- - - -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______ to _______
Commission File No. 0-19136
NATIONAL ENERGY GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 58-1922764
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
(Address of principal executive offices)
(214) 692-9211
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes XX No
-- --
Outstanding shares of the issuer's class of Common Stock as of November 15th,
1995:
Class A Common Stock ($0.01 par value) 11,872,625 shares
- - - -------------------------------------------------------------------------------
<PAGE>
NATIONAL ENERGY GROUP, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Balance Sheets -
September 30, 1995 and December 31, 1994. . . . . . . . . . . . . . 1
Statements of Operations -
Three and Nine months ended September 30, 1995 and 1994 . . . . . . 3
Statement of Stockholders' Equity -
Nine months ended September 30, 1995. . . . . . . . . . . . . . . . 4
Statements of Cash Flows -
Nine months ended September 30, 1995 and 1994 . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . . . . . . . . 11
PART II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
National Energy Group, Inc.
Balance Sheets
<CAPTION>
September 30 December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $700,192 $2,593,645
Marketable securities 1,865,863 1,182,150
Accounts receivable - oil and gas sales 981,468 344,972
Accounts receivable - joint interest and othe 997,774 543,771
Accounts receivable from related parties -- 23,999
Other 434,629 267,731
------------ ------------
Total current assets 4,979,926 4,956,268
Property and equipment:
Oil and gas properties, at cost
(full cost method) 33,657,855 15,284,453
Furniture, fixtures and equipment 368,063 329,445
------------ ------------
34,025,918 15,613,898
Accumulated depreciation, depletion and
amortization 4,190,700 2,501,047
------------ -----------
Net property and equipment 29,835,218 13,112,851
Other assets 601,755 677,056
------------ ------------
Total assets $35,416,899 $18,746,175
============ ============
</TABLE>
See accompanying notes.
1
<PAGE>
<TABLE>
National Energy Group, Inc.
Balance Sheets (continued)
<CAPTION>
September 30 December 31,
1995 1994
------------ ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $2,196,279 $820,377
Accounts payable - revenue 631,035 455,477
Accounts payable - broker margin 1,011,355 --
Accounts payable - other 55,931 36,198
Accrued interest on long-term debt -- 79,917
Current portion of other long-term liabilities 3,503 3,503
Current portion of long-term debt 3,100,000 --
------------ ------------
Total current liabilities 6,998,103 1,395,472
Other long-term liabilities 20,303 23,189
Long-term debt, less current portion 9,875,000 6,000,000
Stockholders' equity:
Convertible preferred stock, $1.00 par:
Authorized shares - 1,000,000
Series B :
Authorized shares - 100,000;
Issued shares - 52,500
Aggregate liquidation preference-
$5,250,000 52,500 52,500
Series C :
Authorized shares - 80,000;
Issued shares - 40,000
Aggregate liquidation preference-
$4,000,000 40,000 --
Class A common stock $.01 par value:
Authorized shares - 50,000,000
Issued shares - 11,872,625 and 8,877,892 at
September 30, 1995 and December 31,
1994 118,726 88,779
Class B common stock $.01 par value:
Authorized convertible shares - 200,000
Issued shares - 129,644 at December 31,
1994 -- 1,296
Common stock issuable under asset acquisition
agreement -- 136,035
Additional paid-in capital 21,440,482 13,626,116
Unrealized gain(loss) on available-for-sale
securities, net (206,354) 136,285
Deficit (2,921,861) (2,713,497)
------------ ------------
Total stockholders' equity 18,523,493 11,327,514
------------ ------------
Total liabilities and stockholders' equity $35,416,899 $18,746,175
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
National Energy Group, Inc.
Statements of Operations
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $2,207,435 $843,612 $4,861,176 $2,272,896
Costs and expenses:
Lease operating 425,279 330,544 1,138,244 835,092
Oil and gas production taxes 111,301 47,112 260,494 127,297
Depreciation, depletion and
amortization 853,286 178,749 1,727,535 494,895
General and administrative 390,423 200,439 914,666 572,883
1,780,289 756,844 4,040,939 2,030,167
----------- --------- ---------- ----------
Operating income 427,146 86,768 820,237 242,729
----------- --------- ---------- ----------
Interest expense (307,572) (139,405) (636,414) (358,720)
Interest income and other 32,616 59,965 81,493 76,607
Gain on sale of marketable securities (3,131) 10,199 220,582 10,199
----------- --------- ---------- ----------
Income (loss) before income taxes 149,059 17,527 485,898 (29,185)
Provision for income taxes -- -- -- --
----------- --------- ---------- ----------
Income (loss) before extraordinary item 149,059 17,527 485,898 (29,185)
Extraordinary charge for early
extinguishment of debt -- -- (431,762) (121,917)
----------- --------- ---------- ----------
Net income (loss) $149,059 $17,527 $54,136 ($151,102)
=========== ========= ========== ==========
Preferred stock dividend requirements 236,250 125,000 511,875 163,355
----------- --------- ---------- ----------
Net loss applicable to common stockholders ($87,191) ($107,473) ($457,739) ($314,457)
=========== ========= ========== ==========
Loss per common share:
Loss before extraordinary item ($0.01) ($0.01) ($0.00) ($0.02)
=========== ========= ========== ==========
Net loss ($0.01) ($0.01) ($0.04) ($0.04)
=========== ========= ========== ==========
Weighted average number of common
shares outstanding 11,845,404 8,970,365 10,306,685 8,452,259
=========== ========= ========== ============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
National Energy Group, Inc.
Statement of Changes in Stockholders' Equity
Nine months ended September 30, 1995
<CAPTION>
Series B Series C Class A
Preferred Stock Preferred Stock Common Stock
------------------- ----------------- -------------------
Shares Amount Shares Amount Shares Amount
------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 52,500 $52,500 0 $0 8,877,892 $88,779
Common stock issued under asset purchase agreement -- -- - - 300,000 3,000
Common stock issued for compensation -- -- - - 13,000 130
Change in unrealized gain (loss) on marketable securities -- -- - -
Dividends declared and paid on Series B preferred stock -- -- - -
Issuanced of preferred stock, Series C -- -- 40,000 40,000
Common stock issued upon exercise of options -- -- - - 40,000 400
Common stock issued upon exercise of warrants -- -- - - 280,492 2,805
Common stock issued upon conversion of Class B -- -- - - 1,296,440 12,964
Common stock issued for purchase of Oakhill -- -- - - 612,301 6,123
Warrants issued for purchase of Oakhill -- -- - -
Common stock issued for purchase of Mustang Island -- -- - - 352,500 3,525
Common stock issued to purchase Texas Gas Fund I
interest in the Goldsmith Adobe Unit -- -- - - 100,000 1,000
Payments for redemption of fractional shares -- -- - -
Net income -- -- - -
------ ------- ------ ------- ---------- --------
Balance at September 30, 1995 52,500 $52,500 40,000 $40,000 11,872,625 $118,726
====== ======= ====== ======= ========== ========
<CAPTION>
Common Stock Unrealized
Class B Under Asset Additional Available-
Common Stock Acquisition Paid-in for-sale
Shares Amount Agreement Capital Securities
------------ ------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 129,644 $1,296 $136,035 $13,626,116 $136,285
Common stock issued under asset purchase agreement -- (136,035) 133,035 --
Common stock issued for compensation -- 25,870 --
Change in unrealized gain (loss) on marketable securities -- (342,639)
Dividends declared and paid on Series B preferred -- --
Issuanced of preferred stock, Series C -- 3,945,319 --
Common stock issued upon exercise of options -- 24,600 --
Common stock issued upon exercise of warrants -- 427,994 --
Common stock issued upon conversion of Class B (129,644) (1,296) (11,668) --
Common stock issued for purchase of Oakhill -- 1,754,242 --
Warrants issued for purchase of Oakhill -- 175,000 --
Common stock issued for purchase of Mustang Island -- 1,053,975 --
Common stock issued to purchase Texas Gas Fund I
interest in the Goldsmith Adobe Unit -- 286,500 --
Payments for redemption of fractional shares -- (501) --
Net income -- --
------------ ------- ----------- ----------- -------------
Balance at September 30, 1995 0 $0 $0 $21,440,482 ($206,354)
============ ======= =========== =========== =============
<CAPTION>
Stockholders'
Deficit Equity
------------ -------------
<S> <C> <C>
Balance at December 31, 1994 ($2,713,497) $11,327,514
Common stock issued under asset purchase agreements $0
Common stock issued for compensation $26,000
Change in unrealized gain (loss) on marketable securities ($342,639)
Dividends declared and paid on Series B preferred (262,500) ($262,500)
Issuanced of preferred stock, Series C $3,985,319
Common stock issued upon exercise of options $25,000
Common stock issued upon exercise of warrants $430,799
Common stock issued upon conversion of Class B $0
Common stock issued for purchase of Oakhill $1,760,365
Warrants issued for purchase of Oakhill $175,000
Common stock issued for purchase of Mustang Island $1,057,500
Common stock issued to purchase Texas Gas Fund I $0
interest in the Goldsmith Adobe Unit $287,500
Payments for redemption of fractional shares ($501)
Net income 54,136 $54,136
------------ -------------
Balance at September 30, 1995 ($2,921,861) $18,523,493
============ =============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
National Energy Group, Inc.
Statements of Cash Flows
For the Nine Months Ended September 30,
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $54,136 ($151,102)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,727,535 494,895
Amortization of deferred compensation 31,232 33,117
Extraordinary charge for early
extinguishment 431,762 121,917
Restricted stock grants 3,499 64,290
Changes in operating assets & liabilities:
Accounts receivable (1,093,942) 69,548
Other current assets (194,307) (115,269)
Accounts payable and accrued liabilities 1,505,966 (290,408)
Accounts receivable and payable with
related parties 23,999 --
------------ -----------
Net cash provided by operating activities 2,485,185 226,988
Investing activities:
Oil and gas acquisition, exploration, and
development expenditures (15,146,741) (1,428,088)
Purchases of furniture, fixtures and equipment (38,618) (37,718)
Proceeds from sales of oil and gas properties 69,306 73,000
Purchases of marketable securities (2,917,659) --
Sales of marketable securities 1,892,447 --
Dividend payments on preferred stock (262,500) (14,705)
Purchase of other long-term assets (11,000) --
Other (3,795) 45,760
------------ -----------
Net cash used in investing activities (16,418,560) (1,361,751)
Financing activities:
Proceeds from exercise of stock options 25,000 32,813
Proceeds from exercise of stock warrants 430,799 --
Proceeds from issuance of preferred stock,
Series B -- 4,436,372
Proceeds from issuance of preferred stock,
Series C 3,980,343 --
Proceeds from issuance of long-term debt,
net of costs 13,185,498 5,691,366
Repayments of long-term debt (6,597,282) (4,277,571)
Proceeds from broker margin account 1,011,355 --
Payments for redemption of fractional shares (486) (477)
----------- -----------
Net cash provided by financing activities 12,039,922 5,882,503
Increase (decrease) in cash and cash equivalents (1,893,453) 4,747,740
Cash and cash equivalents at beginning of period 2,593,645 161,464
----------- -----------
Cash and cash equivalents at end of period $700,192 $4,909,204
Supplemental cash flow information:
Interest paid in cash $716,331 $311,573
=========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
National Energy Group, Inc.
Notes to Financial Statements
September 30, 1995 and 1994
1. Basis of Presentation
In management's opinion, the accompanying financial statements contain all
adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of National Energy Group, Inc. (the
"Company") as of September 30, 1995, the related results of operations for the
three and nine month periods ended September 30, 1995 and 1994 and cash flows
for the nine month periods ended September 30, 1995 and 1994.
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
Company's financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1994.
The Company capitalizes internal general and administrative costs that can be
directly identified with acquisition, exploration and development activities.
These costs totalled $85,616 for the nine months ended September 30, 1995,
and such costs were $77,358 for the nine months ended September 30, 1994.
Fees from overhead charges billed to working interest owners of $100,515 and
$126,907 for the nine months ended September 30, 1995 and 1994, respectively,
have been classified as a reduction of general and administrative expenses in
the accompanying statements of operations.
Certain previously reported amounts have been reclassified to conform with
the 1995 presentation.
Primary earnings (loss) per common and common equivalent share data is
computed by dividing net income (loss) adjusted for preferred stock dividend
requirements by the weighted average number of common and common equivalent
shares outstanding during each period. Shares issuable upon exercise of
options and warrants are included in the computation of earnings per common and
common equivalent share to the extent they are dilutive. Fully diluted earnings
(loss) per share computations also assume conversi on of the Company's
preferred stock if such conversion has a dilutive effect.
6
<PAGE>
For the nine months ended September 30, 1995 and 1994, neither the common
equivalent shares nor the assumed conversion of the preferred stock had a
dilutive effect on the loss per share calculations. Accordingly, the loss per
share calculations for such periods are based on the weighted average number
of common shares outstanding for the period.
Marketable Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Adoption of FAS 115 had no effect on the
Company's financial position at January 1, 1994.
The Company's marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary are included in investment income. The
cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in investment income.
The following is a summary of available-for-sale securities at September 30,
1995:
- - - -------------------------------------------------------------------------------
Gross Gross
Cost unrealized unrealized Estimated
gains losses fair value
- - - -------------------------------------------------------------------------------
Common stocks $2,072,217 $4,147 $210,501 $1,865,863
===============================================================================
During the nine months ended September 30, 1995, the Company sold
available-for-sale securities with a fair value at the date of sale of
$2,111,892. The gross realized gains and gross realized losses on such sales
totaled $223,713 and $3,131, respectively.
The marketable securities are comprised of oil and gas companies that the
Company may have an interest in acquiring. The common stock of one oil and gas
company accounted for 66.8% of the estimated fair market value of the total
marketable securities at September 30, 1995.
2. Acquisitions
In April 1995, the Company consummated the purchase of a 100% working
interest (77% net revenue interest) in State of Texas Lease No. 69153 and the
State Tract 901-S Field, Nueces County, Texas ("Mustang Island"). The purchase
was directly from LLOG
7
<PAGE>
Production Company and was accomplished through an assignment of contract
rights from Sierra Mineral Development, L.C. The Company paid $900,000 cash and
delivered 352,500 shares of Class A Common Stock ("Common Stock"). The cash
portion was funded from available cash.
In June 1995, the Company completed the acquisition of producing gas
properties in the Oak Hill Field in Rusk County, Texas ("Oak Hill") from Sierra
1994 I Limited Partnership ("Sierra"). The consideration paid by the Company to
Sierra for the Oak Hill acquisition consisted of $7,200,000 in cash, 612,311
shares of the Company's Common Stock and Warrants to purchase 200,000 shares of
Common Stock at a puchase price of $2.00 per share. The cash portion of the
acquisition was funded primarily by the Company's new reducing, revolving
credit facility with Bank One, Texas, N.A. ("Bank One").
In addition, in June 1995, the Company completed the acquisition of producing
oil and gas properties in Eddy County, New Mexico from Enron Oil and Gas
Company ("Enron"). The acquisition consists of six gas wells and two oil wells,
which contain approximately 4 billion cubic feet of gas equivalent. The
Company will be the operator of a majority of the properties. The consideration
given for the acquisition was $2,119,295 in cash. This acquisition was funded
by the Company's new credit facility with Bank One and available cash.
The Mustang Island, Oak Hill and Enron acquisitions are hereinafter
collectively referred to as "the Acquisitions".
3. Long-Term Debt
In June 1995, the Company consummated a $33,000,000 reducing revolving line
of credit facility (the "Facility") with Bank One, Texas, N.A. ("Bank One").
The initial funding was $15,500,000, of which $12,500,000 was drawn upon. The
initial advance was used to purchase the Oak Hill and Enron properties (see
Note 2), to pay off the Company's credit facility with Texas Gas Fund I and for
closing fees. In addition, the Company issued 100,000 shares of Common Stock to
Texas Gas Fund I to reduce their Net Profits Interest in the Goldsmith Adobe
Unit ("GAU") in Ector County, Texas. In the future, the Facility will be used
for the further development of the GAU and certain other properties and for
acquisitions and limited exploration.
The Facility consists of a Revolving Note of up to $30,000,000, with an
interest rate of prime plus 1% (subject to reduction in certain circumstances)
or LIBOR plus 3.75% (subject to reduction in certain circumstances), and an
Advance Note of up to $3,000,000 (primarily for the development of GAU) at a
rate of prime plus 4%. Payments of interest and principal will be made monthly.
The Facility is secured by all of the Company's principal oil and gas
properties, related equipment, oil and gas inventory and related revenues.
Prepayments are allowed at any time.
The Revolving Note has a maturity date of June 30, 1999 and the Advance Note
has a maturity date of June 30, 1996. Payment of the Advance Note is
subordinated to payment of the Revolving Note. Beginning July 31, 1995, the
Company began to make required
8
<PAGE>
monthly payments of $175,000 (which amount can be redetermined semi-annually by
Bank One). At September 30, 1995, the Company had $11,975,000 outstanding under
the Revolving Note and $1,000,000 outstanding under the Advance Note.
Subsequent to September 30, 1995, the Company borrowed the remaining $2,000,000
available under the Advance Note.
The Facility contains restrictive and affirmative covenants and required
maintenance of certain financial ratios. Under the Facility with Bank One,
the Company is required to maintain a minimum current ratio (excluding current
maturities of the Facility), debt service ratio and total liabilities to
total equity ratio. In addition, maximum amounts of debt under the Facility
are allowed based on the present value of the Company's oil and gas
properties. Further, the Facility contains restrictions pertaining to cash
dividends, mergers and indebtedness to purchase equity securities. At
September 30, 1995, the Company was not in violation of any covenants of the
Facility.
4. Stockholders' Equity
On June 3, 1994, the Company consummated the sale of $5,000,000 of the
Company's 10% Cumulative Convertible Preferred Stock, Series B ("Series B"),
which was privately placed with certain investment partnerships (the "Series B
Purchasers"). Fifty thousand shares of Series B were sold by the Company at
$100.00 per share. The Series B is convertible into shares of the Company's
Common Stock at a conversion price of $1.625 per share of Common Stock. The
Series B has a liquidation and dividend preference over the common stock. The
Series B has a 10% dividend, payable semi-annually. The Company has the option
to make six dividend payments in shares of Series B; after the sixth such
payment, the Series B Purchasers have the option to receive additional
dividends in shares of Series B or to accrue such dividends in cash. If the
Company makes four dividend payments in shares of Series B, the Series B
Purchasers have the right to appoint one-third of the members of the Company's
Board of Directors. The Series B is redeemable by the Company between one year
and three years from June 3, 1994, at $110.00 per share and, thereafter, at
$100.00 per share, plus accrued and unpaid dividends; provided, however, that
the Company cannot redeem any shares of Series B unless and until all
outstanding shares of the Series C have been redeemed by the Company. The
holders of Series B currently have the right to appoint one member to the
Company's Board of Directors. As a result of a dividend of Series B, there are
52,500 shares of Series B outstanding at September 30, 1995.
The Series B requires that dividends be paid on the Series B before any
dividends are paid on common stock. The holders of Series B are entitled to one
vote for each share as to matters upon which by law they are entitled to vote
as a class, and the approval of a
9
PAGE>
majority of the Series B, voting separately as a class, is required to make
changes to the Company's Certificate of Incorporation or By-Laws which
adversely affect the Series B, to issue preferred stock equal to or senior to
the Preferred Stock as to dividends or liquidation, or, subject to certain
exceptions, to effect an extraordinary transaction that requires a vote of the
Company's stockholders. As a result, a class vote of the holders of Series B
would be required for the Company to merge or be acquired and may therefore
delay, deter, or prevent a change in control of the Company.
In June 1995, the Company consummated the sale of $4,000,000 of the Company's
10 1/2% Cumulative Convertible Preferred Stock, Series C ("Series C"), which
was privately placed with certain investment partnerships (the "Series C
Purchasers"). The Series B Purchasers and the Series C Purchasers are the same
entities. Forty thousand shares of Series C were sold by the Company at $100.00
per share, and the Series C is convertible into shares of the Company's Common
Stock at a conversion price of $2.00 per share of Common Stock.
The Series C has a liquidation and dividend preference over common stock, and
is parity stock to the previously issued Series B. The Series C has a 10 1/2%
dividend, payable semi-annually. The Company has the option to make six
dividend payments in shares of Series C; after the sixth such payment, the
Series C Purchasers have the option to receive additional dividends in shares
of Series C or to accrue such dividends in cash. If the Company makes four
dividend payments in shares of Series C, the Series C Purchasers (voting as a
class with other affected series of preferred stock with similar voting rights)
have the right to appoint one-third of the members of the Company's Board of
Directors; provided, however, that if the holders of Series B are presently
entitled to a similar right, then the holder of Series C shall have no such
right until the right of the holders of Series B terminates. The Series C is
not redeemable by the Company for two years; between two years and three years
from June 14, 1995, the Series C is redeemable at $110.00 per share and,
thereafter, at $100.00 per share, plus accrued and unpaid dividends. No shares
of Series B shall be redeemed by the Company unless and until all outstanding
shares of Series C have been redeemed by the Company. The holders of the Series
C currently have the right to appoint one member to the Company's Board of
Directors. Dividends on Series C are required to be paid before dividends can
be paid on common stock.
The holders of Series C are entitled to one vote for each share as to matters
upon which by law they are entitled to vote as a class, and the approval of a
majority of the holders of Series C, voting separately as a class, is required
to make changes to the Company's Certificate of Incorporation or By-Laws which
adversely affect the Series C, to issue preferred stock equal to or senior to
the Series C as to dividends or liquidation or subject to certain exceptions,
to effect an extraordinary transaction that requires a vote of the Company
stockholders. As a result, a class vote of the holders of Series C, as well as
the Series B, would be required for the Company to merge or be acquired and may
therefore delay, deter, or prevent a change in control of the Company.
In connection with the early extinguishment of the Texas Gas Fund I loan, the
Company issued 100,000 shares of Common Stock to reduce Texas Gas Fund I's Net
Profits Interest in the GAU.
10
<PAGE>
In June 1995, as a result of the Company's proven crude oil and natural gas
reserves reaching a value in excess of $25,000,000, the 129,644 shares of Class
B common stock outstanding at December 31, 1994 were converted into 1,296,440
shares of Common Stock, in accordance with the terms of the Class B.
Common stock issuable under asset acquisition agreement outstanding at
December 31, 1994 represented additional consideration related to the TriSearch
Asset Acquisition. In January 1995, 300,000 shares of Common Stock were issued
in final satisfaction of this obligation.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Liquidity and Capital Resources
- - - -------------------------------
In June 1995, the Company consummated a $33,000,000 reducing revolving line
of credit facility (the "Facility") with Bank One, Texas, N.A. ("Bank One"),
which is fully described in Note 3 to these financial statements. The Facility
consists of a Revolving Note of up to $30,000,000, with an interest rate of
prime plus 1% (subject to reduction in certain circumstances) or LIBOR plus
3.75% (subject to reduction in certain circumstances), and an Advance Note of
up to $3,000,000 (primarily for the development of GAU) at a rate of prime
plus 4%. At September 30, 1995, the Company had $11,975,000 outstanding under
the Revolving Note and $1,000,000 outstanding under the Advance Note.
Subsequent to September 30, 1995, the Company borrowed the remaining $2,000,000
under the Advance Note.
On June 3, 1994, the Company consummated the sale of $5,000,000 of the
Company's 10% Cumulative Convertible Preferred Stock, Series B ("Series B")
which was privately placed with certain investment partnerships (the "Series B
Purchasers"). Fifty thousand shares of Series B were sold by the Company at
$100.00 per share, and the Series B is convertible into shares of the Common
Stock at a conversion price of $1.625 per share of Common Stock. The Company
received $4,436,732 in net proceeds from the sale of the Series B (see Note 4).
Proceeds from the offering of Series B were used to purchase additional
interests in the GAU and to recomplete, enhance and exploit the GAU as well as
certain of the Company's other properties. The proceeds also were used for the
acquisition of producing properties and for exploration drilling.
In June 1995, the Company consummated the sale of $4,000,000 of the Company's
10 1/2% Cumulative Convertible Preferred Stock, Series C ("Series C"), which
was privately placed with certain investment partnerships (the "Series C
Purchasers"). Forty thousand shares of Series C were sold by the Company at
$100.00 per share, and the Series C is convertible into shares of the Company's
Common Stock at a conversion price of $2.00 per share of Common Stock. The
Series B Purchasers and the Series C Purchasers are the same entities.
11
<PAGE>
Some of the proceeds from the offering of Series C have been used to develop
the GAU, to recomplete, enhance and exploit certain of the Company's other
selected properties and for the acquisition of producing properties. Also, a
portion of the proceeds have been used to purchase the securities of oil and
gas companies that the Company may have an interest in acquiring.
The Company's strategy is to continue to acquire oil and gas properties, to
enhance and exploit existing properties for reserves and to engage in limited
exploratory drilling. Subject to sufficient funding (and, in particular,
additional advances under the Facility) the Company expects to incur
approximately $5,000,000 in capital expenditures over the next twelve months to
continue to drill development wells and enhance and exploit wells on its
primary property, the GAU. The Company spent approximately $1,970,000 and
$4,530,925 in capital expenditures to enhance and exploit various wells for the
year ended December 31, 1994 and the nine months ended September 30, 1995,
respectively. The majority of anticipated costs for development of the GAU,
acquisitions of additional oil and gas properties and drilling and enhancement
projects are expected to be funded by existing working capital and additional
advances under the Facility.
Cash flow provided by operating activities increased during the nine months
ended September 30, 1995, as compared to 1994. Net cash provided from operating
activities totalled $2,489,880 for the nine months ended September 30, 1995, as
compared to $226,988 for the same period in 1994. This increase was due
principally to the increased production from the six new GAU wells drilled and
completed during 1994 and the nine new GAU wells drilled and completed during
the nine months ended September 30, 1995 (hereinafter referred to as the "New
GAU Wells"), and the increased production related to the Acquisitions (see
Note 2 to these financial statements for information on the Acquisitions).
The Company's cash and cash equivalent position decreased by $1,893,453 from
December 31, 1994 to September 30, 1995, due primarily to the purchase of
marketable securities, development of the GAU and the Acquisitions.
The Company's working capital deficit at September 30, 1995 was $2,018,177,
as compared to working capital of $3,560,796 at December 31, 1994, which
reflects a decrease in working capital of $5,578,973 for the nine months
ended September 30, 1995. This decrease in working capital is primarily
attributable to the inclusion of the current portion of the Facility with
Bank One which totals $3,100,000.
Results of Operations
- - - ---------------------
Nine Months Ended September 30, 1995 and 1994
- - - ---------------------------------------------
12
<PAGE>
The Company's oil and gas sales increased 113.9% to $4,861,176 for the nine
month period ended September 30, 1995, as compared to the same period in 1994.
This increase in oil and gas sales was the result of the Company's increased
production due to the Acquisitions discussed in Note 2 and the New GAU Wells.
In addition, the increase in sales is also attributable to a 9.3% increase in
average oil prices, partially offset by a 19.3% decrease in gas prices.
During the nine month period ended September 30, 1995, the Company sold
176,591 barrels of oil and 1,065,037 Mcf of gas, as compared to 84,313 barrels
of oil and 440,905 Mcf of gas for the comparable 1994 period, which represents
a 109.4% increase in oil production and a 141.6% increase in gas production.
The average price received for oil sold increased for the nine months ended
September 30, 1995 compared to the same period in 1994 ($17.24 per barrel in
1995 versus $15.78 in 1994, representing a 9.3% increase). The average price
received for gas sold for the nine months ended September 30, 1995 decreased
from the same period in 1994 ($1.71 per Mcf in 1995 versus $2.12 per Mcf in
1994, representing a 19.3% decrease).
The decrease in lease operating expense as a percentage of sales (23.4% for
the nine months ended September 30, 1995 as compared to 36.7% for the same 1994
period) is primarily due to the increased production from the New GAU Wells and
the Acquisitions, both of which have significantly lower lease operating
expenses than the Company's previous average.
The increase in depreciation, depletion and amortization is due to increased
depletion resulting from the additional production from the New GAU Wells and
the Acquisitions.
The increase in general and administrative expense is largely the result of
increased staffing requirements related to the development of the GAU and the
Acquisitions, combined with an increase in the levels of operations as a result
of the Company's improved financial condition.
The Company posted operating income of $820,237 during the nine month period
ended September 30, 1995, as compared to operating income of $242,729 during
the same period in 1994. The increase in operating income for the nine months
ended September 30, 1995 was due to the Company's increased production
primarily from the New GAU Wells, and the Acquisitions, and higher oil prices,
offset in part by lower gas prices, higher general and administrative costs and
an increase in depreciation, depletion and amortization.
The Company reported net income before extraordinary item for the nine months
ended September 30, 1995 of $485,898 as compared to a net loss before
extraordinary item of $29,185 for the same period in 1994, which is a result
of higher operating profit and a gain on sale of marketable securities offset,
in part by increased interest expense.
The Company reported net income of $54,136 for the nine months ended
September 30, 1995 as compared to a net loss of $151,102 for the 1994 period.
The net income for the nine months ended September 30, 1995 was decreased by an
extraordinary charge of
13
<PAGE>
$431,762 for the early extinguishment of the Texas Gas Fund I loan which was
paid off out of the proceeds from the Facility.
Results of Operations
- - - ---------------------
Three Months Ended September 30, 1995 and 1994
- - - ----------------------------------------------
The Company's oil and gas sales increased 161.7% to $2,207,435 for the three
month period ended September 30, 1995, as compared to the same period in 1994.
The increase in oil and gas sales for the quarter from 1994 to 1995 was
directly the result of the increased production due to the Acquisitions and the
New GAU Wells, offset in part by a 3.6% decrease in average oil prices, and a
28.8% decrease in average gas prices.
During the three month period ended September 30, 1995, the Company sold
81,489 barrels of oil and 555,981 Mcf of gas, as compared to 29,687 barrels and
152,988 Mcf for the comparable 1994 period, which represent a 174.5% increase
in oil production and a 263.4% increase in gas production. The average price
received for gas sold during the three months ended September 30, 1995
decreased from the same period for 1994 ($1.56 per Mcf in 1995 versus $2.19 per
Mcf in 1994, representing a 28.8% decrease), and the average price received for
oil sold decreased for the three months ended September 30, 1995 from the same
period in 1994 ($16.64 per barrel in 1995 versus $17.26 in 1994, representing a
3.6% decrease).
The decrease in lease operating expense as a percent of sales (19.3% for the
three months ended September 30, 1995 as compared to 39.2% for the same 1994
period) is due primarily to the increased production from the New GAU Wells and
the Acquisitions, both of which have significantly lower lease operating
expenses than the Company's previous average.
The increase in depreciation, depletion and amortization is due to increased
depletion resulting from the additional production from the New GAU Wells and
the Acquisitions.
The increase in general and administrative expense is largely the result of
increased staffing requirements related to the development of the GAU and the
Acquisitions, combined with an increase in the levels of operations as a result
of the Company's improved financial condition.
The Company posted operating income of $427,146 during the three month period
ended September 30, 1995, as compared to operating income of $86,768 during the
same period in 1994. The increase in operating income for the period ended
September 30, 1995 was due to increased production from the New GAU wells and
the Acquisitions, offset in part by an increase in depreciation, depletion and
amortization, an increase in general and administrative expenses and lower oil
and gas prices.
The Company reported net income for the three months ended September 30, 1995
of $149,059 as compared to net income of $17,527 for the same period in 1994.
The increase was directly the result of the increase in operating profit,
offset by higher interest expense.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 31, 1995, R. E. Steakley and N. M. Steakley filed a lawsuit in the
District Court of Harris County, Texas against Amoco Production Company,
Phillips Petroleum Company, the Company and others. The lawsuit alleges certain
environmental claims and related tortious and contractual claims. The
plaintiffs seek unspecified damages which include remediation and various
tortious and contractual damages.
The Company believes that it is operating in compliance with applicable
environmental laws and regulations and that the ultimate resolution of the
lawsuit will not have a material effect on the Company's financial condition or
results of operations.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be furnished.
(1) The Agreement of Merger, dated December 17, 1990, by and among the
Company, Big Piney Oil and Gas Company, VP Oil, Inc., Big Piney Acquisition
Corp. and VP Acquisition Corp., has been filed as Appendix A to Company's
Registration Statement on For m S-4 (No. 33-38331), dated April 23, 1991. The
Asset Purchase and Sale Agreement, dated as of February 7, 1992, among the
Company, TriSearch Inc. and certain other parties, and the Addendum to Asset
Purchase and Sale Agreement among the Company, TriSearch Inc. and certain
other parties, have been filed as Exhibits 10.5 and 10.6, respectively, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1991. The
Purchase Agreement, dated March 12, 1993, by and among the Company, OilSearch
Leasing Partners, Ltd. ("Leasing"), OilSearch Acquisition Group One, Ltd.,
("Acquisition"), and the various limited partners of Leasing and Acquisition
has been filed as Exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1992. The Asset Purchase and Sale Agreement,
dated as of December 30, 1993, between the Company and Bligh Petroleum, Inc.
has been filed as Exhibit 10.9 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1993. The Agreement for Purchase and Sale (Oak
Hill), dated April 12, 1995, between the Company and Sierra 1994 I Limited
Partnership, and the Agreement for Purchase and Sale (Mustang Island), dated
April 20, 1995, between the Company and Sierra Mineral Development L.C ., have
been filed as Exhibits 10.1 and 10.2, respectively, to the Company's Current
Report on Form 8-K, dated July 17, 1995, and the Purchase and Sale Agreement,
dated as of March 29, 1995, between the Company and Enron Oil and Gas Company
has been filed as Exhibit 10.3 to such Current Report. The Company's
Certificate of Incorporation, as amended, has been filed as Exhibit 4.1 to the
Company's Registration Statement, as amended, dated July 27, 1994 (File No.
33-81172). The Certificate of Designations of National Energy Group, Inc. of
10% Cumulative Convertible Preferred Stock, Series B has been filed as Exhibit
10.4 to the Company's Current Report on Form 8-K, dated June 13, 1994. The
Certificate of Designations of National Energy Group, Inc. of 10 1/2%
Cumulative Convertible Preferred Stock, Series C has been filed as Exhibit 10.6
to the Company's Current Report on Form 8-K, dated July 17, 1995. The Loan
Agreement, dated June 30, 1995 between National Energy Group, Inc. and Bank
One, Texas, N.A., has been filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K, dated July 17, 1995. The Stock Purchase Agreement, dated as
of June 14, 1995, among the Company, Arbco Associates L.P., Offense Group
Associates L.P., Kayne, Anderson Nontraditional Investments L.P., and
Opportunity Associates L.P. has been filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K, dated July 17, 1995. The Stock Purchase Agreement,
dated as of June 2, 1994, among the Company, Arbco Associates L.P., Offense
Group Associates L.P., Kayne, Anderson Nontraditional Investments L.P., and
Opportunity Associates L.P. has been filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K, dated June 13, 1994.
(2) The Financial Data Schedule, for the nine months ended September 30,
1995, is filed as Exhibit 27 attached hereto (applicable to Edgar filings
only).
16
<PAGE>
(b) Reports on Form 8-K.
On July 17, 1995, the Company filed a Current Report on Form 8-K; the report
contained "Item 2 - Acquisition or Disposition of Assets" to disclose the
Company's acquisition of producing gas properties in the Oak Hill Field in Rusk
County, Texas, a producing oil and gas property in the Mustang Island Field in
offshore Nueces County, Texas and producing oil and gas properties in Eddy
County, New Mexico; the report contained an "Item 5 - Other Events" to disclose
the Company's $33,000,000 reducing revolving line of credit facility with Bank
One, Texas, N.A. and the sale of $4,000,000 of the Company's 10 1/2% Cumulative
Convertible Preferred Stock, Series C.
On September 14, 1995, the Company filed a Current Report on Form 8-K/A No. 1
which substituted an "Item 7 - Financial Statements and Exhibits" for the Item
7 in the July 17, 1995 report, and provided the required financial statements
and proforma financial information for the acquired assets.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NATIONAL ENERGY GROUP, INC.
(Registrant)
Date: November 14, 1995 By: /s/ Miles D. Bender
--------------------------------------
Miles D. Bender
President and Chief Executive Officer
Date: November 14, 1995 By: /s/ Robert A. Imel
--------------------------------------
Robert A. Imel
Chief Financial Officer
Date: November 14, 1995 By: /s/ Melissa H. Rutledge
-------------------------------------
Melissa H. Rutledge
Controller and
Chief Accounting Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-QSB for the nine months ended September 30, 1995 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 700,192
<SECURITIES> 1,865,863
<RECEIVABLES> 1,979,242
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,979,926
<PP&E> 34,025,918
<DEPRECIATION> 4,190,700
<TOTAL-ASSETS> 35,416,899
<CURRENT-LIABILITIES> (6,998,103)
<BONDS> 0
<COMMON> (118,726)
0
(92,500)
<OTHER-SE> (18,312,267)
<TOTAL-LIABILITY-AND-EQUITY> (35,416,899)
<SALES> (4,861,176)
<TOTAL-REVENUES> (4,861,176)
<CGS> 0
<TOTAL-COSTS> 1,398,738
<OTHER-EXPENSES> 2,642,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 636,414
<INCOME-PRETAX> (485,898)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (431,762)
<CHANGES> 0
<NET-INCOME> (54,136)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
