<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 May 14, 1996 there were 24,956,033 outstanding shares of TGX
Corporation Common Stock, $.01 par value.
<PAGE>
TGX CORPORATION
Report on Form 10-QSB For The Quarter Ended March 31, 1996
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information 1
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet -
March 31, 1996 and December 31, 1995 2
Consolidated Statement of Operations -
Three Month Periods Ended March 31, 1996 and 1995 3
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Part II. Other Information 15
</TABLE>
<PAGE>
TGX Corporation
Report on Form 10-QSB For the Quarter Ended March 31, 1996
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-KSB for the year ended December 31, 1995. 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 March 31, 1996 and the results of its operations and
cash flows for the three month period ended March 31, 1996. Results of
operations for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. 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-KSB for the year
ended December 31, 1995.
1
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited) Note 1
<TABLE>
<CAPTION>
March 31, December 31,
Thousands, except for share data) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 137 $ 384
Accounts receivable, net of allowance for doubtful accounts of $320 1,227 1,141
Accounts receivable from affiliates, net - 6
Other current assets 19 51
- -------------------------------------------------------------------------------------------
Total current assets 1,383 1,582
- -------------------------------------------------------------------------------------------
Property and equipment:
Oil and natural gas properties 11,552 11,340
Other property and equipment 204 203
Accumulated depletion, depreciation and amortization (4,362) (4,132)
- -------------------------------------------------------------------------------------------
Property and equipment, net 7,394 7,411
- -------------------------------------------------------------------------------------------
Investment in Comite Field Plant Venture 678 739
Other assets 49 59
- -------------------------------------------------------------------------------------------
Total other assets 727 798
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,504 $ 9,791
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 2,880 $ 3,353
- -------------------------------------------------------------------------------------------
Total current liabilities 2,880 3,353
- -------------------------------------------------------------------------------------------
Long-term debt - Note 2 700 500
- -------------------------------------------------------------------------------------------
Total liabilities 3,580 3,853
- -------------------------------------------------------------------------------------------
Commitments and contingencies - Note 3
Redeemable Senior Preferred Stock, 8,851,360 issued;
redemption value $88,514,000 66,365 61,737
- -------------------------------------------------------------------------------------------
Stockholders' deficit:
9% Cumulative Convertible Preferred stock, 300,000
shares issued plus 165,000 shares to be issued for dividends 465 458
Common stock, 28,976,791 shares issued; 24,956,033 outstanding 290 290
Additional paid-in capital 1,483 1,422
Accumulated deficit (62,679) (57,969)
- -------------------------------------------------------------------------------------------
Total stockholders' deficit (60,441) (55,799)
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,504 $ 9,791
===========================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited) Note 1
<TABLE>
<CAPTION>
Three Months Ended March 31,
- ---------------------------------------------------------------------
(Thousands of dollars, except per share data) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
REVENUES
Oil and natural gas sales $ 1,188 $ 967
Natural gas gathering 58 61
Equity earnings in Comite Plant Venture 197 108
Other, net 23 4
- ---------------------------------------------------------------------
1,466 1,140
- ---------------------------------------------------------------------
COSTS AND EXPENSES
Operating expenses 564 438
Depletion, depreciation and amortization 228 182
General and administrative expenses 660 414
Interest 36 35
- ---------------------------------------------------------------------
1,488 1,069
- ---------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (22) 71
Extraordinary gain - Note 3 - 118
- ---------------------------------------------------------------------
NET INCOME (LOSS) (22) 189
Accretion of Senior Preferred redemption value (1,416) (1,133)
Preferred stock dividends (3,272) (3,356)
- ---------------------------------------------------------------------
NET LOSS APPLICABLE TO COMMON STOCK $(4,710) $(4,300)
=====================================================================
NET LOSS PER SHARE OF COMMON STOCK $(0.19) $(0.17)
=====================================================================
AVERAGE COMMON SHARES OUTSTANDING 24,956 25,314
=====================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) Note 1
<TABLE>
<CAPTION>
Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------------
(Thousands of dollars) 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (22) $ 189
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depletion, depreciation and amortization 228 182
Amortization of debt transaction costs and stock compensation 5 34
Distributions in excess of equity earnings 61 45
Extraordinary gain - (118)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (86) 1
Decrease in accounts receivable from affiliates 6 213
Decrease in other current assets 32 20
Decrease in accounts payable and accrued expenses (473) (509)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (249) 57
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net (214) (21)
(Increase) decrease other 16 (4)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (198) (25)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowing pursuant to revolving credit facility 200 100
Principal payments on long-term debt and notes payable - (489)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 200 (389)
- ---------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (247) (357)
Cash and cash equivalents at beginning of period 384 676
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 137 $ 319
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<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 and in oil and natural gas exploration for its direct
account and, previously, beneficially through general and limited partnerships
which were sold to public and private investors. 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, 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".
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 20%. For proved undeveloped properties, the RV was
determined to be 50% of discounted future net revenues. For the purpose of
calculating future net revenues of oil and natural gas properties, then
current oil and natural gas prices were escalated at five percent per annum
to certain maximum amounts and then current operating costs and expenses
were escalated at four percent per annum for the economic life of the
properties. The initial price for natural gas dedicated under the contract
(the "Contract") with National Fuel Gas Distribution Corporation ("NFG"),
which is currently a matter being litigated, was equal to 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 paid since September 1984 and
the 90% of No. 6 Fuel Oil Price.
Current assets and liabilities were recorded at book value which
approximates RV. Long-term liabilities were recorded at the present values
of amounts to be paid and
5
<PAGE>
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 (the "Senior
Preferred") to be 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
present value of liabilities plus (ii) the par value of the pre-
consummation equity interests. The accretion of the difference between the
recorded value and the $10 per share redemption amount of the Senior
Preferred will be recorded as a reduction of income applicable to common
stockholders over a period of approximately 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.
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 March 31, 1996, the
redemption value and accrued dividends related to the Senior Preferred were
$88,514,000 and $43,693,000 respectively. The Senior Preferred dividends must
be paid in full prior to paying any other dividends.
2. LONG-TERM DEBT AND NOTES PAYABLE
As of March 31, 1996 and December 31, 1995, the components of long-term debt
were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
March 31, December 31,
(Thousands of dollars) 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Bank borrowings:
Revolving credit (secured) $ 700 $ 500
Less current maturities - -
- -------------------------------------------------------
Long-term debt $ 700 $ 500
=======================================================
</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. The Bank One facility bears interest at Bank One's
stated rate plus two percent and is secured by substantially all of the
Company's oil and gas properties. The Bank One facility at March 31, 1996 had
a borrowing
6
<PAGE>
base of $2,350,000 and is redetermined every six months or at Bank One's
discretion. Under the current redetermination facility, borrowings are payable
through monthly principal reductions of $50,000. The loan was initially
repayable in 36 months and matures on July 13, 1997. Due to the excess of
borrowing base over year end borrowings outstanding and the current monthly
facility reduction rate, no current maturities for debt are reflected. The Bank
One facility requires the maintenance of certain financial ratios including a
working capital ratio, after excluding certain liabilities and other adjustments
as allowed under the facility, of 1 to 1 and a tangible net worth, including
Senior Preferred stock, of a minimum of $5,000,000, and other financial ratios.
Simultaneously with the securance of the Bank One facility, 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 ("NFG Litigation"). See Note 3
below.
Prior to restructuring its debt through establishment of the Bank One
facility, the Company had been subject to the terms of an Amended and Restated
Credit Agreement (the "Amended Credit Agreement") with BMO which was entered
into in February 1992 and amended thereafter and which essentially continued and
preserved the prior revolving credit agreement. Effective December 31, 1992, the
Company had been notified by BMO that an event of default had occurred under the
Amended Credit Agreement, and as a result, BMO had the right to take certain
actions under such Amended Credit Agreement including, but not limited to, the
acceleration of all of the then outstanding BMO obligations.
In January 1994, in conjunction with the Company's sale of certain assets to
Belden & Blake Corporation ("BBC"), the Company made a debt service payment of
approximately $14.3 million to BMO. On July 13, 1994, in connection with the
series of agreements entered into between the Company and Bank One, the Company
immediately borrowed funds under the Bank One facility and paid approximately
$1,452,000 to BMO and simultaneously therewith, BMO released all of its liens on
the Company's properties with the exception of its lien on the Company's NFG
Litigation. As part of the loan restructuring, BMO converted $4,652,000 of its
outstanding indebtedness 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"). On December 31, 1995, the Company and
BMOF executed the first amendment to the credit agreement. Pursuant to the
amended agreement, TGX and BMOF will share equally any NFG Litigation proceeds
up to $8 million. BMOF shall receive 100% of any proceeds in excess of $8
million until the total received by BMOF equals the $4,652,000 plus any accrued
interest. Thereafter, TGX will receive all funds until the proceeds it has
recovered equals the proceeds received by BMOF. Any additional NFG Litigation
proceeds available shall be shared equally by TGX and BMOF. If NFG Litigation
proceeds are insufficient to repay the BMOF loan, plus applicable interest, the
Company will have no further obligation for such repayment. 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 March 31, 1996, total accrued interest pursuant
to the BMOF note was $833,000 of which $449,000 has been paid through the
issuance of additional notes to BMOF. See Note 4 "Subsequent Event," for a
discussion of the settlement of NFG Litigation and payment of the BMOF loan.
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
7
<PAGE>
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, were to be applied toward the balances due. In early
1995, the Company negotiated settlement with all of the Administrative Note
holders. As a result of negotiated settlements and forfeitures, the Company
reflected an extraordinary net gain in 1995 of $118,000.
During the first quarter of 1995, the Company paid all remaining perfected
Administrative Notes at book value except for one claimant whose Administrative
Note of $40,000 was settled for a payment of $26,000. Those claimants who had
not timely executed the required releases and perfected their claim, were deemed
to have forfeited their claim rights pursuant to the Plan. As a result of the
discount settlement and claim forfeitures, the Company recorded an extraordinary
gain of $110,000 in the current quarter.
3. COMMITMENTS AND CONTINGENCIES
NFG Litigation
In 1974, predecessors of TGX as seller and NFG as buyer entered into a gas
purchase and sale contract (the "NFG Contract") which, in 1983, the New York
State Public Service Commission (the "PSC") determined, in its Opinion No. 83-26
("Opinion 83-26"), that the pricing provision was unacceptable.
A dispute arose between NFG and TGX as to whether the NFG Contract remained
in force after Opinion 83-26, and, if it did, what price the NFG Contract
prescribed starting in December, 1983. In November, 1984, NFG commenced an
action in the United States District Court for the Western District of New York
(Civ. No. 84-1372E) (the "District Court") seeking a declaration of the rights
and obligations of the parties under the NFG Contract after Opinion 83-26. TGX
counterclaimed for damages claiming that NFG had breached the terms of the NFG
Contract. The PSC intervened as a plaintiff in the District Court action. In
January, 1991, the District Court declared that because Opinion 83-26 had
abrogated an essential term of the NFG Contract, it had voided the entire NFG
Contract.
In December, 1991, the Federal Court of Appeals for the Second Circuit (the
"Second Circuit") reversed the judgment of the District Court and held that the
NFG Contract had not been voided. The Second Circuit permitted TGX to continue
to deliver gas under the NFG Contract, but left open the issue of the
appropriate price under the NFG Contract.
The Second Circuit remanded the case to the District Court for further
proceedings consistent with its decision, TGX took the position that it was
entitled to recover Natural Gas Policy Act ("NGPA") prices. NFG has taken the
position that the PSC imposed a ceiling on all future gas purchases under the
NFG Contract based on the price of No.6 fuel oil.
8
<PAGE>
On remand from the Second Circuit, in January 1993, the District Court
granted TGX's motion for partial summary judgment regarding the price to be paid
under the NFG Contract. In response to NFG's request for clarification, the
District Court stated in July 1993 that its January ruling "did not determine
the just and reasonable price for the gas pursuant to [New York Public Service
Law] (S)110(4), set a contract price for the duration of the contract, resolve
any defenses presented by NFG, determine whether such obligation continues until
the present time, or rule on any deregulation issues."
In December 1992, NFG filed a motion with the PSC requesting a hearing to
determine pricing issues related to the NFG Contract. Pursuant to this request,
the PSC ordered that a proceeding take place. Despite the fact that the PSC had
ordered the proceeding at NFG's request, in Opinion No. 95-5, issued in May,
1995 (the "PSC's 1995 Decision"], the PSC decided that the matter was not ripe
for its review because, in its view, there was currently no contract price in
the NFG Contract for the PSC to review.
In September, 1994, TGX amended and supplemented its counterclaims in the
District Court action to assert additional claims against NFG for breach and
repudiation of the NFG Contract and for punitive damages based upon NFG's bad
faith course of conduct towards TGX. NFG has raised various defenses against
TGX's counterclaim, including claims that TGX itself repudiated and breached the
NFG Contract by its conduct; a claim that the assignment of the NFG Contract to
TGX was not valid; procedural and jurisdictional defenses; defenses based upon
the Public Service Law; a claim that TGX failed to fix a price in good faith
after the issuance of Opinion 83-26; and a claim for setoffs for unspecified
damages to NFG's facilities.
During its Reorganization Proceeding, TGX filed an adversary proceeding (the
"Turnover Proceeding") in Bankruptcy Court to compel NFG to pay the amount due
to TGX pursuant to the provisions of the NFG Contract. Effective June 19, 1992,
TGX and NFG entered into a partial settlement agreement, and, 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. As
set forth in Note 4 below, in April 1996, all matters pertaining to the TGX and
NFG Litigation were settled.
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. In July 1995, certain royalty
owners in the same wells commenced a seperate legal action alleging that TGX and
other working interest owners improperly profited under the terms of a Gas
Gathering and Transportation Agreement dated December 12, 1983. Both cases are
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 prepetition and administrative claims related to an
overriding royalty interest previously conveyed by TGX. During that hearing, the
parties stipulated that the finally allowed amount of the claimant's
9
<PAGE>
prepetition claim would be $600,000. That prepetition claim has been fully
satisfied by the issuance of Senior Preferred. The Company had previously
estimated that prepetition claim in that amount, and therefore it had been
reflected in prior years' financial statements. Subsequent to the March, 1994
hearing, and after post-hearing motions from both TGX and the Claimant, the
Bankruptcy Court entered an order on September 7, 1994 which determined that the
claimant would be granted an allowed administrative expense claim for unpaid
overriding royalties arising post-petition but prior to October 4, 1992 in the
amount of $244,000. That administrative claim, when finally allowed, is to be
treated by the issuance of an Administrative Note under the terms of the Plan,
and is to be payable under the terms of the Plan. The Bankruptcy Court further
ruled that it would not exercise any jurisdiction over claims for alleged unpaid
overriding royalties arising subsequent to October 4, 1992. TGX believes that
the Bankruptcy Court erred in its determination of unpaid overriding royalties,
and has appealed the Bankruptcy Court's ruling to the United States District
Court for the Western District of Louisiana. That appeal has been fully briefed,
but no decision has been rendered. As set forth in Note 4 below, in May 1996,
the Company settled this litigation matter and all actions were dismissed.
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.
Note 4. Subsequent Event
On April 12, 1996, TGX entered into a Settlement Agreement with NFG and the
Public Service Commission of the State of New York. Pursuant to the Settlement
Agreement, TGX received on April 19, 1996, $7,200,000 from NFG and all of the
parties to the Settlement Agreement have dismissed all claims and counterclaims
against each other. Pursuant to agreements previously entered into between TGX
and BMOF, 50% of the gross proceeds received by TGX were paid to BMOF in
cancellation and full payment of the non-recourse secured note in the original
principal amount of $4,600,000 issued by TGX to the Bank of Montreal and
assigned to BMOF in July, 1994. As of the date of settlement, the amount of the
BMOF note was approximately $5,504,000 including accrued but unpaid interest.
Pursuant to a BMOF agreement, BMOF is to reimburse TGX for 50% of all taxes and
royalties, if any, which may be due from such proceeds. As a result of the NFG
settlement, TGX retired all of its then outstanding bank debt of $900,000 on
April 22, 1996.
On May 9, 1996, TGX entered into a settlement agreement regarding the
final allowance of pre-petition and administration claims related to an
overriding royalty interest. Under the agreement, TGX paid $400,000 as full
settlement of all claims and received 60,000 Senior Preferred Shares previously
owned by the settling party. This settlement was fully accrued for as of March
31, 1996.
10
<PAGE>
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
Quarter Ended March 31, 1996 ("1996") Compared to March 31, 1995 ("1995")
Following is a comparison of direct operating activity (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 Change
------- ------ -------
<S> <C> <C> <C>
Oil and natural gas revenues $1,188 $ 967 23%
Natural gas gathering and treating 255 169 51%
Operating and workover expenses (564) (438) 29%
General and administrative expenses (660) (414) 59%
------ ----- --
Operating income $ 219 $ 284 23%
====== ===== ==
</TABLE>
Consolidated revenues for 1996 increased $326,000 or 28% to $1,466,000
as compared to $1,140,000 for 1995. Though revenues for 1996 were higher,
operating income for the current quarter decreased by $65,000 or 23% to $219,000
due primarily to higher 1996 operating and general and administrative expenses.
11
<PAGE>
Revenues
Oil and natural gas sales for 1996 increased 23% due to higher oil and
gas product prices. A summary of oil and natural gas sales volumes and revenues
for the respective periods follows:
Summary of Oil Volumes and Revenues
<TABLE>
<CAPTION>
1996 1995 Change
------- ------- --------
<S> <C> <C> <C>
Oil revenues (in thousands) $ 319 $ 316 1%
======= ======= ==
Oil sales volume (barrels) 16,700 18,400 (9%)
======= ======= ==
Oil average price per barrel $ 19.10 $ 17.12 12%
======= ======= ==
</TABLE>
Summary of Natural Gas Production and Revenue
<TABLE>
<CAPTION>
1996 1995 Change
------ ------ --------
<S> <C> <C> <C>
Natural gas revenues (in thousands) $ 869 $ 652 33%
===== ===== ==
Natural gas production (BCF) .423 .445 (5%)
===== ===== ==
Natural gas average sales price per MCF $2.05 $1.46 40%
===== ===== ==
</TABLE>
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 1996 oil and
natural gas production volumes and 73% 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 quarter of 1996, average gas prices increased by approximately $0.59 per
Mcf from the March 31, 1995 average price of $1.46. Current quarter oil prices
were also higher than the previous period by $1.98 per barrel. Higher oil and
gas product prices resulted in an increase in such revenues for 1996 of
$282,000.
Natural gas sales volumes for 1996, including gas balancing, declined by
22,000 Mcf while oil volumes, including one time adjustments, decreased 1,700
barrels. Included in 1995 gas revenues is approximately 89,000 Mcf or $138,000
related to gas balancing revenues. The Company records gas revenues on the net
sales method and thus revenues are recorded when received or operations merit
accrual. Excluding gas balancing revenues, gas sales volumes for 1996 increased
by 67,000 Mcf or 18% to the comparable quarter. Oil volumes for 1995 also
benefited by approximately 7,200 barrels or $116,000 related to a one-time
payout adjustment. Excluding the payout adjustment barrels, 1996 oil sales
volumes increased by 48% as compared to 1995.
Natural gas gathering and treating revenues increased by 51% to $255,000 in
1996 as compared to $169,000 in 1995. This increase in primarily attributable
to recoupment of previously deferred treating fees and higher per Mcf contract
treating costs.
12
<PAGE>
Costs and Expenses
Consolidated costs and expenses for 1996 increased by $418,000 or 39% to
$1,488,000 as compared to $1,069,000 for 1995. The increase in expenses was due
primarily to higher 1996 operating and general and administrative expenses.
For 1996, total operating expenses increased $126,000 or 29% to $564,000 as
compared to $438,000 for 1995. Included in 1996 and 1995 operating expenses are
workover costs totaling $86,000 and $119,000, respectively. Severance taxes,
which are also included in operating expenses, included a one-time benefit
related to a pre-petition tax settlement of $42,000 in 1995. Excluding workover
costs and severance taxes, 1996 and 1995 operating expenses totaled $417,000 and
$317,000, respectively, and represented 35% and 32% of oil and gas sales,
respectively.
Depletion, depreciation, and amortization ("DD&A") expense increased $46,000
or 25% to $228,000 in 1996 from $182,000 in 1995 due primarily to a higher
weighted average DD&A rate per equivalent Mcf. The weighted average DD&A rate
for 1996 on an equivalent Mcf basis is $0.41 as compared to 1995's rate of
$0.30.
General and administrative expenses in 1996 increased by $246,000 or 59% to
$660,000 from $414,000 in 1995 due to additional 1996 legal costs and 1995
including reimbursements from previously managed partnerships. Legal costs for
1996 exceeded 1995 costs by $67,000 primarily due to increased activity
regarding the NFG Litigation. This litigation was settled subsequent to quarter
end (See Note 4). During late 1995, the Company as part of its plan of
divesting non-strategic assets, liquidated the remaining eight managed
partnerships. As a result, 1995 general and administrative costs benefited from
partnership reimbursements of approximately $40,000 per month.
Interest expense for 1996 and 1995 was relatively unchanged. Included in both
periods is $9,000 of amortization of credit facility establishment costs which
are being amortized over the initial term of the facility.
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 25% to $1,416,000 for 1996 as compared to $1,133,000 in 1995.
Pursuant to the terms of the Plan, dividends for the Senior Preferred are
calculated at 10%, compounded annually and resulted in dividends for 1996 of
$3,272,000 as compared to $3,356,000 for 1995.
FINANCIAL CONDITION
During the first quarter of 1996, the Company's total capital expenditures
were $214,000 and were primarily related to development drilling activity. The
Company also incurred workover costs of $86,000.
At March 31, 1996, the Company had a working capital deficit of $1,497,000
which included $452,000 related to various pre-petition obligations. The
current deficit represents a decrease of $274,000 from the prior year end
deficit. Based on current borrowing availability and projected 1996 activity,
capital resources are deemed sufficient for current operating needs.
13
<PAGE>
The Bank One credit facility borrowings outstanding as of March 31, 1996
totaled $700,00 with a borrowing base of $2,350,000. The borrowing base is
reduced monthly by $50,000. Due to the excess borrowing base over quarter end
borrowings outstanding and the current monthly facility reduction rate, no
current maturities for debt are reflected. The borrowing base is redetermined on
a semi-annual basis or at any time at Bank One's election. The facility is
secured by substantially all of the Company's assets and includes financial and
default covenants standard to the industry. Pursuant to the terms of the
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 Bank One credit facility was
initially repayable in 36 month period and all borrowings outstanding are due on
July 13, 1997.
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 March 31, 1996, the
Senior Preferred redemption value including accrued dividends, was $66,365,000.
This 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 March 31, 1996, the Stockholders' deficit was $60,458,000. Due to the
dividend requirements for the Senior, Junior, and Old Preferred Stock and
accretion of the redemption value of Senior Preferred, under the current capital
structure, it is probable that the Company's Stockholders' equity will remain a
deficit for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
For 1996 to date, the Company's cash provided by operating activities was a
deficit of $249,000. The deficit was the result of changes in working capital.
Included in cash provided by operating activities is cash received of
approximately $258,000 from the Company's 35% equity investment in the Comite
Plant Venture.
The Bank One credit facility has a current borrowing base of approximately
$2.35 million of which borrowings outstanding totaled $700,000 and letter of
credit commitments totaled $25,000. Based on the borrowing base and borrowings
and commitments, the Company at quarter end had availability under the credit
facility of $1,625,000. Though the borrowing base is reduced monthly by $50,000
and all amounts borrowed are due July 13, 1997, availability under the facility
is deemed sufficient for current operating activities.
Subject to the availability of cash flow for 1996, the Company's capital
expenditure budget will be substantially related to the development of proved
developed non-producing and undeveloped reserves or similar risk type projects.
The Company shall also continue to review its investment opportunities,
consistent with its available capital, to determine if asset enhancement can be
best obtained through either development of existing Company reserves, drilling
and/or acquisition.
As detailed in Note 4, subsequent to quarter end the Company settled
its NFG Litigation resulting in the Company receiving, after BMOF repayment,
$3,600,000. A portion of these proceeds were utilized to repay the $900,000 of
then existing bank debt and to fund the $400,000 litigation settlement of the
pre-petition and administrative claims related to an overriding royalty.
14
<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-KSB, 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 March 31, 1996, 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: - None
(b) Reports on Form 8-K
Settlement Agreement among the Company, National Fuel Gas Distribution Company,
and the New York Public Service Commission dated as of April 12, 1996.
(Incorporated by reference to Exhibit 1 of Form 8-K dated April 30, 1996).
15
<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: May 14, 1996 By: /s/ Michael A. Gerlich
-------------------------
Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 137
<SECURITIES> 0
<RECEIVABLES> 1,547
<ALLOWANCES> 320
<INVENTORY> 0
<CURRENT-ASSETS> 1,383
<PP&E> 11,756
<DEPRECIATION> 4,362
<TOTAL-ASSETS> 9,504
<CURRENT-LIABILITIES> 2,880
<BONDS> 0
66,365<F1>
458
<COMMON> 280
<OTHER-SE> (61,196)
<TOTAL-LIABILITY-AND-EQUITY> 9,504
<SALES> 1,246
<TOTAL-REVENUES> 1,466
<CGS> 564
<TOTAL-COSTS> 564
<OTHER-EXPENSES> 888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> (22)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,710)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<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 dividends paid to date.
</FN>
</TABLE>
