<PAGE> 1
As filed with The Securities and Exchange Commission on October 8, 1996.
REGISTRATION NO. 33-98042
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 2
TO FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------
NATIONAL ENERGY RESOURCES TRUST SERIES
A THROUGH L
NATIONAL ENERGY RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
--------------------
OKLAHOMA TO BE APPLIED FOR
(Trust) UPON FORMATION
CALIFORNIA 1300 (Trust)
(Corporation) (Primary Standard Industrial 95-4492397
(State of Incorporation Classification Code No.) (I.R.S. Employer
or Organization) Identification No.)
221800 BURBANK BLVD, SUITE 100
WOODLAND HILLS, CALIFORNIA 91364
(800) 201-8666
(Name, address, including zip code and telephone number,
including area code, of Registrant's principal executive office)
<TABLE>
<S> <C>
MARSHALL J. FIELD WITH COPIES TO:
President MARK A. ROBERTSON, ESQ.
NATIONAL ENERGY RESOURCES, INC. ROBERTSON & WILLIAMS
21800 BURBANK BLVD., SUITE 100 3033 N.W. 63RD ST., SUITE 160
WOODLAND HILLS, CALIFORNIA 91364 OKLAHOMA CITY, OK 73116
(800) 201-8666 (405) 848-1944
(Name, address, including zip code and telephone
number, including area code, of agent for service)
</TABLE>
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as possible after the Effective Date of the Registration Statement.
--------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [x]
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE> 2
NATIONAL ENERGY RESOURCES TRUST SERIES
A THROUGH L
NATIONAL ENERGY RESOURCES, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS,
FILED AS PART OF REGISTRATION STATEMENT, OF
INFORMATION REQUIRED BY FORM S-1
<TABLE>
<CAPTION>
ITEM
NUMBER IN
FORM S-1 ITEM CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
- -------- ------------------------ ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . . . Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus . . . . . . . . . . . . . . Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Changes . . . . . . . . . . . . . . Summary of Prospectus; Risk
Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . Front Cover Page
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . . . . . . . . Not Applicable
8. Plan of Distribution . . . . . . . . . . . . . . . . . Front Cover Page; Plan of
Distribution
9. Description of the Securities . . . . . . . . . . . . Summary of Prospectus;
Description of Trust Units
10. Interest of Named Experts and Counsel . . . . . . . . . Not Applicable
11. Information with Respect to Registrant . . . . . . . . The Trust; National Energy;
The Production Payment and
Underlying Properties
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . . . National Energy
13. Expenses of Issuance and
Distribution . . . . . . . . . . . . . . . . . . . . Part II of Registration Statement
14. Indemnification of Directors and Officers . . . . . . . Part II of Registration Statement
15. Recent Sales of Unregistered Securities . . . . . . . . Part II of Registration Statement
16. Exhibits; Financial Statement Schedules . . . . . . . . Exhibits to Registration Statement
17. Undertakings . . . . . . . . . . . . . . . . . . . . . Part II of Registration Statement
</TABLE>
<PAGE> 3
PROSPECTUS
NATIONAL ENERGY RESOURCES, INC.
NATIONAL ENERGY RESOURCES TRUST SERIES
6,000 TRUST UNITS
Each unit of beneficial interest ("Trust Unit") offered by National
Energy Resources, Inc. ("National Energy") the sponsor of the Trusts, evidences
an undivided interest in the National Energy Resources Trusts ("Trusts"), a
series of grantor trusts to be formed for the purpose of acquiring oil and gas
production payments. The assets of each Trust will consist of defined
production payments ("Production Payments") from working interests in producing
properties located in Texas, Oklahoma, Louisiana and Mississippi (collectively,
the "Underlying Properties"). The Trusts will receive the proceeds of the
offering.
This Prospectus describes the 500 Trust Units offered in National Energy
Resources Trust-A ("Trust-A") on an all- or-none basis. The Production Payment
to be purchased by Trust-A will entitle the Trust to receive a percentage of
the Net Cash Flow from the Underlying Properties until the Trust has received
$500,000 plus an amount equal to 12 1/2% per annum of the principal sum.
Additional Trust Units may be offered in Trust B through L only upon the
closing of this offering, up to a total of 6,000 Trust Units for the entire
Series A though L. Each offering including the offering in Trust A, will be
for a period of 3 months from the date of its Prospectus, which period may be
extended by National Energy for 60 days (the "Offering Period"). Units in only
one Trust will be offered at a time. Each Trust will include a minimum of 500
Trust Units and may include a maximum number of Trust Units if the Underlying
Properties for such Trust permit a larger Production Payment. All
subscriptions will be payable to Boatmen's Trust Company ("Escrow Agent") and
will be held along with the Subscription Agreements in escrow by the Escrow
Agent until the minimum number of Units is sold or the Offering terminated.
Subscription funds will earn interest during the escrow which will be paid to
the subscribers promptly after the closing or termination of the offering.
Subscription funds will be returned promptly to subscribers by the Escrow Agent
if an offering fails to raise $500,000 within the Offering Period.
Subscription Agreements may be revoked by subscribers until they are counter
signed by National Energy which has 15 days after receipt of the Subscription
Agreements by the Escrow Agent to accept them. Except for the 500 Trust Units
to be issued by Trust-A, no Trust Units are offered by this Prospectus unless
it is accompanied by a Supplemental Prospectus relating to the Trust for which
Trust Units are then being sold. There is no assurance that any additional
Trust Units will be offered after the 500 Trust Units for Trust-A.
Each Trust will be terminated (i) when investors have received from the
Production Payment their original investment plus interest at a rate per annum
specified for that trust anticipated to occur 5 years from the date of
formation of the Trusts; (ii) upon sale of the Production Payment which may
occur at any time after 2 years from the date of formation of the Trusts by
exercise of the Option by National Energy or a vote of a majority of the Trust
Unitholders; (iii) upon expiration of the number of years specified to comply
with the rule against perpetuities; or (iv) by vote of a majority of the Trust
Unitholders.
INVESTMENT IN THE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" AT PAGE 11 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR. SIGNIFICANT RISKS INCLUDE, BUT ARE
NOT LIMITED TO:
o HIGH RISKS ASSOCIATED WITH THE OIL AND GAS INDUSTRY COULD REDUCE
REVENUES FROM THE PRODUCTION PAYMENT WHICH WOULD RESULT IN REDUCED
DISTRIBUTIONS TO INVESTORS.
o INVESTMENT IS ILLIQUID -- INVESTORS MAY NOT BE ABLE TO SELL THEIR TRUST
UNITS BECAUSE THERE WILL BE NO MARKET FOR THE TRUST UNITS.
(continued on nest page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is October ___, 1996.
<PAGE> 4
(continued from previous page)
o No underlying properties have been identified or selected and therefor,
no investor will have an opportunity to evaluate any of the underlying
properties before investing in the Trust Units.
o Investors will have limited voting rights with respect to their
investments and will be able to terminate the Trust only upon a vote of
a majority of Trust Unitholders.
o The operator of the Underlying Properties will not have a fiduciary
obligation to Trust Unitholders.
o Trust Unitholders may not compel the Trustee to take legal action
against National Energy or any transferee of an Underlying Property for
damages caused by a delay or reduction in payment of distributions
unless its failure to do so would be in bad faith.
o Trust Unitholders will not participate in revenues from the Underlying
Properties in excess of the amount of the investment plus 12 1/2% per
annum.
o Investment is suitable only for investors having substantial financial
resources and who desire a long-term investment.
<TABLE>
<CAPTION>
==============================================================================================================
Initial Public Underwriting Proceeds to
Offering Price Commission (1) Trust (2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Trust Unit . . . . . . . $1,000.00 $80.00 $920.00
-----------------------------------------------------------------------
Total Trust-A . . . . . . $500,000.00 $40,000.00 $460,000.00
Total Series . . . . . . $6,000,000.00 $480,000.00 $5,520,000.00
==============================================================================================================
</TABLE>
(1) There is no firm commitment underwriting. The Trust Units are being
offered on a best efforts basis by members of the National Association
of Securities Dealers, Inc. (the "Soliciting Dealers"). National Energy
Resources, Inc. ("Sponsor") has agreed to indemnify the Soliciting
Dealers against certain liabilities including liabilities under the
Securities Act of 1933, as amended. See "PLAN OF DISTRIBUTION."
(2) Before deducting expenses of the offering payable by Trust estimated at
$30,000 for the Trust-A and $360,000 for the entire Series.
2
<PAGE> 5
AVAILABLE INFORMATION
National Energy Resources Trust Series has filed with the Securities and
Exchange Commission, Washington, D.C. ("SEC"), a registration statement on Form
S-1, Registration No. 33-98042 ("Registration Statement), under the Securities
Act of 1933, as amended ("Securities Act"), with respect to the Trust Units
offered hereby. This prospectus (together with any supplement) which is a part
of the Registration Statement ("Prospectus"), omits certain of the information
contained in the Registration Statement in accordance with the rules and
regulations of the SEC, and reference is hereby made to the Registration
Statement and the exhibits thereto for further information with respect to the
Trusts and the Trust Units. Items of information omitted from this Prospectus
but contained in the Registration Statement may be inspected and copies at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Everett McKinley Dirksen Building, 219 South Dearborn
Street, Room 1204, Chicago, Illinois 60604; and 75 Park Place, Room 1228, New
York, New York 10007, at prescribed rates.
This Prospectus does not constitute an offer to sell or the solicitation
of an offer to buy the Trust Units offered hereby in jurisdictions in which
such offer or solicitation is unlawful.
<TABLE>
<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . 5
National Energy Resources Trust Series . . . . . . . . . . . . . 6
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 7
National Energy Resources Trust-A . . . . . . . . . . . . . . . . 8
National Energy . . . . . . . . . . . . . . . . . . . . . . . . . 8
Summary of Risk Factors . . . . . . . . . . . . . . . . . . . . . 9
Summary Federal Income Tax Consequences . . . . . . . . . . . . . 10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Risks Associated with Oil and Gas Industry Generally . . . . . . 11
Risks Associated With Trust and Trust Units in Particular . . . . 12
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 15
THE PRODUCTION PAYMENT AND THE UNDERLYING PROPERTIES . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Description of Underlying Properties . . . . . . . . . . . . . . 15
Competition, Markets and Regulations . . . . . . . . . . . . . . 16
Environmental Regulation . . . . . . . . . . . . . . . . . . . . 18
NATIONAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Blackjack . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . 21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Classification and Taxation of the Trust . . . . . . . . . . . . 21
Direct Taxation of Trust Unitholders . . . . . . . . . . . . . . 21
</TABLE>
3
<PAGE> 6
<TABLE>
<S> <C>
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . 21
Reporting of Trust Income and Expenses . . . . . . . . . . . . . 21
Other Income and Expenses . . . . . . . . . . . . . . . . . . . . 22
Non-Passive Activity Income and Loss . . . . . . . . . . . . . . 22
Sale of Trust Units . . . . . . . . . . . . . . . . . . . . . . . 22
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . 22
Registration Provision . . . . . . . . . . . . . . . . . . . . . 22
ERISA CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DESCRIPTION OF THE TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . 23
Creation and Organization of the Trust; Amendments . . . . . . . 23
Assets of the Trust . . . . . . . . . . . . . . . . . . . . . . . 24
Duties and Limited Powers of the Trustee . . . . . . . . . . . . 24
Liabilities of the Trust . . . . . . . . . . . . . . . . . . . . 25
Fiduciary Responsibility and Liability of the Trustee . . . . . . 25
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Duration of the Trust; Sale of Production Payment . . . . . . . . 26
Compensation of the Trustee . . . . . . . . . . . . . . . . . . . 26
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DESCRIPTION OF THE TRUST UNITS . . . . . . . . . . . . . . . . . . . . . 26
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Distributions and Income Computations . . . . . . . . . . . . . . 27
Transfer of Trust Units . . . . . . . . . . . . . . . . . . . . . 27
Periodic Reports . . . . . . . . . . . . . . . . . . . . . . . . 27
Liability of Trust Unitholders . . . . . . . . . . . . . . . . . 27
Voting Rights of Trust Unitholders . . . . . . . . . . . . . . . 28
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 28
Subscription Procedures and Payments . . . . . . . . . . . . . . 28
Suitability Standards . . . . . . . . . . . . . . . . . . . . . . 29
VALIDITY OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 30
SUBSCRIPTION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . Exhibit A
</TABLE>
4
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. See "Risk Factors" for
considerations relevant to an investment in the Trust Units.
THE OFFERING
Trust Units offered . . . . . . . . . A total of 6,000 Trust Units is being
offered of which only 500 to be
issued by Trust-A are being offered
by means of this Prospectus. The
additional Trust Units will be
offered only by this Prospectus when
accompanied by a Supplemental
Prospectus relating to the Trust in
which Trust Units are then being
offered.
Purchase Price . . . . . . . . . . . $1,000 per Trust Unit with a minimum
of Ten (10) Trust Units ($10,000) per
investor and a minimum of 500
($500,000) total Trust Units per
Trust. Trust A will consist of 500
Trust Units. Trusts offered later
may include additional Trust Units.
Production Payment . . . . . . . . . For Trust A, the Production Payment
will be equal to a percentage of the
Net Cash Flow from the Underlying
Properties until Trust A receives
$500,000 plus 12 1/2% per annum. For
the other Trusts the percentage of
Net Cash Flow will vary depending on
the estimated future net revenues of
the wells selected and the interest
rate may vary from 12% to 14%.
Use of Proceeds . . . . . . . . . . . 8% commission payable to the selling
broker dealer; up to 6% as a
reimbursement of offering expenses to
National Energy; 86% to the Trust for
the purchase of the Production
Payment from National Energy.
Sponsor . . . . . . . . . . . . . . . National Energy Resources, Inc.
21800 Burbank Blvd., Suite 100
Woodland Hills, California 91364
(800) 201-8666
Trustee . . . . . . . . . . . . . . . Boatmen's Trust Company, an Oklahoma
trust company
Operator of Underlying Properties . . Blackjack Oil & Gas, Inc. or other
independent third parties.
Cash Distributions . . . . . . . . . Semi-annual distributions will be
made to Trust Unitholders in an
amount equal to 12 1/2% per annum on
the amount of their investment. The
excess of receipts from the
Production Payment over the
distribution will be used to
establish a Reserve Fund to pay the
amount of Unitholder's investment
upon the termination of the Trust.
Trust Term . . . . . . . . . . . . . The Trust will terminate when the
Production Payment is paid in full
which is expected to occur in 5
years. The Trust will also terminate
if National Energy exercises its
5
<PAGE> 8
option to repurchase the Production
Payment which may occur at any time
after 2 years from the effective date
of the Production Payment. Otherwise
the Trust will terminate upon vote of
a majority of the Unitholders or the
lapse of years specified in the Trust
Agreement to avoid violation of the
rule against perpetuities.
Redemption of
Trust Units . . . . . . . . . . . . No Trust Units will be redeemed
except in connection with the
termination of the Trust when all
Trust Unitholders will receive
distributions in complete payment of
their initial investments (or partial
payment if cash proceeds of Trust
Assets are insufficient to make full
payment).
Relationship of Parties . . . . . . . National Energy is the sponsor of the
Trusts and will be the working
interest owner of the Underlying
Properties. The Trust will own a
Production Payment in the Underlying
Properties. The Bank, as Trustee,
will receive the monthly payments on
the Production Payment, distribute
the interest portion to investors,
and deposit the principal portion in
the Reserve Fund. Investors will be
Trust Unitholders and beneficiaries
of the Trust. As Trustee, the Bank
will have a fiduciary duty to
investors. Blackjack, as operator of
the Underlying Properties, and any
other party who may act as operator,
will have a contractual relationship
to National Energy as a working
interest owner, but there will be no
direct relationship between the
operator of the wells and the Trust,
the Trustee or the Unitholders.
NATIONAL ENERGY RESOURCES TRUST SERIES
National Energy Resources, Inc. ("National Energy") is the sponsor of a
series of trusts offering up to 6,000 units of beneficial interests ("Trust
Units"). Certificates evidencing the Trust Units will be issued on the Closing
Date of each trust. Each trust will offer a minimum of 500 Trust Units for a
possible total of 12 grantor trusts to be formed during the 12 month period
following the effective date of registration of the Trust Units.
Each trust will be a grantor trust formed pursuant to a Trust Agreement
in substantially the form of agreement included in the Registration Statement
filed with the SEC. Boatmen's Trust Company will serve as the trustee of each
trust and subscribers to Trust Units will be the grantors and the beneficiaries
of the trusts. The name of the trusts will be National Energy Resources Trust
plus the designation of a letter from A through L to indicate the specific
trust. Subscribers to the first 500 Trust Units will be grantors and
beneficiaries of National Energy Resources Trust-A ("Trust-A"), subscribers to
the second 500 Trust Units will be grantors and beneficiaries of National
Energy Resources Trust B and so forth unless in the discretion of National
Energy a trust should be formed with more than the minimum 500 Trust Units. In
no event will a trust be formed with less than 500 Trust Units. The term
"Trust" as used hereafter shall refer to all the trusts together or to a single
trust as the context may require.
Except for the 500 Trust Units to be issued by Trust-A, no Trust Units
are offered by this Prospectus unless it is accompanied by a Supplemental
Prospectus relating to the Trust for which Trust Units are then
6
<PAGE> 9
being sold. There is no assurance that any additional Trust Units will be
offered after the 500 Trust Units for Trust-A.
The Trust will be a passive entity and will not engage in business. The
Trustee will have only such powers as are necessary for the collection and
distribution of the proceeds received by the fund, the establishment,
maintenance and final distribution of a Reserve Fund and the payment of Trust
liabilities and expenses.
TRUST ASSETS
After the completion of the offering for each Trust, the Trust will
purchase from National Energy a production payment from a group of oil and gas
properties (the "Underlying Properties") which will entitle the Trust to
receive a specified percentage of net cash flow from the Underlying Properties
until the Trust has received a sum of money equal to the total contributions of
Trust Unitholders (at least $500,000 for each trust) plus a specified annual
rate of return which is expected to range from 12% to 14%. The annual rate of
return for Trust Unitholders in Trust A will be 12 1/2%. The specific terms of
the Production Payment, a description of the Underlying Properties from which
the Production Payment is carved and an estimate of the reserves attributable
to the Underlying Properties as well as to the Production Payment as they
relate to a particular Trust will be described in a report to the Trust
Unitholders upon identification of the Underlying Properties after the
formation of the Trust.
The Production Payment owned by the Trust and the Reserve Fund
established by the Trustee out of part of the receipts of the Production
Payment will be the sole assets of a Trust. The Underlying Properties from
which a Production Payment is carved will be completely separate from the
Underlying Properties burdened by a Production Payment payable to another
Trust.
PRODUCTION PAYMENT. A production payment is a right to a specified
share of the production from minerals in place or the proceeds from production
which has an expected economic life at the time of its creation of shorter
duration than the economic life of one or more of the mineral properties
burdened by the payment. The share of production may be limited in time by
dollar amount or amount of production. The Production Payment owned by a Trust
will be limited by the dollar amount of the total contributions ($500,000 or
more) to the Trust by its grantors (the subscribers to Trust Units) plus a
specified percentage (from 12% to 14%) per annum of the total contributions.
The Production Payment will be payable by National Energy out of a specified
percentage of the net cash flow from the Underlying Properties. "Net Cash
Flow" is defined in the Conveyance of Production Payment as the total revenues
received from the sale of production less all costs and expenses, including
gross production taxes, lease operating expenses, workover costs, development
costs, and any other expenses directly attributable to ownership of the working
interest in the Underlying Properties other than Federal and state income tax.
National Energy expects to acquire only those Underlying Properties which have
estimated reserves sufficient to create a Production Payment which will reach
its term in 5 years or less, but there can be no assurances that any Production
Payment will be paid in full in the expected time period or any time period.
See "Risk Factors."
Under the terms of the Conveyance of Production Payment, National Energy
will have the right to repurchase the Production Payment at any time after 2
years from the Effective Date at a purchase price equal to an amount sufficient
to pay the amount of the total contributions of the Trust Unitholders plus the
specified annual rate of return for that Trust, less amounts already
distributed to the Unitholders and the amount held in the Reserve Fund. In
this event, the Trustee would distribute the cash to the Trust Unitholders and
terminate the Trust.
UNDERLYING PROPERTIES. National Energy will acquire working interests
in a group of oil and gas leases on which are located producing oil and gas
wells from Blackjack Oil & Gas, Inc. ("Blackjack") an Oklahoma corporation
which is not affiliated with National Energy or the Trust, or from other
independent
7
<PAGE> 10
oil and gas operators. Blackjack owns, operates and acquires oil and gas
properties located principally in Oklahoma, Texas, Louisiana and Mississippi.
A "working interest" is an interest in an oil and gas leasehold which is
subject to some portion of the cost of development, operation, or maintenance.
Although National Energy will be responsible for development costs, and such
costs would be deducted in calculating Net Cash Flow out of which the
Production Payment is paid, National Energy will not acquire working interests
in Underlying Properties where additional wells are expected to be drilled.
There will be, however, some workover costs associated with the wells to be
acquired, which will be paid by National Energy and deducted from gross
revenues in calculating Net Cash Flow. National Energy will own the Underlying
Properties subject to and burdened by the Production Payment, and is entitled
to any Net Cash Flow received by reason of such ownership in excess of the
percentage of Net Cash Flow paid to the Trust in satisfaction of the Production
Payment.
RESERVE FUND. The Production Payment owned by a Trust will entitle the
Trust to receive a specified percentage of the Net Cash Flow from the
Underlying Properties until the Trust has received the total investment in the
Trust made by Trust Unitholders plus a specified rate of return (from 12% to
14% per annum). Therefore, a portion of each payment received by the Trust
represents a return of capital. That part of the Production Payment which
represents a return of capital will be set aside in a separate interest bearing
account as a sinking fund (the "Reserve Fund"). Upon the full payment of the
Production Payment, the Trust will terminate and amounts in the Reserve Fund
will be distributed to Trust Unitholders as a return of their investment. The
Trustee will manage the Reserve Fund and will make all investment decisions
with regard to the funds; however, National Energy has the right to make
recommendations to the Trustee concerning investments of the Reserve Fund.
Interest received on the Reserve Fund will be used to pay general and
administrative expenses of the Trust and the Trustee's fees. Interest in
excess of Trust expenses will reduce the amount owed under the Production
Payment and will be distributed to Trust Unitholders upon termination of the
Trust.
NATIONAL ENERGY RESOURCES TRUST-A
National Energy will acquire working interests in properties which are
expected to generate Net Cash Flow in sufficient amounts to repay the
Production Payment in 5 years from a specified percentage of less than 100% of
the Net Cash Flow. The Underlying Properties are expected to be located in
Oklahoma, Texas or Louisiana and may consist of oil production, natural gas
production or a combination of both oil and gas.
The Underlying Properties will be selected for their consistent
production history and for estimated future net revenues in the amounts
sufficient to return $500,000 plus 12.5% per annum in 5 years without depleting
reserves since it is a requirement for production payments that they be paid
solely out of reserves in a period less that the life of the properties as
estimated at the time the production payment is created. The Company does not
intend to acquire any interest in adjacent properties; however, the operator
may acquire or own such an interest. The Trusts would not be entitled to
participate in any other wells in the area as the Production Payment will be
limited to the wells acquired. Oklahoma's spacing laws would prevent the
operator from drilling additional wells which would jeopardize production from
the Underlying Properties. If drainage occurs, the trusts would have legal
rights to damages.
NATIONAL ENERGY
National Energy Resources, Inc. is a California corporation formed in
August, 1994 for the purpose of engaging in the development and ownership of
oil and gas and for forming the Trusts and conducting this offering. Its
shareholder is Marshall J. Field who owns 100% of the issued and outstanding
stock of National Energy. Its only officer is Marshall J. Field. National
Energy was formed with minimum capital and its initial capital has been
substantially used in the up front costs of the offering for which it will be
reimbursed out of the proceeds of sale of Trust Units. The principal executive
offices of National Energy
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are located at 21800 Burbank Blvd., Suite 100, Woodland Hills, California 91364
and its telephone number is (800) 201-8666. See "National Energy."
National Energy has no prior experience in the oil and gas industry nor
does it have prior experience in sponsoring oil and gas investments such as the
Trust Units.
SUMMARY OF RISK FACTORS
An investment in the Units is subject to certain risk factors that
should be evaluated by prospective investors before purchasing the Units. Such
risk factors include:
Risks associated with the oil and gas industry generally, including:
(a) decreased revenues and reduced production due to volatility of
oil and natural gas prices;
(b) increased production expenses which could result in reduced oil
or gas production volumes;
(c) reduced value of the Units if the reserve estimates of quantities
and values of natural gas differ materially from actual
quantities and values of reserves;
(d) risks of reduced distributions to Unitholders if production were
interrupted for any reason;
(e) entities not controlled by National Energy could curtail
production on the Underlying Properties or excess production
capacity could reduce natural gas prices, either of which could
adversely affect the Trust distributions;
(f) the amount of cash distributions throughout the year may vary
substantially due to the seasonal nature of demand;
(g) decisions regarding operations, future development and production
levels are made by an independent entity and such decisions may
result in decreased cash distributions; and
(h) the operator of the Underlying Properties has no contractual or
fiduciary duty to protect the interests of the Unitholders.
Risks associated with the Trust and the Trust Units in particular,
include:
(a) Trustee is not personally liable to Unitholders under terms of
Trust Agreement unless it acts in bad faith;
(b) No Underlying Properties have been identified or selected and
therefor, no investor will have an opportunity to evaluate any of
the Underlying Properties before investing in the Trust Units.
(c) Transfer of Underlying Properties in violation of Conveyance
could result in delay of distribution;
(d) Portions of Production Payment would be extinguished if a well is
abandoned;
(e) Trust Unitholders have limited voting rights;
(f) No secondary market for Trust Units and illiquid investment; and
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(g) Trust Unitholders will not participate in revenues in excess of
Production Payment.
SUMMARY FEDERAL INCOME TAX CONSEQUENCES
THE TAX CONSEQUENCES OF AN INVESTMENT IN TRUST UNITS TO A PARTICULAR
INVESTOR WILL DEPEND IN PART ON THE INVESTOR'S OWN TAX CIRCUMSTANCES. EACH
PROSPECTIVE INVESTOR SHOULD THEREFORE CONSULT HIS OWN TAX ADVISOR ABOUT THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO SUCH INVESTOR IN TRUST UNITS.
The following is a summary of certain Federal income tax consequences of
acquiring, owning and disposing of Trust Units and is based on the opinion of
Robertson & Williams, counsel to National Energy Resources, Inc. ("Counsel").
For a more detailed discussion of these consequences and the qualifications to
and limitations of the opinions of Counsel, see "Federal Income Tax
Consequences" and "Risk Factors -- Tax Considerations."
Classification and Taxation
of the Trust . . . . . . . . . The Trust will be treated as a grantor
trust and not as an association taxable
as a corporation. As a grantor trust,
the Trust will not be subject to tax. If
the Trust were treated as an association
taxable as a corporation, it would be
treated as a separate entity subject to
corporate tax on its taxable income.
Taxation of Holders . . . . . . . . Because the Trust will be treated as a
grantor trust for Federal income tax
purposes, and because a Trust Unitholder
will be treated, for Federal income tax
purposes, as directly owning an interest
in the assets of the Trust, each Trust
Unitholder will be taxed directly on his
pro rata share of income attributable to
the assets of the Trust consistent with
the Trust Unitholder's method of
accounting and without regard to the
taxable year or accounting method
employed by the Trust.
Interest Income . . . . . . . . . . For Federal income tax purposes, the
Production Payment will be treated as a
debt obligation. As a result, each
purchaser of a Trust Unit will be
required to treat that portion of each
payment received by the Trust and
distributed monthly to Trust Unitholders
as interest income.
Holder Reporting Information . . . Year-end tax information will be
furnished to Trust Unitholders no later
than March 31 of the following year.
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<PAGE> 13
RISK FACTORS
An investment in the Trust is speculative and involves a high degree of
risk. Prior to making an investment, prospective investors should carefully
consider the following risk factors inherent in and affecting the business of
the Trust and this offering.
RISKS ASSOCIATED WITH OIL AND GAS INDUSTRY GENERALLY
POTENTIAL DECREASE IN REVENUES DUE TO VOLATILITY OF OIL AND NATURAL GAS
PRICES AND PRODUCTION. The Trust's revenues will be dependent on the prices
received for oil and natural gas production from the Underlying Properties and,
in the case of Underlying Properties that are working interests, the costs of
producing and developing such oil and natural gas. Prices for oil and natural
gas are subject to wide fluctuations in response to relatively minor changes in
supply, market uncertainty and a variety of additional factors that are beyond
the control of the Trust and National Energy. These factors include political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of foreign imports, the level of consumer product demand, the severity of
weather conditions, government regulations, the price and availability of
alternative fuels and overall economic conditions. In recent years, natural
gas prices have been more depressed than they have been historically when
compared (on a net equivalent barrel basis) to the price of oil. Although
National Energy believes that in the long-term prices for natural gas will
increase in relation to oil prices, no assurances can be made that natural gas
prices will increase in relation to oil prices or that the price of natural gas
will increase at all. Additionally, lower oil and natural gas prices may
reduce the amount of oil and natural gas that is economic to produce.
Oil and natural gas prices have historically been volatile and are
likely to continue to be volatile in the future. Such volatility makes it
difficult to estimate the future levels of cash distributions to Trust
Unitholders or the value of the Trust Units.
PRODUCTION EXPENSES - MAY AFFECT PRODUCTION AND REVENUES TO TRUST.
Production expenses typically include labor, fuel, repairs, hauling, pumping,
insurance, storage, and supervision and administration. Production expenses
may influence the decision of the operator as to the volume of oil or natural
gas to produce from a property or the decision to shut-in or abandon a well. A
working interest owner is obligated for its proportionate share of production
expenses. Accordingly, higher or lower production expenses on the Underlying
Properties may directly decrease or increase the amount received by the Trust
from the Production Payment. All of the Underlying Properties are in
productive fields where, based on information provided by Blackjack, material
increases in production expenses are currently not expected to occur in the
next several years.
REDUCED VALUE OF UNITS IF RESERVE ESTIMATES ARE INACCURATE. The value
of the Trust Units will be substantially dependent upon the proved producing
reserves attributable to the Production Payments owned by the Trust. There are
many uncertainties inherent in estimating quantities and value of proved
reserves and in projecting future rates of production. The reserve data which
will be relied on by National Energy to identify appropriate properties for
acquisition will be prepared by independent consultants in a manner customary
in the industry in an engineering reserve report. However, they are estimates
only, and quantities and estimated values of oil and gas may differ from the
amounts set out in such reserve reports.
DISTRIBUTION COULD BE AFFECTED IF PRODUCTION IS INTERRUPTED. Trust
distributions could be adversely affected if any of the hazards typically
associated with the production and transportation of oil and natural gas were
to occur, including personal injuries, property damage, damage to productive
formations or equipment and environmental damages. Uninsured costs for damages
for any of the foregoing will directly reduce the Production Payments from the
Underlying Properties to the extent such damages reduce the volume of oil and
natural gas produced.
PRODUCTION COULD BE VOLUNTARILY CURTAILED, REDUCING TRUST DISTRIBUTION.
To the extent that production from the Underlying Properties is comprised of
natural gas, from the revenues of the Trust and the amount of cash
distributions made by the Trust will be dependent upon, among other things, the
volume of nature gas produced and the price at which such natural gas is sold.
Since the early 1980's, the available natural gas production capacity
nationwide has exceeded the demand by users of such gas, resulting in
demand-related production curtailments.
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<PAGE> 14
In addition, existing gathering systems and pipelines transporting natural gas
to the users of such gas may not have sufficient capacity to transport the
entire allowable production from a field, resulting in production from the
Underlying Properties being curtailed. Curtailment may exist for
demand-related reasons. See "The Production Payments and the Underlying
Properties."
In addition, during the 1980's and early 1990's, excess natural gas
production capacity in the United States has generally resulted in downward
pressure on natural gas prices. The effect of any excess production capacity
which exists in the future cannot be predicted with certainty; however, any
such excess capacity may have a material adverse effect on Trust distributions
through its impact on prices and volumes.
SEASONAL DEMAND MAY CAUSE DISTRIBUTION TO VARY SUBSTANTIALLY. Due to
the seasonal nature of demand for natural gas and its effect on sales prices
and production volumes, the cash distributions by the Trust may vary
substantially on a seasonal basis. Generally, natural gas production volumes
and prices tend to be higher during the first and fourth quarters of the
calendar year. Because of the lag between National Energy's receipt of
revenues related to the Underlying Properties and the dates on which
distributions are made to Trust Unitholders, however, the seasonality that
affects production and prices generally should be reflected in distributions by
the Trust in later periods.
NATIONAL ENERGY AND THE TRUST EXERCISE LIMITED CONTROL OF OPERATIONS AND
DEVELOPMENT OF THE UNDERLYING PROPERTIES. Under the terms of the Production
Payment, neither the Trustee nor the Trust Unitholders will be able to
influence or control the operations or future development of the Underlying
Properties. Additionally, National Energy, which will be the owner of the
Underlying Properties, will not operate or be able to significantly influence
the operations or future development of such Underlying Properties. All such
operations will be controlled by persons unaffiliated with the Trustee and
National Energy.
Each of the Underlying Properties will have an operating agreement
whereby, if the requisite percentage of working interest holders approve a
development project, all such holders are required to pay their proportionate
share of development costs. The working interests to be acquired by National
Energy may not constitute a sufficient interest in any property to veto or
control a development decision. Under the terms of the Conveyance creating the
Production Payment in these Underlying Properties, the Trust will not be liable
for any development costs, but the amount of such development costs will be
deducted when computing Net Cash Flow payable to the Trust from such
properties.
THE OPERATOR OF THE UNDERLYING PROPERTIES HAS NO DUTY TO PROTECT
INTERESTS OF UNITHOLDERS. Under the terms of a typical operating agreement
relating to oil and gas properties, the operator owes a duty to working
interest owners to conduct the operations on the Underlying Properties in a
good and workmanlike manner and in accordance with its best judgment of what a
prudent operator would do under the same or similar circumstances. The
operator of any Underlying Properties will have no contractual or fiduciary
duty to protect the interest of the Trust or the Unitholders other than
indirectly through its duty of prudent operations to National Energy as a
working interest owner.
RISKS ASSOCIATED WITH TRUST AND TRUST UNITS IN PARTICULAR
FIDUCIARY RESPONSIBILITY OF TRUSTEE. The Trustee is responsible to the
Trust Unitholders as a fiduciary and, as such, under Oklahoma law is required
to act in the best interests of the Trust Unitholders at all times and to
exercise the judgment and care in supervising and managing the Trust's assets
exercised by persons of ordinary prudence, discretion and intelligence. The
Trust Agreement ("Agreement") provides, however, that the Trustee will not be
personally liable to the Trust Unitholders for the failure to exercise such
standard of judgment and care, unless such failure is the result of bad faith.
Due to the passive nature of the Trust, the Trustee is not required to
make business decisions affecting the assets of the Trust. Therefore, the
Trustee's primary functions under the Agreement are anticipated to be
ministerial. Under certain circumstances, however, the Trustee may be required
to approve or disapprove an extraordinary transaction affecting the Trust and
Trust Unitholders. These transactions include a sale of the
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<PAGE> 15
Production Payment, termination of the Trust and amendment of the Agreement.
The Trustee is required to act in the best interests of Trust Unitholders in
connection with any future extraordinary transactions but is not required to
retain an unaffiliated person to represent the Trust Unitholders.
Under Oklahoma law, if the Trustee, in bad faith, were to fail to
collect amounts owed to the Trust or distribute cash held by the Trust for
distribution, or otherwise, in bad faith, take or omit to take any action that
is in the best interest of the Trust Unitholders, the Trustee would be liable
to the Trust Unitholders for damages caused by any such act or omission,
including any loss or depreciation in value of the Trust assets or failure to
make a profit from such assets caused by such act or omission. Oklahoma law
permits the Trust Unitholders to file an action seeking other remedies for such
acts or omissions in addition to damages, including removal of the Trustee,
specific performance, appointment of a receiver, an accounting by the Trustee
to the Trust Unitholders, exemplary damages and other remedies. The
availability of these remedies provided by Oklahoma law is explicitly
incorporated into the Agreement.
UNDERLYING PROPERTIES NOT YET IDENTIFIED OR SELECTED; NO OPPORTUNITY TO
EVALUATE UNDERLYING PROPERTIES. National Energy has not, as of the date of
this Prospectus, selected or agreed to purchase any particular Underlying
Properties from which Production Payment will be made. National Energy will
select all Underlying Properties to be acquired and prospective investors will
not have an opportunity to review those Underlying Properties before investing
in the Trust Units or to participate in the selection of the Underlying
Properties after an investment is made. See "Production Payment and Underlying
Properties."
TRANSFER OF UNDERLYING PROPERTIES IN VIOLATION OF CONVEYANCE COULD
RESULT IN DELAYED DISTRIBUTION. National Energy will purchase the Underlying
Properties from which will be conveyed the Production Payment to Trust-A.
Under the terms of the Conveyance, National Energy will have no right to
transfer all or any portion of its working, royalty, overriding royalty or fee
mineral interests comprising the Underlying Properties as long as they are
burdened by the Production Payment without the consent of the Trustee. In the
opinion of Robertson & Williams, counsel to National Energy, the Production
Payment will constitute a real property interest and upon recording of the
Conveyance creating the Production Payment in the appropriate real property
records, the Production Payment will have priority over National Energy's
creditors and transferees, whose rights would be subject to the Production
Payment and whose interests would be subsequent and inferior to the Production
Payment. Any transferee will succeed to the responsibilities of National
Energy as to the interests so transferred, including the payment duties and
corresponding liabilities to the Trust for damages caused by breach of such
responsibilities. The Trust Agreement does not provide a specific mechanism
whereby Trust Unitholders may compel the Trustee to institute action against
National Energy or a transferee of an Underlying Property for damages caused by
a delay or reduction in the payment of Production Payment to the Trust. As
discussed under "-- Fiduciary Responsibility of Trustee," above, if the Trustee
were to refuse in bad faith to enforce such damage remedies, the Trustee would
be liable to the Trust Unitholders.
The Trustee may cause the sale of the Production Payments if the holders
of a majority of the Trust Units approve such sale or if National Energy
exercises its option to purchase the Production Payment after two years. The
net proceeds of any sale will be distributed to the Trust Unitholders and the
Trust would be terminated. See "Description of the Trust Agreement -- Duration
of the Trust; Sale of Production Payments."
ABANDONMENT OF A WELL WILL EXTINGUISH PORTION OF PRODUCTION PAYMENT.
National Energy and any transferees will have the right to abandon any well or
property on an Underlying Property that is a working interest if, in its
opinion, such well or property ceases to produce or is not capable of producing
in commercially paying quantities, and upon termination of any such lease, that
portion of the Production Payments relating thereto will be extinguished.
It is anticipated the Underlying Properties will be operated by
Blackjack and National Energy does not anticipate any change in operations.
The operator of the Underlying Properties will be under no obligation to
continue operating the properties, and the Trustee, Trust Unitholders and
National Energy may be unable to appoint or control the appointment of a
replacement operator. See "Production Payments and the Underlying Properties
- -- Description of the Underlying Properties."
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LIMITED VOTING RIGHTS OF TRUST UNITHOLDERS. While Trust Unitholders
will have certain voting rights pursuant to the terms of the Trust Agreement,
these rights are more limited than those of stockholders of most public
corporations. For example, there is no requirement for annual meetings of
Trust Unitholders or for an annual or other periodic re-election of the
Trustee. See "Description of the Trust Units -- Voting Rights of Trust
Unitholders."
TAX CONSIDERATIONS. The Trust has received an opinion of Counsel that
the Trust is a "grantor trust" for Federal income tax purposes, and that each
Trust Unitholder will be taxed directly on his pro rata share of the income of
the Trust and his pro rata share of other deductions of the Trust. The income
of the Trust will be deemed to have been received or accrued by the Trust
Unitholders at the time such income is received or accrued by the Trust and not
when distributed by the Trust, therefore, it is possible that the Trust could
realize income without any corresponding distribution to Unitholders. Counsel
believes that its opinion is in accordance with the present position of the IRS
regarding these tax questions. There can be no assurances that National Energy
or the Trust would be granted such a ruling if requested or that the IRS will
not change it position in the future. The tax treatment of the Trust and Trust
Unitholders could be materially different from that described above if the IRS
were to successfully challenge that treatment. See "Federal Income Tax
Consequences."
LACK OF SECONDARY MARKET AND ILLIQUID INVESTMENT. There is no secondary
market for the Trust Units and none is anticipated. Trust Unitholders will
therefore, not be able to liquidate their investment readily and should expect
to hold the Trust Units for the duration of the Trust.
TRUST UNITHOLDERS WILL NOT PARTICIPATE IN EXCESS REVENUES. The Trust
will receive from the Production Payment only the amounts specified in the
Conveyance which for Trust A is $500,000 plus 12 1/2% per annum. This amount
will be paid out of a specified percentage of the Net Cash Flow from the sale
of oil and gas produced by the Underlying Properties (which may be a different
percentage for other Trusts). National Energy will acquire only Underlying
Properties where it is anticipated the Production Payment will be paid in 5
years based on reserve reports at the time of the acquisition. If gas prices
or production increase, the Trust will not receive a larger total sum but the
Production Payment will be paid in a shorter time period. If gas prices or
production decrease, the Production Payment will be paid over a longer period
and there is the risk that it will not be paid in full.
USE OF PROCEEDS
The Trust will receive all the proceeds from the sale of the Trust
Units, all of which will be paid to National Energy for the Production Payment.
National Energy will apply the proceeds from the sale of Trust Units in Trust-A
in the approximate amounts set forth in the table below although there can be
no assurance that the actual amounts will not vary from those set forth below:
<TABLE>
<S> <C>
Commissions $ 40,000
Offering Expenses(1)(2) 30,000
Acquisition of Production Payment 430,000
</TABLE>
- ------------------
(1) Includes legal and accounting fees, consulting fees, Federal and state
securities registration fees, escrow fees, printing and copying charges,
telephone expense and miscellaneous costs.
(2) In no event will offering expenses exceed 6% of the Offering proceeds.
THE TRUST
Trust-A will be formed pursuant to the Trust Agreement between Boatmen's
Trust Company as trustee, and National Energy upon the deposit into escrow of
$500,000 in payment for 500 Trust Units.
National Energy will purchase the Underlying Properties which will be
subject to and burdened by the Production Payment to be purchased by Trust-A
from the proceeds of this offering. Accordingly, National Energy,
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<PAGE> 17
as owner of the Underlying Properties, will receive payments from purchasers of
production or the operators of such properties. National Energy will aggregate
these payments, deduct operating costs and other expenses related to the
Underlying Properties, and make payment to the Trustee each month for the
amounts due to Trust-A under the Production Payment.
FEES AND EXPENSES
The following is a description of certain fees and expenses anticipated
to be paid or borne by Trust-A, including all fees expected to be paid to
National Energy, the Trustee or their affiliates.
ORGANIZATIONAL AND OFFERING EXPENSE. The organization and offering
expenses allocable to Trust-A are $30,000 (6% of the subscription proceeds) for
legal and accounting fees, consulting and engineering fees, registration fees,
printing and miscellaneous costs, which will be reimbursed to National Energy
upon the close of the offering of Trust Units in Trust-A. Each subsequent
trust will bear the same percentage (6%) for organizational and offering
expenses. National Energy has borne and paid the expenses of the entire
offering of Units in the Trust Series but each trust will reimburse National
Energy only one-twelfth (1/12) of such expenses or if more than 500 Units are
offered by a Trust, that Trust will bear expenses in proportion to the number
of Units issued by it bears to the total number of Units included in the
registration. National Energy will not be reimbursed for expenses of the
Offering attributable to unsold Trust Units.
INTEREST. National Energy will not pay interest on any amounts received
from the Underlying Properties prior to payment to Trust-A.
TRUST ADMINISTRATIVE EXPENSES. The Trustee will be paid a trustee fee
of $1,200 per year per trust and an escrow fee of $600 per account. See
"Description of the Trust Agreement -- Compensation of the Trustee." The Trust
will also incur legal, accounting and engineering fees, mailing and printing
costs and other expenses which will be reimbursed to the Trustee at cost.
THE PRODUCTION PAYMENT AND THE UNDERLYING PROPERTIES
GENERAL
The Production Payments will be carved out of the Underlying Properties
which will consist of working interests in producing oil and gas properties
acquired by National Energy from Blackjack or other independent oil and gas
operators. The Production Payment to be acquired by Trust-A will entitle
Trust- A to receive a specific percentage of the Net Cash Flow from the sale of
oil and gas produced from the Underlying Properties until the Trust has
received generally the total investment made by its Trust Unitholders ("Primary
Sum") as adjusted for potential expenses, interest income on reserves and
general and administrative expenses, plus interest at the rate of 12 1/2% per
annum on the Primary Sum. The Primary Sum will be increased if the Trust
should be compelled for any reason to make payments on account of ownership of
the Production Payment and will be decreased by the amount of interest income
on the Reserve Account in excess of general and administrative expenses, if
any. The net effect of these adjustments is to maintain the Primary Sum at
$500,000. In general, Net Cash Flow equals the gross proceeds received by
National Energy from the sale of production less designated costs, including
transportation and marketing costs, applicable production and property taxes,
operating and development costs. The computation of the Production Payment and
its repayment is more specifically described in the Conveyance.
DESCRIPTION OF UNDERLYING PROPERTIES
National Energy will acquire working interests in properties which are
expected to generate Net Cash Flow in sufficient amounts to repay the
Production Payment in 5 years from a specified percentage of less than 100% of
the Net Cash Flow. The Underlying Properties are expected to be located in
Oklahoma, Texas or Louisiana and may consist of oil production, natural gas
production or a combination of both oil and gas.
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<PAGE> 18
The reserve estimates will be prepared using assumptions required by the
Financial Accounting Standards Board. Such assumptions include the use of
period-end prices for oil and natural gas and period-end costs for estimated
future development and production expenditures to produce the proved reserves.
Future net cash flows are discounted at a 10% per annum rate.
Proved reserve quantities are estimates based on information available,
including prices and costs, at the time of preparation. Such estimates are by
their very nature imprecise and subject to change as additional information
becomes available. The reserve report uses prices for natural gas in effect at
the time the reserve report is prepared. Such prices are influenced by
seasonal demand for natural gas and may not be the most appropriate or
representative prices to use in estimating future revenues or reserve data.
The reserves actually recovered and the timing of production of those reserves
may be substantially different from the estimates. Moreover, the present
values shown in a reserve report should not be considered representative of the
market value of such reserves. A market value determination would include many
additional factors.
RESERVES. National Energy will obtain a reserve report on each
Underlying Property acquired by it. The reserve reports for Underlying
Properties must reflect that the Production Payment is capable of being repaid
in less than the useful life of the properties.
Proved reserve quantities in the reserve reports will be calculated in
accordance with the SEC's guidelines for disclosure of oil and natural gas
reserves and assume that oil and natural gas prices, production expenses and
development costs in effect on the date of the report remain constant over the
economic life of the property. Proved reserve quantities for the Underlying
Properties are calculated by multiplying the net revenue interest applicable to
the Underlying Properties by the total amount of oil and natural gas estimated
to be economically recoverable from the properties. Reserve quantities are
calculated differently for the Production Payment because such interests do not
entitle the Trust to a specific quantity of oil or gas. Proved reserves
attributable to the Production Payment, which are carved out of the Underlying
Properties are calculated by deducting an amount of oil or gas sufficient, if
sold at the prices used in preparing the reserve estimates for the Underlying
Properties, to pay the Primary Sum, as adjusted for interest earned, less
general and administrative expenses, plus interest at an annual rate of 12-1/2%
over a term of 5 years. As oil and natural gas prices vary from those used to
calculate the applicable reserve estimate, more or less quantities of oil and
natural gas are required to pay in full the Production Payment.
The Underlying Properties will be selected for their consistent
production history and for estimated future net revenues in the amounts
sufficient to return $500,000 plus 12.5% per annum in 5 years without depleting
reserves since it is a requirement for production payments that they be paid
solely out of reserves in a period less that the life of the properties as
estimated at the time the production payment is created. The Company does not
intend to acquire any interest in adjacent properties; however, the operator
may acquire or own such an interest. The Trusts would not be entitled to
participate in any other wells in the area as the Production Payment will be
limited to the wells acquired. Oklahoma's spacing laws would prevent the
operator from drilling additional wells which would jeopardize production from
the Underlying Properties. If drainage occurs, the trusts would have legal
rights to damages.
COMPETITION, MARKETS AND REGULATIONS
COMPETITION. The oil and natural gas industry is highly competitive in
all of its phases. National Energy will encounter competition from major oil
and natural gas companies, independent oil and natural gas concerns, and
individual producers and operators. Many of these competitors have greater
financial and other resources than National Energy. Competition may also be
presented by alternative fuel sources, including heating oil and other fossil
fuels.
MARKETS. Where the Underlying Properties consist of royalty or royalty
interests in properties, the operators of the properties will make all
decisions regarding the marketing and sales of oil and natural gas production.
Although National Energy generally has the right to market oil and natural gas
produced from the Underlying Properties that are working interests, National
Energy will generally rely on the operators of the properties to market the
production. There are no purchase agreements in effect with respect to the
sale of oil or
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<PAGE> 19
gas from the Underlying Properties. All production will be sold on the spot
market. The ability of the operators to market the oil and natural gas from
the Underlying Properties will depend upon numerous factors beyond their
control, including the extent of domestic production and imports of oil and
natural gas, the proximity of the natural gas production to gas pipelines, the
availability of capacity in such pipelines, the demand for oil and natural gas
by utilities and other end-users, the effects of inclement weather, state and
Federal regulation of oil and natural gas production and Federal regulation of
natural gas sold or transported in interstate commerce. There is no assurance
that such operators will be able to market all of the oil or natural gas
produced on the Underlying Properties or that favorable prices can be obtained
for the oil and natural gas produced.
The supply of natural gas capable of being produced in the United States
has exceeded demand in recent years as a result of decreased demand for natural
gas in response to economic factors, conservation, lower prices for alternative
energy sources and other factors. As a result of this excess supply of natural
gas, natural gas producers have experienced increased competitive pressure and
significantly lower prices. Many natural gas pipelines have reduced their
takes from producers below the amount they were contractually obligated to take
or pay at fixed prices in excess of spot prices or have renegotiated their
obligations to reflect more market responsive terms. The decline in demand for
natural gas resulted in many pipelines reducing or ceasing altogether their
purchases of new natural gas. National Energy anticipates that natural gas
production will be sold at market responsive prices.
Demand for natural gas production has historically been seasonal in
nature. Due to unseasonably warm weather over the last several years the
demand for natural gas has decreased, resulting in lower prices received by
producers during the winter months than in prior years. Consequently, on an
energy equivalent basis, natural gas has sold at a discount to oil for the past
several years. Such price fluctuations will directly impact Trust
distributions, estimates of Trust reserves and estimated future net revenue
from Trust reserves.
In view of the many uncertainties affecting the supply and demand for
crude oil, natural gas and refined petroleum products, National Energy is
unable to make reliable predictions of future oil and natural gas prices and
demand or the overall effect they will have on the Trust. National Energy does
not believe that the loss of purchasers would have a material adverse effect
on the Trust, since it is anticipated that substantially all of the natural gas
sales from Underlying Properties will be made on the spot market.
REGULATION. The production, transportation and sale of oil and gas from
the Underlying Properties will be subject to Federal and state governmental
regulation, including regulations concerning the ceiling prices at which
certain categories natural gas may be sold, regulation of tariffs charged by
pipelines, taxes, the prevention of waste, the conservation of oil and natural
gas, pollution controls and various other matters. The United States has power
to permit increases in the amount of oil imported from other countries and to
impose pollution control measures.
FEDERAL REGULATION OF NATURAL GAS. The Underlying Properties will be
subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC") and the Department of Energy ("DOE") with respect to various aspects
of oil and natural gas operations including marketing and production of oil and
natural gas. The Natural Gas Act and the Natural Gas Policy Act of 1978
("Policy Act") mandate federal regulation of interstate transportation of
natural gas and of wellhead pricing of certain domestic natural gas, depending
on the category of the natural gas and the nature of the sale. In July 1989,
however, Congress enacted legislation that terminated wellhead price controls
on all domestic natural gas as of January 1, 1993, with price-decontrol
effective immediately for certain gas, and effective for other gas as contracts
expire or are terminated. Natural gas from newly spudded wells was
price-decontrolled on May 15, 1991. In addition, parties may voluntarily agree
in writing, as of July 26, 1989 and thereafter, to effect decontrol of natural
gas.
In April 1992, the FERC issued Order No. 636, which provides for the
fundamental restructuring of interstate pipeline sales and transportation
services. Among other things, Order No. 636 requires interstate pipelines to
"unbundle" their merchant sales functions from their transportation and storage
functions, requires interstate pipelines to assign capacity rights they have on
upstream pipelines to the pipelines' former sales customers and provides for
the recovery by interstate pipelines of costs associated with the pipelines'
transition from providing bundled sales services to providing unbundled
transportation and storage services. In August 1992, the FERC issued
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an Order on Rehearing ("Order No. 636-A"), largely upholding the regulations
and requirements of Order No. 636. While Order Nos. 636 and 636-A would not
directly regulate National Energy's activities, the wide ranging implications
of those orders for the natural gas industry may have an indirect effect on
such activities. Among other things, Order No. 636 may increase transportation
costs and tariffs on interstate pipelines and cause interstate pipelines to
seek to renegotiate or terminate certain of their existing purchase contracts,
but ultimately may enhance gas marketing opportunities and transportation
availability.
Order Nos. 636 and 636-A are subject to further rehearing by the FERC
and court challenges. Although the outcome of these proceedings and the
various individual interstate pipeline restructuring proceedings required by
those Orders cannot be predicted with certainty, National Energy does not
believe the Orders will have an adverse effect on its operations or the Trust.
Nevertheless, the Orders have resulted in a degree of uncertainty with respect
to interstate natural gas sales and transportation because the precise effects
of the Orders will remain unknown for some time.
NO PRICE CONTROLS ON LIQUID HYDROCARBONS. Sales of crude oil,
condensate and natural gas liquids can be made at uncontrolled prices. There
are currently no price controls on crude oil, condensate or natural gas
liquids.
LEGISLATIVE PROPOSALS. In the past, Congress has been very active in
the area of natural gas regulation. Legislation recently enacted repeals
incremental pricing requirements and gas use restraints previously applicable.
There are other legislative proposals pending in the Federal and state
legislatures, which, if enacted, would significantly affect the petroleum
industry. At the present time it is impossible to predict what proposals, if
any, might actually be enacted by Congress or the various state legislatures
and what effect, if any, such proposals might have on the Underlying Properties
and Trust.
STATE REGULATION. Many state jurisdictions have at times imposed
limitations on the production of natural gas by restricting the rate of flow
for natural gas wells below their actual capacity to produce and by imposing
acreage limitations for the drilling of a well. States may also impose
additional regulation of these matters. Most states regulate the production
and sale of oil and natural gas, including requirements for obtaining drilling
permits, the method of developing new fields, the spacing and operation of
wells and the prevention of waste of oil and gas resources. The rate of
production may be regulated and the maximum daily production allowable from oil
and natural gas wells may be established on a market demand or conservation
basis or both.
ENVIRONMENTAL REGULATION
GENERAL. Activities on the Underlying Properties will be subject to
existing Federal, state and local laws and regulations governing environmental
quality and pollution control. It is anticipated that, absent the occurrence
of an extraordinary event, compliance with existing Federal, state and local
laws, rules and regulations regulating the discharge of materials in the
environment or otherwise relating to the protection of the environment will not
have a material effect upon the Trust. National Energy cannot predict what
effect additional regulation or legislation, enforcement policies thereunder,
and claims for damages to property, employees, other persons and the
environment resulting from operations on the Underlying Properties could have
on the Trust.
SOLID AND HAZARDOUS WASTE. Only Underlying Properties which have
produced oil and natural gas for several years will be purchased by National
Energy. National Energy will assure itself that the operators have utilized
operating and disposal practices that are standard in the industry at the time,
hydrocarbons or other solid wastes may have been disposed or released on or
under the Underlying Properties by the current or previous operator. State and
Federal laws applicable to oil and gas wastes and properties have become
increasingly more stringent. Under these new laws, National Energy or an
operator of the Underlying Properties could be required to remove or remediate
previously disposed wastes or property contamination (including groundwater
contamination) or to perform redial plugging operations to prevent future
contamination.
The operators of the Underlying Properties may generate wastes that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes. The Environmental Protection Agency ("EPA"), the
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Oklahoma Corporation Commission and the Texas Railroad Commission have limited
the disposal options for certain hazardous wastes and are considering the
adoption of more stringent disposal standards for nonhazardous wastes.
Furthermore, it is anticipated that additional wastes (which could include
certain wastes generated by oil and gas operations) will be designated as
"hazardous wastes," which are subject to more rigorous an costly disposal
requirements.
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability,
without regard to fault of the legality of the original conduct, or certain
classes of persons that contributed to the release of a "hazardous substance"
into the environment. These persons include the owner and operator of a site
and companies that disposed or arranged for the disposal of the hazardous
substance found at a site. CERCLA also authorizes the EPA and, in some cases,
third parties to take actions in response to threats to the public health or
the environment and to seek to recover from the responsible classes of persons
the costs of such action. In the course of their operations, the operators of
the Underlying Properties have generated and will generate wastes that may fall
within CERCLA's definition of "hazardous substances." National Energy or
operator of the Underlying Properties may be responsible under CERCLA for all
or part of the costs to clean up sites at which such wastes have been disposed.
National Energy has not been named a potentially responsible party in any
action brought under CERCLA.
AIR EMISSIONS. The operators of the Underlying Properties are subject
to Federal, state and local regulations for the control of emissions from
sources of air pollution. Administrative enforcement actions for failure to
comply strictly with air regulations or permits are generally resolved by
payment of a monetary penalty and correction of any identified deficiencies.
Alternatively, regulatory agencies could require the operators to forego
construction or operation of certain air emission sources.
OSHA. The operators of the Underlying Properties are subject to the
requirements of the Federal Occupational Safety and Health Act ("OSHA") and
comparable state statutes. The OSHA hazard communication standard, the EPA
community right-to-know regulations under Title III of the federal Superfund
Amendment and Reauthorization Act, and similar state statutes require an
operator to organize information about hazardous materials used or produced in
its operations. Certain of this information must be provided to employees,
state and local governmental authorities and local citizens.
NATIONAL ENERGY
GENERAL
National Energy was formed as a California corporation in August, 1994.
National Energy's principal executive office is located at 21800 Burbank Blvd.,
Suite 100, Woodland Hills, California 91364, and its telephone number is (800)
201-8666.
BUSINESS
National Energy is a development stage company organized to engage in
the acquisition, exploitation and development of producing properties and
related facilities, the exploration for oil and natural gas and the production,
marketing and transportation of oil and natural gas.
National Energy's offices are located in Woodland Hills, California, in
approximately 1,200 square feet of leased space. National Energy also
maintains a leased field office in Enid, Oklahoma with Blackjack.
MANAGEMENT
The business and affairs of National Energy are controlled by its Board
of Directors which is composed of 1 member. The officers of National Energy
are elected by and serve until their successors are appointed by its Board of
Directors. The directors and executive officers of National Energy are as
follows:
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<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
Marshall J. Field President and Director
</TABLE>
Set forth below is the business experience during the past five years of
the directors and executive officers of National Energy.
Marshall J. Field, age 46, has been President and Director of National
Energy Resources, Inc. since its formation in August, 1994. Mr. Field
currently serves as Chief Executive Officer and President of Marshall Field &
Company under Spectrum Securities. Mr. Field was Executive Vice President of
United California Securities, from June of 1994 to January 1996. From December
1993 until June 1994, Mr. Field was with American Business Securities. From
July 1991 until December 1993 Mr. Field was with Southern California
Securities. He has served as a registered representative in several major
brokerage firms, including Prudential Bache from September 1985 to July 1989
and PaineWebber from July 1989 to July 1991. His background in the industry
spans eighteen years of experience in income investments. Mr. Field has been a
regular on "The Interest Rate Report" on KWHY-TV for the past eight years. Mr.
Field was educated at California State Northridge and Santa Monica College in
California.
EMPLOYEES
National Energy had no employees as of May 28, 1996.
CONSULTANTS
National Energy expects to use the services of F.W. Elton, Inc. to
evaluate properties for acquisition. F. W. Elton is an independent consulting
engineer, performing engineering and some geological duties depending upon the
clients' need and wishes. Mr. Elton has performed mineral valuations for
banks, estate work for attorneys, valuations for producers and royalty owners.
In addition, he does open hole log and sample interpretations; prepares
procedure and cost estimates; supervises drilling, completion and remedial and
day to day production operations. His work has covered Oklahoma, Central and
Southeast Kansas, Northwest Mississippi and a portion of Arkansas. From July
1949 to March 1976 Mr. Elton was employed by Shell Oil Company holding the
position of Petroleum Engineer (1949-1958) and Production Foreman (1958-1976).
Mr. Elton retired from Shell Oil Company in 1976. Mr. Elton has an M.E. Degree
from the Colorado School of Mines, Golden, Colorado. Mr. Elton served in the
United States Air Force from 1942 until 1945, in the Colorado National Guard
from 1946 until 1949 and the Army Reserve Corps of Engineers from 1949 until
1953.
BLACKJACK
Blackjack Oil & Gas, Inc., which may be the operator of the Underlying
Properties from which the Trusts will derive their revenues, is a corporation
formed in 1983 in Oklahoma. It employs six people and operates over 65 wells
in Oklahoma. Blackjack's offices are located at 1633 West Garriott Road, Suite
D, Enid, Oklahoma 73703. Its officers and key employees are:
Gary Foster, age 52. Mr. Foster is the owner of Blackjack and prior to
starting Blackjack in 1983, he was the co-owner of Oil Operating Company and
was an independent oil and gas landman. Mr. Foster received a B.A. degree in
1966 and a M.A. degree in 1972 from the University of Northern Colorado and did
post- graduate study at the University of Northern Colorado, University of
Nebraska and Missouri Western.
Tom Gilbert, age 46. Mr. is the Production Superintendent. He has been
engaged in the oil and gas business for 24 years. Mr. Gilbert was the Area
Manager (Rocky Mountain District) for Pool Well Service from 1986-1994 before
being employed at Blackjack. He worked for various other well service
companies from 1972-1986. He has supervised both the drilling and completion
of wells.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section summarizes the principal Federal income tax consequences of
the ownership and sale of the Trust Units. The laws, regulations, court
decisions and IRS interpretations on which this summary is based are subject to
change by future legislation, regulations or new interpretations by the courts
or the IRS, which could have an adverse effect on the ownership of Trust Units.
National Energy will not request advance rulings from the IRS dealing with the
tax consequences of ownership of Trust Units but will rely on the opinion of
Counsel, Robertson & Williams, Inc., Oklahoma City, Oklahoma, regarding the
classification of the Trust and certain tax consequences described below.
Consummation of the offering is conditioned upon the confirmation of Counsel's
opinion at the time of the closing. Counsel believes that its opinion is in
accordance with the present position of the IRS regarding such trusts. Such
opinion is not binding on the IRS or the courts, however, and no assurance can
be given that the IRS or the courts will agree with such opinion.
CLASSIFICATION AND TAXATION OF THE TRUST
In the opinion of Counsel, under current law, the Trust will be taxable
as a grantor trust and not as an association taxable as a corporation. As a
grantor trust, the Trust will not be subject to tax at the trust level. For
tax purposes, the grantors (in this case, the Trust Unitholders) will be
considered to own the Trust's income and principal as though no trust were in
existence. A grantor trust simply files an information return, reporting all
items of income, credit or deductions which must be included in the tax returns
of the grantors. If, contrary to the opinion of Counsel, the Trust were
determined to be an association taxable as a corporation, it would be treated
as a separate entity subject to normal corporate tax on its taxable income, the
Trust Unitholders would be treated as shareholders, and distribution to Trust
Unitholders would be treated as nondeductible corporate distributions. Such
distributions would be taxable to a Trust Unitholder, first, as dividends to
the extent of the Trust Unitholder's pro rate share of the Trust's deemed
earnings and profits, then as a tax-free return of capital to the extent of his
basis in his Trust Units, and finally as capital gain to the extent of any
excess. In the absence of any legislative change or other development deemed
adverse by the Trustee, the Trustee does not intend to set aside any reserve
for possible Federal income taxes imposed on the Trust.
DIRECT TAXATION OF TRUST UNITHOLDERS
Since the Trust will be treated as a grantor trust for Federal income
tax purposes, each Trust Unitholder will be taxed directly on his pro rata
share of the income of the Trust and will be entitled to claim his pro rata
share of the deductions of the Trust. The income of the Trust will be deemed
to have been received or accrued by the Trust Unitholders at the time such
income is received or accrued by the Trust and not when distributed by the
Trust. Income and expenses of the Trust will be taken into account by Trust
Unitholders consistent with their method of accounting and without regard to
the taxable year or accounting method employed by the Trust.
INTEREST INCOME
Based on representations made by National Energy, the reserves to be
burdened by each Production Payment acquired by a Trust and the expected term
of each Production Payment will be such that the Production Payments will meet
the definition of a "production payment" under Section 636(a) of the Code.
Thus, each Trust Unitholder will be treated as making a mortgage loan on the
Underlying Properties to National Energy in an amount equal to the purchase
price of each Trust Unit less interest on the Reserve Fund.
REPORTING OF TRUST INCOME AND EXPENSES
Unless otherwise advised by Counsel or the IRS, the Trustee intends to
treat the interest portion of each production payment it receives as the
taxable income of the Trust Unitholders of record on the day of receipt (i.e.,
the first business day of each calendar month). Similarly, the Trustee intends
to pay expenses only on the day it receives a production payment and to treat
all expenses paid on a production payment receipt day as the expenses
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of the Trust Unitholder to whom the royalty income received on that date is
distributed. Interest earned on a distribution amount will be treated as
belonging to the Trust Unitholder to whom the distribution amount is paid.
Interest earned on the Reserve Fund will not be distributed and will be
allocated to income. In most cases, therefore, the income and expenses of the
Trust for a period will be reported as belonging to the Trust Unitholder to
whom the distribution is made for such period and the amount of the
distribution for a Trust Unit will equal the net income allocated in respect of
such Trust Unit other than the amount of interest earned on the Reserve Fund.
It is possible that the IRS will attempt to impute income to persons who are
Trust Unitholders when a production payment accrues, to disallow administrative
expenses to persons who are not Trust Unitholders when the expenses are
incurred, or both. If the IRS did attempt to impute such income, an accrual
basis Trust Unitholder might realize royalty income in a tax year earlier than
that reported by the Trustee.
OTHER INCOME AND EXPENSES
It is anticipated that the only other income of the Trust will be
interest income earned on funds held as a reserve for payment of the original
investment by Trust Unitholders on termination of the Trust, or funds held
until the next distribution date. Other expenses of the Trust will include any
state and local taxes imposed on the Trust and administrative expenses of the
Trustee. Although the issue has not been definitely resolved, Tax Counsel
believes that all or substantially all of such expenses are deductible in
computing adjusted gross income and, therefore, are not the type of
miscellaneous itemized deductions that are allowable only to the extent that
the aggregate of such deductions exceeds 2% of adjusted gross income.
NON-PASSIVE ACTIVITY INCOME AND LOSS
The income and expenses of the Trust will not be taken into account in
computing the passive activity losses and income under Code Section 469 for a
Trust Unitholder who acquires and holds Trust Units as an investment.
SALE OF TRUST UNITS
Generally, a Trust Unitholder will realize gain or loss on the sale or
exchange of his Trust Units measured by the difference between the amount
realized on the sale or exchange and his adjusted basis for such Trust Units.
Gain or loss on the sale of Trust Units by a Trust Unitholder who is not a
dealer with respect to such Trust Units and who has a holding period for the
Trust Units of more than one year will be treated as long-term capital gain or
loss. A Trust Unitholder's basis in his Trust Units will be equal to the
amount paid for such Trust Units pursuant to this offering or pursuant to
market transactions. It is possible that the IRS would take the position that
a portion of the sales proceeds is ordinary income to the extent of any accrued
income at the time of sale allocable to the Trust Units sold, but which is not
distributed to the selling Trust Unitholder.
BACKUP WITHHOLDING
In general, distributions of Trust income will not be subject to "backup
withholding" unless: (i) the Trust Unitholder is an individual or other
noncorporate taxpayer and (ii) such Trust Unitholder fails to comply with
certain reporting procedures.
REGISTRATION PROVISION
Tax shelter offerings must register with the Service on a form which
includes a brief description of the tax shelter and the promoter. National
Energy believes the Trusts are not tax shelters for the purpose of this
registration requirement.
Ownership of the Production Payment by the Trust may subject Trust
Unitholders to tax in states in which the Underlying Properties are located as
well as the state in which a Trust Unitholder resides or is domiciled.
Prospective Trust Unitholders should consult their own tax advisors regarding
the impact of state and local taxes on their proposed investments.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on pension, profit-sharing and other
employee benefit plans to which it applies ("Plans"), and contains standards on
those persons who are fiduciaries with respect to such Plans. In addition,
under the Code, there are similar requirements and standards which are
applicable to certain Plans and individual retirement accounts (whether or not
subject to ERISA) (collectively, together with Plans subject to ERISA, referred
to herein as "Qualified Plans").
A fiduciary of a Qualified Plan should carefully consider fiduciary
standards under ERISA regarding the Plan's particular circumstances before
authorizing an investment in Trust Units. A fiduciary should first consider
(i) whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA, (ii) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA and (iii) whether
the investment is in accordance with the documents and instruments governing
the Plan as required by Section 404(a)(1)(D) of ERISA.
In order to avoid the application of certain penalties, a fiduciary must
also consider whether the acquisition of Trust Units and/or operation of the
Trust might result in direct or indirect nonexempt prohibited transactions
under Section 406 of ERISA and Code Section 4975. In determining whether there
are such prohibited transactions, a fiduciary must determine whether these are
"plan assets" involved in the transaction. On November 13, 1986, the
Department of Labor published final regulations (the "DOL Regulations")
concerning whether or not a Qualified Plan's assets (such as a Trust Unit)
would be deemed to include an interest in the underlying assets of an entity
(such as the Trust) for purposes of the reporting, disclosure and fiduciary
responsibility provisions of ERISA and analogous provisions of the Code, if the
Plan acquires an "equity interest" in such entity. The DOL Regulations provide
that the underlying assets of an entity will not be considered "plan assets" if
the interests in the entity are a publicly offered security. Trust Units are
considered to be "publicly offered" for this purpose if they are part of a
class of securities that is (i) widely held (i.e., owned by more than 100
investors independent of the issuer and each other), (ii) freely transferable,
and (iii) registered under Section 12(b) or 12(g) of the Exchange Act.
Fiduciaries, will need to determine whether the acquisition of Trust Units is a
nonexempt prohibited transaction under the general requirements of ERISA
Section 406 and Code Section 4975.
Due to the complexity of the prohibited transaction rules and the
penalties imposed upon persons involved in prohibited transactions, it is
important that potential Qualified Plan investors consult with their counsel
regarding the consequences under ERISA and the Code of their acquisition and
ownership of Trust Units.
DESCRIPTION OF THE TRUST AGREEMENT
The following information and the information set forth under
"Description of the Trust Units" are subject to the detailed provisions of the
Trust Agreement between National Energy and Boatmen's Trust Company which acts
as Trustee for the Trust. The following is a general description of the basic
framework of the Trust, and is qualified by the detailed provisions concerning
the Trust set forth in the Agreement, a copy of which was filed as an exhibit
to the Registration Statement. See "Available Information." For a description
of the fiduciary responsibility of the Trustee, including remedies available
for the breach of these duties, see "-- Fiduciary Responsibility and Liability
of the Trustee," below.
CREATION AND ORGANIZATION OF THE TRUST; AMENDMENTS
Pursuant to the Conveyances, the Production Payments will be conveyed by
National Energy to the Trust in exchange for net proceeds from this offering.
The Trust Units are being offered by Trust-A pursuant to this Prospectus and by
Prospectus Supplements relating to Trusts yet to be formed for the remaining
Trust Units.
The Trust will be created under Oklahoma law pursuant to the terms of
the Agreement to acquire and hold the Production Payment for the benefit of the
Trust Unitholders. The Production Payment is passive in nature and
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the Trustee will have no control over and no responsibility for costs relating
to the operation of the Underlying Properties. Neither National Energy nor the
operators of the Underlying Properties have any contractual commitments to the
Trust to conduct further drilling on the Underlying Properties nor to maintain
their ownership interest in any of such properties. For a description of the
Underlying Properties and other information relating to such properties, see
"Production Payment and the Underlying Properties."
The beneficial interest in the Trust-A is divided into 500 Trust Units,
which represent equal undivided portions. For additional information
concerning the Trust Units, see "Description of the Trust Units."
The Agreement may be amended by a vote of holders of a majority of the
Trust Units. No provision of the Agreement, however, may be amended that would
increase the power of the Trustee to engage in business or investment
activities or to alter the rights of the Trust Unitholders as among themselves.
ASSETS OF THE TRUST
The only assets of the Trust, other than cash and temporary investments
being held for the payment of expenses, and for distribution to the Trust
Unitholders, are the Reserve Funds and the Production Payments. See "The
Production Payments and the Underlying Properties."
DUTIES AND LIMITED POWERS OF THE TRUSTEE
The duties of the Trustee are specified in the Agreement and by the laws
of Oklahoma. The basic duties of the Trustee are to collect income
attributable to the Production Payment to pay out of the Trust's income and
assets all expenses, charges and obligations and to distribute the
distributable income to the Trust Unitholders. The Trustee is authorized to
take such action as in its judgment is necessary or advisable to best achieve
the purposes of the Trust.
After payment of or provision for Trust expenses and obligations, the
Trustee will make semi-annual distributions to the Trust Unitholders of certain
proceeds received from the Production Payments to pay the interest portion and
reserve the balance in a Reserve Fund to repay the Trust Unit investment amount
at the termination of the Production Payment. The Trustee will submit periodic
financial reports to the Trust Unitholders as described under "Description of
the Trust Units -- Periodic Reports."
The Agreement provides that cash being held by the Trustee as a reserve
for liabilities, the Reserve Fund, or for distribution at the next distribution
date will be invested in interest-bearing obligations of the United States
government, agreements secured by such obligations or certificates in certain
banks or similar investment grade securities which may be recommended by
National Energy, but the Trustee is otherwise prohibited from acquiring any
asset other than the Production Payments or engaging in any business or
investment activity of any kind whatsoever.
In the event the Trustee determines it to be in the best interest Trust
Unitholders, the Trustee may sell or dispose of all or any part of the
Production Payments only as authorized by a vote of holders of a majority or
more of the Trust Units, or upon termination of the Trust. However, the
Trustee is directed to effect such a sale (without any such vote) if National
Energy exercises the option to repurchase the Production Payment after 2 years
from the date of formation of the Trust. Any such sale must be for cash and
the Trustee must distribute the net proceeds of such sale to the Trust
Unitholders.
The Agreement also provides that in the event of certain judicial or
administrative proceedings seeking the cancellation or forfeiture of any
property included in the Underlying Properties or asserting the invalidity of
or otherwise challenging the Production Payments held by the Trust because of
the nationality, or any other status, of any one or more Trust Unitholders, the
Trustee will have the right to require such holder to dispose of his Trust
Units, and if such person fails to dispose of his Trust Units, the Trustee will
have the right to purchase such Trust Units.
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To achieve the purposes of the Trust, the Trustee is also authorized to
agree to modifications of the terms of the Conveyances or to settle disputes
with respect thereto, so long as such modifications or settlements do not alter
the nature of the Production Payments as to rights to receive a share of the
proceeds of oil or natural gas produced from the Underlying Properties, free of
any expense or other cost.
LIABILITIES OF THE TRUST
Because of the passive nature of the Trust assets and the restrictions
on the power of the Trustee to incur obligations, it is anticipated that the
only liabilities the Trust will incur will be those for routine administrative
expenses, such as the Trustee's fees, clerical expenses and accounting, legal
and other professional fees.
FIDUCIARY RESPONSIBILITY AND LIABILITY OF THE TRUSTEE
The Trustee is a fiduciary with respect to the Trust Unitholders and
under Oklahoma law, the Trustee is required to act in the best interests of the
Trust Unitholders at all times and to exercise the judgment and care in
supervising and managing the Trust's assets exercised by persons of ordinary
prudence, discretion and intelligence. Under Oklahoma law, the Trustee's
duties to the Trust Unitholders are similar to the duties of a director of a
corporation to the shareholders of the corporation, except that the legal
presumption protecting business decisions made by directors from challenge,
generally referred to as the business judgment rule, is inapplicable to
decisions by the Trustee.
Due to the passive nature of the Trust, the Trustee is not expected to
make business decisions affecting the assets of the Trust. Therefore,
substantially all of the Trustee's functions under the Trust Agreement are
anticipated to be ministerial in nature. See " -- Duties and Limited Powers of
the Trustee," above. Under Oklahoma law, the Trustee may not profit from any
transaction with the Trust except that the Trust Agreement permits the Trustee
to charge for its services as trustee and as transfer agent (see "--
Compensation of the Trustee"), to retain funds to pay anticipated future
expenses and to deposit such funds with the Trustee and to borrow funds at
commercial rates from the Trustee to pay expenses of the Trust. The Trustee
will also be entitled to receive reimbursement of out-of-pocket expenses
incurred in administering the Trust.
In discharging its fiduciary duty to the Trust Unitholders, the Trustee
may act in its discretion and shall be personally or individually liable to the
Trust Unitholders only for fraud or acts or omissions constituting bad faith
and will not be liable for any act or omission of any agent or employee of the
Trustee unless the Trustee has acted in bad faith in the selection and
retention of such agent or employee. The Trustee will be indemnified for any
liability, expense, claim, damage or other loss incurred by it individually or
as Trustee in the administration of the Trust or for any act or omission on
account of it being Trustee, unless resulting from fraud or bad faith, and the
Trustee will have a lien upon the assets of the Trust as security for such
indemnification and reimbursement and for compensation to be paid to the
Trustee. The Trustee shall not be entitled to indemnification from Trust
Unitholders. See "Description of the Trust Units -- Liability of Trust
Unitholders." The Trustee is required to ensure that all contractual
liabilities of the Trust are limited to the assets of the Trust and will be
liable to the Trust Unitholders if it fails to do so.
Under Oklahoma law, if the Trustee, in bad faith, were to fail to
collect amounts owed to the Trust or distribute cash held by the Trust for
distribution, or otherwise, in bad faith, take or omit to take any action that
is in the best interest of the Trust Unitholders, the Trustee would be liable
to the Trust Unitholders for damages caused by any such act or omission,
including any loss or depreciation in value of the Trust Assets or failure to
make a profit from such assets caused by such act or omission. Oklahoma law
permits Trust Unitholders to file an action seeking other remedies for such
acts or omissions in addition to damages, including removal of the Trustee,
specific performance, appointment of a receiver, an accounting by the Trustee
to the Trust Unitholders, exemplary damages and other remedies. The
availability of these remedies provided by Oklahoma law is explicitly
incorporated into the Agreement. Under the Agreement, the Trustee may be
removed by the Trust Unitholders, with or without cause, by the affirmative
vote of the holders of a majority of the Trust Units.
25
<PAGE> 28
RESERVE FUND
The Agreement requires the Trustee to establish a Reserve Fund for that
portion of the payments received from the Production Payment which are
allocable to the repayment of the Primary Sum or principal amount. The Trustee
may also set aside sums in the Reserve Fund for contingent or future expenses
of the Trust or the Trustee or to fund any account. The amounts included in
the Reserve Fund are to be invested in U. S. government obligations,
certificates of deposit of any bank having capital, surplus and undivided
profits in excess of $100,000,000, including the bank affiliated with the
Trustee or similar investment grade securities which may be recommended by
National Energy to the Trustee.
Upon termination of the Trust, the Reserve Fund, after payment of Trust
liabilities, if any, will be distributed to the Unitholders as a return of
their initial contributions.
DURATION OF THE TRUST; SALE OF PRODUCTION PAYMENT
The Trust will be terminated upon payment in full of the Production
Payment or the sale by the Trust of all or substantially all of the Production
Payments, which sale may be effected only as described under "-- Duties and
Limited Powers of the Trustee," above. The Trust may also be terminated by a
vote of holders of a majority or more of the Trust Units outstanding or upon
operation of the provisions of the Agreement intended to permit the Trust to
comply with the "rule against perpetuities." Upon termination of the Trust,
the Trustee will sell for cash in one or more sales (which may be public
auctions) all of the assets then constituting the Trust estate. After paying
all liabilities of the Trust and establishing any reserves that the Trustee
deems appropriate for contingent liabilities, the Trustee will distribute the
proceeds of such sales and any other cash in the Trust estate to Trust
Unitholders according to their respective interests. The Trustee will not be
required to obtain approval of Trust Unitholders prior to conducting any sales
upon termination of the Trust.
The Trustee may cause the sale of the Production Payment held by a Trust
if the holders of a majority or more of the Trust Unitholders of that Trust
approve such sale or if National Energy exercises its option to repurchase the
Production Payment at any time after 2 years from the formation of the Trust.
The net proceeds of such sale will be distributed to the Trust Unitholders.
Sale of the Production Payment will terminate the Trust.
COMPENSATION OF THE TRUSTEE
The Agreement provides that the Trustee will be compensated for its
services, out of the Trust assets, in an annual amount of Twelve Hundred
Dollars ($1200.00). The Trustee will also be entitled to reimbursement for its
out-of- pocket expenses.
MISCELLANEOUS
The Agreement provides that the Trustee may, but is not required to,
consult with counsel (which may be counsel to National Energy or its
successors), accountants, geologists, engineers and other parties deemed by the
Trustee to be qualified as experts on the matters submitted to them, and the
Trustee will be authorized and protected with respect to any action taken or
suffered by the Trustee in good faith in reliance upon and in accordance with
the opinion of any such party.
DESCRIPTION OF THE TRUST UNITS
GENERAL
National Energy is the sponsor of a series of trusts offering up to
6,000 units of beneficial interests ("Trust Units"). The Trust Units will be
issued on the Closing Date of each Trust. Each Trust Unit represents an
undivided share of beneficial interest in a National Energy Trust and entitles
its holder to the same rights as the holder of any other Trust Unit in that
Trust. Trust-A will be the first trust formed and will have 500 Trust Units
outstanding. Each Trust will offer a minimum of 500 Trust Units for a possible
total of 12 grantor trusts to be formed during the 12 month period following
the effective date of registration of the Trust Units.
26
<PAGE> 29
DISTRIBUTIONS AND INCOME COMPUTATIONS
The amount received each month by the Trustee on behalf of Trust-A will
be a specific percentage of the Net Cash Flow from the Underlying Properties.
Of this amount, $62,500.00 will be allocated to interest earned on the
Production Payment, one-half of which will be distributed to Trust Unitholders
semi-annually. Excess will be allocated to the repayment of the Primary Sum
and will be added to the Reserve Fund. If at the end of any 12 month period
following the date of the Conveyance of Production Payment the Reserve Fund
does not meet or exceed a specified amount necessary to amortize the Primary
Sum over 5 years, the percentage of Net Cash Flow will increase to 100% until
the Reserve Fund meets or exceeds the required amount.
Unless otherwise advised by counsel or the IRS, the income and expense
of the Trust for each Semi-Annual Period will be reported by the Trustee for
tax purposes as belonging to the Trust Unitholders of record on the Semi-Annual
Record Date, to whom the Semi-Annual Distribution Amount for that Semi-Annual
Period will be distributed. The income and expense will be recognized by the
Trust Unitholders for tax purposes in the Semi-Annual Period received or paid
by the Trust, rather than in the Semi-Annual Period distributed by the Trust.
Net income, apart from any depletion to which a Trust Unitholder may be
entitled, is expected to be essentially the same as the Semi-Annual
Distribution Amount. However, there will be variances because of the
establishment of the Reserve Fund and the possibility that, for example, a
reserve will be established in one Semi-Annual Period that will not give rise
to a tax deduction until a subsequent Semi-Annual Period or an expenditure paid
in one Semi-Annual Period will have to be amortized for tax purposes over
several monthly periods. See "Federal Income Tax Consequences."
TRANSFER OF TRUST UNITS
Trust Units will be transferable on the records of the Trustee upon the
surrender of any Certificate in proper form for transfer as required by the
Trustee. No service charge will be made to the transferor or transferee for
any transfer of a Trust Unit, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with such transfer. Until any such transfer, the Trustee may treat
the owner of any Trust Unit as shown by its records as the owner of the Trust
Units evidenced thereby and the Trustee shall not be charged with notice of any
claim or demand respecting such Certificate or the interest represented thereby
by any other party. Any such transfer of a Trust Unit shall, as to the
Trustee, transfer to the transferee as of the close of business on the date of
transfer, all right, title and interest of the transferor in and to the Trust;
provided, that a transfer of a Trust Unit after any Monthly Record Date shall
not transfer to the transferee the right of the transferor to the Monthly
Distribution Amount relating to such date. As to matters affecting the title,
ownership, warranty or transfer of the Certificates and the Trust Units
represented thereby, the law from time to time in force in the State of
Oklahoma with respect to the transfer of securities shall govern.
PERIODIC REPORTS
The Trustee will mail to the Trust Unitholders of record as of a date to
be selected by the Trustee an annual report containing audited financial
statements of the Trust.
The Trustee will file such returns for Federal income tax purposes as in
its judgment are required to comply with applicable law, and the Trustee will
prepare and mail to the Trust Unitholders annually such reports as may be
necessary to permit each Trust Unitholder to report correctly his share of the
income and deductions of the Trust. The Trustee intends to treat all income
and deductions recognized during each Semi-Annual Period as having been
recognized by holders of record on the last business day of such Semi-Annual
Period unless otherwise advised by counsel or the IRS.
Each Trust Unitholder and his duly authorized agents and attorneys shall
have the right during reasonable business hours to examine and inspect records
of the Trust and the Trustee including a list of the Trust Unitholders.
27
<PAGE> 30
LIABILITY OF TRUST UNITHOLDERS
The Trustee is under a duty not to incur any liability without ensuring
that such liability will be satisfied only out of the Trust assets (regardless
of whether the assets are adequate to satisfy the liability) and in no event
out of amounts distributed to, or other assets owned by, Trust Unitholders.
However, under the law of Oklahoma, it is unclear whether a Trust Unitholder
would be jointly and severally liable for any liability of the Trust in the
event that the following conditions were to occur: (a) the satisfaction of
such liability was not by contract limited to the assets of the Trust; and (b)
insurance proceeds and the assets of the Trust or Trustee were insufficient to
discharge such liability. National Energy believes that because of the value
and passive nature of the Trust assets and the restrictions on the power of the
Trustee to incur liabilities, the imposition of any liability on a Trust
Unitholder is remote.
VOTING RIGHTS OF TRUST UNITHOLDERS
While Trust Unitholders will have certain voting rights, such rights
differ from and are more limited than those of stockholders of most public
corporations. For example, there is no requirement for annual meetings of
Trust Unitholders or for annual or other periodic reelection of the Trustee.
Meetings of Trust Unitholders may be called by the Trustee and the Trust
Unitholders owning not less than 10% of the Trust Units outstanding may direct
the Trustee to call a meeting. All such meetings must be held in Encino,
California, and written notice setting forth the time and place of such meeting
and the matters proposed to be acted upon shall be given not more than 60 days
nor less than 20 days before such meeting to all of the Trust Unitholders of
record. The presence in person or by proxy of Trust Unitholders representing a
majority of the Trust Units outstanding is necessary to constitute a quorum.
Unless otherwise required by the Trust Indenture, any matter shall be deemed to
have been approved by the Trust Unitholders if it is approved by the vote of a
majority in interest of such Trust Unitholders constituting a quorum, although
less than a majority of the Trust Units then outstanding. Each Trust
Unitholder shall be entitled to one vote for each Trust Unit owned by such
holder.
The Trustee may be removed, with or without cause, by a vote of the
holders of a majority of the outstanding Trust Units. The following matters
require the affirmative vote of the holders of a majority of the outstanding
Trust Units: (i) the termination of the Trust; (ii) the amendment of the Trust
Indenture; and (iii) the approval of the sale of all or any part of the assets
of the Trust.
The sale of all or any part of the assets of the Trust requires the
prior consent of the Trustee except in connection with the termination of the
Trust.
PLAN OF DISTRIBUTION
COMMISSIONS
Trust Units will be offered on a best efforts basis by a group of member
firms of the National Association of Securities Dealers, Inc. (the "NASD"),
(such member firms hereafter are referred to as "Soliciting Dealers") which
will be selected by National Energy. Each Soliciting Dealer will receive from
the Trust a commission of up to 8% of the purchase price of Trust Units sold by
such Soliciting Dealer on the Closing Date.
28
<PAGE> 31
INDEMNIFICATION
National Energy, the Trust and the Soliciting Dealers have agreed to
indemnify each other against certain civil liabilities, including liabilities
arising under the 1933 Act.
SUBSCRIPTION PROCEDURES AND PAYMENTS
Persons intending to subscribe should send one signed Subscription
Agreement with the number of Trust Units desired indicated thereon to Boatmen's
Trust Company, Escrow Agent, at P. O. Box 25189, Oklahoma City, Oklahoma 73125-
0189, Attn: Corporate Trust Department, together with a check in the full
amount subscribed payable to Boatmen's Trust Company, Escrow Agent." A
subscription will be binding and enforceable upon a subscriber if within 15
days after the Escrow Agent's receipt of the Subscription Agreement, National
Energy evidences its acceptance by countersigning said Subscription Agreement.
National Energy will not knowingly accept subscriptions from persons who fail
to meet the suitability standards. See "Plan of Distribution -- Suitability
Standards." Each subscription payment will be held by the Escrow Agent in a
trust account until either (1) deposited to the account of the Trust on the
Closing Date or (2) promptly refunded to the subscriber with any interest
earned thereon should it be determined that the offering will not be
consummated.
SUITABILITY STANDARDS
The investment offered hereby represent a long-term investment without
liquidity, which investment involves significant risks, and should be
considered only by persons with substantial financial means who have no need
for liquidity in this investment.
A potential investor will be required to furnish information in the
Subscription Agreement sufficient to satisfy National Energy that the
investment is suitable in light of his or her other security holdings and
financial situation and needs, and that her or she, has such knowledge and
experience in financial and business matters that he or she is capable of
evaluating the merits and risks of the proposed investment.
A potential investor must be able to represent that he or she: (i) has a
net worth of at least $225,000 (exclusive of home, home furnishings and
personal automobiles); or (ii) has a net worth of $75,000 (exclusive of home,
home furnishings and personal automobiles) and has and anticipates that he or
she will continue to have, in the future, annual taxable income of $75,000 or
more, without regard to any taxable income which may be generated by the
investment in the Trust and that the investment will not exceed 10% of his or
her net worth.
VALIDITY OF SECURITIES
The validity of the Trust Units offered hereby will be passed upon for
National Energy by Robertson & Williams, an Oklahoma Professional Corporation.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Museck & Museck, independent accountants, as stated in their reports
appearing herein, and have been so included in reliance upon such reports given
upon the authority of that firm as experts in accounting and auditing.
29
<PAGE> 32
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NATIONAL ENERGY RESOURCES, INC.
Independent Auditor's Report . . . . . . . . . . . . . . . . . . F-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statement of Operations . . . . . . . . . . . . . . . . . . . . . F-3
Statement of Stockholders' Equity . . . . . . . . . . . . . . . F-4
Statement of Retained Earnings . . . . . . . . . . . . . . . . . . F-5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . F-7
</TABLE>
30
<PAGE> 33
MUSECK & MUSECK
Joseph E. Museck PA Accounting & Consulting Services David J. Museck CPA
3 Academy Street
New Providence, NJ 07974
(908) 464-8745 (908) 464-8414
FAX (908) 665-7934
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
National Energy Resources, Inc.
We have audited the accompanying balance sheet of National Energy Resources,
Inc. (a development stage company) as of July 31, 1995 and 1996, and the
related statements of income, retained earnings, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Energy Resources as
of July 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
New Providence, New Jersey
October 5, 1996
F-1
<PAGE> 34
NATIONAL ENERGY RESOURCES, INC.
(A Development Stage Company)
AUDITED FINANCIAL STATEMENTS
July 31, 1995 & 1996
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, July 31,
1995 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH $ 420 $ 4,235
-------- --------
TOTAL CURRENT ASSETS 420 4,235
PROPERTY AND EQUIPMENT, NET 0 1,900
INTANGIBLE ASSETS, NET 5,358 4,145
DEFERRED ISSUE COSTS 19,050 28,239
TOTAL ASSETS $ 24,828 $ 38,519
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 10,319 $ 0
ACCRUED CORPORATION TAX 800 800
ACCRUED INTEREST EXPENSE 0 2,364
-------- --------
TOTAL CURRENT LIABILITIES 11,119 3,164
LONG TERM LOAN, SHAREHOLDERS 14,217 40,457
-------- --------
TOTAL LIABILITIES 25,336 43,621
STOCKHOLDERS' EQUITY:
COMMON STOCK 1,000 1,000
RETAINED EARNINGS - (DEFICIT) (1,508) (6,102)
TOTAL STOCKHOLDERS' EQUITY (508) (5,102)
TOTAL LIABILITIES AND EQUITY $ 24,828 $ 38,519
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 35
NATIONAL ENERGY RESOURCES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
July 31, July 31,
1995 1996
--------- --------
<S> <C> <C>
REVENUE $ 0 $ 0
--------- --------
GENERAL/ADMINISTRATIVE EXPENSES
AMORTIZATION 708 1,213
DEPRECIATION 100
INTEREST 2,373
STATE FILING FEE 108
STATE CORPORATION FEE 800 800
--------- --------
TOTAL GENERAL & ADMIN. EXPENSE 1,508 4,594
NET LOSS $ (1,508) $ (4,594)
========= ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE> 36
NATIONAL ENERGY RESOURCES, INC.
STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------
Number of
Shares Value
--------- -------
<S> <C> <C>
Date of Incorporation, August 8, 1994 -0- $ -0-
Shares Issued for Cash on August 15, 1994 1,000 1,000
----- ------
Balance at July 31, 1995 1,000 1,000
----- ------
Balance at July 31, 1996 1,000 1,000
----- ------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE> 37
NATIONAL ENERGY RESOURCES, INC.
STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
July 31, July 31,
1995 1996
-------- --------
<S> <C> <C>
RETAINED EARNINGS - AUGUST 1 $ -0- $ (1,508)
NET LOSS FOR YEAR ENDED (1,508) (4,594)
RETAINED EARNINGS - JULY 31 (DEFICIT) $ (1,508) $ (6,102)
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE> 38
NATIONAL ENERGY RESOURCES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
July 31, July 31,
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME, PER INCOME STATEMENT $ (1,508) $ (4,594)
ADD:
DEPRECIATION 0 100
AMORTIZATION 708 1,213
INCREASE IN ACCOUNTS PAYABLE 10,319 0
INCREASE IN CURRENT LIABILITIES 800 2,364
-------- --------
DEDUCT:
DECREASE IN ACCOUNTS PAYABLE 0 (10,319)
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES 10,319 (11,236)
CASH FLOW FROM INVESTING ACTIVITIES:
LESS: CASH PAID-EQUIPMENT & ASSETS 6,066 2,000
NET CASH FLOW USED FOR INVESTING (6,066) (2,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
ADD:
INCREASE IN STOCKHOLDERS 14,217 26,240
INCREASE IN COMMON STOCK 1,000 0
DEDUCT:
INCREASE IN OTHER ASSETS (19,050) (9,189)
NET CASH FLOW PROVIDED BY FINANCING
ACTIVITIES (3,833) 17,051
INCREASE IN CASH 420 3,815
CASH AT THE BEGINNING OF THE YEAR 0 420
CASH AT THE END OF THE YEAR $ 420 $ 4,235
======== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE> 39
NATIONAL ENERGY RESOURCES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
National Energy Resources, Inc. (the Company) was incorporated under the laws
of the State of California on August 8, 1994. The Company is considered to be
in the development stage as defined in Financial Accounting Standard No. 7.
National Energy Resources, Inc. intends to be in the business of purchasing
producing oil and gas properties and the rights to a specified share of the
production revenues from the minerals in place.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
Accounting records of the Company and financial statements are maintained and
prepared on the accrual basis.
Year-End
The Company's year-end for financial reporting and tax purposes is July 31.
Cash Equivalents
For financial statement purposes, with respect to the Statement of Cash Flows,
cash equivalents include time deposits and all highly liquid instruments with
original maturities of three months or less. The amount included on the
Company's Statement of Cash Flows is comprised exclusively of cash.
Income Tax
The Company, with the consent of its shareholders, has elected to be taxed as
"C" corporation for Federal and State purposes. Federal and State taxes have
been accrued.
Deferred Issue Costs
Direct costs incurred to register and issue the secured notes are deferred and
amortized to interest expense over the lives of the loans using the actuarial
method.
Organizational Cost
Direct costs incurred to set up the Corporation are capitalized and amortized
over a sixty month period beginning January 1, 1995.
Depreciation
Fixed assets consist of computer equipment. Depreciation is provided on the
straight line method over the estimated useful life (5 years) of the asset.
SEE NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE> 40
NOTE C - STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000 shares of common stock at $1 par
value. On July 31, 1995 and July 31, 1996, there were 1,000 shares of common
stock issued and outstanding.
The holders of the common stock are entitled to one vote per share on all
matters to be voted on by shareholders.
NOTE D - CONTRACT TO PURCHASE OIL AND GAS PROPERTIES
The Company has entered into a $430,000 contract with Blackjack Oil and Gas,
Inc. for the purchase of six producing gas wells which have well-established
production histories and are operated by Blackjack. Both parties are bound by
the contract.
NOTE E - PROPOSED TRUST UNIT OFFERING
The Company intends to offer a total of 6,000 trust units in the principle
amount of $1,000 each. The trust units will bear a rate of return from 12% to
14% per annum, payable semi-annually. The notes will be secured by the oil and
gas properties acquired with the proceeds of the offering and by the production
revenues. The trust units are designed to pay back the trust unitholders their
original investment in five years and may be terminated at any time after two
years from the closing date upon the payment to the trust unitholders of 100%
of their original investment.
The trust units are being offered on a "best-effort" basis. There is a
$500,000 minimum offering for the units per trust.
NOTE F - LOANS FROM OFFICERS/SHAREHOLDERS
Amounts due to officers/shareholders at July 31, 1995 and July 31, 1996 of
$14,217 and $40,457, bear interest at 8% per annum. Included in accrued
expenses is interest payable to officers/stockholders of $2,364 at July 31,
1996. The officers/shareholders have agreed not to demand repayment of the
loans for the period of five years starting on August 8, 1994, the date of
inception.
SEE NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE> 41
EXHIBIT A
SUBSCRIPTION AGREEMENT
NATIONAL ENERGY RESOURCES TRUST SERIES
The undersigned hereby subscribes for, and if accepted by National
Energy Resources, Inc. (the "Sponsor"), in its capacity as Sponsor of the
grantor trust indicated below (the "Trust"), agrees to purchase that certain
dollar amount indicated below of Trust Units at $1,000 per Trust Unit.
Enclosed please find my check in the amount specified on Page B-3 of this
Subscription Agreement made payable to "Boatmen's Trust Company, Escrow Agent
for the Trust." Defined terms used and not defined herein shall have the
meaning assigned to such terms in the Prospectus dated October ___, 1996, as
amended and supplemented from time to time, for the National Energy Resources
Trust Series (the "Prospectus"). With respect to this purchase, being aware
that a broker may sell to me only if I qualify according to the express
standards stated herein and in the Prospectus, I hereby:
INITIAL
________ (a) Acknowledge that I have received a copy of the Prospectus
for the Trust.
________ (b) Represent that I have either (a) a minimum annual gross
income of $75,000 without regard to any taxable income which may
be generated by the investment in the Trust and a minimum net
worth of $75,000 (exclusive of home, home furnishings and
automobiles); or (b) a minimum net worth of $225,000 (exclusive
of home, home furnishings and automobiles) and the investment
will not exceed 10% of my net worth.
________ (c) Except as set forth in (d) below, represent that I am
purchasing for my own account and will be sole party in interest
with respect to the acquired Trust Units and will have all legal,
beneficial and equitable rights in such Trust Units.
________ (d) If a fiduciary, represent that (i) I am purchasing for a
person or entity having the appropriate income and/or net worth;
or (ii) if I am the donor of the funds for investment in a Trust,
I have the appropriate income and/or net worth specified in this
Subscription Agreement.
________ (e) Certify that the number shown as my Social Security or
Taxpayer Identification Number on the signature page is correct
and that I am not subject to backup withholding under the Code.
________ (f) Represent that I have the right, power and authority to
enter into this Subscription Agreement, the Trust Agreement, to
become a Trust Unitholder and to perform my obligations
thereunder.
________ (g) Agree that my completion and execution of this Subscription
Agreement also constitutes my execution of the Trust Agreement,
and if this Subscription is accepted by the Sponsor in its sole
discretion, I will become a Trust Unitholder of the Trust and
will be bound by the terms and provisions of the Trust Agreement
of that Trust.
________ (h) Agree that the Sponsor in its sole and absolute discretion
shall have the right not to form the Trust and to terminate the
offering of Trust Units therein at any time and to reject this
subscription.
________ (i) Agree that the foregoing representations, warranties and
agreements shall remain true and accurate during the term of the
Trust, and I will neither take action nor permit action to be
taken which would cause any of them to become untrue or
inaccurate. In the event that I become aware that any such
representation, warranty or agreement has become untrue or
inaccurate at any time, I shall immediately notify the Sponsor
and provide the Sponsor with such other information and
statements and grant to the Sponsor such power of attorney as the
Sponsor may request.
A-1
<PAGE> 42
________ (j) Acknowledge that it is anticipated that there will not be
any market for resale of the Trust Units hereby and that
assignment of such Trust Units is subject to certain restrictions
described in "Description of Trust Units -- Transfer of Trust
Units" in the Prospectus; accordingly, the investment subscribed
to hereby is not liquid.
________ (k) Represent that I am prepared to bear the risks attendant
with the investment subscribed to hereby for an indefinite period
of time.
THE UNDERSIGNED MUST INITIAL EACH OF THE ABOVE REPRESENTATIONS IN THE
SPACE PROVIDED.
NOTHING HEREIN SHALL BE DEEMED A WAIVER OF ANY RIGHTS OF ACTION WHICH I
MAY HAVE UNDER ANY APPLICABLE FEDERAL OR STATE SECURITIES LAWS.
(1) The NASD requires the Soliciting Dealer or registered
representative to inform potential investors of all pertinent facts relating to
the liquidity and marketability of the Trust Units, including the following:
(i) the risks involved in the offering, including the speculative nature of the
investment and the speculative nature of investment in oil and gas production
payments; (ii) the lack of liquidity of this investment; (iii) the restrictions
on transferability of the Trust Units; and (iv) the tax consequences of the
investment.
Subscriptions shall be accepted or rejected by the Sponsor within 15
days of their receipt; if rejected, all funds shall be returned to the
subscriber immediately. Any amendment to this Subscription Agreement shall be
made only upon execution of a written consent by me, the Sponsor and the
Trustee of the Trust. The Subscription Agreement shall be governed and
enforced in accordance with the laws of the State of Oklahoma. The
representations, warranties, and covenants contained herein will inure to the
benefit of, and be binding upon me, the Sponsor, the Trustee of the Trust, and
my and their respective successors, heirs, representatives, and assigns.
Send Subscriptions and Check to:
Boatmen's Trust Company
P. O. Box 25189
Oklahoma City, Oklahoma 73125-0189
Attn: Corporate Trust Department
A-2
<PAGE> 43
TO BE COMPLETED BY APPLICANT(S)
The undersigned subscribes to the Trust indicated below in the amount
indicated below. The minimum subscription per Trust is $10,000.00 (10 Trust
Units), with additional amounts available in $1,000 increments (one Trust
Unit).
<TABLE>
<S> <C>
SUBSCRIPTION $_______________ TRUST: National Energy Resources Trust A _________ Trust Units
Check one:
___ Individual ___ Employee Benefit Plan as defined in ___ Keogh Plan (HR-10)
___ Community Property Section 3(3) of ERISA ___ IRA, IRA Rollover or SEP
___ Tenants in Common ___ Tax/Partnership ___ Other Qualified Plan
___ Joint tenants with right ___ Corporation ___________________ ___ Tax-exempt under 501(c)(3)
of survivorship (Place of Incorporation) ___ Other (___________) please specify
___ Foreign person or entity
</TABLE>
________________________________________________________________________________
Print Name(s) in which Trust Units should be registered
________________________________________________________________________________
Print Name(s) in which Trust Units should be registered
________________________________________________________________________________
Mailing Address
________________________________________________________________________________
City State Investor's State of Residence
________________________________________________________________________________
Zip Code SS #/Tax ID# Phone No.
CUSTODIAN OR CHECKS PAYABLE TO OTHERS (OPTIONAL)
Checks will be payable to the registration name and address shown above, unless
otherwise specified below.
________________________________________________________________________________
Person/Entity
________________________________________________________________________________
For the Benefit of
________________________________________________________________________________
Acct. No.
________________________________________________________________________________
Mailing Address for Distribution Checks
________________________________________________________________________________
City State Zip Code Tax ID#
I AM AWARE OF, AGREE AND SATISFY THE REPRESENTATIONS, AGREEMENTS AND
SUITABILITY REQUIREMENTS IN THIS SUBSCRIPTION AGREEMENT.
______________________________ ___________________________________
Signature of Applicant or Signature of Joint Applicant or
Authorized Representative Authorized Representative
Date: ________________________ Date: _____________________________
A-3
<PAGE> 44
FOR NATIONAL ENERGY RESOURCES, INC. USE ONLY
NATIONAL ENERGY RESOURCES, INC.
Sponsor
ACCEPTED: By: ___________________________
Title: ___________________________
Date: ___________________________
FOR SOLICITING DEALER USE ONLY
________________________________________________________________________________
Firm
________________________________________________________________________________
Branch Office Address Phone No.
________________________________________________________________________________
City State Zip Code
________________________________________________________________________________
Branch No./Investor Acct. No./Ref. No.
________________________________________________________________________________
Print Name of Registered Authorized Signature for
Representative Branch Office+
+ By signing on this line I hereby represent that I have discharged my
affirmative obligations under Sections 3(b) and 4(d) of Section 34 of
the NASD Rules of Fair Practice and that I have reasonable grounds to
believe, on the basis of information obtained from the applicant
concerning his/her investment objectives, other investments, financial
situation and needs, and any other information known by the member,
that: (i) the applicant is or will be in a financial position
appropriate to enable him to realize to a significant extent the
benefits described in the Prospectus; (ii) the applicant has a fair
market net worth sufficient to sustain the risk inherent in the Trust,
including lack of liquidity; (iii) an investment in the Trust is
otherwise suitable for the applicant; and (iv) the applicant, along with
one or more representatives, advisors or agents has the knowledge and
experience in financial matters to be capable of evaluating the merits
and risks of the offering. If this purchase is being executed in a
discretionary account, the member has received prior written approval of
the purchase by the customer. The member has informed the applicant of
all pertinent facts relating to the liquidity and marketability of the
Trust Units in the Trust.
A-4
<PAGE> 45
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or any offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Trust since the date hereof or imply that the
information contained herein is correct as of any time subsequent to its date.
----------------------------
Until 90 days after the date of this Prospectus, as amended or
supplemented, all dealers effecting transaction in the Trust Units, whether or
not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of the dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotment or subscriptions.
================================================================================
================================================================================
500 TRUST UNITS
NATIONAL ENERGY RESOURCES
TRUST-A
-------------
P R O S P E C T U S
-------------
October ___, 1996
================================================================================
<PAGE> 46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. EXPENSES OF ISSUANCE AND DISTRIBUTION(1).
<TABLE>
<S> <C>
SEC Filing Fees . . . . . . . . . . . . . . . . . . $ 2,068.97
Escrow . . . . . . . . . . . . . . . . . . . . . . . 7,700.00
Printing and Engraving . . . . . . . . . . . . . . . 15,000.00
Legal Fees . . . . . . . . . . . . . . . . . . . . . 22,500.00
Accounting Fees . . . . . . . . . . . . . . . . . . 3,500.00
Miscellaneous Fees . . . . . . . . . . . . . . . . . 3,750.00
----------
Total . . . . . . . . . . . . . . . . . . . . . $ 54,518.97
===========
</TABLE>
- ---------------
(1) All amounts are estimated except SEC filing fees.
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
California Corporations Laws provide that a director, officer, employee
or agent of the Corporation may be indemnified against suit or other proceeding
whether it were civil, criminal, administrative or investigative if he becomes
a party to said lawsuit or proceeding by reason of the fact that he is a
director, officer, employee or agent of the corporation. The compensation for
indemnification includes judgments, fines and amounts paid in settlement actual
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the corporation.
However, no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been judged liable for negligence
or misconduct in the performance of his duty to the corporation, unless the
court in which the action or suit is brought shall determine that despite his
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for expenses such court shall
deem proper.
The By-Laws of the corporation outline the conditions under which any
director or officer of the registrant may be indemnified. The By-laws provide
that to the extent and in the manner permitted by the laws of the State of
California, the corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement.
15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE> 47
16. EXHIBITS.
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
1. (i) Selling Agreement
(ii) Escrow Agreement
3. (i) National Energy Articles of Incorporation (previously filed)
(ii) National Energy By-Laws (previously filed)
4. Trust Agreement of National Energy Resources Trust-A (previously filed)
5. Legal Opinion of Robertson & Williams, Inc.
8. Tax Opinion of Robertson & Williams, Inc. (included in Exhibit 5)
10. (i) Conveyance of Production Payment (previously filed)
(ii) Form Operating Agreement (previously filed)
23. (i) Consent of Robertson & Williams, Inc.
(ii) Consent of Museck & Museck
17. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(1) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(2) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (Section 230.424)(b)
of this chapter) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(3) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
2. For the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering.
II-2
<PAGE> 48
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
5. The registrant will not identify to any third party any prospects
which will go into or are likely to be placed into the investment program or
are representative of prospects which may be placed into the program, whether
such third party is a selling dealer or other party involved with making or
directing investment decisions regarding the purchase of Trust Units, except to
the extent such prospects have been identified in the prospectus, prospectus
supplement or amendment thereto.
6. To the extent a review of prospects or lease inventory is
permitted to third parties, it will be:
(a) only incidental to an underwriter's due diligence
examination;
(b) no reference to any specific property (unless such
property is described in the prospectus, prospectus supplement or an
amendment) will appear in any analysis or report on the program prepared
by such third party; and
(c) any third party prior to receiving permission to examine
properties will agree to the above conditions, and the registrant will
file a copy of such agreement(s) as exhibit(s) to the registration
statement.
7. No prospective investors or their representatives will be
permitted to examine any prospects or reserve, inventory, or other data related
thereto which is not described in the prospectus, prospectus supplement or
amendment thereto.
8. The registrant will send to each investor at least on an annual
basis a detailed statement of any transaction by the Trust(s) with the
trustee(s) or affiliates of such trustee(s), and of fees, commissions,
compensation and other benefits paid or accrued to the trustee(s) for the
fiscal year completed, showing the amount paid or accrued to each recipient and
the services performed.
9. An annual report on Form 10-K will be filed at the conclusion of
the fiscal year following the year in which the registration statement is
declared effective.
10. A Form 8-K or final SR to reflect the expenditure of the proceeds
of the offering will be filed.
11. The prospectus will be supplemented at the close of formation of
each Trust to state the number of participants in that Trust, the amount of
Trust Units sold therein, the cumulative amount sold under all Trusts formed
under the subject registration statement, the amount of Trust Units to be
offered in the next Trust to be formed and in succeeding Trusts to be formed
under the registration statement.
12. Any unsold Trust Units will be deregistered upon termination of
the offering.
13. National Energy hereby undertakes to provide the Trustee at the
closing instructions as to the issuance of trust certificates in such
denominations as required to permit prompt delivery to each purchaser.
II-3
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Woodland
Hills, State of California on October 7, 1996.
(Registrant) NATIONAL ENERGY RESOURCES TRUST SERIES A
THROUGH L
By: NATIONAL ENERGY RESOURCES, INC..
Sponsor
By: /s/ Marshall J. Field
----------------------------------
Marshall J. Field
(Signature and Title) President, Chief Financial Officer
and Director
II-4
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
1. (i) Selling Agreement
(ii) Escrow Agreement
3. (i) National Energy Articles of Incorporation (previously filed)
(ii) National Energy By-Laws (previously filed)
4. Trust Agreement of National Energy Resources Trust-A (previously filed)
5. Legal Opinion of Robertson & Williams, Inc.
8. Tax Opinion of Robertson & Williams, Inc. (included in Exhibit 5)
10. (i) Conveyance of Production Payment (previously filed)
(ii) Form Operating Agreement (previously filed)
23. (i) Consent of Robertson & Williams, Inc.
(ii) Consent of Museck & Museck
</TABLE>
<PAGE> 1
EXHIBIT 1.(i)
NATIONAL ENERGY RESOURCES TRUST SERIES
A THROUGH L
SOLICITING DEALER AGREEMENT
______________, 1996
Dear Sirs:
National Energy Resources, Inc. ("National Energy" or the "Sponsor"), a
California corporation, has organized and will act as the Sponsor of a series
of grantor trusts (the "Trusts") which will engage in the business of acquiring
production payments in producing oil and gas. The Trusts are known as Trust-A
Through L ("Trust A Through L").
An aggregate of $6,000,000 of trust units of $1,000.00 each (the "Trust
Units") is being offered by the Trust in a series of sequential offering
periods through ___________, 1997. The maximum offering includes Units that
may be purchased by the Sponsor. The minimum investment in any one Trust
Series is 500 units, or $500,000. The subscription period of Trust-A will
commence on the effective date of the Registration Statement filed with the
Securities and Exchange Commission relating to the Units (the "Registration
Statement") and the subscription periods for each of the subsequent Trust in
the series will follow sequentially thereafter, each commencing on the date of
a supplement to the Prospectus filed as Part I of the Registration Statement
(the "Prospectus") describing the results of the prior subscription period(s)
and any other changes in the terms of the offering. Terms used unless
otherwise defined herein, shall have the meanings ascribed thereto in the
Prospectus. The subscription period of each Trust will be terminated at a date
to be determined by the Sponsor, in its discretion, or in no event before the
minimum subscription amount of $500,000 for any Trust shall have been raised
(the "Termination Date" for each such Trust), and no subscription period will
extend beyond ________________________. The balance of Units not sold in the
prior offering(s) will be offered in the subsequent offerings. However, the
subsequent offerings will not be made unless there are available for offering
at least 500 registered Units with respect to the subsequent offerings at the
time each such offering is to commence or unless additional Units are
registered under a new registration statement. If a minimum of $500,000 of
Units is not held by the escrow agent for the offering, Boatmen's Trust Company
of Oklahoma, Oklahoma City, Oklahoma (the "Escrow Agent"), at the Termination
Date for a Trust, such Trust will not commence business and the Escrow Agent
will promptly return to the subscribers to such Trust all Subscription
Agreements and sums which have been deposited in escrow during the subscription
period for such Trust. Interest will be paid to subscribers on any such sums
so returned.
National Energy Resources, Inc., as Sponsor, is organizing a group of
soliciting dealers consisting of brokers and dealers who shall be members in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD"), the members of such group being hereinafter called the "Soliciting
Dealers", to solicit purchasers of the Units. You are invited to become one of
the Soliciting Dealers and by your confirmation hereof you agree to act in such
capacity and to use your best efforts, in accordance with the following terms
and conditions, to
1
<PAGE> 2
obtain purchasers of Units.
SECTION 1. Solicitation and Solicitation Material. Solicitation and other
activities by you hereunder shall be undertaken only in accordance with this
Agreement,the Securities Act of 1933, as amended (the "1933 Act") and the
applicable rules and regulations of the Securities and Exchange Commission.
Accompanying this Agreement are copies of the Prospectus describing the terms
of the offering and the Units offered thereby and including the Subscription
Agreement. Additional copies of the Prospectus will be supplied in reasonable
quantities upon your request. You agree that during the period of the offering
you will not use any solicitation material other than the Prospectus and such
other material as may hereafter be furnished to you by us.
SECTION 2. Compensation of Soliciting Dealers. As compensation for the
services of the Soliciting Dealers hereunder, each Trust will pay to each
Soliciting Dealer designated in a Subscription Agreement a commission in the
amount of eight percent (8%) for each Unit in such Trust sold to a subscriber
through such Soliciting Dealer's efforts with respect to such Trust. A
Soliciting Dealer shall be entitled to the foregoing compensation only if (i)
the insertion of such Soliciting Dealer's name has been made in the
Subscription Agreement relating to such subscriber's Units, (ii) an account
executive from such Soliciting Dealer has executed the certificate contained on
the final page of such Subscription Agreement, (iii) such Soliciting Dealer has
executed this Agreement in the form hereof and delivered it to National Energy,
and (iv) the subscriber accepted by the Sponsor as a Beneficiary of the Trust
for the number of Units indicated in his Subscription Agreement. No Soliciting
Dealer may re-allow any portion of its commission hereunder to any non-member
of the NASD.
SECTION 3. Trading. You represent that you have not engaged, and agree that
you will not engage, in any activity in respect of the Units in violation of
the Securities and Exchange Act of 1934, as amended (the "1934 Act"), including
Rule 10b-6 thereunder. Acceptance of Compensation by you will constitute a
representation that you have complied with the preceding sentence.
SECTION 4. Unauthorized Information and Representations. Neither you nor
any other person is authorized by National Energy or any of the Trusts to give
any information or make any representations in connection with this Agreement
or the offering of the Units other than those contained in the Prospectus and
other authorized solicitation material furnished by National Energy or the
Trusts. Without limiting the generality of the foregoing, you agree not to
publish, circulate or otherwise use any other advertisement or solicitation
material without the prior approval of National Energy. On becoming a
Soliciting Dealer and in soliciting purchases, you agree to comply with any
applicable requirements of the 1933 Act, the 1934 Act, and the rules and
regulations under both such Acts.
SECTION 5. Blue Sky and Securities Laws. National Energy assumes no
obligation or responsibility in respect of the qualification of the Units under
the laws of any jurisdiction. The Blue Sky Memorandum for each Trust indicates
or will indicate the jurisdiction in which it is believed that offers and sales
of the Units may be made under the applicable Blue Sky or state securities
laws. In effecting offers or sales in a jurisdiction, you will comply with all
special conditions and limitations imposed by such jurisdiction, as set forth
in the Blue Sky
2
<PAGE> 3
Memorandum for the Trust in which Units are then being offered or sold. If the
Blue Sky Memorandum for a Trust is not enclosed herewith, it will be made
available to you at a later date. Under no circumstances will you as
Soliciting Dealer engage in any activities hereunder in any jurisdiction (a)
which is not listed in the applicable Blue Sky Memorandum as a jurisdiction in
which offers and sales of the Units may be made under the Blue Sky or
securities laws of such jurisdiction or (b) in which you may lawfully so
engage. No Blue Sky Memorandum shall be considered solicitation material, as
that term is herein used.
SECTION 6. Suitability. In recommending to a potential investor the
purchase of Units, you or anyone associated with you shall:
A. Have reasonable grounds to believe, on the basis of information
obtained from the potential investor concerning his investment objectives,
other investments, financial situation and needs, and any other information
known by you or such person associated with you, that:
(1) The potential investor is or will be in a financial
position appropriate to enable him to realize to a significant extent
the benefits described in the Prospectus, including the tax benefits of
the Trust to which such potential investor is subscribing;
(2) The potential investor has a fair market net worth
sufficient to sustain the risks inherent in the Trust to which such
potential investor is subscribing, including loss of investment and lack
of liquidity; and
(3) The Trust to which a potential investor is subscribing is
otherwise suitable for such potential investor; and
B. Maintain in your files for a period of at least six years
documents disclosing the basis upon which the determination of suitability was
reached as to each potential investor.
You hereby represent that you will communicate to each of your sales
agents, representatives and other appropriate persons associated with you the
above-referenced suitability standards. Notwithstanding the provisions of this
Section 6, you shall not execute any transaction in any of the Trusts in a
discretionary account without prior written approval of the transaction by the
potential investor.
SECTION 7. Disclosure.
A. Prior to participating in the offerings of any of the Trusts, you
or a person associated with you shall have reasonable grounds to believe, based
on information made available to you or such person by National Energy through
the Prospectus or other materials, that all material facts are adequately and
accurately disclosed and provide a basis for evaluating the Trust in which
Units are then being offered.
B. In determining the adequacy of disclosed facts pursuant to
Section 7A. hereof, you or a person associated with you shall obtain
information on material facts relating at a minimum to the following, if
relevant in view of the nature of the Trust in which Units are then being
offered:
3
<PAGE> 4
(1) items of compensation;
(2) physical properties;
(3) tax aspects;
(4) financial stability and experience of National Energy;
(5) such Trust's conflicts and risk factors; and
(6) appraisals and other pertinent reports.
C. For purposes of Sections 7A. and 7B. hereof, you or a person
associated with you may rely upon the results of an inquiry conducted by
another member or members of the NASD, provided that:
(1) You or such person associated with you has reasonable
grounds to believe that such inquiry was conducted with due care;
(2) The results of the inquiry were provided to you or such
person associated with you with the consent of the NASD member or
members conducting or directing the inquiry; and
(3) No NASD member that participated in the inquiry is a
sponsor of any of the Trusts or an affiliate of such a sponsor.
D. Prior to executing a purchase transaction in any of the Trusts,
you or a person associated with you shall inform the prospective investor of
all pertinent facts relating to the liquidity and marketability of an
investment in the Units during the term of the prospective investment in the
applicable Trust.
SECTION 8. Termination. This Agreement may be terminated by written or
telegraphic notice to you from National Energy, or upon the expiration or
termination of the offering of Units, provided, however, that such termination
shall not relieve the Trusts of the obligation to pay when due all fees payable
to you hereunder or their obligations referred to under Section 10 hereof, and
shall not relieve you of any obligation or any liability under this Agreement.
SECTION 9. Liability of National Energy. Nothing herein contained shall
constitute the Soliciting Dealers as partners with National Energy or with one
another, nor shall anything herein contained render National Energy liable for
the obligations of any of the Soliciting Dealers. National Energy shall be
under no liability to any Soliciting Dealer or any other person for any act or
omission or any matter connected with this Agreement or the Trusts, except for
obligations expressly assumed by National Energy in this Agreement.
SECTION 10. Indemnification.
A. National Energy will indemnify and hold harmless each Soliciting
Dealer from
4
<PAGE> 5
and against any and all losses, claims, damages or liabilities, joint or
several, to which any Soliciting Dealer may become subject, under the 1933 Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse
each such Soliciting Dealer for any legal or other expenses (including, but not
limited to, reasonable attorneys' fees) reasonably incurred by such Soliciting
Dealer in connection with investigating or defending any such claim or action,
whether or not resulting in any liability.
The indemnify agreement in this Section 10A. will be in addition to any
liability which National Energy may otherwise have and shall extend upon the
same terms and conditions to each person, if any, who controls any Soliciting
Dealer within the meaning of the 1933 Act or is a registered representative of
that Soliciting Dealer who was, at the time the act occurred which gave rise to
the liability for which indemnity is sought hereunder, a registered
representative of that Soliciting Dealer.
B. Each Soliciting Dealer will severally indemnify and hold harmless
National Energy and each Trust and Boatmen's Trust Company of Oklahoma
("Trustee") from and against any and all losses, claims, damages, or
liabilities to which National Energy, the Trustee and any Trust may become
subject insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the failure or alleged failure
by such Soliciting Dealer to perform fully and to act in compliance with the
provisions of Sections 1, 3, 4, 5, 6 and 7 hereof, and will reimburse any legal
or other expenses (including, but not limited to, reasonable attorneys' fees)
reasonably incurred by National Energy, the Trustee or any Trust in connection
with investigating or defending any such claim or action, whether or not
resulting in any liability.
The indemnity agreement in this Section 10B will be in addition to any
liability which such Soliciting Dealer may otherwise have and shall extend upon
the same terms and conditions to each person signing the Registration Statement
on behalf of each Trust and each person, if any, who controls National Energy,
the Trustee, or any Trust within the meaning of the 1933 Act.
C. Promptly after receipt by an indemnified party under this Section
10 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 10, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
him or it from any liability which he or it may have to any indemnified party
otherwise than under this Section 10. In case any such action is brought
against any indemnified party and he or it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that he or it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party (who shall not, except with
the consent of the indemnifying party, be counsel to the indemnifying party),
and after notice from the
5
<PAGE> 6
indemnifying party to such indemnified party of his or its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 10 for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation.
D. If the right to indemnification provided for in paragraphs A, B
or C of this Section 10 would by its terms be available to a person hereunder
but is held to be unavailable by a court of competent jurisdiction for any
reason other than because of the terms of such indemnification provision, then
National Energy and the Soliciting Dealer (collectively, the "Parties") and
individually, a "Party") shall contribute to the aggregate of such losses,
claims, damages and liabilities as are contemplated in those paragraphs
(including, but not limited to, any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any claim,
action, suit or proceeding) in the ratio in which the proceeds of the offering
of the Units have been actually received by each such Party. For purposes of
the preceding sentence, proceeds paid to any Party hereunder and subsequently
paid to another Party or Parties pursuant to this Agreement, the Trust
Agreement for any Trust or otherwise, shall be deemed received by the last of
such Parties to whom or to which such proceeds were paid; provided, however,
that proceeds paid to a Trust and not subsequently paid to such Soliciting
Dealer shall be considered to be received by National Energy. However, the
right of contribution described in the preceding sentences is subject to the
following limitations:
(1) In no case shall any Party and the persons who control
such Party within the meaning of applicable state and federal securities
laws be required to contribute any amount in excess of the aggregate
offering proceeds actually received by it and them (determined as
described above); and
(2) No person guilty of fraudulent misrepresentation within
the meaning of Section 11(f) of the 1933 Act shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Promptly after receipt by any Party entitled to contribution under this
subsection 10.D of notice of commencement of any action, suit, proceeding or
claim against him or it in respect of which a claim for contribution may be
made against another party or Parties, such Party entitled to contribution
will, if a claim in respect thereof is to be made against such other Party or
Parties under this subsection 10.D, notify such other Party or Parties.
Failure to so notify such other Party or Parties shall not relieve such other
Party or Parties from any other obligation it or they may have hereunder or
otherwise. If such other party or Parties are so notified, such other Party or
Parties shall be entitled to participate in the defense of such action, suit,
proceeding or claim at its or their own expense or in accordance with
arrangements satisfactory to all Parties who may be required to contribute.
After notice from such other Party or Parties to the Party entitled to
contribution of its or their election to assume its or their own defense, the
Party or Parties so electing shall not be liable for any legal or other
expenses of litigation subsequently incurred by the Party entitled to
contribution in connection with the defense thereof,other than the reasonable
costs of investigation. No Party shall be required to contribute with respect
to any action or claim settled without his or its consent.
6
<PAGE> 7
SECTION 11. Transfer of Funds. Each Soliciting Dealer will instruct
subscribers to make their checks payable to the Escrow Agent as agent for the
applicable Trust. Any Soliciting Dealer receiving a check not conforming to
the foregoing instructions shall return such check directly to such subscriber
not later than the end of the next business day following its receipt. Checks
received by Soliciting Dealers which conform to the foregoing instructions
shall be transmitted for deposit by any Soliciting Dealer pursuant to one of
the following methods:
A. Where, pursuant to a Soliciting Dealer's internal supervisory
procedures, internal supervisory review is conducted at the same location at
which Subscription Agreements and payments are received, such subscription
payments will be transmitted by the end of the next business day following
receipt b the Soliciting Dealer for deposit to the Escrow Agent; and
B. Where, pursuant to a Soliciting Dealer's internal supervisory
procedures, final internal supervisory review is conducted at a different
location, subscription payments will be transmitted by the end of the next
business day following receipt by the Soliciting Dealer to the office of the
Soliciting Dealer conducting such final internal supervisory review (the "Final
Review Office"). The Final Review Office will in turn transmit such
subscription payments for deposit to the Escrow Agent by the end of the next
business day following receipt thereof by the Final Review Office.
In conjunction with all of the foregoing procedures, investor
checks and subscription documentation delivered on Saturdays, Sundays and
holidays will be treated as not having been received by a Soliciting Dealer
until the first business day thereafter.
SECTION 12. Notices. Any notice hereunder shall be in writing or by
telegram and if to you as a Soliciting Dealer shall be deemed to have been duly
given if mailed or telegraphed to you at the address to which this letter is
addressed, and if to National Energy or any Trust if delivered or sent to us at
21800 Burbank Blvd., Suite 100, Woodland Hills, CA 91467.
SECTION 13. Parties in Interest. The Agreement herein set forth is intended
for the benefit of each Soliciting Dealer, National Energy, the Trustee and
each of the Trusts.
SECTION 14. Confirmation. Please confirm your agreement to become one of
the Soliciting Dealers under the terms and conditions herein set forth by
signing and returning the confirmation on the enclosed duplicate copy of this
letter to us at the above address.
Very truly yours,
CONFIRMED: NATIONAL ENERGY RESOURCES, INC.
, 1996 By:
- ---------------------- ------------------------------
NAME OF SOLICITING DEALER (Authorized Signature)
- ---------------------------------
By:
------------------------------
(Authorized Signature)
7
<PAGE> 1
EXHIBIT 1.(ii)
NATIONAL ENERGY RESOURCES, INC.
21800 Burbank Blvd., Suite 100
Woodland Hills, California 91467
October 3, 1996
Boatmen's Trust Company
Post Office Box 25189
Oklahoma City, Oklahoma 73125
Gentlemen:
National Energy Resources, Inc., a California corporation (the
"Sponsor"), proposes to make a public offering of 6,000 trust units (the
"Units") at $1,000 per Unit. The offering will commence upon the Sponsor's
registration statement on Form S-1 (the "Registration Statement") being
declared effective by the Securities and Exchange Commission ("SEC"). We are
requesting that you consent to continue to act as Depository in connection with
the offering.
As Depository, you will receive, hold in escrow and disburse
subscription funds in accordance with the terms and conditions set forth in
this letter and in the "Plan of Distribution" section of the prospectus
included in the Registration Statement as attached hereto. As to the funds
held by you, you will transfer said funds and accrued interest on only the
funds transferred to an account under these instructions.
You will provide reports upon request to the Sponsor as to the number
and amount of subscriptions received by you. The Sponsor is the grantor of the
trust(s) being established to hold production payments and in which the Units
will be sold, the hereinafter referred to as the "Trust".
The terms and conditions of your engagement as Depository will be as
follows:
1. You will receive and hold deposits of subscription funds of
$1,000 per Unit. The minimum subscription will be ten units ($10,000) for any
subscriber. Each deposit will be accompanied by subscription material in the
form of that attached as an exhibit to the Prospectus identifying by name and
address the subscriber whose funds are deposited and the amount of the funds
deposited by such subscriber. You will keep daily records of receipt of funds
and subscription material and will provide the Sponsor with such reports on a
weekly basis. The Sponsor may inspect any records of the Depository, insofar
as they relate to this Agreement.
2. The Sponsor shall accept or reject all subscriptions within 15
days of their receipt by you as Depository. Upon your receipt of notice of
rejection by the Sponsor of a subscription, you shall return all subscription
funds, without interest, and subscription material to the subscriber forthwith.
<PAGE> 2
October 3, 1996
Page 2
3. Deposits in the form of checks which fail to clear the bank upon
which they are drawn shall be returned by the Depository to the subscriber,
together with the originals of the subscription material. You shall
concurrently furnish to the Sponsor a copy of any such subscription material
and check so returned. The Depository shall have no further liability
therefor.
4. You shall invest subscription funds in such short-term United
States government or agency securities or securities backed or fully insured by
the United State government or its agencies, or money market funds consisting
of such securities.
5. If and at such time as amounts representing subscriptions for an
amount of not less than 500 Units shall have been deposited with you under the
arrangement (the "Minimum Subscriptions"), you shall so notify the Sponsor and
upon receipt of written instructions from the Sponsor you will disburse to the
Trust all subscription funds received. You shall have received cleared funds
prior to disbursing such funds to the Trust. If the offering is terminated
prior to receipt of the Minimum Subscriptions, or if the Minimum Subscriptions
have not been received on or before the offering termination date in the
Prospectus, you shall promptly disburse all subscription funds to the
subscribers who transmitted them, disburse the interest as provided in
paragraph 7 hereof and advise the Sponsor that you have done so.
6. After subscription funds are disbursed to the Trust in accordance
with paragraph 5, you will continue to accept new deposits of subscription
funds, and invest such funds as provided in paragraph 4 with respect to
subscription funds received prior to receipt of Minimum Subscriptions. You
will disburse such subscription funds to the Trust upon receipt of written
instructions from the Sponsor, it being contemplated that, for so long as the
offering continues after receipt of the Minimum Subscriptions, there will be
monthly disbursement of subscription funds from escrow to the Trust. If for
any reason you do not receive instructions as aforesaid to disburse such
subscription funds to the Trust, you shall continue to hold such funds as
aforesaid until you receive written instructions from the Sponsor instructing
you to disburse such funds to the subscribers from whom they were received.
7. Within 5 days after the disbursement of the Minimum Subscriptions
to the Trust and within 5 days after each subsequent disbursement of such funds
to the Trust, interest earned on the disbursed subscription funds shall be
transferred to a special account established and maintained by the Sponsor for
it to distribute such interest to the subscribers on a pro rata basis.
Interest shall also be disbursed in the same manner upon termination under
paragraph 5 hereof or if a subscription is otherwise returned to a subscriber.
Each subscriber's pro rata share shall be calculated by the Sponsor for the
period beginning when funds are received by you and ending on the date the
funds are deposited into the special account for distribution by the Sponsor.
<PAGE> 3
October 3, 1996
Page 3
8. All fees, costs, and charges to the Depository shall be paid by
the Sponsor. Additionally, the Depository shall be entitled to such
compensation from the Sponsor as is set forth on Schedule A hereto. The
Depository shall also be entitled to reimbursement from the Sponsor for all
reasonable expenses paid or incurred by it in the administration of its duties
hereunder, including, but not limited to, all reasonable counsel's, advisors'
and agents' fees and disbursements and all taxes or other governmental charges.
9. In consideration of your acting as Depository herein, it is
agreed that you shall in no case or event be liable for the failure of any of
the conditions of this escrow or damage caused by the exercise of your
discretion in any particular manner, or for any other reason, except gross
negligence or willful misconduct with reference to the said escrow, and you
shall not be liable or responsible for your failure to ascertain the terms or
conditions, or to comply with any of the provisions of, any agreement, contract
or other document filed herewith or referred to herein, nor shall you be liable
or responsible for forgeries or false personation.
It is further agreed that if any controversy arises, between the parties
hereto or with any third person with respect to the subject matter of this
escrow, its terms or conditions, you are entitled at your option to refuse to
comply with any claim or demand, so long as such controversy continues and in
so doing you shall not be or become liable for damages or interest to any party
for your failure or refusal to comply with any conflicting or adverse demands;
and you shall be entitled to continue so to refrain and refuse so to act until:
A. The rights of the adverse claimants have been finally adjudicated
in a court assuming and having jurisdiction of the parties and the money,
papers, and property involved herein or affected hereby; or
B. All differences have been adjusted by agreement and you shall
have been notified thereof in writing by all of the persons interested.
In the event of such controversy, you, in your discretion, may file a
suit in interpleader for the purpose of having the respective rights of the
claimants adjudicated, and deposit with the court all documents and property
held hereunder, and the Sponsor agrees to pay all costs and counsel fees
incurred by you in such action and said costs and fees shall be included in the
judgment in any such action.
You shall not be required to take or be bound by notice of any default
of any person, or to take any action with respect to such default involving any
expense or liability, unless notice in writing is given to you at the office
above named, of such default by the Sponsor and unless you are indemnified in a
manner satisfactory to you against such expense or liability.
You shall be protected in acting upon any notice, request, waiver,
consent, receipt or other paper or document reasonably believed by you to be
signed by the proper party or parties.
<PAGE> 4
October 3, 1996
Page 4
You may consult with legal counsel if any controversy arises, and you
shall incur no liability and shall be fully protected in acting in accordance
with the opinion and instructions of counsel.
In the event that you perform any service not specifically provided
hereinabove, or that there is any assignment or attachment of any interest in
the subject matter of this escrow or modification thereof, or that any
controversy arises hereunder, or that you are named a party to, or intervene
in, any litigation pertaining to this escrow or the subject matter thereto, you
shall be reasonably compensated therefor and reimbursed for all costs and
expenses, including attorney fees, occasioned thereby. The Sponsor shall be
obligated for such compensation and such reimbursement.
10. The Depository may resign upon the giving of 30 days prior
written notice to the Sponsor. The Depository may be removed by the Sponsor
upon 30 days prior written notice to the Depository. In such event, it shall
be the obligation of the Sponsor to appoint a successor Depository. The
Depository will turn over to such successor, at the direction of the Sponsor,
all funds, accounts and records held by the Depository pursuant to this
Agreement.
11. This Agreement shall terminate on the date which is 30 days after
twelve months from the Effective Date of the Registration Statement and in no
event no later than December 31, 1997. Upon termination of this Agreement all
funds and property held by you shall be returned in the manner provided in
Paragraph 5.
Any change in the aforesaid terms and conditions shall require the
consent of both parties. In the event that any questions arise as to the
interpretation of such terms and conditions, you will be authorized to rely
upon written instructions or telegraphic instructions followed by written
instructions from the Sponsor.
<PAGE> 5
October 3, 1996
Page 5
If you consent and agree to act as Depository on the terms and
conditions set forth above, please so signify by causing a duly authorized
officer or employee to sign the enclosed copy of this letter as indicated below
and return it to the undersigned, whereupon the terms and conditions of this
letter shall constitute an agreement between us.
Very truly yours,
NATIONAL ENERGY RESOURCES, INC.
Marshall Field, President
Accepted and Agreed:
BOATMEN'S TRUST COMPANY, an Oklahoma trust company
By:
-----------------------------------
Date:
------------------------------
<PAGE> 1
EXHIBIT 5
ROBERTSON & WILLIAMS
Attorneys and Counselors at Law
6108 North Western Avenue
Oklahoma City, Oklahoma 73118-1044
(405) 848-1944 o Fax (405) 843-6707
October 4, 1996
National Energy Resources, Inc.
21800 Burbank Blvd., Suite 100
Woodland Hills, CA 91364
Re: Form S-1 Registration Statement SEC File No: 33-98042
Gentlemen:
We have acted as counsel to National Energy Resources, Inc., a
California corporation ("Company"), in connection with the registration under
the Securities Act of 1933, as amended ("Act"), of certain beneficiary
interests in grantor trusts ("Trust Units") to be formed by investors as
beneficiaries and Boatmen's Trust Company ("Trustee") as trustee pursuant to
the form of Trust Agreement included in the Registration Statement upon the
closing of the offering for each Trust. The total number of Trust Units
included in the Registration Statement is 6,000 with each Trust Unit
representing a contribution of $1,000 to the Trust. Up to twelve Trusts may be
formed with each Trust issuing a minimum of 500 Trust Units.
A Registration Statement on Form S-1 (Sec File No. 33-98042) under the
Act with respect to the Trust Units was filed with the Securities and Exchange
Commission on October 11, 1995 and amended by Amendment No. 1 filed June 13,
1996, and Amendment No. 2 filed October 4, 1996.
We have examined and are familiar with originals or copies, the
authenticity of which has been established to our satisfaction, of all such
documents, corporate records, and other instruments as we have deemed necessary
to express the opinion hereinafter set forth.
Based on the foregoing, it is our opinion that the Trust Units to be
sold by the Company in the manner described in the Registration Statement,
will, upon payment therefor and delivery thereof, be validity issued securities
of each of the Trusts, fully paid and non-assessable.
You have further requested that we advise you of the anticipated United
States Federal income tax consequences of the Trusts. The opinions in this
letter are based upon our interpretation of existing law, including legislative
history and proposed regulations relating to certain recent statutory changes.
Such existing law is subject to retroactive or prospective change by
legislation, administrative action or judicial decisions. As to certain recent
statutory provisions, our opinion is based upon legislative history and
proposed Treasury Regulations which may be affected by final regulations.
These opinions are also based upon an analysis of the Trust Agreement and the
Company's representation that operations will adhere to the provisions of such
Agreement. It is our opinion that the following Federal income tax
<PAGE> 2
October 4, 1996
Page 2
consequences will result (all references are to the Internal Revenue Code of
1986 (the "Code"), as amended, unless otherwise stated):
1. The Trust will be taxable as a grantor trust and not as an
association taxable as a corporation. As a grantor trust, the
Trust will not be subject to tax at the trust level. For tax
purposes, the grantors (in this case, the Trust Unitholders) will
be considered to own the Trust's income and principal as though
no trust were in existence.
2. Each Trust Unitholder will be taxed directly on his pro rata
share of the income of the Trust and will be entitled to claim
his pro rata share of the deductions of the Trust. The income of
the Trust will be deemed to have been received or accrued by the
Trust Unitholders at the time such income is received or accrued
by the Trust and not when distributed by the Trust.
3. Based on representations made by National Energy, the reserves to
be burdened by each Production Payment acquired by a Trust and
the expected term of each Production Payment will be such that
the Production Payments will meet the definition of a "production
payment" under Section 636(a) of the Code.
4. It is more likely than not that all or substantially all of the
state and local taxes imposed on the Trusts and the
administrative expenses of the Trustee are deductible in
computing adjusted gross income and, therefore, are not the type
of miscellaneous itemized deductions that are allowable only to
the extent that the aggregate of such deductions exceeds 2% of
adjusted gross income.
5. The income and expenses of the Trust will not be taken into
account in computing the passive activity losses and income under
Code Section 469 for a Trust Unitholder who acquires and holds
Trust Units as an investment.
6. A Trust Unitholder will realize gain or loss on the sale or
exchange of his Trust Units measured by the difference between
the amount realized on the sale or exchange and his adjusted
basis for such Trust Units. Gain or loss on the sale of Trust
Units by a Trust Unitholder who is not a dealer with respect to
such Trust Units and who has a holding period for the Trust Units
of more than one year will be treated as long-term capital gain
or loss under Subtitle A, Ch. 1 P. Part III of the Code, except
possibly to the extent of ordinary income, if any, from accrued
but undistributed income. A Trust Unitholder's basis in his
Trust Units will be equal to the amount paid for such Trust Units
pursuant to this offering or pursuant to market transactions.
7. Distributions of Trust income generally will not be subject to
"backup withholding" unless: (i) the Trust Unitholder is an
individual or other noncorporate taxpayer and (ii) such Trust
Unitholder fails to comply with certain reporting procedures and
requirements under Code Section 3406.
<PAGE> 3
October 4, 1996
Page 3
8. The Production Payment shall be treated under Code Section 636(a)
as if it were a mortgage loan on the property and shall not
qualify as an economic interest in the mineral property. Code
Section 1275(d) gives the Treasury Secretary the power to
prescribe regulations to carry out the purposes of the original
issue discount ("OID") of the Code "where by reasons of varying
rates of interest, put or call options, indefinite maturities,
contingent payments, assumptions of debt instruments or other
circumstances" the statutory provisions do not adequately carry
out such purposes. None of the proposed or final OID regulations
provide any specific reference to or guidance with respect to
production payments or deal with contingent payments as might
reasonably be applied to production payments. In the absence of
final OID Regulation, the Production Payment under the offer
appears to be governed by Code Section 636 and 483 and the
regulations thereunder.
The opinion expressed herein is as of the date hereof, is rendered
solely to National Energy Resources, Inc. in connection with the transaction
described herein, and may be relied upon only by National Energy Resources,
Inc. for the specific purposes herein set forth. Any other use of this opinion
without our express consent is prohibited.
We consent to the use of this opinion as an Exhibit to the above
mentioned Registration Statement and to the use of our name in such
Registration Statement and the Prospectus included therein under the heading
"Legal Matters".
Very truly yours,
ROBERTSON & WILLIAMS,
A Professional Corporation
By:
-----------------------------------
Mark A. Robertson
<PAGE> 1
Exhibit 23 (i)
CONSENT OF COUNSEL
Robertson & Williams, Inc., a professional corporation, hereby consents
to the use of its name under the caption "VALIDITY OF SECURITIES" in the
Prospectus constituting a part of this Registration Statement.
ROBERTSON & WILLIAMS, INC.
Oklahoma City, Oklahoma
October 7, 1996
<PAGE> 1
Exhibit 23 (ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1
of our report dated July 31, 1995, on our audit of the financial statement of
National Energy Resources, Inc. We also consent to the reference to our firm
under the caption "EXPERTS."
MUSECK & MUSECK
New Providence, New Jersey
October 7, 1996
