain Relationships and Related Transactions..........................................30 PART IV...................................................................................................43 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................43

i 3 The following text is qualified in its entirety by reference to the more detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Annual Report on Form 10-K (the "Annual Report"). Unless otherwise indicated, (i) all current and prospective information in this Annual Report gives effect to the Merger (as defined) and related transactions completed on or before August 14, 1998, including the sale of certain of Tatham Offshore's existing assets, the related retirement of certain amounts of Tatham Offshore's Preferred Stock, the contribution to Tatham Offshore of two semisubmersible drilling rigs, and the assumption of certain debt, (ii) all references to "Tatham Offshore" or "Company" are to Tatham Offshore, Inc. and its subsidiaries, and (iii) all financial information and per share data in this Annual Report gives effect to the one for ten reverse stock split Tatham Offshore completed on November 24, 1997. Prior to August 1998, Tatham Offshore was in the oil and gas exploration and development business, primarily in the Gulf of Mexico (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. In connection with DeepTech International Inc.'s ("DeepTech") merger with a subsidiary of El Paso Energy Corporation ("El Paso") completed on August 14, 1998, Tatham Offshore (i) transferred its ownership of Tatham Offshore Development, Inc. ("Tatham Development"), which owned oil and gas producing properties, to DeepTech and its remaining oil and gas properties to Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), a New York Stock Exchange-listed master limited partnership in which DeepTech owned an effective 23.2% interest on August 14, 1998, and (ii) acquired from DeepTech ownership of DeepFlex Production Services, Inc. ("DeepFlex") and therefore the FPS Laffit Pincay (the "Laffit Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker" and, together with the Laffit Pincay, the "Rigs"). On August 14, 1998, RIGCO North America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, owned all of the interests in the Laffit Pincay and the Bill Shoemaker. For a description of certain items used herein relating to the oil and gas industry, see Items 1 & 2. "Business and Properties -- Certain Definitions." PART I ITEMS 1 & 2. BUSINESS AND PROPERTIES OVERVIEW Tatham Offshore, a Delaware corporation founded in 1989, has provided offshore contract drilling services to the oil and gas industry in the Gulf and Atlantic Canada and is currently pursuing an integrated energy related investment strategy in Atlantic Canada. Through August 14, 1998, Tatham Offshore had been engaged in the development, exploration and production of oil and gas reserves located primarily in the Gulf focusing principally on the flextrend and deepwater areas. 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, Tatham Offshore and DeepTech were restructured by exchanging certain assets so that DeepFlex, the indirect owner of two semisubmersible drilling rigs, became a wholly-owned subsidiary of Tatham Offshore and Tatham Offshore transferred its interest in the Sunday Silence prospect to DeepTech and transferred all of its remaining assets located in the Gulf to Leviathan, an affiliate of DeepTech and formerly an affiliate of Tatham Offshore. As such, all of the Company's oil and gas operations in the Gulf are reflected as discontinued operations in the financial statements. In connection with this reorganization, Tatham Offshore became independent of DeepTech pursuant to a spin-off transaction effected by a Rights Offering (the "Rights Offering") in which DeepTech offered and sold all of the shares of Tatham Offshore common stock and Series A Preferred Stock held by DeepTech to the stockholders of DeepTech. 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 in 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, 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 1 4 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. RECENT EVENTS Defaults Under Credit Facilities 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 $12.0 million to fund the remaining refurbishments and upgrades to the Bill Shoemaker. Pursuant to the terms of the Credit Facility, RIGCO was required to pay $58.1 million in principal and $2.2 million in accrued interest on April 30, 1999. RIGCO did not make payment of such amounts; as a result, an Event of Default occurred under the Credit Facility. In connection with the Merger, Tatham Offshore entered into a $22.9 million short-term financing arrangement with Tatham Brothers, LLC ("Tatham Brothers") (as amended, the "Short-Term Facility"). Proceeds from the Short-Term Facility were used to refinance existing loans and provide funds necessary to satisfy certain obligations of the Company in connection with the Merger and Rights Offering. Pursuant to the terms of the Short-Term Facility, the Company 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. See "Note 5 -- Indebtedness -- Long-Term Debt -- Affiliates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for additional discussion of the credit facilities of Tatham Offshore and its subsidiaries. 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 $12.9 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 $44.6 million related to the sale of this rig. 2 5 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. On September 25, 2000, the Rig Subsidiaries filed a Motion to Dismiss the Chapter 11 proceedings with the United States Bankruptcy Court (the "Motion to Dismiss"). If the Motion to Dismiss is granted, the Rig Subsidiaries will be required to immediately pay all unaffiliated pre-petition creditors with undisputed claims in full. Additionally, the pending Motion to Dismiss directs the Rig Subsidiaries to remit $325,000 in "Disputed Funds" sought by Sedco Forex Corporation and Sedco Forex Canada Limited into a trust account to be held until resolution of a lawsuit brought by RIGCO against these and other related parties in the 165th Judicial District Court in Harris County, Texas. This lawsuit, referenced hereinafter as the "Harris County Litigation," is discussed further below. Further, if the Motion to Dismiss is granted, all funds remaining after the payments to the unaffiliated creditors and deposit of the Disputed Funds into a trust account will be paid in cash to affiliated pre-petition creditors on a pro rata basis. The affiliated creditors would also share any proceeds recovered by RIGCO from the Harris County Litigation on a pro rata basis. Lawsuit Against Sedco Forex (the Harris County Litigation) On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in Harris County, Texas, against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively, "Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's marketing, manning, management and operation of the Bill Shoemaker and Laffit Pincay pursuant to certain charter, make-ready and other agreements and arrangements. Upon learning that Schlumberger had spun-off what were formerly the Sedco Forex divisions of Schlumberger to form Sedco Forex Corporation and Sedco Forex Canada Limited, RIGCO joined these newly-formed corporations as defendants in this suit. Hereinafter, the defendants are collectively referenced as "Sedco Forex." Allegations against Sedco Forex include claims of gross negligence, breach of contract, fraud, negligent misrepresentation and negligence. RIGCO has also alleged that the manner in which Sedco Forex performed its duties with respect to the Bill Shoemaker and Laffit Pincay during the course of the management and charter agreements resulted in RIGCO's financial difficulties and caused it to default on its secured debt obligations. RIGCO is seeking approximately $51 million in actual damages plus an unspecified amount of exemplary damages. New Credit Facility Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility with Tatham Investment Corp. which is 100% owned by Thomas P. Tatham. 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, 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 to Tatham Investment Corp. as security under this credit facility. ATLANTIC CANADA STRATEGY As its principal focus, the Company intends to pursue an integrated investment strategy in Atlantic Canada. The Company believes that the Atlantic Canada region offers significant investment opportunities. The Company's plans include diversifying its business to include substantial natural gas gathering and transmission facilities, fixed location gravity based platforms, 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. In Atlantic Canada, as with any frontier region, there will be substantial risks associated with investments in such projects. However, the Company believes that by using an integrated investment approach related to the development of the region's hydrocarbon reserves, the potential for investment returns is maximized. The Company is contemplating pursuing the development of the projects described below. Each of these projects is in a preliminary, conceptual phase. In addition, (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 3 6 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 economic 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. Pipeline Activities. During 1997, Tatham Offshore Canada Limited, a wholly-owned subsidiary of the Company, was formed to pursue business opportunities in the Atlantic Canada region. In addition, the Company has caused to be formed two limited partnerships, one in Canada and one in the United States and both known collectively as North Atlantic Pipeline Partners to construct and operate an offshore natural gas or multi-phase pipeline from the Grand Banks area offshore Newfoundland to the east coast of the United States with land falls in both Newfoundland and Nova Scotia. Since another pipeline company was given regulatory authority to construct a pipeline from the offshore Nova Scotia area, North Atlantic Pipeline Partners refocused its efforts to concentrate on the first phase of the pipeline. As redesigned, the initial phase of the pipeline project would be approximately 615 kilometers long and would originate in the Jeanne D'Arc Basin of the Grand Banks area and extend to a point near Come-by-Chance, Newfoundland and would include the construction of a gravity based structure ("GBS") on the Grand Banks. In conjunction with its application to the National Energy Board of Canada in 1997, North Atlantic Pipeline Partners obtained non-binding letters of intent for the use of its system to deliver gas to the United States which total approximately 500 MMcf per day. The Company believes that there is significant reserve potential from the areas offshore Atlantic Canada and as that reserve potential is developed, a second pipeline into the United States will be required to meet increased demand for natural gas on the east coast of the United States. The timing of increased drilling activity and the development of the Atlantic Canada reserve potential is dependent upon major and independent producers. As development drilling in the area continues, the Company will be better able to assess the timing and construction requirements for a second pipeline into the United States. Gas Processing Facility. The natural gas that will be produced in the Grand Banks area and potentially be transported through North Atlantic Pipeline Partners' pipeline system is expected to contain significant quantities of natural gas liquids ("NGLs"), such as ethane, propane, butanes and natural gasoline. These NGLs can be recovered from the natural gas stream through processing. The Company is investigating the possibility of developing a gas processing plant to use the natural gas from the Grand Banks area. The Company estimates that a processing plant to process the natural gas would cost approximately $110 million and would be able to initially process up to 400 MMcf of gas per day, with the ability to be upgraded to process additional natural gas at a cost of approximately $75 million for each additional 400 MMcf per day. In addition, the Company is evaluating opportunities to maximize economic value from potential processing operations with petrochemical producers and with other potential users of NGLs. The successful development of any such processing project would be dependent on the construction of the pipeline system proposed by the North Atlantic Pipeline Partners. The Company currently does not possess the capital necessary to construct a gas processing plant and there can be no assurances that the Company will be able to raise sufficient capital resources at attractive rates to construct such a facility. Power Generation Facility. To develop a market for the Grand Banks area natural gas, in addition to a gas processing plant, the Company has examined the feasibility of building a gas fired power generating plant at a cost of approximately $260 million for 600 megawatts of combined cycle power generation. Electrical generation in Newfoundland is currently not gas fired, relying instead, in large part, on less efficient, transported fuel oil. The successful development of any such power generation project would be dependent on the construction of the pipeline system and gas processing facility discussed above. Hydrocarbon Marketing Company. As part of its activities in the region, the Company has formed North Atlantic Hydrocarbons Marketing, Inc. ("North Atlantic Marketing") to buy natural gas and NGLs contained in the natural gas stream in the production. North Atlantic Marketing would assume the marketing risk related to the natural gas stream, purchasing the natural gas and entrained liquids, and in some cases oil, from producers and finding a market for those hydrocarbons. Oil and Gas Development. Significant oil and gas exploration and production opportunities also exist throughout the region. The Company is actively seeking to acquire working interests for proven and probable 4 7 reserves in Atlantic Canada and has had independent studies undertaken of the prospective reserves in the region. Those studies indicate that the region is one of the largest potential gas regions in North America. Unlike other international opportunities, the Company does not consider political instability as a significant risk factor with respect to Canadian opportunities. On September 18, 1998, Tatham Offshore Canada was informed by the Canada-Newfoundland Offshore Petroleum Board that it was the successful bidder on an exploration license offshore Newfoundland. The exploration license is located on the Grand Banks and contains approximately 176,000 acres. The Company has agreed to spend approximately CN $1,000,000 in the five years following the grant of the license in qualified exploration expenditures in the defined area. The Company may participate as a bidder in upcoming licensing rounds offshore Newfoundland. Other Opportunities. Among other potential businesses the Company may enter, the Company is currently evaluating the feasibility of (i) an industrial gas distribution system, (ii) an ice management system designed to manage and reduce the risk of potential damage to its proposed offshore pipelines and subsea facilities owned by other parties, operated through the Company's subsidiary, Berg Masters Limited, (iii) a large diameter steel pipe rolling mill, (iv) methanol production, (v) a LNG degasification facility and (vi) other opportunities related to or located in Atlantic Canada. There can be no assurances that such opportunities will prove economic, be financeable or will occur. CONTRACT DRILLING SERVICES GENERAL As of June 30, 1999, Tatham Offshore owned two semisubmersible drilling rigs. However, both rigs were sold during the year ended June 30, 2000. DESCRIPTION OF THE RIGS Semisubmersible rigs are floating platforms that consist of an upper working and living deck resting on vertical columns connected to lower hull members. These rigs operate in a "semisubmerged" position, remaining afloat, off bottom in a position in which the lower hull is from 55 to 90 feet below the water line and the upper deck protrudes well above the surface. The Rigs are positioned by chain mooring lines with anchors on the sea floor and remain stable for drilling in the semisubmerged floating position due in part to their wave transparency characteristics at the water line. The Rigs are able to change draft through a water ballasting system that permits them to be submerged to a predetermined depth so that a portion of the hulls are below the water surface during drilling operations. FPS Bill Shoemaker. The Bill Shoemaker is a self-propelled, twin pontoon, eight column, second generation semisubmersible drilling rig of Aker H-3 design. It can drill to depths of 25,000 feet, in water depths of up to 1,500 feet and has a drilling variable load of approximately 3,850 short tons, a VARCO TDS-4S top-drive drilling system, a 10,000 psi blow-out prevention system, 2,000 barrel mud pits and eight 80,000 pound riser tensioners. This rig was built in 1976 and was extensively refurbished, repaired, renovated and upgraded in 1997 at a cost of approximately $56 million. The upgrades included installing a new heliport, mud booster line, third mud pump, a third level of personnel accommodations and a new electrical "SCR" system. In addition, the Bill Shoemaker underwent a complete winterization program in this upgrade, and, as a result, is again able to operate year-round in harsh environments, such as the North Sea, offshore Newfoundland and eastern Canada, where it has operated in the past. FPS Laffit Pincay. The Laffit Pincay is a second generation semisubmersible drilling rig of Penrod/Reineke design. The Laffit Pincay is capable of drilling to depths of 25,000 feet, in water depths of up to 1,200 feet and has a drilling variable load of approximately 2,000 short tons, a 10,000 psi blow-out prevention system, 1,600 barrel mud pits and six 80,000 pound riser tensioners. This rig was built in 1976 and was refurbished, upgraded and renovated in 1996 at a cost of approximately $18 million with the installation of a VARCO TDS-3S top-drive system and a new electrical "SCR" system. 5 8 RIG MANAGEMENT Pursuant to the management and charter agreements, the Sedco Forex Division of Schlumberger 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 Schlumberger a written termination notice of the management and charter agreement for the Bill Shoemaker. Under the Bill Shoemaker management and charter agreement, Schlumberger continued to man and operate the rig through the conclusion of its drilling contract with Husky Oil Operations Limited. In November 1999, RIGCO assumed the marketing, management and operational responsibilities for the Bill Shoemaker. CONTRACTS FOR DRILLING EQUIPMENT Most drilling contracts are structured on a dayrate, footage or turnkey basis. They usually extend over a period covering either the drilling of a single well, a group of wells (a "well-to-well contract") or a stated term (a "term contract") and are terminable if the drilling unit is destroyed or lost, drilling operations are suspended for a specified time because of a breakdown of major equipment or other events occur which are beyond either party's control. In many instances, the customer may extend the contract term upon exercising options to drill additional wells at fixed or mutually agreed upon terms. Most of the Company's drilling contracts were obtained through competitive bids or negotiations with customers and their terms and conditions vary depending on the specific facts and circumstances. A dayrate drilling contract generally provides for a basic drilling rate based on a fixed rate per day. Under such a contract, the customer usually bears a major portion of out-of-pocket costs of drilling and assumes most of the risk associated with drilling operations such as risk of blowout, loss of hole, stuck drill stem, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies and personnel. In contrast, the risks to the contractor on non-dayrate contracts could be substantially greater than on a dayrate drilling contract because the contractor may, and often does, assume more of those risks associated with drilling operations generally assumed by the operator in a dayrate contract. The duration of offshore drilling contracts is generally determined by market demand and the respective management strategy of the offshore drilling contractor and its customers. During periods of rising demand for offshore rigs, contractors typically prefer well-to-well contracts since such contracts provide them the flexibility to profit from increasing dayrates. In contrast, during such periods, customers with reasonably definite drilling programs typically prefer longer-term contracts to maintain prices at the lowest level possible. FPS Bill Shoemaker. After completion of the upgrade and refurbishment in July 1997, the Bill Shoemaker was mobilized to the Grand Banks area offshore Newfoundland where it completed drilling an exploratory well for Amoco Canada Petroleum Company Ltd. ("Amoco Canada") in the West Bonne Bay Field. Amoco Canada exercised an option to drill a second well under this agreement but failed to actually drill such well. To date, the Company has not received any compensation relating to the Amoco Canada option well. Following the completion of the Amoco Canada well, the Bill Shoemaker returned to the Gulf of Mexico and effective January 25, 1998 was under contract to Shell Offshore Inc. ("Shell") for a one-year period. 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. After the early termination of the Shell contract, the Bill Shoemaker underwent upgrades and refurbishments in a shipyard in Galveston, Texas prior to returning to the Grand Banks area offshore Newfoundland. From March through September 1999, the Bill Shoemaker drilled three wells for Husky Oil Operations, Ltd. on their Whiterose project, offshore Newfoundland. On April 20, 1999, RIGCO gave Sedco Forex a written termination notice of the management and charter agreement for the Bill Shoemaker. The termination of the management and charter agreement was effective following the end of the Husky contract in November 1999. During the year ended June 30, 2000, the Bill Shoemaker generated $13.3 million in revenue. FPS Laffit Pincay. Following the completion of a refurbishment and upgrade program in February 1996, the Laffit Pincay was placed under contract with Leviathan to complete a previously drilled well and drill a new well in 6 9 Garden Banks Block 117. Following the completion of the well for Leviathan, the Laffit Pincay was committed to Phillips Petroleum Company to drill one well at Garden Banks Block 70 in the Gulf with options to drill and/or complete three additional wells at various Gulf locations. This contract was completed in late September 1997 after Phillips drilled one of its "option" wells. Pennzoil Exploration and Production Company entered into an agreement to drill two wells following the completion of the two Phillips wells. Pennzoil drilled one of its wells with the Laffit Pincay but failed to drill the second contract well. To date, the Company has not received any compensation for the second Pennzoil well. Following the early release of the Laffit Pincay from Pennzoil, the rig was taken out of service for approximately six weeks to complete scheduled maintenance and certain upgrades. From April 23, 1998 through July 18, 1998, the Laffit Pincay was not under contract due to the softening of market conditions for similar rigs in the Gulf and Sedco Forex's failure to properly market the rig. From July 19, 1998 through August 11, 1998, the Laffit Pincay was under contract with Ocean Energy, Inc. to conduct a one well program. From August 12, 1998 to the date of its sale, the Laffit Pincay did not have a drilling contract. CUSTOMERS The Company provided offshore drilling services to a market that is comprised of major and independent oil and gas companies. The Company did not have as many customers as its competitors primarily due to the Company's limited number of rigs and operating history and the manner in which it has traditionally marketed its rigs through charter agreements with Sedco Forex. COMPETITION The contract drilling industry is an intensely competitive industry where no one company is dominant. The Company's ability to continue to generate business was dependent primarily on the level of domestic oil and gas exploration and development activity and, in part on its ability to adapt to new technology and drilling techniques as they become available. The Company competed with numerous other drilling contractors, some of whom are substantially larger than the Company and possess appreciably greater financial and other resources. INDUSTRY CONDITIONS The demand for offshore drilling services, and thus the Company's revenues and earnings, were directly affected by the worldwide level of oil and gas exploration and development activity. From the mid-1980s through the early 1990s, demand for offshore drilling rigs was declining or flat, and the industry fleet of offshore drilling rigs was reduced. In recent years, demand for offshore rigs has improved, but the supply of rigs is only now beginning to increase. The industry has emphasized upgrading and refurbishing existing rigs, due to the high capital costs and long lead times associated with new construction. In the last two years, however, several competitors have begun construction of new-build deepwater drillships and semisubmersible rigs in response to increased demand for rigs with deepwater capabilities. The new-build rigs and refurbished rigs are beginning to become available in the marketplace which increases competition for an already reduced level of drilling contracts. Technological advances such as extended reach drilling, multilateral drilling techniques and new offshore development and production applications have reduced the costs of developing oil and gas fields. As a result, previously uneconomic discoveries, particularly in deeper water, have become viable, and the industry has placed increasing emphasis on exploiting existing resources using new applications. The development of three-dimensional seismic surveys has reduced exploration risks, thus placing increased emphasis on selective exploratory drilling. However, oil prices declined substantially during 1998, which caused drilling budgets for 1999 to decline. Although temporary downturns in oil prices do not generally have an impact on the demand for deepwater drilling rigs, such declines caused dayrates to decline. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on the services and expertise provided to it by the Company's Chairman of the Board and Chief Executive Officer, Mr. Thomas P. Tatham, the loss of which could substantially impair the Company's operations. The Company has not entered into an employment contract with Mr. Tatham, nor has it obtained "key man" life insurance on his life. Mr. Tatham has not received any salary or other compensation since August 14, 1998. 7 10 OIL AND GAS PROPERTIES GENERAL As of June 30, 1998, Tatham Offshore owned interests in oil and gas leases in the Gulf covering approximately 31,809 gross (22,598 net) acres. See " --Oil and Gas Reserves" for an estimate of Tatham Offshore's total proved developed reserves of oil and gas and a discussion of the assumptions used in, and inherent difficulties relating to, estimating reserves. However, all of these leases were under contract to be transferred, and were transferred, in transactions which closed on or before August 14, 1998. DESCRIPTION OF SIGNIFICANT PROPERTIES The following is a description of the significant properties that Tatham Offshore held until August 14, 1998, the date the Merger and related transactions were completed. See " -- DeepTech Merger and Related Transactions". Viosca Knoll Block 817. Viosca Knoll Block 817 is a producing property that is comprised of 5,760 gross (1,440 net) acres located 40 miles off the coast of Louisiana in approximately 650 feet of water. Tatham Offshore owned a 25% working interest (the "Subject Interest") in the Viosca Knoll Block 817 acreage, which interest is burdened by a convertible production payment described below. See "-- Reversionary Interests." From the inception of production in December 1995 through June 30, 1998, the Viosca Knoll Block 817 project produced 12.4 Bcf of gas and 22,527 barrels of oil, net to Tatham Offshore's 25% working interest. Gas production from Viosca Knoll Block 817 is dedicated to Leviathan for gathering through the Viosca Knoll system. Under the convertible production payment, the holders are entitled in the aggregate to 25% of the proceeds from the production attributable to the Subject Interest (after deducting all leasehold operating expenses, including platform access and processing fees) until the holders have received the aggregate sum of $16.0 million. At the option of the holders, the unpaid portion of the production payment may be converted into Tatham Offshore common stock at any time until September 2000. In March 1998, Mr. Tatham acquired one-half of this convertible production payment. At June 30, 1998, the unpaid portion of the convertible production payment obligation totaled $11.3 million. West Delta Block 35. West Delta Block 35, a producing field located 10 miles off the coast of Louisiana in approximately 60 feet of water, was acquired by Tatham Offshore in 1992 to drill for and produce remaining reserves in a fault block of an abandoned field. In late 1992, Tatham Offshore farmed-out the property and retained a 38% working interest in West Delta Block 35. The West Delta Block 35 field commenced production in July 1993. From the inception of production through June 30, 1998, the West Delta 35 field has produced 3.5 Bcf of gas and 36,873 barrels of oil, net to Tatham Offshore's interest. Ewing Bank Blocks 958, 959, 1002 and 1003. Tatham Development owns a 100% working interest in Ewing Bank Blocks 958, 959, 1002 and 1003, the Sunday Silence Project, an undeveloped field that is comprised of 20,160 gross acres located approximately six miles south of Ewing Bank Blocks 914 and 915 (discussed below) in water depths ranging from 1,400 to 1,600 feet. In July 1994, Tatham Offshore completed the drilling of an exploratory well, the Ewing Bank 958 #1. The Ewing Bank 958 #1 well, which was drilled to a total measured depth of 17,600 feet, identified pay zones in the Pliocene aged formations lying primarily at measured depths between 10,000 and 15,000 feet. Tatham Offshore completed drilling a second well at Ewing Bank Block 1003 in September 1994 to delineate the field. During October 1994, the Ewing Bank 1003 #1 delineation well was flow-tested at a rate of approximately 8,700 barrels of oil and 5.4 MMcf of gas per day. In June 1997, the United States Department of the Interior, Minerals Management Service notified Tatham Offshore that its application for deepwater royalty relief for the Sunday Silence Project had been approved under a federal law enacted in November 1995. The royalty relief provides for the abatement of federal royalty on the first 52.5 million barrels of oil equivalent produced from the Sunday Silence Project. In connection with the Merger and related transactions, Tatham Offshore conveyed to DeepTech all of its outstanding shares of capital stock of Tatham Development as discussed in " -- DeepTech Merger and Related Transactions". Ewing Bank Blocks 914 and 915. Tatham Offshore owned a 100% working interest in each of Ewing Bank Blocks 914 and 915, which are both located in a water depth of approximately 1,000 feet. From the inception of production 8 11 through June 30, 1998, the Ewing Bank 914 #2 well produced a total of 1.2 million barrels of oil and condensate and 3.4 Bcf of gas. In May 1997, the Ewing Bank 914 #2 well was shut-in as a result of a downhole mechanical problem and in May 1998, Tatham Offshore completed abandonment procedures on the Ewing Bank 914 #2 and the Ewing Bank 915 #4 wells. Ship Shoal Block 331. Ship Shoal Block 331 is located 75 miles off the coast of Louisiana in approximately 370 feet of water. Tatham Offshore held a 100% working interest in the 5,278 gross acres lease. In December 1997, Tatham Offshore assigned its interests and related abandonment obligations in Ship Shoal Block 331 to a third party. Prior to the production problems, the Ship Shoal Block 331 project produced 88 MMcf of gas and 41,875 barrels of oil. Reversionary Interests. Tatham Offshore canceled its reversionary working interests of 37.5% in Viosca Knoll Block 817, 25% in Garden Banks Block 72 and 25% in Garden Banks Block 117 in connection with the Merger and related transactions discussed in " -- DeepTech Merger and Related Transactions". Ship Shoal Block 331 Platform. Tatham Offshore owned 100% of a multipurpose platform located in Ship Shoal Block 331. The Ship Shoal 331 Platform is located adjacent to Leviathan's platform at Ship Shoal Block 332 which serves as the junction platform connecting two pipeline systems in which Leviathan owns an approximate 25.7% interest. The Ship Shoal 331 Platform was conveyed to Leviathan in connection with the Merger and related transactions discussed in "-- DeepTech Merger and Related Transactions." CUSTOMERS AND CONTRACTS Ewing Bank Gathering Agreement. In 1992, Leviathan, DeepTech and Tatham Offshore entered into the Ewing Bank Gathering Agreement (the "Ewing Bank Agreement"). Pursuant to the Ewing Bank Agreement and the Master Gas Dedication Agreement (as discussed below), all existing and future oil and gas production from Tatham Offshore's leaseholds in the Ewing Bank project area was dedicated to Leviathan for transportation. Master Gas Dedication Agreement. In December 1993, Leviathan and Tatham Offshore entered into the Master Gas Dedication Agreement pursuant to which Tatham Offshore dedicated to Leviathan transportation of all future production, if any, from Tatham Offshore's Viosca Knoll Block 817, Garden Banks Block 72, Garden Banks Block 117 and Ship Shoal Block 331 project areas and, in certain cases, additional acreage contained in adjoining areas of mutual interest. In exchange, Leviathan agreed to install certain pipeline facilities necessary to transport production from these areas and to provide transportation services with respect to such production. Marketing Agreements. Tatham Offshore and Offshore Gas Marketing, Inc. ("Offshore Marketing"), a subsidiary of DeepTech, entered into agreements whereby Offshore Marketing agreed to purchase all of the gas, oil and condensate produced by Tatham Offshore. The agreement provides 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 Tatham Offshore's production. During the year ended June 30, 1998, Tatham Offshore's sales to Offshore Marketing totaled $10.8 million. During the year ended June 30, 1999, Tatham Offshore's sales to Offshore Marketing totaled $0.9 million. All of the foregoing agreements were either terminated or assigned to DeepTech or Leviathan in connection with the Merger and related transactions. OIL AND GAS RESERVES Estimates of Tatham Offshore's oil and gas reserves as of June 30, 1998 have been made by the Company's reserve engineers. As of June 30, 1998, the Company estimated that the aggregate of Tatham Offshore's proved developed reserves totaled 62,300 barrels of oil and 7,684 MMcf of gas. Estimated proved reserves totaled 41,900 barrels of oil and 5,989 MMcf of gas for Viosca Knoll Block 817 and 20,400 barrels of oil and 1,695 MMcf of gas for West Delta Block 35. 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 9 12 are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenue 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. Estimates with respect to proved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than upon actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations, which may be substantial, in the estimated reserves. A significant portion of Tatham Offshore's reserves is based upon volumetric calculations. The estimated future net cash flows and the present value of estimated future net cash flows discounted at 10% per annum, from the production and sale of the proved developed reserves attributable to the Company's interest in oil and gas properties as of June 30, 1998, as determined by the Company's reserve engineers in accordance with the requirements of applicable accounting standards before income taxes totaled $3.5 million and $3.4 million, respectively. In preparing such estimates, the Company used prices of $12.28 per barrel of oil and $1.76 per Mcf of gas as of June 30,1998. All of Tatham Offshore's reserves at June 30, 1998 were classified as proved developed reserves. In accordance with applicable requirements of the Securities and Exchange Commission (the "Commission"), the estimated discounted future net revenue from estimated proved reserves are based on prices and costs at fiscal year end unless future prices or costs are contractually determined at such date. Actual future prices and costs may be materially higher or lower. Actual future net revenue also will be affected by factors such as actual production, supply and demand for oil and gas, curtailments or increases in consumption by natural gas purchasers, changes in governmental regulations or taxation and the impact of inflation on costs. In accordance with the methodology approved by the Commission, specific assumptions were applied in the computation of the reserve evaluation estimates. Under this methodology, future net cash flows are determined by reducing estimated future gross cash flows to Tatham Offshore for oil and natural gas sales by the estimated costs to develop and produce the underlying reserves, including future capital expenditures, operating costs, transportation costs, royalty and overriding royalty burdens, production payments and net profits interest expense on certain of Tatham Offshore's properties. Future net cash flows were discounted at 10% per annum to arrive at discounted future net cash flows. The 10% discount factor used to calculate present value is required by the Commission, but such rate is not necessarily the most appropriate discount rate. Present value of future net cash flows, irrespective of the discount rate used, is materially affected by assumptions of future oil and natural gas prices and timing of production, which may prove to be inaccurate. In addition, the calculations of estimated net revenue do not take into account the effect of certain cash outlays, including, among other things, general and administrative costs, interest expense and dividends. The present value of future net cash flows shown above should not be construed as the current market value as of June 30, 1998, or any prior date, of the estimated oil and natural gas reserves attributable to Tatham Offshore's properties. 10 13 PRODUCTION, UNIT PRICES AND COSTS The following table sets forth certain information regarding the production volumes of, average unit prices received for and average production costs for Tatham Offshore's sale of oil and gas for the periods indicated:

---------- (1) The components of production costs may vary substantially among wells depending on the methods of recovery employed and other factors, but generally include demand and commodity charges under transportation agreements, platform access and processing fees, maintenance and repair, labor and utilities costs. The relationship between Tatham Offshore's average prices and its average production costs depicted by the table above is not necessarily indicative of future results of operations expected by Tatham Offshore. ACREAGE Undeveloped acreage is considered to be those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. All of Tatham Offshore's acreage is undeveloped. Gross acres refer to the combined number of acres in which a working interest is owned directly by Tatham Offshore. The number of net acres is the sum of the fractional ownership of working interests owned directly by Tatham Offshore in the gross acres. At June 30, 2000, Tatham Offshore had a 100% working interest in Exploratory License EL No. 1042 consisting of 71,251 hectares (approximately 176,000 acres) offshore Newfoundland, Canada. OIL AND GAS DRILLING ACTIVITY The Company did not have any oil and gas drilling activity for the years ended June 30, 1998, 1999 and 2000. As of June 30, 2000, the Company did not have an interest in producing oil or gas wells. REGULATION The oil and gas industry is extensively regulated by federal, state and provincial authorities in the United States and Canada. Further, numerous departments and agencies, both federal and state, have issued rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for the failure to comply. Legislation affecting the oil and gas industry is under constant review and statutes are constantly being adopted, expanded or amended. This regulatory burden increases the oil and gas industry's cost of doing business. In particular, the drilling industry is dependent on the demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax laws, price controls and other laws relating to the energy business. The Company's business is affected generally by political developments and by federal, state, provincial, local and foreign laws, rules and regulations which may relate directly to the oil and gas industry. The adoption of laws, rules and regulations, both domestic and foreign, which curtail exploration and development drilling for oil and gas for economic, environmental or other policy reasons may adversely affect the Company's operations by limiting available drilling and production opportunities. The Company's foreign operations are subject to political, economic, environmental and other uncertainties associated with foreign operations, as well as the additional risks of fluctuating currency values and exchange controls. Governments may from time to time suspend or curtail drilling operations or leasing activities when such operations are considered to be detrimental to the environment or to jeopardize public safety. 11 14 ENVIRONMENTAL General. The Company's operations are subject to extensive federal, state and local statutory and regulatory requirements relating to environmental affairs, health and safety, waste management and chemical products. In recent years, these requirements have become increasingly stringent and in certain circumstances, they impose "strict liability" on a company, rendering it liable for environmental damage without regard to negligence or fault on the part of such company. To the Company's knowledge, its operations are in substantial compliance, and are expected to continue to comply in all material respects, with applicable environmental laws, regulations and ordinances. It is possible, however, that future developments, such as stricter environmental laws, regulations or enforcement policies could affect the handling, manufacture, use, emission or disposal of substances or wastes by the Company. In addition, some risk of environmental costs and liabilities is inherent in the Company's operations and products as it is with other companies engaged in similar or related businesses, and there can be no assurance that material costs and liabilities, including substantial fines and criminal sanctions for violation of environmental laws and regulations, will not be incurred by the Company. Furthermore, the Company will likely be required to increase its expenditures during the next several years to comply with higher industry and regulatory safety standards. However, such expenditures cannot be accurately estimated at this time. Solid Waste. The Company's operations may generate or transport both hazardous and nonhazardous solid wastes that are subject to the requirements of the federal Resource Conservation and Recovery Act ("RCRA"), as amended, 42 U.S.C. Section 6901 et. seq., and its regulations, and comparable state statutes and regulations. Further, it is possible that some wastes that are currently classified as nonhazardous, via exemption or otherwise, perhaps including wastes currently generated during exploration, development and production operations may, in the future be designated as "hazardous wastes," which are subject to more rigorous and costly treatment, storage, transportation and disposal requirements. Such changes in the regulations may result in additional expenditures or operating expenses by the Company. As recently as August 8, 1998, the Environmental Protection Agency ("EPA") added four petroleum refining wastes to the list of RCRA hazardous wastes. While the full impact of the rule has yet to be determined, the rule may, as of February 1999, impose increased expenditures and operating expenses on the Company, which may take on increased obligations relating to the treatment, storage, transportation and disposal of certain petroleum refining wastes that previously were not regulated as hazardous wastes. Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et. seq., and comparable state statutes, also known as "Superfund" laws, impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that cause or contribute to the release or threatened release of a "hazardous substance" into the environment. These persons include the current owner or operator of a site, the past owner or operator of a site, and companies that transport, dispose of or arrange for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA or state agency and, in some cases third parties, to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. Despite the "petroleum exclusion" of Section 101(14) that currently encompasses natural gas, the Company may nonetheless generate or transport "hazardous substances" within the meaning of CERCLA, or comparable state statutes, in the course of its ordinary operations. In addition, certain petroleum refining wastes that previously were not regulated as hazardous wastes may now fall within the definition of CERCLA hazardous substance. Thus, the Company may be responsible under CERCLA or the state equivalents for all or part of the costs required to clean up sites where a release of a hazardous substance has occurred. Air. Tatham Offshore's operations may be subject to the Clean Air Act ("CAA"), 42 U.S.C. Section 7401-7642, et. seq., and comparable state statutes. The 1990 CAA amendments and accompanying regulations, state or federal, may impose certain pollution control requirements with respect to air emissions from operations, particularly in instances where a company constructs a new facility or modifies an existing facility. The Company may also be required to incur certain capital expenditures in the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals addressing other air emission-related issues. However, the Company does not believe its operations will be materially adversely affected by any such requirements. Water. The Federal Water Pollution Control Act ("FWPCA"), or Clean Water Act, 33 U.S.C. Section 1311 et. seq., imposes strict controls against the unauthorized discharge of produced waters and other oil and gas wastes into navigable waters. The FWPCA provides for civil and criminal penalties for any unauthorized discharges of oil and 12 15 other hazardous substances in reportable quantities and, along with the Oil Pollution Act of 1990 ("OPA"), 33 U.S.C. Sections 2701-2761, imposes substantial potential liability for the costs of removal, remediation and damages. Similarly, the OPA imposes liability for the discharge of oil into or upon navigable waters or adjoining shorelines. Among other things, the OPA raises liability limits, narrows defenses to liability and provides more instances in which a responsible party is subject to unlimited liability. One provision of the OPA requires that offshore facilities establish and maintain evidence of financial responsibility of $150 million. State laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of an unauthorized discharge of petroleum, its derivatives or other hazardous substances into state waters. Further, the Coastal Zone Management Act ("CZMA"), 16 U.S.C. Sections 1451-1464, authorizes state implementation and development of programs containing management measures for the control of nonpoint source pollution to restore and protect coastal waters. State and federal wetlands presentation programs may also impose certain restrictions on dredge and fill and development activities. Endangered Species. The Endangered Species Act ("ESA"), 7 U.S.C. Section 136, seeks to ensure that activities do not jeopardize endangered or threatened plant and animal species, nor destroy or modify the critical habitat of such species. Under the ESA, certain exploration and production operations, as well as actions by federal agencies or funded by federal agencies, must not significantly impair or jeopardize the species or its habitat. The ESA provides for criminal penalties for willful violations of the Act. Other statutes which provide protection to animal and plant species and thus may apply to the Company's operations are the Marine Mammal Protection Act of 1972, 16 U.S.C. Sections 1361 to 1421h, the Marine Protection and Sanctuaries Act, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act and the Migratory Bird Treaty Act. The National Historic Preservation Act, 16 U.S.C. Section 470, may impose similar requirements. Communication of Hazards. The Occupational Safety and Health Act ("OSHA"), as amended, 29 U.S.C. Section 651 et. seq., the Emergency Planning and Community Right-to-Know Act ("EPCRA"), as amended, 42 U.S.C. Section 11001 et. seq., and comparable state statutes require the Company to organize and disseminate information to employees, state and local organizations, and the public about the hazardous materials used in its operations and its emergency planning. OPERATIONAL HAZARDS AND INSURANCE Tatham Offshore's exploration, production and development and drilling operations are subject to the usual hazards incident to the drilling and production of natural gas and crude oil, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, pollution, releases of toxic gas and other environmental hazards and risks. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damages and suspension of operations. In addition, a pipeline may experience damage as a result of an accident or other natural disaster. To mitigate the impact of repair costs associated with such an accident or disaster, the Company maintains insurance of various types that it considers to be adequate to cover its operations. Such insurance is subject to deductibles that the Company considers reasonable and not excessive. The Company's insurance does not cover every potential risk associated with the drilling and production of oil and natural gas, but is consistent with insurance coverage generally available to the industry. The Company's insurance policies do not provide coverage for losses or liabilities relating to pollution, except for sudden and accidental occurrences. The occurrence of a significant event not fully insured or indemnified against, or the failure of a party to meet its indemnification obligations, could materially and adversely affect the Company's operations and financial condition. The Company believes that it is adequately insured for public liability and property damage to others with respect to its operation. However, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. INTERNATIONAL OPERATIONS AND RISKS The Company conducts some of its operations outside the United States. Risks associated with operating in international markets include foreign exchange restrictions and currency fluctuations, foreign taxation, changing political conditions and foreign and domestic monetary policies, expropriation, nationalization, nullification, modifications or renegotiation of contracts, war and civil disturbances or other risks that may limit or disrupt markets. The ability of the Company to compete in the international markets may also be adversely affected by 13 16 foreign government regulations that favor or require the awarding of such contracts to local contractors, or by regulations requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. No predictions can be made as to what foreign government regulations may be enacted in the future that could be applicable to the Company's operations. EMPLOYEES As of August 31, 2000, Tatham Offshore had 15 employees. Prior to August 14, 1998, all individuals, including executive officers, necessary to meet the financial, geological, engineering and other technical and administrative requirements of the Company were provided by DeepTech pursuant to a management agreement with Tatham Offshore (the "Management Agreement"), or affiliates of DeepTech pursuant to service contracts. The Management Agreement, as amended, provided for an annual management fee of 26% of DeepTech's overhead expenses. For the year ended June 30, 1998, DeepTech charged Tatham Offshore $4.4 million pursuant to such Management Agreement. The Management Agreement was terminated on August 14, 1998. See " -- DeepTech Merger and Related Transactions". UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION This Annual 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. CERTAIN DEFINITIONS The following are abbreviations and words commonly used in the oil and gas industry and in this Annual Report. "bbl" or "barrel" means barrels, a standard measure of volume for oil, condensate and natural gas liquids which equals 42 U.S. gallons. "Bcf" means billion cubic feet (or thousand MMcf). "development well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. "exploratory well" means a well drilled to find commercially productive hydrocarbons in an unproved area or to extend significantly a known oil or natural gas reservoir. "farm-in" or "farm-out" refers to an agreement whereunder the owner of a working interest in an oil and gas lease delivers the contractual right to earn the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn a working interest in the acreage. The assignor usually retains a royalty or a working interest after payout in the lease. The assignor is said to have "farmed-out" the acreage. The assignee is said to have "farmed-in" the acreage. "gross" oil and natural gas wells or gross acres are the total number of wells or acres, respectively, in which the Company has an interest, without regard to the size of that interest. 14 17 "Mbbl" means thousand barrels. "Mcf" means thousand cubic feet, a standard measure of volume for gas. "MMbtu" means million British Thermal Units, a unit of heat measure with one btu being the amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit. "MMcf" means million cubic feet. "net" oil and natural gas wells or "net" acres or "net" production or reserves are the total gross number of wells or acres, respectively, in which the Company has an interest multiplied times the Company's working interest in such wells or acres. "OCS" means Outer Continental Shelf, an area offshore the United States over which the federal government has jurisdiction, which extends from the end of state territorial waters (three to twelve nautical miles offshore, depending on the state) to 200 nautical miles from shore. The term OCS as used herein includes not only those areas on the Shelf itself, but those areas in the flextrend and the deepwater, to a limit of 200 nautical miles, as well. "royalty" means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually carved from the leasehold interest pursuant to an assignment to a third party reserved by an owner of the leasehold in connection with a transfer of the leasehold to a subsequent owner. "working interest" means an interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties. For example, the owner of a 100% working interest in a lease burdened only by a landowner's royalty of 12.5% would be required to pay 100% of the costs of a well but would be entitled to retain 87.5% of the production. In this Annual Report, natural gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60 degrees Fahrenheit. 15 18 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 and Schlumberger, Canada Ltd. (collectively, "Schlumberger") in connection with the defendants' charters of the FPS Laffit Pincay and the FPS Bill Shoemaker. RIGCO's suit alleges causes of action for gross negligence, breach of contract, negligence, fraud, and negligent misrepresentation arising from Defendants' management, operation and marketing of both rigs as well as Schlumberger Technology Corporation's agreement to renovate the Bill Shoemaker. In early 2000, Defendants notified RIGCO that some or all of the assets subject to this suit were transferred due to merger to two new corporations, Sedco Forex Corporation ("SFC") and Sedco Forex Canada Limited ("SFCL"). RIGCO has joined SFC and SFCL as defendants in the pending action. Discovery has begun and is scheduled to continue through April 2001. Trial is currently set for May 2001. RIGCO is seeking approximately $51 million in actual damages plus an unspecified amount of exemplary damages. In re RIGCO North America, L.L.C., et al.; In the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division; Case Nos. 99-22401-C-11 through 99-22404-C-11 (Jointly Administered Under Case No. 99-22401-C-11). On August 9, 1999, RIGCO North America, L.L.C., FPS VI, L.L.C., FPS III, Inc., and FPS V, Inc. (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Code. The Debtors have been operating their businesses and managing their property as debtors-in-possession. On September 25, 2000, the Rig Subsidiaries filed a motion to dismiss the Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the dismissal of the Chapter 11 proceedings would allow the Rig Subsidiaries to pay in full their pre-petition unaffiliated unsecured creditors. Any funds remaining would be paid to the affiliated unsecured creditors on a pro rata basis. RIGCO North America, L.L.C. v. Schlumberger Technology Corporation and Schlumberger Canada Ltd.; In the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division; Adversary No. 99-2154-C. On September 3, 1999, RIGCO North America, L.L.C. filed a complaint against STC and SCL to avoid a preferential transfer or transfers pursuant to 11 U.S.C. Section 547 and to recover the property transferred or its value pursuant to 11 U.S.C. Section 550. The Defendants have answered the complaint. On September 21, 1999, the Court entered a Comprehensive Discovery, Mediation and Scheduling Order requiring, among other things, non-binding mediation. The Court-ordered mediation was unsuccessful, and the parties are in the process of conducting discovery. As with the Harris County Litigation, RIGCO received notice that SFC and SFCL were the transferees of some or all of the assets subject to the preference action. RIGCO subsequently joined SFC and SFCL in the preference action. The Motion to Dismiss pending in the main Chapter 11 case would also dismiss this action. If not dismissed, discovery is expected to continue through late October 2000 and 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of August 31, 2000, 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, 2000:

19 22 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, 2000, 1999 and 1998. 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. In addition, all of the assets relating to the semisubmersible drilling rig business were sold during the year ended June 30, 2000. 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, 2000 COMPARED WITH YEAR ENDED JUNE 30, 1999 Depreciation expense totaled $64,000 for the year ended June 30, 2000 as compared at $49,000 for the year ended June 30, 1999. Depreciation expense for both periods related to certain anchor chains owned by the Company. General and administrative expense totaled $2.5 million for the year ended June 30, 2000 as compared to $4.1 million for the year ended June 30, 1999. The reduction in general and administrative costs resulted primarily from (i) a reduction in travel related costs and (ii) a reduction in legal expenses attributable to general corporate activities. The operating loss for the year ended June 30, 2000 totaled $2.6 million as compared to an operating loss of $4.1 million, primarily as a result of reduced general and administrative expenses. Interest and other income for the year ended June 30, 2000 totaled $358,000 and included interest income from available cash and revenue from the use of the Company's anchor chains. Interest income and other for the year ended June 30, 1999 totaled $864,000 and included interest income from available cash plus $618,000 related to a settlement with El Paso under certain merger related agreements. Interest and other financing costs for the year ended June 30, 2000 totaled $350,000. Interest expense and other financing costs to affiliates for the year ended June 30, 2000 totaled $5.5 million and related to borrowings from Tatham Brothers and Tatham Investment Corp. For the year ended June 30, 1999, interest expense and other financing costs to affiliates totaled $4.6 million and related to borrowings from Tatham Brothers. Net loss from continuing operations for the year ended June 30, 2000 and 1999 totaled $8.0 million and $7.8 million, respectively. The change was due to the items discussed above. 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 year ended June 30, 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 $221,000 for the year ended June 30, 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. 20 23 Since the Company's only drilling assets were sold during the year ended June 30, 2000, the operations of the drilling subsidiaries are being presented as discontinued operations. Revenue from drilling services totaled $13.3 million for the year ended June 30, 2000. All of the revenue for the year ended June 30, 2000 was generated by the Bill Shoemaker. During this period, the Bill Shoemaker was under contract for the period July 1, 1999 through November 15, 1999. Revenue for the year ended June 30, 1999 totaled $39.8 million. The Bill Shoemaker generated $37.6 million in revenue and the Laffit Pincay generated $2.2 million in revenue during this period. Operating expenses for the Rigs for the year ended June 30, 2000 totaled $11.5 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 $3.1 million. Operating expenses for the Laffit Pincay during this period included the costs necessary to maintain the rig in a warm-stacked mode prior to its sale in May 2000. Operating expenses for the Bill Shoemaker during this period related to the management and direct operating expenses from July 1, 1999 through November 15, 1999 and costs necessary to maintain the rig in a warm-stacked mode from November 1999 through the date of its sale in June 2000. 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 were primarily the costs to maintain the rig in a warm-stacked mode. Depreciation expense for the year ended June 30, 2000 relating to the Rigs totaled $63.0 million and included depreciation expense of $48.5 million and $14.5 million for the Bill Shoemaker and Laffit Pincay, respectively. Depreciation expense included $44.6 million and $12.9 million of impairment expense for the Bill Shoemaker and Laffit Pincay, respectively. Depreciation expense for the year ended June 30, 1999 totaled $5.7 million. Depreciation expense for this period included $3.8 million and $1.9 million for the Bill Shoemaker and Laffit Pincay, respectively. General and administrative expense relating to the Rigs for the year ended June 30, 2000 totaled $4.2 million as compared to $2.9 million for the year ended June 30, 1999. The operating loss relating to the Rigs for the year ended June 30, 2000 totaled $65.4 million as compared to operating income of $9.0 million for the year ended June 30, 1999. The change was due to the items discussed above. Interest income relating to the Rigs totaled $0.2 million for the year ended June 30, 2000 as compared to $0.1 million for the year ended June 30, 1999. Interest expense relating to the Rigs for the year ended June 30, 2000 totaled $7.3 million and primarily reflected interest incurred by RIGCO under the Credit Facility. Interest expense relating to the Rigs for the year ended June 30, 1999 totaled $7.7 million and related to interest incurred related to the Credit Facility. Interest expense to affiliates relating to the Rigs totaled $0.4 million for the year ended June 30, 2000 and included interest expense relating to loans to RIGCO from Tatham Investment Corp. and liquidated damages due to Thomas P. Tatham under the Shoemaker make-ready collateral agreement. Interest expense to affiliates relating to the Rigs totaled $1.3 million for the year ended June 30, 1999 and related to liquidated damages due to Thomas P. Tatham under the Shoemaker make-ready collateral agreement. The net loss from discontinued drilling operations for the year ended June 30, 2000 totaled $72.9 million as compared to a net loss from discontinued drilling operations for the year ended June 30, 1999 of $0.4 million. 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 $3.1 million for the year ended June 30, 2000 as compared to $3.1 million for the year ended June 30, 1999. After taking preferred stock dividends into account, the Company's net loss allocable to common shareholders for the year ended June 30, 2000 was $83.7 million as compared with a net loss allocable to common shareholders for the year ended June 30, 1999 of $11.5 million. Basic and diluted loss per common share from continuing 21 24 operations for the year ended June 30, 2000 was $0.43 per share as compared with $0.41 per share for the year ended June 30, 1999. Basic and diluted loss per common share from discontinued operations for the year ended June 30, 2000 was $2.78 per share as compared with $0.02 per share for the year ended June 30, 1999. Basic and diluted loss per common share for the year ended June 30, 2000 totaled $3.21 per share compared with $0.43 per share for the year ended June 30, 1999. YEAR ENDED JUNE 30, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998 Depreciation expense totaled $49,000 for the year ended June 30, 1999 and related to certain anchor chains owned by the Company. The Company did not have any depreciation expense from continuing operations for the year ended June 30, 1998. General and administrative expense totaled $4.1 million for the year ended June 30, 1999 as compared to $0.9 million for the year ended June 30, 1998. The increase in general and administrative costs resulted primarily from (i) an increase in travel related costs, (ii) increased costs associated with the start-up of stand alone corporate offices and (iii) an increase in legal expenses attributable to general corporate activities. The operating loss for the year ended June 30, 1999 totaled $4.1 million as compared to an operating loss of $0.9 million, primarily as a result of increased general and administrative expenses. Interest and other income for the year ended June 30, 1999 totaled $864,000 and included interest income from available cash plus $618,000 related to a settlement with El Paso under certain merger related agreements. Interest and other income for the year ended June 30, 1998 totaled $384,000. Interest expense and other financing costs to affiliates for the year ended June 30, 1999 totaled $4.6 million and related to borrowings from Tatham Brothers. For the year ended June 30, 1998 the Company did not have any interest expense and other financing costs to affiliates from continuing operations. Net loss from continuing operations for the year ended June 30, 1999 and 1998 totaled $7.8 million and $0.5 million, respectively. The change was due to the items discussed above. 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. The Company reported a net loss from discontinued operations of its oil and gas operations of $221,000 for the year ended June 30, 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. For the year ended June 30, 1998, the Company reported a net loss from discontinued operations of its oil and gas operations of $4.3 million. During the year ended June 30, 1998, the Company sold 4,532 million cubic feet of natural gas and 16,295 barrels of oil at average prices of $2.34 per thousand cubic feet of natural gas and $16.24 per barrel of oil, respectively. Since the Company's only drilling assets were sold during the year ended June 30, 2000, the operations of the drilling subsidiaries are being presented as discontinued operations. Revenue from drilling services totaled $39.8 million for the year ended June 30, 1999. The Bill Shoemaker generated $37.6 million in revenue and the Laffit Pincay generated $2.2 million in revenue during this period. 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. 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 were primarily the costs to maintain the rig in a warm-stacked mode. 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. 22 25 Depreciation expense for the year ended June 30, 1999 totaled $5.7 million. Depreciation expense for this period included $3.8 million and $1.9 million for the Bill Shoemaker and Laffit Pincay, respectively. Depreciation expense totaled $91,000 for the year ended June 30, 1998. General and administrative expense relating to the Rigs for the year ended June 30, 1999 totaled $2.9 million. The rig operations did not incur any general and administrative costs for the year ended June 30, 1998. Operating income relating to the Rigs for the year ended June 30, 1999 totaled $9.0 million as compared to an operating loss of $8,000 for the year ended June 30, 1998. The change was due to the items discussed above. Interest income relating to the Rigs totaled $0.1 million for the year ended June 30, 1999. The rig operations did not generate any interest income for the year ended June 30, 1998. Interest expense relating to the Rigs for the year ended June 30, 1999 totaled $7.7 million and primarily reflected interest incurred by RIGCO under the Credit Facility. The rig operations did not incur any interest expense relating to the Rigs for the year ended June 30, 1998. Interest expense to affiliates relating to the Rigs totaled $1.8 million for the year ended June 30, 1999 and related to the loan from Thomas P. Tatham for the Shoemaker make-ready collateral agreement. The rig operations did not incur any interest expense to affiliates for the year ended June 30, 1998. The net loss from discontinued drilling operations for the year ended June 30, 1999 totaled $421,000 as compared to a net loss from discontinued drilling operations for the year ended June 30, 1998 of $8,000. 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 $3.1 million for the year ended June 30, 1999 as compared to $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 as compared with a net loss allocable to common shareholders for the year ended June 30, 1998 of $8.6 million. Basic and diluted loss per common share from continuing operations for the year ended June 30, 1999 was $0.41 per share as compared with $0.25 per share for the year ended June 30, 1998. Basic and diluted loss per common share from discontinued operations for the year ended June 30, 1999 was $0.02 per share as compared with $0.25 per share for the year ended June 30, 1998. Basic and diluted loss per common share for the year ended June 30, 1999 totaled $0.43 per share compared with $0.50 per share for the year ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Sources of Cash. The Company has no current cash flow from operations. The Company expects to be dependent upon cash on hand and loans under a revolving draw facility with Tatham Investment Corp. to pay its operating expenses and satisfy its other obligations. The use of cash held or generated by the Rig Subsidiaries is subject to 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 23 26 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. On September 25, 2000 the Rig Subsidiaries filed a motion to dismiss the Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the dismissal of the Chapter 11 proceedings would allow the Rig Subsidiaries to pay in full their pre-petition unaffiliated unsecured creditors. Any funds remaining would be paid to the affiliated unsecured creditors on a pro rata basis. In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0 million from an unrelated party. The $4.0 million loan is evidenced by a demand note bearing interest at the rate of 15% per annum. On July 1, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Loans under this agreement bear interest at the prime rate plus 3% (on June 30, 2000, the interest rate under this facility was 12.5%) and were due on September 30, 1999. As of the date of the Bankruptcy Filing, and as of June 30, 2000, Tatham Investment Corp. had an unsecured claim of $338,303 under this agreement. Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility with Tatham Investment Corp. The revolving draw facility provides for loans, at the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in amounts up to $5.0 million. The revolving draw facility bears interest at the rate of 15% per annum and is payable upon demand by the lender. Through June 30, 2000, the Company had borrowed $4.2 million under this facility. The Company pledged all of its equity ownership in certain wholly-owned subsidiaries of the Company as well as a certain promissory note issued by Tatham Offshore Canada, Limited. 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 24 27 million cash collateral which secured its letter of credit in favor of El Paso Energy was released and became available for general corporate purposes. Uses of Cash. The Company expects that its primary uses of cash will consist of amounts necessary to pay general and administrative and other operational expenses. 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. In addition, the Company will use available cash to fund the pursuit of its business strategy in Atlantic Canada. Such uses will include funding initial expenditures related to the North Atlantic Pipeline Partners' pipeline project, the remainder of the Company's Atlantic Canada strategy and any of the Company's other potential capital expenditures. North Atlantic Pipeline Partners is the sponsor of a proposal to construct a natural gas pipeline from offshore Newfoundland and Nova Scotia to Seabrook, New Hampshire. As of June 30, 2000, Tatham Offshore Canada Limited, the Canadian representative of North Atlantic Pipeline Partners, had incurred $14.3 million in developmental costs related to regulatory approval and pipeline infrastructure design in connection with such project and related infrastructure projects. The Company anticipates that the ultimate capital costs of the pipeline and related projects, if approved, could be in excess of several billion dollars. The Company plans to obtain debt and equity financing and/or secure joint venture partners to satisfy the capital requirements for the Atlantic Canada projects, as required. Liquidity Outlook. The Company intends to fund its immediate cash requirements with cash on hand and loans under the revolving draw facility with Tatham Investment Corp. At June 30, 2000, Tatham Offshore had $1.7 million of cash and cash equivalents. In addition, RIGCO had $4.9 million of cash and cash equivalents at June 30, 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 joint venture arrangements. 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, 1998, (ii) provided for interest at the prime rate plus 3% per annum, 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) 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 25 28 in accrued interest. On June 28, 2000, all amounts outstanding under the Credit Facility were repaid from proceeds from the sale of the Bill Shoemaker. 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 Harris County Litigation against Schlumberger Technology Corporation, Schlumberger Canada, Ltd., Sedco Forex Corporation, and Sedco Forex Canada Limited (collectively "Sedco Forex") discussed hereafter. On July 26, 1999, RIGCO filed a petition in the 165th Judicial District Court in Harris County, Texas, seeking both actual and exemplary damages from Schlumberger for claims arising out of Schlumberger's Sedco Forex Division's marketing, manning, management and operation of the Bill Shoemaker and Laffit Pincay pursuant to certain charter, make-ready and other agreements and arrangements. The allegations include claims of gross negligence, breach of contract, fraud, negligent misrepresentation and negligence. 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. 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. Tatham. In exchange for providing the funds to secure the letter of credit, RIGCO paid a fee of $500,000 to Mr. Tatham. RIGCO agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day from February 15, 1999 until such funds were 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. As of June 30, 2000, Mr. Tatham had a claim against RIGCO for liquidated damages of $1.8 million. 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 provided that (i) the debtors-in-possession would 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 would 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 business days of the acceptance of the offer, debtors-in-possession would retain a certain broker to market the Laffit Pincay, (iv) the debtors-in-possession would 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 would 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 would 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 would provide that the sale of the Laffit Pincay would 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 26 29 31, 2000, the debtors-in-possession would 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 would 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 would 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 would pay the secured lenders $2.0 million in partial payment of the secured lenders' claim and (xii) debtors-in-possession would 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. 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 or a dismissal of the Chapter 11 proceedings. On September 25, 2000, the Rig Subsidiaries filed a motion to dismiss the Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the dismissal of the Chapter 11 proceedings would allow the Rig Subsidiaries to pay in full their pre-petition unaffiliated unsecured creditors. Any funds remaining would be paid to the affiliated unsecured creditors on a pro rata basis. 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 $14.3 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. 27 30 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 $81.0 million at June 30, 2000. On March 31, 1999, the Company and Tatham Brothers extended the Short-Term Facility until April 30, 1999. Pursuant to the terms of the Short-Term Facility, Tatham Offshore was required to pay $24.1 million in principal and $0.3 million in interest on April 30, 1999. Tatham Offshore did not make payment of such 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 annual 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 28 31 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk inherent in financial instruments outside the financial statements is considered immaterial. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 32 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, 2000, 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 30 33 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. Mr. Gervais resigned his office effective July 31, 2000. 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 31 34 accounting and financial management positions. Mr. Lubojacky holds a B.B.A. degree from Sam Houston State University and is a certified public accountant. Mr. Lubojacky resigned his office effective May 19, 2000. 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. Mr. Niven resigned as Director of the Company effective July 28, 2000. 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), and a Trustee of the GCG Trust of the Golden American Life Insurance Company (a subsidiary of the ING Group). Mr. Vincent is a graduate of Yale University and Harvard Business School. Mr. Vincent resigned as a Director of the Company effective July 31, 2000. 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. 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 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. 32 35 The following table sets forth the compensation paid by the Company to the Chief Executive Officer and each of the Company's four other most highly compensated executive officers for the fiscal year ended June 30, 2000 (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 year ended June 30, 1998 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. 33 36

---------- (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) Represents the excess of the fair market value of DeepTech options over the exercise price on the date such options were exercised. (5) Mr. Kunetka also served as Senior Vice President - Corporate Finance and Investor Relations for DeepTech and Leviathan until August 14, 1998. (6) 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. (7) 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. (8) Amounts paid by DeepTech. (9) Mr. Fleisher also served as Executive Vice President of DeepFlex Production Services. (10) Mr. German joined the Company on August 15, 1999. (11) Mr. Hamilton served as Corporate Tax Director of DeepTech from August 1997 to August 14, 1998. (12) Options granted under Tatham Offshore's Incentive Plan to purchase Common Stock. 34 37 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, 2000.

---------- (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 35 38 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 Kenneth E. Beeney Don W. Wilson 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 36 39 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 700,000 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. 37 40 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. 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 outside directors of the Company at the time, 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. 38 41 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of August 31, 2000 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. 39 42 (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 options to purchase 33,333 shares of Common Stock. (4) Includes 17,000 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 50,000 shares of Common Stock. Also includes 17,000 shares of Common Stock assumed acquired as a result of conversion of 50,000 shares of Series A Preferred Stock into Common Stock. (6) Includes options to purchase 36,333 shares of Common Stock. (7) Includes 526,524 shares assumed acquired as a result of conversion of 1,548,600 shares of Series A Preferred Stock into Common Stock. Also includes 1,833 shares assumed acquired as a result of conversion of 21,000 shares of Series C Preferred Stock into Common Stock. Mr. Tatham owns 9.0% of the Series A Preferred Stock outstanding. (8) Includes 340 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 33,333 shares of Common Stock. (9) Includes 1,174,851 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. (10) 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 1,763,847 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 289,000 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. (11) Includes 78,924 shares of Common Stock assumed acquired as a result of conversion of 232,128 shares of Series A Preferred Stock. (12) Includes 595,119 shares of Common Stock assumed acquired as a result of conversion of 1,750,350 shares of Series A Preferred Stock. Also includes 1,833 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 189,332 shares of Common Stock. The executive officers and directors as a group beneficially own 10.2% of the Series A Preferred Stock outstanding. 40 43 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, 2000, its executive officers, directors and greater than 10% beneficial owners complied with all applicable filing requirements. 41 44 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 June 30, 1995. 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, 2000) [GRAPH]

42 45 PART IV 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 F-1 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). 43 46 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). 44 47 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). 45 48 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). 46 49 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). 47 50 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 (filed as Exhibit 10.48 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 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 (filed as Exhibit 10.49 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 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 (filed as Exhibit 10.50 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 10.51 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, Commission File No. 0-22892 and incorporated herein by reference). 10.52 Supplement to Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection (filed as Exhibit 99.2 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Commission File No. 0-22892 and incorporated herein by reference). 10.53 Second Supplement to Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection (filed as Exhibit 99.3 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Commission File No. 0-22892 and incorporated herein by reference). 21.1 List of Subsidiaries of Tatham Offshore, Inc. (filed as Exhibit 21.1 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 23.1* Consent of Independent Accountants, PricewaterhouseCoopers LLP. 48 51 24.1 Powers of Attorney (included on the signature page on this Annual Report on Form 10-K). 27.1* Financial Data Schedule. ---------- * Filed herewith (b) Reports on Form 8-K None. 49 52 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 28, 2000 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 ---------------------------------------------- Thomas P. Tatham, Chairman of the Board and Chief Executive Officer September 28, 2000 /s/ Dennis A. Kunetka ---------------------------------------------- Dennis A. Kunetka, Chief Financial Officer, Senior Vice President and Secretary (Principal Accounting Officer) September 28, 2000 /s/ Kenneth E. Beeney ---------------------------------------------- Kenneth E. Beeney, Director September 28, 2000 /s/ Don W. Wilson ---------------------------------------------- Don W. Wilson, Director September 28, 2000 50 53 TATHAM OFFSHORE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1 54 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Tatham Offshore, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Tatham Offshore, Inc. and its subsidiaries (the Company) at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 1 and 5 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. Additionally, as of April 30, 1999, the Company was in default under the terms of its short-term credit facility with an affiliate. In May and June 2000, the four subsidiaries sold the drilling rigs and paid the secured lenders all principal, interest and expenses associated with the senior secured credit facility. At June 30, 2000, the Company remains in default under the terms of its short-term credit facility with an affiliate and does not have the ability to repay this borrowing. With the sale of the drilling rigs, the Company currently has no operating assets and no operating cash flow. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Houston, Texas September 28, 2000 F-2 55 TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except share data)

The accompanying notes are an integral part of this financial statement. F-3 56 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. F-4 57 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. F-5 58 TATHAM OFFSHORE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands)

The accompanying notes are an integral part of this financial statement. F-6 59 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: Tatham Offshore, Inc. ("Tatham Offshore" or the "Company"), a Delaware corporation, is currently pursuing, through its subsidiaries, energy related opportunities in Atlantic Canada, including substantial natural gas gathering and transmission facilities and related energy infrastructure (see "Bankruptcy Filing by Subsidiaries" and "Discontinued Operations" below). 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 North America, L.L.C. ("RIGCO") and FPS VI, L.L.C. ("FPS VI"), wholly-owned subsidiaries of DeepFlex, owned interests in the FPS Laffit Pincay (the "Laffit Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker", together with the Laffit Pincay, the "Rigs"), both second generation semisubmersible drilling rigs. Pursuant to management and charter agreements, Sedco Forex Division of Schlumberger Technology Corporation ("Sedco Forex") 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. Through June 30, 2000, Tatham Offshore Canada Limited has incurred approximately $16.1 million in costs associated with the North Atlantic project and related infrastructure projects. Such costs include engineering, survey, legal, regulatory and other costs associated with the project. 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 F-7 60 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 $12.9 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. The remaining cash received will be used for general corporate purposes. Loss from discontinued operations includes an impairment provision of $44.6 million related to the sale of this rig. On September 25, 2000, the Rig Subsidiaries filed a motion to dismiss the Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the dismissal of the Chapter 11 proceedings would allow the Rig Subsidiaries to pay in full their pre-petition unaffiliated unsecured creditors. Any funds remaining would be paid to the affiliated unsecured creditors on a pro rata basis. Additionally, the unsecured creditors would share, again on a pro rata basis, any proceeds recovered by RIGCO in its action against Sedco Forex (See Note 9). 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). Equity investment on the consolidated balance sheet includes the Company's investment in the Rig Subsidiaries at June 30, 2000 of $77.0 million and an advance to the Rig Subsidiaries of $81.0 million which relates to certain payment-in-kind subordinated promissory notes owed by the Rig Subsidiaries to DeepFlex, a wholly-owned subsidiary of the Company. 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 In order to pay its secured creditors, RIGCO and FPS VI sold all of their interests in the Laffit Pincay and the Bill Shoemaker. Since all operating assets of RIGCO were sold, Tatham Offshore's Rig Subsidiaries are being presented as discontinued operations. Revenue from drilling services for the year ended June 30, 1999 totaled $39.8 million. The Laffit Pincay was stacked without a drilling contract for the year ended June 30, 2000 and therefore did not generate any revenue from drilling services for this period. The Bill Shoemaker drilled three wells for Husky Oil Operations, Limited and generated $13.3 million in revenue for the year ended June 30, 2000. Operating expenses for the Rigs for the year ended June 30, 2000 totaled $11.5 million compared to operating expenses for the year ended June 30, 1999 of $22.2 million. Depreciation expense for the Rigs totaled $63.0 million for the year ended June 30, 2000 and included an impairment provision of $12.9 million for the Laffit Pincay and $44.6 million for the Bill Shoemaker. Depreciation expense for the year ended June 30, 1999 totaled $5.7 million. General and administrative expense relating to the rigs for the year ended June 30, 2000 totaled $4.2 million as compared with $2.9 million for the year ended June 30, 1999. Interest expense relating to the Rigs for the year ended June 30, 2000 totaled $7.3 million as compared to $7.7 million for the year ended F-8 61 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) June 30, 1999. Interest expense to affiliates relating to the Rigs totaled $0.4 million for the year ended June 30, 2000 as compared to $1.3 million for the year ended June 30, 1999. Oil and Gas Operations Discontinued operations from oil and gas 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 and $10.9 million for fiscal years 1999 and 1998, 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 and $4.9 million for fiscal years 1999 and 1998, respectively. Interest expense for the year 1998 was allocated 100% to discontinued operations from oil and gas operations. 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 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 included the operation of two semisubmersible drilling rigs, the Bill Shoemaker and the Laffit Pincay, and were 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. F-9 62 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The accompanying consolidated financial statements include the accounts of Tatham Offshore and those 50% or more owned subsidiaries controlled by Tatham Offshore (collectively referred to as the "Company"). All of Tatham Offshore's subsidiaries are currently 100% owned. All significant intercompany balances and transactions have been eliminated in consolidation. 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. Demand Note Receivable The Company's demand note receivable is a $2.0 million demand note payable to North Atlantic Pipeline Partners, L.P. dated December 1, 1999 which bears interest at a rate equal to the Royal Bank of Canada's prime interest rate. 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. The Company recognizes 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. 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, 2000 and 1999, the Company had capitalized $14.3 million and $12.6 million, respectively, of development costs related to regulatory approval and design of a pipeline to be constructed 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 was recognized in the period rendered. 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 assets and liabilities. F-10 63 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Earnings per Share Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. 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, 2000, 1999 and 1998. 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 accounting principles generally accepted in the United States of America 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". 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 and SFAS No. 138, "Accounting for Certain Derivative Instruments....an Amendment of FAS 133", is effective for fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 on July 1, 2000. The adoption of SFAS No. 133 has not had a material effect on the Company's results of operations, cash flows or financial position. Certain amounts in prior years have been reclassified to conform to the current year's presentation. F-11 64 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 $144,468,000 and $12,154,000 and represented the Company's 100% interest in the Laffit Pincay and the Bill Shoemaker. As discussed in Note 1, due to the bankruptcy proceedings for the drilling subsidiaries, the drilling subsidiaries have been presented on the equity method and as discontinued operations in 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 a loss of $12.9 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 a loss of $44.6 million related to the sale of this rig. 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

F-12 65 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Costs Incurred in Oil and Gas Acquisition, Exploration and Development Activities

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 F-13 66 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 year ended June 30, 1998, production and operating expenses include $1,236,000 of production payments 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 F-14 67 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. NOTE 5 - INDEBTEDNESS: RIGCO Credit Facility On September 30, 1996, RIGCO entered into a $65 million senior secured credit facility with a syndicate of lenders (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, 1998, (ii) provided for interest at the prime rate plus 3% per annum (which equaled 12.5% at June 30, 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 14.5% at June 30, 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 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 in accrued interest is included in accounts payable and accrued liabilities on the consolidated balance sheet. 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. On May 1, 2000, the balance of the proceeds from the sale of the Laffit Pincay was used as partial payment of the Credit Facility. On June 28, 2000, all amounts outstanding under the Credit Facility were repaid from proceeds from the sale of the Bill Shoemaker. See Note 1. Long-Term Debt - 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 F-15 68 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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, which totaled $31.0 million at June 30, 2000 and $26.1 million at June 30, 1999, are included in long-term debt to affiliate currently payable on the consolidated balance sheet. The Standby Agreement (the "Standby Agreement"), dated as of February 27, 1998, was executed in connection with the Merger and related transactions and is by and among Tatham Offshore, DeepTech, Mr. Thomas P. Tatham and El Paso Energy. Pursuant to the Standby Agreement, to the extent that any of the Company's Common Stock or Series A Preferred Stock was not subscribed for by holders of DeepTech common stock in the Rights Offering, Tatham Brothers committed to purchase such number of unsubscribed shares in order for DeepTech to receive net proceeds from the Rights Offering of not less than $75 million (the "Standby Commitment"). In addition, Tatham Brothers had the right to purchase any shares which DeepTech held after the Rights Offering and the satisfaction of the Standby Commitment. Mr. Tatham unconditionally guaranteed Tatham Brothers' performance of the Standby 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. 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 for the year ended June 30, 1998. F-16 69 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Committed Draw Facility On June 30, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Loans under this agreement bear interest at the prime rate plus 3% (on June 30, 2000, the interest rate under this facility was 12.5%) and were due on September 30, 1999. As of June 30, 1999, amounts outstanding under this agreement totaled $439,062 and are included in long-term debt to affiliates currently payable on the consolidated balance sheet. As of the date of the Bankruptcy Filing, and as of June 30, 2000, Tatham Investment Corp. had an unsecured claim of $338,303 under this agreement. RIGCO Make-ready Letter of Credit Effective January 25, 1998, Sedco Forex entered into a one-year contract with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell would cease using the Bill Shoemaker to conduct drilling operations in the Gulf. RIGCO has been paid for drilling services performed by the Bill Shoemaker for Shell through November 18, 1998, but has not been paid for any period since that time. RIGCO is seeking to recover its damages resulting from this early termination, along with damages unrelated to the Shell contract, in suit against Schlumberger Technology Corporation, Schlumberger Canada, Ltd., Sedco Forex Corporation and Sedco Forex Canada Limited (collectively "Sedco Forex") discussed hereafter. Following the early release of the rig by Shell, the Bill Shoemaker was towed to a shipyard in Galveston, Texas where it underwent significant unanticipated refurbishments in preparation for mobilization to the Grand Banks area in Atlantic Canada. Capital costs, including crew costs while in the shipyard, for the make-ready totaled approximately $8.5 million. Following the make-ready, the Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada and conducted a three-well program at predetermined rates for Husky Oil Operations Limited. In connection with the Bill Shoemaker make-ready agreement with Sedco Forex, RIGCO obtained a letter of credit for $6.5 million to secure payment to Sedco Forex. The letter of credit was secured with funds provided by Mr. Thomas P. Tatham. In exchange for providing the funds to secure the letter of credit, RIGCO paid a fee of $500,000 to Mr. Tatham. RIGCO also agreed to pay Mr. Tatham, as liquidated damages, $10,000 per day from February 15, 1999 until such funds are returned. The liquidated damages payment would be in the form of a promissory note bearing interest at the rate of 18% per annum. At June 30, 1999, 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. As of the date of the Bankruptcy Filing, and as of June 30, 2000, Mr. Tatham had an unsecured claim of $8,240,000 for the funds securing the letter of credit plus liquidated damages. All of the funds securing the letter of credit were drawn by Sedco Forex for payments under the make-ready agreement. RIGCO Debtor-in-Possession Loan On May 25, 2000, RIGCO entered into a Secured Super-Priority Debtor-in-Possession Credit Agreement (the "DIP Loan") with a group of its secured lenders with BHF (USA) Capital Corporation as agent for the creditor group. Under the DIP Loan, RIGCO could borrow up to $2.4 million for working capital purposes detailed in an approved budget. The DIP Loan bore interest at the rate of prime plus 2% and matured on June 30, 2000. On May 31, 2000, RIGCO borrowed $1,500,000 under this agreement. On June 28, 2000, RIGCO repaid $1,500,000 in principal from the proceeds from the sale of the Bill Shoemaker and this agreement terminated. For the fiscal year ended June 30, 2000, RIGCO paid $13,000 in interest under the DIP Loan. F-17 70 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Anchor Chain Loan 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 had 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. As approved by the Bankruptcy Court, on June 29, 2000, RIGCO paid Tatham Offshore Canada Limited $2.0 million in full satisfaction of these promissory notes. Tatham Offshore - Tatham Investment Corp. Facility Effective July 1, 1999, Tatham Offshore entered into a revolving draw facility with Tatham Investment Corp. The revolving draw facility provides for loans, at the lender's sole discretion, by Tatham Investment Corp. to Tatham Offshore in amounts up to $5.0 million. The revolving draw facility bears interest at the rate of 15% per annum and is payable upon demand by the lender. Through June 30, 2000, the Company has borrowed $4.2 million under this facility, which is included in accounts payable to affiliates on the consolidated balance sheet. For the fiscal year ended June 30, 2000, Tatham Offshore paid $503,000 in interest 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 as security under this revolving draw facility. Other Tatham Offshore is a guarantor of $5.0 million of a $6.4 million loan from Bank of America, N.A. to Tatham Brothers. The $5.0 million guaranteed by Tatham Offshore was originally loaned to DeepFlex to fund certain improvements to the Rigs. The Tatham Brothers loan bears interest at 6.5% and is due on September 30, 2000 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. In December 1999, North Atlantic Pipeline Partners, L.P. borrowed $4.0 million from an unrelated party. The loan is evidenced by a demand note bearing interest at a rate of 15% per annum. The loan, plus accrued interest, is included in long-term debt currently payable on the consolidated balance sheet. NOTE 6 - STOCKHOLDERS' EQUITY: The following table summarizes Tatham Offshore's outstanding equity:

---------- (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. F-18 71 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 vest 33 1/3% each year beginning December 31, 1999. Options issued under the Incentive Plan vest pursuant to the terms of the individual option grants. 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 and 1998, Tatham Offshore issued 400,000 options and 15,000 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, 2000 totaled 1,106,000 of which 189,332 options were exercisable. F-19 72 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, 2000:

F-20 73 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Since no options were granted for the year ended June 30, 2000, information relating to the Black-Scholes option-pricing model is not presented. 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. Tatham Aviation, Inc. 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, 2000 and 1999, the Company paid Tatham Aviation $2.2 million and $2.4 million, respectively, under this agreement. Leviathan Gas Pipeline Partners, L.P. Leviathan charged Tatham Offshore $197,500 and $1,827,000 for the years ended June 30, 1999 and 1998, 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. Offshore Gas Marketing, Inc. During the years ended June 30, 1999 and 1998, Tatham Offshore sold 99% of its production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an 80%-owned subsidiary of DeepTech. Tatham Offshore's agreement with Offshore Marketing provided for fees to Offshore Marketing 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. See also Note 5 for other related party transactions. F-21 74 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 8 - INCOME TAXES: The Company's deferred income tax liabilities (assets) at June 30, 2000 and 1999 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 $73.3 million and $36.3 million at June 30, 2000 and 1999, respectively, were provided against the net deferred tax assets. At June 30, 2000, the Company had approximately $215,685,000 of regular tax NOL carryforwards and approximately $213,940,000 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: 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, 2000, RIGCO had recorded a $7.4 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 in the 165th Judicial District Court in Harris County, Texas, against Schlumberger Technology Corporation and Schlumberger Canada, Ltd. (collectively, "Schlumberger") for claims arising out of Schlumberger's Sedco Forex Division's marketing, manning, management and operation of the Shoemaker and Pincay pursuant to certain charter, make-ready and other agreements and arrangements. Earlier this year, RIGCO joined the newly-formed corporations Sedco Forex Corporation and Sedco Forex Canada Limited as defendants in this suit. The allegations include claims of gross negligence, breach of contract, fraud, negligent misrepresentation and negligence. RIGCO is seeking approximately $51 million in actual damages plus an unspecified amount of exemplary damages. RIGCO has alleged in this suit as well as in bankruptcy court proceedings that the manner in which Sedco Forex performed its duties with respect to the Bill Shoemaker and Laffit Pincay during the course of the management and charter agreements resulted in RIGCO's financial difficulties and caused it to default on its secured debt obligations. In the ordinary course of business, the Company is subject to various laws and regulations. In the opinion of management, compliance with existing laws and regulations will not materially affect the financial position or operations of the Company. Various legal actions have arisen in the ordinary course of business. Management believes that the outcome of such proceedings will not have a material adverse effect on the Company's results of operations, cash flows or financial position. F-22 75 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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

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): Cash $ (1,605) Oil and gas properties, net (5,466) Accounts payable 755 Accounts payable to DeepTech 1,062 Accounts payable to Leviathan 2,480 Other noncurrent liabilities 3,416 ----------- Increase in paid in capital $ 642 ===========

F-23 76 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 12 - SEGMENT INFORMATION: The Financial Accounting Standards Board 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 financial position, results of operations or cash flows but did affect the disclosure of segment information. The Company previously operated 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. Summarized financial information of the Company's reportable segments for the years ended June 30, 2000, 1999 and 1998 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. F-24 77 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. In fiscal year 1998, Shell accounted for $0.7 million of drilling services revenue. No other customer accounted for more than 10 percent of consolidated revenue in 2000, 1999 or 1998. 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 2000, 1999, and 1998. 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 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. F-25 78 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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) 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 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. F-26 79 TATHAM OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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.

The following are the principal sources of change in the standardized measure (in thousands):

---------- (1) In connection with the transfer of all of the Company's oil and gas properties to Leviathan. F-27 80 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION COMBINED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998 F-28 81 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of RIGCO North America, L.L.C., FPS III, Inc., FPS V, Inc. and FPS VI, L.L.C. In our opinion, the accompanying combined balance sheet and the related combined statements of operations and accumulated deficit and of cash flows present fairly, in all material respects, the financial position of RIGCO North America, L.L.C., FPS III, Inc., FPS V, Inc. and FPS VI, L.L.C. (the Companies) at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companies' 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 auditing standards generally accepted in the United States of America, 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 Companies will continue as a going concern. As discussed in Note 1 to the combined financial statements, as of April 30, 1999, RIGCO North America L.L.C. was in default under the terms of its senior secured credit facility and on August 9, 1999, RIGCO North America, L.L.C., FPS III, Inc., FPS V, Inc. and FPS VI, L.L.C. all filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code. In May and June 2000, the Companies sold the drilling rigs and paid the secured lenders all principal, interest and expenses associated with the senior secured credit facility. With the sale of the drilling rigs, the Companies currently have no operating assets and no operating cash flow and remain in Chapter 11. These factors raise substantial doubt about the Companies' ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1. The accompanying combined financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Houston, Texas September 28, 2000 F-29 82 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION COMBINED BALANCE SHEET (IN THOUSANDS)

The accompanying notes are an integral part of the combined financial statements. F-30 83 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION COMBINED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT (IN THOUSANDS)

The accompanying notes are an integral part of the combined financial statements. F-31 84 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS)

Supplemental disclosures to the statement of cash flows - see Note 8. The accompanying notes are an integral part of the combined financial statements. F-32 85 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION: The accompanying financial statements are the combined statements of RIGCO North America, L.L.C., ("RIGCO"), FPS III, Inc., ("FPS III"), FPS V, Inc. ("FPS V") and FPS VI, L.L.C. ("FPS VI"), (combined, the "Companies"), which are indirect wholly-owned subsidiaries of Tatham Offshore, Inc. ("Tatham Offshore"). DeepFlex Production Services, Inc. ("DeepFlex"), a wholly-owned subsidiary of Tatham Offshore, owns 100% of FPS III and FPS V. RIGCO and FPS VI owned two semisubmersible drilling rigs, the FPS Laffit Pincay (the "Laffit Pincay") and the FPS Bill Shoemaker (the "Bill Shoemaker") which were sold in May 2000 and June 2000, respectively. Prior to June 25, 1998, DeepFlex was a wholly-owned subsidiary of DeepTech International Inc. ("DeepTech"). Bankruptcy Filing by Subsidiaries On August 9, 1999, RIGCO, FPS VI, FPS III, and FPS V 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 Companies are administered jointly. As a result of the Bankruptcy Filing, the Rigs were managed by the Companies 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. Depreciation expense for the year ended June 30, 2000 includes an impairment of $12.9 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 Note 4) 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 cash received will be used for general corporate purposes. Depreciation expense for the year ended June 30, 2000 includes an impairment of $44.6 million related to the sale of this rig. On September 25, 2000, RIGCO, FPS VI, FPS III, and FPS V filed a motion to dismiss the Chapter 11 proceedings with the United States Bankruptcy Court. If granted, the dismissal of the Chapter 11 proceedings would allow the Debtors to pay their pre-petition unaffiliated unsecured creditors in full. Any funds remaining would be paid to the affiliated unsecured creditors on a pro rata basis. Additionally, the unsecured creditors would share, again on a pro rata basis, any proceeds recovered by RIGCO in its action against Sedco Forex. F-33 86 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: Principles of Combination All significant intercompany balances and transactions have been eliminated in combination. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Semisubmersible Drilling Rigs The cost of the semisubmersible drilling rigs is capitalized and depreciated using the straight-line method over the drilling rigs' estimated useful lives of 25 years. Impairment losses on the semisubmersible drilling rigs are recognized if the carrying amount of such assets, grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows from other assets, exceeds the estimated undiscounted future cash flows of such assets. Measurement of any impairment loss is based on the fair value of the assets. Capitalization of Interest Interest and other financing costs are capitalized in connection with construction projects as part of the cost of the asset and amortized over the related asset's estimated useful life. Debt Issue Costs Debt issue costs are capitalized and amortized over the life of the related indebtedness. Revenue Recognition Revenue from services is recognized in the period rendered. All of the Companies' operating revenues were generated from contract drilling services related to the use of its two semisubmersible drilling rigs. Income Taxes The Companies' fiscal 1998 results were included in DeepTech's consolidated federal income tax return. DeepTech and its subsidiaries, which were part of the consolidated tax group including the Companies, were parties to intercompany tax sharing agreements which described the method of determining the intercompany charge for income taxes. Under its tax sharing agreement, the Companies calculated a provision for income taxes equal to that which would be calculated if the Companies filed a separate income tax return. Tax loss and other tax benefit carryforwards were similarly calculated for the Companies on a separate return basis. Such agreement terminated on June 25, 1998 when DeepTech contributed its outstanding shares of capital stock in DeepFlex to Tatham Offshore. This agreement was replaced with a similar tax sharing agreement between DeepFlex and Tatham Offshore. F-34 87 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) Estimates The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the combined 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 Companies' assets and liabilities approximate their carrying values. NOTE 3 - SEMISUBMERSIBLE DRILLING RIGS: At June 30, 1999, capitalized costs and related accumulated depreciation of semisubmersible drilling rigs totaled $144,468,000 and $12,154,000 and represented the Companies' 100% interest in the Laffit Pincay and the Bill Shoemaker. 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. Depreciation expense includes an impairment of $12.9 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. Depreciation expense includes an impairment of $44.6 million related to the sale of this rig. NOTE 4 - INDEBTEDNESS: RIGCO Credit Facility 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, 1998, (ii) provided for interest at the prime rate plus 3% per annum (which equaled 12.5% at June 30, 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 F-35 88 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) 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 14.5% at June 30, 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. On June 28, 2000, all amounts outstanding under the Credit Facility were repaid from proceeds from the sale of the Bill Shoemaker. See Note 1. 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 in accrued interest is included in accounts payable and accrued liabilities on the combined balance sheet. RIGCO Make-ready Letter of Credit Effective January 25, 1998, Sedco Forex entered into a one-year contract with Shell Offshore Inc. ("Shell") for the use of the Bill Shoemaker in the Gulf. RIGCO was notified by Sedco Forex that as of November 18, 1998, Shell would cease using the Bill Shoemaker to conduct drilling operations in the Gulf. RIGCO has been paid for drilling services performed by the Bill Shoemaker for Shell through November 18, 1998, but has not been paid for any period since that time. RIGCO is seeking to recover its damages resulting from this early termination, along with damages unrelated to the Shell contract, in the suit against Sedco Forex discussed hereafter. Following the early release of the rig by Shell, the Bill Shoemaker was towed to a shipyard in Galveston, Texas where it underwent significant unanticipated refurbishments in preparation for mobilization to the Grand Banks area in Atlantic Canada. Capital costs, including crew costs while in the shipyard, for the make-ready totaled approximately $8.5 million. Following the make-ready, the Bill Shoemaker was mobilized to the Grand Banks area in Atlantic Canada 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. At June 30, 1999, the $6.5 million in collateral plus accrued liquidated damages totaling $1.3 million are included in accounts payable to affiliates on the combined balance sheet. As of the date of the Bankruptcy Filing, and as of June 30, 2000, Mr. Tatham had an unsecured claim of $8,240,000 for the funds securing the letter of credit plus liquidated damages. All of the funds securing the letter of credit were drawn by Sedco Forex for payments under the make-ready agreement. F-36 89 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) Committed Draw Facility On June 30, 1999, RIGCO entered into a committed draw facility with Tatham Investment Corp., which is 100% owned by Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company. Tatham Investment Corp. agreed to loan up to $750,000 to RIGCO for working capital purposes. Loans under this agreement bear interest at the prime rate plus 3% (on June 30, 2000, the interest rate under this facility was 12.5%) and were due on September 30, 1999. As of June 30, 1999, RIGCO had borrowed $439,062 under this facility, which was included in notes payable to affiliates on the combined balance sheet. As of the date of the Bankruptcy Filing, and as of June 30, 2000, Tatham Investment Corp. had an unsecured claim of $338,303 under this agreement. RIGCO Debtor-in-Possession Loan On May 25, 2000, RIGCO entered into a Secured Super-Priority Debtor-in-Possession Credit Agreement (the "DIP Loan") with a group of its secured lenders with BHF (USA) Capital Corporation as agent for the creditor group. Under the DIP Loan, RIGCO could borrow up to $2.4 million for working capital purposes detailed in an approved budget. The DIP Loan bore interest at the rate of prime plus 2% and matured on June 30, 2000. On May 31, 2000, RIGCO borrowed $1,500,000 under this agreement. On June 28, 2000, RIGCO repaid $1,500,000 in principal from the proceeds from the sale of the Bill Shoemaker and this agreement terminated. For the fiscal year ended June 30, 2000, RIGCO paid $13,000 in interest. Payment-in-kind Subordinated Promissory Notes RIGCO and FPS V have issued payment-in-kind Subordinated Promissory Notes ("PIK Notes") to DeepFlex. The PIK notes bear interest at 12% per annum. At June 30, 1999, the Company owed $78.9 million to DeepFlex which amount is included in PIK notes payable on the combined balance sheet. At June 30, 2000, the Company owed $81.0 million to DeepFlex which amount is included in PIK notes payable on the combined balance sheet. NOTE 6 - RELATED PARTY TRANSACTIONS: DeepTech has entered into management agreements with each of its subsidiaries, including DeepFlex, pursuant to which each affiliate is charged an annual management fee in exchange for operational, financial, accounting and administrative services. The management agreement with DeepTech terminated upon the closing of the merger between DeepTech and El Paso Energy on August 14, 1998. Effective August 14, 1998, Tatham Offshore and DeepFlex entered into a similar management agreement. Costs incurred by DeepFlex are allocated to the combined companies as incurred. Tatham Brothers Loan to Tatham Offshore In connection with the Merger, Tatham Offshore entered into a short-term financing arrangement with Tatham Brothers to provide for funds to (i) satisfy approximately $1.6 million of cash requirements with respect to the Redemption Agreement with the Partnership, (ii) pay $1.4 million to DeepTech in connection with the Management Agreement between Tatham Offshore and DeepTech, (iii) pay approximately $6.9 million to TB Securities with respect to obligations under the Rights Offering, (iv) fund a $7.5 million letter of credit for potential tax liabilities, (v) refinance $5.1 million in existing loans to DeepFlex and (vi) pay fees and expenses associated with the short-term financing. Tatham Brothers is an affiliate of Thomas P. Tatham and the parent company of TB Securities. The short-term financing bears interest at the rate of 12% per annum and is due on January 15, 1999. It is secured by a F-37 90 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) pledge of DeepFlex of its interest in a certain payment-in-kind Subordinated Promissory Notes (see above) issued by RIGCO and FPS V, which has a current outstanding balance of approximately $81.0 million. NOTE 7 - INCOME TAXES: The Companies were included in the consolidated federal income tax returns filed by DeepTech for periods prior to June 25, 1998. DeepFlex and DeepTech have entered into a tax sharing agreement providing for the manner of determining payments with respect to federal income tax liabilities (Note 2). Such agreement terminated on June 25, 1998 when DeepTech contributed its outstanding shares of capital stock in DeepFlex to Tatham Offshore. This agreement has been replaced with a tax sharing agreement between DeepFlex and Tatham Offshore. There were no intercompany charges for federal income taxes for the period ended June 30, 2000, 1999 and 1998. No amounts were due for federal income taxes at June 30, 2000, 1999 or 1998. NOTE 8 - SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS: Cash paid, net of amounts capitalized, during each of the periods presented

NOTE 9 - COMMITMENTS AND CONTINGENCIES: In the ordinary course of business, the Companies are 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 the results of operations of the Companies. 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 Companies were 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 Companies have 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, 2000, RIGCO had recorded a $7.4 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 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. In May 2000, F-38 91 RIGCO NORTH AMERICA, L.L.C. FPS III, INC. FPS V, INC. FPS VI, L.L.C. DEBTORS-IN-POSSESSION NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED) RIGCO joined Sedco Forex Corporation and Sedco Forex Canada Limited as defendants in this action. Trial is currently set for May 2001. NOTE 10 - SEGMENT INFORMATION: The Financial Accounting Standards Board 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 Company operates in one segment, the offshore contract drilling business. Following is a summary of revenues by geographic areas for offshore contract drilling segments. Revenues are attributed to countries based on the location of service provided.

In fiscal year 2000, Husky Oil Operations Limited accounted for $13.4 million of drilling services revenue. In fiscal year 1999, Shell accounted for $22.9 million and Husky Oil Operations Limited accounted for $14.7 million of drilling services revenue. In fiscal year 1998, Amoco Canada Petroleum Company Ltd. accounted for $23.6 million of drilling services revenue, Shell accounted for $15.6 million of drilling services revenue, Pennzoil Exploration and Production Company accounted for $14.4 million of drilling services revenue and Phillips Petroleum Company accounted for $7.8 million of drilling services revenue. No other customer accounted for more than 10 percent of consolidated revenue in 2000, 1999 or 1998. F-39 92 INDEX TO 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). 93 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). 94 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). 95 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). 96 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). 97 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 (filed as Exhibit 10.48 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 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 (filed as Exhibit 10.49 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 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 (filed as Exhibit 10.50 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 10.51 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, Commission File No. 0-22892 and incorporated herein by reference). 10.52 Supplement to Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection (filed as Exhibit 99.2 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Commission File No. 0-22892 and incorporated herein by reference). 10.53 Second Supplement to Stipulation and Order Authorizing Continued Use of Cash Collateral and Adequate Protection (filed as Exhibit 99.3 to Tatham Offshore's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Commission File No. 0-22892 and incorporated herein by reference). 21.1 List of Subsidiaries of Tatham Offshore, Inc. (filed as Exhibit 21.1 to Tatham Offshore's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, Commission File No. 0-22892 and incorporated herein by reference). 23.1* Consent of Independent Accountants, PricewaterhouseCoopers LLP. 98 24.1 Powers of Attorney (included on the signature page on this Annual Report on Form 10-K). 27.1* Financial Data Schedule. ---------- * Filed herewith

TATHAM OFFSHORE INC 10-K