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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
72-0890264
DELAWARE (I.R.S. EMPLOYER-
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
222 PENNBRIGHT, SUITE 200 HOUSTON, TEXAS 77090
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (281) 872-0500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value Not Applicable
Series A Senior Preferred Stock, $1 par
value Not Applicable
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 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 [_]
The aggregate market value of the voting stock held by non-affiliates as of
March 31, 1997 was approximately $249,558.
As of March 31, 1997 there were 24,955,807 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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INDEX
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PAGE
ITEM NUMBER
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PART I.
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ITEM 1. BUSINESS AND PROPERTIES OF THE COMPANY....................... 1
ITEM 2. PROPERTIES................................................... 15
ITEM 3. LEGAL PROCEEDINGS............................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 15
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS......................................... 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 46
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT............... 46
ITEM 11. EXECUTIVE COMPENSATION....................................... 48
ITEM 12. CERTAIN STOCK OWNED BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT. 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 52
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 53
SIGNATURES............................................................. 56
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PART I
ITEM 1. BUSINESS AND PROPERTIES OF THE COMPANY
GENERAL
TGX Corporation ("TGX" or the "Company"), formerly named Templeton Energy,
Inc., is a Delaware corporation that was organized in June 1980. TGX's
executive offices are at 222 Pennbright, Suite 200, Houston, Texas 77090
(telephone number 281/872-0500). TGX 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. TGX is also engaged in intrastate natural gas gathering and
treating. TGX commenced operations on July 1, 1981 as the result of the
consummation of an offer in which shares of its Common Stock were issued in
exchange for certain interests in developed and undeveloped oil and natural
gas properties held by various affiliated and unaffiliated entities.
On December 5, 1985, TGX acquired Amarex, Inc. ("Amarex"), subsequently
renamed Temex Energy, Inc. ("Temex"), an oil and gas exploration company
operating primarily through general and limited partnerships (the "Amarex
Partnerships"), in exchange for the payment of approximately $52,000,000 in
cash and the issuance of 11,475,000 shares of Common Stock to former creditors
of Amarex. On August 8, 1988, Temex was merged with and into TGX. Following
this acquisition, TGX, as successor in interest to Temex, acted as general
partner of the Amarex Partnerships until the liquidation or dissolution of
such partnerships in 1994.
From November 1986 through August 1991, TGX, through its then wholly owned
subsidiary LEDCO, Inc. ("LEDCO"), was also engaged in natural gas marketing
and, to a limited degree, providing natural gas transportation services to
producers, local distribution companies and industrial end-users.
On February 22, 1990, TGX filed a voluntary petition in the United States
Bankruptcy Court for the Western District of Louisiana (the "Bankruptcy
Court") for reorganization (the "Reorganization Proceeding") pursuant to
Chapter 11 ("Chapter 11") of Title 11 of the United States Bankruptcy Code
(the "Bankruptcy Code").
Effective August 31, 1991, TGX sold LEDCO to Ledco Acquisition Company,
Inc., a company wholly owned by Steinhardt Partners, L.P., a Delaware limited
partnership ("Steinhardt"), and related entities for $2,900,000 and the
assignment to TGX by Steinhardt of $2,145,000 principal amount of claims
related to TGX's Senior Subordinated Fixed Rate Notes ("Senior Subordinated
Notes").
On January 7, 1992, a Reorganization Plan ("Reorganization Plan" or the
"Plan") was confirmed by the Bankruptcy Court and the Plan became effective on
January 21, 1992 (the "Effective Date"). On October 2, 1992, the Bankruptcy
Court's order of substantial consummation regarding the Plan became final and
non-appealable. For further information concerning the Reorganization Plan,
see "Reorganization Proceeding" below.
BUSINESS STRATEGY
After substantial consummation of the Reorganization Plan, and in order to
maximize stockholder value, the Company embarked on a strategy of eliminating
non-core assets, reducing overhead and restructuring its debt. During 1993 and
1994, a substantial portion of management's efforts were engaged in
implementing the components of this business plan. Beginning in 1995, the
Company turned its focus to increasing its oil and gas revenues through a
limited number of acquisitions and the drilling of a small number of oil and
gas exploration and development wells.
In early 1993 the Company relocated and consolidated its offices in Houston,
Texas, thereby reducing expenses and began a program of downsizing, including
consideration of the outsourcing of certain financial and administrative
services. Following the office consolidation, the Company retained an
investment banker to conduct an extensive review of the Company's operations
and assets to determine the most appropriate means for implementing
management's strategy.
The Company's efforts also involved the restructuring and replacing of its
secured long-term debt with Bank of Montreal ("BMO"), the renegotiation of its
debt with certain persons holding notes arising from
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administrative claims incurred during the Reorganization Proceeding, and a
program to liquidate and dissolve substantially all the public and private oil
and gas drilling and production purchase programs for which the Company acted
as a general partner. The Company also implemented a program of selling assets
which were either believed not to be essential to the Company's long-term
business strategy or which could provide a significant immediate cash infusion
to relieve debt obligations and long term benefit by reducing overhead.
In furtherance of these strategies, in 1994, the Company completed the sale
of substantially all of its oil and gas properties in Ohio and New York to
Belden & Blake Corporation ("BBC") for approximately $16,200,000, restructured
its bank indebtedness as set forth under "Bank Indebtedness," liquidated 17
oil and gas partnerships and began the process of dissolving and winding up an
additional eight partnerships, which was completed in 1995, and sold, to a
third party, approximately 31 properties for $1,424,000 which management
believed were not essential to the Company's long-term business strategy.
During 1994, the Company was able to reduce the number of its employees from
27 to 13, excluding contract personnel, and its general and administrative
expenses from $3,323,000 to $2,239,000.
In 1995, the Company's oil and gas activities focused on lower risk workover
operations, drilling development wells and acquiring producing oil and gas
properties. During this period, the Company participated in ten workovers at a
net cost to the Company of $274,000 and participated in drilling seven new
wells at a net cost of $372,000. Of the wells drilled, four were deemed
successful at a net cost of $303,000. Also, in 1995, the Company acquired
additional interests in certain of its operated producing properties and five
new producing wells at a total net acquisition cost of $771,000. As a result
of these activities and upward revision of previous estimates, the Company, in
1995, increased its total proved reserves by approximately 1.9 equivalent
billion cubic feet of gas ("Bcf") (one barrel of oil equals six Mcf of gas and
1,000,000 Mcf equals one Bcf) from year-end 1994, representing a 12% increase
in equivalent year end reserves.
On April 12, 1996 the Company entered into a Settlement Agreement with
National Fuel Gas Distribution Corporation ("NFG") and the Public Service
Commission of the State of New York. Pursuant to the agreement, TGX received
$7,200,000 from NFG and all parties to the Settlement Agreement dismissed all
claims and counterclaims against each other. In conjunction with the NFG
settlement, the Company recognized a net litigation settlement gain of
$7,100,000, after payment of $100,000 to a third party entitled to participate
in the proceeds. For further information concerning the settlement see "Bank
Indebtedness" and "NFG Litigation" below. As the Company's financial condition
continued to improve, the Company expanded its drilling and property
acquisition activity resulting in total 1996 capital expenditures of
$4,280,000. As a result of these expenditures and improvement in year end
product prices, the Company, in 1996, increased its total proved reserves by
3.8 equivalent Bcf or 21% from year-end 1995 equivalent reserves.
In 1997, the Company plans to seek shareholder approval to effect a
recapitalization of its existing security holders by merging (the "Merger")
with and into its wholly-owned subsidiary, GeoStrat Resources, Inc.
("GeoStrat"). Pursuant to the recapitalization, holders of the Company's
Series A Senior Preferred Stock ("Senior Preferred Stock") would receive one-
half share of GeoStrat Common Stock for each share of TGX Senior Preferred
Stock they hold at the time of the Merger. Other series of Company Preferred
Stock and Common Stock would be eliminated pursuant to the proposed merger.
The Merger would help position GeoStrat to meet the economic and industry
needs presently being placed on the Company as a result of the need to have
access to greater capital as the Company attempts to expand its oil and gas
exploration and development programs, would create the flexibility and
liquidity required for future stability and growth, would advance the
Corporation's 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. For further
information concerning the proposed merger see "Planned Recapitalization"
below.
BANK INDEBTEDNESS
Prior to the Reorganization Proceeding, BMO was TGX's principal secured
lender. At the time of the Chapter 11 filing, TGX owed approximately
$29,700,000 to BMO (the "Existing BMO Debt") which was secured by
substantially all of TGX's assets. TGX also guaranteed to BMO certain of the
debt of LEDCO.
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Pursuant to the Plan, TGX entered into an Amended and Restated Credit
Agreement (the "Amended Credit Agreement") under which the Existing BMO Debt
was continued and preserved, but was evidenced by new loans ("New BMO Loans"),
in the original aggregate principal amount of approximately $27,000,000 which
continued to be secured by substantially all of TGX's assets. TGX also entered
into a revolving credit agreement for working capital or the issuance of
letters of credit in the maximum amount of $1,000,000. The guaranty of the
LEDCO debt was eliminated.
In early 1993, the Company was notified that events of default had occurred
under the Amended Credit Agreement which were not cured and, as a result, BMO
had the right to take certain actions under the Amended Credit Agreement,
including without limitation, the acceleration of all of the New BMO Loans.
In January 1994, in conjunction with the Company's sale of certain assets to
BBC, as described under "Proved Oil and Natural Gas Reserves--Sale of New York
and Ohio Properties", the Company made a debt service payment of approximately
$14,300,000 to BMO and entered into a limited forbearance agreement, pursuant
to which TGX was required to make a payment (the "Required Payment") of
$18,000,000 plus accrued interest and fees less (i) the $14,300,000 paid to
BMO and (ii) any amounts paid to BMO subsequent to January 1, 1994, that were
applied toward the Required Payment.
On July 13, 1994, TGX entered into a series of agreements with BMO and Bank
One, Texas, N.A. ("Bank One") whereby the New BMO Loans were restructured and
all BMO Events of Default resolved. Pursuant to the restructuring, Bank One
established a borrowing-based facility of $2,350,000 under which TGX
immediately borrowed $1,600,000, of which $1,452,000 was paid to BMO in
satisfaction of the remaining amount due of the Required Payment. The Bank One
facility originally bore interest at Bank One's stated rate plus 2% and was to
mature on July 13, 1997. The Bank One facility is secured by substantially all
of TGX's oil and gas properties and is repayable through monthly borrowing
base reductions. The borrowing base is redetermined at a minimum of every six
months or at Bank One's discretion. The Bank One facility requires the
maintenance of certain financial ratios including a working capital ratio of 1
to 1, as defined, and a tangible net worth of a minimum of $5,000,000, a 1997
annual limit on general and administrative expense of $1,700,000 and other
ratios. Effective September 30, 1996, the credit facility was amended and the
borrowing base was increased to $5,000,000, with monthly borrowing base
reductions of $100,000, interest rate lowered to stated rate plus 1.5% and the
maturity extended to June 30, 1999. The Company had $1,500,000 borrowings
outstanding at December 31, 1996.
Simultaneously with securing the Bank One facility and payment of the
Required Payment, BMO released all of its liens on TGX's properties with the
exception of its lien on the NFG Litigation. As part of the loan
restructuring, BMO converted $4,652,000 (the "BMOF Principal") of the New BMO
Loans, including fees and expenses, to a non-recourse note secured only by the
litigation pending against NFG ("NFG Litigation") and any proceeds that might
be received therefrom. BMO assigned its rights to the loan, security and TGX
note, to BMO's wholly owned subsidiary, BMO Financial Inc. ("BMOF"). Pursuant
to the July 13, 1994 agreement, after repayment of the outstanding BMOF
Principal, plus interest, from NFG Litigation proceeds, if any, BMOF would
have in certain instances, after TGX received a sum equal to the amount paid
to BMOF, been entitled to receive up to fifty percent interest in certain
additional litigation proceeds. If NFG Litigation proceeds were insufficient
to repay the BMOF Principal, plus applicable interest, TGX would have no
further obligation for such repayment. The BMOF note had no recourse, except
against NFG Litigation proceeds, if any, and was to mature on December 31,
1997, subject to each party having the right to extend the maturity date. The
BMOF note 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 of such loan, no cash payment for such interest would be required;
instead, TGX was to pay interest in kind through the issuance of additional
notes to BMOF.
On December 31, 1995, TGX and BMOF executed a First Amendment to the Second
Amended and Restated Credit Agreement ("BMOF Agreement"). Pursuant to the BMOF
Agreement, TGX and BMOF were to share equally any NFG Litigation proceeds up
to $8,000,000. BMOF was to receive 100% of any proceeds in excess of
$8,000,000 until the total received by BMOF equalled the BMOF Principal, plus
any accrued interest. Thereafter, the Company was to receive proceeds until
the total it received equalled the amount received by
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BMOF, and any additional NFG Litigation proceeds would have been shared
equally by TGX and BMOF. The NFG Litigation was settled on April 12, 1996, for
$7,200,000 and, after payment to BMOF of $3,600,000, the Company recognized an
extraordinary gain for debt forgiveness of $1,831,000, net of income taxes of
$37,000, resulting from forgiveness of the remaining BMOF Principal including
accrued interest, paid in kind through the issuance of additional BMOF notes,
of $816,000. See "--NFG Litigation."
See Note 3 of the Notes to Consolidated Financial Statements.
ADMINISTRATIVE CLAIMS
During the Reorganization Proceeding, TGX incurred, and claimants filed
applications for, approximately $7,131,000 in administrative fees and expenses
relating to the reorganization ("Administrative Claims"). TGX objected to
certain of the Administrative Claims and negotiated settlement amounts and
terms of payment with certain holders of Administrative Claims. As a result,
each of these administrative claimants, other than three designated
administrative claimants whose administrative claims were satisfied in a
different manner, were entitled to receive a promissory note (the
"Administrative Notes") due December 31, 1994, in satisfaction of each
claimant's unpaid Administrative Claim. Such Administrative Notes were to be
issued upon the execution of releases in favor of the Company and others.
Substantially all persons entitled to Administrative Notes executed such
releases. See "Reorganization Proceeding--Overview of the Plan." 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, would be applied toward the balances due. During late
1994 and early 1995, the Company renegotiated the terms of substantially all
of the Administrative Notes. As a result of negotiations and forfeitures,
Administrative Notes totaling approximately $1,126,000 in principal and
$253,000 in accrued interest charges were renegotiated with the Company making
cash payments of $455,000, issuing 151,518 shares of the Company's Senior
Preferred Stock and a $90,000 principal amount nonrecourse note payable out of
TGX's share of proceeds, if any, to be received from the NFG Litigation. As a
result of the Administrative Note renegotiations and administrative claim
forfeitures, the Company reflected an extraordinary net gain in 1995 of
$93,000, and all such notes and claims were settled as of year end 1995.
NFG LITIGATION
The NFG Contract was executed in 1974 between Paragon Resources, Inc.
("Paragon") and Iroquois Gas Corporation, predecessors of TGX and NFG, as
seller and buyer, respectively. In 1983, the New York State Public Service
Commission (the "PSC"), under whose jurisdiction NFG's intrastate gas
purchases fall, expressed dissatisfaction with the NFG Contract for among
other reasons the inclusion of a "three-pipeline escalator" ("3-PE") in its
pricing provision. The PSC, in its Opinion No. 83-26 ("Opinion 83-26") found
3-PE clauses to be unacceptable and disapproved contracts containing such
clauses.
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 when Opinion 83-26 was issued. 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 from the District Court 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 NFG
Litigation addressed, among other things, the validity of the NFG Contract,
the price for gas sold, and certain other claims relating to NFG's obligation
to take or pay for, even if not taken, gas dedicated to the NFG Contract. The
PSC intervened as a plaintiff in the District Court action. In March 1989, a
separate action for breach of contract was commenced by TGX against NFG in New
York's Supreme Court, County of Chautauqua (Index No. G-13357). This case was
stayed in 1989 on the grounds that the issues in this case were the same as
those in the District Court action.
Both NFG and the PSC took the position before the District Court that the
effect of Opinion 83-26 was to cancel the NFG Contract in its entirety. 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.
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In December 1991, the Court of Appeals for the Second Circuit (the "Second
Circuit") reversed the judgment of the District Court. The Second Circuit held
that only the price term had been rejected by the PSC but that such rejection
did not void the entire NFG Contract, which clearly envisioned potential
governmental rulings like Opinion 83-26. Therefore, the Second Circuit
permitted TGX to continue to deliver gas under the NFG Contract in the
aftermath of Opinion 83-26 at a price consistent with that Opinion.
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.
Based on the District Court's order, TGX concluded that from December 1983,
until at least January 1, 1993, the date price controls under the Natural Gas
Policy Act ("NGPA") were terminated, the price under the NFG Contract was
equal to the lower of (i) the applicable maximum lawful price for December
1983 and for each month thereafter as established by the NGPA, subject to the
escalations provided by the NGPA, or (ii) the December 1983 permitted price
under the NFG Contract of approximately $4.41 per Mcf.
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, but after the hearing
the PSC decided that the matter was not ripe for its review because, in its
view, there was currently no contract price in the 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 raised various defenses against TGX's counterclaim in the District Court
action including claims that TGX itself repudiated and breached the contract
by its conduct; a claim that the assignment of the contract from Paragon 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 the 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
dismissed the Turnover Proceeding without prejudice and 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.
On April 12, 1996, a final settlement of the NFG Litigation was reached. In
return for a lump-sum payment to TGX of $7,200,000, of which TGX retained
approximately $3,500,000 after a debt retirement payment of $3,600,000 and a
$100,000 payment to another party entitled to participate in the proceeds, a
full release of all claims between the parties was executed.
See Note 3 of the Notes to Consolidated Financial Statements.
FRESH START REPORTING
As a result of the substantial consummation of the Reorganization Plan and
due to (i) the reallocation of the voting rights of equity interests owners
and (ii) the reorganization value of TGX's assets being less than the total of
all of its post-petition liabilities and allowed claims, as of October 2,
1992, the effects of the Reorganization Proceeding were accounted for in
accordance with the fresh start reporting standards promulgated under the
American Institute of Certified Public Accountants Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7").
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In conjunction with implementing fresh start reporting, the Company's
management determined a reorganization value ("RV') which attempted to
establish the fair market value of the Company as of the date of substantial
consummation of the Plan. Oil and gas property and other related asset values
were estimated by discounting future net revenues on the basis of actual, or
in some instances, assumed prices. Other assets were valued at their book
value. The value of the Company's Senior Preferred Stock, which was issued
pursuant to the Plan, was determined on the basis of the difference between
the RV of the Company's assets less the present value of liabilities and the
par value of preconsummation equity interests. For further information
concerning the method of calculating the RV, see Note 2 of the Notes to
Consolidated Financial Statements.
The RV was determined by management on the basis of its best judgment of
what it considered at the time to be the fair market value ("FMV') of the
Company's assets and liabilities, 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.
In conjunction with the implementation of fresh start reporting, the Company
also implemented the successful efforts method, rather than the full cost
method, of accounting for oil and natural gas properties. In the opinion of
the Company's management, this accounting method was preferable since it would
result in a better matching of oil and natural gas revenue with the related
exploration and production cost and expense. See Note 1 of the Notes to
Consolidated Financial Statements.
REORGANIZATION PROCEEDING
Overview of the Plan. The following is a brief summary of certain
information regarding the Reorganization Plan. The summary is necessarily
incomplete and selective and is qualified in its entirety by reference to the
Plan, the full terms of which are hereby incorporated by reference.
Pursuant to the Reorganization Plan, the Company entered into the Amended
Credit Agreement with BMO, and, depending on the amount of the claim,
satisfied unsecured claims with cash or Senior Preferred Stock. See "Business
and Properties of the Company--Bank Indebtedness", and "--Unsecured Claims".
In addition, certain specified classes of claims were paid in cash, retained
or otherwise provided for. Administrative claimants holding allowed
Administrative Claims under the Reorganization Plan were paid in cash or had
their claims otherwise satisfied, and numerous executory contracts were
assumed or rejected by TGX. See "Business and Properties of the Company--
Administrative Claims." As of December 31, 1995, the aggregate balance of
prepetition obligations related to assumed executory contracts was
approximately $317,000, related to undistributed net oil and gas revenues and
which were in a "suspended pay" status. Pursuant to the Plan and statute of
limitations, the "suspended pay" liability was dismissed during 1996.
As of the effective date of the Reorganization Plan, the preferred and
common stockholders selected a new Board of Directors (the "New Board")
comprised of eight individuals to serve until January 1995, or until their
successors were duly elected and qualified. The New Board consisted of five
members selected by holders of the Senior Preferred Stock (two of which were
designees of a creditor, and one of which could not be an affiliate of any
holder of the Senior Preferred Stock) and two members selected by holders of
the other classes of stock acting as one class. The remaining member of the
New Board was required to be the chief executive officer of the Company. In
January 1995 TGX amended the TGX Bylaws to provide for a Board of five
members. When new directors are elected, the Reorganization Plan provides that
directors are to be elected without regard to class representation. However,
holders of Senior Preferred Stock have 95% of the voting power of TGX and a
plurality of such holders can, therefore, effectively elect all directors. At
any time after January 21, 1995, whenever quarterly dividends payable on the
Senior Preferred Stock are in arrears in an aggregate amount equal to six full
quarterly dividends (which need not be consecutive), the number of directors
of the Company is increased by two and such additional directors are elected
by the holders of the Senior Preferred Stock at the next succeeding annual
meeting of stockholders (and at each succeeding annual meeting of stockholders
thereafter until such right shall terminate as provided pursuant to the Plan).
See "--Unsecured Claims."
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Administrative Expenses. During the Reorganization Proceeding, certain
claimants filed applications for Administrative Claims of approximately
$7,131,000 in administrative fees and expenses related to the Reorganization
Proceeding. Three of the large administrative claimants (the "Opposing
Administrative Claimants") agreed that in consideration for the satisfaction
in full of the balance of their Administrative Claims as of the date of
substantial consummation they would receive (i) a payment of $300,000 (ii)
55,000 shares of the Senior Preferred Stock and (iii) the conveyance of
approximately 29,400 acres of undeveloped land in Culberson and Hudspeth
Counties, Texas. For information concerning the payment of other
Administrative Claims see "Business and Properties of the Company -
Administrative Claims".
Unsecured Claims. Pursuant to the Reorganization Plan, the Company
designated the Senior Preferred Stock to be issued to holders of certain
classes of claims and retained its Old Preferred Stock and Common Stock.
Senior Preferred Stock. The Reorganization Plan provided for a total of
8,529,246 shares of Senior Preferred Stock to be issued to holders of certain
unsecured claims on the basis of one share of Senior Preferred Stock for every
$10 of certain finally allowed or otherwise agreed upon claims. The Senior
Preferred Stock entitles its holders to receive a 10% annual compounded cash
dividend, payable quarterly, provided however, that the payment of such
dividend does not violate Delaware law or certain covenants in the Company's
bank loan agreements. The Company has not paid any of the quarterly dividends
required since the effective date of the Plan.
The Senior Preferred Stock was issued without registration under the
Securities Act of 1933, as amended (the "Securities Act") in reliance upon the
exemption from registration available under Section 1145 of the Bankruptcy
Code.
Holders of Senior Preferred Stock have a liquidation preference in the
amount of $10 per share, with the holders of Senior Preferred Stock having
priority over the liquidation preference afforded the holders of Old Preferred
Stock and Common Stock. At the option of the Company, the Senior Preferred
Stock is redeemable in whole or in part at any time at a price per share equal
to the liquidation preference amount per share, plus all accrued and unpaid
dividends through the date of redemption. The Company must redeem all
outstanding shares of the Senior Preferred Stock at the full redemption price
on or before ten years from the effective date of the Plan unless such
redemption would violate Delaware law, in which case the Company must redeem
the Senior Preferred Stock as soon as it is possible in accordance with
Delaware law.
Holders of Senior Preferred Stock have 95% of the voting rights of TGX with
the remaining 5% of voting rights being allocated collectively among holders
of the Old Preferred Stock and Common Stock (herein collectively called the
"Other Stock").
Old Preferred Stock. The 300,000 shares of Old Preferred Stock, with a
liquidation preference of $10 per share, ranks junior in preference and
priority to Senior Preferred Stock. Subject to the prohibitions of Delaware
law and the Amended Credit Agreement, Old Preferred Stock receives dividends
at the rate of 9% per annum beginning on the Effective Date of the Plan,
payable annually on the first business day of January of each year, with such
dividends being paid in additional shares of Old Preferred Stock until the
Senior Preferred Stock is redeemed in full. As of December 31, 1996, Old
Preferred Stock shares to be issued for accrued dividends totaled 185,000
shares. Subsequent to their sale of LEDCO to TGX, Gaylon D. Simmons and Gloria
Annette Turner Simmons (collectively, "Simmons"), the former owners of LEDCO,
have been engaged in a series of lawsuits against TGX and certain other
parties. Pursuant to the Plan, Simmons will not seek recoveries against the
Company in this litigation. In addition, any recoveries by Simmons from other
parties, after a reduction for Simmons' reasonable attorneys' fees and costs
plus interest, will result in the cancellation of securities issued to Simmons
to the extent necessary to assure that Simmons' treatment under the Plan does
not result in a double recovery on identical causes of action.
The Old Preferred Stock may be converted in whole, at any time, or in part,
from time to time, at the option of the holder thereof into fully paid and
non-assessable shares of Common Stock at the conversion rate of four shares of
Common Stock for each share of Old Preferred Stock.
7
<PAGE>
Common Stock. The Company is authorized to issue 100,000,000 shares of
Common Stock, of which 24,955,807 shares were outstanding as of December 31,
1996. All outstanding shares of the Common Stock are fully paid and non-
assessable.
The holders of Common Stock are entitled to one vote per share upon all
matters presented to them. Pursuant to the Reorganization Plan, holders of
Common Stock are entitled, collectively with holders of Old Preferred Stock,
to 5% of the total voting power of the Company. The holders of Common Stock
are entitled to dividends in such amounts as may be declared from time to time
out of any funds legally available for such purposes. However, no dividends
are payable until all accrued dividends have been paid to the holders of the
Preferred Stock. In the event of liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or involuntary, after payment of
debts and liquidation preferences on preferred stock, all remaining assets, if
any, will be divided and distributed among the holders of Common Stock pro
rata according to the number of shares owned by them. The Common Stock does
not have preemptive rights and is not subject to redemption.
Jurisdiction of Bankruptcy Court. The Reorganization Plan provides that the
Bankruptcy Court retains jurisdiction after the confirmation date for certain
matters including, but not limited to, (i) modifying the Plan pursuant to the
Bankruptcy Code, (ii) assuring the performance by TGX under the Plan, (iii)
enforcing and interpreting the terms and conditions of the Plan, (iv) entering
into such orders, including injunctions, as are necessary to enforce the
title, rights and powers of TGX and to impose such limitations, restrictions,
terms and conditions of such title, rights and powers as the Bankruptcy Court
may deem necessary and, (v) deciding issues concerning federal tax reporting
and withholding which arise in connection with the confirmation of the Plan.
PLAN OF RECAPITALIZATION
On February 22, 1990, TGX filed a voluntary petition in Bankruptcy Court
pursuant to Chapter 11 of the Bankruptcy Code. During the Reorganization
Proceeding a plan of reorganization was negotiated and confirmed by the
Bankruptcy Court. Pursuant to the Reorganization Plan, the Company's secured
indebtedness was restructured, certain claims were paid in cash and unsecured
creditors received shares of Senior Preferred Stock in satisfaction of their
claims. See "--Reorganization Proceeding."
Because of the uncertainty of the NFG Litigation, it was considered possible
that a post-reorganization resolution of the NFG Litigation might result in
proceeds sufficient to redeem the Senior Preferred Stock which would result in
some value for those who, before commencement of the Reorganization
Proceeding, held equity interests in the Company. Thus, the Reorganization
Plan provided that the holders of the Old Preferred Stock and the Common Stock
would retain their shares upon consummation.
Following substantial confirmation of the Reorganization Plan, the Company,
BMO and Bank One entered into the agreements described under "Bank
Indebtedness." In April 1996, TGX settled the NFG Litigation and the related
BMOF indebtedness as described under "--NFG Litigation."
To date, no dividends have been paid to the holders of the Senior Preferred
Stock and accrued, but unpaid, dividends on the Senior Preferred Stock totaled
approximately $53,294,000 at December 31, 1996. The dividend obligation
together with the liquidation preference, with respect to the outstanding
8,788,571 shares of Senior Preferred Stock, of approximately $87,886,000,
consequently, it would require an aggregate payment of approximately
$141,180,000 to currently redeem the Senior Preferred Stock.
Neither the Company's book value, of approximately $11,050,000 at December
31, 1996, nor its revenues, considered either singly or together, are
sufficient to redeem even a majority of the Senior Preferred Stock in
accordance with the terms set forth in the Reorganization Plan. See "--
Properties"; "Selected Financial Data"; "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements. Under these circumstances, neither the
Common Stock nor the Old Preferred Stock has any current value and cannot,
under any reasonably foreseeable circumstances, be expected to have any value
attributed to it in the future, based on the Company's existing and reasonably
foreseeable operations.
8
<PAGE>
The Company, after analyzing various alternatives that it believed would
meet the economic and industry demands faced by the Company, and help create
the flexibility and liquidity that TGX believes will be required for its
future stability and growth, determined that the Company should eliminate its
obligations with respect to the Senior Preferred Stock and establish a capital
structure that could facilitate the possibility of additional capital being
provided to the Company. Thus, the Company plans to seek shareholder approval
to effect a recapitalization of its existing security holders by merging with
and into its wholly-owned subsidiary, GeoStrat. Pursuant to the
recapitalization, if approved, holders of the Company's Senior Preferred Stock
would receive one-half share of GeoStrat common stock, par value $.01 per
share ("GeoStrat Common Stock") for each share of Company Senior Preferred
Stock held at the time of Merger and all other series of Company Preferred
Stock and Common Stock would be cancelled.
The Company anticipates submitting the Merger proposal for shareholder
approval in the first half of 1997. All holders of Senior Preferred Stock, Old
Preferred Stock and Common Stock outstanding at the record date will be
entitled to vote regarding the Merger. Due to the Company's Certificate of
Incorporation and By-laws, the holders of the Senior Preferred Stock, in the
aggregate, have 95% of the voting power of all classes of Company equity
securities.
The Company cannot determine when the Merger proposal will be presented to
the stockholders and, if presented, whether or not it will be approved. In
addition, if the recapitalization is approved, the Company can make no
assurances that the benefits believed or anticipated from such
recapitalization will, in fact, be effective. Further, if the recapitalization
plan is not effected, the Company will have to seek other alternatives for
eliminating its current Senior Preferred Stock obligation and again there can
be no assurance that any such other alternatives will be successful.
BUSINESS SEGMENT INFORMATION
The only segment in which the Company operates is the development and
production of, and to a lesser degree the exploration for, oil and natural gas
plus intrastate natural gas gathering and treating.
GENERAL CONDITIONS IN THE OIL AND GAS INDUSTRY
The Company's revenues, profitability, cash flow, future growth and the
carrying value of its oil and gas properties are affected by changes in oil,
gas and natural gas liquid ("NGL") prices. The Company's ability to maintain
or increase its borrowing capacity and to obtain additional capital on
attractive terms is also substantially dependent upon such prices. Prices for
oil, gas and NGLs are subject to significant fluctuations in response to
market changes beyond the control of the Company including, but not limited
to, weather conditions, the condition of the United States economy, the
actions of the Organization of Petroleum Exporting Countries, governmental
regulation, political stability in the Middle East and elsewhere, foreign
supply of oil and gas, the price of foreign imports and the availability of
alternate fuel sources. These influences have resulted in significant
fluctuations in prices in recent years.
The NYMEX natural gas contract price for December 1996, based on an Mcf
basis, was $4.10 as compared to $2.35 for December 1995 and $1.77 for December
1994. As of December 31, 1996, the per barrel posted price for West Texas
Intermediate oil production ("WTI"), the benchmark for domestic oil prices,
was $24.42 as compared to $18.05 for the same date in 1995. Since year-end
1996 oil and natural gas prices have declined resulting in prices of $20.47
and 2.67, respectively, as of February 28, 1997. Moreover, the NYMEX natural
gas futures price is only an indicator of price trends and may not be
indicative of prices ultimately realized at the wellhead. Volatile oil and gas
prices make it difficult to estimate the value of producing properties for
acquisition and to budget for and project the return on development and
exploitation projects.
9
<PAGE>
PROPERTIES
Oil and Gas Exploration and Production. The Company's principal post
bankruptcy activity, prior to 1995, was the production of oil and natural gas.
In 1995, the Company began a modest program of oil and natural gas exploration
and development drilling and property acquisition activities as allowed by its
financial condition. In 1996, as the Company's financial condition continued
to improve, the Company expanded its development drilling and property
acquisition activity resulting in total 1996 capital expenditures of
$4,280,000. The Company continues to maintain a staff of professional and
support personnel required to manage its existing properties, including three
engineers, and two marketing and land personnel. In addition, the Company
engages petroleum landmen, geologists and engineers on a contract basis, as
required.
Proved Oil and Natural Gas Reserves.
(a) General:
Estimating economically recoverable crude oil and natural gas reserves
and the future net revenues therefrom is not an exact science and is based
upon a number of variable factors, such as historical production of the
subject properties as compared with similar producing properties, and
assumptions such as the effects of regulation by governmental agencies,
future taxes, and development and other costs, all of which may vary
considerably from actual results. All such estimates are to some degree
speculative, and classifications of reserves are only attempts to define
the degree of speculation involved. For these reasons, estimates of
economically recoverable reserves of crude oil and natural gas attributable
to any particular group of properties, the classification and risk of
recovering such reserves, and estimates of the future net revenues expected
therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions. Estimates with respect to proved undeveloped and proved
developed non-producing reserves that may be developed and produced in the
future are based upon volumetric calculations or upon analogy to similar
types of reservoirs. Later studies of the same reservoirs based upon
production history may result in variations, which may be substantial. The
actual production, revenues, severance and excise taxes, development costs,
and operating expenditures with respect to the Company's reserves as
reflected herein may vary from estimates, and such variances may be
material.
10
<PAGE>
Based on the independent petroleum engineering report of Netherland,
Sewell & Associates, Inc., as of January 1, 1997 and 1996, utilizing year
end product prices and costs held constant, the Company's proved oil and
natural gas reserve volumes, in thousand of barrels of oil ("MBbls") and
billion of cubic feet of gas ("Bcf"), and associated estimated future net
revenues, undiscounted and discounted at 10% ("PV 10"), before future
income taxes, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
OIL(MBBLS) GAS(BCF) OIL(MBBLS) GAS(BCF)
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Proved developed................. 525 13.4 465 9.7
Proved undeveloped............... 456 2.4 479 2.5
------- ------- ------- -------
Total proved reserves............ 981 15.8 944 12.2
======= ======= ======= =======
<CAPTION>
1996 1995
-------------------- --------------------
UNDISCOUNTED PV 10 UNDISCOUNTED PV 10
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Proved developed................. $39,118 $23,761 $13,831 $ 8,816
Proved undeveloped............... 11,827 5,495 7,054 2,988
------- ------- ------- -------
Total proved reserves............ $50,945 $29,256 $20,885 $11,804
======= ======= ======= =======
</TABLE>
Estimated future development costs associated with proved developed non-
producing and proved undeveloped reserves for both 1996 and 1995 total
$3,800,000. Production of those reserves is dependent upon the Company's
ability to fund such future development costs, which are scheduled to be
incurred over numerous years. See Note 12 of the Notes to Consolidated
Financial Statements for a discussion of the calculation of the estimated
future net revenues on an undiscounted and discounted basis.
(b) Tabular Information:
The table below sets forth an analysis of the change in the Company's
proved oil and natural gas reserves for the periods indicated. Reserves are
stated in Mbls of oil and Bcf of natural gas.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
OIL GAS OIL GAS
--- ---- --- ----
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year.................................... 944 12.2 931 10.4
Sales of reserves-in-place........................... (8) (.1) (2) --
Purchases of reserves-in-place....................... 45 4.1 22 1.2
Extensions and discoveries........................... 57 .6 1 0.1
Revisions of previous estimates...................... 19 .5 55 2.2
Production (1)....................................... (76) (1.5) (63) (1.7)
--- ---- --- ----
End of year.......................................... 981 15.8 944 12.2
=== ==== === ====
Proved-developed reserves.............................. 525 13.4 465 9.7
=== ==== === ====
</TABLE>
- --------
(1) 1995 includes .220 Bcf of gas volumes related to gas balancing
collections.
11
<PAGE>
Except for the data contained in filings with the Securities and Exchange
Commission ("SEC") and information furnished in conjunction with the
Reorganization Proceeding pursuant to the order of the Bankruptcy Court, the
Company has not filed information relating to estimates of its proved oil and
natural gas reserves with any federal agencies.
Oil and Gas Production. Information pertaining to the Company's oil and
natural gas production is set forth in the table. Average natural gas price is
shown per thousand cubic feet of gas ("Mcf") and equivalent Mcf is based on
one barrel of oil equals six Mcf of natural gas on a heating value basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Oil sales volume (MBbls)........................................ 76 63
Average price per barrel........................................ $21.16 $17.20
Natural gas sales volume (Bcf)(1)............................... 1.542 1.701
Average price per Mcf........................................... $ 2.24 $ 1.49
Equivalent Mcf.................................................. 1,999 2,078
Lease operating expense per equivalent Mcf...................... $ 0.71 $ 0.61
Net oil and natural gas revenues (in thousands):
Sales revenues................................................ $5,059 $3,611
Lease operating expenses(2)................................... (1,417) (1,276)
Treating and transportation expenses.......................... (794) (629)
------ ------
Net oil and natural gas revenues................................ $2,848 $1,706
====== ======
</TABLE>
- --------
(1) 1995 includes .220 Bcf of gas volumes and $213,000 of natural gas revenues
related to gas balancing collections.
(2) Includes production taxes and workover costs.
The following table summarizes drilling and acquisition well activity, as of
December 31 for each year presented, to which the Company owns a working
interest:
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
-------------------- --------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
Development wells:
1995................................ 3 2 5 .47 .30 .77
1996................................ 6 1 7 1.32 .12 1.44
Exploration wells:
1995................................ 1 1 2 .07 .16 .23
1996................................ -- 1 1 -- .31 .31
Acquisition wells:
1995................................ 5 -- 5 1.55 -- 1.55
1996................................ 23 -- 23 7.87 -- 7.87
</TABLE>
Company net drilling costs for 1996 totaled $1,288,000 of which $164,000 was
expensed as unsuccessful exploration cost. The Company also incurred unproved
and proved property acquisition costs of $163,000 and $2,931,000,
respectively. Of the proved property purchases, $1,737,000 was acquired in
December with effective dates at the end of December 1996 resulting in no
impact on 1996 revenues and expenses. The Company also implemented workover
operations at a net cost of $239,000 in 1996. In 1995, the Company incurred
net drilling costs of $407,000 of which $69,000 was expensed as unsuccessful
exploration cost. The Company also incurred unproved and proved property
acquisition costs of $18,000 and $718,000, respectively, and workover costs of
$274,000.
12
<PAGE>
Leasehold Acreage and Productive Wells. The following table sets forth the
Company's interest in undeveloped acreage, developed acreage and productive
wells in which it owns a working interest as of December 31, 1996.
<TABLE>
<CAPTION>
UNDEVELOPED DEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)
-------------- -------------- --------------
GROSS(2) NET(3) GROSS(2) NET(3) GROSS(2) NET(3)
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Arkansas........................ 1,571 471 3,560 1,178 47 17
Louisiana....................... 1,246 586 9,330 2,478 21 6
Oklahoma........................ 5,211 953 26,637 4,478 53 8
Texas........................... 115 29 8,966 1,341 20 4
----- ----- ------ ----- --- ---
Total......................... 8,143 2,039 48,493 9,475 141 35
===== ===== ====== ===== === ===
</TABLE>
- --------
(1) Productive wells are wells capable of producing oil or natural gas.
(2) Gross represents the total number of acres or wells in which the Company
owns a working interest.
(3) Net represents the Company's proportionate working interest resulting from
its ownership in the gross acres or wells.
The following table provides, as of December 31 for each year presented,
additional information pertaining to the productive wells in which the Company
owns a working interest.
<TABLE>
<CAPTION>
GROSS(1) NET(2)
------------- -------------
OIL GAS TOTAL OIL GAS TOTAL
--- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C>
1995................................................ 56 93 149 17 14 31
1996................................................ 56 85 141 20 15 35
</TABLE>
- --------
(1) Gross wells are the total number of wells in which the Company owns a
working interest.
(2) Net represents the Company's proportionate working interest resulting from
its ownership in each gross well.
Natural Gas Treating Plant. Through a joint venture, the Company owns a 35%
interest in a natural gas treating plant located in the Comite Field, East
Baton Rouge Parish, Louisiana. Natural gas from one well operated by the
Company and two wells operated by third parties is transported to the plant
where it is treated to satisfy pipeline specifications. The plant also
provides condensate handling and saltwater disposal facilities. The Company
receives cash distributions from the joint venture for its share of net cash
flow. In addition, the joint venture charges the Company for gas treating and
such charges are included in operating expenses. For information concerning
this treating plant, see Note 5 of the Notes to Consolidated Financial
Statements.
COMPETITION, MARKETS AND OTHER EXTERNAL FACTORS
Competition and Marketing--Oil and Natural Gas Industry. The oil and natural
gas industry is highly competitive both in the search for and acquisition of
oil and natural gas reserves and in the redefining, processing and marketing
of petroleum products. Competitors include the major and independent crude oil
and natural gas companies, individual producers and operators, and major
pipeline companies. Other sources of energy, such as coal and nuclear power,
also provide competition, and crude oil and natural gas are subject to
substantial competition from foreign sources.
The price the Company receives for its oil production depends on many
variables over which it has no control, such as the world supply of, and
demand for, oil, the level of imports, and the political stability of foreign
governments. The influence exerted by these and other factors has caused
domestic oil prices to fluctuate dramatically.
13
<PAGE>
The availability of a ready market as well as the price received for natural
gas produced and sold by the Company also depends upon numerous factors beyond
its control, including the proximity of producing natural gas properties to
pipelines, the capacity of such pipelines, fluctuations in seasonal or overall
demand, domestic deliverability, government regulations, and competition from
alternative forms of energy. A trend has emerged recently among major natural
gas marketing companies toward consolidation mergers, both amongst themselves
as well as in the form of strategic alliances with large producers or end-
users. These consolidations have the effect of putting control of the majority
of the supply and the market in hands of a few industry participants. The
longer term ramifications of this trend are difficult to foresee, but will
likely have an impact on the way natural gas is bought and sold in the future
and this impact could be potentially more significant to the smaller
independent producers such as the Company.
Major Customers. Information concerning sales to customers who accounted for
more than 10% of total revenues, the loss of any of which could have a
material adverse effect on the Company's operations if alternative customers
could not be found, is contained in Note 11 of the Notes to Consolidated
Financial Statements appearing elsewhere herein.
Production and Development Hazards. Hazards such as unexpected formations,
blow-outs, cratering and fires are involved in crude oil and natural gas
drilling, production and development activities. Such hazards, as well as
adverse weather conditions, may hinder or delay drilling and development
operations. TGX attempts to obtain and maintain insurance coverage customary
in the crude oil and natural gas industry, but may be subject to liability for
pollution and other damages or may lose substantial portions of its properties
due to hazards against which it is impossible or impractical (due to
prohibitive premium requirements) to maintain insurance. Governmental
regulations relating to environmental matters could also increase TGX's cost
of production and development operations or require it to cease production and
development operations in certain areas.
REGULATION
Environmental Regulation. The drilling for, production, transportation and
storage of oil and natural gas and the operation and maintenance of natural
gas treating plants are subject to various federal and state laws and
regulations designed to protect the environment. Moreover, various state and
governmental agencies are considering, and some have adopted, other laws and
regulations regarding environmental control which could adversely affect the
business of the Company. Compliance with such legislation and regulations,
together with any penalties resulting from noncompliance therewith, may
increase the cost of the Company's operations or may affect the Company's
ability to complete, in a timely fashion, existing or future activities.
However, the Company does not believe that such regulations could materially
and adversely affect its financial condition or operations at the present
time.
State Regulation. All states in which the Company conducts oil and natural
gas production operations have statutory provisions regulating the drilling
for, production, transportation, storage and sale of oil and natural gas. Such
statutes, and the regulations promulgated in connection therewith, generally
are intended to prevent the waste of oil and natural gas and to protect
correlative rights and opportunities to produce oil and natural gas as between
owners of interests in a common reservoir. Certain state regulatory
authorities also regulate the amount of oil and natural gas produced by
assigning allowable rates of production to each well or proration unit.
The Company may conduct operations on federal oil and natural gas leases,
and such operations must comply with numerous regulatory restrictions and
requirements issued by the Mineral Management Service, including various
nondiscrimination statutes, and certain of such operations must be conducted
pursuant to appropriate permits issued by the Bureau of Land and Management.
EMPLOYEES
As of December 31, 1996, the Company employed 14 persons, none of whom are
represented by a labor union or collective bargaining agent. Also at December
31, 1996, the Company had engaged one person on a temporary contract basis to
perform certain engineering functions. The Company considers its relations
with its employees to be good and has experienced no work stoppages associated
with labor disputes or grievances.
14
<PAGE>
ITEM 2. PROPERTIES
For information concerning the Company's properties, see "Item 1. Business--
Properties".
ITEM 3. LEGAL PROCEEDINGS
Reorganization Proceeding. For information concerning the Company's
Reorganization Proceeding, see "Reorganization Proceeding" above.
NFG Litigation. For information concerning the NFG Litigation and its
settlement, see "NFG Litigation" above.
Former Director Litigation. On May 31, 1995, the Company entered into a
Settlement Agreement among itself, Paragon Resources, Inc., J.C. Templeton,
W.M. Templeton and a number of other former directors of the Company, trusts
on behalf of members of the Templeton family and other entities pursuant to
which all lawsuits between and among the parties were dismissed with
prejudice. In consideration therefor, the Company received $325,000, an
assignment of certain oil and gas leases, and receipt of past due joint
operating expenses payable by certain of the defendants. The Company released
lis pendens against certain of the defendant's properties and conveyed to the
defendants an interest in certain properties to which they were entitled. The
parties to the litigation also conveyed to the Company any Common Stock or
Preferred Stock which they held.
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 had not been
properly credited to the interests of the unleased mineral interest owners. In
July 1995, in a separate action, certain royalty owners in the same wells
commenced a 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 claimant's
prepetition claim would be $600,000. That prepetition claim was fully
satisfied by the issuance of 60,000 shares of Senior Preferred Stock. 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, was to be treated by the issuance
of an Administrative Note under the terms of the Reorganization Plan and was
to be payable under the terms of the Reorganization 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. In
May 1996, TGX settled this litigation for payment of $400,000 and the return
to the Company of the 60,000 shares of Senior Preferred Stock previously
issued.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During 1996, no matters were submitted to vote of the security holders. For
further information regarding a proposed security holders' vote for 1997, see
"Business and Properties--Plan of Recapitalization."
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
MARKET PRICE INFORMATION
The Company. As a result of TGX's Chapter 11 filing, in March 1991, the
National Association of Securities Dealers, Inc. (the "NASD") notified TGX
that it was terminating the inclusion of TGX's Common Stock on the Nasdaq
National Market System. Through June 1992, the Company's common stock price
continued to be reported on Nasdaq. Since July 1, 1992, neither the Common
Stock nor the Senior Preferred Stock has been included on the Nasdaq National
Market System. TGX's Common Stock and Senior Preferred Stock are listed on the
NASD's "bulletin board". The Senior Preferred Stock was initially listed on
the bulletin board in September 1996.
As of December 31, 1996, there were approximately 3,995 holders of record of
the Company's Common Stock, and 1,541 holders of record of the Senior
Preferred Stock. The following table sets forth bid prices reported by the
National Quotations Bureau, Inc., for the Company's Common Stock. Trading of
the Company's Common Stock is very sporadic. All quotations represent bid
prices between dealers without retail markup or markdown or commission and do
not reflect actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
1996:
March 31.................................................... $ * $ *
June 30..................................................... .0002 .0002
September 30................................................ .10 .10
December 31................................................. .01 .001
1995:
March 31.................................................... $ .03 $.001
June 30..................................................... .005 .005
September 30................................................ .01 .01
December 31................................................. .01 .002
</TABLE>
- --------
* No reported trading activity for the period noted.
Holders of Senior Preferred Stock have a dividend and liquidation preference
over holders of other classes of preferred stock and the Common Stock. As of
December 31, 1996, the redemption value and accrued dividends related to the
Senior Preferred Stock were $87,886,000 and $53,294,000, respectively. The
Senior Preferred Stock dividends must be paid in full prior to paying any
dividends for the Common Stock. Under a liquidation scenario, after secured
debt and other liabilities have been paid or provided for, the Senior
Preferred Stock redemption value of $87,886,000 plus any accrued dividends
must be paid in full before any liquidating distributions are made to the
holders of other preferred stock or Common Stock.
The Company has not paid, and does not anticipate paying, any cash dividends
with respect to its Preferred Stock or Common Stock. The Company is prohibited
from paying dividends on its Common Stock at any time that it is in arrears in
paying dividends on any class of its preferred stock. The Company is currently
in arrears in making such payments.
On March 27, 1997, the closing bid and asked price per share of the Common
Stock, as reported by the National Quotations Bureau, Inc., was $0.01. Trading
of the Company's Common Stock is very sporadic.
There was only one NASD trade of the Company's Senior Preferred Stock at
$0.25 per share in November 1996. Due to the limited public trading activity,
the Company cannot determine the market value, if any, therefor.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information presented below
for, and as of the end of, each of the years in the two-year period ended
December 31, 1996 is derived from the consolidated financial statements of
TGX, which have been audited by Price Waterhouse LLP, independent accountants.
The following selected consolidated financial information should be read in
conjunction with TGX's consolidated financial statements and related notes and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)(2)....................................... $ 13,800 $ 4,597
Costs and expenses:
Operating expenses.................................. 1,417 1,276
Treating and transportation expense................. 794 629
Depletion, depreciation and amortization............ 964 973
General and administrative expenses................. 2,437 1,476
Exploration costs................................... 164 69
Interest............................................ 207 607
-------- --------
Total costs and expenses......................... 5,983 5,030
-------- --------
Income (loss) before income taxes and extraordinary
gain................................................ 7,817 (433)
Income tax expense (benefit)......................... (787) --
-------- --------
Income (loss) before extraordinary gain.............. 8,604 (433)
Extraordinary gain, net of income taxes of $37 in
1996(2)............................................. 1,831 93
-------- --------
Net income (loss).................................... 10,435 (340)
Preferred stock dividends and accretion of Senior
Preferred redemption value.......................... (19,247) (17,353)
-------- --------
Net loss applicable to common stock.................. $ (8,812) $(17,693)
======== ========
Net loss per share of common stock:
Before extraordinary gain........................... $ (0.42) $ (0.71)
Extraordinary gain.................................. 0.07 --
-------- --------
Net loss per share of Common Stock.................. $ (0.35) $ (0.71)
======== ========
Average common shares outstanding.................... 24,956 25,105
Cash dividends....................................... -- --
Capital expenditures................................. $ 4,280 $ 1,228
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 1,015 $ (1,771)
Property and equipment, net.......................... 10,636 7,411
Total assets......................................... 15,547 9,791
Long-term debt....................................... 1,500 5,835
Redeemable Senior Preferred Stock.................... 80,726 61,737
Stockholders' deficit................................ (69,676) (61,134)
</TABLE>
- --------
(1) 1996 includes net litigation settlement gain of $7,100,000.
(2) See Note 3 of TGX's Notes to Consolidated Financial Statements.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 ("1996") AND DECEMBER 31, 1995 ("1995")
General. The following discussion provides information which management
believes is relevant to an understanding and assessment of the Company's
results of operations and 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
Consolidated revenues for 1996 totaled $13,800,000, an increase of
$9,203,000 or 200% from 1995 consolidated revenues of $4,597,000. The
substantial revenue increase for 1996 is due to the recognition of a net
litigation settlement gain of $7,100,000 related to the NFG Litigation, a non-
recurring item, and a $166,000 gain on property sales, combined with
improvements in operation areas as discussed below.
Total costs and expenses for 1996 were $5,983,000, an increase of $953,000
or 19% over total costs and expenses for 1995 of $5,030,000. The 1996 expense
increase is primarily related to 1996 recapitalization costs incurred of
$440,000 and recognition in 1995 of $425,000 of receivable allowance
recoupment and $166,000 of franchise tax settlement, both non-recurring
benefits, which decreased general and administrative expense for 1995.
Income (loss) before income taxes and extraordinary gain for 1996, including
the net litigation settlement gain of $7,100,000, was $7,817,000, as compared
to a $433,000 loss for 1995.
Revenues
Revenues from oil and natural gas sales for 1996 were $5,059,000, an
increase of $1,448,000 or 40% over 1995 revenues of $3,611,000. The increase
in 1996 revenues was due to higher product prices and oil volumes. A summary
of oil and natural gas sales volumes and revenues for the respective years
follows with natural gas prices being reflected on a thousand cubic feet
("Mcf") and volumes on a thousand Mcf ("Mmcf") basis.
Summary of Oil Volumes and Revenues
<TABLE>
<CAPTION>
1996 1995 CHANGE
------- ------- ------
<S> <C> <C> <C>
Oil revenues (in thousands).............................. $ 1,613 $ 1,081 49%
Oil sales volume (barrels)............................... 76,200 62,900 21%
Oil average sales price per barrel....................... $ 21.16 $ 17.19 23%
</TABLE>
Summary of Natural Gas Volumes and Revenues
<TABLE>
<CAPTION>
1996 1995 CHANGE
------- ------- ------
<S> <C> <C> <C>
Natural gas revenues (in thousands)...................... $ 3,446 $ 2,530 36 %
Natural gas sales volume (Mmcf).......................... 1,542 1,701 (9)%
Natural gas average sales price per Mcf.................. $ 2.24 $ 1.49 50 %
</TABLE>
On an equivalent unit basis (one barrel of oil equals six Mcf of natural gas
on a heating value basis), natural gas represents 77% 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 $2.24 or $0.75 per Mcf from the 1995 average
price of $1.49. Current period oil prices were also higher than the previous
period
18
<PAGE>
by $3.96 per barrel. Higher oil and gas product prices contributed to an
increase in revenues for 1996 of $1,455,000.
Natural gas sales volumes for 1996 were 1,542 Mmcf, down 9% from sales
reported in 1995 of 1,701 Mmcf, which included non-recurring adjustments of
220 Mmcf related to gas imbalance cash settlements and 149 Mmcf related to
well payout adjustments. Excluding 1995 gas balancing and payout adjustment
volumes, gas sales volumes for 1996 increased by 210 Mmcf or 16%. 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 76,200
barrels, up 21% over 1995 volumes of 62,900 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 20,900
barrels or 38% as compared to the same period in 1995. The sales volume
increases for 1996, after excluding 1995 non-recurring volumes, 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 11% to a combined total of $768,000 in 1996 as compared
to $694,000 in 1995. This increase is primarily attributable to recoupment of
previously deferred treating fees and higher per Mcf contract treating fees.
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 $7,200,000 of gross settlement
proceeds from NFG and all parties to the settlement agreement dismissed all
claims and counterclaims against each other. In conjunction with the NFG
settlement, the Company recognized a net litigation settlement gain of
$7,100,000, after payment of $100,000 to a third party entitled to participate
in the proceeds. Pursuant to amended credit agreements with BMOF (See Note 3),
50% or $3,600,000 of the settlement proceeds were paid to BMOF in cancellation
and full payment of the non-recourse secured note. The Company also recognized
an extraordinary gain from debt forgiveness of $1,831,000, net of income taxes
of $37,000, in conjunction with the final payment. As a result of the NFG
proceeds, BMOF payment and payment to another third party entitled to
participate in the proceeds, the Company retained $3,500,000 of net litigation
settlement proceeds.
For 1996, the Company recorded gains on property sales and other revenues of
$873,000 as compared to $292,000 for 1995. The 1996 gain on property sales of
$166,000 is primarily the result of the Company selling, in separate
transactions, marginal wells and an interest in a pipeline for gross sale
proceeds of $215,000 resulting in a net gain of $166,000 as compared to 1995's
gain on wells sold of $68,000. Other revenues for 1996 is comprised of take-
or-pay contract net settlement proceeds of approximately $110,000, net
settlement proceeds regarding fees on the pipeline interest sold in 1996 of
$218,000, dismissal of certain pre-petition liabilities, pursuant to the Plan
and statute of limitations, of $217,000 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 $953,000 or 19% to
$5,983,000 as compared to $5,030,000 for 1995. The increase in expenses was
primarily due to higher 1996 general and administrative expenses.
For 1996, total operating expenses increased $141,000 or 11% to $1,417,000
as compared to $1,276,000 for 1995. Included in operating expenses are
workover costs, severance taxes and through wellhead production costs (lifting
costs).
Workover costs for 1996 and 1995 totaled $252,000 and $274,000,
respectively, and primarily represent discretionary well production activities
that are implemented to enhance or increase production. A significant
19
<PAGE>
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 1997.
Severance taxes for 1996 and 1995 were $234,000 and $202,000, respectively.
The increase in severance taxes is related to increased oil sales volumes and
oil and natural gas revenues due to higher prices.
Excluding workover costs and severance taxes, 1996 and 1995 operating
expenses totaled $931,000 and $800,000, respectively, for production costs
through the wellhead. 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 $0.46 as compared to $0.38 for 1995.
Treating and transportation expenses in 1996 increased by $165,000 or 26% to
$794,000 as compared to 1995 cost of $629,000. These costs represent post
wellhead expenditures incurred to treat Company gas to comply with pipeline
specifications or to transport the gas to market. The 1996 increase is
primarily due to contract treating fee escalations and recognition of
previously deferred treating fees pursuant to an agreement. Treating and
transportation expenses for 1996 and 1995, per equivalent Mcf, were $0.40 and
$0.30, respectively.
Depletion, depreciation, and amortization ("DD&A") expense in 1996 decreased
$9,000 or 1% to $964,000 from $973,000 in 1995 due primarily to a decrease in
the weighted average DD&A rate per equivalent Mcf. The weighted average DD&A
rate for 1996 decreased 4% to $0.46 per equivalent Mcf as compared to 1995's
rate of $0.48.
Pursuant to successful efforts accounting, unsuccessful exploration costs
are expensed as opposed to capitalized. For 1996 such costs represented
activity on two gross wells (net .43) at a net cost to the Company of
$164,000. Exploration costs for 1995 of $69,000 represented activity on three
gross wells (net .46).
General and administrative expenses in 1996 increased by $961,000 or 65% to
$2,437,000 from $1,476,000 in 1995 due primarily to expenses associated with
the Company's 1996 recapitalization efforts and 1995 benefiting from a
litigation receivable recoupment and franchise tax settlement, both non-
recurring benefits. General and administrative expenses for 1996 included
$440,000 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 1997. In 1995, the Company recognized a receivable
allowance recoupment of $425,000 in conjunction with litigation settlement
regarding affiliated receivables. Also, in 1995, the Company recognized a
reduction in franchise tax expense of $166,000 related to a settlement.
Excluding the 1996 equity restructuring costs and 1995 receivable allowance
recoupment and franchise tax settlement benefits, 1996 general and
administrative expenses decreased $70,000 as compared to 1995.
Interest expense for 1996 decreased $400,000 or 66% to $207,000 from
$607,000 in 1995, primarily due to a decrease in borrowings outstanding.
Accrued interest pursuant to the nonrecourse BMOF note, which was payable in
kind through issuance of additional notes, decreased $333,000 in 1996 to
$132,000 as a result of final debt payment and forgiveness in April 1996.
Interest pursuant to the Company's secured facility also declined in 1996 due
to lower average debt outstanding. Included in 1996 and 1995 is approximately
$30,000 and $36,000, respectively, of amortization of credit facility
establishment costs which are being amortized over the remaining term of the
facility.
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 1996 of $180,000, which includes $37,000 of income tax related
to the extraordinary gain. The tax expense recognized represents an effective
tax rate of approximately 2% on income before income taxes. In 1996, the
Company recognized a deferred income tax asset of $930,000, of which $680,000
was current, based on current projected benefit to be realized from existing
tax loss carryforwards.
20
<PAGE>
Debt forgiveness for 1996 and 1995 resulted in the recognition of an
extraordinary gain of $1,831,000, net of income taxes of $37,000, and $93,000,
respectively. The 1996 gain is the result of payment of 50% of the NFG
Litigation gross proceeds or $3.6 million, pursuant to the amended credit
agreement, in full settlement of the BMOF note of $4,652,000 and related
accrued interest of $816,000. The BMOF debt forgiveness extraordinary gain of
$1,868,000 was reduced by related income taxes of $37,000. The 1995 gain of
$93,000 was derived from Administrative Note settlements and claim
forfeitures.
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 $12,873,000 as compared to $12,038,000 for 1995.
Dividends on the Old Preferred Stock were $270,000 for 1996 and 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 21% to $6,104,000 for 1996 as compared to $5,045,000 in 1995.
FINANCIAL CONDITION
During 1996, the Company's capital expenditures totaled $4,280,000, an
increase of $3,052,000 from 1995 activity and were primarily related to
development drilling and producing well acquisition activity. The Company also
incurred workover costs of $252,000. The positive results of these
expenditures are reflected in the increased sales and reserve quantities
reported in 1996.
At December 31, 1996, the Company had positive working capital of $1,015,000
which represents an increase of $2,786,000 from the prior year end working
capital deficit. The significant improvement in working capital is
attributable to the $3.5 million of net litigation settlement proceeds
retained by the Company after BMOF debt and other third party participation
payments and the inclusion of a $680,000 current deferred tax asset.
As a result of the litigation settlement proceeds, in April 1996 the Company
paid $3,600,000 in full settlement of the $5,468,000 of BMOF debt, including
interest due of $816,000. The Company used a portion of the settlement
proceeds to retire $900,000 of Bank One credit facility borrowings then
outstanding. Late in 1996, the Company borrowed $1,500,000 under the Bank One
facility in connection with proved oil and gas property acquisitions. The Bank
One credit facility matures on June 30, 1999 and the interest rate is the
bank's stated rate plus 1.5%. The borrowing base under the current credit
facility at December 31, 1996 was $4,700,000 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 December 31,
1996, the Senior Preferred redemption value and accrued dividends were
$87,886,000 and $53,294,000, respectively. These amounts, plus any additional
accrued dividends, must be satisfied before any value can be attributed to the
holders of Old Preferred and Common Stock.
At December 31, 1996, the stockholders' deficit was $69,676,000. Due to the
dividend requirements for the Senior Preferred Stock and Old Preferred Stock
and accretion of the redemption value of Senior Preferred, if the proposed
equity restructuring is not consummated, it is probable that the Company's
stockholders' equity will remain a deficit for the foreseeable future.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For 1996, the Company's cash provided by operating activities was $8,199,000
and included net litigation settlement proceeds of $7,100,000 of which
$3,600,000 was paid to BMOF (See Note 3). Also, included in cash provided by
operating activities is approximately $691,000 of proceeds received from the
Company's 35% equity investment in the Comite Field Plant Venture. Primarily
as a result of the litigation settlement and recognition of a current deferred
tax asset, the Company had positive working capital of $1,015,000 at the end
of the current year.
In 1996, the Company purchased, for cash, producing oil and gas properties,
through numerous transactions, for $2,932,000 with effective dates at various
times during the year. Of such purchases, $1,737,000, comprising eight
separate transactions, was acquired in December with effective dates at the
end of December 1996, resulting in no impact on 1996 revenues and expenses.
Had all 1996 properties purchased been acquired at the beginning of the year,
the impact on revenues and income before income taxes and extraordinary gain
would have been an increase of $889,000 and $405,000, respectively. The
Company anticipates that these acquisition properties will have a positive
impact on future results.
The Bank One credit facility has a current borrowing base of $4,700,000 with
$1,500,000 of borrowings outstanding at December 31, 1996. The Company has
letter of credit commitments totaling $92,000 outstanding under the credit
facility resulting in a year-end facility availability of $3,108,000. 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.
The Company has no requirements to make payments on the Senior Preferred
share obligations until the year 2002. If the Company's planned Merger is
consummated, such Senior Preferred obligations will be eliminated.
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 of approximately 350,000 Mcf as of
December 31, 1996 and is currently recouping or attempting to settle its net
under-produced status. Any balancing recoupments or settlements, which will
typically be over an extended period of time, are not anticipated to be
material to future 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.
Inflation and Changes in Prices. The Company's revenues have been and will
continue to be affected by changes in oil and natural gas prices which have
been unstable. For management purposes, the Company assumes that oil and
natural gas prices will escalate at 5% per annum and that costs and expenses
will escalate at 4% per annum. The principal effects of inflation on the
Company relate to the costs required to drill, complete and operate oil and
natural gas properties. Such costs have also been on a general downward trend
since the early 1980's due primarily to the industry-wide decrease in drilling
activity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of December 31, 1996 and
1995 and for each of the two years ended December 31, 1996, and the report of
Price Waterhouse LLP, independent accountants, follow.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of TGX Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of TGX Corporation and its
subsidiaries (the Company) at December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
February 10, 1997, except
as to Note 14 which is
as of March 31, 1997.
23
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1996 1995
------ -------- --------
(THOUSANDS OF
DOLLARS EXCEPT
FOR SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 1,924 $ 384
Accounts receivable, net of allowance for doubtful
accounts of $200 (1996) and $320 (1995)................. 1,291 1,141
Accounts receivable from affiliates...................... -- 6
Deferred tax asset....................................... 680 --
Other current assets..................................... 117 51
-------- --------
Total current assets................................... 4,012 1,582
-------- --------
Property and equipment:
Oil and natural gas properties........................... 15,535 11,340
Other property and equipment............................. 204 203
Accumulated depletion, depreciation and amortization..... (5,103) (4,132)
-------- --------
Property and equipment, net............................ 10,636 7,411
-------- --------
Investment in Comite Field Plant Venture--Note 5........... 596 739
Deferred tax asset......................................... 250 --
Other assets............................................... 53 59
-------- --------
Total other assets..................................... 899 798
-------- --------
TOTAL ASSETS............................................... $ 15,547 $ 9,791
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities--Note 6......... $ 2,997 $ 3,353
-------- --------
Total current liabilities.............................. 2,997 3,353
-------- --------
Long-term debt--Note 3..................................... 1,500 5,835
-------- --------
Total liabilities...................................... 4,497 9,188
-------- --------
Commitments and contingencies--Note 4
Redeemable Senior Preferred Stock, 8,788,571 (1996) and
8,851,360 (1995) shares outstanding; redemption value
$87,886 (1996) and $88,514 (1995)--Note 7................. 80,726 61,737
-------- --------
Stockholders' deficit--Note 8
9% Cumulative Convertible Preferred Stock, 300,000 shares
outstanding plus 185,000 (1996) and 158,000 (1995)
shares to be issued for dividends....................... 485 458
Common stock, 24,955,807 (1996) and 24,956,033 (1995)
shares outstanding...................................... 290 290
Additional paid-in capital............................... 1,665 1,422
Accumulated deficit...................................... (72,116) (63,304)
-------- --------
Total stockholders' deficit............................ (69,676) (61,134)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................ $ 15,547 $ 9,791
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE DATA)
<S> <C> <C>
REVENUES
Oil and natural gas sales.......................... $ 5,059 $ 3,611
Natural gas gathering.............................. 220 245
Equity earnings in Comite Field Plant Venture...... 548 449
Litigation settlement gain, net--Note 3............ 7,100 --
Gain on property sales............................. 166 68
Other, net......................................... 707 224
-------- --------
13,800 4,597
-------- --------
COSTS AND EXPENSES
Operating expenses................................. 1,417 1,276
Treating and transportation expenses............... 794 629
Depletion, depreciation and amortization........... 964 973
Exploration costs.................................. 164 69
General and administrative expenses................ 2,437 1,476
Interest........................................... 207 607
-------- --------
5,983 5,030
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
GAIN.............................................. 7,817 (433)
Income tax expense (benefit)--Note 9:
Current.......................................... 143 --
Deferred......................................... (930) --
-------- --------
(787) --
-------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN............ 8,604 (433)
Extraordinary gain, net of income taxes of $37 in
1996--Note 3...................................... 1,831 93
-------- --------
NET INCOME (LOSS).................................. 10,435 (340)
Preferred stock dividends.......................... (13,143) (12,308)
Accretion of Senior Preferred redemption value..... (6,104) (5,045)
-------- --------
NET LOSS APPLICABLE TO COMMON STOCK................ $ (8,812) $(17,693)
======== ========
NET INCOME (LOSS) PER SHARE OF COMMON STOCK:
Before extraordinary gain........................ $ (0.42) $ (0.71)
Extraordinary gain............................... 0.07 --
-------- --------
NET LOSS PER SHARE OF COMMON STOCK................. $ (0.35) $ (0.71)
======== ========
AVERAGE COMMON SHARES OUTSTANDING.................. 24,956 25,105
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31,
----------------
1996 1995
------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $10,435 $ (340)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depletion, depreciation and amortization.......... 964 973
Amortization of debt transaction costs and stock
compensation..................................... 55 79
Gain on property sales............................ (166) (68)
Distributions in excess of equity earnings........ 143 139
Interest to be paid through issuance of additional
notes............................................ 132 465
Extraordinary gain................................ (1,868) (93)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable....... (150) 65
Decrease in accounts due from/to affiliates, net. 6 256
Increase in deferred tax asset................... (680) --
Decrease (increase) in other current assets...... (66) 9
(Decrease) increase in accounts payable and
accrued liabilities............................. (356) 1
Deferred tax asset................................ (250) --
------- -------
Net cash provided by operating activities............ 8,199 1,486
------- -------
Cash flows from investing activities:
Capital expenditures............................... (4,280) (1,228)
Proceeds from disposal of assets................... 215 168
Decrease (increase) in other assets................ (7) --
------- -------
Net cash provided by (used in) investing
activities........................................ (4,072) (1,060)
------- -------
Cash flows from financing activities:
Principal payments of long-term debt and notes
payable........................................... (4,500) (1,601)
Advances pursuant to revolving credit facility..... 1,900 850
Debt transaction costs and other................... 13 33
------- -------
Net cash used in financing activities.............. (2,587) (718)
------- -------
Net increase (decrease) in cash and cash equivalents. 1,540 (292)
Cash and cash equivalents at beginning of period..... 384 676
------- -------
Cash and cash equivalents at end of period........... $ 1,924 $ 384
======= =======
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
Forgiveness of bank debt and other notes payable... $ 1,868 $ 93
Interest to be paid through issuance of additional
notes............................................. $ 132 $ 465
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Reorganization Proceeding
TGX Corporation ("TGX") (collectively with its subsidiaries, the "Company"),
is a domestic independent energy company engaged in the production of oil and
natural gas. The Company is also engaged in intrastate natural gas gathering
and treating.
As discussed in Note 2, on February 22, 1990, TGX filed a voluntary petition
for reorganization pursuant to Chapter 11 of the Bankruptcy Code. TGX's then
wholly owned subsidiaries, LEDCO, TGX Finance Corporation, Diablo Farms, Inc.,
and Templeton Energy Income Corporation, did not file petitions for
reorganization under the Bankruptcy Code nor did any of the limited or general
partnerships for which TGX served as general partner. On January 7, 1992, the
Bankruptcy Court confirmed an Amended Plan of Reorganization (the "Plan") for
TGX and on October 2, 1992 an order of substantial consummation regarding the
Plan became final and nonappealable. Accordingly, the Company implemented
fresh start reporting as of October 2, 1992.
During 1996, the Company commenced efforts to effect a recapitalization by
merging with and into its wholly-owned subsidiary, GeoStrat Resources, Inc.
("GeoStrat"). GeoStrat was incorporated in 1996 solely to accomplish the
planned merger. GeoStrat has no independent operations of its own and will
conduct the operations of TGX, as the surviving corporation, if the merger is
consummated.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TGX and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company accounts for its investments in
limited and general partnerships under the proportionate consolidation method.
Under this method, the Company's financial statements include its pro-rata
share of assets, liabilities, revenues, and expenses of the limited and
general partnerships in which it owns beneficial interests. At year end 1995,
all Company sponsored partnerships had been liquidated. The Company's 35%
investment in a natural gas treating plant is accounted for using the equity
method.
Oil and Natural Gas Properties
In conjunction with the implementation of fresh start reporting, as
described in Note 2, the Company also implemented the successful efforts
method of accounting for oil and natural gas operations. Under the successful
efforts method, capitalized costs relating to proved properties are amortized
using the unit-of-production method based on estimated proved reserves. The
cost of unsuccessful exploration wells is charged to operations. If an
assessment indicates that an unproved property has been impaired, a loss is
recognized by providing a valuation allowance. Net capitalized costs in excess
of future net revenues, adjusted for tax effects, are charged to operations in
the year during which such excess occurs. Generally, a gain or loss is
recognized on the disposition of a property.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" in the fourth quarter of 1995. Under the provisions
of the statement, if the net book value of an individual asset is greater than
its undiscounted future net cash flows, then the excess of the net book value
over the fair value is recognized as an impairment of the asset. This adoption
had no effect on the Company's 1996 or 1995 financial statements.
27
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Property and Equipment
Depreciation of other property and equipment is provided on the straight-
line method over the estimated useful lives of the related assets, which range
from 3 to 25 years.
Revenue Recognition
Revenue from the sale of crude oil is recognized upon the passage of title,
net of royalties. Revenue from natural gas production is recognized using the
sales method, net of royalties. 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 of approximately
350,000 Mcf as of December 31, 1996 and is currently recouping or attempting
to settle its net under-produced status. Any balancing recoupments or
settlements, which will typically be over an extended period of time, are not
anticipated to be material to future operating results.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair value method
of accounting and reporting for awards granted after December 15, 1995 under
stock compensation plans. SFAS No. 123 encourages, but does not require,
companies to adopt the fair value method of accounting in place of the
existing method of accounting for stock-based compensation for employees
whereupon compensation costs are recognized only in situations where stock
compensation plans award intrinsic value to recipients at the date of grant.
Companies that do not adopt the fair value method of accounting prescribed in
SFAS No. 123 must, nonetheless, make annual pro forma disclosures of the
estimated effects on net income and earnings per share in their year-end 1996
financial statements as if the fair value method had been used for grants
after December 31, 1994. The Company has elected to follow the accounting
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees", as allowed by SFAS No. 123.
Cost and Expense Reimbursements
Pursuant to the provisions of the applicable agreements, the Company reduced
certain of its costs and expenses by reimbursements for certain administrative
and operating costs paid or incurred in connection with the administration and
supervision of certain oil and natural gas properties and limited and general
partnerships which are sponsored by the Company. During late 1995 all Company
sponsored partnerships were liquidated through third party sales.
Per Share Amounts
Per share amounts are determined by dividing net income or loss applicable
to Common Stock by the weighted average number of common shares outstanding
during the year. In 1996 and 1995, the dilutive effect, if any, of the assumed
conversion of preferred stock to common stock was considered for the
computation of fully diluted income or loss per common share and such assumed
conversion was not material to the computation. The assumed exercise of
outstanding stock options was not included in the computation of per share
amounts as their effect was not dilutive.
28
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
Cash includes cash on-hand and cash in interest bearing accounts with
original maturities of 90 days or less.
Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities and the
periods in which certain items of revenue and expense are included. Actual
results may differ from such estimates.
Reclassifications
Certain amounts from prior years have been reclassified to conform to the
current year presentation.
2. REORGANIZATION PROCEEDING
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 of 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 at October 2, 1992, 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 being litigated (See Note 4), 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 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.
29
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The recorded value of the Series A Senior Preferred Stock (the "Senior
Preferred") issued pursuant to the Plan was determined based on the
difference between the RV of the Company's assets less the sum of (i) the
present value of liabilities plus (ii) the par value of pre-consummation
equity interests. The accretion of the difference between the recorded
value and the $10 per share redemption amount of the Senior Preferred is
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 were comparable and the difference between the Company's calculated RV and
the FMV could, in fact, have been material.
Pursuant to the provisions of the Plan, TGX provided for (i) the payment in
full of its secured debt by the issuance of new notes pursuant to the terms of
a restructured credit agreement, (ii) the conversion of substantially all of
its unsecured debt into two different series of preferred stock, (iii) tax and
priority and certain other specified classes of claims and interests arising
from options for common stock being paid in cash, retained or otherwise
provided for, and (iv) administrative claims being paid in cash or otherwise
being satisfied.
Three of the large administrative claimants (the "Opposing Administrative
Claimants") agreed that in full satisfaction of the balance of their
administrative claims they would receive (i) a payment of $300,000 (ii) 55,000
shares of Senior Preferred and (iii) the conveyance of approximately 29,400
acres of undeveloped land in Culberson and Hudspeth Counties, Texas. In
satisfaction of their unpaid administrative claims, all other administrative
claimants received cash and/or were entitled to receive promissory notes due
December 31, 1994 which were secured by certain assets of the Company. Such
notes were issued upon the execution of releases in favor of the Company and
others. As set forth in Note 3 below, all administrative notes were ultimately
settled through whole or partial repayment in cash, issuance of shares of
Senior Preferred and issuance of a non-recourse note payable out of proceeds
from the NFG Litigation described in Note 4 below.
TGX was a party to numerous executory contracts which, pursuant to the
provisions of the Bankruptcy Code, could be assumed or rejected by TGX. If an
executory contract was assumed by TGX, all defaults related to the executory
contract were cured (generally, paid-in-full with cash). At December 31, 1995,
the aggregate balance of pre-petition obligations related to assumed executory
contracts was approximately $317,000 and represented undistributed net oil and
gas revenues in a "suspended pay" status. Pursuant to the Plan and statue of
limitations, the "suspended pay" liability was dismissed during 1996. If an
executory contract was rejected by TGX, all claims related to the executory
contract were satisfied pursuant to the terms of the Plan.
As of the Effective Date of the Plan, the preferred and common stockholders
selected a new Board of Directors to serve until January 1995, or until their
successors were duly elected and qualified. When new directors are elected,
the Plan provides that directors are to be elected without regard to class
representation. However, holders of Senior Preferred have 95% of the voting
power of the Company and a plurality of such holders can, therefore,
effectively elect all Directors. In addition, to whatever number of directors
is provided for in the Company's by-laws, two additional directors are to be
elected solely by the Senior Preferred Stockholders until the Company has made
up its dividend arrearages.
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 of the dividends
since the Effective Date of the Plan and based on the current financial
position of the Company, 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.
30
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT AND NOTES PAYABLE
As of December 31, 1996 and 1995, the components of long-term debt were:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Bank borrowings:
Revolving credit facility (secured)..................... $1,500 $ 500
Nonrecourse note........................................ -- 5,335
Less current maturities................................. -- --
------ ------
Long-term debt........................................ $1,500 $5,835
====== ======
</TABLE>
On July 13, 1994, the Company entered into a series of agreements with Bank
One, Texas N.A. ("Bank One") whereby the Company's then outstanding secured
debt with the Bank of Montreal ("BMO") was restructured and all existing BMO
events of default were resolved. Pursuant to the restructuring, Bank One
established a borrowing-based facility of $2,350,000 under which the Company
immediately borrowed $1,600,000 of which $1,452,000 was paid to BMO. The Bank
One facility initially bore interest at Bank One's stated rate plus 2% and was
to mature on July 13, 1997. The Bank One facility is secured by substantially
all of the Company's oil and gas properties. Effective September 30, 1996, the
credit facility was amended and the borrowing base was increased to
$5,000,000, with monthly borrowing base reductions of $100,000, interest rate
lowered to stated rate plus 1.5% and the maturity extended to June 30, 1999.
The Bank One facility at December 31, 1996 had a borrowing base of $4,700,000
and is redetermined every six months or at Bank One's discretion. 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, a tangible net
worth, including Senior Preferred stock, of a minimum of $5,000,000, a future
annual limit on general and administrative expense of $1,700,000 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 litigation with National Fuel Gas Distribution Corporation ("NFG
Litigation"). See Note 4 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,
the Company made a debt service payment of approximately $14,300,000 to BMO.
As set forth above, in July 1994, in connection with the 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, including fees and
expenses, to a nonrecourse note secured only by the NFG Litigation and any
proceeds that might be received therefrom. BMO assigned its rights to the
loan, security, and the Company's note to BMO's wholly owned subsidiary, BMO
Financial, Inc. ("BMOF"). As of December 31, 1995, total accrued interest
pursuant to the BMOF note was $683,000, payable through the issuance of
additional notes, resulting in a total year-end BMOF debt of $5,335,000. On
December 31, 1995, the Company and BMOF executed
31
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $8,000,000. BMOF was to receive 100% of any proceeds in excess of
$8,000,000 until the total received by BMOF equalled the BMOF Principal, plus
any accrued interest. Thereafter, the Company was to receive proceeds until
the total it received equalled the amount received by BMOF, and any additional
NFG Litigation proceeds would have been shared equally by TGX and BMOF. If NFG
Litigation proceeds were insufficient to repay the BMOF loan, plus applicable
interest, the Company had no further obligation for such repayment. The BMOF
note 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 of such loan, no cash payment for such
interest was required; instead, the Company was to pay interest in kind
through the issuance of additional notes to 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, TGX received on April 19, 1996, $7,200,000 from NFG and all parties
to the Settlement Agreement dismissed all claims and counterclaims against
each other. As a result of the NFG gross settlement proceeds and payment of
$100,000 to another party entitled to participate in the proceeds, TGX
recorded a net litigation settlement gain of $7,100,000. Pursuant to amended
credit agreements with BMOF, 50% of the gross settlement proceeds were paid to
BMOF in cancellation and full payment of the non-recourse secured note
totaling $5,468,000, including accrued interest of $816,000. TGX recorded an
extraordinary gain for debt forgiveness of $1,831,000, net of income taxes of
$37,000, in conjunction with the $3,600,000 BMOF final payment.
During the Reorganization Proceeding, the Company incurred and claimants
filed applications for approximately $7,131,000 in administrative fees and
expenses relating to the reorganization ("Administrative Claims"). The Company
objected to certain of the Administrative Claims and negotiated settlement
amounts and terms of payment with certain holders of Administrative Claims. As
a result, administrative claimants, other than the Opposing Administrative
Claimants, upon execution of certain releases in favor of the Company and
others, were entitled to receive promissory notes (the "Administrative Notes")
due December 31, 1994, in satisfaction of each of their unpaid administrative
claim. Substantially all administrative claimants entitled to receive
Administrative Notes, perfected their claims by executing such releases. The
Administrative Notes bore interest at a rate not to exceed 8% and were secured
with certain collateral (the "Consummation Collateral"). If the proceeds
related to the Consummation Collateral were not sufficient to satisfy the
Company's obligations under the Administrative Notes the Company's excess
operating funds, if any, were to be applied toward the balances due. During
late 1994 and early 1995, the Company negotiated settlement with substantially
all of the Administrative Note holders. As a result of negotiated settlements
and forfeitures, Administrative Notes and Administrative Claims totaling
approximately $1,126,000 in principal and $253,000 in accrued interest were
renegotiated or forfeited with the Company making cash payments in the
aggregate of $455,000, issuing 151,518 shares of Senior Preferred Stock and
further issuing its non-recourse note in the aggregate amount of $90,000
payable out of proceeds received by the Company from the NFG Litigation, if
any, and all such notes and claims were deemed settled as of year end 1995.
The Company reflected an extraordinary net gain in 1995 of $93,000 in
conjunction with these settlements.
Cash paid for interest during 1996 and 1995 totaled approximately $45,000
and $64,000, respectively.
32
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. 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.
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
dismissed the Turnover Proceeding without prejudice and 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.
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 parties
to the Settlement Agreement have dismissed all claims and counterclaims
against each other.
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 separate 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. TGX
does not believe that the ultimate resolution of these matters will have a
material adverse effect on the financial condition or results of operations of
TGX.
In March 1994, a hearing was conducted in the Bankruptcy Court regarding the
final allowance of pre-petition and administrative claims related to an
overriding royalty interest previously conveyed by TGX. During that hearing,
the parties stipulated that the finally allowed amount of the claimant's
prepetition claim would be $600,000. That prepetition claim has been fully
satisfied by the issuance of 60,000 shares 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, was to be treated by the issuance of an Administrative Note
under the terms of the Plan, and was 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. On May 9, 1996, TGX settled this litigation for
payment of $400,000 and return of the 60,000 shares of Senior Preferred
previously issued.
33
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 31, 1995, the Company entered into a Settlement Agreement among
itself, Paragon Resources, Inc., J. C. Templeton, W. M. Templeton and a number
of other former directors of the Company, trusts on behalf of members of the
Templeton family and other entities pursuant to which all lawsuits between and
among the parties were dismissed with prejudice. In consideration therefor,
the Company received $325,000, an assignment of certain oil and gas leases,
and receipt of past due joint operating expenses payable by certain of the
defendants. The Company released lis pendens against certain of the
defendants' properties and conveyed to the defendants an interest in certain
properties to which they were entitled. The parties to the litigation also
conveyed to the Company any Common Stock or Preferred Stock which they held.
From time to time, in the normal course of business, the Company is a party
to various other litigation matters the outcome of which, to the extent not
otherwise provided for, should not have a material adverse effect on the
Company.
Leases
As of December 31, 1996, the Company's only lease commitment was for its
office lease which is cancellable, at the Company's election, with 90 days
notice and expires on May 31, 1999. Future annual rental amounts are $70,000
(1997), $70,000 (1998) and $29,000 (1999).
Other
As of December 31, 1996, the Company had letters of credit outstanding of
$92,000 under the Bank One credit facility which reduced the Company's
availability under the facility. See Note 3 above.
5. INVESTMENT IN NATURAL GAS TREATING PLANT
In conjunction with the acquisition of Amarex, Inc. in 1985, the Company
acquired Amarex's 35% interest in the Comite Field Plant Venture (the
"Venture"), an Oklahoma general partnership formed in April 1982 for the
purpose of constructing and operating a natural gas treating plant to serve
the Comite Field in East Baton Rouge Parish, Louisiana. Natural gas produced
from one well operated by the Company and two wells of other operators are
transported to the plant where contaminants are extracted to satisfy pipeline
specifications. In addition, the plant also provides condensate handling and
saltwater disposal facilities. The Company receives cash distributions from
the Venture for its share of net cash flow. In addition, the Venture charges
the Company for gas treating and such charges are included in operating
expenses.
34
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Venture's unaudited financial position as of December 31,
1996 and 1995, and the results of its operations for the years then ended is:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
SUMMARY BALANCE SHEETS
Current assets................................................... $ 594 $ 667
Net property and equipment....................................... 1,278 1,701
------ ------
$1,872 $2,368
====== ======
Current liabilities.............................................. $ 144 $ 155
Long-term debt................................................... 50 100
Partners' capital................................................ 1,678 2,113
------ ------
$1,872 $2,368
====== ======
SUMMARY STATEMENTS OF EARNINGS
Fees earned...................................................... $2,608 $2,448
Operating expenses............................................... 1,062 1,131
------ ------
Operating income................................................. 1,546 1,317
Other income..................................................... 4 8
------ ------
Net income....................................................... $1,550 $1,325
====== ======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of December 31, 1996 and 1995, the primary components of accounts payable
and accrued liabilities were (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Accounts payable................................................. $ 360 $ 555
Undistributed net oil and natural gas revenue.................... 1,281 1,152
Accrued pre-petition liabilities................................. -- 518
Accrued operating and tax expenses............................... 354 312
Accrued professional fees........................................ 347 125
Income tax liability............................................. 180 --
Operation advances............................................... 115 159
Miscellaneous accruals........................................... 360 532
------ ------
$2,997 $3,353
====== ======
</TABLE>
35
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. REDEEMABLE SENIOR PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Series A Redeemable
Senior Preferred Stock ("Senior Preferred") with a par value of $1 per share.
The Senior Preferred entitles its holders to receive a 10% annual compounded
cash dividend, payable quarterly, provided however, that the payment of such
dividend does not violate Delaware law or certain covenants in the Company's
bank loan agreements. The Company has not paid any of the quarterly dividends
required to date and based on the Company's current financial position does
not expect to make any such dividend payments in the near future. The Senior
Preferred have a liquidation preference of $10 per share and have priority
over the liquidation preference afforded the holders of Series B Preferred
Stock (the "Junior Preferred"), 9% Cumulative Convertible Preferred Stock (the
"Old Preferred") and Common Stock. The Senior Preferred are scheduled to be
redeemed on January 21, 2002 ("Redemption Date"). On a monthly basis, the
accretion of the difference between the recorded value and the redemption
amount of the Senior Preferred is reflected as a reduction of income
applicable to common stockholders. Since the Senior Preferred have both debt
and equity characteristics it is not classified as a component of equity.
Holders of Senior Preferred have 95% of the voting rights of the Company with
the remaining 5% of voting rights being allocated collectively among the
holders of the Junior Preferred, Old Preferred and Common Stock.
Pursuant to the Plan, the Company provided for a total of 8,529,246 shares
to be issued to holders of certain unsecured claims on the basis of one share
of Senior Preferred for every $10 of certain finally allowed or otherwise
agreed upon claim. During 1992, an additional 200,000 shares were issued to an
executive officer pursuant to a management agreement. In conjunction with
fresh start reporting, in 1992, the Senior Preferred was recorded at a value
of $11,046,000 which is $76,246,000 less than redemption value. In 1995, an
additional 250,000 shares were issued to certain executive officers and
128,110 canceled in conjunction with settlement of certain pre-petition
obligations, post-petition asset sale and litigation settlement. In 1996,
60,000 shares were canceled in conjunction with litigation settlement and
2,565 shares canceled as a result of purchase by the Company. The Company
recorded in 1996 and 1995 $24,000 and $52,000, respectively, of stock
compensation expense related to the management agreement and executive officer
stock issuances. Stock compensation expense is amortized over the stock award
forfeiture period of two years from grant date. For stock compensation expense
recognition purposes the 1992 award was valued at $1.50 per share, based on an
internal estimate of Company net assets as of October 2, 1992 (fresh start
reporting). The 1995 awards were valued based on a reported 1995 Senior
Preferred trade at $0.20 per share. The compensation accruals recognized by
the Company are not significantly different from amounts that would have been
recognized under the SFAS 123 fair value method at the grant date.
36
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Since December 31, 1994, the components of the number of shares of the
Company's Senior Preferred and changes in associated values are as follows (in
thousands):
<TABLE>
<CAPTION>
NUMBER RECORDED
OF SHARES VALUE
--------- --------
<S> <C> <C>
Balance, December 31, 1994.................................. 8,729 $44,602
Accrued and unpaid dividends................................ -- 12,038
Accretion on redemption value and dividends................. -- 5,045
Amortization of compensation shares pursuant to
management agreement....................................... -- 35
Shares issued pursuant to management
option agreements.......................................... 250 17
Shares canceled............................................. (128) --
----- -------
Balance, December 31, 1995.................................. 8,851 61,737
Accrued and unpaid dividends................................ -- 12,873
Accretion on redemption value and dividends................. -- 6,104
Amortization of compensation shares pursuant to
management agreement....................................... -- 24
Shares canceled............................................. (63) (12)
----- -------
Balance, December 31, 1996.................................. 8,788 $80,726
===== =======
</TABLE>
See Note 14 below.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Since December 31, 1994, the components of the number of shares of the
Company's stockholders' equity (deficit) and the changes therein are:
<TABLE>
<CAPTION>
OLD
PREFERRED COMMON TREASURY
STOCK STOCK STOCK
--------- ------ --------
(THOUSANDS OF SHARES)
<S> <C> <C> <C>
Balance, December 31, 1994........................... 431 25,314 3,663
Dividends on Old Preferred Stock..................... 27 -- --
Shares surrendered................................... -- (358) 358
--- ------ -----
Balance, December 31, 1995........................... 458 24,956 4,021
Dividends on Old Preferred Stock..................... 27 -- --
--- ------ -----
Balance, December 31, 1996........................... 485 24,956 4,021
=== ====== =====
</TABLE>
As a result of the Senior Preferred Stock liquidation and dividend
preference, no value was ascribed to common stock held in treasury.
37
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Since December 31, 1994, the components of the Company's stockholders'
equity (deficit), and the changes therein are:
<TABLE>
<CAPTION>
OLD ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
--------- ------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, December 31, 1994............. $431 $290 $1,179 $(45,611)
Preferred dividends, payable with
additional shares of Old Preferred.... 27 -- 243 (270)
Dividends on Senior Preferred.......... -- -- -- (12,038)
Accretion of Senior Preferred
redemption value...................... -- -- -- (5,045)
Net loss............................... -- -- -- (340)
---- ---- ------ --------
Balance, December 31, 1995............. 458 290 1,422 (63,304)
---- ---- ------ --------
Preferred dividends payable with
additional shares of Old Preferred.... 27 -- 243 (270)
Dividends on Senior Preferred.......... -- -- -- (12,873)
Accretion of Senior Preferred
redemption value...................... -- -- -- (6,104)
Net income............................. -- -- -- 10,435
---- ---- ------ --------
Balance, December 31, 1996............. $485 $290 $1,665 $(72,116)
==== ==== ====== ========
</TABLE>
Cumulative Convertible Preferred Stock
The Company is authorized to issue 10,000,000 shares of 9% Cumulative
Convertible Preferred Stock (the "Old Preferred") of which 300,000 shares are
outstanding. The Old preferred have a $1 par value and a liquidation
preference of $10 per share, convertible at any time at the rate of one Old
Preferred share for four shares of the Company's Common Stock. In addition,
185,000 shares of Old Preferred will be issued for accrued dividends. Until
the redemption value plus all accrued dividends attributable to Senior
Preferred are paid in full, dividends related to the Old Preferred will be
paid with additional shares of Old Preferred.
Common Stock
The Company is authorized to issue 100,000,000 shares of Common Stock, with
a $.01 par value, of which 24,955,807 were outstanding at December 31, 1996.
All outstanding shares of Common Stock are fully paid and non-assessable.
The holders of Common Stock are entitled to one vote per share upon all
matters presented to them. Pursuant to the Plan, holders of Common Stock are
entitled, collectively with holders of Junior Preferred and Old Preferred, to
5% of the total voting power of the Company. The holders of Common Stock are
entitled to dividends in such amounts as may be declared from time to time out
of any funds legally available for such purposes. However, no dividends are
payable until all accrued dividends have been paid to the preferred
stockholders. In the event of liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or involuntary, after payment of
debts and liquidation preferences on preferred stock, all remaining assets, if
any, will be divided and distributed among the holders of Common Stock pro
rata according to the number of shares owned by them. The Common Stock does
not have preemptive rights and is not subject to redemption.
38
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"), which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference, if any, between the financial reporting and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
In conjunction with the recognition of tax gains on property sales,
litigation settlements and debt forgiveness, the Company estimated and accrued
state income taxes in 1996 of $180,000 of which $37,000 was netted against the
extraordinary gain.
In 1996, as a result of improvement in current income and projections of
continued improvement in such, the Company recognized a deferred tax asset of
$930,000, including $187,000 of alternative minimum tax. The valuation of this
asset was based on assumptions concerning future oil and gas prices, which are
currently trending downward, limited Company history of positive financial
results and other factors unique to the Company.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Income taxes currently payable......................... $ 180 $ --
Income tax expense attributed to extraordinary gain.... (37) --
------- -------
143 --
------- -------
Deferred income tax (benefit):
Current.............................................. (680) --
Non-current.......................................... (250) --
------- -------
(930) --
------- -------
$ (787) $ --
======= =======
Deferred tax assets (liabilities) are comprised of the following:
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Loss carryforwards................................... $ 7,531 $11,062
Alternative minimum tax credit carryforward and
other............................................... 187 6
Deferred Tax Liabilities:
Oil and gas properties............................... (1,405) (2,571)
------- -------
Net deferred tax asset................................. 6,313 8,497
Valuation allowance.................................... (5,383) (8,497)
------- -------
$ 930 $ --
======= =======
</TABLE>
39
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense differs from the amounts computed by applying the
statutory federal rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------
1996 1995
---- ----
<S> <C> <C>
Income taxes computed at statutory federal rate............. 34 % 34 %
Net operating loss carryover utilized in current period..... (34) (34)
Alternative minimum tax and other........................... 2 --
Reduction in valuation allowance of deferred tax assets..... (12) --
--- ---
(10)% -- %
=== ===
</TABLE>
Pursuant to the provisions of the Internal Revenue Code (the "Code"), a
corporation which undergoes a "change of ownership" is generally subject to an
annual limitation on the utilization of its loss carryovers. As a result of
the Reorganization Proceeding, on the Effective Date a "change of ownership"
for the Company occurred under the Code. Since the Reorganization Proceeding
was conducted pursuant to the Bankruptcy Code, the Company was eligible for an
exception (the "Bankruptcy Exception") to this general rule. In order to
maintain the Bankruptcy Exception, the Company could not have another "change
of ownership" within two years of the first change. If such a change did
occur, the Company's entire pre-"change of ownership" loss carryovers would be
eliminated. Due to the probability that a second "change of ownership" for tax
reporting purposes could occur, the Company elected out of the Bankruptcy
Exception regarding the utilization of its pre-"change of ownership" loss
carryovers.
Since the Company has elected not to apply the Bankruptcy Exception, the
Company is limited in its utilization of the pre-"change of ownership" loss
carryovers. Based on the value of the Company as of the Effective Date, the
annual amount of the pre-"change of ownership" loss carryovers to be utilized
is limited to $1,230,000 but loss carryovers not fully utilized in the year
that they are available may be carried over and utilized in subsequent years,
subject to their expiration provisions. As of December 31, 1996, the Company
had pre-"change of ownership" net operating loss carryforwards of $2,526,000
which are available for use through 2006. The Company also had post-"change of
ownership" net operating loss carryforwards of $7,701,000 that expire in 2008
and are available without limitation.
The Company has certain investment tax credits which are also subject to the
"change of ownership" limitation. Due to the limitation and scheduled
expiration, it is unlikely that the Company will realize any future benefit
from such credits. The Company had depletion carryforwards, as of December 31,
1996, of $14,600,000 which are limited annually to 65% of taxable income.
10. RELATED PARTY TRANSACTIONS
Pursuant to the provisions of the applicable agreements and in its capacity
as general partner, the Company received recurring supervisory and
administrative fees, including reimbursement of certain general and
administrative costs, from certain partnerships. Supervisory and
administrative fees of $424,000 were received during 1995. All partnerships
for which the Company acted as general partner were liquidated in late 1995
thus negating any future administrative fees and reimbursement.
Paragon Resources, Inc. ("Paragon") and certain of its affiliates were
owners of approximately 14% of the Company's outstanding Common Stock in 1994.
In the past, the Company had substantial transactions with Paragon including
the offering of interests and in the drilling of wells for partnerships. In
February 1992, the Company commenced a legal action regarding the collection
of amounts due to it from Paragon and certain of its affiliates. Due to the
uncertainty regarding the status of this litigation, the Company established
an allowance
40
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for all amounts due from Paragon and affiliates in excess of $286,000. In
1995, the litigation against Paragon and certain of its affiliates was
settled. As a result of the litigation settlement, the Company recognized an
allowance recoupment of $425,000 and offset the remaining allowance against
the outstanding receivables.
11. MAJOR CUSTOMERS
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and natural gas industry. The concentration of credit
risk in a single industry affects the Company's overall exposure to credit
risks since customers may be similarly affected by changes in economic and
other conditions.
Customers which accounted for greater than 10% of oil and gas sales are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Lion Oil Company ............................................... 24% 22%
Chesapeake Energy Marketing, Inc. .............................. 14% 28%
Energy Source, Inc. ............................................ 11% 12%
Enron Gas Marketing ............................................ --% 14%
</TABLE>
12. INFORMATION ON OIL AND GAS ACTIVITIES
Following are supplemental disclosures relating to the Company's oil and
natural gas exploration and production activities.
Oil and Gas Related Costs and Operating Results
The following schedules present capitalized costs and costs incurred,
whether capitalized or expensed, and operating results for the periods then
ended.
<TABLE>
<CAPTION>
1996 1995
------- ------
(IN THOUSANDS)
<S> <C> <C>
Capitalized costs:
Unproved properties.................................... $ 191 $ 18
Proved properties...................................... 15,344 11,322
Accumulated depletion and depreciation................. (4,996) (4,062)
------- ------
$10,539 $7,278
======= ======
Costs incurred:
Acquisition of properties:
Unproved............................................... $ 163 $ 18
Proved................................................. 2,932 718
Development............................................ 1,124 338
------- ------
$ 4,219 $1,074
======= ======
Operating results(1):
Revenues............................................... $ 5,059 $3,611
------- ------
Costs and expenses:
Production and exploration costs....................... 2,375 1,974
Depletion and depreciation............................. 933 951
------- ------
3,308 2,925
------- ------
Operating earnings before income taxes................... 1,751 686
Income tax benefit....................................... (787) --
------- ------
Operating earnings....................................... $ 2,538 $ 686
======= ======
</TABLE>
- --------
(1) Excludes general and administrative and interest expense.
41
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Acquisitions
In 1996, the Company purchased, for cash, producing properties, through
numerous transactions, for $2,932,000 with effective dates at various times
during the year. Of such purchases, $1,737,000, comprising eight separate
transactions, were acquired in December with effective dates at the end of
December 1996, resulting in no impact on 1996 revenues and expenses. In 1995,
the Company purchased certain producing properties for $771,000 with primarily
an effective date of December 1, 1995. These acquisitions have been accounted
for on a purchase basis and all post effective date revenues and expenses for
such acquisitions were included in the respective year results.
Pro Forma Acquisition Information (Unaudited)
Had all 1996 properties purchased been acquired at the beginning of the
years presented, the impact on revenues and income before extraordinary gain
would have been an increase of $1,030,000 and $520,000, respectively for 1996
and $885,000 and $291,000, respectively, for 1995. The 1995 property purchase
impact on operating results was not material.
The following table summarizes certain pro forma condensed consolidated
results of operations data that give effect to the 1996 acquisitions as if
they had occurred on January 1, 1996 and 1995 (in thousands, except per share
data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- --------
<S> <C> <C>
Total revenues.............................................. $14,830 $5,482
Income (loss) before extraordinary gain..................... 9,124 (142)
Net loss applicable to common stock......................... (8,292) (17,402)
Net loss per share of common stock.......................... $ (0.33) $ (0.69)
</TABLE>
Proved Reserves (Unaudited)
The following schedule presents estimates of proved oil and natural gas
reserves attributable to the Company, all of which are located in the United
States. Proved reserves are estimated quantities of oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected
to be recovered through existing wells with existing equipment and operating
methods. Reserves are stated in thousands of barrels of oil and billions of
cubic ("Bcf") feet of natural gas.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
OIL GAS OIL GAS
--- ---- --- ----
<S> <C> <C> <C> <C>
Proved reserves:
Beginning of year................................ 944 12.2 931 10.4
Sales of reserves in place....................... (8) (.1) (2) --
Purchases of reserves-in-place................... 45 4.1 22 1.2
Extensions and discoveries....................... 57 .6 1 0.1
Revisions of previous estimates.................. 19 .5 55 2.2
Production(1).................................... (76) (1.5)( (63) (1.7)
--- ---- --- ----
End of year...................................... 981 15.8 944 12.2
=== ==== === ====
Proved-developed reserves.......................... 525 13.4 465 9.7
=== ==== === ====
</TABLE>
(1) 1995 includes .220 Bcf of gas volumes related to gas balancing.
Estimating economically recoverable crude oil and natural gas reserves and
the future net revenues therefrom is not an exact science and is based upon a
number of variable factors, such as historical production of the subject
properties as compared with similar producing properties, and assumptions such
as the effects of
42
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
regulation by governmental agencies, future taxes, and development and other
costs, all of which may vary considerably from actual results. All such
estimates are to some degree speculative, and classifications of reserves are
only attempts to define the degree of speculation involved. For these reasons,
estimates of economically recoverable reserves of crude oil and natural gas
attributable to any particular group of properties, the classification and
risk of recovering such reserves, and estimates of the future net revenues
expected therefrom, prepared by different engineers or by the same engineers
at different times, may vary substantially.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Estimates
with respect to proved undeveloped and proved developed non-producing reserves
that may be developed and produced in the future are based upon volumetric
calculations or upon analogy to similar types of reservoirs. Later studies of
the same reservoirs based upon production history may result in variations,
which may be substantial. The actual production, revenues, severance and
excise taxes, development costs, and operating expenditures with respect to
the Company's reserves as reflected herein may vary from estimates, and such
variances may be material.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The following schedules present the standardized measure of estimated
discounted future net cash flows attributable to the Company's proved oil and
gas reserves ("Standardized Measure"), and an analysis of the changes in these
amounts and quantities for the periods indicated. The Standardized Measure was
computed on the basis of (a) contractual prices, including escalations for
natural gas, in effect at year end for oil and natural gas (b) the market
price for natural gas and the posted price for oil in effect at year end for
the area in the case of properties being commercially developed but not
covered by existing contracts, (c) estimated deliverability, which not only
considers the physical characteristics of the well or property, but also the
amount and timing of future production estimated to be taken by its
purchasers, and (d) where applicable, the premise that future prices and
deliveries will be in accordance with existing contractual terms which may
require arbitration or litigation to ultimately assure compliance. Estimated
future production and development costs are based on economic conditions at
the respective year ends. Estimated future development costs associated with
proved developed non-producing and proved undeveloped reserves for both 1996
and 1995 totaled $3.8 million. Production of those reserves is dependent upon
the Company's ability to fund such future development costs, which are
scheduled to be incurred over numerous years. Future income taxes, if any, are
computed by applying statutory income tax rates to the difference between the
future pre-tax cash flows and the tax basis of proved oil and gas properties,
after considering investment tax credits and depletion carryforwards and net
operating loss carryovers associated with these properties.
Since the Standardized Measure was prepared using the prevailing economic
conditions existing at each applicable year end, it is emphasized that such
conditions continually change, as evidenced by the fluctuations in oil and
natural gas prices during recent years. Weighted average year end oil and
natural gas prices utilizated in computing the Standardized Measure for 1996
were $24.43 and $3.33, respectively, and for 1995 were $18.66 and $1.76,
respectively. Accordingly, such information should not serve as a basis in
making any judgment on the potential value of the Company's recoverable
reserves, or in estimating future results of operations.
43
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Future net cash flows:
Future revenues............................................ $ 76,568 $39,205
-------- -------
Future production costs.................................... 21,793 14,476
Future development costs................................... 3,830 3,844
-------- -------
25,623 18,320
-------- -------
Future pre-tax cash flows.................................. 50,945 20,885
Future income taxes........................................ (4,444) --
-------- -------
Future net cash flows...................................... 46,501 20,885
10% discount factor........................................ (19,257) (9,081)
-------- -------
Standardized Measure, discounted at 10%, of future net cash
flows...................................................... $27,244 $11,804
======== =======
Changes in Standardized Measure:
Standardized Measure, beginning of year.................... $ 11,804 $ 8,807
-------- -------
Purchases of reserves-in-place............................. 5,818 1,174
Extensions and discoveries................................. 2,377 188
Revisions of previous quantity estimates................... 878 1,835
Changes in future development costs........................ (539) (247)
Development costs incurred during the period that reduced
future development costs.................................. 538 254
Net changes in prices and production costs................. 10,511 959
Sales of oil and natural gas produced, net of production
costs..................................................... (2,848) (1,706)
Net change in income taxes................................. (2,012) --
Accretion of discount...................................... 1,180 881
Sale of reserves-in-place.................................. (134) (16)
Changes in production rates and other, net................. (329) (325)
-------- -------
Net increase (decrease).................................... 15,440 2,997
-------- -------
Standardized Measure, end of year........................... $ 27,244 $11,804
======== =======
</TABLE>
Since year-end 1996 oil and natural gas prices have declined resulting in
prices of $20.47 and $2.67, respectively, as of February 28, 1997.
13. INTERIM FINANCIAL DATA (UNAUDITED)
The unaudited interim results of operations, are summarized below (in
thousands of dollars except per share amounts):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1996:
Revenues....................... $ 1,466 $ 1,480 $ 1,517 $ 2,237
Gross profit................... 624 620 662 942
Litigation settlement gain,
net........................... -- 7,100 -- --
Extraordinary gain, net of
income taxes of $37........... -- 1,831 -- --
Net income (loss) applicable to
common stock.................. (4,827) 4,201 (4,690) (3,496)
Net income (loss) per common
share......................... $ (0.19) $ 0.17 $ (0.19) $ (0.14)
1995:
Revenues....................... $ 1,140 $ 959 $ 1,244 $ 1,254
Gross profit................... 529 144 327 706
Extraordinary gain (loss)...... 118 (25) -- --
Net loss applicable to common
stock......................... (4,415) (4,741) (4,603) (3,934)
Net loss per common share...... $ (0.17) $ (0.19) $ (0.18) $ (0.16)
</TABLE>
44
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENT
On February 10, 1997, Mr. Carpenter, the Chief Executive Officer and
President of the Company, resigned. Pursuant to a Settlement Agreement,
Release and Confidentiality Agreement entered into between the Company and Mr.
Carpenter, Mr. Carpenter has agreed to forfeit 100,000 shares of the Company's
stock which would have become non-forfeitable on April 1, 1997. In addition,
he has resigned as an officer and director of the Company, released the
Company and others from all liabilities and has agreed that he would not
acquire or attempt to acquire or help others to acquire any stock in the
Company for a period of three years. Mr. Carpenter has also agreed to consult
with the Company for one year on a limited basis. In consideration for these
agreements, the Company has paid to Mr. Carpenter the sum of $225,000 and
released him from all liabilities arising from his employment with the Company.
As a result of this settlement agreement and 10,000 shares subject to forfeiture
as a result of another officer resignation in March 1997, the total Senior
Preferred shares outstanding, after these forfeitures, is 8,678,571.
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During 1996, there were no disagreements with the Company's independent
accountants regarding accounting or financial disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
BOARD OF DIRECTORS
The following table sets forth for each current director his name, age,
principal occupation and employment for the past five years, offices held with
the Company and the date he first became a director. Each of the directors may
be contacted at the Company's address set forth on the cover page of this 10-
KSB and each is a citizen of the United States.
<TABLE>
<CAPTION>
POSITION, PRINCIPAL OCCUPATION, BUSINESS DIRECTOR
NOMINEES AGE EXPERIENCE AND DIRECTORSHIPS HELD SINCE
- -------- --- ---------------------------------------- --------
<S> <C> <C> <C>
David H. Scheiber.... 38 Principal of Chesapeake Bay Investors, L.L.C., 1995
an investment management company in Baltimore,
Md., since April, 1996. From September 1992 to
April, 1996, Mr. Scheiber was President of Cana
Capital, LLC, an investment banking and
financial services company located in Laguna
Niguel, California. From September 1991 to
August 1992, Mr. Scheiber was affiliated with
Monitor Company, Inc., a management consulting
firm headquartered in Boston, Massachusetts, as
manager of their bankruptcy practice.
Jeffrey E. Susskind.. 42 Principal of Strome, Susskind Investment 1992
Management, L.P., an investment management
company in Santa Monica, California. Mr.
Susskind previously was an investment manager
with Kayne, Anderson & Co.
</TABLE>
Only those directors who are not employees of the Company are entitled to
receive a fee, plus reimbursement for reasonable travel expenses incurred in
conjunction with meetings. Under the Company's standard arrangement for
compensation of directors, directors receive a retainer fee of $833 per month
plus a meeting fee of $1,000 per day and $250 for each telephone meeting. The
monthly retainer fee is subject to forfeiture on a six-month prospective basis
if a director attends less than seventy-five percent (75%) of the meetings.
Four meetings of the Board were held in the last fiscal year. No incumbent
director attended fewer than seventy-five percent (75%) of the meetings of the
Board held in the last fiscal year.
The Board has a standing Audit Committee which met once during the last
fiscal year. The Audit Committee consists of Messrs. Scheiber and Susskind.
The Audit Committee assists the Board in fulfilling its fiduciary
responsibilities with respect to the accounting policies and reporting
practices of the Company and the sufficiency of the audits of all Company
activities. It is the Board's agent in ensuring the integrity of financial
reports of the Company, and the adequacy of disclosures to shareholders. The
Audit Committee is the focal point for communication between the directors,
the independent accountants and management as their duties relate to financial
accounting, reporting, and controls.
46
<PAGE>
The Board has a standing Compensation Committee which met once during the
last fiscal year, and consists of Messrs. Scheiber and Susskind, the
nonemployee directors. During the year the Compensation Committee consulted
with management regarding the compensation and benefits that are provided to
the directors, officers and employees of the Company.
The Board has a standing Executive Committee which did not meet during the
last fiscal year. The Executive Committee is authorized to exercise all of the
powers of the Board of Directors except those not permitted by the General
Corporation Law of Delaware. In 1996, the Executive Committee consisted of
Messrs. Carpenter and Susskind.
EXECUTIVE OFFICERS
The following table provides information regarding the executive officers of
the Company. Pursuant to the TGX Bylaws, the officers serve at the discretion
of the Board and may be removed, with or without cause, at any time.
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITION
---- --- ------- --------
<S> <C> <C> <C>
Michael A. Gerlich....... 42 1994 Mr. Gerlich was elected Vice President and
Chief Financial Officer of the Company in
December, 1994. From January 1993 until
joining TGX, he owned and managed Chalk
Hill Resources, Inc., an independent oil
and gas investing and financial consulting
company. Prior thereto, he was Executive
Vice President from January 1989 to
December 1992 and Vice President of
Finance from May 1982 to December 1988 for
Trinity Resources, Inc., an independent
public oil and gas company.
</TABLE>
47
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of the Chief Executive Officer of the Company, and of the
Company's most highly compensated executive officers (other than the CEO)
whose total annual salary and bonus exceeded $100,000, for each of the
Company's fiscal years ending December 31, 1996 and December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- ------------
(A) (B) (C) (D) (E) (F)
RESTRICTED
NAME AND PRINCIPAL SALARY STOCK ALL OTHER
POSITION YEAR ($)(1) BONUS ($) AWARDS (#) COMPENSATION ($)
------------------ ---- ------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Larry H. Carpenter(8)... 1996 225,000 50,000(5) -- -0-
President & CEO 1995 209,000 125,000(3) 200,000(4) -0-
Michael A. Gerlich...... 1996 120,000 12,000(5) -- -0-
Vice-President & CFO 1995 107,000 10,000(3) 30,000(6) -0-
Donald T. Duke(9)....... 1996 119,000(2) 25,000(5) -0-
Manager Oil and Gas
Operations 1995 48,500(7) 15,000(3) 20,000(6) -0-
</TABLE>
- --------
(1) Includes perquisites and other benefits, unless the aggregate amount of
such does not exceed the lesser of either $50,000 or 10% of the total
annual salary and bonus reported for the named executive officer. See
"Employment Agreements."
(2) Includes amounts paid as a consultant to officer.
(3) Of the bonus amount shown for Mr. Carpenter, $75,000 was granted in
regards to 1994 accomplishments and paid in 1995. The remaining $50,000 is
for 1995 accomplishments and was paid in January 1996. All of Mr.
Gerlich's and Mr. Duke's bonus was granted and paid in January 1996.
(4) Of such award 100,000 are vested and the remaining 100,000 shares were
subject to forfeiture. In February 1997 Mr. Carpenter resigned as CEO and
these 100,000 shares were forfeited. See "Employment Agreements." As of
December 31, 1995, there was limited trading in the Senior Preferred Stock
and, therefore, the Company has utilized the price reflected in Schedule
13-D filed on May 8, 1995 of $0.20 for stock compensation recognition
purposes.
(5) Bonus was granted for 1996 accomplishments and was paid in January 1997.
(6) Of such award, 50% of the shares ceased to be subject to forfeiture on
September 27, 1996 and the remainder were subject to forfeiture. Mr. Duke
resigned in March 1997 and these 10,000 shares were forfeited. As of
December 31, 1995, there was limited trading in the Series A Senior
Preferred Stock and, therefore, the Company has utilized the price
reflected in Schedule 13-D filed on May 8, 1995 of $0.20 for stock
compensation recognition purposes.
(7) Represents amounts paid as a consultant.
(8) Mr. Carpenter resigned on February 10, 1997.
(9) Mr. Duke resigned on March 15, 1997.
EMPLOYMENT AGREEMENTS
Larry H. Carpenter, Chairman of the Board, President and Chief Executive
Officer of the Company, entered into an employment agreement (the "Employment
Agreement") with the Company in March 1992. Pursuant to the Employment
Agreement, for the period through November 1992, Mr. Carpenter acted as a
consultant to the Company and had an option to become a full-time employee,
President and member of the Board of Directors. In November 1992, Mr.
Carpenter exercised such option and, at that time, was elected President of
the Company and, pursuant to the Certificate of Incorporation, became a member
of the Board of Directors. Pursuant to the Employment Agreement, for a period
of three years ending March 30, 1995, Mr. Carpenter received compensation
equal to $175,000 per annum, plus discretionary bonuses as determined by the
Board of Directors. For 1993, the Board of Directors did not grant a
discretionary bonus. However, in February 1994, the Board of Directors granted
a bonus of $100,000 to Mr. Carpenter in connection with his efforts in
consummating the sale of the Company's New York and Ohio properties. In
addition, Mr. Carpenter in 1992 received 200,000 shares of Senior Preferred
Stock which vested over the term of the Employment Agreement. The Employment
Agreement
48
<PAGE>
also provided Mr. Carpenter with certain living expense allowances, as well as
benefits relating to moving expense, health and life insurance, club
membership and use of an automobile. On April 1, 1995, Mr. Carpenter and the
Company entered into an Employment Agreement covering a period of two years
ending March 31, 1997 ("New Employment Agreement"). Mr. Carpenter received
compensation of $225,000 per annum, plus discretionary bonuses as determined
by the Board of Directors. In 1995 the Board of Directors granted a bonus of
$75,000 related to 1994 results and an additional bonus of $50,000 in 1996
related to 1995 results. In addition, Mr. Carpenter received 200,000 shares of
the Company's Senior Preferred Stock which vests over the initial term of the
New Employment Agreement. The New Employment Agreement also provided Mr.
Carpenter, at Company expense, benefits of health and life insurance. In 1996,
the Board of Directors granted a bonus of $50,000 related to 1996 results and
payable in January 1997. On February 10, 1997, Mr. Carpenter resigned as
President and CEO of the Company. Pursuant to a Settlement Agreement, Release
and Confidentiality Agreement entered into between the Company and Mr.
Carpenter, Mr. Carpenter has agreed to forfeit 100,000 shares of the Company's
stock which would have become non-forfeitable on April 1, 1997. In addition,
he has resigned as an officer and director of the Company, released the
Company and others from all liabilities and has agreed that he would not
acquire or attempt to acquire or help others to acquire any stock in the
Company for a period of three years. Mr. Carpenter has also agreed to consult
with the Company for one year, on a limited basis. In consideration for these
agreements, the Company has paid to Mr. Carpenter the sum of $225,000 and
released him from all liabilities arising from his employment with the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No nonemployee director is or has been an officer or employee of TGX or any
of its subsidiaries or had any relationship requiring disclosure pursuant to
Item 404 of SEC Regulation S-K. No executive officer of TGX served as a member
of the Compensation Committee (or other board committee performing similar
functions or, in the absence of any such committee, the entire board of
directors) of another corporation, any of whose executive officers served on
the TGX Compensation Committee. No executive officer of TGX served as a
director of another corporation, one of whose executive officers served on the
TGX Compensation Committee. No executive officer of TGX served as a member of
the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another corporation, one of whose executive officers served as a
director of TGX.
REPORT ON EXECUTIVE COMPENSATION
We are pleased to present this report to stockholders on executive
compensation. This report summarizes the responsibilities of the Company's
nonemployee directors who act as a Compensation Committee (the "Committee"),
although the Company has not formally established such a Committee. The
Compensation Committee establishes the compensation policy and objectives that
guide the development and administration of the executive compensation
program, and the basis on which the compensation for the Chief Executive
Officer, corporate officers and other key executives was determined for the
fiscal year ended December 31, 1996.
During the fiscal year, the Committee was comprised of the following Board
members, all of whom were non-employee directors of the Company: Jeffrey E.
Susskind, and David H. Scheiber. The Committee's responsibilities are to
oversee the development and administration of the compensation program for
corporate officers and subsidiary presidents, and administer the executive
incentive and stock option plans. During fiscal year 1996, the Committee also
reviewed market compensation trends for outside directors.
The objective of the executive compensation program is to create strong
financial incentive for corporate officers and managers to increase profits
and grow revenues. The following objectives guide the Committee in its
deliberations:
. Provide a competitive compensation program that enables the Company to
attract and retain key executives and Board members.
. Assure a strong relationship between the performance results of the
Company or subsidiary and the total compensation received.
49
<PAGE>
. Balance both annual and longer performance objectives of the Company.
. Encourage executives to acquire and retain meaningful levels of equity
ownership in the Company.
. Work closely with the Chief Executive Officer to assure that the
compensation program supports the management style and culture of the
Company.
In addition to normal employee benefits, the executive total compensation
program includes base salary, annual cash bonus compensation, and longer term
stock based grants and awards.
Recent changes to the Internal Revenue Code (Section 162(m)) impose a
$1,000,000 limit, with certain exceptions, on the deductibility of
compensation paid to each of the five highest paid executives. In particular,
compensation that is determined to be "performance based" is exempt from this
limitation. To be "performance based," incentive payments must use
predetermined objective standards, limit the use of discretion in making
awards, and be certified by the Compensation Committee made up of "outside
directors." While the Committee intends to comply with the provisions of
Section 162(m) with respect to the longer term stock based incentives, it
believes that the use of discretion in evaluating the individual contributions
of corporate management is appropriate. As such, the Committee has taken no
action to comply with Section 162(m) with respect to annual incentive
payments. It is not anticipated that any executive will receive compensation
in excess of this limit during fiscal years 1997 or 1998. The Committee will
continue to monitor this situation and will take appropriate action if it is
warranted in the future.
The Chief Executive Officer participates in the executive compensation
program described in this report.
In establishing the total compensation program for Mr. Carpenter, the
Committee assessed the pay levels for CEOs in similar companies in the oil and
gas industry, the improvement in profit performance of the Company, and Mr.
Carpenter's efforts in seeking out growth opportunities for the Company,
supervising and managing the NFG Litigation and other litigation, and
controlling costs. For fiscal years 1996 and 1995, Mr. Carpenter received a
bonus incentive awards of $50,000 and $125,000, respectively. The 1995 bonus
incentive award includes $75,000 related to 1994 results but paid in 1995. In
February 1997, Mr. Carpenter resigned as President and CEO.
Respectfully submitted,
Jeffrey E. Susskind
David H. Scheiber
STOCK BASED COMPENSATION
Previously, the Company had adopted a key employee compensation package
which consisted of a Restricted Stock Plan, a Non-Qualified Stock Option Plan,
and an Incentive Stock Option Plan. Both the Non-Qualified Stock Option Plan
and the Incentive Stock Option Plan were terminated in 1991 pursuant to the
respective plan's provisions and no options under these plans can be issued or
are outstanding.
Shares of common stock under the Restricted Stock Plan were granted free of
charge to the recipient in consideration for services rendered. Grants made
under the plan are subject to forfeiture, based on a formula, in the event the
recipient leaves the employment of the Company within three, four or five
years after the date of grant. The market value of the Common Stock on the
date of grant was charged to expense over a five-year period, regardless of
whether or not the shares are ultimately earned by the employee. The Company
has reserved 89,333 shares of Common Stock for issuance under the plan. From
1991 through 1996, no shares of common stock were issued to vested
participants pursuant to the plan and no new grants will be issued under this
plan.
50
<PAGE>
ITEM 12. CERTAIN STOCK OWNED BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding each person
known by the Company owning or entitled to own as the beneficial owner, more
than five percent (5%) of the Company's outstanding Common Stock, Senior
Preferred Stock or Old Preferred Stock as of December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
OF BENEFICIAL OWNER CLASS OWNERSHIP CLASS
------------------- ---------------- ------------- -------
<S> <C> <C> <C>
Liberty National Bank and Trust Common 3,136,986(1) 12.6%
Company of Oklahoma City
Escrow Agent UA
November 18, 1985, Templeton
Energy,
Inc./Temex Energy, Inc. and Escrow
Agent for the benefit of certain
claimants of Amarex, Inc.
P.O. Box 25848
Oklahoma City, Oklahoma 73125
Gaylon E. Simmons and Senior Preferred 569,561 6.5%
Gloria Annette Turner Simmons Old Preferred 485,000 100%
905 East Main Street
Jonesboro, Louisiana 71251
Jeffrey and Janis Susskind Senior Preferred 1,778,002 20.2%
FBO The Susskind Family Trust
100 Wilshire Blvd., 15th Floor
Santa Monica, California 90401
The AIF-Lion Group Senior Preferred 1,823,000(2) 20.7%
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
</TABLE>
- --------
(1) In connection with its acquisition of Amarex, Inc. which was consummated
on December 5, 1985, the Company issued 11,475,000 shares of Common Stock
into escrow with Liberty National Bank and Trust Company of Oklahoma City
as escrow agent. Such shares are held by the escrow agent for the benefit
of various classes of creditors of Amarex and its affiliates entitled to
receive the shares under a Plan of Reorganization confirmed in Amarex's
bankruptcy proceeding, and the shares have been and will continue to be
distributed by the escrow agent from time to time as the various
creditors' claims are adjudicated and allowed by the Bankruptcy Court. As
of December 31, 1996, 3,136,986 shares remained in escrow. Pursuant to the
agreement governing the administration of the escrow account, the escrow
agent has agreed to cause the escrowed shares to be voted at any annual or
special stockholders' meeting in accordance with the instructions of the
Company.
(2) Such information has been supplied to the Company pursuant to Schedule 13D
filed with the Securities and Exchange Commission on December 31, 1994, by
AIF II, L.P., a Delaware limited partnership and Lion Advisors, L.P., a
Delaware limited partnership (collectively the "Reporting Persons"). Such
Reporting Persons may together constitute a "group" within the meaning of
Rule 13D-5 under the Securities Exchange Act of 1934, as amended.
51
<PAGE>
The following table sets forth, as of December 31, 1996, the amount of the
Company's Common Stock or Senior Preferred Stock beneficially owned by each of
its directors, each executive officer named in the Summary Compensation Table,
and all directors and executive officers as a group, based upon information
obtained from such persons:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
--------------------------------------
OPTIONS
EXERCISABLE PERCENT
NAME OF SOLE VOTING AND WITHIN 60 OF
INDIVIDUAL OR GROUP INVESTMENT POWER DAYS CLASS(1)
------------------- -------------------------- ----------- -------
<S> <C> <C> <C>
Larry H. Carpenter (2)... 300,000 Senior Preferred -0- 3.4%
David H. Scheiber........ 10,000 Senior Preferred -0- *
Jeffrey E. Susskind...... 1,778,002 Senior Preferred -0- 20.2%
Michael A. Gerlich(3).... 30,000 Senior Preferred -0- *
Donald T. Duke(4)........ 20,000 Senior Preferred -0- *
All Executive Officers
and Directors as a group
(5 persons)............. 2,138,002 Senior Preferred -0- 24.3%
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, the holders have sole voting and investment
powers.
(2) Of Mr. Carpenter's shares, 100,000 were subject to forfeiture pursuant to
the terms of his employment agreement. In February 1997, Mr. Carpenter
resigned from the Company and as a result of a settlement reached with the
Company forfeited the 100,000 shares of the Company's stock. See
"Employment Agreement".
(3) Fifty percent of shares shown are subject to forfeiture until September
27, 1997 per agreement.
(4) Fifty percent of shares shown were subject to forfeiture until September
27, 1997 per agreement. In March 1997, Mr. Duke resigned from the Company
and as a result 10,000 shares were forfeited.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation--Employment Agreeements".
52
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Index to Financial Statements
1. Financial Statements:
The following financial statements of the Company are included in Part II,
Item 8.
(a) Report of Independent Accountants
(i) Price Waterhouse LLP
(b) Financial Statements of TGX Corporation (the Registrant) and Subsidiaries
(i) Consolidated Balance Sheet as of December 31, 1996 and 1995
(ii) Consolidated Statement of Operations for the years ended December
31, 1996 and 1995
(iii) Consolidated Statement of Cash Flows for the years ended December
31, 1996 and 1995
(iv) Notes to Consolidated Financial Statements
2. Financial Statements Schedules:
None required
3. Exhibits:
<TABLE>
<C> <S>
Exhibit 2.1 Amended Plan of Reorganization and Disclosure Statement as
revised and filed by the Company, as debtor-in-possession, on
January 7, 1992. (Incorporated by reference to Exhibit 2.1 of
the Registrant's Current Report on Form 8-K dated February 4,
1992, File No. 1-10201.)
Exhibit 2.2 Order Confirming Amended Plan of Reorganization dated January
7, 1992. (Incorporated by reference to Exhibit 2.2 of the
Registrant's Current Report on Form 8-K dated February 4, 1992,
File No. 1-10201.)
Exhibit 2.4 Stock Sale and Purchase Agreement by and between LEDCO
Acquisition Company, Inc. and the Company dated as of December
31, 1991. (Incorporated by reference to Exhibit 2.4 of the
Registrants' Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 0-10201).
Exhibit 2.5 Stock Purchase and Sale Agreement between Gaylon D. Simmons and
Gloria Annette Turner Simmons and Templeton Energy, Inc. dated
October 13, 1986 (Incorporated by reference to Exhibit 2.1 of
the Registrant's Current Report on Form 8-K dated December 1,
1986, File No. 1-10201.
Exhibit 3.1 Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.1 of the Registrants'
Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-10201).
Exhibit 3.2 Amended and Restated By-Laws of the Company. (Incorporated by
reference to Exhibit 3.2 of the Registrants' Annual Report on
Form 10-K for the year ended December 31, 1991, File
No. 0-10201).
Exhibit 3.3 Rights Agreement dated as of October 4, 1988 between the
Company and American Stock Transfer & Trust Company
(Incorporated by reference to Exhibit C.1 of the Registrant's
Current Report on Form 8-K dated October 11, 1988).
Exhibit 4.1 Specimen Certificate representing shares of Common Stock
(Incorporated by reference to Exhibit 4.1 of the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1985, File No. 0-10201).
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
Exhibit 4.2 Specimen Certificate representing shares of Old Preferred
Stock (Incorporated by reference to Exhibit 4.2 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1986, File No. 0-10201).
Exhibit 4.3 Specimen Certificate representing shares of Senior Preferred
Stock. (Incorporated by reference to Exhibit 4.3 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 0-10201).
Exhibit 10.1 Amended and Restated Credit Agreement effective as of February
1, 1992 between the Company and the Bank of Montreal and the
First Amendment thereto. (Incorporated by reference to Exhibit
10.1 of the Registrants' Annual Report on Form 10-K for the
year ended December 31, 1991, File No. 0-10201).
Exhibit 10.2 Amended and Restated Security Agreement effective as of
February 1, 1992 between the Company and the Bank of Montreal.
(Incorporated by reference to Exhibit 10.2 of the Registrants'
Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-10201).
Exhibit 10.3 Amended and Restated Security Agreement (Partnerships)
effective as of February 1, 1992 between the Company and the
Bank of Montreal. (Incorporated by reference to Exhibit 10.3
of the Registrants' Annual Report on Form 10-K for the year
ended December 31, 1991, File No. 0-10201).
Exhibit 10.4 Amendment and Restated Stock Pledge Agreement effective as of
February 1, 1992 between the Company and the Bank of Montreal.
(Incorporated by reference to Exhibit 10.4 of the Registrants'
Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-10201).
Exhibit 10.5 Amended and Restated Pledge of Secured Notes effective as of
February 1, 1992 between the Company and the Bank of Montreal.
(Incorporated by reference to Exhibit 10.5 of the Registrants'
Annual Report on Form 10-K for the year ended December 31,
1991, File No. 0-10201).
Exhibit 10.6 Promissory Note (Term Loan A) in the amount of $15,600,000
effective as of February 1, 1992, executed by the Company to
the order of the Bank of Montreal. (Incorporated by reference
to Exhibit 10.6 of the Registrants' Annual Report on Form 10-K
for the year ended December 31, 1991, File No. 0-10201).
Exhibit 10.7 Promissory Note (Term Loan B) in the amount of $10,000,000
effective as of February 1, 1992, executed by the Company to
the order of the Bank of Montreal. (Incorporated by reference
to Exhibit 10.7 of the Registrants' Annual Report on Form 10-K
for the year ended December 31, 1991, File No. 0-10201).
Exhibit 10.8 Promissory Note (Term Loan C) in the amount of $1,250,000
effective as of February 1, 1992, executed by the Company to
the order of the Bank of Montreal. (Incorporated by reference
to Exhibit 10.8 of the Registrants' Annual Report on Form 10-K
for the year ended December 31, 1991, File No. 0-10201).
Exhibit 10.9 Promissory Note (Revolving Credit Note) in the amount of
$500,000 effective as of February 1, 1992, executed by the
Company to the order of the Bank of Montreal. (Incorporated by
reference to Exhibit 10.9 of the Registrants' Annual Report on
Form 10-K for the year ended December 31, 1991, File
No. 0-10201).
Exhibit 10.10 Restricted Stock Award Plan (Incorporated by reference to
Exhibit 13.51 of the Registrant's Registration Statement No.
2-70911 on Form S-1 effective March 4, 1981).
Exhibit 10.11 Non-Qualified Stock Option Plan (Incorporated by reference to
Exhibit 13.50 of the Registrant's Registration Statement
No. 2-70911 on Form S-1 effective March 4, 1981).
Exhibit 10.12 Incentive Stock Option Plan (Incorporated by reference to
Exhibit A of the Registrant's 1981 Proxy Statement dated April
26, 1982).
Exhibit 10.13 Employment Agreement dated December 23, 1991 between the
Company and Ronald E. Grappe. (Incorporated by reference to
Exhibit 10.13 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991, File No. 0-10201).
</TABLE>
54
<PAGE>
<TABLE>
<C> <S>
Exhibit 10.14 Employment Agreement dated December 23, 1991 between the
Company and Joe W. Cluck. (Incorporated by reference to
Exhibit 10.14 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991, File No. 0-10201).
Exhibit 10.15 Form of Indemnification Agreement to be entered into by an
among the Company and each officer and director. (Incorporated
by reference to Exhibit 10.15 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991, File
No. 0-10201).
Exhibit 10.16 Form of Indemnification Trust Agreement. (Incorporated by
reference to Exhibit 10.16 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1991, File
No. 0-10201).
Exhibit 10.17 Promissory Note (Term Loan D) in the amount of $194,750
effective October 1, 1992, executed by the Company to the
order of Bank of Montreal. (Incorporated by reference to
Exhibit A of Form 8-K dated October 2, 1992, File
No. 0-10201).
Exhibit 10.18 Personal Service and Employment Agreement Dated March 30, 1992
between the Company and Larry H. Carpenter. (Incorporated by
reference to Exhibit 10.18 of Form 10-K for the year ended
December 31, 1992, File No. 0-10201).
Exhibit 10.19 Purchase and Sale Agreement between TGX Corporation and Belden
and Blake Corporation dated as of December 17, 1993
(Incorporated by reference to Exhibit C of Form 8-K dated
January 14, 1994, File No. 0-10201).
Exhibit 10.20 Limited Forbearance Agreement between TGX Corporation and Bank
of Montreal dated as of January 10, 1994 (Incorporated by
reference to Exhibit C of Form 8-K dated January 14, 1994,
File No. 0-10201).
Exhibit 10.21 Second Amended and Restated Credit Agreement between the
Company and BMO Financial, Inc. dated as of July 13, 1994
(Incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K dated July 13, 1994).
Exhibit 10.22 Amended and Restated Credit Agreement between the Company and
Bank One, Texas, N.A. dated as of July 13, 1994 (Incorporated
by reference to Exhibit 10.4 of the Registrant's report on
Form 8-K dated July 13, 1994).
Exhibit 10.23 Settlement Agreement among the Company, Paragon Resources and
others dated May 31, 1995. (Incorporated by reference to
Exhibit C of Form 8-K dated May 31, 1995, File No. 0-1020).
Exhibit 10.24 Employment Agreement dated April 1, 1995 between the Company
and Larry H. Carpenter (Incorporated by reference to Exhibit A
of Form 10-Q dated June 30, 1995, File No. 0-10201).
Exhibit 10.25 First Amendment to Second Amended and Restated Credit
Agreement dated as of December 31, 1995. (Incorporated by
reference to Exhibit 10.25 of Form 10-K for the year ended
December 31, 1995, File No. 0-10201).
Exhibit 10.26 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 C of Form 8-K dated April 30, 1996, File
No. 0-10201).
Exhibit 10.27 Third Amendment to Amended and Restated Credit Agreement
between TGX Corporation and Bank One, Texas, N.A. effective as
of October 1, 1996. Filed herewith.
Exhibit 10.28 Settlement, Release and Confidentiality Agreement between the
Company and Larry H. Carpenter dated as of March 31, 1997.
Filed herewith.
Exhibit 18 Letter regarding Change in Accounting Principles.
(Incorporated by reference to Exhibit 18 of Form 10-K for the
year ended December 31, 1992, File No. 0-10201).
Exhibit 27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K for the quarter ended December 31, 1996:
None.
55
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Michael A. Gerlich Vice President, March 31, 1997
_____________________________ Chief Financial Officer, and
Michael A. Gerlich Chief Accounting Officer
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Michael A. Gerlich Vice President, March 31, 1997
____________________________ Chief Financial Officer, and
Michael A. Gerlich Chief Accounting Officer
By: /s/ David H. Scheiber Director March 31, 1997
___________________________
David H. Scheiber
By: /s/ Jeffrey E. Susskind Director March 31, 1997
____________________________
Jeffrey E. Susskind
</TABLE>
56
<PAGE>
EXHIBIT 10.27
THIRD AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
between
TGX CORPORATION
and
BANK ONE, TEXAS, NATIONAL ASSOCIATION
Effective as of
October 1, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I. DEFINITIONS........................................ 1
1.01 Terms Defined Above.......................... 1
1.02 Terms Defined in Agreement................... 1
1.03 References................................... 1
1.04 Articles and Sections........................ 2
1.05 Number and Gender............................ 2
ARTICLE II. AMENDMENTS......................................... 2
2.01 Amendment of Section 1.2..................... 2
2.02 Amendment of Section 2.7 (a)................. 3
2.03 Amendment of Section 2.12.................... 3
2.04 Amendment of Section 6.17.................... 3
2.05 Amendment of Section 6.18.................... 3
ARTICLE III. CONDITIONS......................................... 4
3.01 Receipt of Documents......................... 4
3.02 Accuracy of Representations and Warranties.. 4
3.03 Matters Satisfactory to Lender............... 4
ARTICLE IV. REPRESENTATIONS AND WARRANTIES..................... 5
ARTICLE V. RATIFICATION....................................... 5
ARTICLE VI. MISCELLANEOUS...................................... 5
6.01 Scope of Amendment........................... 5
6.02 Agreement as Amended......................... 5
6.03 Parties in Interest.......................... 5
6.04 Rights of Third Parties...................... 5
6.05 ENTIRE AGREEMENT............................. 5
6.06 GOVERNING LAW................................ 6
6.07 JURISDICTION AND VENUE....................... 6
i
<PAGE>
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Third Amendment") is made and entered into effective as of October 1, 1996, by
and between TGX CORPORATION, a Delaware corporation ("Borrower") and BANK ONE,
TEXAS, NATIONAL ASSOCIATION, a national banking association (the "Lender").
W I T N E S S E T H:
WHEREAS, the above named parties did execute and exchange counterparts
of that certain Amended and Restated Credit Agreement dated July 13, 1994, as
amended by First Amendment effective as of June 1, 1995, and Second Amendment
effective as of October 1, 1995 (the "Agreement"), to which reference is here
made for all purposes;
WHEREAS, the parties subject to and bound by the Agreement are
desirous of amending the Agreement in the particulars hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties to the Agreement, as set forth therein, and the mutual
covenants and agreements of the parties hereto, as set forth in the Third
Amendment, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.01 Terms Defined Above. As used herein, each of the terms
"Agreement," "Borrower," "Third Amendment," and "Lender" shall have the meaning
assigned to such term hereinabove.
1.02 Terms Defined in Agreement. As used herein, each term defined
in the Agreement shall have the meaning assigned thereto in the Agreement,
unless expressly provided herein to the contrary.
1.03 References. References in this Third Amendment to Article or
Section numbers shall be to Articles and Sections of this Third Amendment,
unless expressly stated herein to the contrary. References in this Third
Amendment to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow,"
"hereof," and "hereunder" shall be to this Third Amendment in its entirety and
not only to the particular Article or Section in which such reference appears.
<PAGE>
1.04 Articles and Sections. This Third Amendment, for convenience
only, has been divided into Articles and Sections and it is understood that the
rights, powers, privileges, duties, and other legal relations of the parties
hereto shall be determined from this Third Amendment as an entirety and without
regard to such division into Articles and Sections and without regard to
headings prefixed to such Articles and Sections.
1.05 Number and Gender. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural and
likewise the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine, and neuter, when such
construction is appropriate, and specific enumeration shall not exclude the
general, but shall be construed as cumulative. Definitions of terms defined in
the singular and plural shall be equally applicable to the plural or singular,
as the case may be.
ARTICLE II.
AMENDMENTS
The Borrower and the Lender hereby amend the Agreement in the
following particulars:
2.01 Amendment of Section 1.2. Section 1.2 of the Agreement is
hereby amended as follows:
The following definitions are amended to read as follows:
"Commitment Amount" shall, subject to the applicable provisions of
this Agreement and in particular, Section 2.7, mean the amount of
$5,000,000.
"Commitment Termination Date" shall mean June 30, 1999.
"Final Maturity" shall mean June 30, 1999.
"Floating Rate" shall mean an interest rate per annum equal to the
Base Rate from time to time in effect plus one and one-half percent (1
1/2%), but in no event exceeding the Highest Lawful Rate.
"Letter of Credit" shall mean any standby letter of credit issued by
the Lender for the account of the Borrower pursuant to Section 2.19.
2
<PAGE>
2.02 Amendment of Section 2.7(a). Section 2.7(a) is amended to read
as follows:
"(a) The Borrowing Base as of September 1, 1996, is acknowledged by
the Borrower and the Lender to be $5,000,000. The Monthly Reduction
Amount as of September 1, 1996, is acknowledged by the Borrower and
the Lender to be $100,000. Commencing on October 1, 1996, and
continuing thereafter on the first day of each calendar month through
the Commitment Termination Date, the amount of the Borrowing Base
shall be reduced by the Monthly Reduction Amount."
2.03 Amendment of Section 2.12. Section 2.12 of the Agreement is
hereby amended to read as follows:
"Engineering Fee. In addition to interest on the Note as provided
herein and the Commitment Fees, Facility Fees and Letter of Credit
Fees payable hereunder and to compensate the Lender for the costs of
evaluating the Collateral and reviewing the Reserve Reports, the
Borrower shall pay to the Lender, in immediately available funds, on
the date of each redetermination of the Borrowing Base, an engineering
fee in the amount of $5,000.00."
2.04 Amendment of Section 6.17. Section 6.17 of the Agreement is
hereby amended to read as follows:
"6.17 Capital Expenditures. Make expenditures for capital or fixed
assets in any fiscal year other than for domestic oil and gas
properties and related assets required in the ordinary course of
business and not to exceed the aggregate amount of $50,000.00."
2.05 Amendment of Section 6.18. Section 6.18 of the Agreement is
hereby amended to read as follows:
"6.18 Borrower shall not permit general and administrative expenses to
be more than the following:
(a) For the quarter ending March 31, 1997, the amount of general and
administrative expenses for such period, times 4 equals a sum that, if
in excess of $1,700,000, in Lender's sole discretion, be deemed to be
in compliance or not.
3
<PAGE>
(b) For the six month period ending June 30, 1997, the amount of general
and administrative expenses times 2 equals a sum that, if in excess of
$1,700,000 in Lender's sole discretion, be deemed to be in compliance or
not.
(c) For the nine month period ending September 30, 1997, the amount of
general and administrative expenses times 1.33 equals a sum that, if in
excess of $1,700,000, in Lender's sole discretion, be deemed to be in
compliance or not.
(d) For the year ending December 31, 1997, for each rolling four
quarters thereafter, the amount of general and administrative expenses
shall not exceed $1,700,000."
ARTICLE III.
CONDITIONS
The obligation of the Lender to amend the Agreement as provided herein
is subject to the fulfillment of the following conditions precedent:
3.01 Receipt of Documents. The Lender shall have received, reviewed, and
approved the following documents and other items, appropriately executed when
necessary and in form and substance satisfactory to the Lender:
(a) multiple counterparts of this Third Amendment and the Note, as
requested by the Lender;
(b) Notice of Final Agreement; and
(c) such other agreements, documents, items, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may
reasonably request.
3.02 Accuracy of Representations and Warranties. The representations
and warranties contained in Article IV of the Agreement and this Third Amendment
shall be true and correct.
3.03 Matters Satisfactory to Lender. All matters incident to the
consummation of the transactions contemplated hereby shall be satisfactory to
the Lender.
4
<PAGE>
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Borrower hereby expressly re-makes, in favor of the Lender, all of
the representations and warranties set forth in Article IV of the Agreement, and
represents and warrants that all such representations and warranties remain
true and unbreached.
ARTICLE V.
RATIFICATION
Each of the parties hereto does hereby adopt, ratify, and confirm the
Agreement and the other Loan Documents, in all things in accordance with the
terms and provisions thereof, as amended by this Third Amendment.
ARTICLE VI.
MISCELLANEOUS
6.01 Scope of Amendment. The scope of this Third Amendment is
expressly limited to the matters addressed herein and this Third Amendment shall
not operate as a waiver of any past, present, or future breach, Default, or
Event of Default under the Agreement, except to the extent, if any, that any
such breach, Default, or Event of Default is remedied by the effect of this
Third Amendment.
6.02 Agreement as Amended. All references to the Agreement in any
document heretofore or hereafter executed in connection with the transactions
contemplated in the Agreement shall be deemed to refer to the Agreement as
amended by this Third Amendment.
6.03 Parties in Interest. All provisions of this Third Amendment shall
be binding upon and shall inure to the benefit of the Borrower, the Lender and
their respective successors and assigns.
6.04 Rights of Third Parties. All provisions herein are imposed solely
and exclusively for the benefit of the Lender and the Borrower, and no other
Person shall have standing to require satisfaction of such provisions in
accordance with their terms and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.
6.05 ENTIRE AGREEMENT. THIS THIRD AMENDMENT CONSTITUTES THE ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
5
<PAGE>
SUBJECT HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WHETHER WRITTEN OR ORAL,
BETWEEN SUCH PARTIES REGARDING THE SUBJECT HEREOF. FUTHERMORE IN THIS REGARD,
THIS THIRD AMENDMENT, THE AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE
OTHER WRITTEN DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN
CONNECTION WITH OR AS SECURITY FOR THE NOTE REPRESENT, COLLECTIVELY, THE FINAL
AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
6.06 GOVERNING LAW. THIS THIRD AMENDMENT, THE AGREEMENT AND THE NOTE
SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. THE PARTIES ACKNOWLEDGE
AND AGREE THAT THIS AGREEMENT AND THE NOTE AND THE TRANSACTIONS CONTEMPLATED
HEREBY BEAR A NORMAL, REASONABLE, AND SUBSTANTIAL RELATIONSHIP TO THE STATE OF
TEXAS.
6.07 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM
THIS THIRD AMENDMENT, THE AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED
IN COURTS HAVING SITUS IN HARRIS COUNTY, TEXAS. EACH OF THE BORROWER AND THE
LENDER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT
LOCATED IN HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO
TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST
IT BY THE BORROWER OR THE LENDER IN ACCORDANCE WITH THIS SECTION.
IN WITNESS WHEREOF, this Third Amendment to Amended and Restated Credit
Agreement is executed effective the date first hereinabove written.
BORROWER:
TGX CORPORATION
By: /s/ Larry H. Carpenter
------------------------
Larry H. Carpenter
President
6
<PAGE>
LENDER:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By: /s/ Kelly L. Elmore, III
-------------------------
Kelly L. Elmore, III
Vice-President
7
<PAGE>
EXHIBIT 10.28
SETTLEMENT, RELEASE AND CONFIDENTIALITY AGREEMENT
This settlement, release and confidentiality agreement (the "Agreement") is
made and entered into by and between Larry H. Carpenter ("Employee"), his heirs
and assigns, and TGX Corporation, its successors, subsidiaries and affiliates
(the "Company").
W I T N E S S E T H:
-------------------
WHEREAS, Employee commenced employment either as a consultant or employee
with the Company on or about March 30, 1992 and has entered into that certain
Personal Service and Employment Agreement dated as of March 31, 1992 and that
further Employment Agreement made as of April 1, 1995 (the "Employment
Agreement"); and
WHEREAS, Employee's active service for the Company terminated on February
10, 1997; and
WHEREAS Employee and the Company desire to settle fully and finally all
differences between them, including, any claims that might arise out of: (i)
Employee's employment with the Company; (ii) the termination thereof; and (iii)
the Employment Agreement.
NOW THEREFORE, in consideration of the premises and mutual promises herein
contained, it is agreed as follows:
1. Employee agrees that his active employment with the Company terminated
as of February 10, 1997 (the "Termination Date") and as of the
Termination Date he no longer serves as President or as any other
officer or an employee of the Company. Employee agrees that effective
as of the date upon which the parties hereto execute this Agreement
and Employee receives the cash payment provided for herein (the
"Effective Date") Employee agrees that he is no longer a director of
the Company and Employee shall execute a formal letter of resignation
as a director. Employee acknowledges and understands that he will not
be reemployed by the Company. Employee specifically waives all claims
for back pay, front pay, vacation pay, sick pay, bonus pay, or any
other form of compensation, except as set forth herein.
2. Employee represents that he has not filed any claim, complaint,
charge, or lawsuit against the Company with any governmental agency or
any court, and that he will not do so at any time hereafter for any
matter, claim, or incident known or unknown which occurred or arose
out of occurrences on or prior to the Effective Date; provided,
however, that this shall not limit Employee from filing a claim or
lawsuit for the sole purpose of enforcing his rights under this
Agreement.
3. Employee and the Company agree that all claims of any nature
whatsoever by Employee against the Company, its legal representatives,
successors, assigns, officers, directors, employees, agents,
affiliates or attorneys for any matters which arose during the time,
or as a result of, Employee's employment with the Company, whether
known or unknown, suspected or unsuspected, including but
<PAGE>
not limited to, rights under federal, state, or local laws prohibiting
age, race, religion, or other forms of discrimination; or claims
growing out of any legal restrictions on the Company's right to
terminate its employees, except as provided in Paragraph 4 hereof or
claims arising out of this Agreement shall be resolved and settled on
the following basis:
(a) Upon the execution of this Agreement by Employee, and upon the
Company's receipt of the certificate representing the Stock,
defined below, Employee shall receive $225,000 in cash (subject
to applicable deductions for taxes, F.I.C.A., etc.) less any
amounts previously paid to Employee for the period after the
Termination Date. Such payment shall be in full consideration
for all accrued and unpaid vacation, sick pay, services or other
cash compensation Employee may believe he is entitled to receive
from the Company.
(b) Employee hereby waives any and all rights he may have, and hereby
forfeits, all right, title and interest in 100,000 shares of TGX
Series A Senior Preferred Stock (the "Stock") which otherwise
would have become non-forfeitable on April 1, 1997 and the
Company acknowledges and agrees that after such forfeiture
Employee shall continue to own all other shares of Stock which
have heretofore vested and as to which restrictions thereon have
lapsed pursuant to Section 5 of the Employment Agreement or
otherwise. Upon execution of this Agreement, Employee shall
return to the Company, for cancellation, a certificate he holds
representing 200,000 shares of the Stock, and in exchange the
Company shall deliver to Employee a certificate evidencing his
ownership of 100,000 fully paid and non-assessable shares of the
Stock.
(c) Employee agrees that for a period not to exceed twelve months
from the Effective Date and up to a maximum of 20 hours during
such period, Employee will consult with the Company concerning
operations, litigation, etc. with Employee to be paid at a rate
of $75 per hour for the next 20 hours and then at a rate of $150
per hour for each hour thereafter. Employee's consulting
obligation shall be effected upon the request of the Chairman of
the Board of the Company.
4. Except for the rights of the Employee and the Company contained in
this Agreement, Employee, on the one hand, and the Company on the
other, each mutually RELEASES, ACQUITS, AND FOREVER DISCHARGES the
other, their legal representatives, successors, assigns, officers,
directors, employees, agents, affiliates and attorneys, of and from
any and all claims, obligations, liabilities, suits, complaints,
debts, obligations, reckonings, promises, covenants, controversies,
actions, causes of action, trespasses, variances, judgments,
executions, damages, demands, rights, titles, interests, charges,
encumbrances or liens of any kind or nature, whether known or unknown,
whether liquidated or unliquidated, whether in tort or in contract or
otherwise which Employee or the
2
<PAGE>
Company has heretofore held, may now hold, or may hereafter hold,
arising out of or relating to any act, omission, or occurrence on or
prior to the Effective Date, including without limitation, any breach
of fiduciary duty, breach of any duty of good faith or fair dealing,
breach of confidence, undue influence, duress, economic coercion,
conflict of interest, negligence, bad faith, malpractice, intentional
or negligent infliction of emotional or mental distress, employment
discrimination, sexual harassment, tortious interference with
corporate governance or prospective business advantage, breach of
contract, tortious interference with contract, deceptive trade
practices, libel, slander, conspiracy, usury, fraud,
misrepresentation, omission, mistake, or violation of any federal or
state securities law, regulations, or rules. Specifically, Employee
and the Company further agree that neither he nor they nor any of his
or their legal or personal representatives or successors or assigns
will institute, prosecute, or in any way aid in the institution or
prosecution of any claim, demand, action, or cause of action now
existing or hereafter asserted against Employee or the Company or
their legal and personal representatives, successors, assigns,
officers, directors, employees, agents, affiliates, or attorneys
arising out of or relating to any of the foregoing. Employee and the
Company specifically acknowledge that they are irrevocably releasing
each other of any obligations and any rights of Employee or the
Company under, and each is hereby terminating, any and all employment
agreements, bonus agreements, rights to equity in the Company, any
compensation plan or agreement, any bonus plan or agreement, and any
rights to vacation pay or sick pay, and any stock option, stock
purchase, or similar plan or agreement with the Company, in effect on
the date hereof. Employee, however, does not release any rights he
may have for indemnification, exculpation, or coverage pursuant to the
express terms of the Certificate of Incorporation, or By-laws of the
Company, or under any policies of insurance covering acts or omissions
of Employee while employed by the Company or pursuant to Section 19 of
the Employment Agreement.
5. Employee and the Company agree that this Agreement shall inure to the
benefit of any successor, assignee, or legal representative of any of
the Employee, or the Company, it being understood that this Agreement
does not purport to grant a release from liabilities or obligations
originating from acts, omissions, or circumstances arising subsequent
to the Effective Date and/or in connection with the terms of this
Agreement.
6. If any court or arbitrator shall determine that any of the provisions
hereof is for any reason, or to any extent, invalid or unenforceable,
the remaining provisions are not invalidated and their application to
other persons or circumstances shall continue in full force and effect
to bind Employee and the Company.
7. The parties hereto acknowledge and agree that their execution of this
Agreement does not constitute in any manner whatsoever any admission
of liability on their part for any matters covered by or released
hereby, but that such liability is specifically denied, and that
entering into this Agreement is simply to
3
<PAGE>
compromise, settle and release any and all potential claims relating
to such matters, if any, which may have been or could have been
alleged.
8. This Agreement shall be governed by, construed and interpreted
according to the laws of the State of Texas without regard to the
conflicts of laws principles thereof and venue for any dispute arising
hereunder shall lie exclusively in Houston, Texas.
9. This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which, taken together, shall
constitute one and the same instrument.
10. Employee and the Company represent and agree that they will keep the
terms, conditions, and amounts of this Agreement and all other
agreements between themselves completely confidential and that they
will not hereafter voluntarily disclose any information concerning
this Agreement and all other agreements between themselves to anyone
except their immediate families, legal counsel, accountants, and
financial advisors, provided, however, that they agree to keep this
information confidential and not disclose it to others. Employee
further agrees that upon the Effective Date, he has not, and will not,
take with him or retain without prior written authorization of the
Company, any papers, writings or other property which is, or directly
relates to Confidential Information. Employee further agrees that all
such Confidential Information shall at all times belong to and remain
the property of the Company and that Employee shall return all such
Confidential Information immediately. Employee agrees that except as
may be required by law, or in a judicial proceeding under law,
Employee will disclose to any person or other entity any Confidential
Information, directly or indirectly, for a period of three years after
Employee's employment has terminated with the Company. Employee
agrees that he will not use any Confidential Information to compete
with the Company nor will Employee use any Confidential Information in
a manner which is detrimental to the Company. Employee agrees that in
addition to any other remedy available at law or equity, the Company
shall be entitled to injunctive relief, without the posting of any
bond, in the event of a breach of the confidentiality agreement set
forth in this paragraph. For the purposes of this Agreement,
"Confidential Information" shall mean any non-public information as to
or concerning the profits, revenues, expenses, cash flow, prospects,
well information, information relating to any of their operations of
the Company and any other non-public financial or operating
information concerning any project owned or operated by the Company.
Confidential Information shall not mean (i) information with regard to
the Company which is already in the hands of third parties if that
information is not subject to a confidentiality agreement or other
obligation of secrecy between the Company and the third party that has
such information; (ii) information with regard to the Company which
generally becomes available to the public other than as a result of
disclosure by Employee; and (iii) information with regard to the
Company which becomes available to Employee on a non-confidential
basis from a third party that is not
4
<PAGE>
under a duty to, or agreement with, the Company to keep such
information confidential.
11. The language of all parts of this Agreement shall in all cases be
construed as a whole according to its fair meeting and not strictly
for or against any of the parties.
12. Employee acknowledges that Employee has had the opportunity to consult
with counsel in connection with the negotiation and execution of this
Agreement and all other matters contemplated hereby, that Employee has
had the opportunity to review and reflect on all terms of this
Agreement and that Employee has not been subject to any undue or
improper influence interfering with the exercise of Employee's free
will to execute this Agreement. Employee does not rely, and has not
relied, on any representation, promise or inducement concerning this
Agreement made by the Company, its officers, directors, employees,
agents or attorneys, with the exception of the consideration expressly
contained herein in executing the Agreement.
13. Employee agrees that for a period of three years from the Effective
Date neither he nor any Affiliate (as that term is defined in Rule 405
under the Securities Act of 1933) (regardless of whether such person
or entity is an Affiliate on the date hereof) will (i) acquire, offer
to acquire, or agree to acquire, directly or indirectly, by purchase
or otherwise, any voting securities or direct or indirect rights or
options to acquire any voting securities of the Company, except
Employee may purchase Stock which Employee contributed to his ex-
spouse, (ii) make, or in any participate, directly or indirectly, in
any "solicitation" of "proxies" to vote (as such terms are used in the
Proxy Rules of the Securities and Exchange Commission), or seek to
advise or influence any person or entity with respect to the voting of
any voting securities of the Company, (iii) form, join, or in any way
participate in a "group" within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934 with respect to any voting securities
of the Company (except to the extent you and your ex-spouse are
considered a "group"), or (iv) otherwise act, alone or in concert with
others, to seek to control or influence the management, Board of
Directors, or policies of the Company.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
5
<PAGE>
NOTICE. THE EXECUTION OF THIS MUTUAL RELEASE WILL RESULT IN IMPORTANT LEGAL
CONSEQUENCES. YOU SHOULD READ IT CAREFULLY. YOU ACKNOWLEDGE THAT YOU HAVE
CONSULTED WITH AN ATTORNEY BEFORE SIGNING IT.
IN WITNESS WHEREOF, the undersigned parties hereto have executed this
Agreement as of the 31st day of March, 1997.
-----------------------------------
Name: Larry H. Carpenter
TGX CORPORATION
By:
--------------------------------
Name: Michael A. Gerlich
Title: Interim President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,924
<SECURITIES> 0
<RECEIVABLES> 1,491
<ALLOWANCES> 200
<INVENTORY> 0
<CURRENT-ASSETS> 4,012
<PP&E> 15,739
<DEPRECIATION> 5,103
<TOTAL-ASSETS> 15,547
<CURRENT-LIABILITIES> 2,997
<BONDS> 0
80,726<F1>
485
<COMMON> 290
<OTHER-SE> (70,451)
<TOTAL-LIABILITY-AND-EQUITY> 15,547
<SALES> 5,279
<TOTAL-REVENUES> 13,800<F2>
<CGS> 2,211
<TOTAL-COSTS> 2,211
<OTHER-EXPENSES> 3,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207
<INCOME-PRETAX> 7,817<F2>
<INCOME-TAX> (787)
<INCOME-CONTINUING> 8,604
<DISCONTINUED> 0
<EXTRAORDINARY> 1,831
<CHANGES> 0
<NET-INCOME> (8,812)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
<FN>
<F1>Represents Series A Redeemable Senior Preferred Stock that has a $10
liquidation preference and entitles holder to 10% earned compounded cash
dividend. No dividends paid to date.
<F2>Includes net litigation settlement gain of $7,100.
</FN>
</TABLE>
