<PAGE>
--------------------------------------------------------------------------------
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 June 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 each of the issuer's classes of Common Stock as of
August 2, 1995:
Class A Common Stock ($0.01 par value) 11,857,625 shares
--------------------------------------------------------------------------------
<PAGE>
NATIONAL ENERGY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Balance Sheets -
June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . 1
Statements of Operations -
Three and Six months ended June 30, 1995 and 1994 . . . . . . . . 3
Statement of Stockholders' Equity -
Six months ended June 30, 1995 . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows -
Six months ended June 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 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $2,667,331 $2,593,645
Marketable securities 184,204 1,182,150
Accounts receivable - oil and gas sales 649,299 344,972
Accounts receivable - joint interest and other 580,053 543,771
Accounts receivable from related parties -- 23,999
Other 356,402 267,731
------------------------------
Total current assets 4,437,289 4,956,268
Property and equipment:
Oil and gas properties, at cost
(full cost method) 30,578,592 15,284,453
Furniture, fixtures and equipment 341,449 329,445
-------------------------------
30,920,041 15,613,898
Accumulated depreciation, depletion and
amortization 3,344,278 2,501,047
-------------------------------
Net property and equipment 27,575,763 13,112,851
Other assets 306,996 677,056
-------------------------------
Total assets $32,320,048 $18,746,175
===============================
</TABLE>
See accompanying notes.
1
<PAGE>
NATIONAL ENERGY GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable - trade $ 822,200 $ 820,377
Accounts payable - revenue 139,101 97,935
Accounts payable - other 451,768 393,740
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 2,100,000 --
-------------------------------
Total current liabilities 3,516,572 1,395,472
Other long-term liabilities 21,190 23,189
Long-term debt, less current portion 10,400,000 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 - 11,773,133 and 8,877,892 at
June 30, 1995 and December 31, 1994 , respectively 117,731 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 21,314,731 13,626,116
Unrealized gain(loss) on available-for-sale securities, net (71,756) 136,285
Deficit (3,070,920) (2,713,497)
-------------------------------
Total stockholders' equity 18,382,286 11,327,514
-------------------------------
Total liabilities and stockholders' equity $32,320,048 $18,746,175
===============================
</TABLE>
See accompanying notes.
2
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $1,562,993 $734,702 $2,653,741 $1,429,284
Costs and expenses:
Lease operating 416,606 242,347 712,965 504,548
Oil and gas production taxes 88,037 37,010 149,193 80,185
Depreciation, depletion and
amortization 540,741 142,571 874,249 316,146
General and administrative 287,572 204,605 524,243 372,444
------------------------- -------------------------
1,332,956 626,533 2,260,650 1,273,323
------------------------- -------------------------
Operating income 230,037 108,169 393,091 155,961
Interest expense (174,717) (122,939) (328,842) (219,315)
Interest income and other 18,224 10,207 48,877 16,642
Gain on sale of marketable securities 158,309 -- 223,713 --
------------------------- -------------------------
Income (loss) before income taxes 231,853 (4,563) 336,839 (46,712)
Provision for income taxes -- -- -- --
------------------------- -------------------------
Income (loss) before extraordinary item 231,853 (4,563) 336,839 (46,712)
Extraordinary charge for early
extinguishment of debt (431,762) (121,917) (431,762) (121,917)
------------------------- -------------------------
Net loss ($199,909) ($126,480) ($94,923) ($168,629)
========================= =========================
Preferred stock dividend requirements $148,750 $37,500 $280,000 $37,500
------------------------- -------------------------
Net loss to common shareholders ($348,659) ($163,980) ($374,923) ($206,129)
========================= =========================
Loss per common share:
Income (loss) before extraordinary item $0.01 ($0.01) $0.01 ($0.01)
========================= =========================
Net loss ($0.04) ($0.02) ($0.04) ($0.03)
========================= =========================
Weighted average number of common
shares outstanding 9,907,007 8,379,409 9,524,574 8,114,321
========================= =========================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
NATIONAL ENERGY GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1995
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
Change in unrealized gain 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 -- -- -- -- 194,000 1,940
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 below market 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 loss -- -- -- -- -- --
-----------------------------------------------------------------------
Balance at June 30, 1995 52,500 $52,500 40,000 $40,000 11,773,133 $117,731
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
CLASS B ISSUABLE GAIN ON
COMMON STOCK UNDER ASSET ADDITIONAL AVAILABLE-
------------------------- ACQUISITION PAID-IN FOR-SALE
SHARE 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 --
Change in unrealized gain on marketable securities -- -- -- -- (208,041)
Dividends declared and paid on Series B preferred stock -- -- -- -- --
Issuanced of preferred stock, Series C -- -- -- 3,960,000 --
Common stock issued upon exercise of options -- -- -- 24,600 --
Common stock issued upon exercise of warrants -- -- -- 313,310 --
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 below market 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 -- -- -- (379) --
Net loss -- -- -- -- --
---------------------------------------------------------------------
Balance at June 30, 1995 0 $0 $0 $21,314,731 ($71,756)
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT EQUITY
-----------------------------
<S> <C> <C>
Balance at December 31, 1994 $(2,713,497) $11,327,514
Common stock issued under asset purchase agreement -- 0
Change in unrealized gain on marketable securities -- (208,041)
Dividends declared and paid on Series B preferred stock (262,500) (262,500)
Issuanced of preferred stock, Series C -- 4,000,000
Common stock issued upon exercise of options -- 25,000
Common stock issued upon exercise of warrants -- 315,250
Common stock issued upon conversion of Class B -- 0
Common stock issued for purchase of Oakhill -- 1,760,365
Warrants issued below market 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 -- 287,500
interest in the Goldsmith Adobe Unit
Payments for redemption of fractional shares -- (379)
Net loss (94,923) (94,923)
---------------------------
Balance at June 30, 1995 $(3,070,920) $18,382,286
==========================
</TABLE>
See accompany notes
4
<PAGE>
NATIONAL ENERGY GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1994
-------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (94,923) $ (168,629)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation, depletion and amortization 874,249 316,146
Amortization of deferred compensation 21,175 21,134
Extraordinary charge for early extinguishment of debt 431,762 121,917
Restricted stock grants -- 5,000
Changes in operating assets and liabilities:
Accounts receivable (344,052) 118,407
Other current assets (138,581) (64,255)
Accounts payable and accrued liabilities 36,677 (348,252)
Accounts receivable and payable with related parties 23,999 2,200
-------------------------------
Net cash provided by operating activities 810,306 3,668
Investing activities:
Oil and gas acquisition, exploration, and
development expenditures (12,025,022) (526,301)
Purchases of furniture, fixtures and equipment (12,004) (9,738)
Proceeds from sales of oil and gas properties 69,306 73,000
Purchases of marketable securities (1,095,010) --
Sales of marketable securities 1,886,055 --
Dividend payments on preferred stock (262,500) (14,705)
Purchase of other long-term assets (11,000) --
Other (4,859) 81,044
-------------------------------
Net cash used in investing activities (11,455,034) (396,700)
Financing activities:
Proceeds from exercise of stock options 25,000 12,500
Proceeds from exercise of stock warrants 315,250 --
Proceeds from issuance of preferred stock, Series B -- 4,436,372
Proceeds from issuance of preferred stock, Series C 3,997,524 --
Proceeds from issuance of long-term debt, net of costs 12,453,286 5,691,366
Repayments of long-term debt (6,072,282) (4,266,321)
Payments for redemption of fractional shares (364) (377)
-------------------------------
Net cash provided by financing activities 10,718,414 5,873,540
Increase in cash and cash equivalents 73,686 5,480,508
Cash and cash equivalents at beginning of period 2,593,645 161,464
-------------------------------
Cash and cash equivalents at end of period $ 2,667,331 $ 5,641,972
===============================
Supplemental cash flow information:
Interest paid in cash $ 408,759 $ 166,752
===============================
</TABLE>
See accompanying notes.
5
<PAGE>
NATIONAL ENERGY GROUP, INC.
Notes to Financial Statements
June 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 June 30, 1995, the related results of operations for the three
and six month periods ended June 30, 1995 and 1994 and cash flows for the six
month periods ended June 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 $63,900 for the six months ended June 30, 1995. There were
no capitalized general and administrative costs for the six months ended June
30, 1994.
Fees from overhead charges billed to working interest owners of $63,816 and
$30,466 for the six months ended June 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.
The results of operations for the six months ended June 30, 1995 are not
necessarily indicative of the results expected for the full year.
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 conversion of the Company's preferred stock
if such conversion has a dilutive effect.
6
<PAGE>
For the six months ended June 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.
2. ACQUISITIONS
During 1994, the Company acquired approximately 17.0% of additional working
interests in the Goldsmith Adobe Unit (the "GAU"). Such interests were acquired
for $584,095 in cash. The Company is the operator of the GAU and, as a result
of the acquisitions in 1994, holds a 93.6% working interest in the GAU.
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 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. The
cash portion was internally generated.
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 Class A Common Stock and Warrants to purchase 200,000
shares of Class A Common Stock at a price per share of $2.00. 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").
Collectively, the Oak Hill and Mustang Island interests have proved
reserves estimated to contain nearly 30 billion cubic feet of gas equivalent.
The Company will operate both properties.
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 internally generated
cash.
The Mustang Island, Oak Hill and Enron acquisitions are hereinafter
collectively referred to as "the Acquisitions".
7
<PAGE>
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 Class A common
stock to Texas Gas Fund I to reduce their Net Profits Interest in the GAU. In
the future, the Facility will be used for the further development of the
Goldsmith Adobe Unit ("GAU") in Ector County, Texas and for 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 is required to make monthly payments of $175,000 (which amount can be
redetermined semi-annually by Bank One).
The Facility contains restrictive and affirmative covenants and required
maintenance of certain financial ratios. The Company cannot merge with another
entity unless (i) the Company is the surviving corporation or (ii) Bank One
consents, and (iii) no Event of Default shall occur. The Company must keep a
current ratio, excluding the current maturities of the Facility, of at least 1.0
to 1.0, a debt service ratio, as defined in the agreement, of 1.10 to 1.00, a
total liabilities to total equity ratio of no more than 1.25 to 1.00, and total
bank debt may not exceed 67% of the present value of the Company's oil and gas
properties on January 1, 1996, and 65% of such present value on April 1, 1996.
The Company cannot pay any dividends on or redeem common stock. However, cash
dividends on and redemptions of Preferred Stock are allowed, so long as no Event
of Default has occurred and is continuing or would occur as a result of such
payment. At June 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
Class A at a conversion price of $1.625 per share of Class A. 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
8
<PAGE>
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 not redeemable by the Company for one year; between one year and
three years from June 3, 1994, the Series B is redeemable at $110.00 per share
and, thereafter, at $100.00 per share, plus accrued and unpaid dividends. The
holders of Series B currently have the right to appoint one member to the
Company's Board of Directors.
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 majority of the Series B 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 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 investment partnerships associated with
Kayne, Anderson Investment Management, Inc. of Los Angeles, California (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 Class A Common Stock ("Class A") at a conversion price of $2.00
per share of Class A.
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 Series C; after the sixth such payment, the
Series C Purchasers have the option to receive additional dividends in 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.
9
<PAGE>
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 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 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,
defer, 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 Class A common stock to reduce
their Net Profits Interest in the GAU.
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 in to
1,296,440 shares of Class A, 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 Class A were
issued in final satisfaction of this obligation.
10
<PAGE>
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. At June 30,
1995, the Company had $12,500,000 outstanding under the Facility.
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 investment partnerships associated with Kayne,
Anderson Investment Management, Inc. of Los Angeles, California. 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 Class A at a conversion price of $1.625 per
share of Class A. The Company received $4,436,732 in net proceeds from the sale
of the Series B.
Proceeds from the offering of Series B were used to develop an expanded
waterflood project on the GAU, 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 affiliates of Kayne, Anderson Investment
Management, Inc. of Los Angeles, California. 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 Class A Common Stock ("Class A") at
a conversion price of $2.00 per share of Class A.
Proceeds from the offering of Series C will be used to develop the
Company's GAU property in Ector County, Texas, and to recomplete, enhance and
exploit certain of the Company's other selected properties. The proceeds also
may be used for the acquisition of producing properties or companies, or the
securities of such companies, and for limited exploration drilling.
The Company currently has total working capital of approximately $920,717,
as a result of the proceeds from the Facility and the sale of Series B and
Series C, which proceeds were reduced by acquisitions, development and
exploration costs incurred since the fundings, and working capital was further
reduced by the current maturities of the Facility. Current cash flows from the
Company's properties are adequate for the Company's general requirements and are
sufficient to meet its debt service requirements. Anticipated cash flows from
operations, however, are not sufficient to fund the planned capital expenditures
for development and enhancement of the GAU and the Company's other existing
properties, which capital expenditures will require additional advances under
the Facility.
11
<PAGE>
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 $3,000,000 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 $1,560,000 in
capital expenditures to enhance and exploit various wells for the year ended
December 31, 1994 and the six months ended June 30, 1995, respectively. The
majority of anticipated development costs for 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 six months
ended June 30, 1995, as compared to 1994. Net cash provided by operating
activities totalled $738,024 for the six months ended June 30, 1995, as compared
to $3,668 for the same period in 1994. This increase was due principally to the
Company's 1994 acquisition of an additional 17.0% working interest in the GAU,
the increased production from the drilling of six new wells at the GAU, and the
increased production related to the Acquisitions.
The Company's cash and cash equivalent position increased by $73,686 from
December 31, 1994 to June 30, 1995, due to the additional proceeds from the
Facility and sale of Series C, offset by the Acquisitions and the payoff of the
Texas Gas Fund I loan (see Notes 2, 3, and 4).
The Company's working capital at June 30, 1995 was $920,717, as compared to
working capital of $3,560,796 at December 31, 1994, which reflects a decrease in
working capital of $2,640,079 for the six months ended June 30, 1995. This
decrease in working capital is primarily attributable to the inclusion of the
current portion of the new Facility with Bank One which totals $2,100,000.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
The Company's oil and gas sales increased 85.7% to $2,653,741 for the six
month period ended June 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 acquisition of additional working interests in the GAU, of
which production is included for the entire 1995 period and the Acquisitions
discussed in Note 2, combined with the drilling of six new wells at GAU. In
addition, the increase in sales is also attributable to an 18.4% increase in
average oil prices, partially offset by a 10.0% decrease in gas prices.
During the six month period ended June 30, 1995, the Company sold 94,767
barrels of oil and 509,275 Mcf of gas, as compared to 54,626 barrels of oil and
287,917 Mcf of gas for the comparable 1994 period, which represents a 73.5%
increase in oil production and a 76.9% increase in gas production. The average
price received for oil sold increased for the six months ended June 30, 1995
from the same period in 1994 ($17.92 per barrel in 1995
12
<PAGE>
versus $15.13 in 1994, representing a 18.4% increase). The average price
received for gas sold for the six months ended June 30, 1995 decreased from the
same period in 1994 ($1.88 per Mcf in 1995 versus $2.09 per Mcf in 1994,
representing a 10.0% decrease).
The decrease in lease operating expense as a percentage of sales (26.9% for
the six months ended June 30, 1995 as compared to 35.3% for the same 1994
period) is primarily due to the increased production from the six new wells
drilled on the GAU.
The increase in depreciation, depletion and amortization is due to
increased depletion resulting from the additional production from the six new
wells on the GAU 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, 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 $393,091 during the six month period
ended June 30, 1995, as compared to operating income of $155,961 during the same
period in 1994. The increase in operating income for the six months ended June
30, 1995 was due to the Company's increased production primarily from the
acquisition of an additional 17.0% working interest in the GAU, the drilling of
six new wells at GAU, increased production due to the Acquisitions, and higher
oil prices, offset in part by higher general and administrative costs and lower
gas prices. The increase in operating income was also offset by an increase in
depreciation, depletion and amortization.
The Company reported net income before extraordinary item for the six
months ended June 30, 1995 of $336,839 as compared to a net loss before
extraordinary item of $46,712 for the same period in 1994 which is a result of
higher operating profit and a gain on the sale of marketable securities, offset
by the increased interest expense.
The Company reported a net loss of $94,923 for the six months ended June
30, 1995 as compared to a net loss of $168,629 for the 1994 period. The net
loss for the six months ended June 30, 1995 is directly the result of an
extraordinary charge of $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 JUNE 30, 1995 AND 1994
The Company's oil and gas sales increased 112.7% to $1,562,993 for the
three month period ended June 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
primarily the result of the acquisition of additional working interests in the
GAU, increased production due to the Acquisitions, the drilling of six new wells
on the GAU, and a 10.8% increase in oil prices, offset by a 14.2% decrease in
gas prices.
13
<PAGE>
During the three month period ended June 30, 1995, the Company sold 54,546
barrels of oil and 336,811 Mcf of gas, as compared to 27,945 barrels and
140,550 Mcf for the comparable 1994 period, which represent a 95.2% increase in
oil production and a 139.6% increase in gas production, respectively. The
average price received for gas sold for the three months ended June 30, 1995
decreased from the same period in 1994 ($1.75 per Mcf in 1995 versus $2.04 per
Mcf in 1994, representing a 14.2% decrease), and the average price received for
oil sold increased for the three months ended June 30, 1995 from the same period
in 1994 ($18.52 per barrel in 1995 versus $16.71 in 1994, representing a 10.8%
increase).
The decrease in lease operating expense as a percent of sales (26.7% for
the three months ended June 30, 1995 as compared to 33.0% for the same 1994
period) is due primarily to the increased production from the six new wells
drilled on the GAU.
The increase in depreciation, depletion and amortization is due to
increased depletion resulting from the additional production from the six new
wells on the GAU and the Acquisitions.
The Company posted operating income of $230,037 during the three month
period ended June 30, 1995, as compared to operating income of $108,169 during
the same period in 1994. The increase in operating income for the period ended
June 30, 1995 was due to increased production from the acquisition of a 17.0%
additional working interest in the GAU, the six new wells drilled on the GAU,
increased production from the Acquisitions, and higher oil prices, offset by
lower gas prices.
The Company also reported net income before extraordinary item of $231,853
for the three months ended June 30, 1995, as compared to a net loss before
extraordinary item of $4,563 for the 1994 period. The increase was primarily
due to the gain recognized on the sale of marketable securities.
The Company reported a net loss for the three months ended June 30, 1995 of
$199,909 as compared to a net loss of $126,480 for the same period in 1994. The
increased loss was directly the result of an extraordinary charge of $431,762
for early extinguishment of the Texas Gas Fund I loan, which was paid off out of
the proceeds of the Facility.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
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
Facility limits the rights of the holders of the Company's Class A Common Stock
("Class A") through restrictive covenants. Under the Facility, the Company
cannot declare or pay any dividends or purchase, redeem or otherwise acquire for
value any of its stock (including the Class A), return any capital to
stockholders, or make any distribution of its assets to its stockholders as
such; provided, however, that the Company can pay cash dividends on and redeem
preferred stock so long as no Event of Default has occurred or will occur.
The Company cannot merge with another entity unless (i) the Company is the
surviving corporation or (ii) Bank One consents, and (iii) no Event of Default
shall occur.
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 an investment partnerships associated
with Kayne, Anderson Investment Management, Inc. of Los Angeles, California
(the "Series C Purchasers"). Forty thousand shares of Series C were sold by
the Company at $100.00 per share.
Certain terms of the Series C limit the dividend and other rights of the
holders of the Company's Class A. Subject to the Company's Facility with Bank
One and the rights of the holders of the Series B (as defined on page 11 above)
and Series C, holders of Class A would be entitled to receive dividends when,
as, and if declared by the Board of Directors out of funds of the Company
legally available for the payment of dividends. The Facility, however,
prohibits the payment of dividends or other distributions on the Class A and
limits the dividends on Series B and Series C and, under the terms of the Series
B and Series C, no dividend or distribution may be paid on the Class A unless
all accrued and unpaid dividends on the Series B and Series C, respectively,
have been paid. 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 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 holders of Series C shall
have no such right until the right of the holders of Series B terminates.
In addition, the Series C is convertible into shares of Class A at a
conversion price of $2.00 per share of Class A. The Series C has a liquidation
and dividend preference over Class A. Subject to the Facility, upon any
liquidation, dissolution or winding-up of the affairs of the Company, holders of
Class A would be entitled to receive all of the assets of the Company available
for distribution to stockholders after payment of any liquidation
15
<PAGE>
preference of the Series B and Series C and any other preferred stock that may
be issued and outstanding at the time. The Series C is not redeemable by the
Company for two years; between two years and three years from June 15, 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 Series C currently have the right
to appoint one member to the Company's Board of Directors.
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 Series C is required to make changes to the Company's
Certificate of Incorporation or By-Laws which adversely affect the Series C, to
issued preferred stock equal to or senior to the Series C as to dividends or
liquidation, or 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
C 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 addition, the Series B has similar terms which limit the dividend and
other rights of the holders of the Company's Class A, which terms are described
in the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 9, 1995, at the Company's annual stockholders' meeting, the
Company's stockholders elected all six nominees to the Company's Board of
Directors and ratified the selection of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ended December 31, 1995.
The following nominees were elected to the Company's Board of Directors,
and each nominee received the indicated number of votes for or votes withheld:
George B. McCullough (8,113,868 votes for, and 34,940 votes withholding
authority), Norman C. Miller (8,113,768 votes for, and 35,040 votes withholding
authority), Miles D. Bender (8,113,798 votes for, and 35,010 votes withholding
authority), Robert H. Kite (8,114,198 votes for, and 34,610 votes withholding
authority), George N. McDonald (8,113,068 votes for, and 35,740 votes
withholding authority) and Robert V. Sinnott (8,086,998 votes for, and 61,810
votes withholding authority).
In addition, the proposal to ratify the selection of Ernst & Young LLP as
independent auditors for the Company for the current fiscal year ended December
31, 1995, was approved, with 7,998,091 votes for, 4,940 votes against, and
145,777 votes abstaining.
16
<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 Form 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 six months ended June 30,
1995, is filed as Exhibit 27 attached hereto.
17
<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. The report also contained an "Item 7 -
Financial Statements and Exhibits", which noted that the Company will file the
required financial statements and pro forma financial information for the
acquired assets as they are available and, in any event, as soon as practicable,
but not later than 60 days after the date that the Form 8-K must have been
filed.
18
<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: August 4, 1995 By: /s/ Miles D. Bender
---------------------------------------------
Miles D. Bender
President and Chief Executive Officer
Date: August 4, 1995 By: /s/ Robert A. Imel
--------------------------------------------
Robert A. Imel
Chief Financial Officer
Principal Financial Officer and
Principal Accounting Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-QSB for the six months ended June 30, 1995 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,667,331
<SECURITIES> 184,204
<RECEIVABLES> 1,229,352
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,437,289
<PP&E> 29,856,778
<DEPRECIATION> 3,339,913
<TOTAL-ASSETS> 32,320,048
<CURRENT-LIABILITIES> (3,516,572)
<BONDS> 0
<COMMON> (117,731)
0
(92,500)
<OTHER-SE> (18,172,055)
<TOTAL-LIABILITY-AND-EQUITY> (32,320,048)
<SALES> (2,653,741)
<TOTAL-REVENUES> (2,653,741)
<CGS> 0
<TOTAL-COSTS> 862,158
<OTHER-EXPENSES> 1,398,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 328,842
<INCOME-PRETAX> (336,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (431,762)
<CHANGES> 0
<NET-INCOME> (94,923)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
