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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2002
----------
COMMISSION FILE NUMBER 0-30475
TRANSTEXAS GAS CORPORATION
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032-2949
Registrant's telephone number, including area code: (281) 987-8600
DELAWARE 76-0401023
(State of incorporation) (I.R.S. Employer
Identification No.)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares of Class A Common Stock of the registrant
outstanding on December 16, 2002 was 63,448,830.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements:
Report of Independent Accountants............................................................ 2
Condensed Consolidated Balance Sheet as of October 31, 2002 and January 31, 2002............. 3
Condensed Consolidated Statement of Operations for the Three and Nine Months Ended
October 31, 2002 and 2001................................................................. 4
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended
October 31, 2002 and 2001................................................................. 5
Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 25
Item 4. Controls and Procedures......................................................................... 26
PART II
OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 27
Item 3. Defaults Upon Senior Securities................................................................. 27
Item 5. Other Information............................................................................... 27
Item 6. Exhibits and Reports on Form 8-K................................................................ 27
Signature.................................................................................................. 28
Certifications............................................................................................. 29
</Table>
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet
of TransTexas Gas Corporation (the "Company") as of October 31, 2002 and the
related condensed consolidated statements of operations for each of the three
and nine month periods ended October 31, 2002 and 2001 and the consolidated
statement of cash flows for the nine months ended October 31, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 2 and 3 to
the condensed consolidated interim financial statements, the Company has not
paid the $15 million interest payment due on its 15% Senior Secured Notes due
2005 within the 30-day cure period and is now in default under the terms of its
debt agreements, which could result in acceleration of the maturity of such
obligations. On November 14, 2002, the Company filed a voluntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code, which raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Notes 2 and 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of January 31, 2002, and the related consolidated statements of
operations, of stockholders' equity (deficit), and of cash flows for the year
then ended (not presented herein); and in our report dated April 30, 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of January 31, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
December 16, 2002
2
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
OCTOBER 31, JANUARY 31,
2002 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 6,297 $ 6,559
Accounts receivable ........................................................... 11,674 15,267
Inventories ................................................................... 399 818
Other ......................................................................... 1,526 3,112
----------- -----------
Total current assets ..................................................... 19,896 25,756
----------- -----------
Property and equipment ........................................................... 500,748 494,748
Less accumulated depreciation, depletion and amortization ........................ 389,888 367,801
----------- -----------
Net property and equipment - based on the full cost method of accounting for
gas and oil properties of which $47,999 and $45,301 was excluded from
amortization at October 31, 2002 and January 31, 2002, respectively ......... 110,860 126,947
----------- -----------
Other assets ..................................................................... 2,407 2,101
----------- -----------
$ 133,163 $ 154,804
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .......................................... $ 3,609 $ 2,444
Notes payable.................................................................. 53,272 --
Accounts payable .............................................................. 1,756 5,805
Accrued liabilities ........................................................... 8,568 26,127
----------- -----------
Total current liabilities ................................................ 67,205 34,376
----------- -----------
Long-term debt, net of current maturities ........................................ 916 261,774
Production payments, net of current portion ...................................... 22,729 26,005
Other liabilities ................................................................ 628 6,644
Liabilities subject to compromise ................................................ 237,669 --
Redeemable preferred stock ....................................................... 54,440 72,125
Commitments and contingencies (Note 7) ........................................... -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value, 200,000,000 shares and 100,247,500 shares
authorized at October 31, 2002 and January 31, 2002; 63,448,830 shares and
1,250,251 shares issued and outstanding at October 31, 2002 and
January 31, 2002 ............................................................ 634 12
Additional paid-in capital .................................................... 79,038 25,013
Accumulated deficit ........................................................... (329,820) (273,493)
Accumulated other comprehensive income (loss) ................................. (276) 2,348
----------- -----------
Total stockholders' deficit .............................................. (250,424) (246,120)
----------- -----------
$ 133,163 $ 154,804
=========== ===========
</Table>
See accompanying notes to condensed consolidated financial statements.
3
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Revenues:
Gas, condensate and natural gas liquids ............. $ 14,973 $ 32,108 $ 55,982 $ 109,015
Other ............................................... 176 265 885 737
--------------- --------------- --------------- ---------------
Total revenues .................................... 15,149 32,373 56,867 109,752
--------------- --------------- --------------- ---------------
Costs and expenses:
Operating ........................................... 2,655 4,304 9,324 15,470
Depreciation, depletion and amortization ............ 5,527 27,481 22,164 68,563
General and administrative .......................... 3,983 4,559 13,021 14,987
Taxes other than income taxes ....................... 570 685 2,479 4,183
Impairment of gas and oil properties ................ -- 38,919 -- 95,746
--------------- --------------- --------------- ---------------
Total costs and expenses .......................... 12,735 75,948 46,988 198,949
--------------- --------------- --------------- ---------------
Operating income (loss) ........................... 2,414 (43,575) 9,879 (89,197)
--------------- --------------- --------------- ---------------
Other income (expense):
Interest income ..................................... 67 48 100 486
Interest expense, net ............................... (9,856) (9,004) (29,344) (25,830)
--------------- --------------- --------------- ---------------
Total other expense ............................... (9,789) (8,956) (29,244) (25,344)
--------------- --------------- --------------- ---------------
Loss before income taxes .......................... (7,375) (52,531) (19,365) (114,541)
Income tax benefit - deferred .......................... -- -- -- (9,984)
--------------- --------------- --------------- ---------------
Net loss .......................................... (7,375) (52,531) (19,365) (104,557)
Accretion of preferred stock ........................... 9,322 12,207 36,962 32,709
--------------- --------------- --------------- ---------------
Net loss available to common stockholders ......... $ (16,697) $ (64,738) $ (56,327) $ (137,266)
=============== =============== =============== ===============
Basic and diluted net loss per share ................... $ (0.52) $ (51.78) $ (4.80) $ (109.79)
=============== =============== =============== ===============
Weighted average number of shares outstanding for basic
and diluted net loss per share ...................... 32,349,541 1,250,251 11,730,598 1,250,251
=============== =============== =============== ===============
</Table>
See accompanying notes to condensed consolidated financial statements.
4
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
OCTOBER 31,
---------------------------
2002 2001
----------- -----------
Operating activities:
Net loss ..................................................... $ (19,365) $ (104,557)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization .................. 22,164 68,563
Impairment of gas and oil properties ...................... -- 95,746
Accretion of discount on long-term debt ................... 163 62
Amortization of debt issue costs .......................... 901 377
Deferred income taxes ..................................... -- (9,984)
Changes in assets and liabilities:
Accounts receivable ..................................... 6,593 17,243
Receivable from affiliates .............................. -- 4
Inventories ............................................. 419 (69)
Other current assets .................................... (762) 1,010
Accounts payable ........................................ (4,049) 1,460
Accrued liabilities ..................................... 6,776 (12,309)
Other assets ............................................ 204 (35)
Other liabilities ....................................... (373) (1,247)
----------- -----------
Net cash provided by operating activities ............ 12,671 56,264
----------- -----------
Investing activities:
Capital expenditures ......................................... (9,568) (122,066)
Proceeds from the sale of assets ............................. 677 49,722
----------- -----------
Net cash used by investing activities ................ (8,891) (72,344)
----------- -----------
Financing activities:
Issuance of production payments .............................. 27,000 49,800
Principal payments on production payments .................... (30,058) (14,208)
Issuance of debt ............................................. 2,000 2,134
Principal payments on debt ................................... (1,445) (5,924)
Revolving credit agreement, net .............................. 30 (12,566)
Debt issue costs ............................................. (1,569) (310)
----------- -----------
Net cash provided (used) by financing activities ..... (4,042) 18,926
----------- -----------
Increase (decrease) in cash and cash equivalents ..... (262) 2,846
Beginning cash and cash equivalents ............................. 6,559 20,715
----------- -----------
Ending cash and cash equivalents ................................ $ 6,297 $ 23,561
=========== ===========
</Table>
See accompanying notes to condensed consolidated financial statements.
5
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of TransTexas Gas Corporation (together with
its subsidiaries, "TransTexas" or the "Company") contain all adjustments
(consisting of normal, recurring accruals) necessary to fairly state the
Company's consolidated financial position, the results of its operations and
cash flows for the periods presented. TransTexas' subsidiaries are Galveston Bay
Pipeline Company ("Pipeline") and Galveston Bay Processing Corporation
("Processing"). The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes included in
TransTexas' annual report on Form 10-K for the year ended January 31, 2002. The
condensed consolidated balance sheet as of January 31, 2002 was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. Interim results of operations and cash
flows are not necessarily indicative of the Company's operations for the entire
year.
The condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed in
Note 2, TransTexas, Pipeline and Processing filed voluntary petitions for relief
under Chapter 11 of the U.S. Bankruptcy Code on November 14, 2002.
Comprehensive Income (Loss)
A summary of the Company's comprehensive loss for the three and nine
months ended October 31, 2002 and 2001 is as follows (in thousands of dollars):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Comprehensive loss:
Net loss ........................................ $ (7,375) $ (52,531) $ (19,365) $ (104,557)
Cumulative effect of adopting SFAS 133 .......... -- -- -- (1,282)
Change in the fair value of hedging agreements .. (485) (241) (2,624) 293
Reclassification adjustments for hedge
agreement settlements .......................... -- -- -- 1,144
------------- ------------- ------------- -------------
$ (7,860) $ (52,772) $ (21,989) $ (104,402)
============= ============= ============= =============
</Table>
A summary of the Company's accumulated other comprehensive income
(loss) for the period ended October 31, 2002 is as follows (in thousands of
dollars):
<Table>
Accumulated other comprehensive income (loss):
Balance at January 31, 2002..................... $ 2,348
Change in the fair value of hedging agreements . (2,624)
-------------
Balance at October 31, 2002..................... $ (276)
=============
</Table>
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations." SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recorded in the
period in which it is incurred with a corresponding increase in the carrying
amount of the related long-lived asset. Under SFAS 143, salvage value is not
considered when determining the retirement obligation. The Company currently
includes estimated future reclamation costs in its full cost center and
amortizes these costs as a component of the Company's depletion expense. The
Company is evaluating the impact of SFAS 143, which is effective for the Company
in February 2003.
6
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale and
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 did not affect the ceiling test calculation under
the full cost method of accounting. The adoption of SFAS 144 effective February
1, 2002 had no impact on the Company's financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS 145 provides guidance for income statement classification of
gains or losses from extinguishment of debt and accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
Gains or losses from extinguishments that are part of a company's recurring
operations would not be reported as an extraordinary item. SFAS 145 will be
effective for the Company in February 2003 and will be used to report any debt
extinguished or leases modified after that date.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
requires recognition of a liability for costs associated with an exit or
disposal activity when the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002 and will be
used to report any exit or disposal activity after that date.
2. CHAPTER 11 FILING AND LIQUIDITY
On November 14, 2002 (the "Petition Date"), TransTexas, Pipeline and
Processing filed voluntary petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Texas, Corpus Christi Division (the "Bankruptcy Court"). The bankruptcy cases
are being jointly administered (see Note 7). TransTexas, Pipeline and Processing
are operating their businesses and managing their properties as debtors in
possession. As a result of the Chapter 11 filings, absent approval from the
Bankruptcy Court, the Company is prohibited from paying, and creditors are
prohibited from attempting to collect, claims or debts arising prior to the
Petition Date.
The bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of the interests of existing security holders as a result of the
issuance of securities to creditors or new investors. The consummation of a plan
of reorganization will require approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the
bankruptcy proceedings or the effect on the business of the Company or on the
interests of creditors, royalty owners or stockholders.
As a result of the bankruptcy filing, a significant amount of the
Company's liabilities, including secured debt, are subject to compromise. As of
October 31, 2002, liabilities subject to compromise included the following (in
thousands of dollars):
<Table>
Long-term debt....................................... $ 205,197
Note payable ........................................ 2,000
Accrued liabilities.................................. 24,829
Other liabilities.................................... 5,643
------------
$ 237,669
============
</Table>
7
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. As a result
of the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of TransTexas to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop gas and oil reserves.
In the ordinary course of business, TransTexas makes substantial
capital expenditures for the exploration and development of natural gas and oil
reserves. TransTexas historically has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
and private offerings of debt and equity securities, the sale of production
payments, asset sales, an accounts receivable revolving credit facility and
other financings. Cash flow from operations is sensitive to the prices
TransTexas receives for its natural gas and oil. A reduction in planned capital
spending or an extended decline in gas and oil prices could result in less than
anticipated cash flow from operations in fiscal year 2004 and later years which
could have a material adverse effect on TransTexas.
Management's plans are to continue to incur capital expenditures with
the goal of increasing production and reserves. To finance these planned capital
expenditures, TransTexas will be required to supplement its anticipated cash
flow from operating activities with a combination of borrowings under the
production payment drilling program and other financings. In addition, the
Company is in the process of negotiating joint venture drilling opportunities
with several unrelated entities. The ability to incur capital expenditures and
obtain additional financing is subject to the approval and ongoing supervision
of the Bankruptcy Court. There is no assurance that adequate funds can be
obtained on a timely basis or that the Bankruptcy Court will approve such
transactions.
Prior Reorganization
On April 19, 1999 (the "Prior Petition Date"), TransTexas filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. This
filing did not include the Company's subsidiaries. The United States Bankruptcy
Court for the Southern District of Texas, Corpus Christi Division confirmed the
Company's Second Amended, Modified and Restated Plan of Reorganization dated
January 25, 2000 (the "Prior Plan") on February 7, 2000. The Effective Date of
the Prior Plan was March 17, 2000.
3. CREDIT AGREEMENTS AND PRODUCTION PAYMENTS
Accounts Receivable Facility
On March 17, 2000, the Company and GMAC Commercial Credit LLC ("GMACC")
entered into a Third Amended and Restated Accounts Receivable Management and
Security Agreement, dated as of March 15, 2000 (the "Accounts Receivable
Facility"). The Accounts Receivable Facility is a revolving credit facility
secured by accounts receivable and inventory. The maximum loan amount under the
facility is $15 million, against which the Company may from time to time,
subject to the conditions of the Accounts Receivable Facility, borrow, repay and
reborrow. The Accounts Receivable Facility matures on March 14, 2005. Advances
under the facility bear interest monthly in arrears at a rate per annum equal to
the higher of (i) the prime commercial lending rate of The Bank of New York plus
1/2 of 1%, and (ii) the Federal Funds Rate plus 1%, payable monthly in arrears.
As of October 31, 2002, the outstanding principal balance under the Accounts
Receivable Facility was $1.3 million with availability for additional advances
of approximately $0.4 million. On November 15, 2002, a first interim financing
order of the Bankruptcy Court modified the maximum loan amount under the
Accounts Receivable Facility to $10 million and modified certain other terms of
the facility. Pursuant to this interim order, GMACC waived compliance with
certain provisions of the facility. On December 19, 2002, a hearing is scheduled
in the Bankruptcy Court to approve a second interim financing order for debtor
in possession financing.
8
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Production Payments
In March 2000, TransTexas entered into a production payment drilling
program agreement with two unaffiliated third parties in the form of a term
overriding royalty interest carved out of and burdening certain properties. The
Company has the right to offer additional interests to the production payment
parties at a negotiated purchase price. The production payment requires the
repayment of the primary sum plus an amount equivalent to a 15% annual interest
rate on the unpaid portion of such primary sum. In March 2002, the Company
closed an Eighth Supplement to the production payment whereby the Company
received $14.0 million. In June 2002, the Company closed a Ninth Supplement to
the production payment whereby the Company received $13.0 million in exchange
for additional properties being made subject to the production payment. As of
October 31, 2002, the outstanding balance of the production payment was $25.4
million, of which $2.7 million attributable to produced volumes is included in
accrued liabilities. The Oil and Gas Revolving Credit and Term Loan Agreement
(the "Oil and Gas Facility") entered into by TransTexas, as Borrower, Pipeline
and Processing, as Guarantors, and with GMACC, as Lender and as Agent, places
certain restrictions on the amount that may be outstanding under the production
payment.
Events of Default
The Company has not paid the $15 million interest payment that was due
September 15, 2002 on its 15% Senior Secured Notes due 2005 (the "15% Notes").
Also, the Company has not paid the principal sum of $2 million, together with
accrued interest, on a term loan between the Company and Credit Suisse First
Boston Management Corporation ("CSFB") that was due on October 15, 2002. The
Company is in default under the terms of the these obligations as well as its
Oil and Gas Facility, the Accounts Receivable Facility and other long-term debt.
4. PREFERRED STOCK DIVIDENDS AND CONVERSION TO CLASS A COMMON STOCK
The Certificate of Designation for the Senior Preferred Stock of the
Company provides for the mandatory conversion of one-half of the outstanding
shares of Senior Preferred Stock into fully paid and non-assessable shares of
Class A Common Stock at the rate of 0.3461 shares of Class A Common Stock for
each $1.00 of liquidation preference per share, plus an amount equal to accrued
and unpaid dividends, of Senior Preferred Stock if the Company fails to pay
dividends on the Senior Preferred Stock as required by the Certificate of
Designation for the Senior Preferred Stock on any two dividend payment dates.
The Certificate of Designation for the Series A Junior Preferred Stock ("Junior
Preferred Stock" and together with the Senior Preferred Stock, the "Preferred
Stock") provides for the mandatory conversion of all of the outstanding shares
of Junior Preferred Stock into fully paid and non-assessable shares of Class A
Common Stock at the rate of 0.1168 shares of Class A Common Stock for each $1.00
of liquidation preference per share, plus an amount equal to accrued and unpaid
dividends, of Junior Preferred Stock if the Company fails to pay dividends on
the Senior Preferred Stock as required by the Certificate of Designation for the
Senior Preferred Stock on any two dividend payment dates.
The Certificate of Designation for each of the Senior Preferred Stock
and the Junior Preferred Stock required the payment to the holders of a cash
dividend on the Senior Preferred Stock and an in-kind dividend on the Junior
Preferred Stock, respectively, by the Company on June 15, 2002 and on September
15, 2002. The Company did not make the required dividend payments on either
date. Therefore, the liquidation preference of the Senior Preferred Stock was
increased to approximately $1.04 per share and the liquidation preference of the
Junior Preferred Stock was increased to approximately $1.05 per share. As a
result, on September 16, 2002, each two shares of Senior Preferred Stock was
converted into one share of New Senior Preferred and into approximately 0.3596
shares of Class A Common Stock and each share of Junior Preferred Stock was
converted into approximately 0.1227 shares of Class A Common Stock. No
fractional shares were issued in the conversion. The Board of Directors of the
Company determined that the fair market value of each share of the Preferred
Stock and Common Stock for purposes of the conversion was less than $0.01 per
share and, therefore, no cash was paid to holders of Preferred Stock in lieu of
fractional shares.
9
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In the aggregate 164,333,875 shares of Senior Preferred Stock
representing one-half of all of the outstanding Senior Preferred Stock were
converted into 59,101,243 shares of Class A Common Stock and 25,240,513 shares
of Junior Preferred Stock representing all of the outstanding Junior Preferred
Stock were converted into 3,097,336 shares of Class A Common Stock. Since the
Company did not pay the required dividend payments, holders of the Senior
Preferred Stock have the right, voting separately as a class, to elect all five
directors to the Company's Board of Directors. On December 16, 2002, the Company
did not make the required cash dividend payment to the remaining holders of the
Senior Preferred Stock.
5. HEDGING AGREEMENTS
As of October 31, 2002, the Company had entered into the following
hedging arrangements (settlement price based on a published industry index of
natural gas prices at Houston Ship Channel) as cash flow hedges of forecasted
sales of a portion of the Company's natural gas production:
<Table>
<Caption>
CONTRACT PRICE
------------------
TOTAL COLLAR
VOLUMES IN ------------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ----- -------
Natural gas:
February 2002 - March 2002.................................... 590,000 $ 2.85 $ 3.30
February 2002 - July 2002..................................... 1,267,000 3.30 3.95
April 2002 - October 2002..................................... 1,070,000 2.85 3.35
August 2002 - October 2002.................................... 644,000 3.10 3.40
November 2002 - March 2003.................................... 755,000 3.50 3.95
November 2002 - March 2003.................................... 755,000 3.50 3.90
April 2003 - October 2003..................................... 1,284,000 3.25 4.05
</Table>
For the nine months ended October 31, 2002, the Company recognized
hedging gains of $0.7 million, which are reflected in gas, condensate and
natural gas liquids revenues. At October 31, 2002, the Company's estimated net
liability of these contracts was $0.3 million.
Because substantially all of its long-term obligations at October 31,
2002 are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($1.3 million
outstanding at October 31, 2002) are subject to a rate of interest that
fluctuates based on short-term interest rates. The Company had no interest rate
hedges at October 31, 2002.
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash financing
activities (in thousands of dollars):
<Table>
<Caption>
NINE MONTHS ENDED
OCTOBER 31,
-----------------------------------
2002 2001
--------------- ---------------
Financing activities:
Accretion of preferred stock .................................... $ 36,962 $ 32,709
=============== ===============
</Table>
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Chapter 11 Bankruptcy. On November 14, 2002, TransTexas, Pipeline and
Processing filed voluntary petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Texas, Corpus Christi Division. The bankruptcy cases are being jointly
administered under the caption "In re: TransTexas Gas Corporation, et al.,
Debtors," Case No. 02-21926-C-11. TransTexas, Pipeline and Processing are
operating their
10
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
businesses and managing their properties as debtors in possession. As a result
of the Chapter 11 filings, absent approval from the Bankruptcy Court, the
Company is prohibited from paying, and creditors are prohibited from attempting
to collect, claims or debts arising prior to the Petition Date.
Insurance Settlement. In October 2002, TransTexas entered into a
settlement agreement with an unaffiliated oilfield service company whereby that
company will cause to pay TransTexas $3.0 million. This settlement was approved
by the Bankruptcy Court on December 4, 2002.
TransTexas is a party to various claims and routine litigation arising
in the normal course of its business. Although the outcome of these lawsuits
cannot be predicted with certainty, TransTexas does not expect these matters to
have a material adverse effect on its financial position.
Environmental Matters
TransTexas' operations and properties are subject to extensive federal,
state and local laws and regulations relating to the generation, storage,
handling, emission, transportation and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification and renewal by issuing
authorities. TransTexas also is subject to federal, state and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. Certain aspects of TransTexas' operations may not be in
compliance with applicable environmental laws and regulations, and such
noncompliance may give rise to compliance costs and administrative penalties. It
is not anticipated that TransTexas will be required in the near future to expend
amounts that are material to the financial condition or operations of TransTexas
by reason of environmental laws and regulations, but because such laws and
regulations are frequently changed and, as a result, may impose increasingly
strict requirements, TransTexas is unable to predict the ultimate cost of
complying with such laws and regulations.
Potential Tax Liabilities
Part of the debt refinancing of TransAmerican Natural Gas Corporation
("TransAmerican") in 1993 involved the cancellation of approximately $65.9
million of accrued interest and of a contingent liability for interest of $102
million owed by TransAmerican. TransAmerican has taken the federal tax position
that the entire amount of this debt cancellation is excluded from its income
under the cancellation of indebtedness provision (the "COD Exclusion") of the
Internal Revenue Code of 1986, as amended, and has reduced its tax attributes
(including its net operating loss and credit carryforwards) as a consequence of
the COD Exclusion.
As a former member of the affiliated group for tax purposes (the "TNGC
Consolidated Group") which included TNGC, the sole stockholder of TransAmerican,
TransAmerican, TransAmerican Energy Corporation, TransTexas and TransAmerican
Refining Corporation, TransTexas will be severally liable for any tax liability
resulting from any transaction of the TNGC Consolidated Group that occurred
during any taxable year of the TNGC Consolidated Group during which TransTexas
was a member, including the above-described transaction.
TransTexas expects that a significant portion of its net operating loss
carryovers ("NOLs") will be eliminated and the use of those NOLs that are not
eliminated will be severely restricted as a consequence of the Prior Plan. In
addition, certain other tax attributes of TransTexas may under certain
circumstances be eliminated or reduced as a consequence of the Prior Plan. The
potential elimination or reduction of NOLs and such other tax attributes may
substantially increase the amount of tax payable by TransTexas.
11
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Drilling Rig Commitment
During February 2001, TransTexas entered into a one-year contract with
an independent drilling contractor for utilization of a drilling rig capable of
drilling wells to a depth of approximately 18,500 feet. TransTexas utilized this
rig to drill wells in the Galveston Bay area. As of October 31, 2002, the
balance remaining to be paid under this contract was approximately $1.0 million.
Gas Delivery Commitments
TransTexas has entered into contracts with Kinder Morgan Ship Channel
Pipeline, L.P., formerly Tejas Ship Channel, LLC, for transportation of its
production from the Eagle Bay field to the Winnie facilities at a fixed
negotiated rate. Under these contracts, the Company has agreed to deliver up to
75,000 MMBtu per day of natural gas and associated condensate through June 30,
2003.
The Company also entered into a contract with Duke Energy Field
Services, LLC for transportation of natural gas on a firm and interruptible
basis from the Winnie facility to natural gas liquids recovery facilities
located in the Beaumont/Port Arthur, Texas area, and residue gas from these
facilities to various distribution points. Under the agreement, the Company has
agreed to deliver up to a maximum of 56,250 Mcf of natural gas and 19,500 MMBtu
of residue gas per day through June 30, 2003. Transportation fees for natural
gas and residue gas are based on fixed negotiated rates.
8. RELATED PARTY TRANSACTIONS
In March 2002, John R. Stanley resigned as Chief Executive Officer and
as Chairman and member of the Board of Directors of the Company. Pursuant to a
separation agreement, the Company is obligated to pay Mr. Stanley $3.0 million
in cash in installments plus interest at the rate of 10% per annum until paid in
full. At October 31, 2002, the severance remaining to be paid to Mr. Stanley was
$0.8 million.
On March 15, 2002, CSFB and the Company, as borrower, and Galveston Bay
Processing Corporation, as guarantor, entered into an unsecured Term Loan
Agreement, wherein CSFB advanced to the Company the principal sum of $2.0
million which was due and payable, together with interest at a rate of 15% per
annum, on October 15, 2002. As discussed in Note 2, the Company is in default
under the terms of this loan. CSFB is the beneficial owner of more than 10% of
each of the 15% Notes, Class A Common Stock and Senior Preferred Stock.
9. SUPPLEMENTAL GUARANTOR INFORMATION
Galveston Bay Pipeline Company and Galveston Bay Processing Corporation
are guarantors of the 15% Notes and the Oil and Gas Facility. Separate financial
statements of the Guarantors are not considered to be material to holders of the
15% Notes and GMACC. The following condensed consolidating financial statements
present supplemental information of the Guarantors as of and for the three and
nine-month periods ended October 31, 2002.
12
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
----------- ----------- ----------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 5,893 $ 2 $ 402 $ -- $ 6,297
Accounts receivable, net ......................... 11,533 -- 141 -- 11,674
Receivables from affiliates ...................... 17,101 -- -- (17,101) --
Inventories ...................................... 399 -- -- -- 399
Other current assets ............................. 1,526 -- -- -- 1,526
----------- ----------- ----------- ----------- -----------
Total current assets ....................... 36,452 2 543 (17,101) 19,896
----------- ----------- ----------- ----------- -----------
Property and equipment ........................... 486,832 2,272 11,644 -- 500,748
Less accumulated depreciation, depletion and
amortization ................................... 384,278 831 4,779 -- 389,888
----------- ----------- ----------- ----------- -----------
Net property and equipment ................ 102,554 1,441 6,865 -- 110,860
----------- ----------- ----------- ----------- -----------
Other assets ..................................... 2,409 -- -- (2) 2,407
----------- ----------- ----------- ----------- -----------
$ 141,415 $ 1,443 $ 7,408 $ (17,103) $ 133,163
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........... $ 3,517 $ 26 $ 66 $ -- $ 3,609
Notes payable .................................. 53,272 -- -- -- 53,272
Accounts payable ............................... 1,703 3 50 -- 1,756
Accrued liabilities ............................ 8,464 -- 104 -- 8,568
----------- ----------- ----------- ----------- -----------
Total current liabilities ................. 66,956 29 220 -- 67,205
----------- ----------- ----------- ----------- -----------
Payable to affiliates ............................ -- 2,386 14,715 (17,101) --
Long-term debt, net of current maturities ........ 528 276 112 -- 916
Production payments, net of current portion ...... 22,729 -- -- -- 22,729
Other liabilities ................................ 628 -- -- -- 628
Liabilities subject to compromise ................ 237,669 -- -- -- 237,669
Redeemable preferred stock ....................... 54,440 -- -- -- 54,440
Stockholders' equity (deficit):
Common stock ................................... 634 -- -- -- 634
Additional paid-in capital ..................... 79,038 1 1 (2) 79,038
Accumulated deficit ............................ (320,931) (1,249) (7,640) -- (329,820)
Accumulated other comprehensive loss ........... (276) -- -- -- (276)
----------- ----------- ----------- ----------- -----------
Total stockholders' deficit ............... (241,535) (1,248) (7,639) (2) (250,424)
----------- ----------- ----------- ----------- -----------
$ 141,415 $ 1,443 $ 7,408 $ (17,103) $ 133,163
=========== =========== =========== =========== ===========
</Table>
13
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 6,058 $ 33 $ 468 $ -- $ 6,559
Accounts receivable ....................................... 15,033 -- 234 -- 15,267
Receivables from affiliates ............................... 15,523 -- -- (15,523) --
Inventories ............................................... 818 -- -- -- 818
Other ..................................................... 3,110 -- 2 -- 3,112
---------- ---------- ---------- ---------- ----------
Total current assets .................................. 40,542 33 704 (15,523) 25,756
---------- ---------- ---------- ---------- ----------
Property and equipment ....................................... 480,850 2,267 11,631 -- 494,748
Less accumulated depreciation, depletion and
amortization ............................................... 363,343 653 3,805 -- 367,801
---------- ---------- ---------- ---------- ----------
Net property and equipment ............................ 117,507 1,614 7,826 -- 126,947
---------- ---------- ---------- ---------- ----------
Other assets ................................................. 2,103 -- -- (2) 2,101
---------- ---------- ---------- ---------- ----------
$ 160,152 $ 1,647 $ 8,530 $ (15,525) $ 154,804
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ...................... $ 2,353 $ 17 $ 74 $ -- $ 2,444
Accounts payable .......................................... 5,546 -- 259 -- 5,805
Accrued liabilities ....................................... 26,115 -- 12 -- 26,127
---------- ---------- ---------- ---------- ----------
Total current liabilities ............................. 34,014 17 345 -- 34,376
---------- ---------- ---------- ---------- ----------
Payable to affiliates ........................................ (28) 1,948 13,603 (15,523) --
Long-term debt, net of current maturities .................... 261,050 580 144 -- 261,774
Production payments, net of current portion .................. 26,005 -- -- -- 26,005
Other liabilities ............................................ 6,644 -- -- -- 6,644
Redeemable preferred stock ................................... 72,125 -- -- -- 72,125
Stockholders' equity (deficit):
Common stock .............................................. 12 -- -- -- 12
Additional paid-in capital ................................ 25,013 1 1 (2) 25,013
Accumulated deficit ....................................... (267,031) (899) (5,563) -- (273,493)
Accumulated other comprehensive income .................... 2,348 -- -- -- 2,348
---------- ---------- ---------- ---------- ----------
Total stockholders' deficit ........................... (239,658) (898) (5,562) (2) (246,120)
---------- ---------- ---------- ---------- ----------
$ 160,152 $ 1,647 $ 8,530 $ (15,525) $ 154,804
========== ========== ========== ========== ==========
</Table>
14
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
-------------- -------------- -------------- -------------- --------------
Revenues:
Gas, condensate and natural gas liquids .. $ 14,973 $ -- $ -- $ -- $ 14,973
Other .................................... (23) 18 798 (617) 176
-------------- -------------- -------------- -------------- --------------
Total revenues ......................... 14,950 18 798 (617) 15,149
-------------- -------------- -------------- -------------- --------------
Costs and expenses:
Operating ................................ 2,380 3 889 (617) 2,655
Depreciation depletion and amortization .. 5,231 46 250 -- 5,527
General and administrative ............... 3,966 (2) 19 -- 3,983
Taxes other than income taxes ............ 542 -- 28 -- 570
-------------- -------------- -------------- -------------- --------------
Total costs and expenses ............... 12,119 47 1,186 (617) 12,735
-------------- -------------- -------------- -------------- --------------
Operating income (loss) ................ 2,831 (29) (388) -- 2,414
-------------- -------------- -------------- -------------- --------------
Other income (expense):
Interest income .......................... 67 -- -- -- 67
Interest expense, net .................... (9,416) (59) (381) -- (9,856)
-------------- -------------- -------------- -------------- --------------
Total other expense .................... (9,349) (59) (381) -- (9,789)
-------------- -------------- -------------- -------------- --------------
Net loss ............................... $ (6,518) $ (88) $ (769) $ -- $ (7,375)
============== ============== ============== ============== ==============
</Table>
15
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------- ------------- ------------- ------------- -------------
Revenues:
Gas, condensate and natural gas liquids $ 32,108 $ -- $ -- $ -- $ 32,108
Other .................................. 31 39 938 (743) 265
------------- ------------- ------------- ------------- -------------
Total revenues ....................... 32,139 39 938 (743) 32,373
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Operating .............................. 4,116 2 929 (743) 4,304
Depreciation, depletion and amortization 26,812 104 565 -- 27,481
General and administrative ............. 4,532 10 17 -- 4,559
Taxes other than income taxes .......... 663 -- 22 -- 685
Impairment of gas and oil properties ... 38,919 -- -- -- 38,919
------------- ------------- ------------- ------------- -------------
Total costs and expenses ............. 75,042 116 1,533 (743) 75,948
------------- ------------- ------------- ------------- -------------
Operating loss ....................... (42,903) (77) (595) -- (43,575)
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest income ........................ 46 -- 2 -- 48
Interest expense, net .................. (8,549) (71) (384) -- (9,004)
------------- ------------- ------------- ------------- -------------
Total other expense .................. (8,503) (71) (382) -- (8,956)
------------- ------------- ------------- ------------- -------------
Net loss ............................. $ (51,406) $ (148) $ (977) $ -- $ (52,531)
============= ============= ============= ============= =============
</Table>
16
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------- ------------- ------------- ------------- -------------
Revenues:
Gas, condensate and natural gas liquids $ 55,982 $ -- $ -- $ -- $ 55,982
Other .................................. 123 33 3,050 (2,321) 885
------------- ------------- ------------- ------------- -------------
Total revenues ....................... 56,105 33 3,050 (2,321) 56,867
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Operating .............................. 8,768 15 2,862 (2,321) 9,324
Depreciation depletion and amortization 21,018 178 968 -- 22,164
General and administrative ............. 12,963 4 54 -- 13,021
Taxes other than income taxes .......... 2,381 -- 98 -- 2,479
------------- ------------- ------------- ------------- -------------
Total costs and expenses ............. 45,130 197 3,982 (2,321) 46,988
------------- ------------- ------------- ------------- -------------
Operating income (loss) .............. 10,975 (164) (932) -- 9,879
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest income ........................ 98 -- 2 -- 100
Interest expense net ................... (28,011) (186) (1,147) -- (29,344)
------------- ------------- ------------- ------------- -------------
Total other expense .................. (27,913) (186) (1,145) -- (29,244)
------------- ------------- ------------- ------------- -------------
Net loss ............................. $ (16,938) $ (350) $ (2,077) $ -- $ (19,365)
============= ============= ============= ============= =============
</Table>
17
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------- ------------- ------------- ------------- -------------
Revenues:
Gas, condensate and natural gas liquids $ 109,015 $ -- $ -- $ -- $ 109,015
Other .................................. 99 180 2,545 (2,087) 737
------------- ------------- ------------- ------------- -------------
Total revenues ....................... 109,114 180 2,545 (2,087) 109,752
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Operating .............................. 14,118 6 3,433 (2,087) 15,470
Depreciation, depletion and amortization 67,036 240 1,287 -- 68,563
General and administrative ............. 14,927 10 50 -- 14,987
Taxes other than income taxes .......... 4,101 1 81 -- 4,183
Impairment of gas and oil properties ... 95,746 -- -- -- 95,746
------------- ------------- ------------- ------------- -------------
Total costs and expenses ............. 195,928 257 4,851 (2,087) 198,949
------------- ------------- ------------- ------------- -------------
Operating loss ....................... (86,814) (77) (2,306) -- (89,197)
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest income ........................ 480 -- 6 -- 486
Interest expense, net .................. (24,442) (222) (1,166) -- (25,830)
------------- ------------- ------------- ------------- -------------
Total other expense .................. (23,962) (222) (1,160) -- (25,344)
------------- ------------- ------------- ------------- -------------
Loss before income taxes ............. (110,776) (299) (3,466) -- (114,541)
Income tax benefit - deferred ............. (9,984) -- -- -- (9,984)
------------- ------------- ------------- ------------- -------------
Net loss ............................. $ (100,792) $ (299) $ (3,466) $ -- $ (104,557)
============= ============= ============= ============= =============
</Table>
18
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------- ------------- ------------- ------------- -------------
Operating activities:
Net loss ...................................... $ (16,938) $ (350) $ (2,077) $ -- $ (19,365)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation depletion and amortization .... 21,018 178 968 -- 22,164
Accretion of discount on long-term debt .... 129 20 14 -- 163
Amortization of debt issue costs ........... 901 -- -- -- 901
Changes in assets and liabilities:
Accounts receivable ...................... 6,500 -- 93 -- 6,593
Receivable from affiliates ............... (1,550) -- -- 1,550 --
Inventories .............................. 419 -- -- -- 419
Other current assets ..................... (764) -- 2 -- (762)
Accounts payable ......................... (3,843) 3 (209) -- (4,049)
Accrued liabilities ...................... 6,684 -- 92 -- 6,776
Transactions with affiliates, net ........ -- 438 1,112 (1,550) --
Other assets ............................. 204 -- -- -- 204
Other liabilities ........................ (373) -- -- -- (373)
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by
operating activities .................. 12,387 289 (5) -- 12,671
------------- ------------- ------------- ------------- -------------
Investing activities:
Capital expenditures ......................... (9,556) (5) (7) -- (9,568)
Proceeds from the sale of assets ............. 677 -- -- -- 677
------------- ------------- ------------- ------------- -------------
Net cash used by
investing activities ................. (8,879) (5) (7) -- (8,891)
------------- ------------- ------------- ------------- -------------
Financing activities:
Issuance of production payments .............. 27,000 -- -- -- 27,000
Principal payments on production payments .... (30,058) -- -- -- (30,058)
Issuance of debt ............................. 2,000 -- -- -- 2,000
Principal payments on long-term debt ......... (1,076) (315) (54) -- (1,445)
Revolving credit agreement, net .............. 30 -- -- -- 30
Debt issue costs ............................. (1,569) -- -- -- (1,569)
------------- ------------- ------------- ------------- -------------
Net cash used by financing activities .. (3,673) (315) (54) -- (4,042)
------------- ------------- ------------- ------------- -------------
Decrease in cash and cash equivalents .. (165) (31) (66) -- (262)
Beginning cash and cash equivalents ............ 6,058 33 468 -- 6,559
------------- ------------- ------------- ------------- -------------
Ending cash and cash equivalents ............... $ 5,893 $ 2 $ 402 $ -- $ 6,297
============= ============= ============= ============= =============
</Table>
19
TRANSTEXAS GAS CORPORATION
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------- ------------- ------------- ------------- -------------
Operating activities:
Net loss .................................. $ (100,792) $ (299) $ (3,466) $ -- $ (104,557)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation, depletion and amortization 67,036 240 1,287 -- 68,563
Impairment of gas and oil properties .... 95,746 -- -- -- 95,746
Accretion of discount on long-term debt . (4) 29 37 -- 62
Amortization of debt issue costs ........ 377 -- -- -- 377
Deferred income taxes ................... (9,984) -- -- -- (9,984)
Changes in assets and liabilities:
Accounts receivable ................... 16,999 -- 244 -- 17,243
Receivable from affiliates ............ (3,850) -- -- 3,854 4
Inventories ........................... (69) -- -- -- (69)
Other current assets .................. 1,171 (188) 27 -- 1,010
Accounts payable ...................... 1,450 (15) 25 -- 1,460
Accrued liabilities ................... (12,377) -- 68 -- (12,309)
Transactions with affiliates, net ..... -- 804 3,050 (3,854) --
Other assets .......................... (35) -- -- -- (35)
Other liabilities ..................... (1,247) -- -- -- (1,247)
------------- ------------- ------------- ------------- -------------
Net cash provided by
operating activities ............... 54,421 571 1,272 -- 56,264
------------- ------------- ------------- ------------- -------------
Investing activities:
Capital expenditures ...................... (120,803) (339) (924) -- (122,066)
Proceeds from the sale of assets .......... 49,722 -- -- -- 49,722
------------- ------------- ------------- ------------- -------------
Net cash used by
investing activities .............. (71,081) (339) (924) -- (72,344)
------------- ------------- ------------- ------------- -------------
Financing activities:
Issuance of production payments ........... 49,800 -- -- -- 49,800
Principal payments on production payments . (14,208) -- -- -- (14,208)
Issuance of long-term debt ................ 2,134 -- -- -- 2,134
Principal payments on long-term debt ...... (5,050) (226) (648) -- (5,924)
Revolving credit agreement, net ........... (12,566) -- -- -- (12,566)
Debt issue costs .......................... (310) -- -- -- (310)
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by
financing activities ............... 19,800 (226) (648) -- 18,926
------------- ------------- ------------- ------------- -------------
Increase (decrease) in cash and
cash equivalents ................... 3,140 6 (300) -- 2,846
Beginning cash and cash equivalents ........ 19,902 39 774 -- 20,715
------------- ------------- ------------- ------------- -------------
Ending cash and cash equivalents ........... $ 23,042 $ 45 $ 474 $ -- $ 23,561
============= ============= ============= ============= =============
</Table>
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto of TransTexas
included elsewhere in this report.
The Company filed a voluntary petition for relief under Chapter 11 of
the U.S. Bankruptcy Code on November 14, 2002, which is more fully described in
the "Liquidity and Capital Resources" section below.
RESULTS OF OPERATIONS
General
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate and
natural gas liquids ("NGLs"). The profitability of TransTexas also depends on
its ability to minimize finding and lifting costs and maintain its reserve base
while maximizing production.
TransTexas' operating data for the three and nine months ended
October 31, 2002 and 2001 are as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales volumes:
Gas (Bcf) ............................ 2.3 6.6 8.8 17.9
NGLs (MMgal) ......................... 7.2 10.2 27.8 28.0
Condensate (MBbls) ................... 190 356 738 879
Average prices:
Gas (dry) (per Mcf) .................. $ 3.41 $ 2.75 $ 3.19 $ 4.18
NGLs (per gallon) .................... 0.35 0.33 0.31 0.41
Condensate (per Bbl) ................. 26.77 24.53 24.91 26.06
Number of gross wells drilled ........... -- 3 -- 14
Percentage of wells completed ........... -- 67% -- 86%
</Table>
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Operating costs and expenses:
Lease ................................... $ 1.5 $ 2.4 $ 5.3 $ 8.7
Pipeline and gathering .................. 1.1 1.9 4.0 6.8
----------- ----------- ----------- -----------
2.6 4.3 9.3 15.5
Taxes other than income taxes
(severance, property and other taxes) ..... 0.6 0.7 2.5 4.2
----------- ----------- ----------- -----------
$ 3.2 $ 5.0 $ 11.8 $ 19.7
=========== =========== =========== ===========
</Table>
TransTexas' average depletion rates have been as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Depletion rates (per Mcfe) ............. $ 1.63 $ 3.18 $ 1.63 $ 2.92
========== ========== ========== ==========
</Table>
Three Months Ended October 31, 2002 Compared with the Three Months
Ended October 31, 2001
Gas, condensate and NGL revenues for the three months ended October 31,
2002 decreased $17.1 million from the prior period, due primarily to a decrease
in natural gas sales volumes. Approximately 3.6 Bcf of the decrease in natural
gas volumes for the three months ended October 31, 2002 was attributable to
reduced production rates from wells in the Southwest Bonus field and
approximately 0.6 Bcf of the decrease was attributable to the sale in the prior
year of TransTexas' interest in the Bob West Field. The Company's Eagle Bay
field was shut-in two days during the current quarter due to Tropical Storm Fay
and Hurricane Lili. The average monthly prices received per Mcf of gas ranged
from $3.12 to $3.63 in the three months ended October 31, 2002, compared to a
range of $2.04 to $3.49 in the prior period.
21
Lease operating expenses for the three months ended October 31, 2002
decreased $0.9 million from the prior period due primarily to a decrease in well
service costs and fewer number of productive wells due to the sale in the prior
year of the Bob West field. Pipeline and gathering expenses decreased $0.8
million from the prior period due primarily to lower labor costs. Depreciation,
depletion and amortization expense for the three months ended October 31, 2002
decreased $22.0 million due to a $1.55 per Mcfe decrease in the depletion rate.
The decrease in the depletion rate is due primarily to the impairments of gas
and oil properties recorded during fiscal year 2002. General and administrative
expenses decreased $0.6 million primarily as a result of lower personnel and
related costs, partially offset by higher legal and consulting fees incurred due
to the Company's bankruptcy filing in November 2002. Taxes other than income
taxes decreased by $0.1 million over the prior period due primarily to lower
franchise taxes. Interest expense for the three months ended October 31, 2002
increased by $0.9 million from the prior period due primarily to lower
capitalized interest. The impairment loss for the three months ended October 31,
2001 relates to a write-down of $38.9 million of TransTexas' net capitalized
costs of gas and oil properties to the cost center ceiling in accordance with
the full cost method of accounting. The cost center ceiling at October 31, 2001
decreased from that at July 31, 2001 primarily due to a decrease in prices for
natural gas and condensate.
Nine Months Ended October 31, 2002 Compared With the Nine Months Ended
October 31, 2001
Gas, condensate and NGL revenues for the nine months ended October 31,
2002 decreased $53.0 million from the prior period, due primarily to lower
prices for all products and lower natural gas sales volumes. Approximately 2.5
Bcf of the decrease in natural gas volumes for the nine months ended October 31,
2002 was attributable to the sale in the prior year of TransTexas' interest in
the Bob West field and approximately 5.8 Bcf of the decrease is attributable to
reduced production rates from wells in the Southwest Bonus field. The average
monthly prices received per Mcf of gas ranged from $2.16 to $3.63 in the nine
months ended October 31, 2002, compared to a range of $2.04 to $6.73 in the
prior period.
Lease operating expenses for the nine months ended October 31, 2002
decreased $3.4 million from the prior period due primarily to a decrease in
workover expenses and fewer number of productive wells due to the sale in the
prior year of the Bob West field. Pipeline and gathering expenses decreased $2.8
million from the prior period due primarily to the lower cost of natural gas
used in operations and lower labor costs. Depreciation, depletion and
amortization expense for the nine months ended October 31, 2002 decreased $46.4
million due to a $1.29 per Mcfe decrease in the depletion rate. The decrease in
the depletion rate is due primarily to the impairments of gas and oil properties
recorded during fiscal year 2002. General and administrative expenses decreased
$2.0 million primarily as a result of lower professional fees. Interest income
decreased $0.4 million compared to the prior period due to lower cash balances
available for investment. Interest expense for the nine months ended October 31,
2002 increased by $3.5 million from the prior period due to lower capitalized
interest. The impairment loss for the nine months ended October 31, 2001 relates
to a write-down of $95.7 million of TransTexas' net capitalized costs of gas and
oil properties to the cost center ceiling in accordance with the full cost
method of accounting. The cost center ceiling at October 31 and July 31, 2001
decreased from that at January 31, 2001 primarily due to a decrease in prices
for natural gas and condensate.
LIQUIDITY AND CAPITAL RESOURCES
On November 14, 2002 (the "Petition Date"), TransTexas, Pipeline and
Processing filed voluntary petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of Texas, Corpus Christi Division (the "Bankruptcy Court"). The bankruptcy cases
are being jointly administered (see Note 7). TransTexas, Pipeline and Processing
are operating their businesses and managing their properties as debtors in
possession. As a result of the Chapter 11 filings, absent approval from the
Bankruptcy Court, the Company is prohibited from paying, and creditors are
prohibited from attempting to collect, claims or debts arising prior to the
Petition Date.
The bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of the interests of existing security holders as a result of the
issuance of securities to creditors or new investors. The consummation of a plan
of reorganization will require approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the
bankruptcy proceedings or the effect on the business of the Company or on the
interests of creditors, royalty owners or stockholders.
22
Management's plans are to continue to incur capital expenditures with
the goal of increasing production and reserves. To finance these planned capital
expenditures, TransTexas will be required to supplement its anticipated cash
flow from operating activities with a combination of borrowings under the
production payment drilling program and other financings. In addition, the
Company is in the process of negotiating joint venture drilling opportunities
with several unrelated entities. The ability to incur capital expenditures and
obtain additional financing is subject to the approval and ongoing supervision
of the Bankruptcy Court. There is no assurance that adequate funds can be
obtained on a timely basis or that the Bankruptcy Court will approve such
transactions.
On March 17, 2000, the Company and GMAC entered into the Accounts
Receivable Facility. The Accounts Receivable Facility is a revolving credit
facility secured by accounts receivable and inventory. The maximum loan amount
under the facility is $15 million, against which the Company may from time to
time, subject to the conditions of the Accounts Receivable Facility, borrow,
repay and reborrow. The Accounts Receivable Facility matures on March 14, 2005.
Advances under the facility bear interest monthly in arrears at a rate per annum
equal to the higher of (i) the prime commercial lending rate of The Bank of New
York plus 1/2 of 1%, and (ii) the Federal Funds Rate plus 1% payable monthly in
arrears. As of October 31, 2002, the outstanding principal balance under the
Accounts Receivable Facility was $1.3 million, with availability for additional
advances of approximately $0.4 million. On November 15, 2002, a first interim
financing order of the Bankruptcy Court modified the maximum loan amount under
the Accounts Receivable Facility to $10 million and modified certain other terms
of the facility. Pursuant to this interim order, GMACC waived compliance with
certain provisions of the facility. On December 19, 2002, a hearing is scheduled
in the Bankruptcy Court to approve a second interim financing order for debtor
in possession financing.
In March 2000, TransTexas entered into a production payment drilling
program agreement with two unaffiliated third parties in the form of a term
overriding royalty interest carved out of and burdening certain properties. The
Company has the right to offer additional interests to the production payment
parties at a negotiated purchase price. The production payment requires the
repayment of the primary sum plus an amount equivalent to a 15% annual interest
rate on the unpaid portion of such primary sum. In March 2002, the Company
closed an Eighth Supplement to the production payment whereby the Company
received $14.0 million. In June 2002, the Company closed a Ninth Supplement to
the production payment whereby the Company received $13.0 million in exchange
for additional properties being made subject to the production payment. As of
October 31, 2002, the outstanding balance of the production payment was $25.4
million, of which $2.7 million attributable to produced volumes is included in
accrued liabilities. The Oil and Gas Facility places certain restrictions on the
amount that may be outstanding under the production payment.
On March 15, 2002, CSFB and the Company, as borrower, and Galveston Bay
Processing Corporation, as guarantor, entered into an unsecured Term Loan
Agreement, wherein CSFB advanced to the Company the principal sum of $2.0
million which was due and payable, together with interest at a rate of 15% per
annum, on October 15, 2002. The Company has not paid the principal and accrued
interest of this loan and is in default under its terms. CSFB is the beneficial
owner of more than 10% of each of the 15% Notes, Class A Common Stock and Senior
Preferred Stock and Junior Preferred Stock.
The Company has not paid the $15 million interest payment that was due
September 15, 2002 on its 15% Notes. The Company is also in default under the
terms of the Oil and Gas Facility, Accounts Receivable Facility and other
long-term debt.
TransTexas is highly leveraged and has significant cash requirements
for servicing debt and the production payment obligation and significant charges
to net income available for common stockholders for Senior Preferred Stock
dividends. In order to maintain or increase proved oil and gas reserves,
TransTexas must continue to make substantial capital expenditures for the
exploration and development of its natural gas and oil prospects. For the nine
months ended October 31, 2002, total capital expenditures incurred were $7
million, including $5 million for capitalized interest, $1 million for
nonproducing leases and $1 million for drilling and development. Capital
expenditures for the fourth quarter of fiscal year 2003 are estimated to be
approximately $3 million. Management plans to fund TransTexas' fiscal fourth
quarter 2003 debt service requirements and capital expenditures with cash flows
from operating activities and borrowings under the production payment drilling
program and other financings. TransTexas anticipates capital expenditures of $34
million for fiscal 2004 and estimates that these capital expenditures will be
funded by cash flows from operating activities, borrowings under the production
payment drilling program and other financings. Should these drilling prospects
not be productive or should oil and gas prices decline for a prolonged period,
absent other sources of capital, the Company would substantially reduce its
capital expenditures, which would limit its ability to maintain or increase
production and in turn meet its debt service requirements. Asset sales and
financings are restricted under the terms of the Company's debt documents and
Senior Preferred Stock and subject to Bankruptcy Court approval.
23
Preferred Stock Dividends and Conversion to Class A Common Stock
The Certificate of Designation for the Senior Preferred Stock of the
Company provides for the mandatory conversion of one-half of the outstanding
shares of Senior Preferred Stock into fully paid and non-assessable shares of
Class A Common Stock at the rate of 0.3461 shares of Class A Common Stock for
each $1.00 of liquidation preference per share, plus an amount equal to accrued
and unpaid dividends, of Senior Preferred Stock if the Company fails to pay
dividends on the Senior Preferred Stock as required by the Certificate of
Designation for the Senior Preferred Stock on any two dividend payment dates.
The Certificate of Designation for the Junior Preferred Stock provides for the
mandatory conversion of all of the outstanding shares of Junior Preferred Stock
into fully paid and non-assessable shares of Class A Common Stock at the rate of
0.1168 shares of Class A Common Stock for each $1.00 of liquidation preference
per share, plus an amount equal to accrued and unpaid dividends, of Junior
Preferred Stock if the Company fails to pay dividends on the Senior Preferred
Stock as required by the Certificate of Designation for the Senior Preferred
Stock on any two dividend payment dates.
Upon the occurrence of the mandatory conversion specified above, the
outstanding shares of Senior Preferred Stock and Junior Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Company or its transfer agent; provided, however, that the Company shall not
be obligated to issue certificates evidencing the shares of Class A Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Senior Preferred Stock and Junior Preferred Stock are either delivered to the
Company or its transfer agent as provided below, or the holder thereof notifies
the Company or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the Company to indemnify
the Company from any loss incurred by it in connection with such certificates.
Upon the occurrence of such mandatory conversion of the Preferred
Stock, the holders of Preferred Stock shall surrender the certificates
representing each share of such Preferred Stock at the office of the Company or
any transfer agent for the Preferred Stock. Thereupon, there shall be issued and
delivered to each such holder of Senior Preferred Stock promptly at such office
and in its name as shown on such surrendered certificate or certificates, (i) a
certificate or certificates for the number of shares of Class A Common Stock
into which one-half of the number of shares of Senior Preferred Stock
surrendered by such holder were convertible on the date on which such automatic
conversion occurred, and (ii) a certificate or certificates for one-half of the
number of shares of Senior Preferred surrendered by such holder. Thereupon,
there shall be issued and delivered to each such holder of Junior Preferred
Stock promptly at such office and in its name as shown on such surrendered
certificate or certificates a certificate or certificates for the number of
shares of Class A Common Stock into which the shares of Junior Preferred Stock
surrendered were convertible on the date on which such automatic conversion
occurred.
The Certificate of Designation for each of the Senior Preferred Stock
and the Junior Preferred Stock required the payment to the holders of a cash
dividend on the Senior Preferred Stock and an in-kind dividend on the Junior
Preferred Stock, respectively, by the Company on June 15, 2002 and on September
15, 2002. The Company did not make the required dividend payments on either
date. Therefore, the liquidation preference of the Senior Preferred Stock was
increased to approximately $1.04 per share and the liquidation preference of the
Junior Preferred Stock was increased to approximately $1.05 per share. As a
result, on September 16, 2002, each two shares of Senior Preferred Stock was
converted into one share of New Senior Preferred and into approximately 0.3596
shares of Class A Common Stock and each share of Junior Preferred Stock was
converted into approximately 0.1227 shares of Class A Common Stock. No
fractional shares were issued in the conversion. The Board of Directors of the
Company determined that the fair market value of each share of the Preferred
Stock and Common Stock for purposes of the conversion was less than $0.01 per
share and, therefore, no cash was paid to holders of Preferred Stock in lieu of
fractional shares.
In the aggregate 164,333,875 shares of Senior Preferred Stock
representing one-half of all of the outstanding Senior Preferred Stock were
converted into 59,101,243 shares of Class A Common Stock and 25,240,513 shares
of Junior Preferred Stock representing all of the outstanding Junior Preferred
Stock were converted into 3,097,336 shares of Class A Common Stock. Since the
Company did not pay the required dividend payments, holders of the Senior
Preferred Stock have the right, voting separately as a class, to elect all five
directors to the Company's Board of Directors. On December 16, 2002, the Company
did not make the required cash dividend payment to the remaining holders of the
Senior Preferred Stock.
Potential Tax Liabilities
Part of the debt refinancing of TransAmerican in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the COD Exclusion and has
reduced its tax attributes (including its net operating loss and credit
carryforwards) as a consequence of the COD Exclusion.
24
As a former member of the TNGC Consolidated Group which included TNGC,
the sole stockholder of TransAmerican, TransAmerican, TransAmerican Energy
Corporation, TransTexas and TransAmerican Refining Corporation, TransTexas will
be severally liable for any tax liability resulting from any transaction of the
TNGC Consolidated Group that occurred during any taxable year of the TNGC
Consolidated Group during which TransTexas was a member, including the
above-described transaction.
TransTexas expects that a significant portion of its NOLs will be
eliminated and the use of those NOLs that are not eliminated will be severely
restricted as a consequence of the Prior Plan. In addition, certain other tax
attributes of TransTexas may under certain circumstances be eliminated or
reduced as a consequence of the Prior Plan. The potential elimination or
reduction of NOLs and such other tax attributes may substantially increase the
amount of tax payable by TransTexas.
Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, competition and the ultimate
resolution of litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from adverse changes in prices
for natural gas, condensate and oil and interest rates as discussed below.
The Company's revenues, profitability, access to capital and future
rate of growth are substantially dependent upon the prevailing prices of natural
gas, condensate and oil. These prices are subject to wide fluctuations in
response to relatively minor changes in supply and demand and a variety of
additional factors beyond the Company's control. From time to time, the Company
has utilized hedging transactions with respect to a portion of its gas and oil
production to achieve a more predictable cash flow, as well as to reduce
exposure to price fluctuations. While hedging limits the downside risk of
adverse price movements, it may also limit future revenues from favorable price
movements. Because gains or losses associated with hedging transactions are
included in gas and oil revenues when the hedged volumes are delivered, such
gains and losses are generally offset by similar changes in the realized prices
of commodities.
As of October 31, 2002, the Company had entered into the following
hedging arrangements (settlement price based on a published industry index of
natural gas prices at Houston Ship Channel) as cash flow hedges of forecasted
sales of a portion of the Company's natural gas production:
<Table>
<Caption>
CONTRACT PRICE
--------------------
TOTAL COLLAR
VOLUMES IN --------------------
PERIOD MBtus FLOOR CEILING
------ ------------ --------- ---------
Natural gas:
February 2002 - March 2002...................................... 590,000 $ 2.85 $ 3.30
February 2002 - July 2002....................................... 1,267,000 3.30 3.95
April 2002 - October 2002....................................... 1,070,000 2.85 3.35
August 2002 - October 2002...................................... 644,000 3.10 3.40
November 2002 - March 2003...................................... 755,000 3.50 3.95
November 2002 - March 2003...................................... 755,000 3.50 3.90
April 2003 - October 2003....................................... 1,284,000 3.25 4.05
</Table>
For the nine months ended October 31, 2002, the Company recognized
hedging gains of $0.7 million, which are reflected in gas, condensate and
natural gas liquids revenues. At October 31, 2002, the Company's estimated net
liability of these contracts was $0.3 million.
25
Because substantially all of its long-term obligations at October 31,
2002 are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($1.3 million
outstanding at October 31, 2002) are subject to a rate of interest that
fluctuates based on short-term interest rates. The Company had no interest rate
hedges at October 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Within the 90 days prior to
the date of this quarterly report, the Company evaluated the effectiveness of
the design and operation of its disclosure controls and procedures. This
evaluation was conducted under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have each concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
b) Changes in Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of the Company's most recent evaluation.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the condensed consolidated financial statements for a
discussion of TransTexas' legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See "Events of Default" in Note 3 to the condensed consolidated
financial statements.
ITEM 5. OTHER INFORMATION
See Notes 2 and 4 to the condensed consolidated financial statements
for a discussion of the Company's Chapter 11 filing and the conversion of
one-half of the outstanding shares of Senior Preferred Stock and all of the
outstanding shares of Junior Preferred Stock into shares of Class A Common
Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On September 16, 2002, the Company filed a Current Report on Form 8-K,
to report under Item 5 (i) the mandatory conversion of one-half of the
outstanding shares of Senior Preferred Stock and all of the outstanding shares
of Junior Preferred Stock into shares of Class A Common Stock, (ii) certain
events of default and (iii) the status of the Company's proposed
recapitalization.
27
SIGNATURE
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.
TRANSTEXAS GAS CORPORATION
By: /s/ ED DONAHUE
-----------------------------------------
Ed Donahue
Vice President, Chief Financial Officer
and Secretary
December 16, 2002
28
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Arnold H. Brackenridge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransTexas Gas
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or other persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2002 /s/ ARNOLD H. BRACKENRIDGE
---------------------------------------
Arnold H. Brackenridge
President, Chief Executive Officer and
Chief Operating Officer
29
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Ed Donahue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransTexas Gas
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or other persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2002 /s/ ED DONAHUE
----------------------------------------
Ed Donahue
Vice President, Chief Financial Officer
and Secretary
30
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>