<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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 0-10201
TGX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-0890264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Pennbright, Suite 200
Houston, Texas 77090
(Address of principal executive offices) (Zip Code)
(713) 872-0500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for 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 whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- _____
As of November 13, 1995 there were 24,956,033 outstanding shares of TGX
Corporation Common Stock, $.01 par value.
Page 1 of 20
<PAGE>
TGX CORPORATION
Report on Form 10-Q For The Quarter Ended September 30, 1995
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information.............................................. 3
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994...................... 4
Consolidated Statement of Operations -
Three and Nine Month Periods Ended September 30, 1995 and 1994 5
Consolidated Statement of Cash Flows -
Three and Nine Month Ended September 30, 1995 and 1994........ 6
Notes to Consolidated Financial Statements (Unaudited)........ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 13
Part II. Other Information................................................. 18
</TABLE>
Page 2 of 20
<PAGE>
TGX Corporation
Report on Form 10-Q For the Quarter Ended September 30, 1995
Part I. Financial Information
Item 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of TGX
Corporation ("TGX") and its subsidiaries (collectively the "Company") have been
prepared in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements", and accordingly do not include all information and notes required
under generally accepted accounting principles for complete financial
statements. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994. In the opinion of the
Company's management, these interim financial statements contain all adjustments
necessary for a fair presentation, in all material respects, of the Company's
financial position as of September 30, 1995 and the results of its operations
and cash flows for the nine month period ended September 30, 1995. Results of
operations for the nine month period ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. It is recommended that these unaudited consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
Page 3 of 20
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited) Note 1
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except for share data) 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 260 $ 676
Accounts receivable, net 962 1,206
Accounts receivable from affiliates, net 100 504
Other current assets 76 60
- - --------------------------------------------------------------------------------
Total current assets 1,398 2,446
- - --------------------------------------------------------------------------------
Property and equipment:
Oil and natural gas properties 10,661 10,407
Other property and equipment 209 157
Accumulated depletion, depreciation and amortization (3,928) (3,307)
- - --------------------------------------------------------------------------------
Property and equipment, net 6,942 7,257
- - --------------------------------------------------------------------------------
Investment in Comite Field Plant Venture 783 878
Other assets 58 95
- - --------------------------------------------------------------------------------
Total other assets 841 973
- - --------------------------------------------------------------------------------
TOTAL ASSETS $ 9,181 $ 10,676
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 2,813 3,515
Accounts payable to affiliates 43 242
Notes payable - Note 3 - 171
- - --------------------------------------------------------------------------------
Total current liabilities 2,856 3,928
- - --------------------------------------------------------------------------------
Long-term debt - Note 3 200 1,150
- - --------------------------------------------------------------------------------
Total liabilities 3,056 5,078
- - --------------------------------------------------------------------------------
Commitments and Contingencies - Note 4
Redeemable Senior Preferred Stock, 7,484,656 shares
issued, 1,494,590 shares to be issued; redemption
$89,792,000 58,190 44,602
- - --------------------------------------------------------------------------------
Stockholders' deficit:
9% Cumulative Convertible Preferred stock, 300,000
shares issued plus 151,000 shares to be issued for
dividends 451 431
Common stock, 28,976,791 shares issued
and 24,956,033 outstanding 290 290
Additional paid-in capital 1,361 1,179
Accumulated deficit (54,167) (40,904)
- - --------------------------------------------------------------------------------
Total stockholders' deficit (52,065) (39,004)
- - --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,181 $ 10,676
================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 4 of 20
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) Note 1
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands, except per share data) 1995 1994 1995 1994
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
- - -----------------------------------------------------------------------------------------------------
Oil and natural gas production $ 830 $ 1,296 $ 2,492 $ 3,285
Natural gas gathering 72 64 197 243
Share of earnings of natural gas treating plant 142 112 358 312
Other, net (Note 5) 197 (9) 290 1,013
- - -----------------------------------------------------------------------------------------------------
1,241 1,463 3,337 4,853
- - -----------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating expenses 503 827 1,492 1,771
Depletion, depreciation and amortization 249 790 620 1,754
General and administrative expenses 253 239 835 1,354
Exploration costs 19 - 57 -
Interest 13 43 71 631
- - -----------------------------------------------------------------------------------------------------
1,037 1,899 3,075 5,510
- - -----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT AND EXTRAORDINARY GAIN 204 (436) 262 (657)
Income tax benefit 150 - 150 -
- - -----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 354 (436) 412 (657)
Extraordinary gain - Note 3 - 4,288 93 4,288
- - -----------------------------------------------------------------------------------------------------
NET INCOME 354 3,852 505 3,631
Accretion of Senior Preferred redemption value (1,532) (1,020) (3,585) (2,906)
Preferred stock dividends, net (3,431) (2,717) (10,181) (8,063)
- - -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $(4,609) $ 115 $(13,261) $(7,338)
=====================================================================================================
PER SHARE OF COMMON STOCK AMOUNTS:
Before extraordinary gain $(0.18) $(0.17) $(0.53) $(0.46)
Extraordinary gain - 0.17 - 0.17
- - -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(0.18) $0.00 $(0.53) $(0.29)
- - -----------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 24,956 25,314 24,956 25,314
=====================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 5 of 20
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) Note 1
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(In thousands) 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 412 $ (657)
Adjustments to reconcile net income (loss)
before extraordinary gain to cash provided by
operating activities:
Depletion, depreciation and amortization 620 1,754
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 244 (140)
Decrease in accounts receivable from affiliates, net 205 782
Decrease (increase) in other current assets (16) 15,145
Decrease in accounts payable and accrued expenses (702) (4,730)
- - -------------------------------------------------------------------------------
Net cash provided by operating activities 763 12,154
- - --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (306) (418)
Proceeds from asset sale, net - 1,244
(Increase) decrease in other assets 155 (65)
- - --------------------------------------------------------------------------------
Net cash provided by (used by) investing activities (151) 761
- - --------------------------------------------------------------------------------
Cash flows from financing activities:
Advances pursuant to Revolving Credit Facility 350 1,725
Principal payments on long-term debt (1,300) (15,128)
Principal payments on notes payable (78) (83)
- - --------------------------------------------------------------------------------
Net cash used by financing activities (1,028) (13,486)
- - --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (416) (571)
Cash and cash equivalents at beginning of period 676 1,220
- - --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 260 $ 649
================================================================================
Supplemental Disclosure of Non-Cash
Financing Activities:
Forgiveness of bank debt and other notes payable $ 93 $ 4,288
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 6 of 20
<PAGE>
TGX Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
TGX Corporation ("TGX") and subsidiaries (collectively, the
"Company"), is a domestic independent energy company engaged in the production
of oil and natural gas. The Company is also engaged in intrastate natural gas
gathering and treating.
On February 22, 1990, TGX filed a voluntary petition in the United
States Bankruptcy Court for the Western District of Louisiana, Shreveport
Division (the "Bankruptcy Court") for reorganization pursuant to Chapter 11,
Title 11 of the United States Code (the "Reorganization Proceeding"). On
January 7, 1992, the Bankruptcy Court confirmed an Amended Plan of
Reorganization ("Plan") for TGX, and the confirmation order became effective
on January 21, 1992 (the "Effective Date"). On September 21, 1992, the
Bankruptcy Court determined that the Plan had been substantially consummated,
and the Bankruptcy Court's order of substantial consummation became final and
nonappealable on October 2, 1992.
As a result of the substantial consummation of the Plan and due to (i)
the reallocation of the voting rights among the equity interests owners and
(ii) the Reorganization Value, as defined below, of TGX's assets being less
than the total of all post-petition liabilities and allowed claims, the effects
of the Reorganization Proceeding were accounted for in accordance with the fresh
start reporting standards promulgated under the American Institute of
Certified Public Accountants Statement of Position 90-7 "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
In conjunction with implementing fresh start reporting, a
reorganization value ("RV") of the Company's assets and liabilities as of
October 2, 1992 was determined by management in the following manner:
The RV of proved oil and natural gas properties and other related assets
was determined based on future net revenues discounted to present value
utilizing a rate of twenty percent (20%). For proved undeveloped
properties, the RV was determined to be fifty percent (50%) of discounted
future net revenues. For the purpose of calculating future net revenues
of oil and natural gas properties, current oil and natural gas prices
were escalated at five percent (5%) per annum to certain maximum amounts
and current operating costs and expenses were escalated at four (4%) per
annum for the economic life of the properties. The initial price for
natural gas dedicated under the contract with National Fuel Gas
Distribution Corporation ("NFG"), which is currently a matter being
litigated, was equal to ninety percent (90%) of the rolling twelve month
average price for No. 6 fuel oil in the Buffalo, New York area (the "90%
of No. 6 Fuel Oil Price"). The RV of oil and natural gas properties also
included $2,905,000 attributable to the difference, plus interest,
between the price that NFG has paid since September 1984 and the 90% of No.
6 Fuel Oil Price.
Page 7 of 20
<PAGE>
Current assets and liabilities were recorded at book value which
approximated RV. Long-term liabilities were recorded at the present values of
amounts to be paid and the pre-consummation stockholders deficit was adjusted
to reflect the par value of pre-consummation equity interests.
The recorded value of the Series A Senior Preferred Stock ("Senior
Preferred") issued pursuant to the Plan was determined based on the difference
between the RV of the Company's assets less the sum of (i) the then present
value of liabilities plus (ii) the par value of pre-consummation equity
interests. The accretion of the difference between the recorded value and the
$10 per share redemption amount of the Senior Preferred has been recorded as a
reduction of income applicable to common stockholders over a period of
approximately ten (10) years.
The RV was determined by management on the basis of its best judgment
of what it considered to be the fair market value ("FMV") of the Company's
assets and liabilities at the time of the valuation after reviewing relevant
facts concerning the price at which similar assets were being sold between
willing buyers and sellers. However, there can be no assurances that the RV and
the FMV are comparable and the difference between the Company's calculated RV
and the FMV may, in fact, be material.
The consolidated financial statements have been prepared on a going
concern basis which contemplates continuity of operations and realization of
assets and liquidation of liabilities in the ordinary course of business.
Certain amounts from the prior year have been reclassified to conform
to current year presentation.
The Senior Preferred has a $10 per share redemption value and has a
provision for a 10% annual compounded cash dividend, payable quarterly,
provided however, that the payment of such dividend does not violate Delaware
law or certain loan covenants. The Company has not paid any dividends since
the Effective Date of the Plan and based on the current financial position of
the Company and bank covenants restricting dividend payments, it does not
expect to make any such dividend payments in the near future. Subject to
Delaware law, the Senior Preferred must be redeemed no later than January 21,
2002. Holders of Senior Preferred have 95% of the voting rights of TGX. As
of September 30, 1995, the redemption value and accrued dividends related to
the Senior Preferred were $89,792,000 and $35,798,000, respectively. The
Senior Preferred dividends must be paid in full prior to paying any other
dividends.
2. SALE OF OIL AND NATURAL GAS PROPERTIES AND RELATED ASSETS
In January 1994, TGX consummated the sale of substantially all of its
New York and Ohio oil and natural gas properties and related assets to Belden
& Blake Corporation ("BBC") for $16.2 million, subject to certain adjustments.
The effective date of this transaction was December 1, 1994. Substantially all
of the net proceeds from this transaction were applied toward the reduction of
TGX's obligation to the Bank of Montreal (Note 3). In conjunction with the
BBC transaction, TGX assigned to BBC its contract with NFG pursuant to which
a substantial portion of TGX's New York natural gas production was marketed.
The assignment of TGX's contract with NFG was made with certain reservations
relating to the litigation and administrative proceedings between TGX and NFG.
Page 8 of 20
<PAGE>
3. LONG-TERM DEBT AND NOTES PAYABLE
As of September 30, 1995 and December 31, 1994, the components of
long-term debt were:
<TABLE>
<CAPTION>
September 30, December 31,
(Thousands of dollars) 1995 1994
- - ------------------------------------------------------------
<S> <C> <C>
Bank borrowings:
Revolving credit (secured) $ 200 $1,150
Less current maturities - -
- - ------------------------------------------------------------
Long-term debt $ 200 $1,150
============================================================
</TABLE>
On July 13, 1994, the Company entered into a series of agreements with Bank
One, Texas N.A. ("Bank One") whereby the Company's then outstanding secured debt
with the Bank of Montreal ("BMO") was restructured and all existing BMO events
of default were resolved. Pursuant to the restructuring, Bank One established a
borrowing-based facility of $2,350,000 under which the Company immediately
borrowed $1,600,000 of which $1,452,000 was paid to BMO. The Bank One debt
represents the only long term debt outstanding at September 30, 1995 and
December 31, 1994 and is secured by substantially all of the Company's oil and
gas properties. The Bank One facility at September 30, 1995 had a borrowing base
availability of $2,240,000 which is reduced by $53,000 per month and is
redetermined every six months or at Bank One's discretion. The loan is
repayable in 36 months through monthly principal reductions. The Bank One
facility requires the maintenance of certain financial ratios including an
adjusted working capital ratio, a tangible net worth ratio, including Senior
Preferred stock, and other financial ratios. The Company was in compliance with
all financial ratios and covenants at September 30, 1995, but can give no
assurance that it will be able to continually meet the Bank One facility ratios
and covenants.
In conjunction with the debt restructuring, BMO released all of its liens on
the Company's properties with the exception of its lien on the Company's
currently pending litigation with NFG pursuant to the NFG Litigation. As part
of the loan restructuring, BMO converted $4,652,000 of its outstanding
indebtedness, including legal transaction costs incurred by BMO, to a non-
recourse note secured only by the NFG Litigation and any proceeds that might be
received therefrom. BMO has assigned its rights to the loan, security, and the
Company's note to BMO's wholly owned subsidiary, BMO Financial, Inc. ("BMOF").
Pursuant to agreement, after repayment of the outstanding BMOF note from NFG
Litigation proceeds, if any, BMOF will, in certain instances, after the Company
has received the same amount as was paid to BMOF, be entitled to receive up to
50% interest in certain additional litigation proceeds. If NFG Litigation
proceeds are insufficient to repay the BMOF note, plus applicable interest, the
Company will have no further obligation for such repayment. Since the BMO loan
has no recourse, the Company recognized an extraordinary gain from debt
forgiveness, net of expenses, of $4,260,000 in the third quarter of 1994. The
BMOF note matures on December 31, 1997, subject to each party having the right
to extend the maturity date and bears interest at the rate of 10% per annum.
However, until December 31, 1997, and for such further time as BMOF elects to
extend the maturity date of such loan, no cash payment for such interest is
required; instead, the Company will pay interest in kind through the issuance of
additional notes to BMOF. As of September 30, 1995, accrued interest pursuant to
the BMOF note was approximately $590,000.
Page 9 of 20
<PAGE>
During the Reorganization Proceeding, the Company incurred and claimants
filed applications for approximately $7,131,000 in administrative fees and
expenses relating to the reorganization ("Administrative Claims"). The Company
objected to certain of the Administrative Claims and negotiated settlement
amounts and terms of payment with certain holders of Administrative Claims. As a
result, administrative claimants, other than the Opposing Administrative
Claimants, upon execution of certain releases in favor of the Company and
others, were entitled to receive promissory notes (the "Administrative Notes")
due December 31, 1994, in satisfaction of each of their unpaid administrative
claim. Substantially all administrative claimants entitled to receive
Administrative Notes, perfected their claims by executing such releases. The
Administrative Notes bore interest at a rate not to exceed 8% and were secured
with certain collateral (the "Consummation Collateral"). If the proceeds related
to the Consummation Collateral were not sufficient to satisfy the Company's
obligations under the Administrative Notes the Company's excess operating funds,
if any, was to be applied toward the balances due. During the third quarter of
1994, the Company negotiated discounted settlements with certain persons holding
Administrative Notes. As a result, Administrative Notes totaling approximately
$24,000 in principal and $11,000 in accrued interest were settled by cash
payments of $7,000 resulting in a 1994 third quarter extraordinary gain of
$28,000.
During 1995, the Company paid all remaining perfected Administrative Notes
at book value except for two claimants whose Administrative Notes totaling
$106,000 in principal and $20,000 in accrued interest were renegotiated with the
Company paying $51,000 in cash and issuing 10,000 shares of Senior Preferred
Stock. Other claimants holding Administrative Notes, including interest, of
$18,000, who had not timely executed the required releases and perfected their
claims, were deemed to have forfeited their claim rights pursuant to the Plan.
As a result of the discounted settlements and claim forfeitures, the Company
recorded an extraordinary net gain during 1995 of $93,000. As a result of the
Administrative Note settlements, all Consummation Collateral was released to the
Company.
As a result of secured debt and Administrative Note forgiveness, the Company
recorded extraordinary gains in 1995 and 1994 of $93,000 and $4,288,000,
respectively.
4. COMMITMENTS AND CONTINGENCIES
NFG Litigation
- - --------------
Since November 30, 1984, TGX has been involved in litigation in the United
States District Court for the Western District of New York ("New York Federal
Court") (Civ. No. 84-1372-E) with NFG concerning the validity of a contract (the
"Contract") pursuant to which TGX (as successor-in-interest to Paragon
Resources, Inc. ("Paragon"), the original contracting party) sold certain
natural gas production to NFG. The litigation addresses, among other things, the
continued validity of the Contract, the price for natural gas sold, and certain
take-or-pay claims.
In December 1983, certain pricing provisions of the Contract were
disapproved by the New York Public Service Commission ("PSC") and as a result,
in January 1991, the New York Federal Court determined that the Contract was
invalidated. However, on December 3, 1991, the Court of Appeals for the Second
Circuit ("Court of Appeals") (Case No. 91-7127) reversed the New York Federal
Court and held that the Contract remains in effect subject to the pricing
provisions set forth therein. The Court of Appeals remanded the case to the New
York Federal Court for further proceedings not inconsistent with the opinion of
the Court of Appeals.
Page 10 of 20
<PAGE>
During the Reorganization Proceeding, TGX filed an adversary proceeding (the
"Turnover Proceeding") in the Bankruptcy Court to compel NFG to pay the amount
due to TGX pursuant to the provisions of the Contract. Effective June 19, 1992,
TGX and NFG entered into a partial settlement agreement regarding the settlement
of some, but not all, of their disputes. Pursuant to the provisions of the
partial settlement agreement, in consideration of a payment of $2,940,000 (the
"Payment") from NFG, TGX (i) dismissed the Turnover Proceeding without prejudice
(ii) released NFG (subject to certain limitations) from any and all liability
and affirmative claims for relief alleged to arise from or based upon certain
evidence presented by TGX in the Turnover Proceeding, and (iii) reserved its
rights regarding the assumption or rejection of certain other relatively minor
gas purchase agreements with NFG.The Payment will be credited against any future
amount due to TGX from NFG, if any.
In July 1992, the New York Federal Court denied a motion filed by NFG for
partial summary judgment wherein NFG sought a finding that it had properly
suspended performance under,and eventually terminated, the Contract. A
subsequent rehearing upheld this conclusion, but determined that certain matters
relating to this issue were questions of fact that could not be resolved by
summary judgment. In December 1992, NFG filed a motion with the PSC requesting
a hearing to determine pricing issues related to the Contract. In 1993, the PSC
determined that it would hold the requested hearing, but in May 1995, the PSC
determined that NFG's requested hearing and the dealings after 1983 between NFG
and TGX did not constitute the type of filing appropriate for PSC review. The
PSC stated that it would not determine whether a price to be paid under the
Contract was appropriate until such time as such price was finally agreed to by
the parties or determined by the New York Federal Court, which would also be
needed to determine the continued viability of the Contract. NFG has brought a
special proceeding for the New York State Supreme Court, Albany County, seeking
to have that court request the PSC to determine the issue raised in NFG's
December 1992 motion. TGX has joined such proceeding as a party.
In January 1993, the New York Federal Court granted TGX's motion for partial
summary judgment regarding the price to be paid under the Contract. Based on
the New York Federal Court's order, TGX has concluded that from December 1983,
until at least, January 1, 1993, the date Federal price controls were
terminated, the Contract price is equal to the lower of (i) the applicable
maximum lawful price for December 1983 and for each month thereafter as
established by the Natural Gas Policy Act ("NGPA") subject to the escalations
provided by the NGPA or (ii) the December 1983 permitted Contract price of
approximately $4.41 per Mcf. The Federal Court's decision might be interpreted
such that the December 1983 permitted contract price would be $4.41 per Mcf
during the winter months and $4.01 per Mcf during the summer months. Based on
TGX's calculations, the gross difference between the price actually paid by NFG
and the price required by the New York Federal Court's order (assuming a
contract price of $4.41 for winter and $4.01 for summer per Mcf) is
approximately $25,033,000 as of September 30, 1995, including permitted
statutory interest. The New York Federal Court's order did not determine the
impact of the termination of the NGPA, the effect of any subsequent PSC order
or NFG's defense, including the alleged repudiation by TGX of the NFG Contract.
As part of its sale of substantially all of its oil and gas properties in Ohio
and New York to BBC, TGX assigned the Contract effective December 1, 1994. TGX's
assignment of the contract did not include TGX's rights in its existing claims
against NFG, any proceeds therefrom, and TGX's rights, claims or causes of
action, even if they had not yet been asserted, that arose prior to the
effective time of the assignment.
In November 1994, the New York Federal Court appointed a Magistrate to review
and hear various aspects of the Federal Court litigation, including certain
motions, scheduling, and certain pre-trial discovery. In July 1995 the
Magistrate issued a scheduling order regarding all pre-trial discovery.
Page 11 of 20
<PAGE>
Other
- - -----
In August 1992, certain unleased mineral interest owners commenced a legal
action against TGX, as operator of certain wells, in the 19th Judicial District
Court for East Baton Rouge Parish, Louisiana (Case Number 383844, Division "A").
The complaint alleges that revenues in excess of the reasonable costs of
drilling, completing, and operating certain wells have not been credited to the
interests of the unleased mineral interest owners. This case is in the
discovery stage and if settlement negotiations are not successful, TGX will
vigorously defend itself in the litigation.
In March 1994, a hearing was conducted in the Bankruptcy Court regarding the
final allowance of pre-petition and administrative claims related to an
overriding royalty interest previously conveyed by TGX. As a result of this
hearing, the Bankruptcy Court established the method for computing these claim
amounts. The parties stipulated that the finally allowed pre-petition claim
amount was $600,000 which has been satisfied with the issuance of Senior
Preferred. Previously, the Company had estimated this claim amount and
therefore it had been included in the financial statements for prior years.
Pursuant to the Bankruptcy Court's order, certain post-petition but prior to
October 2, 1992 claims are to be treated as administrative claims. The
administrative claim amount will be calculated by the claimant, subject to
review and approval by the Company, and pursuant to the terms of the Plan. Any
claims subsequent to October 2, 1992 are subject to the Bankruptcy Court's
review, including ownership of the overriding royalty interest. TGX has
appealed the Bankruptcy Court decision.
On May 31, 1995, the Company entered into a Settlement Agreement among itself,
Paragon Resources, Inc., J. C. Templeton, W. M. Templeton and a number of other
former directors of the Company, trusts on behalf of members of the Templeton
family and other entities pursuant to which all lawsuits between and among the
parties were dismissed with prejudice. In consideration therefore, the Company
received $325,000, an assignment of certain oil and gas leases, and receipt of
past due joint operating expenses payable by certain of the defendants. The
Company released lis pendens against certain of the defendants' properties and
--- -------
conveyed to the defendants an interest in certain properties to which they were
entitled. The parties to the litigation also conveyed to the Company any Common
Stock or Preferred Stock which they held.
From time to time, in the normal course of business, the Company is a party to
various other litigation matters the outcome of which, to the extent not
otherwise provided for, should not have a material adverse effect on the
Company.
Page 12 of 20
<PAGE>
5. OTHER REVENUE
The primary components of other revenue are
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- - -----------------------------------------------------------------
(Thousands of dollars) 1995 1994
- - -----------------------------------------------------------------
<S> <C> <C>
Proceeds from asset sales, net $ 56 $ 877
- - -----------------------------------------------------------------
Interest 148 -
- - -----------------------------------------------------------------
Other 86 136
- - -----------------------------------------------------------------
$ 290 $1,013
- - -----------------------------------------------------------------
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF UNAUDITED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion provides information which management believes is
relevant to an understanding and assessment of the Company's results of
operations, financial condition, and those presently known events, trends or
uncertainties that are reasonably likely to have a material impact on the
Company's future results of operations or financial condition or that are
reasonably likely to cause the historical financial statements not to be
necessarily indicative of future operating results or financial condition. It
should be read in conjunction with the unaudited consolidated financial
statements and related notes appearing elsewhere herein.
RESULTS OF OPERATIONS
Comparison of The First Nine Months of 1995 to the First Nine Months of 1994
- - ----------------------------------------------------------------------------
Current year operations continue to be negatively impacted by low gas prices
while benefiting from lower general and administrative, interest and depletion
and depreciation costs. Total revenues decreased $1,516,000 to $3,337,000
compared to 1994 revenues of $4,853,000. Though 1995 revenues decreased 31%,
direct operating income decreased by only 7% to $663,000. Current period direct
operating results benefitted from one time settlements related to accounts
receivable allowance recoupment and pre-petition state tax settlements of
$425,000 and $252,000, respectively.
Page 13 of 20
<PAGE>
Following is a comparison of direct operating activity (amounts in thousands):
<TABLE>
<CAPTION>
Change
--------------
1995 1994 $ %
-------- -------- ------- -----
- - ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oil and natural gas revenues $ 2,492 $ 3,285 $(793) (24)%
- - ------------------------------------------------------------------------
Natural gas gathering and treating 555 555 - -
- - ------------------------------------------------------------------------
Operating and exploration expenses (1,549) (1,771) (222) (13)%
- - ------------------------------------------------------------------------
General and administrative expenses (835) (1,354) (519) (38)%
- - ------------------------------------------------------------------------
Operating income $ 663 $ 715 $ (52) (7)%
- - ------------------------------------------------------------------------
</TABLE>
Revenues
- - --------
Oil and natural gas revenues for 1995 decreased $793,000 due to
significantly lower gas volumes sold and average prices received. The impact of
lower gas revenues was partially offset by higher oil prices and a slight
increase in oil volumes sold. A summary of oil and natural gas production and
revenues for the respective nine month period follows:
Summary of Oil Production and Revenue
<TABLE>
<CAPTION>
1995 1994 Change
- - ------------------------------------------------------------
<S> <C> <C> <C>
Oil revenues (in thousands) $ 838 $ 729 15%
- - ------------------------------------------------------------
Oil production (barrels) 48,830 47,700 2%
- - ------------------------------------------------------------
Oil average price per barrel $ 17.34 $ 15.28 13%
- - ------------------------------------------------------------
</TABLE>
Summary of Natural Gas Production and Revenue
<TABLE>
<CAPTION>
1995 1994 Change
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Natural gas revenues (in thousands) $1,654 $2,556 (35)%
- - -----------------------------------------------------------------------
Natural gas production (BCF) 1.180 1.392 (15)%
- - -----------------------------------------------------------------------
Natural gas average sales price per Mcf $ 1.40 $ 1.84 (24)%
- - -----------------------------------------------------------------------
</TABLE>
Page 14 of 20
<PAGE>
On an equivalent unit basis (one barrel of oil equals six Mcf of natural gas
on a heating value basis), natural gas represents 80% of TGX's 1995 oil and
natural gas production volumes and 66% of oil and natural gas revenues. Due to
the Company's production being heavily weighted toward gas, its revenues and
cash flow is significantly influenced by changes in gas prices. During the
first nine months of 1995, average gas prices declined by approximately $0.44
per Mcf from the September 30, 1994 average price of $1.84. The 24% decrease in
average 1995 gas prices resulted in $514,000 of lower gas revenues while a
decline in production volumes of 15% lowered 1995 gas revenues by $388,000.
Included in 1995 gas revenues is approximately $143,000 of gas balancing
revenues. The Company records gas revenues on the net sales method and thus
revenues are recorded when received or operations merit accrual.
Natural gas gathering and treating revenues in total were unchanged from 1994.
The decline in gathering revenues resulting from lower production rates was
offset by a reduction in plant treating expense accruals.
The decline in other revenues is primarily due to lower property sale
proceeds in 1995. (See Note 5). During 1994, the Company was actively
liquidating certain managed partnership assets and other non-strategic holdings
and such activity yielded significant financial benefit. The Company is
currently liquidating eight remaining managed partnerships, but any future
benefit from such sales will be minimal due to the Company's small ownership.
Costs and Expenses
- - ------------------
Consolidated costs and expenses for 1995 decreased by $2,435,000 or 44% to
$3,075,000 compared to $5,510,000 for 1994. The significant decrease in
expenses was due primarily to lower general and administrative and interest
costs and a decline in depletion, depreciation and amortization costs, a non-
cash expense.
For 1995, operating expenses decreased $279,000 or 16% to $1,492,000 compared
to $1,771,000 for 1994. Included in 1995 and 1994 operating expenses are
workover costs totaling $222,000 and $108,000 respectively. Workover expenses
represent non-recurring operation costs implemented to enhance or increase
production. Also, in 1995 the Company incurred exploration costs of
approximately $57,000. Pursuant to successful efforts reporting, unsuccessful
exploration costs are expensed as opposed to capitalized. Excluding workover
and exploration costs, 1995 and 1994 operating expenses totaled $1,270,000 and
$1,663,000, respectively, and represented 51% of oil and natural gas revenues
for both 1995 and 1994.
Depletion, depreciation, and amortization ("DD&A") expense decreased
$1,134,000 or 65% to $620,000 in 1995 from $1,754,000 in 1994 due primarily to a
lower weighted average DD&A rate per equivalent Mcf. As a result of the
Company's improving financial condition, the Company determined in late 1994
that it could fund development of its proved undeveloped and proved developed
non-producing reserves. These reserves, which previously had been excluded from
calculating DD&A through the first three quarters of 1994, were included in the
1995 calculation. As a result of this change in calculating DD&A, the weighted
average DD&A rate for 1995 on an equivalent Mcf basis was $0.41 as compared to
1994's rate of $1.39. Had the change in calculating DD&A been reflected in the
first nine months of 1994, DD&A expense for that period would have decreased by
$746,000.
Page 15 of 20
<PAGE>
General and administrative expenses in 1995 decreased by $519,000 or 38% to
$835,000 from $1,354,000 in 1994 primarily due to recoupment of previously
allowed for receivables, state tax settlement and lower staff costs. As
discussed in Note 4, the Company received as settlement of litigation a
combination of cash and properties totaling approximately $425,000. The
$325,000 of cash and $100,000 of estimated fair market value properties received
were deemed as a recoupment of previously allowed for receivables totaling
approximately $2,027,000 and thus was credited against general and
administrative expenses. General and administrative expenses for 1994 included
in accounts receivable allowance recoupment of approximately $242,000. During
the third quarter of 1995, the Company settled certain pre-petition state
franchise taxes for an ultimate payment, including interest, of $139,000. This
discounted settlement resulted in a reduction of previously accrued general and
administrative costs of $166,000. The tax settlement is to be paid over a 15
month period commencing September 30, 1995 with interest of 6%.
The Company also realized 1995 general and administrative savings in the area
of staff costs due to outsourcing of certain accounting functions. Staff costs
net savings (after outsourcing expenses) to date for 1995 has been approximately
$274,000. Total expense reduction savings for 1995 were partially offset by a
decrease in reimbursements from managed partnerships of approximately $196,000,
resulting in a current year reimbursement total of $362,000. The net decrease
in partnership reimbursements was due to the liquidation of approximately 17
partnerships in late 1994. The remaining eight managed partnerships are
anticipated to be liquidated by the fourth quarter of 1995, which will negate
current partnership reimbursements of approximately $40,000 per month.
Interest expense decreased $560,000 or 89% in 1995 to $71,000 from $631,000 in
1994. This decrease is primarily attributable to lower bank borrowings and
interest rates. During 1995, maximum bank borrowings outstanding were
$1,150,000 resulting in a current quarter end balance of $200,000. For the same
period in 1994, borrowings outstanding peaked at $19,499,000 resulting in a
quarter end balance of $1,150,000. As a result of the debt restructuring on
July 13, 1994, the Company's per annum interest rate was reduced from a high of
13% in 1994 to a floating rate of prime plus two percent or approximately 11%
for 1995. Also, included in 1995 interest expense is $27,000 of amortization of
initial credit facility establishment costs. These credit facility
establishment fees are being amortized over the initial term of the facility.
During the third quarter of 1995, the Company recorded a tax benefit of
$150,000 as a result of a reduction in 1994's accrued tax expense. The
reduction in the tax accrual was prompted by benefits derived from recognition
of additional tax basis on sold and abandoned properties.
As discussed in Note 3, the Company recognized in 1995 and 1994, extraordinary
gains related to secured debt and notes payable forgiveness of $93,000 and
$4,288,000, respectively. The significant 1994 gain was primarily related to
the bank debt restructuring completed in July 1994.
The accretion of the Senior Preferred redemption value, a non-cash item, is
calculated based on the interest method. Accordingly, the amount of accretion
increased by 23% to $3,585,000 for 1995 compared to $2,906,000 in 1994.
Pursuant to the terms of the Plan, dividends for the Senior Preferred are
calculated at 10%, compounded annually. Due to the annual compounding factor,
Preferred Stock dividends for 1995 totaled $10,181,000 as compared to $8,063,000
for 1994. The Company has not paid any dividends
Page 16 of 20
<PAGE>
since the Effective Date of the Plan and based on the current financial position
of the Company and bank covenants restricting dividend payments, it does not
expect to make any such dividend payments in the near future.
FINANCIAL CONDITION
For 1995, the Company's capitalized expenditures totaled approximately
$306,000, of which $100,000 related to properties received as a result of
litigation settlement. The Company also incurred workover and exploration costs
of $222,000 and $57,000, respectively.
At September 30, 1995, the Company had a working capital deficit of
$1,458,000 which included $522,000 of pre-petition obligations. Pursuant to
the new secured borrowing base facility, the Company must maintain certain
financial ratios including a current ratio of 1 to 1, after excluding certain
liabilities and making other adjustments as allowed under the facility. After
making such current ratio adjustments, the Company has to date been in
compliance with the current ratio test and other financial ratios. The Company
can give no assurance that it will be able, in the future, to comply with the
current ratio test or any other ratio tests as required under the new credit
facility.
The Company has certain dividend and redemption obligations related to the
Senior Preferred shares. For financial reporting purposes, the Senior Preferred
shares have both debt and equity characteristics. Accordingly, it is not
classified as a component of stockholders' equity. At September 30, 1995, the
Senior Preferred value, including accrued dividends and accretion, was
$58,190,000. The redemption value of the Senior Preferred of $89,792,000 amount
plus any additional accrued dividends must be satisfied before any value can be
attributed to the holders of Old Preferred and Common Stock.
At September 30, 1995, the stockholders' deficit was $52,065,000. Due to the
dividend requirements for the Senior, and Old Preferred Stock and accretion of
the redemption value of Senior Preferred, it is probable that the Company's
Stockholders' equity will remain a deficit for the foreseeable future under the
current capital structure.
LIQUIDITY AND CAPITAL RESOURCES
For 1995, the Company's cash provided by operating activities was $763,000.
During 1995, current operating activities cash flow was benefited by a one-time
litigation settlement of $425,000 and a state franchise tax settlement of
$166,000 plus related interest accrual benefit of $158,000. The Company had a
working capital deficit of $1,458,000 at current quarter end.
The July 13, 1994 debt restructuring with BMO and the establishment of a new
line of credit with Bank One (See Note 3) significantly improved the Company's
liquidity. The new credit facility has a current borrowing base of
approximately $2.2 million of which $200,000 was outstanding at September 30,
1995. Though the borrowing base is reduced monthly by approximately $53,000,
availability under the facility is deemed sufficient for current operating
activities.
Pursuant to the terms of various agreements, the Company, as a working
interest owner, is responsible for marketing its share of natural gas production
from certain properties. If the Company is unable or unwilling to market its
share of natural gas production from a property, its under-produced status is
subject to balancing with other working interest owners who have sold more than
Page 17 of 20
<PAGE>
their pro-rata share of natural gas production. On an aggregate net basis for
certain natural gas properties, it appears that the Company is substantially
under-produced and the Company is conducting negotiations to recoup or otherwise
settle its net under-produced status. During the first nine months of 1995, the
Company recognized $143,000 of gas balancing revenues. The Company can give no
assurance as to its ability to recoup or otherwise settle any net under-produced
status and thus no additional accruals are reflected in the financial
statements.
The Company's capital expenditure budget for the remainder of 1996 and the
foreseeable future will continue to focus on the development of proved developed
non-producing and behind pipe reserves and the drilling of existing proved
undeveloped locations. The Company shall also continue to review investment
opportunities to determine if asset enhancement may be better obtained through
acquisition.
In addition to the on-going oil and gas production operations, a key factor in
the Company's future will be the final resolution of the litigation with NFG.
While the Company has attempted to commence settlement negotiations with NFG, to
date no meaningful discussions have taken place. If a settlement cannot be
reached, the Company is committed to prosecuting this litigation with every
reasonable resource available to it. The outcome of the NFG Litigation, which
may be many years away if a settlement cannot be reached, could materially
affect the Company's future (see Note 4). Under the restructured credit
agreement with BMO (see Note 3), BMO's subsidiary will be entitled to receive
the initial $4,652,000 of any settlement proceeds, plus interest, and in certain
instances, after TGX has received the same initial amount paid to BMO, be
entitled to receive up to 50% of any additional settlement proceeds.
Page 18 of 20
<PAGE>
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
Except as set forth in Note 4 of the Notes to Consolidated Financial Statements
Unaudited included in Part I hereof, since the filing date of the Annual Report
on Form 10-K, there have been no substantial developments related to the legal
proceedings described therein.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) Dividends for the Senior Preferred Stock began accruing on the Effective
Date, however, as of September 30, 1995, no dividends had been declared. The
Senior Preferred Stock will receive a 10% annual compounded cash dividend,
payable quarterly, provided however, that the payment of such dividends does
not violate (i) Delaware Law which prohibits the payment of dividends when
such payment would impair the capital of the Company or (ii) certain
covenants in the Company's Credit Agreement with Bank One, Texas N.A.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -
27 -- Financial Data Schedule
(b) Reports on Form 8-K - None
Page 19 of 20
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TGX CORPORATION
(Registrant)
Date: November 13, 1995 By: /s/ Michael A. Gerlich
--------------------------
Vice President and
Chief Financial Officer
Page 20 of 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 260
<SECURITIES> 0
<RECEIVABLES> 1,415
<ALLOWANCES> (353)
<INVENTORY> 0
<CURRENT-ASSETS> 1,398
<PP&E> 10,870
<DEPRECIATION> (3,928)
<TOTAL-ASSETS> 9,181
<CURRENT-LIABILITIES> 2,856
<BONDS> 0
<COMMON> 290
58,190<F1>
451
<OTHER-SE> (52,806)
<TOTAL-LIABILITY-AND-EQUITY> 6,125
<SALES> 3,047
<TOTAL-REVENUES> 3,337
<CGS> 1,492
<TOTAL-COSTS> 677
<OTHER-EXPENSES> 835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 262
<INCOME-TAX> (150)
<INCOME-CONTINUING> (13,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 93
<CHANGES> 0
<NET-INCOME> (13,261)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
<FN>
<F1>Represents Series A Redeemable Senior Preferred Stock that has a $10
liquidation preference and entitles holder to 10% annual compounded cash
dividend, no dividend paid to date.
</FN>
</TABLE>
