<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 0-10201
TGX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-0890264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Pennbright, Suite 200
Houston, Texas 77090
(Address of principal executive offices) (Zip Code)
(281) 872-0500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----
As of May 13, 1997, there were 24,955,807 outstanding shares of TGX
Corporation Common Stock, $.01 par value.
<PAGE>
TGX CORPORATION
Report on Form 10-QSB For The Quarter Ended March 31, 1997
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information 1
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet -
March 31, 1997 and December 31, 1996 2
Consolidated Statement of Operations -
Three Month Periods Ended March 31, 1997 and 1996 3
Consolidated Statement of Cash Flows -
Three Month Periods Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 13
</TABLE>
Forward-Looking Statements
Stockholders are cautioned that all forward-looking statements involve
risks and uncertainties, including without limitation, statements about the
costs of exploring and developing new oil and natural gas reserves, the price
for which such reserves can be sold, the Company's attempts to reduce overhead
and eliminate non-core assets, environmental concerns affecting the drilling of
oil and natural gas wells, pending litigation, the possible equity
restructuring, and general market conditions, competition and pricing.
Although the Company believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions
could be inaccurate, and there can therefore be no assurance that the forward-
looking statements included in this Form 10-QSB will prove accurate. Because of
the significant uncertainties inherent in the forward-looking statements
contained in this Form 10-QSB, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
<PAGE>
TGX Corporation
Report on Form 10-QSB For the Quarter Ended March 31, 1997
Part I. Financial Information.
Item 1. FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements of TGX
Corporation ("TGX") and its subsidiaries (collectively the "Company") have been
prepared in accordance with Rule 310 of Regulation S-B, "Interim Financial
Statements", and accordingly do not include all information and notes required
under generally accepted accounting principles for complete financial
statements. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996. These interim financial
statements reflect all adjustments (which were normal recurring adjustments)
which are, in the opinion of the management, necessary for a fair presentation,
in all material respects, of the Company's financial position as of March 31,
1997 and the results of its operations and cash flows for the three month period
ended March 31, 1997. Results of operations for the three month period ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. It is recommended that these
unaudited consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996.
Page 1
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
(In thousands except
ASSETS for share data)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,476 $ 1,924
Accounts receivable, net of allowance for doubtful
accounts of $200 1,213 1,291
Deferred tax asset 680 680
Other current assets 315 117
-------- --------
Total current assets 3,684 4,012
-------- --------
Property and equipment:
Oil and natural gas properties 16,242 15,535
Other property and equipment 204 204
Accumulated depletion, depreciation and amortization (5,454) (5,103)
-------- --------
Property and equipment, net 10,992 10,636
-------- --------
Investment in Comite Field Plant Venture 586 596
Deferred tax asset 250 250
Other assets 49 53
-------- --------
Total other assets 885 899
-------- --------
TOTAL ASSETS $ 15,561 $ 15,547
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities - Note 4 $ 2,594 $ 2,997
-------- --------
Total current liabilities 2,594 2,997
-------- --------
Long-term debt - Note 2 1,500 1,500
-------- --------
Total liabilities 4,094 4,497
-------- --------
Commitments and contingencies - Note 3
Redeemable Senior Preferred Stock, 8,678,571 (1997) and
8,788,571 (1996) shares outstanding; redemption
value $86,786 (1997) and $87,886 (1996) 85,642 80,726
-------- --------
Stockholders' deficit:
9% Cumulative Convertible Preferred stock,
300,000 shares issued plus 192,000 (1997) and 185,000
(1996) shares to be issued for dividends 492 485
Common stock, 24,955,807 shares outstanding 290 290
Additional paid-in capital 1,725 1,665
Accumulated deficit (76,682) (72,116)
-------- --------
Total stockholders' deficit (74,175) (69,676)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 15,561 $ 15,547
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 2
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
--------------------
1997 1996
--------- ---------
(In thousands except
per share data)
<S> <C> <C>
REVENUES
Oil and natural gas sales $ 1,789 $ 1,188
Natural gas gathering 57 58
Equity earnings in Comite Field Plant Venture 90 197
Other, net 76 23
-------- --------
2,012 1,466
-------- --------
COSTS AND EXPENSES
Operating expenses 390 326
Treating and transportation expenses 147 238
Depletion, depreciation and amortization 346 228
Exploration costs 13 -
General and administrative expenses 630 660
Interest 44 153
-------- --------
1,570 1,605
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 442 (139)
Income tax expense 10 -
------- --------
NET INCOME (LOSS) 432 (139)
Preferred stock dividends (3,245) (3,272)
Accretion of Senior Preferred redemption value (1,753) (1,416)
-------- --------
NET LOSS APPLICABLE TO COMMON STOCK $(4,566) $(4,827)
======== ========
NET LOSS PER SHARE OF COMMON STOCK $(0.18) $(0.19)
======== ========
AVERAGE COMMON SHARES OUTSTANDING 24,956 24,956
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 3
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
---------------------------
1997 1996
------ -----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 432 $(139)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depletion, depreciation and amortization 346 228
Amortization of debt transaction costs and stock compensation, net (11) 5
Distributions in excess of equity earnings 10 61
Interest to be paid through issuance of additional notes - 117
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 78 (86)
Decrease in accounts due from/to affiliates, net - 6
Decrease (increase) in other current assets (198) 32
Decrease in accounts payable and accrued liabilities (403) (473)
------ -----
Net cash provided (used) by operating activities 254 (249)
------ -----
Cash flows from investing activities:
Capital expenditures (707) (214)
Decrease in other assets 5 16
------ -----
Net cash used by investing activities (702) (198)
------ -----
Cash flows from financing activities:
Advances pursuant to revolving credit facility - 200
------ -----
Net cash provided by financing activities - 200
------ -----
Net decrease in cash and cash equivalents (448) (247)
Cash and cash equivalents at beginning of period 1,924 384
------ -----
Cash and cash equivalents at end of period $1,476 $ 137
====== =====
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
Interest to be paid through issuance of additional notes $ - $ 117
</TABLE>
See accompanying notes to consolidated financial statements
Page 4
<PAGE>
TGX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
TGX Corporation ("TGX") and subsidiaries (collectively, the "Company"), is a
domestic independent energy company engaged in the production of oil and natural
gas. The Company is also engaged in intrastate natural gas gathering and
treating.
On February 22, 1990, TGX filed a voluntary petition in the United States
Bankruptcy Court for the Western District of Louisiana, Shreveport Division (the
"Bankruptcy Court") for reorganization pursuant to Chapter 11, Title 11 of the
United States Code (the "Reorganization Proceeding"). On January 7, 1992, the
Bankruptcy Court confirmed an Amended Plan of Reorganization ("Plan") for TGX
and the confirmation order became effective on January 21, 1992 (the "Effective
Date"). On September 21, 1992, the Bankruptcy Court determined that the Plan
had been substantially consummated, and the Bankruptcy Court's order of
substantial consummation became final and nonappealable on October 2, 1992.
As a result of the substantial consummation of the Plan and due to (i) the
reallocation of the voting rights among the equity interests owners and (ii) the
reorganization value of TGX's assets being less than the total of all post-
petition liabilities and allowed claims 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" .
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, 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 had paid since
September 1984 and the 90% of No. 6 Fuel Oil Price.
Current assets and liabilities were recorded at book value which
approximates RV. Long-term liabilities were recorded at the present
values of amounts to be paid and the pre-consummation stockholders'
deficit was adjusted to reflect the par value of pre-consummation
equity interests.
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 the pre-consummation equity interests. The accretion of the
difference between the recorded value and the $10 per share
redemption amount
Page 5
<PAGE>
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
are comparable and the difference between the Company's calculated RV and the
FMV could have, in fact, been material.
The Senior Preferred has a $10 per share redemption value and has a provision
for a 10% annual compounded cash dividend, payable quarterly, provided however,
that the payment of such dividend does not violate Delaware law or certain loan
covenants. The Company has not paid any dividends since the Effective Date of
the Plan and based on the current financial position of the Company and bank
covenants restricting dividend payments, does not expect to make any such
dividend payments in the near future. Subject to Delaware law, the Senior
Preferred must be redeemed no later than January 21, 2002. Holders of Senior
Preferred have 95% of the voting rights of TGX. As of March 31, 1997, the
redemption value and accrued dividends related to the Senior Preferred were
$86,786,000 and $56,473,000 respectively. The Senior Preferred dividends must
be paid in full prior to paying any other dividends.
2. LONG-TERM DEBT AND NOTES PAYABLE
As of March 31, 1997 and December 31, 1996, the components of long-term debt
were:
<TABLE>
<CAPTION>
March 31, December 31,
(Thousands of dollars) 1997 1996
-------------------------------------------------------
<S> <C> <C>
Bank borrowings:
Revolving credit (secured) $1,500 $1,500
Less current maturities - -
-------------------------------------------------------
Long-term debt $1,500 $1,500
=======================================================
</TABLE>
On July 13, 1994, the Company entered into a series of agreements with Bank
One, Texas N.A. ("Bank One") whereby the Company's then outstanding secured debt
with the Bank of Montreal was restructured. The Bank One facility currently
bears interest at Bank One's stated rate plus 1.5% and is secured by
substantially all of the Company's oil and gas properties. The Bank One
facility at March 31, 1997 had a borrowing base of $4,400,000 and is
redetermined every six months or at Bank One's discretion. Under the current
facility, the borrowing base is reduced through monthly reductions of $100,000
and the loan matures on July 13, 1999.
Cash paid for interest during the first three months of 1997 and 1996 totaled
approximately $40,000 and $17,000, respectively.
Page 6
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
Litigation
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 the operation of TGX.
From time to time, in the normal course of business, the Company is a party
to various other litigation matters the outcome of which, to the extent not
otherwise provided for, should not have a material adverse effect on the
Company.
Recapitalization Proposal
TGX has filed a registration statement relating to the merger of TGX with and
into its wholly-owned subsidiary, GeoStrat Resources, Inc. ("GeoStrat"), in
order to effect a recapitalization of its existing security holders. Pursuant
to the recapitalization, holders of TGX Senior Preferred stock would receive
one-half share of GeoStrat common stock for each share of TGX Senior Preferred
they currently hold. Other series of TGX preferred stock and TGX common stock
would be eliminated pursuant to the proposed merger. The Board of Directors
retained American Appraisal Associates, Inc. as an independent consultant to
review the terms of the proposed merger and American Appraisal determined that
the proposal would be fair to the stockholders of TGX from a financial point of
view.
The Board of Directors of TGX, which would become the Board of Directors of
GeoStrat if the merger is approved, stated that they believed the proposed
merger would help position GeoStrat to meet the economic and industry demands
being faced by TGX, create the flexibility and liquidity required for future
stability and growth and advance the strategic objectives of TGX. The proposed
merger and recapitalization is anticipated to be presented to the TGX
shareholders at a special meeting to be held in June 1997.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of March 31, 1997 and December 31, 1996, the primary components of accounts
payable and accrued liabilities were:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable $ 57 $ 360
Undistributed net oil and natural gas revenue 1,567 1,281
Accrued operating and tax expenses 356 354
Accrued professional fees 242 347
Income tax liability - 180
Operation advances 38 115
Miscellaneous accruals 334 360
- -------------------------------------------------------------------------------
$2,594 $2,997
===============================================================================
</TABLE>
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 (''1997'') and March 31, 1996 (''1996'')
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.
Revenues
Revenues from oil and natural gas sales for 1997 were $1,789,000, an increase
of $601,000 or 50% over 1996 revenues of $1,188,000. The increase in 1997
revenues was due to higher product prices and volumes sold. A summary of oil and
natural gas sales volumes and revenues for the respective periods 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>
1997 1996 Change
------- ------- -------
<S> <C> <C> <C>
Oil revenues (in thousands) $ 385 $ 319 21%
Oil sales volume (barrels) 17,700 16,700 6%
Oil average sales price per barrel $ 21.75 $ 19.10 14%
</TABLE>
Summary of Natural Gas Volumes and Revenues
<TABLE>
<CAPTION>
1997 1996 Change
------- ------ -------
<S> <C> <C> <C>
Natural gas revenues (in thousands) $1,404 $ 869 62 %
Natural gas sales volume (Mmcf) 488 423 15%
Natural gas average sales price per Mcf $ 2.88 $2.05 40%
</TABLE>
On an equivalent unit basis (one barrel of oil equals six Mcf of natural gas
on a heating value basis) ("Emcf"), natural gas represented 82% of TGX's 1997
Emcf sales volumes and 78% 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 1997, average gas
prices increased to $2.88 or $0.83 per Mcf from the 1996 average price of $2.05.
Current period oil prices were also higher than the previous period by $2.65 per
barrel. Higher oil and gas product prices contributed to an increase in revenues
for 1997 of $449,000 or 75% of the current period revenue increase. Both oil
and gas prices have declined further since the current quarter end as a result
of mild weather conditions and other market factors. The NYMEX natural gas
contract price, based on a Mcf basis, was $2.13 for May 1997. As of April 30,
1997, the per barrel posted price for West Texas Intermediate was $18.00.
Sales volumes during 1997 for natural gas and oil increased 15% and 6%,
respectively, primarily due to the Company's continuing acquisition and
drilling program activity. The increases in sales
Page 8
<PAGE>
volume resulted in additional 1997 oil and gas revenues of $152,000 or 25% of
the current period revenue increase. The Company's 1997 acquisition and drilling
efforts are continuing and should result in additional sales volume increases
over the remainder of 1997.
Natural gas gathering revenues were relatively flat as compared to 1996, while
equity earnings in the Comite Field Plant Venture treating plant decreased by
$107,000 or 54% to $90,000 in 1997. The decrease in treating plant earnings is
attributed to continued field production declines and 1996 benefiting from the
recoupment of approximately $78,000 of previously deferred treating fees
pursuant to an agreement. As a result of recent third party exploration
activity in close proximity to both the treating plant and gathering system, an
additional well's gas has been contracted to this facility with prospects of
additional wells being added later in 1997 and 1998. Though the new well's
treating and gathering rates per Mcf are lower than current well agreements, the
addition of new wells could partially offset the continued decrease in revenues
resulting from the older existing wells' production declines.
Other revenues for 1997 of $76,000 consists of interest income of $19,000 and
miscellaneous revenues of $57,000 primarily attributed to the sale of the
Company's option to purchase a pipeline in Arkansas to a third party.
Costs and Expenses
For 1996, total operating expenses increased $64,000 or 20% to $390,000 as
compared to $326,000 for 1996. Included in operating expenses are workover
costs, severance taxes and through wellhead production costs (lifting costs).
Workover costs for 1997 and 1996 totaled $60,000 and $86,000, respectively,
and primarily represent discretionary well production activities that are
implemented to enhance or increase production. Additional workovers are
scheduled for 1997.
Severance taxes for 1997 and 1996 were $81,000 and $60,000, respectively. The
increase in severance taxes is related to increased oil and natural gas revenues
due to higher prices and increased sales volumes.
Excluding workover costs and severance taxes, 1997 and 1996 operating expenses
totaled $249,000 and $180,000, respectively, for production costs through the
wellhead. Operating expenses for 1997 were higher due to an increase in
production volumes and full current period impact of 1996 acquisitions and
drilling activity. Production costs per equivalent Mcf for 1997 was $0.42 as
compared to $0.34 for 1996.
Treating and transportation expenses in 1997 decreased by $91,000 or 38% to
$147,000 as compared to 1996 cost of $238,000. These costs represent post
wellhead expenditures incurred to treat Company gas to comply with pipeline
specifications or to transport the gas to market. The 1997 decrease is primarily
due to 1996 including approximately $78,000 of previously deferred treating fees
pursuant to an agreement and expansion of gas sales volumes in 1997 not
requiring treating. Treating and transportation expenses for 1997 and 1996,
excluding 1996 deferred fees, per equivalent Mcf were $0.25 and $0.31,
respectively.
Depletion, depreciation, and amortization (''DD&A'') expense in 1997 increased
$118,000 or 52% to $346,000 from $228,000 in 1996 due primarily to an increase
in the weighted average DD&A rate per equivalent Emcf and higher sales volumes.
The weighted average DD&A rate for 1997 increased 32% to $0.58 per equivalent
Mcf as compared to 1996's rate of $0.44. The remaining increase in DD&A for 1996
is the result of an increase in Emcf sold of 13%.
Page 9
<PAGE>
Pursuant to successful efforts accounting, unsuccessful exploration costs are
expensed as opposed to capitalized. Exploration costs for 1997 totaled $13,000
and represent additional costs incurred related to previously reported
unsuccessful 1996 exploration activities.
General and administrative expenses in 1997 decreased by $30,000 or 5% to
$630,000 from $660,000 in 1996. General and administrative expenses for 1997
includes a net charge of $186,000 resulting from a settlement payment, pursuant
to an agreement, to the former chief executive officer and $45,000 of
professional and other fees related to the previously announced equity
restructuring. Excluding the net officer settlement expense, 1997 general and
administrative expenses as compared to 1996 decreased $216,000 due primarily to
lower personnel and legal costs.
Interest expense for 1997 decreased $109,000 or 71% to $44,000 from $153,000
in 1996, due to 1996 including accrued interest of $117,000 pursuant to the
nonrecourse BMOF note. The accrued BMOF note interest was payable in kind
through issuance of additional notes. In conjunction with the April 1996 NFG
Litigation settlement, BMOF was paid 50% of the settlement proceeds, pursuant to
the amended credit agreement, in cancellation and full payment of the non-
recourse secured note. In conjunction with the BMOF note settlement, the
Company recognized an extraordinary gain from debt forgiveness, including
accrued interest. Included in 1997 and 1996 is approximately $4,000 and
$9,000, 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. The current income tax of 2% represents an estimate
of alternative minimum taxes and represents an effective tax rate of
approximately 2% on income before income taxes.
Pursuant to the terms of the Plan, dividends for the Senior Preferred stock
are calculated at 10%, compounded annually and resulted in accrued, but unpaid,
dividends expense for 1997 and 1996 of $3,178,000 as compared to $3,205,000,
respectively. Dividends on the Old Preferred Stock were $67,000 for 1997 and
1996.
The accretion of the Senior Preferred redemption value, a non-cash item, is
calculated based on the interest method. Accordingly, the amount of accretion
increased by 24% to $1,753,000 for 1997 as compared to $1,416,000 in 1996.
Page 10
<PAGE>
FINANCIAL CONDITION
During 1997, the Company's capital expenditures totaled $707,000, an increase
of $493,000 from 1996 activity and were primarily related to development
drilling and producing well acquisition activity. The Company also incurred
workover costs of $60,000. The positive results of these expenditures should
result in an increase in sales volumes for 1997.
At March 31, 1997, the Company had positive working capital of $1,090,000,
including $680,000 of estimated current deferred tax asset. The Company also
had additional borrowing capacity under its Bank One credit facility of
$2,900,000. 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 March 31, 1997 was $4,400,000 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 March 31, 1997, the Senior
Preferred redemption value and accrued dividends were $86,786,000 and
$56,473,000, 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 March 31, 1997, the stockholders' deficit was $74,175,000. 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.
LIQUIDITY AND CAPITAL RESOURCES
For 1997, the Company's cash provided by operating activities was $254,000.
Cash provided by operating activities for 1997 was reduced by the net settlement
cost incurred of $186,000 related to the resignation of the former chief
executive officer. Also, included in cash provided by operating activities is
approximately $100,000 of proceeds received from the Company's 35% equity
investment in the Comite Field Plant Venture.
The Bank One credit facility has a current borrowing base of $4,400,000 with
$1,500,000 borrowings and $92,000 of letter of credit commitments outstanding at
March 31, 1997. 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
Page 11
<PAGE>
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.
Page 12
<PAGE>
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
Except as set forth in Note 3 of the Notes to Consolidated Financial
Statements (Unaudited) included in Part I hereof, since the filing date of the
Annual Report on Form 10-KSB, there have been no substantial developments
related to the legal proceedings described therein.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) Dividends for the Senior Preferred Stock began accruing on the
Effective Date, however, as of March 31, 1997, no dividends had been
declared. The Senior Preferred Stock will receive a 10% annual
compounded cash dividend, payable quarterly, provided however, that
the payment of such dividends does not violate (i) Delaware Law which
prohibits the payment of dividends when such payment would impair the
capital of the Company or (ii) certain covenants in the Company's
Credit Agreement with Bank One, Texas N.A.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None.
Page 13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TGX CORPORATION
(Registrant)
Date: May 14, 1997 By: /s/ Michael A. Gerlich
----------------------
Chief Financial Officer
Page 14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,476
<SECURITIES> 0
<RECEIVABLES> 1,413
<ALLOWANCES> 200
<INVENTORY> 0
<CURRENT-ASSETS> 3,684
<PP&E> 16,446
<DEPRECIATION> 5,454
<TOTAL-ASSETS> 15,561
<CURRENT-LIABILITIES> 2,594
<BONDS> 0
85,642<F1>
492
<COMMON> 290
<OTHER-SE> (74,957)
<TOTAL-LIABILITY-AND-EQUITY> 15,561
<SALES> 1,789
<TOTAL-REVENUES> 2,012
<CGS> 537
<TOTAL-COSTS> 537
<OTHER-EXPENSES> 989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 442
<INCOME-TAX> 10
<INCOME-CONTINUING> 432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,566)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
<FN>
<F1>REPRESENTS SERIES A REDEEMABLE SENIOR PREFERRED STOCK THAT HAS A $10
LIQUIDATION PREFERENCE AND ENTITLES HOLDER TO A 10% ANNUAL COMPOUNDED DIVIDEND.
NO DIVIDENDS PAID TO DATE.
</FN>
</TABLE>
