<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 September 30, 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 November 14, 1996 there were 24,955,807 outstanding shares of TGX
Corporation Common Stock, $.01 par value.
<PAGE>
TGX CORPORATION
Report on Form 10-QSB For The Quarter Ended September 30, 1996
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet -
September 30, 1996 and December 31, 1995 2
Consolidated Statement of Operations -
Three and Nine Month Periods Ended September 30, 1996 and 1995 3
Consolidated Statement of Cash Flows -
Three and Nine Months Periods Ended September 30, 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 10
Part II. Other Information 15
</TABLE>
Forward-Looking Statements
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainties, including without limitation, statements about the
costs of exploring and developing new oil and natural gas reserves, the price
for which such reserves can be sold, the Company's attempts to reduce overhead
and eliminate non-core assets, environmental concerns affecting the drilling of
oil and natural gas wells, pending litigation, the possible equity
restructuring, and general market conditions, competition and pricing.
Although the Company believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions
could be inaccurate, and there can therefore be no assurance that the forward-
looking statements included in this Form 10-QSB will prove accurate. Because of
the significant uncertainties inherent in the forward-looking statements
contained in this Form 10-QSB, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
<PAGE>
TGX Corporation
Report on Form 10-QSB For the Quarter Ended September 30, 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 310 of Regulation S-B, "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. These interim financial
statements reflect all adjustments (which were normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the Company's financial position as of September 30, 1996 and the results of its
operations and cash flows for the nine month period ended September 30, 1996.
Results of operations for the nine month period ended September 30, 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.
Page 1
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited) Note 1
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except for share data) 1996 1995
- -------------------------------------- ------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,089 $ 384
Accounts receivable, net of allowance for doubtful accounts of $320 1,005 1,141
Accounts receivable from affiliates - 6
Other current assets 224 51
- ------------------------------------------------------------------------ -------- --------
Total current assets 4,318 1,582
- ------------------------------------------------------------------------ -------- --------
Property and equipment:
Oil and natural gas properties 12,089 11,340
Other property and equipment 264 203
Accumulated depletion, depreciation and amortization (4,873) (4,132)
- ------------------------------------------------------------------------ -------- --------
Property and equipment, net 7,480 7,411
- ------------------------------------------------------------------------ -------- --------
Investment in Comite Field Plant Venture 693 739
Other assets 58 59
- ------------------------------------------------------------------------ -------- --------
Total other assets 751 798
- ------------------------------------------------------------------------ -------- --------
TOTAL ASSETS $ 12,549 $ 9,791
======================================================================== ======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued liabilities - Note 4 $ 2,979 $ 3,353
- ------------------------------------------------------------------------ -------- --------
Total current liabilities 2,979 3,353
- ------------------------------------------------------------------------ -------- --------
Long-term debt - Note 2 - 500
- ------------------------------------------------------------------------ -------- --------
Total liabilities 2,979 3,853
- ------------------------------------------------------------------------ -------- --------
Commitments and contingencies - Note 3
Redeemable Senior Preferred Stock 8,788,571 and 8,851,360
issued, respectively; redemption value $87,886 (1996) and
$88,514 (1995) 75,818 61,737
- ------------------------------------------------------------------------ -------- --------
Stockholders' deficit:
9% Cumulative Convertible Preferred Stock, 300,000 shares
issued plus 178,000 and 158,000, respectively, shares to be issued
for dividends 478 458
Common stock, 28,976,791 shares issued and 24,955,807 outstanding 290 290
Additional paid-in capital 1,604 1,422
Accumulated deficit (68,620) (57,969)
- ------------------------------------------------------------------------ -------- --------
Total stockholders' deficit (66,248) (55,799)
- ------------------------------------------------------------------------ -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 12,549 $ 9,791
======================================================================== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 2
<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) 1996 1995 1996 1995
- ------------------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil and natural gas sales $ 1,146 $ 830 $ 3,473 $ 2,492
Natural gas gathering 65 72 173 197
Equity earnings in Comite Field Plant Venture 130 142 439 358
Litigation settlement, net - Note 2 - - 3,500 -
Gain on property sales - - 145 -
Other 176 200 233 297
- ------------------------------------------------ ------- ------- -------- --------
1,517 1,244 7,963 3,344
------- ------- -------- --------
COSTS AND EXPENSES
Operating expenses 484 503 1,567 1,492
Depletion, depreciation and amortization 268 249 729 620
General and administrative expenses 547 253 1,800 835
Exploration costs - 19 - 57
Interest 24 16 78 78
- ------------------------------------------------ ------- ------- -------- --------
1,323 1,040 4,174 3,082
------- ------- -------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 194 204 3,789 262
Income tax expense (benefit) - (150) 164 (150)
- ------------------------------------------------ ------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY GAIN 194 354 3,625 412
Extraordinary gain - Note 2 - - - 93
- ------------------------------------------------ ------- ------- -------- --------
NET INCOME 194 354 3,625 505
Preferred stock dividends (3,308) (3,431) (9,835) (10,181)
Accretion of Senior Preferred redemption value (1,576) (1,259) (4,441) (3,585)
- ------------------------------------------------ ------- ------- -------- --------
NET LOSS APPLICABLE TO COMMON STOCK $(4,690) $(4,336) $(10,651) $(13,261)
================================================ ======= ======= ======== ========
NET LOSS PER SHARE OF COMMON STOCK:
Before extraordinary gain $(0.19) $(0.17) $(0.43) $(0.53)
Extraordinary gain - - - -
- ------------------------------------------------ ------- ------- -------- --------
NET LOSS PER SHARE OF COMMON STOCK $( 0.19) $(0.17) $(0.43) $(0.53)
================================================ ======= ======= ======== ========
AVERAGE COMMON SHARES OUTSTANDING 24,956 24,956 24,956 24,956
================================================ ======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 3
<PAGE>
TGX Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) Note 1
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(In thousands) 1996 1995
- -------------- ------ -------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,625 $ 505
Adjustments to reconcile net income to cash provided
by operating activities:
Depletion, depreciation and amortization 729 620
Amortization of debt transaction costs and stock compensation 44 64
Distributions in excess of equity earnings 46 95
Gain on property sales (145) -
Extraordinary gain - (93)
Changes in operating assets and liabilities:
Decrease in accounts receivable 136 244
Decrease in accounts receivable from affiliates 6 205
Increase in other current assets (173) (16)
Decrease in accounts payable and accrued liabilities (374) (702)
- ------------------------------------------------------------------- ------ -------
Net cash provided by operating activities 3,894 922
- ------------------------------------------------------------------- ------ -------
Cash flows from investing activities:
Capital expenditures (810) (306)
Proceeds from disposal of assets 145 -
Increase in other assets (24) (4)
- ------------------------------------------------------------------- ------ -------
Net cash used by investing activities (689) (310)
- ------------------------------------------------------------------- ------ -------
Cash flows from financing activities:
Principal payments on long-term debt and notes payable (900) (1,378)
Advances pursuant to revolving credit facility 400 350
- ------------------------------------------------------------------- ------ -------
Net cash used in financing activities (500) (1,028)
- ------------------------------------------------------------------- ------ -------
Net increase (decrease) in cash and cash equivalents 2,705 (416)
Cash and cash equivalents at beginning of period 384 676
- ------------------------------------------------------------------- ------ -------
Cash and cash equivalents at end of period $3,089 $ 260
=================================================================== ====== =======
Supplemental Disclosure of Non-Cash Financing Activities:
Forgiveness of notes payable - $ 93
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 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 was a matter then 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 the pre-consummation stockholders' deficit was
adjusted to reflect the par value of pre-consummation equity interests.
Page 5
<PAGE>
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 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, 1996, the
redemption value and accrued dividends related to the Senior Preferred were
$87,886,000 and $49,777,000, 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 September 30, 1996 and December 31, 1995, the components of long-term
debt were:
<TABLE>
<CAPTION>
September 30, December 31,
(Thousands of dollars) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Bank borrowings:
Revolving credit (secured) $ - $ 500
Less current maturities - -
- -----------------------------------------------------------
Long-term debt $ - $ 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 is secured by substantially
all of the Company's oil and gas properties, and initially bore interest at
Bank One's stated rate plus two percent. Effective September 30, 1996, the
Bank One facility was amended to mature on June 30, 1999, the interest rate
lowered to stated rate plus 1.5% and borrowing base increased to $5,000,000. The
borrowing base is redetermined every six months or at Bank One's discretion and
is reduced monthly by $100,000. The Bank One facility requires 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.
Page 6
<PAGE>
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 then pending litigation with NFG ("NFG Litigation").
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. As set forth above, in July 1994, in
connection with a series of agreements entered into between the Company and Bank
One, the Company 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 (the "BMOF Principal") of its
outstanding indebtedness to a proceeds-sharing arrangement secured only by the
NFG Litigation and any proceeds received therefrom. BMO subsequently assigned
its rights to proceeds-sharing arrangement and security to BMO's wholly owned
subsidiary, BMO Financial, Inc. ("BMOF"). The BMOF Principal was to mature on
December 31, 1997, subject to each party having the right to extend the maturity
date and bore interest at the rate of 10% per annum. However, until December 31,
1997, and for such further time as BMOF elected to extend the maturity date, no
cash payment for such interest is required; instead, the Company was to pay
interest in kind through increases in BMOF Principal balance.
On December 31, 1995, the Company and BMOF executed the first amendment to
the credit agreement. Pursuant to the amended agreement, TGX and BMOF were to
share equally any NFG Litigation proceeds up to $8 million. BMOF was to receive
100% of any proceeds in excess of $8 million until the total received by BMOF
equaled the BMOF Principal plus any accrued interest. Thereafter, TGX was to
receive all funds until the proceeds it had recovered equaled the proceeds
received by BMOF. Any additional NFG Litigation proceeds available were to be
shared equally by TGX and BMOF.
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, on April 19, 1996, TGX received $7.2 million from NFG and all
parties to the Settlement Agreement dismissed all claims and counterclaims
against each other. Pursuant to the amended credit agreements with BMOF, 50% of
the settlement proceeds were paid to BMOF in cancellation and full payment of
proceeds-sharing arrangement, which as of the date of settlement, totaled
approximately $5,378,000, including accrued but unpaid interest. As a result of
the NFG Litigation settlement proceeds and $3.6 million BMOF payment and a
$100,000 payment to another third party entitled to participate in the proceeds,
the Company retained $3.5 million of settlement proceeds and recorded a
corresponding amount as net litigation settlement revenues. 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.
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
Page 7
<PAGE>
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 remaining Administrative Note holders. As a result of
negotiated settlements and forfeitures, the Company reflected an
extraordinary net gain in 1995 of $93,000.
Cash paid for interest during the first nine months of 1996 and 1995 totaled
approximately $53,000 and $51,000, respectively.
3. COMMITMENTS AND CONTINGENCIES
NFG Litigation
- --------------
On April 12, 1996, TGX entered into a Settlement Agreement with NFG and the
Public Service Commission of the State of New York. See Note 2 above.
Other Litigation
- ----------------
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.
In July 1992, certain unleased mineral interest owners commenced a legal
action against TGX, as operator of four wells, in the 19th Judicial District
Court for East Baton Rouge Parish, Louisiana, (Case No. 383844, Division
"A"). The petition alleges that the unleased owners are entitled to a refund of
all revenue paid since first production (between 1982 and 1984) attributable to
their proportionate unit interest which had been paid to TGX and other working
interest owners to offset the proportionate share of costs associated with the
wells attributable to the Plaintiff's mineral interest. TGX has denied that it
is liable on two grounds. First, TGX has argued that the unleased owners
cannot establish their claim under Louisiana law. Second, TGX has argued that
even if a claim can be established, any claim which arose prior to the date of
the entry of the order confirming TGX's Plan has been discharged. To establish
the second defense, TGX filed a lawsuit in the Bankruptcy Court (Case No. 96AP-
1047). Recently, the Bankruptcy Court found that such claims were not
discharged and, consequently denied the relief requested by TGX. TGX has asked
the Bankruptcy Court to reconsider its ruling. In the event the Bankruptcy
Court does not reconsider its ruling, TGX intends to appeal the ruling. In
July 1995, certain royalty owners in the same wells commenced a separate legal
action in U.S. District Court, Baton Rouge, Louisiana (Case No. 95-744)
alleging that TGX and other working interest owners improperly profited under
the terms of a Gas Gathering and Transportation Agreement dated December 12,
1983. Recently, the District Court entered an order granting TGX's motion for
partial summary judgment which held that all of the royalty owners' claims
preceding the filing of the suit by more than three years were time barred. Both
cases are in the early discovery stage and TGX is unable to predict the outcome
of either action. If settlement negotiations are not successful, TGX will
vigorously defend itself in the lawsuits.
Page 8
<PAGE>
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.
Recapitalization Proposal
- -------------------------
TGX has filed a registration statement relating to the merger of TGX with its
wholly-owned subsidiary, GeoStrat Resources, Inc., in order to effect a
recapitalization of its existing security holders. Pursuant to the
recapitalization, holders of TGX Senior Preferred stock would receive one-half
share of GeoStrat Common stock for each share of TGX Senior Preferred they
currently hold. Other series of TGX Preferred stock and TGX Common stock would
be eliminated pursuant to the proposed merger. The Board of Directors retained
American Appraisal Associates, Inc. as an independent consultant to review the
terms of the proposed merger and American Appraisal determined that the proposal
would be fair to the stockholders of TGX from a financial point of view.
The Board of Directors of TGX, which would become the Board of Directors of
GeoStrat if the merger is approved, stated that they believed the proposed
merger would help position GeoStrat to meet the economic and industry needs
presently being placed on TGX as a result of the need to have significantly
greater capital than TGX presently has access to, would create the flexibility
and liquidity required for the future stability and growth, would advance its
strategic objectives by allowing GeoStrat to potentially raise additional
capital, and would enhance the value to the Senior Preferred stockholders by
providing a more readily available public market.
The proposed merger and recapitalization is anticipated to be presented to the
TGX shareholders at a special meeting to be held in either late 1996 or early
1997.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of September 30, 1996 and December 31, 1995, the primary components of
accounts payable and accrued liabilities were:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Accounts payable $ 162 $ 555
Undistributed net oil and natural gas revenue 1,484 1,152
Accrued pre-petition liabilities 354 518
Accrued operating and tax expenses 341 312
Operation advances 201 159
Miscellaneous accruals 437 657
- -----------------------------------------------------------------
$2,979 $3,353
=================================================================
</TABLE>
Page 9
<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
Nine Months Ended September 30, 1996 ("1996") Compared to September 30, 1995
- ----------------------------------------------------------------------------
("1995")
- --------
Consolidated revenues for 1996 totaled $7,963,000, an increase of $4,619,000
from 1995 consolidated revenues of $3,344,000. The substantial revenue increase
for 1996 is due to the receipt of net litigation settlement proceeds of
$3,500,000 related to the NFG Litigation and a $145,000 gain on property sales,
both non-recurring items, combined with improvements in operation areas as
discussed below.
Total costs and expenses for 1996 were $4,174,000, an increase of $1,092,000
or 35% over total costs and expenses for 1995 of $3,082,000. Over half of the
1996 expense increase is related to recognition in 1995 of $425,000 of
receivable allowance recoupment and $166,000 of franchise tax settlement
benefit which decreased reported general and administrative expense for 1995.
Net income before income taxes and extraordinary gain for 1996 was
$3,625,000, as compared to $412,000 for 1995.
Revenues
- --------
Revenues from oil and and natural gas sales for 1996 were $3,473,000, up 39%
or $981,000 over 1995 on improved oil volumes and product prices. A summary of
oil and natural gas sales volumes and revenues for the respective nine month
periods follows:
<TABLE>
<CAPTION>
Summary of Oil Volumes and Revenues
- ---------------------------------------------------------------------
1996 1995 Change
------- ------- -------
<S> <C> <C> <C>
Oil revenues (in thousands) $ 1,112 $ 838 33%
Oil sales volume (barrels) 54,900 48,300 14%
Oil average sales price per barrel $ 20.27 $ 17.34 17%
- ---------------------------------------------------------------------
Summary of Natural Gas Volumes and Revenue
- ---------------------------------------------------------------------
1996 1995 Change
------- ------- -------
Natural gas revenues (in thousands) $2,361 $1,654 43%
Natural gas sales volume (Mmcf) 1,147 1,180 (3)%
Natural gas average sales price per Mcf $ 2.06 $ 1.40 47%
- -------------------------------------------------------------------
</TABLE>
Page 10
<PAGE>
On an equivalent unit basis (one barrel of oil equals six Mcf of natural gas
on a heating value basis), natural gas represents 78% of TGX's 1996 oil and
natural gas sales volumes and 68% of oil and natural gas revenues. Due to the
Company's production being heavily weighted toward gas, its revenues and cash
flow are significantly influenced by changes in gas prices. During 1996,
average gas prices increased to $2.06 or $0.66 per Mcf from the 1995 average
price of $1.40. Current period oil prices were also higher than the previous
period by $2.93 per barrel. Higher oil and gas product prices contributed to an
increase in revenues for 1996 of $915,000.
Natural gas sales volumes for 1996 were 1,147 Mmcf, down 3% from sales
reported in 1995 of 1,180 Mmcf, which included non-recurring adjustments of 154
Mmcf related to gas imbalance cash settlements and 66 Mmcf related to well
payout adjustments. Excluding 1995 gas balancing and payout adjustment volumes,
gas sales volumes for 1996 increased by 186 Mmcf or 19%. The Company records
gas revenues on the net sales method and thus revenues are recorded when
received or operations merit accrual.
Oil volumes for 1996 were 54,900 barrels, up 14% over 1995 volumes of 48,300
barrels, which included non-recurring payout volume adjustments of 7,600
barrels. Excluding the non-recurring volumes recognized in 1995, oil volumes
for 1996 increased 14,200 barrels or 35% as compared to the same period in 1995.
The change in 1996 oil and gas sales volumes resulted in additional 1996 net
revenues of $66,000 compared to those reported in 1995. The sales volume
increases for 1996 reflect the successful results of the Company's acquisition,
drilling and workover activity.
Natural gas gathering revenues and equity earnings in Comite Field Plant
Venture increased by 10% to a combined total of $612,000 in 1996 as compared to
$555,000 in 1995. This increase is primarily attributable to recoupment of
previously deferred treating fees and higher per Mcf contract treating fees.
As previously mentioned, on April 12, 1996 the Company entered into a
settlement agreement with NFG and the Public Service Commission of the State of
New York. Pursuant to the agreement, on April 19, 1996 TGX received $7.2
million from NFG and all parties to the settlement agreement dismissed all
claims and counterclaims against each other. Pursuant to amended credit
agreements with BMOF (See Note 2), 50% of the settlement proceeds were paid to
BMOF in cancellation and full payment, of the proceeds-sharing arrangement. As a
result of the NFG proceeds, the $3.6 million BMOF payment and a $100,000 payment
to another third party entitled to participate in the proceeds, the Company
retained $3.5 million of settlement proceeds and recorded a corresponding one-
time amount as net litigation settlement revenues.
For 1996, the Company recorded property sales and other revenues of $378,000
as compared to 1995 revenues of $297,000. The increase in 1996 revenues is
primarily the result of the Company selling approximately 54 marginal wells for
net proceeds of $145,000 and recognition, in the third quarter, of take-or-pay
contract settlement proceeds of approximately $100,000 with the remaining amount
being primarily attributed to interest income. Included in 1995 other revenues
is $147,000 of interest attributed to a franchise tax settlement and
approximately $56,000 of gain recognized in the liquidation of various Company
managed limited partnerships. The limited partnership liquidation was completed
in late 1995.
Costs and Expenses
- ------------------
Consolidated costs and expenses for 1996 increased by $1,092,000 or 35% to
$4,174,000 as compared to $3,082,000 for 1995. The increase in expenses was
primarily due to higher 1996
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general and administrative expenses and an increase in non-cash depletion,
depreciation and amortization expense.
For 1996, total operating expenses increased $75,000 or 5% to $1,567,000 as
compared to $1,492,000 for 1995. Included in operating expenses are workover
costs, severance taxes and expenses for both pre and post wellhead production
costs. During 1995 the Company also recorded $57,000 of unsuccessful
exploration cost, and for 1996, the Company has not incurred such costs.
Workover costs for 1996 and 1995 totaled $193,000 and $222,000, respectively,
and primarily represent discretionary well production activities that are
implemented to enhance or increase production. A significant portion of the
workover costs incurred are related to the Company's major field in Arkansas and
resulted in significant increases in oil production. Additional workovers are
scheduled for the remainder of 1996.
Severance taxes for 1996 and 1995 were $171,000 and $154,000, respectively.
The increase in severance taxes is related to increased sales volumes and
prices.
Excluding workover costs and severance taxes, 1996 and 1995 operating
expenses totaled $1,203,000 and $1,116,000, respectively, for production costs
through the wellhead (lifting costs), as well as post production costs incurred
beyond the wellhead such as treating, marketing and transportation. Operating
expenses related directly to production for 1996 were $586,000 as compared to
$690,000 for 1995. Production costs for 1996 are relatively flat to 1995, after
excluding 1995 well payout and settlement adjustments of approximately $101,000.
Operating expenses for 1996 were lower in the Company's older fields due to the
sale of marginal wells effective April 1, 1996, but this was offset by the
addition of new properties in 1996 and full current period impact of late 1995
acquisitions. Production costs per equivalent Mcf for 1996 was $0.40 as
compared to $0.46 for 1995.
Post-production costs of $617,000 in 1996 increased approximately $191,000
as compared to 1995 cost of $426,000 primarily due to 1996 contract treating fee
escalations and recognition of previously deferred treating fees pursuant to an
agreement. Post-production costs for 1996 and 1995, per equivalent Mcf, were
$0.42 and $0.29, respectively.
Depletion, depreciation, and amortization ("DD&A") expense in 1996 increased
$109,000 or 10% to $729,000 from $620,000 in 1995 due primarily to an increase
in the weighted average DD&A rate per equivalent Mcf. The weighted average DD&A
rate for the current nine months increased 17% to $0.48 per equivalent Mcf as
compared to 1995's rate of $0.41.
General and administrative expenses in 1996 increased by $965,000 or 116% to
$1,800,000 from $835,000 in 1995 due primarily to expenses associated with the
Company's recapitalization efforts in 1996 and 1995 benefiting from a litigation
receivable recoupment, reimbursements from previously managed limited
partnerships and franchise tax settlement. General and administrative expenses
for 1996 includes $247,000 of professional and other fees related to the
previously announced equity restructuring that would result in an exchange of
the Senior Preferred stock for new common stock while eliminating all existing
preferred and common shares. The Company plans on soliciting shareholder
approval regarding this equity restructuring in either late 1996 or early 1997.
In 1995, the Company recognized a receivable allowance recoupment of $425,000 in
conjunction with litigation settlement regarding affiliated receivables. During
late 1995, the Company, as part of its plan of divesting non-strategic assets,
liquidated its remaining eight managed limited partnerships. Thus, 1995 general
and administrative expense benefited from partnership expense reimbursements of
approximately $338,000. Also, in the third quarter of 1995, the Company
recognized a reduction in franchise tax expense of $166,000 related to a
settlement.
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<PAGE>
Excluding the 1996 equity restructuring costs and 1995 receivable allowance
recoupment, partnership reimbursement and franchise tax settlement benefits,
1996 general and administrative expenses decreased $211,000 as compared to 1995.
Interest expense for 1996 and 1995 was relatively unchanged. Included in
both periods is approximately $27,000 of amortization of credit facility
establishment costs which are being amortized over the remaining term of the
facility. Interest expense for the remainder of 1996 should be significantly
lower due to the Company currently having no borrowings outstanding.
Due to tax loss carryforwards, the Company currently pays federal
alternative minimum income taxes only. In conjunction with the recognition of
the litigation settlement and related tax gain resulting from the final BMO debt
settlement, the Company has estimated and accrued alternative minimum income
taxes in 1995 of $164,000. The tax expense recognized represents an effective
tax rate of 4.3% on income before income taxes.
Pursuant to the terms of the Plan, dividends for the Senior Preferred stock
are calculated at 10%, compounded annually and resulted in accrued but unpaid
dividends for 1996 of $9,633,000 as compared to $9,979,000 for 1995. Dividends
on the Old Preferred Stock were $202,000 for 1996 and 1995. The decrease in
current period dividend expense is due to cancellation of Senior Preferred
Shares in late 1995.
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 24% to $4,414,000 for 1996 as compared to $3,585,000 in 1995.
FINANCIAL CONDITION
During 1996, the Company's capital expenditures totaled $810,000, an
increase of $504,000 from 1995 activity and were primarily related to
development drilling and producing well acquisition activity. The Company also
incurred workover costs of $193,000. The positive results of these expenditures
are reflected in the increased sales volumes reported in 1996.
At September 30, 1996, the Company had positive working capital of $1,339,000
which represents an increase of $3,110,000 from the prior year end deficit. The
significant improvement in working capital is attributable to the $3.5 million
of net litigation settlement proceeds received in April 1996 (See Note 2).
As a result of the litigation settlement proceeds, in April 1996 the Company
retired $900,000 of Bank One credit facility borrowings then outstanding and had
no borrowings outstanding as of September 30, 1996. Effective September 30,
1996 the Bank One credit facility maturity was extended to June 30, 1999 and
interest rate reduced to the bank's stated rate plus 1.5%, a decrease in
interest rate of 0.5%. The borrowing base under the amended credit facility at
September 30, 1996 was $5,000,000 and is reduced monthly by $100,000. The
borrowing base is redetermined on a semi-annual basis or at any time at Bank
One's election. The credit facility is secured by substantially all of the
Company's assets and includes financial ratio and default covenants standard to
the industry.
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 and, accordingly, are not
classified as a component of stockholders' equity. At September 30, 1996, the
Senior Preferred redemption value and accrued dividends were $87,886,000 and
$49,777,000, respectively. These amounts, plus any additional accrued dividends,
Page 13
<PAGE>
must be satisfied before any value can be attributed to the holders of Old
Preferred and Common Stock.
At September 30, 1996, the Stockholders' deficit was $66,248,000. Due to
the dividend requirements for the Senior Preferred Stock 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, the Company's cash provided by operating activities was $3,894,000
and included net litigation settlement proceeds of $3.5 million (See Note 2).
Also, included in cash provided by operating activities is approximately
$485,000 of proceeds received from the Company's 35% equity investment in the
Comite Field Plant Venture. Primarily as a result of the litigation settlement,
the Company had a positive working capital of $1,339,000 at the end of the
current quarter.
The Bank One credit facility has a current borrowing base of $5.0 million
with no borrowings outstanding. The Company has letter of credit commitments
totaling $89,000 outstanding under the credit facility resulting in a quarter-
end facility availability of $4,911,000. The borrowing base is reduced monthly
by $100,000 and all amounts borrowed are due June 30, 1999. As a result of the
Company's working capital position, improving operating results and availability
under the credit facility, capital resources are 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
their proportionate share of natural gas production. On an aggregate net basis
for certain natural gas properties, it appears that the Company is in an under-
produced status and is currently recouping or attempting to settle its net
under-produced status. Any balancing recoupments or settlements, which will
typically be over a period of time, are not anticipated to be material to
operating results.
The Company anticipates that continued development drilling and workovers
will maintain or increase current production volumes. In addition, the Company
is continually evaluating opportunities for acquisition of producing properties
and currently intends to pursue future production volume and reserve base growth
through acquisitions. The current cash balance, projected cash flows from
existing properties and borrowings available under the Company's current line of
credit are considered adequate to fund future capital growth plans. Effective
implementation of the Company's development and acquisition plans is expected to
meet the Company's long-term operation and liquidity requirements.
Page 14
<PAGE>
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
Except as set forth in Note 3 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 September 30, 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:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
Page 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: November 14, 1996 By: /S/ Michael A. Gerlich
----------------------------------
Michael A. Gerlich
Vice President and
Chief Financial Officer
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,089
<SECURITIES> 0
<RECEIVABLES> 1,325
<ALLOWANCES> 320
<INVENTORY> 0
<CURRENT-ASSETS> 4,318
<PP&E> 12,353
<DEPRECIATION> (4,873)
<TOTAL-ASSETS> 12,549
<CURRENT-LIABILITIES> 2,979
<BONDS> 0
75,818<F1>
478
<COMMON> 290
<OTHER-SE> (67,016)
<TOTAL-LIABILITY-AND-EQUITY> 12,549
<SALES> 3,473
<TOTAL-REVENUES> 7,963
<CGS> 1,567
<TOTAL-COSTS> 1,567
<OTHER-EXPENSES> 2,529
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> 3,789
<INCOME-TAX> 164
<INCOME-CONTINUING> 3,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,651)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
<FN>
<F1>Represents Series A Redeemable Senior Preferred Stock that has a $10
liquidation preference and entitles holder to a 10% annual compounded dividend.
No dividends paid to date.
</FN>
</TABLE>
