<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
AMENDMENT NO. 2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER 0-616094
---------------------
EASTEX ENERGY INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2172796
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 FIRST INTERSTATE BANK PLAZA
1000 LOUISIANA
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 650-6255
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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<PAGE> 2
This Amendment No. 2 on Form 10-K/A amends the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 (as amended by
Amendment No. 1 on Form 10-K/A dated April 30, 1995) to include a Subsequent
Event footnote in the Financial Statements and update the Report of Independent
Accountants as set forth in Item 8.
1
<PAGE> 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 3
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1993 and 1994........................ 4
Consolidated Statements of Operations for the Years Ended December 31, 1992,
1993 and 1994 and Pro Forma Consolidated Statement of Operations for the
Year Ended December 31, 1993..................................................... 5
Pro Forma Consolidated Statement of Operations for the Year Ended December 31,
1992............................................................................. 6
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1992, 1993 and 1994................................................. 7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1992,
1993 and 1994.................................................................... 8
Notes to Consolidated Financial Statements.......................................... 9
</TABLE>
2
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Eastex Energy Inc.
We have audited the accompanying consolidated balance sheets of Eastex
Energy Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993
and 1994, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eastex Energy Inc. and
subsidiaries as of December 31, 1993 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
Subsequent to March 30, 1995, the date of our original report, the Company
was named as a defendant in a lawsuit related to a proposed acquisition which
was not consummated. As indicated in Note 12, "Subsequent Event," management
believes that the litigation is without merit and intends to vigorously defend
the claims asserted against it; however, the ultimate outcome of the litigation
is not presently determinable.
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1995 (except with respect to the matter discussed
in Note 12, as to which the date is August 11, 1995)
3
<PAGE> 5
EASTEX ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $17,202 $11,857
Accounts receivable, net of allowance for doubtful accounts............ 41,679 48,245
Notes receivable from related parties.................................. 238 246
Stored gas............................................................. 4,146 2,849
Prepaid gas purchase cost.............................................. 625 1,315
Prepaid expenses and other current assets.............................. 6,310 2,364
------- -------
Total Current Assets........................................... 70,200 66,876
PROPERTY AND EQUIPMENT, net of accumulated depreciation,
depletion and amortization............................................. 14,416 13,756
INTANGIBLE ASSETS, net of accumulated amortization....................... 1,564 1,159
GOODWILL, net of accumulated amortization................................ 5,580 5,432
OTHER ASSETS............................................................. 464 1,010
------- -------
Total Assets................................................... $92,224 $88,233
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...................................... $ 114 $ 1,021
Accounts payable....................................................... 47,853 49,801
Accrued gas purchase cost.............................................. 1,472 1,803
Other accrued expenses................................................. 3,529 1,530
------- -------
Total Current Liabilities...................................... 52,968 54,155
LONG-TERM DEBT, net of current portion................................... 9,854 8,893
OTHER LONG-TERM PAYABLES................................................. 1,259 1,000
DEFERRED FEDERAL AND STATE INCOME TAXES.................................. 2,196 2,376
------- -------
Total Liabilities.............................................. 66,277 66,424
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share; 15,000,000 authorized;
6,656,767 issued in 1993 and 6,716,950 in 1994;
6,395,967 outstanding in 1993 and 6,265,250 in 1994................. 67 67
Additional paid-in capital............................................. 21,936 22,032
Retained earnings...................................................... 4,595 950
Less treasury stock; 260,800 shares in 1993 and 451,700 in 1994, at
cost................................................................ (651) (1,240)
------- -------
Total Stockholders' Equity..................................... 25,947 21,809
------- -------
Total Liabilities and Stockholders' Equity..................... $92,224 $88,233
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
EASTEX ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED AND PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS CONSOLIDATED
----------- ------------
1992 1993 1993 1993 1994
-------- -------- ----------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.............................. $174,929 $356,091 $14,363(a) $370,454 $366,768
COST OF SALES, EXCLUDING DEPRECIATION,
DEPLETION AND AMORTIZATION (Shown
below):
Gas purchases....................... 162,466 337,104 11,384(a) 348,488 350,726
Transportation...................... 3,170 10,991 1,421(a) 12,412 11,265
Gas storage and operating
expenses......................... 615 556 -- 556 535
-------- -------- ------- -------- --------
166,251 348,651 12,805 361,456 362,526
-------- -------- ------- -------- --------
GROSS PROFIT.......................... 8,678 7,440 1,558 8,998 4,242
-------- -------- ------- -------- --------
OTHER OPERATING EXPENSES:
General and administrative.......... 3,493 5,157 351(a)(b) 5,508 7,208
Depreciation, depletion and
amortization..................... 1,098 1,103 11(a) 1,114 1,226
Amortization of intangible assets... -- 225 75(c) 300 405
Amortization of goodwill............ 34 127 28(d) 155 148
-------- -------- ------- -------- --------
4,625 6,612 465 7,077 8,987
-------- -------- ------- -------- --------
INCOME (LOSS) FROM
OPERATIONS.......................... 4,053 828 1,093 1,921 (4,745)
-------- -------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest income..................... 291 341 22(a) 363 504
Interest expense.................... (754) (1,030) (102)(a)(e) (1,132) (1,308)
Other, net.......................... 41 2 -- 2 145
-------- -------- ------- -------- --------
(422) (687) (80) (767) (659)
-------- -------- ------- -------- --------
INCOME (LOSS) BEFORE FEDERAL AND STATE
INCOME TAXES AND MINORITY
INTEREST............................ 3,631 141 1,013 1,154 (5,404)
-------- -------- ------- -------- --------
PROVISION (BENEFIT) FOR FEDERAL AND
STATE INCOME TAXES:
Current............................. 934 (936) 344(a)(f) (592) (366)
Deferred............................ 326 1,013 -- 1,013 (1,393)
-------- -------- ------- -------- --------
1,260 77 344 421 (1,759)
-------- -------- ------- -------- --------
INCOME BEFORE MINORITY INTEREST....... 2,371 64 669 733 (3,645)
MINORITY INTEREST..................... (9) -- -- -- --
-------- -------- ------- -------- --------
NET INCOME (LOSS)..................... $ 2,380 $ 64 $ 669 $ 733 $ (3,645)
======== ======== ======= ======== ========
INCOME (LOSS) PER SHARE OF COMMON
STOCK AND COMMON STOCK EQUIVALENTS:
Primary............................. $ 0.50 $ 0.01 -- $ 0.13 $ (0.58)
Fully Diluted....................... $ 0.48 $ 0.01 -- $ 0.13 $ (0.58)
AVERAGE COMMON STOCK AND COMMON STOCK
EQUIVALENTS OUTSTANDING, EXCLUSIVE
OF MINORITY INTEREST:
Primary............................. 4,753 5,778 12(e) 5,790 6,295
Fully Diluted....................... 4,914 5,788 12(e) 5,800 6,295
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
EASTEX ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED AND PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
-------------------------------------------------
HEATH PRO FORMA PRO FORMA
EASTEX PETRA ADJUSTMENTS CONSOLIDATED
-------- ------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES.......................................... $174,929 $57,746 $ -- $232,675
COST OF SALES, EXCLUDING DEPRECIATION, DEPLETION
AND AMORTIZATION, (Shown below):
Gas purchases................................... 162,466 48,989 -- 211,455
Transportation.................................. 3,170 5,423 -- 8,593
Gas storage and operating expenses.............. 615 -- -- 615
-------- ------- ------- --------
166,251 54,412 -- 220,663
-------- ------- ------- --------
GROSS PROFIT...................................... 8,678 3,334 -- 12,012
-------- ------- ------- --------
OTHER OPERATING EXPENSES:
General and administrative...................... 3,394 2,765 (1,365)(b) 4,893
Depreciation, depletion and amortization........ 1,098 42 -- 1,140
Amortization of intangible assets............... -- -- 300(c) 300
Amortization of goodwill........................ 34 -- 111(d) 145
-------- ------- ------- --------
4,625 2,807 (954) 6,478
-------- ------- ------- --------
INCOME FROM OPERATIONS............................ 4,053 527 954 5,534
-------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest income................................. 291 108 -- 399
Interest expense................................ (754) (35) (473)(e) (1,262)
Other, net...................................... 41 (75) -- (34)
-------- ------- ------- --------
(422) (2) (473) (897)
-------- ------- ------- --------
INCOME BEFORE FEDERAL AND STATE
INCOME TAXES AND MINORITY
INTEREST........................................ 3,631 525 481 4,637
PROVISION (BENEFIT) FOR FEDERAL AND STATE INCOME
TAXES:
Current......................................... 934 158 164(f) 1,256
Deferred........................................ 326 (88) -- 238
-------- ------- ------- --------
1,260 70 164 1,494
-------- ------- ------- --------
INCOME BEFORE MINORITY INTEREST................... 2,371 455 317 3,143
-------- ------- ------- --------
MINORITY INTEREST................................. (9) -- -- (9)
-------- ------- ------- --------
NET INCOME........................................ $ 2,380 $ 455 $ 317 $ 3,152
======== ======= ======= ========
INCOME PER SHARE OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS:
Primary......................................... $ 0.50 -- -- $ 0.66
Fully Diluted................................... 0.48 -- -- 0.64
AVERAGE COMMON STOCK AND COMMON STOCK EQUIVALENTS
OUTSTANDING EXCLUSIVE OF MINORITY INTEREST:
Primary......................................... 4,753 -- 9(e) 4,762
Fully Diluted................................... 4,914 -- 35(e) 4,949
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
EASTEX ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
----- ------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1991
common stock, $0.01 par value,
15,000,000 shares authorized........... 4,225 $ 44 $ 12,129 $ 2,151 $ (384) $ 13,940
----- ---- -------- ------- ------- --------
Treasury stock acquired.................. (119) -- -- -- (379) (379)
Treasury stock issued.................... 17 -- 12 -- 32 44
Stock options exercised.................. 39 1 49 -- -- 50
Net income............................... -- -- -- 2,380 -- 2,380
----- ---- -------- ------- ------- --------
BALANCE, December 31, 1992
common stock, $0.01 par value,
15,000,000 shares authorized........... 4,162 45 12,190 4,531 (731) 16,035
----- ---- -------- ------- ------- --------
Treasury stock issued.................... 32 -- 85 -- 80 165
Common stock issued...................... 2,087 22 9,519 -- -- 9,541
Stock options exercised.................. 115 -- 142 -- -- 142
Net income............................... -- -- -- 64 -- 64
----- ---- -------- ------- ------- --------
BALANCE, December 31, 1993
common stock, $0.01 par value,
15,000,000 shares authorized........... 6,396 67 21,936 4,595 (651) 25,947
----- ---- -------- ------- ------- --------
Treasury stock acquired.................. (201) -- -- -- (616) (616)
Treasury stock issued.................... 10 -- -- -- 27 27
Stock options exercised.................. 60 -- 96 -- -- 96
Net loss................................. -- -- -- (3,645) -- (3,645)
----- ---- -------- ------- ------- --------
BALANCE, December 31, 1994
common stock, $0.01 par value,
15,000,000 shares authorized........... 6,265 $ 67 $ 22,032 $ 950 $(1,240) $ 21,809
===== ==== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 9
EASTEX ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994
------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,380 $ 64 $(3,645)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization................ 1,098 1,103 1,226
Amortization of goodwill and intangible assets.......... 34 352 553
Deferred federal and state income taxes................. 326 1,013 (1,393)
Minority interest....................................... (9) -- --
Change in accounts receivable........................... (9,006) (13,859) (6,566)
Change in notes receivable from related parties......... (63) (6) (8)
Change in stored gas.................................... (53) (3,271) 1,297
Change in prepaid gas purchase cost..................... (68) 49 (690)
Change in accounts payable and accrued gas purchase
cost.................................................. 8,578 21,136 2,279
Changes in other current assets and liabilities......... (430) (3,979) 3,520
Other................................................... (47) (306) (927)
------- -------- -------
Net cash flows provided by (used in) operating
activities.............................................. 2,740 2,296 (4,354)
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment..................... (598) (493) (522)
Proceeds from sale of assets............................ 30 -- 40
Acquisition of minority interests....................... (473) -- --
Acquisition of Heath Petra, net of cash acquired........ -- (5,046) --
Acquisition of Paragon.................................. -- (14) --
------- -------- -------
Net cash flows used in investing activities................ (1,041) (5,553) (482)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt.............................. -- 4,500 98
Retirements of long-term debt........................... (331) (222) (114)
Issuance of treasury stock.............................. 44 132 27
Acquisitions of treasury stock.......................... (379) -- (616)
Issuance of common stock................................ -- 9,541 --
Exercise of stock options............................... 50 142 96
------- -------- -------
Net cash flows provided by (used in) financing
activities.............................................. (616) 14,093 (509)
------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:............ 1,083 10,836 (5,345)
Cash and Cash Equivalents:
Beginning of period..................................... 5,283 6,366 17,202
------- -------- -------
End of period........................................... $ 6,366 $ 17,202 $11,857
======= ======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid........................................... $ 740 $ 1,041 $ 1,213
Federal and state income taxes paid, net of refunds
received.............................................. $ 1,177 $ 450 $(1,186)
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 10
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION:
The consolidated financial statements included herein are those of Eastex
Energy Inc. and its subsidiaries (referred to herein as the "Company"). Eastex
Energy Inc. (the "Parent"), a Delaware corporation, was organized in January
1987 and owns 100% of the common stock of Eastex Gas Transmission Company,
Eastex Hydrocarbons, Inc., Eastex Gas Production Company, Eastex Gas Storage and
Exchange, Inc. and Heath Petra Resources, Inc. The Company is an independent gas
merchant providing gas supplies and gas management services to its customers
through (i) direct end user gas sales, (ii) merchant trading and (iii) gas
inventory optimization services.
Acquisition of Rotherwood --
In February 1988, the Company entered into a joint venture with a limited
partnership to own, develop and operate Rotherwood, a combined enhanced oil
recovery and gas storage facility. The Company acquired an initial 50% ownership
interest in the joint venture for $4,500,000. In October 1988, the Company
purchased, subject to certain liabilities and obligations of approximately
$1,434,000 as of the date of acquisition, all of the common stock of two
corporations that owned partnership interests in the limited partnership for
$1,150,000. As a result of these transactions, the Company had a controlling 84%
ownership interest in the joint venture and became the manager and operator of
Rotherwood and general partner of the limited partnership. In December 1989 and
July 1990, the Company conveyed limited partnership interests to certain
existing limited partners in satisfaction of obligations assumed as a part of
the October 1988 purchase. As a result, the Company had an 82% ownership
interest in the joint venture as of July 1990. In November 1992, the Company
purchased the remaining 18% ownership interest in the joint venture for
approximately $473,000. As a result, both the joint venture and limited
partnership were terminated and the Company owns 100% of Rotherwood.
Acquisition of Heath Petra --
In April 1993, the Company acquired all of the issued and outstanding
capital stock of Heath Petra Resources, Inc., a Delaware corporation ("HPRI"),
its wholly owned subsidiary, Heath Petra Exploration, Inc., a Delaware
corporation ("HPEI"), all of the outstanding partnership interests of
Southeastern Gas Gathering, Ltd., a Texas limited partnership ("SGG"), and 47%
of the outstanding limited partnership interests in HPR Marketing, Ltd., a Texas
limited partnership ("HPRM") (collectively referred to herein as "Heath Petra").
Prior to the acquisition, HPRI was the managing general partner of both
partnerships with 1% and 2% general partnership interests in each of SGG and
HPRM, respectively.
The purchase price consisted of (i) the payment to the stockholders of HPRI
and partners of HPRM and SGG of $5.6 million in cash and the contingent
obligation to issue up to 300,000 shares of Eastex common stock, all or part of
which will be issued based upon the resolution of certain contingencies and
future performances of the combined companies and (ii) costs incurred in
connection with the acquisition. The Company financed the cash portion of the
transaction with available working capital and the issuance of $4.5 million of
long-term notes (see Note 6).
Purchase of Assets From Paragon Gas Corporation --
In November 1993, the Company acquired substantially all of the assets of
Paragon Gas Corporation, a Texas corporation ("Paragon"). The purchase price
consisted of (i) a cash payment of approximately $14,000 and 6,700 shares of
common stock at closing, (ii) $50,000 in cash, shares of common stock or a
combination thereof which was paid $25,000 in cash and $25,000 in stock on the
first anniversary of the closing in November 1994 and (iii) a contingent payment
payable to Paragon Gas Corporation on April 1, 1995 not to exceed $200,000 in
value based upon the performance of the acquired assets during the fiscal year
ending December 31, 1994. The contingent payment calculated at December 31, 1994
is approximately $60,000.
9
<PAGE> 11
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisitions of Rotherwood and Heath Petra were recorded using the
purchase method of accounting, whereby, for financial statement purposes, the
assets were recorded at their estimated fair value and the liabilities were
recorded at their estimated settlement amounts as of the acquisition date. The
acquired assets of Paragon were recorded based on the fair market value of the
assets acquired.
In October 1994, the Company entered into an arrangement with Inventory
Management and Distribution Company, LLC to form Hub Venture Services, a joint
venture focusing on development of storage inventory optimization arrangements
with utilities and other firm storage capacity owners.
Pro Forma Financial Statements --
The following pro forma adjustments have been made to the financial
statements of the Company and Heath Petra to reflect the acquisition as if it
had occurred as of January 1, 1992 and 1993:
(a) To reflect the historical results of operations, by account, of
HPRI, HPEI, SGG and the Company's 49% proportionate interest in HPRM from
January 1, 1993 to the date of acquisition. Revenues, gross profit, loss
from operations and net income, before the effects of the following pro
forma adjustments, from the beginning of the year to the date of
acquisition, were approximately $14.4 million, $1.6 million, $22,000 and
$0, respectively.
(b) The former stockholders and officers of HPRI earned a base salary
plus bonuses based on the performance of HPRI. A pro forma adjustment has
been reflected to eliminate the previously recorded compensation expense,
record base salary and incentive compensation expense expected under the
new ownership structure and eliminate certain non-recurring HPRI management
fee expenses paid in 1992 to certain former HPRI stockholders and HPRI
legal expenses incurred in the three months ended March 31, 1993 related to
the acquisition.
(c) To reflect the amortization of intangible assets resulting from
the acquisition.
(d) To reflect the amortization of goodwill resulting from the
acquisition.
(e) To reflect the increase in interest expense related to the
issuance of the $4.5 million Increasing Rate Secured Notes, including
warrants to purchase Eastex common stock.
(f) To reflect the change in the income taxes related to the pro
forma adjustments. Pro forma taxes have been provided as if the limited
partnerships were subject to federal income taxes.
The pro forma results of operations for the twelve months ended 1992 and
1993 are not necessarily indicative of the results of operations that would have
been achieved had the acquisition occurred prior to the periods indicated or
that might be attained in the future.
(2) SUMMARY OF ACCOUNTING POLICIES:
Consolidation --
The consolidated financial statements include the accounts of the Parent
and all majority-owned subsidiaries and the subsidiaries' proportionate share of
assets, liabilities, and revenues and expenses from their investments in
partnerships and joint ventures. Minority interest represents minority limited
partners' proportionate share of the net income or loss of the limited
partnership. All significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents --
Short-term investments with a maturity of three months or less are
considered to be cash equivalents.
10
<PAGE> 12
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stored Gas and Prepaid Gas Purchase Cost --
Stored gas represents gas which has been purchased and stored in Rotherwood
and other third-party storage facilities. Prepaid gas purchase costs represent
gas which has been purchased and is due to the Company by third-party pipelines.
Stored gas and prepaid gas purchase costs are stated at the lower of cost or
market, with cost being determined using the average cost method. In the third
quarter of 1994, the Company recorded a lower of cost or market adjustment of
approximately $1,100,000 to writedown its stored gas inventories.
Property and Equipment --
Property and equipment are carried at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, including
31.5 years for buildings and the gas storage reservoir, five to 15 years for
pipeline systems and gas storage machinery and equipment and three to five years
for all other assets. Gains and losses from the sale or retirement of property
and equipment are recognized in the year of disposition.
Amortization of Intangible Assets and Goodwill --
Intangible assets are amortized over the life of the asset and goodwill is
amortized over 40 years. At each balance sheet date, the Company evaluates the
recoverability of intangible assets and goodwill based upon expectations of
undiscounted cash flows for each subsidiary having a material intangible asset
or goodwill balance.
Income Taxes --
The Company adopted Statement No. 109 "Accounting for Income Taxes" of the
Financial Accounting Standards Board (FASB) in December 1992, effective as of
January 1, 1992. There was no significant effect on the Company's financial
position or cumulative effect on its results of operations attributable to the
adoption of Statement No. 109. Prior year financial statements have not been
restated to reflect the new accounting method. The Company files a consolidated
federal income tax return. Deferred federal income taxes have been provided for
all differences in basis of assets and liabilities for tax and financial
reporting purposes.
Futures Contracts --
The Company trades natural gas futures contracts for the purpose of hedging
price risks associated with certain firm purchase and sales commitments and
anticipated sales of Company-owned prepaid and stored gas inventories. Realized
and unrealized changes in the market value of such transactions are deferred
until the hedged transaction is recognized. Deferred losses as of December 31,
1993 and 1994 were $3,775,631 and $277,755, respectively. These deferred losses
were included as part of prepaid expenses and other current assets at December
31, 1993 and 1994.
Accrued Gas Purchase Cost --
Accrued gas purchase costs represent estimated gas purchase costs related
to volumetric imbalances, measurement and other variances under gas sales and
purchase contracts. Such variances and imbalances are inherent in natural gas
purchases, transportation and sales.
Net Income Per Share --
Primary and fully diluted income per share are based on the weighted
average number of shares outstanding during the period, after the consideration
of the dilutive effect of employee and non-employee
11
<PAGE> 13
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
director stock options and warrants to purchase common stock related to the 12%
Senior Secured Notes and Increasing Rate Secured Notes (see Note 6).
Allowance for Doubtful Accounts --
The allowance for doubtful accounts was $0 and $350,000 as of December 31,
1993 and 1994, respectively.
Reclassifications --
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
(3) FEDERAL INCOME TAXES:
The components of the provision (benefit) related to federal and state
income taxes reflected in the consolidated statements of operations are:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal income tax............................ $ 945 $ (941) $ (400)
State income tax.............................. (11) 5 34
------ ------ -------
934 (936) (366)
------ ------ -------
Deferred:
Federal income tax............................ 326 1,013 (1,393)
------ ------ -------
Total......................................... $1,260 $ 77 $(1,759)
====== ====== =======
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
to the effective tax rate for the years ended December 31, 1992, 1993 and 1994:
<TABLE>
<CAPTION>
1992 1993 1994
------------------- ------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ -------- ------ -------- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Taxes computed by applying statutory
rate................................. $1,235 34.0 $ 48 34.0 $(1,837) 34.0
State income taxes..................... (11) (0.3) 5 3.5 34 (0.6)
Amortization of goodwill............... 12 0.3 43 30.5 50 (0.9)
Tax exempt interest income............. -- -- (25) (17.7) (10) 0.2
Other, net............................. 24 0.7 6 4.3 4 (0.1)
------ -------- ------ -------- ------- --------
Provision for federal income taxes..... $1,260 34.7 $ 77 54.6 $(1,759) 32.6
====== ====== ====== ====== ======= ======
</TABLE>
12
<PAGE> 14
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for deferred federal income taxes for the years
ended December 31, 1992, 1993 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1992 1993 1994
---- ------ -------
<S> <C> <C> <C>
Difference in tax and book basis of assets and
liabilities............................................. $278 $1,013 $(1,393)
Decrease in tax loss carryforward......................... 2 -- --
Alternative minimum tax credit carryforward............... 46 -- --
Other, net................................................ -- -- --
---- ------ -------
$326 $1,013 $(1,393)
==== ====== =======
</TABLE>
The components of the net deferred tax liability and the tax effect of
significant temporary differences representing deferred tax assets and
liabilities at December 31, 1993 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Current deferred:
Tax effect of net operating loss carryforward................. $1,094 $ 400
Tax effect of uniform capitalization of inventories........... 18 16
Tax effect of alternative minimum tax credit carryback........ -- 164
Tax effect of lower of cost or market adjustment to
inventories.................................................. -- 329
------ ------
1,112 909
Non-current deferred:
Tax effect of net operating loss carryforward................. -- 153
Tax effect of alternative minimum tax credit carryforward..... -- 250
Tax effect of the establishment of an allowance for doubtful
accounts..................................................... -- 119
Other......................................................... -- 68
------ ------
-- 590
------ ------
Total deferred tax assets..................................... 1,112 1,499
------ ------
Deferred tax liabilities:
Current deferred:
Tax effect of deferred futures losses......................... 865 --
Other......................................................... 55 55
------ ------
920 55
------ ------
Noncurrent deferred liabilities:
Deferred tax liability relating to property and equipment..... 2,196 2,376
------ ------
Total deferred tax liabilities................................ 3,116 2,431
------ ------
Total net deferred tax liabilities............................ $2,004 $ 932
====== ======
</TABLE>
At December 31, 1994, the Company had available for Federal income tax
purposes a regular tax net operating loss carryforward of approximately $553,000
which expires in 2003 through 2008. The Company also has alternative minimum tax
credit carryforwards of approximately $250,000 which may be utilized to offset
future tax liabilities to the extent that the Company's regular tax liability
exceeds the alternative minimum tax liability.
13
<PAGE> 15
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) NOTES RECEIVABLE FROM RELATED PARTIES:
In conjunction with the relocation of the corporate offices in 1987, the
Company loaned the President of the Company $166,500 pursuant to an unsecured
note which was due November 1, 1994 and was extended in 1994 to November 1,
1995. The note accrues interest at the prime rate and is payable at maturity. At
December 31, 1993 and 1994, $171,000 and $179,000, respectively, were
outstanding under the note.
(5) PROPERTY AND EQUIPMENT:
The following is a summary of property and equipment at December 31, 1993
and 1994:
<TABLE>
<CAPTION>
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gas storage, transportation and secondary oil recovery
facility............................................... $15,256 $14,941
Pipeline systems......................................... 4,458 4,363
Other.................................................... 2,161 2,989
------- -------
21,875 22,293
Less: Accumulated depreciation, depletion and
amortization........................................... 8,550 9,628
------- -------
13,325 12,665
Land..................................................... 1,091 1,091
------- -------
$14,416 $13,756
======= =======
</TABLE>
(6) LONG-TERM DEBT AND FINANCING ARRANGEMENTS:
The following is a summary of long-term debt outstanding at December 31,
1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
12% Senior Secured Notes................................... $5,000 $5,000
Increasing Rate Secured Notes.............................. 4,500 4,500
Note payable due in quarterly installments, at the prime
rate
plus 1%, secured by land................................. 425 325
Other...................................................... 43 89
------ ------
9,968 9,914
Less: Current portion...................................... 114 1,021
------ ------
$9,854 $8,893
====== ======
</TABLE>
In 1990, the Company sold $5 million of 12% Senior Secured Notes (the
"Senior Secured Notes") with warrants which entitle the holders to purchase up
to 650,000 shares of common stock of the Company, subject to certain
antidilutive features. The terms of the Senior Secured Notes provide for equal
annual repayments of principal each year beginning on February 15, 1996 until
retired in full at maturity on February 15, 2000 and may be prepaid in full at
any time without penalty. The warrants became exercisable on February 21, 1992,
in whole or in part, for shares of common stock of the Company at an exercise
price of $2.00 per share of common stock. The holder exercised warrants to
purchase 162,500 shares of common stock immediately before the offering (see
Note 7) and 487,500 warrants remain exercisable at December 31, 1994. In
addition to the 12% coupon, the Senior Secured Notes bear an additional interest
factor in an amount up to 1.5% per annum based on storage activities at
Rotherwood. The Rotherwood facility has been pledged as security for the Senior
Secured Notes. Dividends on shares of common stock are prohibited as long as the
Senior Secured Notes are outstanding.
14
<PAGE> 16
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1993, the Company issued $4.5 million of Increasing Rate Secured Notes
(the "Increasing Rate Secured Notes") in connection with the Heath Petra
acquisition. The terms of the Increasing Rate Secured Notes provided for an
interest rate of 9% per annum through November 1, 1993 and increased to a rate
of 12% per annum thereafter. Interest expense is accounted for using the
interest method. The terms of the Increasing Rate Secured Notes provide for
equal annual repayments of principal each year beginning on May 1, 1995 until
retired in full at maturity on May 1, 1999 and may be prepaid in full at any
time without penalty. In connection with the sale of the Increasing Rate Secured
Notes, the Company issued warrants to purchase 160,000 shares of common stock of
the Company exercisable at $4.00 per share at any time after May 1, 1995 and
before May 1, 2003; provided, however, that in the event the Increasing Rate
Secured Notes are repaid in full prior to May 1, 1995, the warrants will expire
and not be exercisable by the holders. The Company does not expect to repay the
Increasing Rate Secured Notes prior to May 1, 1995.
In December 1993, the Company amended its credit agreement with its bank,
increasing the amount available for letters of credit up to $35 million and
adding HPRI as a borrower under the note. In September 1994, based on its
historical and projected utilization of the facility and in an effort to reduce
the Company's costs associated with the facility, the Company reduced the size
and resultant availability under the facility to $25 million. The credit
facility is subject to termination and mandatory prepayment, pursuant to the
initial terms and conditions of the facility, on April 30, 1995. The facility is
subject to a defined borrowing base and certain restrictive covenants, the most
significant of which requires the Company to maintain the ratio of its current
assets to current liabilities of not less than 1.1 to 1.0, tangible net worth of
at least $15 million and cumulative net income from continuing operations of at
least $1.00 as of the end of each fiscal year and for the latest elapsed four
quarters as of the end of each fiscal quarter. The Company did not meet the
covenant regarding net income from continuing operations and received waivers
from the banks for each of the four quarters during the year ending December 31,
1994.
In March 1995, the Company received a commitment letter in which two of the
three banks in the existing credit facility agreed to a renewal and
rearrangement of the credit facility, to provide for a total commitment of $20
million and a direct cash sublimit for cash advances of $5 million, subject only
to availability under the borrowing base. The facility is subject to a defined
borrowing base and certain restrictive covenants, the most significant of which
requires the Company to maintain the ratio of its current assets to current
liabilities of not less than 1.1 to 1.0, tangible net worth of at least $14
million and 90% of certain net income projections provided to the bank. If the
Company were to fail to comply with any of the covenants and was unable to
obtain a waiver or renegotiate the covenant for periods after April 30, 1995,
resulting in an event of default, the banks would have the right to require cash
collateralization of any outstanding letters of credit. The Company had letters
of credit outstanding at December 31, 1994 of $14.1 million and unused letters
of credit lines at December 31, 1994 of $10.9 million. The Company had no cash
borrowings under the line of credit during 1994. The Company is currently
negotiating with a bank who is not a party to the existing facility to replace
the current facility under terms more favorable to the Company.
Annual maturities of long-term debt for each of the next five years are
$1,021,000 in 1995, $2,024,000 in 1996, $2,026,000 in 1997, $1,943,000 in 1998
and $1,900,000 in 1999.
(7) STOCKHOLDERS' EQUITY:
The Company acquired 201,000 shares of treasury stock in 1994. The Company
records its purchases of treasury stock at cost. The Company issued 25,000
shares of treasury stock to certain officers and employees in 1993, and 6,700
and 10,000 shares of treasury stock in 1993 and 1994, respectively, in
consideration of a non-compete agreement.
In August 1993 the Company completed a public offering of common stock,
whereby the Company and certain stockholders sold a total of 2,425,000 shares at
a price of $5.50 per share. Of these shares, 1,925,000 were sold by the Company
and 500,000 were sold by the selling stockholders. Of the 2,425,000 shares,
15
<PAGE> 17
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1,925,000 shares were previously unissued shares and 237,500 were issued
immediately before the offering upon the exercise of warrants related to the
Senior Secured Notes issued in February 1990 and employee stock options. Total
proceeds to the Company, net of underwriting discounts and expenses payable by
the Company, were approximately $9.6 million, including proceeds of $388,000
from the exercise by the selling stockholders of the warrants and options.
(8) BENEFIT PLANS:
Stock Option Plan --
In June 1987, the sole stockholder and director approved the 1987 Stock
Option Plan (the "Plan"), which included incentive and non qualified stock
options for key employees, covering a total of 200,000 shares of common stock.
In 1989 and 1993, the stockholders approved amendments whereby the number of
shares available under the Plan were increased to 400,000 and 600,000 shares,
respectively. Under the terms of the Plan, the purchase price of the shares
subject to each option granted shall not be less than 100% of the fair market
price of such shares on the date the option is granted.
The following is a summary of activity under the Plan:
<TABLE>
<CAPTION>
NUMBER
OF OPTION PRICE
SHARES PER SHARE
------- --------------
<S> <C> <C>
Options outstanding, December 31, 1992............... 405,767 $0.84 - 5.22
Options granted.................................... 116,200 $5.13 - 5.8125
Options exercised.................................. (75,000) $0.84
-------
Options outstanding, December 31, 1993............... 446,967 $0.84 - 5.8125
Options granted.................................... 83,000 $2.5 - 4.0625
Options exercised.................................. (60,183) $1.588
Options canceled................................... (81,084) $2.5 - 5.8125
Options relinquished............................... (5,000) $1.875
-------
Options outstanding, December 31, 1994............... 383,700 $0.84 - 5.75
=======
</TABLE>
Under the Plan, 23,768 and 21,850 shares were available for future grants
and 264,307 and 288,056 shares were exercisable at December 31, 1993 and 1994,
respectively.
Non-employee Director Stock Option Plan
In June 1987, the sole stockholder and director adopted the Non-employee
Director Stock Option Plan (the "Non-employee Plan"). Under the Non-employee
Plan, each non-employee director of the Company is automatically granted
options, at fair market value, to purchase 10,000 shares of common stock on the
date the director becomes a director of the Company and each of the first four
anniversaries thereafter, as long as such person is a director on the date of
each such grant. The director appointed pursuant to the terms of the Senior
Secured Notes and the Increasing Rate Secured Notes is not entitled to any
options in the Company's Stock Option Plans.
16
<PAGE> 18
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of activity under the Non-employee Plan:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Options outstanding, December 31, 1992............ 130,000 $0.75 - 11.00
Options granted................................. 20,000 $5.12 - 5.8125
Options canceled................................ (10,000) $11.00
Options exercised............................... (40,000) $1.19 - 2.93
---------
Options outstanding, December 31, 1993............ 100,000 $0.75 - 11.00
Options granted................................. 20,000 4.5
---------
Options outstanding, December 31, 1994.......... 120,000 $0.75 - 11.00
=======
</TABLE>
Under the Non-employee Plan, 60,000 and 40,000 shares were available for
future grants and 80,000 and 100,000 shares were exercisable at December 31,
1993 and 1994, respectively.
The Company does not offer any retirement or other post-employment
benefits.
1992 Stock Bonus Plan --
In 1993, the Company's stockholders approved the 1992 Stock Bonus Plan (the
"Stock Bonus Plan") which provides for the grant of up to 250,000 shares of
common stock during a five-year period from the date of adoption by the Board of
Directors. Under the Stock Bonus Plan, 217,500 and 220,500 shares were available
for future grants at December 31, 1993 and 1994, respectively. The Company
amortizes the compensation expense over the vesting period of the stock, based
on the number of shares issued and the market price of the shares as of the date
of the grant.
401(k) Plan --
The Company provides a retirement plan for all of its employees through a
401(k) Plan. The 401(k) Plan commenced July 1, 1990 and included a Company
matching contribution equaling 50% of the individual employee contribution,
limited to individual employee contributions up to 6% of the employee's salary.
Effective June 1, 1991, the Company amended the 401(k) Plan whereby the
Company's matching contribution increased to 100%, up to the 6% maximum.
Effective January 1, 1995, the Company amended the 401(k) Plan whereby the
Company's matching contribution is 50% of the individual employee contribution,
limited to individual employee contributions up to 6% of the employee's salary.
Included in general and administrative expenses for the years ended December 31,
1992, 1993 and 1994 are approximately $75,500, $114,000 and $140,000,
respectively, relating to the Company's contributions to the 401(k) Plan.
(9) COMMITMENTS AND CONTINGENCIES:
Lease payments under lease commitments will be $344,000 for 1995, $128,000
for 1996, $51,000 for 1997, and $10,000 for 1998. Total rental expense paid by
the Company for the years ended December 31, 1992, 1993 and 1994 was
approximately $237,000, $273,000 and $360,000, respectively.
During 1991, the Company entered into a ten-year gas storage services
contract with Northern Indiana Public Service Company ("NIPSCO"). The contract
provided for storage of up to 500 Mmcf at any one time during the first contract
year that began in April 1992, storage of up to 750 Mmcf during the second
contract year and storage of up to one Bcf per contract year through the
remaining term of the contract. NIPSCO will pay the Company a firm minimum
monthly demand charge and certain other fees depending on the amount of actual
capacity used at Rotherwood.
17
<PAGE> 19
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1989, the Company signed a long-term gas sales agreement with
Entergy, Inc. ("Entergy"), formerly Gulf States Utilities Company. The agreement
calls for the Company to supply up to 18.25 trillion Btu's of gas per year over
the five-year primary term of the agreement and Entergy, at its option, may
increase the contract maximum to 36.5 trillion Btu's per year. The terms of the
contract provided that either party could terminate the agreement on January 1,
1994 or any January 1 thereafter by giving written notice to the other party at
least two years prior to such date and that the price of gas sold under the
contract was a percentage of Entergy's system-wide weighted average cost of gas.
In December 1993, the Company terminated the contract by written notice to
Entergy, effective December 31, 1995. Subsequently, the Company and Entergy
negotiated an amendment to the contract, effective January 1, 1994, to provide
that the price of gas sold will be calculated based upon a group of market based
indices for gas supplies delivered under the remaining term of the contract.
Pursuant to the agreement, the Company provides both base load and peaking gas
to Entergy's electrical generating plants located in Southeast Texas.
The Company generally purchases the gas it markets under gas purchase
contracts with producers. The Company's current policy is to attempt to match
its gas sales contracts with corresponding gas purchase or hedge contracts to
limit exposure to price redeterminations or other possible events of
termination. To the extent the Company does not match or hedge its purchase and
sales contracts for any reason, its risk would be increased and its business
could be adversely affected.
The Company uses "interruptible" transportation services offered by
pipelines and recallable excess firm transportation capacity because of the
lower cost of such services. The Company has experienced little difficulty in
obtaining transportation services under interruptible arrangements.
Interruptible service costs are less than "firm" transportation arrangements
because availability is less certain since users of interruptible service are
the first to be curtailed when demand on a pipeline exceeds its capacity.
Although the Company has not experienced significant interruptions in
transportation services provided under its current arrangements, a significant
interruption could adversely affect the Company's results of operations.
Recent regulatory rules set forth under the Federal Energy Regulatory
Commission Order 636 have required pipelines to unbundle their traditional firm
sales, transportation and storage services on a nondiscriminatory basis to all
shippers and provide comparable transportation and storage services to all
shippers. While the Company believes these regulatory changes have created and
will continue to create significant opportunities for independent gas merchants
such as the Company, management cannot predict the nature of or likelihood of
any such change or its possible affect on the Company's business.
The Company's concentration of credit risk results primarily from
uncollateralized sales to consumers of natural gas, principally in the natural
gas utility, commercial and end-user industries, on terms normal in the
industry. Changes in economic or other conditions may affect such consumers and
therefore may result in a credit risk from sales to such consumers. In the
Company's opinion, the credit worthiness of its customer base is strong. The
Company has not experienced significant losses on credit sales to its customers.
The Company and its subsidiaries are parties to certain claims arising from
their operations. The Company believes that the outcome of these claims,
individually and in the aggregate, will not have a material effect on the
Company's financial position or results of operations.
New Accounting Pronouncements --
In December 1991, the FASB issued Statement No. 107, "Disclosures About
Fair Value of Financial Instruments". This Statement is effective for financial
statements issued for fiscal years ending after December 15, 1992, except for
entities with less than $150 million in total assets. For these entities, the
effective date is for fiscal years ending after December 15, 1995. Since the
Company had less than $150 million in total assets at December 31, 1994,
management plans to adopt in 1995.
18
<PAGE> 20
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1994, the FASB issued Statement No. 119, "Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments". This
Statement is effective for financial statements issued for fiscal years ending
after December 15, 1994, except for entities with less than $150 million in
total assets. For these entities, the effective date is for fiscal years ending
after December 15, 1995. Since the Company had less than $150 million in total
assets at December 31, 1994, management plans to adopt in 1995.
(10) QUARTERLY FINANCIAL SUMMARY -- (UNAUDITED):
<TABLE>
<CAPTION>
NET INCOME (LOSS)
INCOME (LOSS) PER SHARE
BEFORE TAXES NET -----------------
OPERATING GROSS AND MINORITY INCOME FULLY
REVENUES PROFIT INTEREST (LOSS) PRIMARY DILUTED
--------- ------ ------------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
QUARTERS ENDED 1993:
First................................ $ 51,070 $1,567 $ 240 $ 153 $ 0.03 $ 0.03
Second............................... 96,113 2,582 861 547 0.11 0.11
Third................................ 99,142 2,152 261 167 0.03 0.03
Fourth............................... 109,766 1,139 (1,221) (803) (0.13) (0.13)
--------- ------ ------------- -------
$ 356,091 $7,440 $ 141 $ 64 0.01 0.01
======== ====== =========== =======
QUARTERS ENDED 1994:
First................................ $ 100,029 $1,522 $ (856) $ (583) $ (0.09) $ (0.09)
Second............................... 90,982 996 (1,144) (763) (0.12) (0.12)
Third................................ 78,877 (830) (3,647) (2,417) (0.39) (0.39)
Fourth............................... 96,880 2,554 243 118 0.02 0.02
--------- ------ ------------- -------
$ 366,768 $4,242 $(5,404) $(3,645) (0.58) (0.58)
======== ====== =========== =======
</TABLE>
(11) MAJOR CUSTOMERS AND INDUSTRY SEGMENTS:
In 1992 and 1993, the Company had revenues attributable to sales to Entergy
of $36.6 million and $47.4 million, respectively, which represented 21% and 13%,
respectively, of the Company's total revenues. No other customer accounted for
more than 10% of total revenues during 1992 and 1993. No customer accounted for
more than 10% of total revenues during 1994.
The business segments of the Company are defined as Direct End User Gas
Sales, Merchant Trading and the Gas Inventory Optimization Services. The Gas
Inventory Optimization Services segment began operations in late 1994 and its
operations were not significant to the Company as a whole.
19
<PAGE> 21
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present total revenues, income (loss) from operations
and other financial information by business segment for the years 1992, 1993 and
1994, respectively. Segment information for 1992 and 1993 have been restated to
conform to current business segments.
<TABLE>
<CAPTION>
DIRECT END USER GAS SALES MERCHANT TRADING
-------------------------- ------------------------------
1992 1993 1994 1992 1993 1994
---- ------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.......................... -- $74,178 $ 122,421 $ 198,919 $ 319,330 $285,327
Inter-segment revenues.................. -- 1,403 2,217 23,990 36,014 38,763
Unaffiliated revenues................... -- 72,775 120,204 174,929 283,316 246,564
Depreciation, depletion and
amortization.......................... -- 320 435 1,132 1,135 1,344
Income (loss) from operations........... -- (100) 1,871 4,053 928 (6,658)
Identifiable assets..................... -- 24,862 18,029 52,712 67,362 70,204
Capital expenditures.................... -- 65 33 717 428 489
</TABLE>
(12) SUBSEQUENT EVENT:
Recent Litigation --
A petition was filed on July 28, 1995, in the 129th Judicial District Court
of Harris County, Texas against NIPSCO Industries, Inc., certain other named
subsidiaries of NIPSCO (collectively "NIPSCO"), the Company, Robert G. Phillips,
Chairman and CEO of the Company (in his individual capacity) and certain
individuals associated with NIPSCO (collectively the "Defendants"), by
certain minority shareholders of Triumph Natural Gas, Inc. ("Triumph")
(collectively the "Plaintiffs"). The petition alleges, among other things and
insofar as it relates to the Company and Mr. Phillips, that the Company and Mr.
Phillips wrongfully interfered with Triumph's business and/or contractual
relations with NIPSCO with the intention of harming Triumph and its
stockholders, and that all of the Defendants conspired to deprive Triumph of
valuable business opportunities for their own benefit. In early March 1994, the
Company and NIPSCO entered into an Agreement (the "Agreement"), whereby the
Company was to acquire the majority interest in Triumph owned by NIPSCO, subject
to certain conditions, including approval by the Triumph board of the transfer
of the Triumph equity interest owned by NIPSCO to the Company. In late March
1994, Triumph's board, a majority of whom were independent of NIPSCO and Eastex,
determined not to approve the proposed transfer. Accordingly, the transactions
contemplated in the Agreement were not consummated and negotiations related
thereto promptly ceased. The Plaintiffs have alleged lost profits and other
damages against all of the Defendants in a range of $20 to $30 million, as well
as punitive damages. Management believes that the litigation is without merit
and intends to vigorously defend the claims asserted against it.
20
<PAGE> 22
EASTEX ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
EASTEX ENERGY INC.
/s/ R. CRIS SHERMAN
------------------------------------
R. Cris Sherman
Vice President and Chief Financial
Officer
Date: August 14, 1995
21
